Ethics programme's success begins and ends with ethical leadership

28 February 2008

Willem Landman
Chief Executive Officer
Ethics Institute of South Africa

Tiger Brands was recently in the news twice because of alleged irregular and illegal conduct. In 2007, Tiger Brands was fined R100 million as a result of cartelisation in respect of the bread price.
 
Now there are allegations that Adcock Ingram, Tiger Brands' pharmaceutical company, has formed a cartel with other pharmaceutical companies to fix the price of medical products supplied to hospitals, and to apportion contracts between them.
 
Not only is the formation of cartels illegal, but it is also profoundly unethical, because it flies in the face of the values or standards for good conduct. Individual and institutional consumers are disadvantaged in that they pay too much for products - the price of a staple food is kept artificially high, also for the needy, and taxpayers unnecessarily cough up millions for medication in state hospitals. And Tiger Brands' shareholders benefit unfairly and wrongfully.
 
The detrimental effect on Tiger Brands' reputation and the confidence of consumers may still cast a long shadow over the rpivate sector as a whole.
 
Some of Tiger Brands' ethical risks have materialised. This happens when ethical values - such as integrity, respect, honesty, or fairness - and, coupled therewith, specific ethical conduct that is anchored in those values are disregarded.
 
Ethics-risk management forms the basis of all risk management in companies. The most far-reaching ethics risks are fraud and corruption , but there are many others, such as risk relating to the safety of workers and consumers, or misrepresentation in communications.
 
How should Tiger Brands have managed its ethics risks, and what should Tiger Brands - or any other company - do henceforth to limit or prevent unethical conduct? In short, what are the obligations of the board of directors and top management with regard to ethical risks in the company?
 
The King 3 report on corporate governance, planned to be complete later this year, will provide much clearer guidance on ethics management.
 
Ethics management is aimed at the creation of an ethical culture, rather than unthinking, slavish compliance with legal regulations and ethics precepts.
 
Ethics management rests on four pillars. Firstly, a company should measure its ethics risks and opportunities - negative risks to reputation and financial welfare, as well as positive oppotunities to build confidence. The right prescription depends on good diagnosis in the form of a risk profile, which serves as a management instrument to manage risk and opportunities .
 
Secondly, a company should draw up its ethics "constitution" in the form of a code of ethics, which should also refer to other, more detailed ethics policies - on, for example, conflicts of interest, the giving and receipt of gifts, or the use of company assets.
 
A code of ethics deals with ethics risks and opportunities by listing the company's values and defining them operationally, and by means of conduct precepts or rules that practically illustrate these values. A good code of ethics will state, for example, under the ethical value "integrity", a principle requiring non-participation in the formation of cartels, and from this principle specific conduct precepts will then follow, amongst others: "I will not participate in cartels, such as price fixing with competitors to fix or maintain discounts, rebates, or joint boycotts of suppliers or clients."
 
Thirdly, ethical standards ought to be institutionalised by an ethics committee, the appointment of an ethics officer and the creation of structures, such as communication channels, ongoing ethics training, and anonymous reporting channels for irregularities.
 
Lastly, the successes and challenges of the ethics programme ought to be internally monitored, audited and reported. Ultimately, there ought to be an external audit, verification and reporting, as in the case of the company's financial performance.
 
In short, in a commercial context, ethics is not concerned with "soft" issues or optional extras in a "hard" reality of doing business. Ethics risks form part of the typical activities of the company - whether these be planning or marketing, mining or the sale of products.
 
An ethics programme is concerned primarily with the building of an ethical culture - "this is how we do things here". But this can happen only if ethical standards are properly communicated and debated, are integrated into ways in which business is done and are enforced. The success of an ethics programme begins and ends with ethical leadership by the board of directors and top management - the "tone at the top".
 
But even a model ethics programme on its own is no guarantee of good institutional ethics because, ultimately, it is the free choice of individuals or groups to act unethically that can harm the company or even destroy it, as in the Enron case.
 
If an ethics risk none the less materialises in a company with an ethical culture, self-defence is easier, however.
 
The board of directors and top management will more credibly be able to distance themselves from unethical conduct and damage, because it clearly goes against their public commitment to ethical values, policy and conduct.
 
The question posed to Tiger Brands, and, at the same time, all South African companies and state institutions, is the following: "What are you doing to manage your ethics risks and to build an ethical culture?"