A similar article was published in CIMAGLOBAL e-magazine:

The crux of the article is that Finance professionals must play an active role as ethical champions.

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A new paper takes an in depth look at ethics in business and sets out recommendations for an ethical approach to accounting. By Victor Smart, head of profile and communications, and Danielle Cohen, head of ethics, CIMA.

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Take action on ethics and strategy
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Finance professionals must play an active role as ethical champions by challenging the assumptions upon which business decisions are made, according to senior busines figures. But they must do so while upholding their valued reputation for impartiality and independence.

This is one of the ten main recommendations of a new paper, 'Incorporating ethics into strategy: developing sustainable business models’. The report distils the findings from a series of high level round table discussions with senior business decision makers and experts in ethics, corporate responsibility and environmental sustainability.

The round tables discussed how organisations should approach social, environmental, economic and ethical issues that go beyond the financial bottom line. Over three sessions the group explored how companies can respond to society’s changing ethical demands and why Chartered Management Accountants are uniquely placed to add value.

Lessons to be learned
Businesses can be tempted to make short term gains by turning a blind eye to ethics. Despite codes of practice, regulatory oversight and ever increasing public pressure, many firms routinely ignore ethical considerations. Some even claim that a business simply needs to abide by the law without concerning itself with broader ethical issues.

Yet such disregard can undermine the wider economy and, in time, cause irreparable damage. Lessons must be learned from the corporate collapses of the past decade: myopic strategies can create massively profitable entities, yet impressive initial results may turn out to be unsustainable.

There is a strong business case for running companies in an ethically responsible way and for finance professionals to facilitate this. A socially and environmentally ethical approach ensures a company’s ability to thrive in the long term by protecting its reputation, its licence to operate, its supply chain, its relationships with partners and its ability to recruit talent. It’s about avoiding corporate collapse as a result of litigation or fraud.

Of the 28 companies that fell out of the world leading S&P 500 index in the past ten years, comparatively few casualties were claimed by shifts in technologies and markets. More were victims of massive fraud (as with Enron and WorldCom) or had leaders who’d failed to create a sustainable business model.

This was evident most graphically in the financial services industry, with the likes of Lehman Brothers, Bear Stearns and Wachovia choosing huge short term gains at the cost of their long term survival. Similarly, UK electronics company Marconi was brought down by its unsustainable plan for its business.

Establishing strong ethical credentials
While some firms consistently fail to consider ethical factors, others have given themselves a competitive edge by establishing strong credentials in this area. For instance, in the nineties Toyota boosted its global standing with pioneering work on the hybrid Prius model.

Coca-Cola thought it commercially worthwhile to take a minority stake in the UK fruit drinks firm Innocent, which boasts that it gives away a tenth of all its profits. And McDonald’s is investing heavily in activities aimed at associating it with ethical and environmental awareness as it rebuilds its brand and attempts to overcome decades of negative publicity.

The round table discussions highlighted that the link between ethics and business has become far clearer in recent years, as companies realise that corporate interests must be aligned with the broader concerns of society if they are to survive. In a successful company, ethics are embedded in decision making and long term strategy. ‘Doing the right thing’ is not an afterthought that’s bolted on to the mainstream activities that generate its profits. Successful, sustainable firms aspire to integrate ethics into all aspects of strategy.

New approaches to accounting
The financial crisis has certainly highlighted the need for capital market decision making to reflect long term considerations. It has shown the extent to which corporate reporting fails to highlight systemic risks. A shift to a reporting model that supports the information needs of long term investors and reflects the connected nature of environmental, governance and societal factors is an essential step towards building a sustainable economy.

The Prince’s Accounting for Sustainability initiative has set out the need for ‘new approaches to accounting and reporting to reflect the broader and longer term consequences of decisions taken. Without more complete and comprehensive information, companies, investors and others cannot make the fully informed decisions needed to survive and prosper.’

Work has already begun to tackle these issues. Accounting for Sustainability believes that the establishment of a connected and integrated reporting framework, overseen by an International Connected Reporting Committee, is essential to help the transition to a sustainable economy.

