The importance of business ethics

BG plc, formerly British Gas, describes its Statement of Business Principles in the following terms:

"It is our corporate values that determine the character of the organisation … these are the key beliefs that define our corporate philosophy. The document also details the ethical principles that govern our day-to-day operations. These are not negotiable and represent what we stand for, and what we will not stand for. They demonstrate to those outside as well as inside the company the standards that govern the behaviour of all BG employees. We will be judged on our success in meeting these standards at all times and under all circumstances."³¹

Shell's Statement of General Business Principles was first adopted more than 20 years ago. These principles, described by the company as "our contract with society", were revised in 1996 and now include "commitments to support fundamental human rights and to contribute to sustainable development" (see figure 2.8).³²

Difficulties

Codes of conduct require accompanying reinforcement, such as appropriate reward systems and awareness training, as well as continuous monitoring and enforcement. As IPD director Geoff Armstrong has commented:

"Embedding business ethics takes more than a code of conduct. A written statement is a good start, but it should be supported by ongoing action to ensure that the organisation's values are understood and implemented by every employee."³³

Ethical principles stem from the corporate values expressed by the senior management team. These then become part of the corporate culture and are implemented via codes of practice and statements of business principles.

The Institute of Business Ethics' model implementation process - 12 steps for implementing a code - are reproduced in figure 2.6). Evidence suggests that codes of conduct and other written statements outlining the company's ethical stance often fall short of the best practice outlined in the model. An Institute of Management study found that ethics codes did not always facilitate free and open discussions of ethical problems. In addition, 30% of respondents said that senior management were the main obstacles to ethical management in their organisations.³⁴ The Institute of Business Ethics' own research found "some ambiguity" as to who should be responsible for implementing the code. The survey reported that some organisations rely on all staff to implement it, leaving the author to conclude that: "Experience indicates that if everyone has the specific role of implementing a code, then in practice, no one has."³⁵

The research also found that only 38% of respondents had established a procedure to ensure that staff both applied and understood the code. In addition, more than a third of those surveyed had no procedure for "employees to raise matters concerning their own or other's conformity."³⁶

An Ashridge College survey reported that only a small number of companies with codes use ethics awareness training.³⁷ People Management found that many written statements were little more than a set of broad principles, rather than guides to action, leaving staff to apply them as they see fit.³⁸

Codes of conduct and suppliers, which can prove particularly tricky and which can present a number of important difficulties, is discussed in detail in chapter six (Supplier relations).

Training the key to success

Ethics training is the key to ensuring that staff adhere to written ethical codes and statements and take on board espoused values. The Ashridge College study reported that 78% of directors questioned believed that ethics training was either an "effective" or "very effective" method of developing an understanding of the company's ethical stance.³⁹ The launch of the Co-operative Bank's ethical policy in 1992, for example, occurred alongside a cascade training programme to explain the bank's stance to employees. A new training initiative entitled "Our heritage, culture and values", was introduced by the Co-op in 1995 and all existing and new employees attend a half-day training event to examine the bank's ethical approach. The course involves videos and exercises, together with question-and-answer sessions. The key objective is to "develop a greater shared understanding" of:

US aerospace company Lockheed Martin places a good deal of emphasis on ethics training for its 200,000 employees. The company operates a cascade approach similar to the Co-operative Bank's in that superiors train their subordinates throughout the business, with each instructor receiving training from an ethics officer. Lockheed Martin has also created a innovative board game using characters from the Dilbert cartoon to present staff with ethical dilemmas.⁴¹ Texas Instruments has developed a seven-stage "Quick test" for staff to help them determine whether a decision is ethical:

Social audits

Written ethics statements and codes of conduct are an essential step to developing a comprehensive ethics programme, while ethics training is vital to embedding corporate values throughout the company. Establishing a mechanism to measure how organisations meet their espoused values and principles in practice is the next stage. Some companies, such as the Co-operative Bank and The Body Shop examples noted earlier, have established social audits to monitor their positions. Social audits are described as:

"A social audit measures the following aspects of an organisation's activities: how employees and other stakeholders perceive the organisation; how the organisation is fulfilling its aims; how the organisation is working within its own values statements. Social auditing assesses the social impact and ethical behaviour of an organisation in relation to its aims, and those of its stakeholders."⁴³

The New Economics Foundation, a UK-based non-profit-making organisation that advises on ethical and social issues affecting business, estimates that between 7% and 15% of FTSE companies are exploring the idea of social audits.⁴⁴

PricewaterhouseCoopers, the chartered accountancy business, which will launch its Reputation Assurance service in January 1999 that is designed to help companies assess their social and environmental impact, estimates that 1,000 businesses in Europe and the US will adopt wider accountability measures over the next few years.⁴⁵

Social audits supplement traditional financial measures of corporate performance. The Co-op Bank's Partnership Report, for example, is published in addition to its annual financial statement. Shell UK, too, publishes the Shell UK report to society as well as its annual report.

