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FTSE100 companies failing to provide clear measures of ethical standards

19 January 2015

FTSE100 companies are failing to provide investors with clear measures of how they maintain robust ethical standards, according to a study by the Chartered Institute of Internal Auditors. This leaves investors with little concrete information about how well companies are protecting themselves from exposure to corporate scandals and serious reputational damage.

The Chartered Institute of Internal Auditors' study shows that while 91% of the FTSE100 refer in their annual reports to their high standards of business ethics and integrity, only 8% provided a specific metric of their company's ethical performance.
This low level of reporting comes despite the mounting evidence from scandals such as the mis-selling of financial products that a company's poor ethical standards can cost shareholders dearly.

The Chartered Institute of Internal Auditors points out that performance metrics, whether financial or non-financial, are crucial in enabling shareholders to understand whether a company is improving in a particular area or getting worse.
The specific measures on ethical performance provided by companies included indicators of employee awareness of ethics, and industry-specific measures such as supplier and factory visits.

56% of FTSE100 companies state in their annual report that they have an ethical code or policy. However, just 3% of companies provided information to demonstrate that their employees had actually read and understood the code. A further 4% of companies provided figures showing what proportion of their workforce had undergone some form of training on proper ethical standards, and one company said that it monitored employee awareness of ethics, without explaining how.

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 and legal risks.
Dr Ian Peters, Chief Executive of the Chartered Institute of Internal Auditors, said: "Recent corporate scandals have provided ample demonstration of the material risk that poor ethical standards can pose to businesses."