The spotlight is once again on corporate morality but ethics can only be managed if they are measurable. Management accountants can help. By Charles Tilley, chief executive, CIMA.
Once upon a time, making money without breaking the law was all businesses needed to focus on. Now every product from a throwaway T-shirt to a teaser-rate mortgage - or even a humble can of tuna – seems to pose stark moral choices. Certainly no listed company can afford to shrug off the fact that there is a potential moral dimension to everything it does or sells.
At this rate, the C-suite (CEO, CFO, COO etc) is soon going to contain two CEOs, one dedicated solely to ethics. Business leaders now contending with the fallout from the economic downturn may wonder how they are expected to find time to make a profit.
For today’s companies ‘don’t be evil’, as Google puts it, is no longer enough. A firm must actively do good through corporate responsibility programmes, carbon offsetting and the like. Cynics will argue that in a recession, companies aren’t interested in doing more than paying lip-service to ethics. But whatever your view, no one can argue that building unsustainable business models is a good idea. The current economic downturn is due in no small part to many banks developing practices that were unsustainable. As Warren Buffett pointed out earlier this year: ‘You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight.’
Intangible concept
The problem for most prudent companies is not that they are intrinsically unethical but that ethics is an intangible concept. Making a healthy profit is difficult enough without the current downturn. Ethics in itself is not a driver. It does not sit comfortably on the dashboard or scorecard in the same way as sales or risk. The challenge is to convert the principles of ethics into a language that business can relate to.
Ethics needs to be incorporated into the business lexicon so that it becomes as tangible as profit and loss, tax and legal issues. Once you turn a concept into fact, it loses its vagueness and becomes a potential asset. CIMA’s interest in this issue stems from the fact that its roots are in management accounting and its members are uniquely trained to measure, analyse and manage hard-to-quantify data. We contend that ethical management can only be effective if it can be measured. It’s a tough call but not an impossible one. The challenge now is to develop the right methodology.
To behave ethically, a company must behave sustainably. If you can’t measure sustainability, then you can’t measure ethical performance properly. For this reason, companies need to ensure they have a measurement framework in place. After all what gets measured, gets done. Most important of all is the inclusion of externalities in the measurement of sustainable performance.
Innovative but accurate measures
Let’s look at the issue of water use in the agricultural sector. Although 70% of the global water supply is used by farmers, in most cases this water is delivered free of charge or below the actual distribution rate – despite increasing levels of water scarcity. The result is a system whose inefficiencies cannot be measured because there is no metering policy.
At progressive companies such as Nestlé, management accountants have been busy developing processes to keep the firm’s water use in check. This has resulted in Nestle being able to reduce its production use from 4.5 litres to less than 1.8 litres per US$ of sales. This same process can be put in place for other harder-to-define issues. It’s up to individual companies to come up with innovative and accurate ways to measure its ethical and sustainable practices.
The key to this issue is transparency. Undoubtedly, many companies are already using metrics or indicators to monitor a wide range of activities but few are using them as part of their accountability process. A recent CIMA/Institute of Business Ethics survey found that while almost three quarters of companies have a code of ethics or equivalent, fewer than a third collect information to manage their performance against ethical goals and only 35% report their ethical performance publicly.
Long on rhetoric, short on evidence
A cursory look through online Corporate Responsibility reports presented by the UK’s FTSE100 companies shows that most are still long on rhetoric and short on any useful quantitative evidence of how they are moving towards more ethical and sustainable practices. Without some form of publicly reported benchmarking, businesses continue to leave themselves open to accusations that they are preventing stakeholders from getting a true picture of underlying corporate risks. Of course governments have a role to play in setting the right policies but at the same time, businesses must not be hindered by excessive regulation.
Clear and concise KPIs
One of the notable exceptions to the current malaise is supermarket giant, Tesco. Not only has the group attempted to present its corporate responsibility key performance indicators in a clear and concise layout but it is confident enough to list its shortfalls as well as its achievements. As we move further into turbulent times both economically and environmentally, corporate reporting will come under closer scrutiny and the tolerance for so-called greenwash will diminish. Businesses need to walk the talk.
In short, we’ve got to get more business minded about ethics. For this to become a reality, ethics must be built into corporate strategy and driven from the top. To become truly effective, companies also need to rigorously cost all externalities so that they can quantify what damage they are doing to the environment. Once this framework is in place the route to truly ethical and sustainable processes can be made actionable.
Painting a rose-tinted corporate picture is futile in the long term. Stakeholders want to see the lie of the land - and while no corporate landscape is without the odd blemish, these are much more tolerable if they are put into context.
Links
Visit our ethics web section.
Watch the webcast of our recent debate ‘Is global ethics a myth?’ and read the article ‘Ethics panel slams short-term practices’.
January 2009