Developed in the 1970s to track corporate performance in terms of its social responsibility, social audits tend to examine the following issues, among others: employment (eg, equal opportunities, gender, ethnic minorities, discrimination); pollution and environment (eg, energy consumption/ efficiency, recycling, carbon dioxide emissions); working conditions (eg, salary package, job security, employee development), customer concerns (eg, service levels, participation, satisfaction levels); community (eg, impact of plant closures, charitable funding, volunteering).

The Shell UK report to society, first published in May 1998, covers a wide range of issues, as Harold Bardsley, corporate health, safety and environment manager, explains:

"It covers many areas from sustainability to environmental data, as well as our social impacts, community programmes and industrial relations issues - the way we treat our employees. In many ways, it is a kind of behavioural report on Shell UK - trying to tell the world what we do and how we do it." (see case study 1).

The conviction that a company is doing things right is not the same as getting them right. The Body Shop International's mission statement, which embraces human and civil rights, ecological sustainability and animal welfare, is the starting point for its social audit. The mission statement includes the pledge: "To tirelessly work to narrow the gap between principle and practice …"⁴⁶ It is the social audit which establishes each year how narrow that gap is.

The benefits of social auditing have been summarised as:

Transparency and verification are the key

Social audits require independent and external verification if they are to be seen as more than a public relations exercise. The different aspects of the Body Shop International's 1997 Values Report, for example, were verified by three bodies. The report's environmental content was verified by the British Standards Institution; the social content by the New Economics Foundation; and the animal protection content by SGS Yarsley International.⁴⁸ Royal Dutch/Shell Group's 1998 report - Profits and principles: does there have to be a choice? - was verified by both KPMG accountants and PricewaterhouseCoopers.⁴⁹ The Co-operative Bank uses Investors In People to assess its staff development. The Centre for Tomorrow's Company evaluates how the bank responds to the interests of each partner group, and Business in the Community evaluates its sponsorship and donation policies.⁵⁰

Transparency is also vitally important if stakeholders are to have trust in the auditing process and confidence in the business. Sheena Carmichael, author of a report on business ethics published by the think-tank Demos, suggests that openness is a "key instrumental value" and that without it "there is no way of establishing the commitment of an organisation to its other professed values."⁵¹ This can occur through honest and open dialogue with all stakeholder groups and widespread internal information sharing. Social audits examine all aspects of business activity and because the outcomes include both positive and negative results, a high level of trust is attached to the findings. The Co-operative Bank, for example, admits to both successes and failures in its Partnership Report. The first report, published in 1998, contained positive findings, such as "more than four-fifths of suppliers strongly agreed that the bank behaves with integrity", and negative results, including the admission that despite a commitment to environment issues, the company had failed to recycle a single drinks can over the past year.⁵²

Corporate admission that problems exist also lends credibility to the monitoring process. This is also important when unavoidable problems arise. People will accept that accidents will happen and organisations will make mistakes, but it is how the business reacts to those situations that is important. As one participant in Shell's external stakeholders meeting, held in November 1997, explained:

"When Shell gets it wrong, which it does occasionally, it should be prepared to own up and admit it, which would greatly increase public credibility."

Despite the need for openness and transparency in reporting ethical issues, it is worth noting that of the 39 organisations responding to our survey of business ethics, more than 43% wanted their response to remain confidential.

The Body Shop International's list of social auditing "dos and don'ts" can be found in figure 2.7.

Figure 2.7: Dos and Don'ts of social auditing

Source: The Body Shop approach to ethical auditing (1998)

WHY DO IT?

Although more and more companies recognise the necessity for codes of practice and ethics programmes, and some have taken further steps to monitor how the business meets its stated ethical stance, the majority only take action when faced with a public relations disaster. Managers generally become defensive when faced with accusations of unethical corporate conduct and usually organisations are taken by complete surprise when a business activity creates controversy. The US-based Ethics Resource Centre estimates that two-thirds of corporate clients request assistance with establishing a ethics programme after adverse media attention.⁵³

Yet there are significant potential business benefits to be gained from being seen to commit to a high level of probity, integrity and fairness in corporate activity, as well as pragmatic reasons for adopting an ethical stance. Bottom line results increasingly depend on corporate reputations. Corporate standing is determined by perceptions of its relationships with customers, employees, suppliers and the wider community. Adverse publicity can destroy carefully nurtured reputations which at best may take years to restore and at worst, may never recover. Academic John Kay suggests that lasting companies are those which manage their key relationships and focus on their reputations.⁵⁴

One US study reported that 78% of all consumers avoid, or refuse to buy from, certain businesses because of negative perceptions about them, with almost half of those citing unethical business practices as playing a significant role in their decisions. In addition, the survey found that 16% of consumers actively seek information about a company's business practices before making a purchase.⁵⁵ Indeed, it only takes a small minority of consumers to resist buying a company's goods or services to affect profitability.

