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OPINION: NZ companies need to up their ethics game

Huge discrepancies between how NZX top 10 companies spell out conduct to employees.

Jane Arnott
Wed, 18 Jan 2017

Seldom does the absence or presence of codes of conduct attract so much attention as when they are highlighted for being grossly inadequate. 

Dame Margaret Bazley's criticism of the Wellington Rugby Union and her specific recommendation that a new code of conduct should clearly cover off-field behaviour such as drunkenness, violence and inappropriate sexual behaviour fell into this category.

Over almost the same time period, the NZX called for submissions on a new, proposed NZX code, which included a recommendation for issuers to develop a code of ethics for directors that was capable of being modelled for the entire organisation.

NZX identified issues such as conflicts of interest, gratuities, treatment of whistleblowers, share trading by directors and employees, and the need to act honestly.

In the opening days of 2017, as both these items slipped from the headlines, the Institute of Directors tabled a series of issues facing directors. 

Unsurprisingly, risk intelligence, and ethical business and culture, were both highlighted, with specific mention of the need to lead from the top.

The Institute of Business Ethics says a meaningful and relevant Code of Ethics is a vital part of “tone from the top,” to provide all levels of employees with guidance on what it means to do the right thing.

Discrepancies between top companies

A review of the published codes on the websites of companies in the NZX top 10 by index weight yields a useful insight into how seriously or otherwise our largest companies view the task of preparing and implementing a code.

The depth in which such codes are written, made visible and embedded, consistently reveals massive discrepancies.

At one extreme is an extraordinarily brief two-page code with nine points – many consisting of a single sentence. Two separate points are devoted to either explaining that “this is the code of ethics” or “where to go for further information.”

The document doesn’t refer to company values and is dated 2013. Another company code highlights that it will be reviewed in November 2015 – a date that tends to suggest some serious oversight or lapse.

One code referred to “undertaking duties in accordance with the company values” – but these values couldn’t be located elsewhere on the website.

Reporting a breach of a code featured consistently. However, there was almost no information supplied as to the subsequent process or any protected disclosure.

Should New Zealand shareholding community be concerned?

When it comes to risk management, reputation and shareholder value, the answer is unreservedly yes.

Research from the UK highlights the top reasons for not reporting a breach include the belief nothing will be done, lack of support mechanisms, lack of confidence in the process, and fear it may impact on ongoing career prospects.

To gloss over these aspects by not providing insight into the process or not providing an array of means for reporting is to court disaster. Or, as a more cynical person may observe, is designed to ensure breaches remain hidden. 

Something as simple as a platform where employees could confidentially raise concerns could make the difference. For governance and executive teams who are really serious about learning what really goes on, a simple question worthy of being included in any employee survey is: “If you reported a breach would you trust your manager to do something about it?”

Has New Zealand fallen behind?

In other parts of the world, risk management, company culture and codes of ethics form far stronger bonds.

A recent IBE publication highlighted the UK trend of having separate governance committees to reflect shifting perceptions of risk in this area. However, concentrating on internal drivers of the company and engaging with the executive about this is still in its infancy in New Zealand.

According to IBE associate director Peter Montagnon, “boards need to understand the drivers of behaviour within their organisation and assure themselves that they are appropriate.”

How to improve

At the other end of spectrum of the NZX top 10 companies, are more comprehensive codes which are fully integrated with company values along with sector-relevant examples of behaviour.

In one outstanding example, a short series of questions is included so that employees can “affirm their acknowledgement of the code in question.”

Clarifying some of the key behavioural expectations holds merit – as Dame Margaret clearly agrees.

One code clarifies what a conflict of interest is and then outlines five examples. Gifts, corporate opportunities and confidentiality are similarly explained – nothing is left to chance.

Language is another area where codes diverge. It seems those companies which have clearly invested more time in developing their code and allowing the code to form an integral part of company culture, have also loosened the language.

Formality and corporate speak have been replaced with gutsy and refreshing “say it as it is” style. One company says: “In an industry with large international players, we have much more to lose if we botch things up.”

How employees interpret values is always open to suggestion – which is why values that are reinforced and discussed as part of everyday decision-making create depth.

This depth, when faced with challenges and ethical dilemmas, builds confidence and a willingness to act in the spirit and letter of the law. Imparting information is always best done in a style and tone that suits the audience. This trend is a good one and is to be encouraged.

In a US survey that examined employee behaviour and linked this to codes and cultures the findings are stark. In companies with weak codes and cultures, 48% of employees did not report misconduct they had observed compared to 6% with strong company cultures.

In companies with weak codes, 89% of employees had observed misconduct in the previous 12 months compared to 30% of employees with strong company codes, and 33% felt pressure to compromise standards compared to 7%.

For companies and shareholders the message is an important one. Investing in your code and embedding it within a company culture programme will ensure that not only reputation enhanced, but poor behaviour will be minimised.

Perhaps a 2017 version of that company’s 2015 code will make all the difference.

*Jane Arnott is the only offshore associate and New Zealand representative for the Institute of Business Ethics. 

Jane Arnott
Wed, 18 Jan 2017
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OPINION: NZ companies need to up their ethics game