If a company wants to be trusted, it must be much more than merely competent. And, compared with community expectations around ethics, an ability to do the job is a relatively minor concern.

We now know ethical concerns are three times more important than being able to do the job to the expected standard, thanks to a recent global poll by the Edelman Trust Barometer.

Australia has been in a state of distrust for almost a decade, with an increasingly cynical and disappointed public, drip-fed on a regular diet of corporate and institutional scandals.

The recent bushfires made matters worse, with Australians feeling they were no longer in control, according to Edelman Australia CEO Michelle Hutton.

“The lack of empathy, authenticity and communications crushed trust across the country,”  she told the Australian Financial Review.

The majority of the mass population do not trust their institutions to do what is right, according to the Barometer.

Executive director of The Ethics Centre, Dr Simon Longstaff, warns that important institutions in Australia are getting “perilously close” to losing their legitimacy – which creates anger, insecurity and fear.

None of those things allow a society to enjoy the kind of settled peace that it would aspire to, he said recently.

“Trust is an issue because most of our institutions have betrayed their purpose. I don’t think they set out to do it in a deliberate way. I think they forgot their purpose, whether it’s churches or banks or in politics,” he said on the ABC’s Q&A programme in February.

Longstaff defines trust as an ability to rely on somebody to do what they have said, even when no one is watching them.

The Edelman Trust Barometer divides company trust scores into four elements, and ability (or competence) accounted for 24% of the total. Ethical concerns make up the remainder: integrity 49%, purpose 12%, and dependability 15%.

The researchers find the reason for the general lack of trust in institutions is that none are regarded as both competent and ethical.

Among the institutions – business, government non-government organisations (NGOs) and the media – only the NGOs were seen as ethical (but not competent) and only business was found to be competent (but not ethical).

Part of the explanation for the poor regard for business ethics could be explained by the tendency of companies to give a higher priority to communicating their performance than their commitment to ethics and integrity, or their purpose and vision for the future, say the researchers.

“At the same time, stakeholder expectations have risen,” they say.

“Consumers expect the brands they buy to reflect their values and beliefs, employees want their jobs to give them a sense of purpose, and investors are increasingly focused on sustainability and other ethical commitments as a sign of a company’s long-term operational health and success.

“Business is already recognised for its ability to get things done. But to earn trust, companies must make sure that they are acting ethically, and doing what is right. Because for today’s stakeholders, competence is not enough.”

Dr Longstaff says regaining trust starts with owning up to mistakes.

“What we can expect of ourselves firstly sincerity, and then think before you act. Do that, and you can reasonably be assured that the trust that you hope for will be bestowed.”

How to rebuild trust:

Adopting a minimum threshold of fundamental values and principles can restore trust and minimise the risk of corporate failure.

1. Respect people. Everyone has intrinsic value – regardless of their age, gender, culture, and sexual orientation. A person should never be used merely as a means to an end or as a commodity. This principle forbids wrongs, such as forced labour and supports the practice of stakeholder engagement.
2. Do no harm. The goods and services should confer a net benefit to users without doing harm. Those who profit from engaging in harmful activity should disclose the nature of the risk.
3. Be responsible. Benefits should be proportional to responsibility. One should look beyond artificial boundaries (such as the legal structures of corporations) to take into account the “natural” value-chain, such as how supply chains are viewed and concerning matters like corporate tax and its avoidance and evasion. This principle takes into account asymmetries in power and information to the detriment of weaker third parties.
4. Be transparent and honest. These values are fundamental to the operation of free markets, in which stakeholders can make fully-informed decisions about the extent (of their involvement with the corporation. Corporations need to disclose details of the ethical frameworks that they employ when deciding whether or not a decision is “good” or “right”.

Source: Edelman Trust Barometer. An online survey in 28 markets of more than 34,000 people. Fieldwork was conducted between October 19 and November 18, 2019. A supplementary study was conducted in Australia in February 2020 to account for the bushfires. In Australia, 1,350 people were polled.

The Ethics Centre is a world leader in assessing cultural health and building the leadership capability to make good ethical decisions in complexity. To arrange a confidential conversation contact the team at consulting@ethics.org.au. Visit our consulting page to learn more.

They say that what gets measured, gets managed (or improved).  But when it comes to measuring corporate culture, that’s an idea that needs unpacking.

