Does Business Ethics Pay?
Launch speech by Sir Paul Judge
At the Institute of Business Ethics, 24 Greencoat Place, London SW1P 1BE
Thursday 3rd April 2003

It must be respected by society but some people still have in their minds the days of dark satanic mills and child chimney sweeps, when the words business ethics were interpreted in a very different context. And we still have too many people who look down on trade in their various ways.

The first part of my career was at Cadbury Schweppes. Sir Adrian Cadbury is one of the most ethical of businessmen. I remember him telling me about the time in the 1980's when he went to Eton to talk to the housemaster about his son's career. The housemaster asked Adrian about his own thoughts on this. Adrian answered that in the light of his family heritage it would be very nice if his son were to go into some form of manufacturing or other business activity. The housemaster reflected on this for a while and said "Well Adrian, that is very interesting but it is rather a pity as he is such a bright boy".

There has also been a reluctance in some quarters to apply normal and rigorous scholarly research to the area of business. However academics exist to research and teach about all of the intellectual, practical and moral aspects of human heritage and behaviour. In my view the buying and selling of goods and services must surely feature as one of the most important aspects of human endeavour. It is therefore a very legitimate area for proper research to try to counter any popular misconceptions.
I would now like to comment on three of the key areas which impact on modern business ethics. These are consumers and the community, corporate governance and the management team.

Earlier this week I was at a breakfast seminar given by Pete Peterson, a former US Secretary of Commerce. He has recently been Chairman of the Conference Board Commission on public trust and private enterprise. He said he began that review with his own somewhat comforting theory that in top business, despite the evidence of Enron and WorldCom, there are only a few rotten apples in the barrel. However he stated that the research he did for that Commission showed that the breakdown of public trust in American business is actually broad and deep. Study after study shows that substantial majorities of Americans now believe that most of the people at senior levels of business are, in the broadest sense, presumed guilty until proven innocent. 79% of Americans said that it is very or somewhat widespread that top executives of large corporations take improper actions to help themselves at the expense of the corporation. Similarly although 75% of Americans trust the people who run small businesses, only 23% trust the CEO's of large corporations. This is only just above the 15% who trust car dealers.

Similar attitudes occur in the UK and elsewhere around the world. We all remember the issues surrounding Brent Spar and the difficulties which Nike and GAP have had with their sourcing of their products from developing countries. Business must clearly do everything it can to rebuild the trust of consumers and politicians.

Companies need customers and they also need legitimacy from governments. Issues about executive remuneration, the environment, and employee policies become inextricably linked in attitudes to policy making. The corporate sector must maintain and improve its public image if it wishes to escape serious regulation and restriction.

This leads me on to the importance of corporate governance. The recent Higgs report was commissioned as a reaction to various shareholding losses. I am however not one who believes in box-ticking for its own sake. Maxwell and Saunders were not caught because they filled a form in wrongly. Burglars do not normally tell the police before they break in.

However it is a key responsibility of all Boards to decide and communicate their culture and character. Many British companies have indeed had statements of values for many decades but this was first codified in the 1992 Cadbury Report on Corporate Governance. This said "It is important that all employees should know what standards of conduct are expected of them. We regard it as good practice for Boards of Directors to draw up codes of ethics or statements of business practice and to publish them both internally and externally". This gave Board's the clear dual responsibility of framing codes of conduct and then of living by them.

These codes can relate to the environment, to community activities, to the treatment of suppliers, to trading with the third world, and to employee and general human rights. Different aspects will be of importance to different companies. However all of them need carefully to consider their own priorities and the ways in which ethical standards are most needed to be clarified for the particular organisation.

This is not just a theoretical exercise as there will often be a series of organised interest groups ranged against the company. They bring pressure to bear and attempt to influence corporate decisions. Such pressure groups are nearly always single minded and are formed to pursue a particular purpose, such as a campaign against the closure of a particular factory. However they do not of course carry any responsibility for finding a better solution to the problems which gave rise to the proposed closure. This narrow focus can apparently give special interest groups the moral high ground compared with the Board of a company which has to balance the interests of all of its various stakeholders. It is often comparatively easy for interest groups to argue that the Board is biased and is solely influenced by private gain. It is at such times that clarity about the company's values and ethics can be at its most important. Boards must consider all of these pressures and then try to arrive at a decision which takes account of all of the various interests.

It can therefore be seen that a fundamental responsibility of a Board is to codify and monitor its ethical values. The companies which do this are likely to have a clearer and more cohesive management group and this leads me on to my third key area.

I have for some time been a strong believer in the need to recognise management as a profession. We do not of course allow somebody to practice as a brain surgeon or as a barrister without a proper professional qualification. And yet we have been too ready to allow people to lead massive commercial or governmental organisations without any equivalent training. However, we know that even compared with the traditional professions the effectiveness of such leaders can have even more important ramifications on the communities in which they operate. I therefore believe that management should be seen as a sector where, as in the traditional professions, it is possible to learn both the theoretical framework and useful practical techniques. Equally important to a profession is that continuing education and a structure of ethics must play a full part.

I believe that the business schools are now putting ethics very much on the agenda. Past examples and case studies can help people to analyse and understand the issues which must be considered. As is realised by all of those who know the realities of life, there are many situations where there are no simple answers. For instance if a management team becomes aware of a possible but unlikely serious setback, should it disclose this if the disclosure is itself likely to damage the company and its employees. With hindsight it may be very clear, but at the time there will be huge conflicts to consider. We need people to take an honest look at the issues and to come to the best possible decision. Corporate governance can help to provide the proper structures for the debate. All directors also have to acknowledge and accept their two common law duties which predate all the codes of conduct: the duty of loyalty and the duty of care. However in the end it is the personal characteristics of the people involved which will make all the difference and determine whether the company acts ethically or otherwise.

I therefore welcome this research as it impacts on each of these three key areas. Firstly it helps in the process of highlighting to the community the importance of ethics to a company. Secondly it builds on the corporate governance requirements by using the existence of codes of conduct as one of its key inputs. Thirdly the results which it demonstrates will help management teams to see the benefits of ethical codes.

In many ways it is not surprising that this research report shows that those companies with a clear code of ethics also perform better than those which do not have one. However it is very important to have the clear evidence that this is so. With these results you can all be confident that a set of well thought out corporate values in your own organisation can reduce its level of risk and give greater coherence to all of its decisions. Quite simply it can help a company to be a better team and more easily to meet its objectives.

Thank you.

Paul Judge/3 April 03

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