Ethical businesses are not a new phenomenon, of course. During the industrial revolution many companies in the US and Europe thrived on a strong philanthropic tradition. What is new is the way in which ethics now needs to be seen as a core part of companies’ strategies and how it is being embedded into management culture at all levels.

There are numerous explanations for this new prominence. One suggestion from the round table discussion was that, thanks to modern communications technology and an increase in living standards, the circle of concern has grown among the public. Young people in particular seem to be much more aware of the social and environmental effects that businesses can have around the world – and more critical of those that they see as part of the problem.

The global growth in population and per capita consumption as a result of industrialisation is another factor. Once abundant resources are growing scarcer and can no longer be considered a free gift from nature. And, in the jargon of economics, the ‘externalities’ – that is, the negative effects of economic activity - are increasing steeply. Indeed, they may actually outweigh the economic benefits of the goods rolling off the production line, which is something not captured by traditional reports and accounts.

A more managerial factor is the increasing value placed on corporate reputations. A multinational supplier of consumer goods, for example, can replace a burnt out factory more easily than it can restore a tarnished brand.

In the 1970s Ford calculated that the cost of recalling all its Pinto cars, which were prone to fuel tank fires, would probably exceed that of handling all the accident victims’ claims for damages, so it initially decided not to recall the model. For the most part, corporate culture rejects such an approach today. Dealing swiftly and openly with problems can serve to establish a firm’s credibility as trustworthy brands. Toyota management has discovered this year that it is judged as much on its handling of the recall of millions of vehicles with suspected defects as on the specific engineering problems.

Win-win situation
The shift is not complete by any means, though. Companies that don’t deal directly with consumers can still be tempted to risk a good reputation for quick profits. But even firms that aren’t directly consumer facing must consider the effects of negative reporting about their activities or of falling foul of legislation. And the steady growth in the use of ethical criteria by institutional investors means that lapses in corporate social responsibility can dent a public company’s share price or a private firm’s prospects of finding investment.

With ethics now centre stage globally, there’s a chance to create a win-win situation in which companies can find out how a sustainable approach benefits the bottom line, thereby convincing even the most profit hungry of investors. This is what UK retailer Marks & Spencer did with its ‘Plan A’ environmental marketing initiative, what the UK’s Co-operative Group has consistently done and what BP attempted with its ‘Beyond Petroleum’ rebranding campaign.

Encouraging businesses to listen to public opinion is a step in the right direction. But inevitably there have been accusations that their stated commitment to corporate social responsibility may be opportunist or only skin deep. Accusations of ‘green wash’ abound, with environmentalists arguing that firms have seen the new interest in ecological issues as simply another chance to market products as ‘environmentally friendly’ to gullible consumers.

One problem for businesses is that, although some ethical issues are straightforward, many are highly debatable. Are nuclear power stations bad and wind turbines good, for example? Should an armaments business quit markets where bribery is rife or simply behave better than its rivals? And terms such as ‘predatory lending’, ‘excessive risk taking’ and ‘greed’ are all notoriously hard to define.

Another problem, which was highlighted by the financial crisis in the West, is that shareholders cannot be relied upon to defend their own interests. The fashionable drive to maximise shareholder value has seen investors and business leaders combine in a quest for short term advantage. Far from being champions for sustainable business, the equity markets have imposed huge pressures on senior managers for quick returns. Today it could be seen that one of the duties of a tough CEO is to resist such pressure by delivering more realistic financial results in the short term, if need be. This hardly squares with current remuneration practices, of course – especially in investment banking.

Tone from the top
As the Enron scandal dramatically illustrated, there is a strong correlation between short termism and the cutting of ethical corners. By its nature, a long term approach is more concerned with various aspects of sustainability. Many companies take the long view. But it is often huge multinationals, such as HSBC and Nestlé, that can see they have a greater stake in the future. Larger companies arguably have more resources available to undertake scenario planning for decades ahead and are more likely to feel that factors such as food security, water scarcity or climate change will have a material effect on their commercial prospects.