Two examples show what can happen when problems arise. Nike reported in March 1998 that its financial performance over the previous year had deteriorated. According to The Washington Post this was in part due to "resistance by customers because of persistent allegations that the company mistreats its factory workers".⁵⁶ In the eight years following the Bhopal disaster, Union Carbide's sales fell from $9,900 million in 1984 to $4,800 million in 1992.⁵⁷

Some companies have made a virtue out of displaying a high level of business ethics and have become successful as a result. Body Shop's reputation and marketing strategy, for example, has been built on taking an ethical stance on a range of human and animal rights issues. Cafédirect coffee, launched in 1996 and sourced straight from the producers, has recorded a 55% increase in sales between 1997 and 1998.⁵⁸

Obviously adopting a high moral and ethical stance has its dangers. When business activity contravenes an organisation's stated values (especially those highlighted in advertisements) or a code of practice, the subsequent publicity is likely to be vitriolic. Disney, Levi Strauss and Nike have all suffered an exposé of working conditions in supplier companies that failed their own intended corporate standards and experienced damaging publicity (see chapter six, Supplier relations). In the UK, Prudential Assurance provides a clear example of advertising that subsequently becomes an embarrassment. Prior to the company's involvement in the pension mis-selling scandal, the Prudential ran a series of television advertisements portraying its chief executive, Sir Peter Davis, and using the slogan "trust me".⁵⁹ Similarly, clothing company Benetton, which uses adverts challenging racism and prejudice, has been accused of using Turkish suppliers which employ child labour (see chapter six, Supplier relations).⁶⁰

Establishing high ethical standards which are continuously updated and monitored can provide a early warning system of potential problems. An ethics programme which considers the views of all stakeholders is also one that can alert the business to changing concerns, enabling it to begin its own change process ahead of competitors.

Case Study 1
From pariah to paragon? The transformation of Shell

In 1994, Shell initiated a process of change - called "Our Transformation" - with the aim of challenging every aspect of the group's business operations and management style. The change process was accelerated following the public furore over the disposal of the Brent Spar oil storage facility in the North Sea in 1995 and, later, by criticism of the company's role in Nigeria following the execution of activist Ken Saro-Wiwa. Although Shell claims that it acted honourably in both cases, the company accepts that its responses were inadequate, observing: "Clearly, the conviction that you are doing things right is not the same as getting them right. For us, at least, this has been a very salutary lesson."

Shell carried out an extensive communications exercise in 1996 which involved 7,500 members of the general public in 10 countries, 1,300 opinion leaders in 25 countries and 600 Shell employees in 55 countries. The exercise revealed that a small but significant group of people had a very poor opinion of Shell's approach to the environment and human rights. As The Shell Report 1998: Profits and Principles - does there have to be a choice ? says: "We had looked in the mirror and we neither recognised nor liked some of what we saw. We have set about putting it right, and this report is a small manifestation of widespread action taking place across the group."

A crucial development in the change process was the establishment, in autumn 1997, of a Corporate Social Accountability Team at the group's London headquarters. The principle objective of the team was to get a measure of society's changing expectations of a large multinational fossil fuel energy provider like Shell. But the team also wanted to find out how Shell could report more effectively on its activities and operations in the context of sustainable development, and how it could develop the requisite management structure and systems. The Shell Report 1998 is the first major outcome of the team's deliberations. Mark Wade, a member of the three-person team, comments: "Although other companies produce social reports, Shell is trying to do something different by drawing together, for the first time, financial, social and environmental information to present a 'sustainable development footprint' of the group." According to Wade, the report is, "the visible part of a management system designed to provide a basis for implementing sustainable development reporting methods and to drive continuous improvement."

REPORTING ON SUSTAINABLE DEVELOPMENT

The Shell Report 1998 was based on the group's statement of general business principles, which were updated in March 1997 (see figure 2.8). The revised principles reflect public interest in human rights - Shell is the first major energy company to give its public support to the UN Universal Declaration of Human Rights. The principles also commit the group to the concept of sustainable development. "A carefully considered step, not made lightly and not driven by public relations concerns," says Heinz Rothermund, managing director of Shell UK Exploration and Production (Shell Expro).

Broadening thinking

As well as setting out the Shell group's stall in terms of what it is doing to implement its business principles, The Shell Report 1998 addresses a number of issues and dilemmas on which it requests feedback, and poses a series of what are essentially moral problems associated with the running of a large multinational company. The report also discusses six social and environmental issues which the group sees as "critical":

The report summarises Shell's approach to each of these. For example, on human rights, Shell supports the UN Declaration, refers to human rights in its business principles, is developing awareness training and management procedures, including a guide for managers, and is setting up social responsibility management systems.

THE APPROACH OF SHELL UK

But what does sustainable development mean to an operating company that is part of the larger group, such as Shell UK?

Much of the analysis and thinking on sustainable development is currently being carried out by the upstream division of Shell UK - Shell Expro - which has a central sustainability group responsibility for collating employee views and suggestions through a cascade system of focus groups. According to Rothermund, business should be a "partner" in sustainable development based on economic success, environmental improvement and social responsibility. "Forget any - or focus too much on just one - and the concept begins to crumble," he warns.

