Business Ethics as Risk Management

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Responses to recent corporate collapses have overlooked the importance of business ethics in managing risk

* Four indicators of business ethics and their risk management aspects are discussed

* Investors are wanting companies to disclose how they are managing the risks from poor business ethics practices

Over the past decade, poor risk management of various kinds, for example, a lack of board independence or potentially compromised auditors, has contributed to sometimes spectacular company losses and failures. Largely absent from regulatory and (until recently) investor responses to this has been a consideration of business ethics. As the collapse of Enron demonstrated, all the correct oversight structures of an independent board and corporate governance charters cannot compensate for the lack of an ethical corporate culture.

The importance of business ethics in risk management has hovered around the edges of inquiries such as the Owen Royal Commission and the Jackson Inquiry. Both inquiries looked beyond mere legal boundaries on company behaviour, to wonder if all the costs and reputation damage could have been avoided by (in Justice Neville Owen's words) someone asking 'is this right?'

Why has the issue of business ethics not received more systematic attention from business and investor groups? One explanation could be that ethics is a contentious subject that overlaps, sometimes uneasily, with questions of law. Another explanation is that real measurement of ethics by outsiders is difficult, although not impossible. However, investors are beginning to focus on business ethics as one of the missing pieces to the risk management puzzle.

Research commissioned by BT's superannuation fund clients and performed by Monash Sustainability Enterprises, has shown that poor business ethics practices can translate into a range of risks to company performance and returns to shareowners. This article discusses the business ethics indicators used, the need for investors to be informed about how companies are managing the risks posed by poor ethical practices, and the need for listed companies to ensure such information is disclosed and to develop a strong ethical business culture.

Defining business ethics

To try and define business ethics, we selected four indicators that focused on ethical breaches which threaten to harm a company's major external stakeholders: consumers and the general public. Such breaches in turn, create material business risks.

The four indicators we chose were:

* avoiding unfair business practices

* protecting consumer privacy

upholding community safety and welfare, and

* responsible marketing and promotion.

These indicators are by no means exhaustive, rather a set of 'measurable' risks. We discuss the risk management aspects of these indicators below.

Avoiding unfair business practices

Unfair business practices such as price fixing, bid rigging and market collusion can be punished with fines of $10 million under the Trade Practices Act (TPA). Proposed amendments to this Act, now before the Parliament, would substantially raise the penalty for violations to up to three times the amount of revenue generated by their collusive practices, or if this cannot be quantified, 10% of their annual turnover.

Other legislation implementing the OECD's Anti-Bribery Convention makes bribery of foreign public officials an offence, punished with a maximum fine of $330,000 for companies and up to 10 years in prison for the responsible executives. There are similar penalties for bribery of an Australian official, not to mention the associated negative publicity.

Protecting consumer privacy

Customers want to feel their information is safe and protected by the companies they give their business to, otherwise they will switch to a competitor, so it is vital for a company to manage the risks of a privacy breach. Certain companies, by the very nature of their...
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