Leadership is the key factor that establishes whether a company is long sighted and able to integrate ethics successfully into strategy – the tone comes from the top. Only effective and dynamic leadership can set a corporate culture that goes beyond merely averting the damage to reputation risked by unethical behaviour. It can also transform the dangers posed by ethical challenges into commercial opportunities, thereby ensuring that the organisation is fit for the future.

Leaders who fail to understand the changing context in which they operate are not providing a sustainable foundation for their companies. They will permit outmoded business models to be pursued, even when the assumptions that these were based on have altered. Specifically, leaders need to recognise the threats and opportunities posed by factors such as climate change, the declining reserves of fossil fuels and the corrosive economic impact of endemic bribery in certain sectors and regions.

A failure to understand these factors has already become evident in some industries – it’s arguably a major reason behind the crisis that engulfed US car makers last year. Competitors such as Honda anticipated the increase in petrol prices and benefited from this. Similar scarcity trends are predicted in water, land and food. If companies are to survive these changes to the balance of supply and demand, their leaders must both understand the threats and see the opportunities.

Dynamic leaders who can see the problems and prospects ahead must use this knowledge to set the right tone across their organisations. This tone from the top is vital in all aspects of governance. In ethics, the CEO’s personal perspective is crucial. Once the leader ‘gets the ethics bug’, the whole organisation is more likely to follow suit.

Backed up with action
But leaders must go much further than being merely aspirational. Policy statements need to backed by action that is clear, effective and brings about changes in direction. These changes demonstrate to middle managers that their leaders mean what they say. If they realise that there is a genuine corporate commitment to a particular course of action, they are more likely to support it in practice.

Middle managers need to be given explicit and implicit authority to speak up where they believe that the welfare of the organisation and its employees is being threatened. They must be converts and evangelists for the corporate mission – including the ethical dimension. The leader who understands the value of ethical principles and practices will effect real change only if their zeal can be converted into a strong culture that infects the whole organisation.

Accountants: ethical responsibilities
So what are the special responsibilities of accountants in making business more ethical? Countering bribery is an obvious starting place. CIMA members are bound by strict standards in the CIMA code of ethics. Because of this, they are valued by organisations as a bulwark against morally questionable practices. They can be instrumental in countering the development of a culture that normalises the payment of bribes.

Management accountants have a further important responsibility: the delivery of accurate management information is vital to understanding a firm’s overall sustainability, gauging its environmental impact and showing how effective its governance systems are, for example. They have a key role in compiling the so called ‘connected reports’ that Accounting for Sustainability is advocating with increasing force.

Some accountants may feel that being a cheerleader for a cause such as sustainability clashes with the dispassionate role of the traditional finance function. Undeniably, people with professional accountancy qualifications are valued because of their ability to stand above the fray and perform impartial analyses. But, as this paper has argued, it’s wrong to believe that ethical principles conflict with the long term viability of a business.

Here are the recommendations in the paper
Ethics must be embedded in business models, organisational strategy and decision making processes.

Senior managers and business leaders must demonstrate an ethical approach by example. This will show that middle and junior managers will be rewarded for taking an ethical stance.

Non executive directors should act as custodians of sustainability, with the particular duty of ensuring that their executive colleagues are building a sustainable business.

Managers must come to problems with ‘prepared minds’, looking at ways in which an organisation can benefit from an ethical approach rather than one that relies narrowly on cost cutting or compliance.

Finance professionals must play an active role as ethical champions by challenging the assumptions upon which business decisions are made. But they must do so while upholding their valued reputation for impartiality and independence.

Management accountants are encouraged to help ensure that their businesses are measuring performance on an appropriate timescale that will deliver sustained and sustainable success.

Business leaders should use the skills of the finance team to evaluate and quantify reputational and other ethical risks.

Finance professionals need to take social, environmental and ethical factors into account when allocating capital, so that sustainable innovation is encouraged.