Shell UK has been carrying out consultations and dialogue with its "stakeholders", although as Harold Bardsley, corporate health, safety and environment manager, points out, recognising who these stakeholders are can be difficult. He explains: "Brent Spar was a classic example of where we failed to establish the views of our stakeholders, or understand the importance of their views to our business. The textbooks tell you that stakeholders include customers, shareholders and employees. Environmental pressure groups want to be stakeholders, too. But the public at large is also a key external stakeholder for a large multinational like Shell. And you think, hang on a minute, when do we actually get out to the public and talk to them about what we are doing and about their expectations of us?"

In an attempt to establish just such a dialogue, Shell UK has carried out surveys to assess the public's perception of it as a business. Bardsley reports that although issues such as the use of resources and pollution were seen as important by respondents, other concerns such as treatment of staff, human rights and community involvement were also cited as key areas.

To clarify what its external stakeholders expect of it in terms of sustainable development, improving communications and providing information, Shell invited more than 160 external stakeholders to an evening meeting in November 1997 in London. Participants included representatives from the media, academic institutions, research bodies, environmental groups and trades unions. The meeting was designed and facilitated by the independent charity, The Environment Council. Bardsley reports that it threw up much useful feedback. In its subsequent publication (The Shell UK report to society), Shell UK addresses the responses it received to the three questions asked at the November meeting:

Issues such as business integrity, trustworthiness, transparency, accountability and the importance of external verification cropped up time and again. One participant noted: "Shell UK and Shell Group, like other multinationals, have a real role to play in challenging the short-term view of decision-making which may be prevalent and demonstrating that they are actually taking decisions on a long-term basis. To do that, they need to have a lot more transparency in both the decision-making process and criteria used to evaluate decisions." Another commented: "When Shell gets it wrong, which it does occasionally, it should be prepared to own up and admit it, which would greatly increase public credibility." More specifically, participants wanted to see Shell UK being more involved in energy efficiency, reducing its carbon dependency, educating the public on energy and environmental matters, and taking the lead in terms of innovative reporting, business ethics and standards.

The Shell UK report to society, published in May 1998, referred to many of these issues. Bardsley explains: "It covers many areas from sustainability to environmental data, as well as our social impacts, community programmes and industrial relations issues - the way we treat our employees. In many ways, it is a kind of behavioural report on Shell UK - trying to tell the world what we do and how we do it." One of the big issues the report addressed is how Shell UK plans to apply the business principles of the Shell group in the UK. Bardsley comments: "The report looked at our attitude to sustainability in the longer term. For example, you can't stop energy consumption overnight but you can go down roads that lead to renewables. The group has a scenario which says that by the middle of the next century, half the energy supplied by Shell will be generated by renewables. We expect to go down that sort of route. Shell Expro is looking at wind farms, carbon trading and tree planting to counteract the carbon emissions arising from offshore flaring."

In October 1997, the Shell group announced the establishment of a fifth core business, Shell International Renewables (SIR), with plans for an initial investment of more than £300 million over the next five years in renewable energy. SIR brings together the group's current activities in solar, biomass and forestry, and sits alongside the existing business sectors - exploration and production, oil products, chemicals, and gas and coal. Shell believes that renewable energy sources could provide between 5% and 10% of the world's energy by 2025, possibly rising to over 50% by 2050. The ultimate objective is, according to Bardsley: "To be seen as a sustainable energy company not an oil company."

Licence to operate - the influence of stakeholders

One of Shell's key dilemmas in recent years has been what to do with the Brent Spar oil facility. In January, Shell UK announced that it was planning to use the Spar's hull to build a new quay extension at Mekjarvik near Stavanger in Norway. The decision, taken after two years of extensive and open dialogue, has, according to the group report, "helped to promote a different approach to making decisions in Shell, and has stimulated us in developing new ways of being more open and accountable".

In many ways, Brent Spar was a defining moment for Shell. It forced the company to look seriously at its business practices and management style and, says Bardsley, resulted in senior executives becoming more aware of the need to communicate with, and listen to, a much wider range of stakeholders.

Has Shell recovered from Brent Spar? Bardsley comments: "It would be a brave man to say 'yes', but the real answer is that the world has changed, even in only the last two years, and attitudes and expectations have also changed. We have worked hard to get an acceptable solution for Brent Spar, and that is what we have now achieved. But that solution wasn't on the table in 1995 when we opted for deep sea disposal. Brent Spar was something we learned a huge amount from and it has driven us down a road of becoming much more open and transparent than we were before."

Shell says that it is now far more aware of the need to foster and nurture its relationship with all its stakeholders. As Bardsley points out: "The easy bit is filling in the necessary regulatory forms and consents in order to comply with the law. The difficult bit is to assess and respond to stakeholder perceptions and expectations - that can have just as much impact on a company's licence to operate as being refused authorisation by the Environment Agency."

He observes: "I would like to think that Shell could not have another Brent Spar. I think we have learned our lessons - and the dialogue process with stakeholders is proving very successful in other projects, for example the Camisea Project in Peru. Brent Spar has driven us down the road of becoming a better company. But I think there are other companies that could have a Brent Spar and I think there are those, not necessarily oil companies, that have not learned from Shell's experience."

