Ethical conduct translates into better yields for all stakeholders

 Stakeholders during the signing by the Kenya Bankers Association (KBA) to the “Code of Ethics for Business in Kenya”

Stakeholders follow proceedings during the signing by the Kenya Bankers Association (KBA) to the “Code of Ethics for Business in Kenya”, which was developed by UN Global Compact, Kepsa and Kenya Association of Manufacturers on behalf of the private sector at the Stanley Hotel in Nairobi on April 21, 2016. 

Photo credit: File | Nation Media Group

What you need to know:

  • The firm’s focus on business ethics can consequently enhance long-term performance.
  • For the code of ethics to be effective, it must do more than hang on the wall and serve as a preventative measure. 

Early this month, we woke up to a headline story based on a report by the US Securities and Exchange Commission (SEC) imposing the highest-ever penalty against an audit firm.

The firm was Ernst & Young LLP (EY), the penalty was $100 million (Sh11.8 billion) and the offence was cheating by audit professionals on CPA ethics exams and withholding evidence of this misconduct during investigations.

The SEC, while imposing the penalty, noted that the action involved a breach of trust by gatekeepers entrusted to audit public entities and further underlined its dismay that the very professionals responsible for detecting cheating by clients cheated on ethics exams, of all things, and actively hindered their investigation of the misconduct.

Why is ethics in the corporate space so critical?

An ethical climate translates into collective ethical behaviour that shows care for those affected by their actions (empathy) and belief in the ability to successfully follow through on their decisions. 

The flip side to this is that when unethical practices evolve, they may become acceptable and once deemed acceptable, individuals are more likely to engage in unethical practices to meet their goals when current efforts to meet them are insufficient. 

Goal-setting 

In fact, one of the downsides of goal-setting is that it could motivate unethical behaviour when people fall short of their goals, as compared to people without specific goals who are just trying to do their best. 

The tendency towards unethical behaviour is strongest when people fall just short of reaching their goals.

When firms have lax expectations in place for individuals to follow in terms of ethical behaviour, the leaders and even employees tend to act opportunistically and make decisions that are in their own best interests, and not necessarily the organisation’s. 

This prevents the organisation from achieving its optimum performance in the pursuit of its corporate goals.

Some of the decisions taken in the best interest of the leaders may be to the detriment of the firm’s stakeholders.

For instance, manipulation of earnings is commonly used by CEOs to reflect better firm performance, especially in cases where their remuneration is tied to performance in the short run.

Core values and ethics

For the code of ethics to be effective, it must do more than hang on the wall and serve as a preventative measure. 

Photo credit: Shutterstock

This manipulation would ultimately be detrimental to the other stakeholders.

The tendency for unethical conduct has become more rampant among leaders because those who use an ethical decision-making approach can satisfy stakeholder expectations but are unlikely to produce above-average returns, as by its very nature it is driven to satisfy minimum ethical standards of stakeholders. 

Such unethical behaviour is more likely to happen when the firm has no laid-down guidelines to guide individuals regarding ethical conduct.

Firms with a culture that embraces stakeholders’ ethical concerns are most likely to identify economic opportunities arising from the ethical concerns and thereby realise growth, enhance profitability and build a competitive advantage. 

We can even push this argument further and add that the potential exists for firms to develop superior capabilities in recognising emerging economic opportunities associated with ethics-related demands of stakeholders. 

The firm’s focus on business ethics can consequently enhance long-term performance.

To minimise illegal or unethical activity within and on behalf of the organisation, three elements need to be in place. 

One is a set of core ethical values infused throughout the organisation in its policies, processes and practices. 

Two, a formal ethics programme, including a code of ethics, ethics training, an ethics hotline, and an ethics officer. 

Three, the presence of ethical leadership sets an appropriate tone at the top. 

While each of these three elements is distinct, they also overlap, relate to and reinforce each other.

For the code of ethics to be effective, it must do more than hang on the wall and serve as a preventative measure. 

Executives would make greater use of the code of ethics when they feel pressure from market stakeholders (customers, suppliers, shareholders) than from non-market stakeholders (regulators, government) partly because market stakeholders have power over resources critical for the production processes of the firm.

Pressure from non-market stakeholders for accountability may be addressed by merely adopting codes of ethics and not necessarily implementing them. 

Code of ethics 

In order to support the organisation’s culture, the code of ethics must be continuously revised based on input from within and without the organisation and disseminated to all stakeholders. 

In addition, explicit reward systems that recognise acts of courage such as reporting wrongdoing and generally create an environment in which all people are treated with dignity must be put in place.

In order to address concerns raised about unethical conduct in the private sector, the Code of Ethics for Business in Kenya was developed by the Kenya Private Sector Alliance, UN Global Compact and the Kenya Association of Manufacturers. 

It aims to enhance and promote the ethics of business conduct and applies to private companies that expect their business partners to adhere to it and complements the individual company’s code of ethics

The Kenya Bankers Association has signed the code, as have a number of its member banks.

Dr Olaka is the Chief Executive Officer of the Kenya Bankers Association