FTSE 100 companies still failing to prove their ethical claims

FSTE 100 companies are still not providing shareholders and other stakeholders with a measure of the ethical standards they claim in their annual reports, according to research by the Chartered Institute of Internal Auditors.

90% of FTSE 100 companies make reference to their high ethical standards or integrity as part of their annual report.  However, only 18% provided a metric to demonstrate to shareholders that these ethical standards are actually being upheld in practice, and to allow shareholders to track whether the company’s performance is getting better in this area, or worse.

The IIA says that although more than twice as many FTSE100 companies are now providing specific metrics on ethical standards in comparison with three years ago, the number doing so is still very low.  This may suggest that many FTSE100 companies do not have a complete picture of the health of the corporate culture and standards of behaviour across the company.

The IIA recently called for boards to take action to audit their corporate culture and behaviour. The report said that boards must clearly define the standards of behaviour that the company aims to uphold, and back this up with policies and systems that enable it to monitor these standards throughout the organisation, not just at the top.  The IIA advises that these systems should address areas such as recruitment policies, performance management and reward.

Internal Auditors are responsible for providing an independent opinion to the company’s board on how the organisation’s risk management and governance is working, including systems to manage reputational, compliance and legal risks.

Recent controversies including the GlaxoSmithKline bribery case, the Libor rigging scandal involving several major banks, and the Leveson inquiry all illustrate the risks to businesses of failing to ensure that appropriate standards of ethics are maintained across the organisation.   Policy-makers are also taking an increased interest in business ethics – the new Banking Standards Review Council is expected to have a strong focus on the improvement of culture and behaviour within banks.

 In the IIA’s study, the most common measures used by FTSE100 companies to demonstrate their ethical behaviour were indicators showing how well the company’s ethical policies are understood by staff and suppliers.  Seven FTSE 100 companies included in their annual report the percentage of their staff who had formally acknowledged that they understood and accepted the company’s ethical policies. A further 11 gave figures on the amount of training on ethical issues that had been provided to their staff.

Additionally, 26% of FTSE 100 companies provided a specific reference to their anti-bribery standards or compliance with the Bribery Act.

Dr Ian Peters, Chief Executive of the IIA, said: “It is becoming increasingly accepted that boards and senior management need to set the right ethical tone across the whole business. If they don’t, they run the risk of getting into difficulties with the law and regulators and this can damage the company’s reputation and brand. The fact that so many FTSE 100 companies are now making specific reference to the ethics of their business in their annual report demonstrates a growing awareness that behaviour and practices are on the radar of shareholders as well as of consumers and regulators.”

“However, although 90% of the companies in the FTSE 100 say they have high standards of ethics and integrity, fewer than one in five provides shareholders with evidence that these standards are truly being enforced.  This suggests that companies need to do more to ensure effective controls and metrics are in place to protect themselves from the risks that can crystallise when ethics and culture are weak. Not only do they need to do more but it needs to be appropriately reported, with the information in those reports adequately quality assured.”