Figure 2.1: What is business ethics?

Business ethics is not easily defined. One definition regards business ethics as "being peculiarly concerned with moral issues of business." Another refers to it as "how personal moral norms apply to the activities and goals of commercial enterprise." What constitutes business ethics depends on whether one accepts a wide or narrow definition. Proponents of stakeholder theory (see figure 2.2), for example, tend to see business ethics in terms of a corporation's relationship with a broad spectrum of society, including consumers, suppliers, the local community and its staff. A more limited approach, and one preferred by Milton Friedman and Elaine Sternberg, for example, regards anything outside profit maximisation as morally wrong. Sternberg goes as far as to describe corporate community involvement as theft.⁶¹

Primarily business ethics is concerned with conduct. It raises questions as to how corporations and the people employed by them should behave: What is good or bad? Right or wrong? What should rewarded? And what should be punished?

The answers to such questions inform and guide actions. While moral codes help to highlight what should and should not be done, business ethics goes further than a list of dos and don'ts. Ethics inquires into issues of morality. Such an examination seeks to determine the moral justification for a particular course of action. So that it is not simply the case that organisations should not engage in activities which have a detrimental impact on the environment, it determines why, morally, it is wrong.

Organisations can accomplish this by examining the evidence to support the notion that environmental damage is wrong. It can ascertain whether stopping an activity is the right course of action in the circumstances. For example, it is a commonplace that burning coal causes more pollution than producing energy with natural gas. But is it morally acceptable to deprive miners of employment? And should limited natural gas resources be depleted when more plentiful stocks of coal are available?

Corporations in the past would not have been responsible for resolving complex ethical dilemmas. This is no longer true. Business cannot isolate itself from the pervasive values of society. Companies can attempt to influence the constantly changing ethical environment in which it operates but it cannot control it. Above all corporations must respond to changing values and beliefs. Consequently, companies are increasingly required to make ethical decisions which are not based entirely on bottom line criteria.

Public opinion is broadly supportive of measures to reduce environmental damage. Whatever the respective environmental and legal merits of Shell's decision to dispose of the Brent Spar oil storage facility at sea rather than on land, the company lost the argument. Fuelled by media coverage of its eviction of Greenpeace activists from the platform and subsequent action against protesters, public opinion, especially in the environmentally-conscious Northern European countries, was against the company's proposal and it was forced to make a u-turn. Companies, therefore, make a trade-off between ethics and other business interests. In Shell's case it is more expensive to dispose of Brent Spar on land, but, in the long term, its consumer base may be bolstered by bowing to public opinion and responding to criticism of its performance.

Figure 2.2: Understanding the stakeholder approach

The stakeholder concept

Stakeholder theory is based on the premise that property rights, in this case those derived from share ownership, are not absolute and that other constituencies, both directly and indirectly affected by a corporation's actions, also have comparable, if not more important, rights. Stakeholding is a shift from property rights to membership rights.

Stakeholding v shareholding

Stakeholder theory has its origins in the systems of corporatism - whereby representatives of business and labour meet with government to make joint economic decisions - popular in continental Europe, especially in Germany and the Scandinavian countries. Such arrangements run contrary to the Anglo-Saxon model of largely unfettered market forces and shareholder supremacy. The corporate-shareholder relationship common in the UK and the US is a fiduciary one in which managers have a duty act in the best interests of their investors. As a consequence the main business objectives are to enhance corporate profit and maximise shareholder gain. As the 1997 Hampel Report on corporate governance stated:

"The single overriding objective shared by all listed companies, whatever their size or type of business, is the preservation and the greatest practicable enhancement over time of their shareholders' investment. All boards have this responsibility and their policies, structures, composition and governing processes should reflect this."⁶²

The dominance of shareholders' interests in corporate decision making has been criticised for failing to take into account the interests of staff, customers, suppliers, the local community and the wider environment other than to meet its necessary legal obligations.⁶³ According to supporters of this view, companies are social organisations and, as such, they have obligations to a broader constituency whose interests should not necessarily be subordinate to the claims of shareholders. Whereas the shareholder approach is based primarily on economic and financial relationships, the stakeholder concept includes "moral, political, ecological and human-welfare interests as well as economic factors."⁶⁴

Proponents of the stakeholder concept suggest that the fiduciary obligation of managers to shareholders should be expanded to also include a responsibility to the broader constituency of community, customers, suppliers, employees etc.⁶⁵ It follows therefore that corporate responsibility should no longer be confined to profit maximisation, but should also involve acts of social responsibility. As George Chryssides and John Kaler explain:

"What defines social responsibility is not the exclusion of profit as an outcome, but its exclusion as a motive: the fact that when an act is done simply as a means to the end of profit it is not then an act of business social responsibility."⁶⁶

Under the stakeholder model profit maximisation is only one factor to be satisfied. John Parkinson believes that only the pursuit of long-term profit maximisation is truly compatible with a stakeholder approach.⁶⁷ Companies that eschew short-term gain for the benefit of stakeholders are likely to reap, over the longer term, the rewards of greater workforce dedication and enhanced customer loyalty. This view is endorsed by Will Hutton and John Kay, who say that "good businesses are bound to make profits" but that they should "share the rewards equitably between all their stakeholders - workers, customers and suppliers - rather than proclaim their sole aim is to increase shareholder value."⁶⁸

The overall health of the organisation requires managers to balance the "multiple claims of conflicting stakeholders" in terms of, for example: higher pay and job security (employees); improved products/services (customers); greater return on investment (shareholders); better facilities (local community); reduced environmental damage (all).⁶⁹

A stake in the business?