The corporate sector has traditionally taken a quantitative approach to risk management and governance. Compliance, regulation, risk and legislative frameworks are applied, analysed, audited and reported-on to varying degrees of accuracy and certainty.

Unfortunately, these management mechanisms do not in themselves lead to effective governance as evidenced by a multitude of corporate scandals and collapses. Overconfidence in the science of risk management can lead to faulty corporate governance – and could well lead to disaster.

The art of risk management and governance lies in the capability of directors and executives to navigate and understand the highly complex and unpredictable set of human behaviours and interactions that make up a modern organisation.

The current scientific approach to risk management is insufficient when seeking to mitigate non-financial risks to business success – leaving companies vulnerable to catastrophic levels of exposure. There is now a shift in thinking and an appreciation that the intangible qualities of culture are critical to the issue of risk management and corporate governance.

Can you measure culture?

The subtle aspects of an organisation, such as values, motivations and political dynamics, are difficult to measure, influence and describe, let alone govern effectively. Performance management and processes, culture and engagement surveys, leadership competency assessments and organisational development initiatives are designed to create visibility of these aspects of organisations, but they often fall short by not accounting for the hidden, unspoken and un-self-aware aspects of human agents and the social systems in which they operate.

For over 20 years The Ethics Centre has been developing a unique approach to navigating these complexities – and, in the process, to accurately measure and understand culture.

Our Everest process assesses the level to which an organisation’s lived culture, and the actual systems and processes that drive the business, align with their intended ethical framework. Through in-depth exploration and analysis, gaps between the ideal and the actual culture of a business emerge, along with areas where formal systems and behaviours are misaligned to the stated values and principles.

Everest digs far deeper than a standard organisational review, identifying themes that relate to experiences over time and between groups of people, and reflecting them against the organisation’s formal policies and procedures. It enables companies to build a climate of trust for clients, shareholders and regulators; to unify employees around a common purpose and encourage values-aligned behaviour; to develop consistency between what you say you believe in and how you act; and to enable consistent decision making. Ultimately reducing the risk of ethical failure and poor decisions.

The Ethics Centre’s Everest process is a tried and tested methodology that produces invaluable insights and recommendations for change. In just the past five years, Everest has been deployed to assess the organisational culture of one of Australia’s largest banks, a major superannuation fund, a leading energy company, a major telco, a mining company and a wagering company – amongst many others.

Transforming organisations

Whilst most of our clients have chosen to keep their Everest reports confidential, two recent clients – The Australian Olympic Committee and Cricket Australia – elected to publicly release the reports into their organisations.

In both instances, these acts of “radical transparency” acted as a circuit-breaker following periods of widespread negative coverage.  The release of these reports allowed the organisations to re-boot with renewed purpose and energy.

According to Matt Carroll, the widely-respected CEO of the AOC, “the review conducted by The Ethics Centre provided us with the platform to reset the organisation. We are committed to building a culture that is fit for purpose and aligned to our values and principles.”

Our report on Cricket Australia – following the infamous ball-tampering incident in 2018 –  ran to 147 pages and contained 42 detailed recommendations. Our key finding was that a focus on winning had led to the erosion of the organisation’s culture and a neglect of some important values. Aspects of Cricket Australia’s player management had served to encourage negative behaviours.

It was clear, with the release of the report, that many things needed to change at Cricket Australia. And change they did. Cricket Australia committed to enacting 41 of the 42 recommendations made in the report, along with widespread renewal of their executive team and board.

“With culture, it’s something you’ve got to keep working at, keep your eye on, keep nurturing,” says CA’s chairman Earl Eddings. “It’s not: we’ve done the ethics report, so now we’re right.”

Most of the corporate collapses and scandals that have occurred lately were not the result of inadequate risk management, poorly crafted strategy or an absence of appropriate policies.  Nor were they caused by incompetence or poorly trained staff.

In almost every case, it is becoming apparent that the causes lay in the psychology, ethics and beliefs of individuals and in an organisational culture that rewards short term value extraction over long term, sustainable value creation.

This misalignment between the espoused purpose, values and principles of an organisation and the real-time decisions being made each day can increase reputational and conduct risk leading to an erosion of trust, disengagement and poor customer outcomes.

Even companies with no burning platform benefit from the rigorous corporate health-check that Everest provides.  To quote Ian Silk, CEO of another Everest client Australian Super:

“In my darkest moments I just wondered if we had all drunk the Kool-Aid, and whether the staff surveys reflected the facts.  So I thought a really good way to test this would be to get The Ethics Centre to come in and do an entirely independent, entirely objective test of the culture and the ethics in the organisation.”

