How do you measure ethics in business?

FTSE firms have been panned for not reporting their ethical performance - but doing good is difficult to define.

by Jack Torrance
Last Updated: 11 Apr 2016

We’re not living in Victorian times anymore. For the most part people in business want to do ‘the right thing,’ rather than getting rich at the cost of labour abuses, boardroom corruption and a polluted planet. But that’s not to say that people don’t often look the other way when they know something isn’t quite right – as the banks’ libor, PPI and forex scandals, VW’s emission cheating and Tesco’s financial creativity attest.

A report just published by the Chartered Institute of Internal Auditors (IIA) calls out Britain’s biggest businesses for failing to accompany their ethical words with action. It found that while 94 FTSE 100 companies mentioned ethics in their 2014 annual reports, just 23 had some way of measuring whether they were behaving ethically. Although that’s five more than last year, the IIA says the figure suggests Britain’s biggest firms still don’t have ‘demonstrable oversight and control’ of ethical standards. None disclosed a target for ethical performance.

‘Almost all serious reviews of the global financial crisis and other business scandals since then have highlighted the importance of improving ethical standards and corporate culture,’ said its chief executive Dr Ian Peters. ‘Allegations of unethical behaviour can damage both a company’s reputation, and the overall financial strength of the business.’

The IIA has a point, but how on earth does a company measure ethics? The examples it gives are pretty shallow. The insurance firm Aviva’s metric of ethical behaviour is simply the proportion of staff who said in a survey that they had read and understood the company’s code of ethics (96% - presumably the remaining 4% don’t value their jobs, or simply answered ‘don’t know’). Drinks company Diageo’s slightly more meaningful ‘metric for ethical performance’ is the proportion of staff who have passed its Annual Certificate of Complicance.

While both of these are good things, they are far from being meaningful measures of ethical behaviour. Just because someone has ticked a box or answered some questions doesn’t mean they are behaving responsibly. In fact, if you were behaving irresponsibly the last thing you're going to do is admit to it in the annual employee ethics survey. Measuring ethics in a thorough and objective way is at best extremely onerous and at worst impossible.

Rewarding people based on their performance against some kind of ethical criteria is just asking them to game the system. Even measuring the bad things - customer complaints, carbon emissions, legal bills - risks incentivising cover-ups. While encouraging people to do good and sanctioning them for wrongdoing are both important things for companies to do, attempts to reduce these to some kind of metric seem doomed to failure.

Ethics isn't simply about action, it's also about intent. Companies and their staff will only truly behave ethically when they believe that's what they ought to be doing - not just to satisfy the demands of their board. 

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