R Edward Freeman defines a stakeholder as "any individual or group who can affect or is affected by the actions, decisions, policies, practices or goals of the organisation."⁷⁰ David Wheeler and Marian Sillenpää make a clear distinction between the various stakeholders.⁷¹ According to their view there are social and non-social stakeholders and each group consists of primary and secondary elements.

"Stakeholders are individuals and entities who can be influenced by, or can impact upon, an organisation …

Primary social stakeholders include:

Secondary social stakeholders embrace government and other civil society and include:

Primary social stakeholders are those who have a direct stake in the organisation and its success. Secondary social stakeholders may be extremely influential … but their stake is more representational than direct. Consequently, the level of moral accountability to a secondary stakeholder tends to be lower.

Primary non-social stakeholders include:

Secondary non-social stakeholders include:

Wheeler and Sillenpää's list is too extensive and in reality organisations will do best to focus on their primary stakeholders - customers, employees, local community, management, shareholders and suppliers. Companies that build relationships with these groups that are based on mutual respect tend also to have a positive relationship with secondary and non-social stakeholders.

Stakeholding in reality

Stakeholder theory does not give primacy to one group. Yet how does the corporation manage to resolve the conflicting demands of the various stakeholders? Once a stakeholder has been recognised as such what claim should the individual or entity have on the business? One solution to such dilemmas is to establish a two-tier board in which the various stakeholders are represented at senior level and with a management board making business decisions based on the policies advocated from above. William Evan and R Edward Freeman believe that "these directors will be vested with the duty of care to manage the affairs of the corporation in concert with the interests of its stakeholders."⁷³ However, such a system still raises a number of questions. Which stakeholders should be represented on the board? Who chooses them? To whom are the representatives accountable to?⁷⁴

John Parkinson suggests that a stakeholder approach should be based on the development of cooperative relationships in which each group respects the interests of the other stakeholders on an ongoing basis.⁷⁵ Thus, there is a constant reminder that the success of the business and shareholder value is dependent on all stakeholders. In Japan, kyosei - the "spirit of cooperation" - permeates all corporate relationships. As Ryuzaburo Kaku, former chair of camera to photocopier business Canon, describes it:

"A company that is practising kyosei establishes harmonious relations with its customers, its suppliers, its competitors, the governments with which it deals, and the natural environment … [And] a company that practices kyosei must start by creating a cooperative spirit among its employees."⁷⁶

In the UK, the Co-operative Bank has been at the forefront of developing cooperative relationships with each of seven stakeholder groups - customers, staff, shareholders, suppliers, local communities, society and past and future generations. In a letter to customers in 1997 outlining its strategy in this area the bank offered the following explanation:

"Our Inclusive Partnership approach is about cooperation. Our Ethical Policy, introduced back in 1992, was a vitally important step in this direction - recognising our responsibility to invest our customers' money in accordance with their wishes. But Partnership goes much further; it's based on the belief that, in every area of our business, we have an obligation to take into account the needs and interests of all those involved in our activities, or affected by them in any way."⁷⁷

In order to achieve greater cooperation between the different stakeholder groups, the Co-op has developed an ongoing programme of "communication and opinion-gathering" and each year the bank supplements its annual report with independently audited reports on its progress towards the aims of Inclusive Partnership.

Figure 2.6: 12 steps to implementing an ethics code

1. Integration

Produce a strategy for integrating the code into the running of the business at the time that it is issued

2. Endorsement

Make sure the code is endorsed by the chair of the organisation and by the chief executive

3. Distribution

Send the code to all employees in a readable and portable form and give it to all employees joining the company

4. Breaches

Include a short section on how an employee can react if he or she is faced with a potential breach of the code or is in doubt about a course of action involving an ethical choice

5. Personal response

Give all staff the personal opportunity to respond to the content of the code

6. Affirmation

Have a procedure for managers and supervisors regularly to state that they and their staff understand and apply the provisions of the code and raise matters not covered by it

7. Regular review

Have a procedure for regular review and updating of the code

8. Contracts

Consider making adherence to the code obligatory by including reference to it in all contracts of employment and linking it with disciplinary procedures

9. Training

Ask those responsible for company training programmes at all levels to include issues raised by the code in their programmes

10. Translation

See that the code is translated for use in overseas subsidiaries or other places where English in not the principal language

11. Distribution

Make copies of the code available to business partners (suppliers, customers etc)

12. Annual report

Reproduce or insert a copy of the code in the annual report so that shareholders and a wider public know about the company's position on ethical matters

Source: Institute of Business Ethics

Figure 2.8: Shell's Business Principles

1. Objectives

The objectives of Shell companies are to engage efficiently, responsibly and profitably in the oil, gas, chemicals and other selected businesses and to participate in the search for and development of other sources of energy. Shell companies seek a high standard of performance and aim to maintain a long-term position in their respective competitive environments.

