Six reasons why businesses should actively manage, measure and report on their ethics
1. Managing ethics and reporting on ethics are legal requirements in terms of the Companies Act, No.71 of 2008
A new provision of the Companies Act mandates that every state-owned company, listed public company and any other company that scores more than 500 public interest points in any two of the previous five years (which is based on the number of employees, annual turnover and third party liability) establish a social and ethics committee by 1 May 2012. The committee is appointed by the board and needs to comprise no less than three directors or prescribed officers (senior managers or executives), at least one of whom has served as a non-executive director for the previous three financial years. The committee is required to draw matters to the attention of the board as required, and to report to the shareholders at the company’s annual general meeting.
2. Managing ethics and reporting on ethics are primary recommendations of the King III Report on Corporate Governance in South Africa
The King III Report recognises ethics as a central feature of corporate governance. Chapter 1, “Ethical leadership and corporate citizenship”, includes two noteworthy principles: Principle 1.1 which states that “The board should provide effective leadership based on an ethical foundation” and Principle 1.3 which states that “The board should ensure that the company’s ethics are managed effectively”. The King III Report specifically recommends the assessment, monitoring, reporting and disclosure of an organisation’s ethical performance, which is “necessary to provide the board and management with relevant and reliable information about the achievement of ethics objectives, the outcome of ethics initiatives and the quality of the company’s ethics performance.”
3. Directors’ liability in terms of the Companies Act and directors’ responsibility in terms of King III warrant that they support the regular measurement and monitoring of ethics.
Directors should insist on the regular measurement and monitoring of the company’s ethics using an independent survey. The survey will provide them with good insight into the company’s ethical status so that they can make informed decisions as regards necessary remedial actions. This applies particularly to non- executive directors who have limited opportunity to personally assess the business’s ethical behaviour and risk.
4. The effective management and measurement of ethics reduces the risk of ethical failures and the associated costs
The cost of ethical failure can be very damaging to an organisation, whether financially, in the forms of fines or legal settlements, in falling share price, or in eroded market and customer confidence. Conducting regular ethics surveys is an important feature of a risk strategy to avoid these costs.
5. A good ethical reputation is an asset which builds ethical capital
A good ethical reputation brings with it many advantages: It increases brand equity. It favours easier access to capital and a lower cost of capital. It enhances employee commitment and customer loyalty. It supports the recruitment and retention of top talent for employees and the board. It supports good stakeholder relationships.
6. Ethics is a valuable source of competitive advantage
Many sources of competitive advantage offer only a limited window of competitive opportunity because of the ease and speed with which they can be copied. A unique source of competitive advantage, which cannot be easily copied, is therefore far more valuable. An ethical culture and an ethical reputation offer such a source of competitive advantage because it is not easy to copy, it cannot be bought or sold, and it cannot be owned, but must be lived every day.
By Cynthia Schoeman