The impact of ethics: the new 4th bottom line

Regular scandals in both the public and private sectors tend to fuel the perception that the current status of ethics is getting worse. This view is confirmed by, for example, the results of Transparency International’s annual global survey, the Corruption Perceptions Index, which found that perceptions of public sector corruption in South Africa have declined over the last two years. Quantifying the cost of fraud in African, KPMG’s Africa Fraud Barometer revealed that the 875 reports of fraud for 2011 amounted to a staggering US$10.9 billion.

The insurance industry is also subject to a great deal of unethical conduct. This entails not only ‘soft fraud’ when, for example, a claimant inflates a genuine claim, but also ‘hard fraud’ when someone deliberately plans or invents a loss that is covered by their insurance policy in order to receive payment for damages. The resultant added cost incurred by the fraudster impacts honest clients in the form of increased premiums. Standard Bank estimates that for short-term insurance about 15% of premium costs can be attributed to fraud - or about R3 billion a year.

The impact of ethics – or, more particularly, a lack of ethics – on companies and industries can incur numerous costs and consequences. Breaches of ethics can lead to the loss of their job or a jail sentence for guilty individuals. For organisations found to be unethical it can include financial costs in the form of losses, fines or legal settlements, a fall in share price, reputational damage or even the closure of a business.

Ethics also has a positive impact. The benefits arising from being recognized as an ethical organisation include the ability to attract and retain top staff and board members, enhanced stakeholder confidence, improved risk management, easier access to capital, enhanced reputation and increased brand equity. Within the company an ethical culture fosters greater trust, allows better and faster decision making and greater consistency of responses, encourages more individual accountability with less need for policing, and avoids excessive regulation. Collectively, these factors amount to a unique source of competitive advantage, which, because it cannot be easily copied, has greater value than other sources of competitive advantage.

These reasons, among others, reflect why ethics makes great business sense. It follows that ethics should be a key management focus area – and warrants that organisations expand their bottom lines from three to four to include ethics.

The rationale behind the move from a single, economic bottom line to a triple bottom line – namely to balance the extent of business influence with its responsibilities to the societies in which it operates – applies equally to ethics as a bottom line. The extent of business’s influence on ethical behaviour can be profound, to either substantially improve the level of ethics or to erode it.

Elevating ethics to be a recognised bottom line is an excellent way to make ethics a distinguishing feature of the organisation and its culture. However, ethics should not become the fourth bottom line as regards its priority ranking. Instead, it should be viewed as a first among equals. This ensures a focus on how business is conducted and avoids the problem of ‘doing business at any cost’ which can arise when financial goals are not tempered with an ethical focus.

There are various ways to realise the benefits of ethics and avoid the costs of breaches of ethics.

The Code for Responsible Investing in South Africa sets out a set of principles aimed at promoting sound governance that apply to institutional investors as asset owners, which includes insurance companies.

A further recommendation is to focus on ethical awareness to improve ethics. A high level of ethical awareness promotes ethical behaviour by keeping the organisation’s values in constant focus, and by emphasising what behaviour is and isn’t acceptable. It also acts as a deterrent to reduce unethical behaviour – much as the security vehicle patrolling the neighbourhood does.

This is made all the more effective when the organisation’s leaders follow an ethical approach, especially because leaders exert the greatest influence relative to ethics. What they say and do create very visible examples of what is actually acceptable in the organisation. The company’s policies may say all the right things, but if it is not acted out by the leaders, it only serves to show up the gap between what is said and done.

Leaders should be the custodians of ethics and should consciously accept that they have the primary responsibility to enhance and uplift the ethics in their organisation.

As to whether a company realises the benefits of sound ethics and avoids the costs of ethical failures, this will rest on whether ethics matters to the organisation and its leadership, and what is done to manage ethics more effectively.

Cynthia Schoeman shared a speaking platform with Alec Hogg and Tony Dixon at the Insurance Institute of Gauteng’s Power Seminar at the Hyatt Hotel in Johannesburg
on Friday 4 May 2012