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Turning To Ethics When Trust In Business Is At An All-Time Low (What About Pay?)

This article is more than 9 years old.

After years of feeling they might be fighting lone battles, all the 'good guys' with an interest in better business, leadership and corporate governance could be forgiven for giving a little cheer. Not only is 'sustainability' beginning to go mainstream, but so - it seems - is an endeavour for ethics to follow suit.

The latest report from the UK's  Institute of Business Ethics  (IBE) sets out why company directors need to be actively involved in setting and maintaining a company’s ethical values. One of the lessons of the 2008 banking crisis has been that ethics matters to business, both in terms of its reputation and its sustainability, writes Peter Montagnon, Associate Director  in Ethics, Risk & Governance: a board briefing paper. The challenge for business is how to develop and embed real values in order to regain public trust, needed if they are to secure their franchise for the long term.

There is nothing revolutionary in the thinking here. But, in the wake of the financial crisis it marks a concerted effort at the top of British business and regulation to put across the same message. Welcoming the report at its launch at the Institute of Directors, Sir Winfried Bischoff, Chairman of the Financial Reporting Council (FRC) pointed to the need to restore trust  in business at a time when "trust is at an all-time low."

The public" said Sir Win, "has rarely been more cynical about big business." He added : “The UK Corporate Governance Code requires Boards to set out their companies’ values and standards and lead by example so that good, appropriate behaviours are embedded throughout the company."

Indeed, a survey conducted by YouGov (which tracks public opinion) for the Institute For Family Business (IFB) has just found that family companies are more than twice as likely to be trusted than listed businesses. The IFB found: "Values are key: 88% say an important factor for a company to be trusted by them is that it has strong values. Some 53% say family businesses have stronger values than other companies  - only 9% disagree."

But all the talk about ethics is still in danger of amounting to little more than hot air unless incentives - both in a relative and an absolute sense - are tackled as intrinsic to the construct of values. Ways suggested by the IBE paper (available on the its website) in which boards can focus on values, include making sure that "incentives are based on non-financial as well as financial performance" and that "targets do not undermine the company’s ethical values."

So where do the banks fit in ? A survey by Mercer just out reveals that the majority of EU-based banks plan to increase use of non-performance linked cash allowances or raise base salaries to manage within an EU-imposed bonus cap. It says 70% of EU-based banks are seeking approval for increasing the bonus cap to 200%.

Benchmarking remains a popular means of reinforcing the status quo when it comes to high pay. Nor is it restricted to bankers, but to an entire corporate elite - which includes the accountancy and law firms that act as trusted advisers to the financial sector.

The increasingly difficult question may be where to begin to fix the loss of trust without looking harder at the overlap in top levels of pay, and at the players who overlap different sectors. A report, Cheques And The City, written by Stephen Wilks, Professor Emeritus at Exeter University, for the High Pay Centre, an independent non-party UK think-tank, provides food for thought.

It says: "The ‘Big 4’ accountants are responsible for auditing 96% of FTSE 350 companies. 46 FTSE 100 Finance Directors are former employees of one of the Big 4, while five of the fifteen board members of the FRC, responsible for regulating auditing and accounting practices, as well the development and enforcement of the UK Corporate Governance Code, previously worked for the Big 4."

And it adds: "Lawyers and accountants face a potential conflict of interest. On the one hand, they have a quasi-regulatory role, ensuring that markets can have trust and confidence in accounts and contracts. On the other, the firms they scrutinise are their biggest customers and ultimately generate the multi-million pound pay packages for senior partners."

It may well be that if the restoration of trust in business is the goal, then levels of 'pay' needs to come under as much scrutiny and be as much a 'buzzword' as 'ethics' appears to have become.