ETHICAL CAPITAL: IGNORED, RECOGNISED OR VALUED?

Ethics scandals continue to highlight the costs and negative consequences of breaches of ethics. But are the punitive measures sufficient to curb unethical practices, or is there another factor that could motivate an ethical approach in the workplace more effectively?

The cost of ethical failures


In the banking industry, manipulating benchmark rates has occurred with worrying frequency. In April this year Deutsche Bank was fined for rigging the Libor (London Interbank Offered Rate) and the European Union’s Euribor International Bank Offered Rate. The following month, six major global banks were fined nearly $6 billion for rigging the world's currency market: Barclays Bank, JPMorgan Chase, Citicorp, the Royal Bank of Scotland and UBS.

Another current high profile ethical failure is the massive corruption scandal involving FIFA. Seven senior FIFA officials were detained in Switzerland in May this year, accused by US authorities of involvement in bribes totalling more than $150 million. Thus far one official has agreed to be extradited to the United States, and FIFA has banned Chuck Blazer, former executive committee member and ex-Concacaf general secretary, from all football-related activity for life.

As these examples illustrate, the financial consequences for the banks were high and, no doubt, the consequences for the FIFA officials will also be high once the investigations are concluded. In these, as in other cases, the cost can include reputational damage and a fall in share prices for listed organisations. Ethical scandals can also have a negative impact on stakeholder confidence, triggering the risk of investors removing their investments or clients taking their business elsewhere.

But a cynic would argue that the impact of some of these factors is only short term. The share price, for example, is likely to bounce back provided the company continues to operate profitably. Another relevant issue is the public outrage that accompanies major ethical scandals, which can exacerbate the damage. However, the ‘outrage quotient’ is at risk of being dulled by the sheer number of scandals, such as those in the financial services industry.

If then the negative costs and consequences are not sufficiently effective to deter unethical behaviour, the question needs to be explored as to what other motivation there is to create and maintain ethical organisations.

Ethical capital


Ethical capital offers a sound source of motivation, where ethical capital represents the value that is generated by ethical leadership and an ethical organisational culture. The opposite, ethical or moral bankruptcy, was highlighted by Greg Smith in March 2012 when he resigned as an executive director from Goldman Sachs via an opinion piece in the New York Times (in which he described his employer as "morally bankrupt").

The benefits that ethical capital delivers include, among many others, a high-trust working environment, the ability to attract and retain top staff and board members, increased customer loyalty, better stakeholder relationships, improved risk management, enhanced reputation and brand equity and reduced cost of capital. These benefits alone demonstrate that ethics make good business sense.

The value of ethical capital is also well illustrated as part of an organisation’s asset base. Financial capital represents the most obvious element of an organisation’s asset base to which, conventionally, tangible assets such as plant and machinery have contributed either positively or negatively. Intangible assets now also need to be recognised and managed. This includes employees’ knowledge capital, employees’ relationship capital, organisational capital, customer capital, supplier capital, community capital and, crucially, ethical capital, where the latter is created by and directly proportional to ethical conduct, decisions and choices relative to employees and all the organisation’s external stakeholders.

Among all the sources of intangible assets, ethical capital is the most important because ethics adds overarching value to the other areas of intangible assets. For example, sound workplace ethics enhances the quality of the relationship capital that the organisation enjoys with its people and with its external stakeholders. In contributing to the value of an organisation’s intangible assets, ethics adds, in turn, to its financial capital.

Yet despite its obvious merit, ethical capital is not widely acknowledged as a source of value.

Quantifying ethical capital


Although intangible assets, by their nature, are often not visible and can be difficult to measure, this should not diminish their value. In the case of an organisation’s ethical capital, it can be quantified by using a suitable tool such as an ethics survey. It is important that the tool that the organisation chooses to use is able to produce credible results that reflect the ethical behaviours, experiences and perceptions of management and all employees – not simply a result based on a small sample.

A quantitative measure of the organisation’s ethical status also serves as an effective way to enable organisations to manage their ethics more effectively by highlighting ethical strengths and risks or vulnerabilities. Furthermore, it meets both the mandate of the Companies Act Social and Ethics committee to monitor and report on ethics and the King III recommendations to assess, monitor, disclose and report on ethical performance.

The new ROI


A concept that can support the pursuit of ethical capital and an ethical culture is the new ROI.

ROI, as the acronym for ‘return on investment’, is central to most businesses and entails the investment of capital and resources to deliver a financial return. The new ROI also centres on an investment, but this time it is an investment in workplace ethics in pursuit of a return on integrity.

As a return on investment would be measured in increased financial capital, so too can a return on integrity be measured in terms of improved ethical capital. The two ROIs are also similar as regards failure to deliver. Failure to deliver financial returns and failure to conduct a business ethically both risk eroding shareholder confidence and, ultimately, jeopardising the ongoing existence of the company. Yet the attention afforded to ethics and the return on integrity is rarely comparable to that given to the return on investment.

Reaping the benefits of the new ROI and building the organisation’s ethical capital will largely fall to leadership and their commitment to ethics is imperative. In its absence, ethical capital is unlikely to be fully realised and the pursuit of ethics risks being overtaken by economic pressures or operational targets.

By Cynthia Schoeman
Published in ED Focus, USB Executive Development, July 2015

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