2. Responsibilities

Shell companies recognise five areas of responsibility:

a. To shareholders

To protect shareholders' investment, and provide an acceptable return.

b. To customers

To win and maintain customers by developing and providing products and services which offer value in terms of price, quality, safety and environmental impact, which are supported by the requisite technological, environmental and commercial expertise.

c. To employees

To respect the human rights of their employees, to provide their employees with good and safe conditions of work, and good and competitive terms and conditions of service, to promote the development and best use of human talent and equal opportunity employment, and to encourage the involvement of employees in the planning and direction of their work, and in the application of these principles within their company. It is recognised that commercial success depends on the full commitment of all employees.

d. To those with whom they do business

To seek mutually beneficial relationships with contractors, suppliers and in joint ventures and to promote the application of these principles in so doing. The ability to promote these principles effectively will be an important factor in the decision to enter into or remain in such relationships.

e. To society

To conduct business as responsible corporate members of society, to observe the laws of the countries in which they operate, to express support for fundamental human rights in line with the legitimate role of business and to give proper regard to health, safety and the environment consistent with their commitment to contribute to sustainable development.

These five areas of responsibility are seen as inseparable. Therefore it is the duty of management continuously to assess the priorities and discharge its responsibilities as best it can on the basis of that assessment.

3. Economic Principles

Profitability is essential to discharging these responsibilities and staying in business. It is a measure both of efficiency and of the value that customers place on Shell products and services. It is essential to the allocation of the necessary corporate resources and to support the continuing investment required to develop and produce future energy supplies to meet consumer needs. Without profits and a strong financial foundation it would not be possible to fulfil the responsibilities outlined above.

Shell companies work in a wide variety of changing social, political and economic environments, but in general they believe that the interests of the community can be served most efficiently by a market economy.

Criteria for investment decisions are not exclusively economic in nature but also take into account social and environmental considerations and an appraisal of the security of the investment.

4. Business Integrity

Shell companies insist on honesty, integrity and fairness in all aspects of their business and expect the same in their relationships with all those with whom they do business. The direct or indirect offer, payment, soliciting and acceptance of bribes in any form are unacceptable practices. Employees must avoid conflicts of interest between their private financial activities and their part in the conduct of company business. All business transactions on behalf of a Shell company must be reflected accurately and fairly in the accounts of the company in accordance with established procedures and be subject to audit.

5. Political Activities

a. Of companies

Shell companies act in a socially responsible manner within the laws of the countries in which they operate in pursuit of their legitimate commercial objectives.

Shell companies do not make payments to political parties, organisations or their representatives or take any part in party politics. However, when dealing with governments, Shell companies have the right and the responsibility to make their position known on any matter which affects themselves, their employees, their customers or their shareholders. They also have a right to make their position known on matters affecting the community, where they have a contribution to make.

b. Of employees

Where individuals wish to engage in activities in the community, including standing for election to public office, they will be given the opportunity to do so where this is appropriate in the light of local circumstances.

6. Health, Safety and the Environment

Consistent with their commitment to contribute to sustainable development, Shell companies have a systematic approach to health, safety and environmental management in order to achieve continuous performance improvement.

To this end Shell companies manage these matters as any other critical business activity, set targets for improvement, and measure, appraise and report performance.

7. The Community

The most important contribution that companies can make to the social and material progress of the countries in which they operate is in performing their basic activities as effectively as possible. In addition Shell companies take a constructive interest in societal matters which may not be directly related to the business. Opportunities for involvement - for example through community, educational or donations programmes - will vary depending upon the size of the company concerned, the nature of the local society and the scope for useful private initiatives.

8. Competition

Shell companies support free enterprise. They seek to compete fairly and ethically and within the framework of applicable competition laws; they will not prevent others from competing freely with them.

9. Communication

Shell companies recognise that in view of the importance of the activities in which they are engaged and their impact on national economies and individuals, open communication is essential. To this end, Shell companies have comprehensive corporate information programmes and provide full relevant information about their activities to legitimately interested parties, subject to any overriding considerations of business confidentiality and cost.

Source: Shell UK

³     "50% of your employees are lying, cheating and stealing", Workforce, October 1997, pp.44-53; Henley Centre (1994), Planning for social change.

⁴     Institute of Management (1994), Walking the tightrope - a survey of ethics in management (London).

⁵     HMSO (1995), The first report of the Committee on Standards in Public Life.

⁶     OECD (1997), Ethics in the public sector, current issues and practice, (London), Public management occasional papers 14

⁷     Borrie G (1996), "Business ethics and accountability", in Four windows on whistleblowing (Public Concern at Work, London).

⁸     The Industrial Society (1996), Managing ethics, Managing Best Practice 26, August.

