Does your company have a AAA ethics rating?

Credit ratings fulfill an important role in evaluating the credit worthiness of businesses and governments. The rating is based on the rating agency’s assessment of risk of the debtor's ability to pay back the debt and the likelihood of default. The value of a AAA investment grade rating is widely recognised, as is the negative impact when a rating is downgraded.

Similarly, an ethics rating can add significant value to enable investors and other stakeholders to assess an organisation’s ethical risks and for organisations to get recognition when they have been operating ethically. An ethics rating also serves as a valuable tool to enable organisations to manage their ethics more effectively and in this way reduce ethical risks and maximise their ethical capital.

At a national level, there are some reliable measures of the ethical status of different countries. Transparency International’s Corruption Perceptions Index provides this insight by measuring the perceived level of public sector corruption. Survey results show that the least corrupt countries were Denmark, New Zealand and Singapore in 2010, New Zealand, Denmark, Finland, Sweden, Singapore and Norway in 2011, and Denmark, Finland and New Zealand in 2012.

What is noteworthy is the correlation between ethics and risk. In the latest (Q4 2012) Euromoney Country Risk survey, the seven least risky countries were Norway, Luxembourg, Singapore, Sweden, Switzerland, Finland and Denmark. Since ethics is a crucial dimension of risk as well as sustainability, an ethics rating should be indispensable.

There are currently no similar global ethics surveys for companies. But, by way of an informal assessment, I have asked audiences at various local conferences and workshops to identify just three companies operating in South Africa that have really distinguished themselves as being ethical. The very minimal number of companies identified is a telling sign – not that there are no ethical companies in South Africa, but rather than very few organisations have been widely recognised for their sound ethical culture.

This represents a real waste of ethical capital. Seeing that organisations rarely waste other sources of capital, it is prudent that companies quantify their ethics to ensure they can leverage its inherent benefits.

A web-based ethics survey such as the Ethics Monitor delivers just such an ethics rating (for the organisation and for its branches and departments). The assessment of ethics by means of the survey is based on the assumption that, when there is a breach of ethics, it is likely that someone within the organisation other than the perpetrator is aware of it. The confidentiality of the Ethics Monitor survey provides a mechanism to enable employees to report unethical behaviour more easily, without exposing themselves to reprisals. The survey results therefore provide a comprehensive ethics risk analysis (of ethical weaknesses and strengths) and identify and prioritise the necessary actions to improve ethics. Since the survey is based on the responses of all employees and executives, it also offers a credible, accurate measurement of ethics for reporting purposes.

An organisation should use its ethics rating to increase its reputation and to build its ethical capital with external stakeholders. For example, being able to increase the degree of trust between the company and its stakeholders would lead to many benefits, such as quicker, easier and more sustainable negotiations. And, as credit ratings are intended to be comparable across different sectors and regions, so too can the Ethics Monitor rating be used as a benchmark within industries, market sectors and regions.

Ethics ratings are ideally assessed on two key ethical concepts: behaviour and an ethical boundary:

  • Behaviour ranges from very ethical to extremely unethical. Unethical behaviour can vary from relatively minor misdemeanours to serious misconduct. The degree of ethical conduct directly mirrors the organisation’s level of ethical maturity. Higher levels imply that ethical conduct derives primarily from commitment to shared values. This represents a sustainable foundation for ethics, because behaviour is driven by personal decisions. Lower levels of ethical behaviour reflect lower ethical maturity, indicating mainly rules-based behaviour, where ethical action is largely a function of compliance with laws, rules, regulations (often in the form of codes of conduct) and policies. Managing ethics by rules alone represents a ‘high maintenance’ approach in the sense that it requires time and effort to supervise and police behaviour and its effectiveness rests heavily on the successful enforcement of the rules.
  • An ethical boundary assesses the organisation’s degree of inclusion or exclusion relative to stakeholders and the extent to which the organisation follows a triple bottom line approach (recognising an economic bottom line as well as social and environmental responsibilities). It is measured on a scale from inclusive to exclusive. High inclusivity reflects an ethical boundary that encompasses a wide range of stakeholders and affected groups and social and environmental concerns. High exclusivity, on the other hand, indicates a narrow ethical boundary that excludes all or most other stakeholders and the effects of the organisation’s behaviour on parties other than itself. The ethical boundary therefore addresses one of the primary features of ethics, namely that ethics applies to others as well as to self.

As governments and organisations aspire to the highest credit rating, so too should they aspire to a AAA ethics rating. To realise and retain this level of ethics rating necessitates on-going commitment from leadership to a sound ethical culture. Ethics also need to be clearly identified as a high priority organisational goal and included as a core feature of the organisation’s strategy. In the absence of this support, the pursuit of ethics risks being overtaken by operational targets. The concluding question is, therefore, whether government and businesses have the political and leadership will to commit to this goal.

AAA, AA and A ethics rating

A AAA rating reflects the highest levels of ethical behaviour (and ethical maturity) and an ethical boundary that accommodates a very high degree of inclusivity relative to stakeholders and social and environmental issues.

The rating declines to AA when ethical maturity declines and ethical behaviour is more a function of compliance with rules and regulations, or when the degree of inclusiveness of the organisation’s ethical boundary decreases relative to its stakeholders or the triple bottom line.

An A rating still reflects an ethical status, but illustrates a situation where both ethical behaviour is at its lower levels because it is largely compliance driven, and where the inclusiveness of the organisation’s ethical boundary is not seen to fully encompass its stakeholders or its social and environmental responsibilities.

B ethics rating

While this indicates ethical behaviour, the ethical boundary falls within the exclusive zone which shows that ethics is practised primarily with reference to the organisation’s own interests (such as economic goals), excluding the interests of all or most other stakeholders or a triple bottom line. Although, strictly speaking, this represents an ethical status, prioritising profits and self-interest is increasingly being considered unacceptable in the face of the on-going importance accorded to the interests of other affected parties and environmental concerns.

C ethics rating

This rating indicates unethical behaviour, but with an inclusive ethical boundary. This depicts an unusual situation that rarely occurs, in which the benefits of unethical conduct are not purely for self-gain, but are shared with others. A popular example of this is Robin Hood, who stole from the rich and gave to the poor.

D ethics rating

This is the worst ethical rating. It represents both unethical behaviour and an exclusive ethical boundary, where the misconduct is purely for self-gain, to the exclusion of the interests of others or the impact of such misconduct on other stakeholders, affected communities or the environment.