Six reasons to measure and report on ethics:Part 1

Consider the first three reasons that make a case for monitoring, measuring and reporting on your company’s ethics.

Within the workplace there are many reasons that demand, encourage or deter actions. Typically, these would fall into two camps: doing something because you have to or doing something because you want to. The latter can be driven by the company’s commitment to following a value-based ethical approach or by its desire to be seen to be doing the right thing.

Irrespective of the underpinning motivation, the difference is significant because “wanting to” derives from intentional choice by the person or organisation, and this internal locus of control makes it more sustainable. On the other hand, “doing something because you have to” is often dependent on an external party insisting on compliance, be that the law or your boss.

The reasons why organisations should measure, monitor and report on their ethics also fall within this range. Understanding the combination of reasons is important to ensure that ethics does not fall within the zone of reluctant actions based on a minimalist compliance approach.

It is also important to recognise that all these reasons support quantitative governance, which is considered far more valuable than a qualitative approach.

Reason 1: Companies Act 71 of 2008

Compliance with the law should be a good reason to do something. In this regard, the Companies Act mandated that all state-owned companies, listed public companies 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 roles and responsibilities of the committee are to monitor social and ethics issues, draw matters to the attention of the board as required, and to report to the shareholders at the company’s annual general meeting. The legislation does not specifically detail the intended purpose of the social and ethics committee, but it can be interpreted as speaking directly to the purpose of the Companies Act, in particular “to promote the development of the South African economy by … encouraging transparency and high standards of corporate governance”.

Reason 2: King III

The recommendations contained in The King Report on Corporate Governance (King III) offer another important reason to assess and report on ethics. Although King III is a voluntary code based on the principle of “apply or explain”, compliance with the King Reports is a requirement for companies listed on the JSE.

King III advocates the assessment, monitoring, reporting and disclosure of an organisation’s ethical performance. Both an internal and an external assessment are recommended. An internal assessment is deemed 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”, while an external assessment is needed “to provide internal and external stakeholders with relevant and reliable information about the quality of the company’s ethics performance”. The external assessment is motivated on the grounds that “the independent assurance of the company’s ethics performance, supported by an assurance statement (as part of the integrated report) enhances the credibility of the information provided to stakeholders”.

King III recognises that the ultimate objective of the assessment, reporting and disclosure is to improve the company’s ethical culture by enhancing its ethical performance.

Reason 3: Directors’ liability and responsibility

Directors’ liability in terms of the Companies Act and directors’ responsibility in terms of King III warrant that they should insist on regular measurement and monitoring to enable accurate reporting of ethics.

Ideally, they should support an independent assessment for the greater measure of impartiality it brings. They should also stipulate that the views and experiences of all employees (and, if relevant, key stakeholder groups) are evaluated to ensure that they are provided with reliable, credible and accurate information about the organisation’s ethical status on which to base their decisions. This applies particularly to non-executive directors who have limited opportunity to personally assess the business’s ethical behaviour and risks.

Three further reasons why companies should measure and report on their ethics will be discussed in the October issue of HR Future.

By Cynthia Schoeman
Posted on HR Future, September 2014