By Ian Lavis on behalf of Praxity Global Alliance
We have revisited this topic, Click Here to read about 'The new ethical challenges in testing times'
As ethical behaviour becomes increasingly important in business, more and more companies are taking steps to address their ethical decision-making.
In an age where being seen to do the right thing is more important than ever, business ethics are increasingly viewed as a driver for success.
Ethical decision-making can reduce risks, minimise brand damage and create value. Moreover, organisations with a strong ethical standpoint are more likely to attract a new generation of ethically-minded consumers and jobseekers.
The term ethics usually refers to moral principles and norms by which human actions may be judged. In business, it impacts just about any decision made by any employee, director or owner, in any industry, from developing products and services to the way organisations interact with customers, suppliers, employees and society.
The International Federation of Accountants says a growing number of organisations go far beyond viewing ethical practise merely as a means to avoid penalties or fines. These organisations “believe corporate responsibility and ethical practices lead to sustainable value creation”.
So, how does an organisation – and indeed its stakeholders – go about making more ethically sound decisions to add value?
Jeffrey Luckins, Director of Audit and Assurance at Praxity participant firm William Buck in Australia, and a member of the Governance Institute of Australia, says there are two forces at play in ethical decision-making:
• Risk – how to mitigate the negative outcomes from potentially unethical decisions being made by a business
• Market forces – consumers are specifically choosing to buy from ethical business (especially younger generations)
“In most cases, the risk issues are the first issues business leaders respond to in order to avoid brand damage,” he says.
This is borne out by the case of Nike, which overhauled its approach to ethical decision-making after the US footwear giant was linked to cases of child labour at manufacturing sites. According to a report Nike pulled the plug on low cost suppliers that could not meet the company’s minimum working conditions and is now regarded by many as a leading example of a sustainable business based on its approach to improving environmental impact, transparency and supply chain working conditions.
The question is: How can organisations and their employees make better judgements on a day to day basis, not only to minimise risk and brand damage but also to add value through ethical, sustainable practices?
Many business leaders believe the answer lies in putting a framework in place to help guide people on what action to take, but there is also an argument for better governance throughout an organisation to improve ethical decision-making.
Ethics in accountancy
The accounting profession has led the way when it comes to making ethics central to decision-making, principally with the Code of Ethics which every accounting professional must follow. In recent years, steps have been taken to improve training, while guidance is continually being updated to encourage good practice.
The Association for Certified Chartered Accountants, for example, recently introduced a new Ethics and Professional Skills module into its qualification. The module is designed to allow professional accountants to demonstrate they understand and can apply ethical behaviour in complex real-world situations.
The Institute of Chartered Accountants of Scotland (ICAS) believes ethics and integrity is very much the personal responsibility of every CA, and this lies behind it’s ‘Power of One’ initiative. This calls on all CAs to “place ethical leadership at the heart of their professional responsibilities, to shape the culture and values of their organisations, to help re-establish ethics at the core of business practices and to rebuild public trust in business.” In turn, ICAS provides resources and support.
Steffen Ahrens, Partner at German Praxity participant firm FALK GmbH & Co KG, says ethical decision-making boils down to values and the notion of being responsible. He adds: “Individuals have to look at who they are working for and ask themselves, can I feel proud?”
But while much of ethical behaviour is down to personal responsibility, can an organisation do more to ensure everyone is working to the same hymn sheet when it comes to making decisions?
Creating a framework
One approach which has gained credence in recent years is the creation of ethical frameworks for employees to follow. The idea is that putting a framework in place helps managers and employees understand the moral dimensions and implications of situations they might meet and helps them ask the right questions and work towards identifying solutions that are in line with the organisation’s values.
There are numerous models for creating a framework for ethical decision-making. The typical model consists of a series of questions or statements that help users clarify their thoughts and how they see an issue. The idea is to encourage managers and employees to assess a situation, decide what to do, agree a way forward, report and communicate.
The Markkula Center for Applied Ethics, in Santa Clara University, California, has produced the following framework for decision-making based on five sources of ethical standards – utilitarianism, rights, fairness or justice, common good and virtue:
Recognise an ethical issue
- Could this decision or situation be damaging to someone or to some group? Does this decision involve a choice between a good and bad alternative, or perhaps between two "goods" or between two "bads"?
- Is this issue about more than what is legal or what is most efficient? If so, how?
Get the facts
- What are the relevant facts of the case? What facts are not known? Can I learn more about the situation? Do I know enough to make a decision?
- What individuals and groups have an important stake in the outcome? Are some concerns more important? Why?
- What are the options for acting? Have all the relevant persons and groups been consulted? Have I identified creative options?
Evaluate alternative actions
- Which option will produce the most good and do the least harm? (The Utilitarian Approach)
- Which option best respects the rights of all who have a stake? (The Rights Approach)
- Which option treats people equally or proportionately? (The Justice Approach)
- Which option best serves the community as a whole, not just some members? (The Common Good Approach)
- Which option leads me to act as the sort of person I want to be? (The Virtue Approach)
Make a decision and test it
- Considering all these approaches, which option best addresses the situation?
- If I told someone I respect -- or told a television audience -- which option I have chosen, what would they say?
Act and reflect on the outcome
- How can my decision be implemented with the greatest care and attention to the concerns of all stakeholders?
- How did my decision turn out and what have I learned from this specific situation?
Having a method for ethical decision-making is “absolutely essential”, the Markkula Center claims, adding: “Making good ethical decisions requires a trained sensitivity to ethical issues and a practiced method for exploring the ethical aspects of a decision and weighing the considerations that should impact our choice of a course of action.”
Many organisations have put in place similar frameworks, often supplemented with further questions and with mechanisms to report unethical practices. The aim is to help employees decide what to do in different and often difficult situations.
The importance of good governance
However, putting in place a framework of this type is not enough by itself. Ethical-decision making is also about effective management and good governance.
Jeffrey Luckins argues: “The dilemma on ethical decision making is not so much the framework and having policies and procedures in place, it’s about having the management awareness to know there is a problem and how to deal with it. If the problem occurs at too low a level of management and there is not appropriate governance in place for identifying and dealing with issues, then the problem may not be resolved in accordance with the governing vision and principles of the business.”
The importance of governance in the ethical decision-making debate was recently highlighted by Greg Medcraft, former Chairman of the Australian Securities and Investments Commission, who now heads up the Directorate for Financial and Enterprise Affairs at the OECD (Organisation for Economic Cooperation and Development).
Doing the right thing
In a speech about the “tone at the top” of an organisation and its influence and conduct and culture, he stressed the need for boards to stay alert to “red flags” like inconsistencies and decisions that clash with stated values. He also highlighted the role of senior executives to create a culture where everyone has ownership and responsibility for “doing the right thing”, and that this should be cascaded down though an organisation, supported by training.
While Greg Medcraft was talking about culture rather than ethics, they are clearly intertwined. His comments underline that while everyone has a responsibility to improve the ethical decision-making process within an organisation, the board and senior executives need to ensure everything is in place to enable employees to do the right thing.
So, it would seem the best way to improve ethical decision-making is not only to create a clear framework, but to ensure the board and senior management set and communicate the right tone, backed by strong governance.
As Jeffrey Luckins points out, better ethical decision-making “can reduce risks and protect the goodwill of the business” while also being consistent with profit motives. That’s a pretty strong argument for making sure ethics are at the core of an organisation.