If you are interested in discussing any of the topics raised in this article in more depth with The Ethics Centre’s consulting team, please make an enquiry via our website.

Over the past few weeks a lot has been written about the “Statement on the Purpose of a Corporation” issued by the Business Roundtable in the United States.

The Business Roundtable, an association of chief executive officers from America’s leading companies, has shifted its position on who a corporation principally serves.

The original statement, published in 1997, suggested that companies exist to serve its shareholders. The new statement, signed by 163 chief executive officers, states that “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.”

This “stakeholder approach” to corporate responsibility is not in itself ground-breaking. Nor is it a recent invention. In Johnson and Johnson’s corporate credo developed in 1943, the company lists patients, doctors and nurses as its primary stakeholders, followed by employees, customers, communities and finally shareholders.

Indeed, the shift to a stakeholder approach may not be as profound in practice as some have suggested. Even the Business Roundtable have said that the previous statement “does not accurately describe the ways in which we and our fellow CEOs endeavour every day to create value for all our stakeholders, whose long-term interests are inseparable.”

Given this, it is possible that chief executive officers only support the stakeholder approach to the extent that it benefits both themselves and the shareholder. And we should not necessarily decry this. Adam Smith, sometimes referred to as the “father of economics”, argued that individual self-interest can produce optimal outcomes, the source of his so-called “invisible hand”.

Even Milton Friedman, the much-maligned University of Chicago economist who is often held out as being the most vocal advocate for shareholder primacy, was not ignorant to the possibility that looking after the needs of stakeholders is not necessarily at odds with generating superior returns for shareholders in the long run. Famously, Friedman wrote:

“It may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.”

However, as committed as the Business Roundtable might be, circumstances will prevail that are not supportive of the stakeholder approach. Uncompetitive markets result in companies benefiting at the expense of consumers. Seemingly sensible incentive schemes can drive perverse outcomes. And a company’s products, despite being highly valued by its customers, can have broader, deleterious consequences (fossil fuel companies producing carbon dioxide, social media companies empowering covert actors, and technology companies producing “e-waste” are three examples of the latter).

The signatories to the revamped Statement on the Purpose of a Corporation would have you believe that they can be trusted to manage these types of scenarios. We should be cautious taking them at their word. History shows that even well-intentioned chief executives find it extraordinarily difficult to drive the required change in a system where the incentives endorse the status quo. And in some cases, regardless of how hard they might try, they do not have the ability to do so. The most lucid corporate purpose statement won’t save us here.

It is therefore noteworthy that the Business Roundtable has omitted the idea of accountability from its statement. If chief executive officers are serious about serving all stakeholders, how will they be held accountable?

Milton Friedman also had something to say about this. He believed that corporations should conform “to the basic rules of society, both those embodied in law and those embodied in ethical custom.” But more importantly, as laissez faire as he was, he acknowledged that there was a role for government to “enforce compliance” and hold those who don’t “play the game” accountable.

Arguably this is the most important piece of the puzzle. Strong public institutions that develop good policy and hold corporations accountable. It is also the piece that is currently missing.

The recent financial services Royal Commission was a demonstration of what can happen when boundaries are established but not enforced. In a recent speech delivered by Commissioner Kenneth Hayne, he asked us to “grapple closely” with what the seemingly endless calls for Royal Commissions in Australia “are telling us about the state of our democratic institutions.”

But more relevant to this essay, Commissioner Hayne also provided his view on purpose statements and industry codes in the Royal Commission’s final report. He labelled them as mere “public relations puffs”, proposing that the only way they can be effective is by making them enforceable:

“If industry codes are to be more than public relations puffs, the promises made must be made seriously. If they are made seriously (and those bound by the codes say that they are), the promises that are set out in the code … must be kept. This must entail that the promises can be enforced by those to whom the promises are made.”

To be sure, the stance taken by the Business Roundtable should be applauded. Their intentions are without question noble. But more powerful would be a description of how they are going to hold themselves accountable to the statement and create the conditions that deliver value for all their stakeholders over the long-term.

Of course, this exercise would reveal the costs (financial and otherwise) that are associated with being genuinely committed to positive outcomes for all stakeholders. For some chief executive officers, the price would be too high. And because, like all of us, chief executives have their limits, so too does self-regulation.