⁹     Weiss J W (1998), Business ethics: a stakeholder and issues management approach, 2nd edition (Dryden Press, London), p.5.

¹⁰    Chryssides G D and Kaler J H (1993), An introduction to business ethics (Chapman & Hall, London), p.3.

¹¹    Ibid., p.5.

¹²    Hutton W (1995), The state we're in (Cape, London), p.xiii.

¹³    Lloyds TSB Group plc annual report 1997.

¹⁴    Grand Metropolitan quoted in McIntosh M, Leipziger D, Jones K and Coleman G (1998), Corporate citizenship: successful strategies for responsible companies (Financial Times/Pitman, London), p.55.

¹⁵    American Society of Chartered Life Underwriters & Chartered Financial Consultants and the Ethics Officers Association (1997), Sources and consequences of workplace pressures; increasing the risk of unethical and illegal business practices (Pennsylvania).

¹⁶    Financial Times, 28 September 1998.

¹⁷    Chryssides and Kaler, see note 10, above, p.3.

¹⁸    Ibid.

¹⁹    Environmental Report, Ericsson 1997; Health, safety and environment report, Novartis 1997.

²⁰    McIntosh et al, note 14, above, p.42.

²¹    Webley S (1995), Applying codes of business practice: a report on best practice (Institute of Business Ethics, London).

²²    The Institute of Internal Auditors Survey (April 1995).

²³    Taylor K (1995), "Operating a code of ethics: the Esso experience", in Webley, see note 21, above, pp.24-25.

²⁴    Reported in "50% of your employees are lying, cheating and stealing", Workforce, October 1997, pp.44-53.

²⁵    Institute of Business Ethics (1998).

²⁶    The Industrial Society, see note 8, above.

²⁷    See note 24, above.

²⁸    "Prepare to make a moral judgment", People Management, 4 May 1995, pp.22-25.

²⁹    First report of the Committee on Standards in Public Life (1995).

³⁰    Webley, see note 21, above, p.37.

³¹    BG plc (1998), Statement of business principles.

³²    The "Shell" Transport and Trading Company plc annual report 1997, p.3.

³³    Quoted in People Management, 4 May 1995, p.25.

³⁴    Institute of Management, see note 4, above.

³⁵    Webley, see note 21, above.

³⁶    Ibid.

³⁷    Ashridge College (1993), The importance of being ethical.

³⁸    People Management, 4 May 1995, p.25.

³⁹    Ashridge College, see note 37, above.

⁴⁰    IRS (1997), "Co-operative Bank invests in ethical employees", IRS Employment Review 632, May, pp.12-16.

⁴¹    "50% of your employees are lying, cheating and stealing", Workforce, October 1997, pp.44-53.

⁴²    "Texas Instruments gives employees a Quick test", Personnel Journal, June 1995, pp.30-41.

⁴³    McIntosh et al, see note 14, above, p.289.

⁴⁴    Financial Times, 8 September 1997.

⁴⁵    The Guardian, 21 September 1998.

⁴⁶    Body Shop International, Values Report 1997.

⁴⁷    McIntosh et al, see note 14, above, p.242.

⁴⁸    See note 46, above.

⁴⁹    The Shell Report 1998, p.52.

⁵⁰    See note 2, above, p.5.

⁵¹    Carmichael S (1995), Business ethics: the new bottom line (Demos, London), p.32.

⁵²    See note 2, above.

⁵³    Reported in "50% of your employees are lying, cheating and stealing", Workforce, October 1997, pp.44-53.

⁵⁴    Kay J (1993), Foundations of corporate success (Oxford University Press, Oxford).

⁵⁵    Quoted in Winter M and Steger U (1998), Managing outside pressure: strategies for preventing corporate disasters (Wiley, Chichester), p.85.

⁵⁶    Quoted in McIntosh et al, see note 14, above, p.xii.

⁵⁷    "Union Carbide: 10 years after Bhopal, still dealing with the fall-out", Reputation Management, January-February 1994.

⁵⁸    The Guardian, 15 October 1998.

⁵⁹    McIntosh et al, see note 14, above, pp.66-67.

⁶⁰    The Guardian, 13 October 1998.

⁶¹    Sternberg E (1994), Just business (Little Brown, London).

⁶²    Hampel Report (1997).

⁶³    See, for example, Parkinson J (1996), The stakeholder business (Employment Policy Institute, London); Evan W M and Freeman R E, "A stakeholder theory of the modern corporation: Kantian capitalism", in Chryssides G D and Kaler J H (1993), An introduction to business ethics (Chapman Hall, London), pp.254-266; IRS (1997), Measuring performance, IRS Management Review 5.

⁶⁴    Weiss J W (1998), Business ethics: a stakeholder and issues management approach (Dryden Press, London), p.28.

⁶⁵    Evan and Freeman, see note 2, above.

⁶⁶    Chryssides G D and Kaler J H (1993), An introduction to business ethics (Chapman Hall, London), p.232.

⁶⁷    Parkinson, see note 2, above.

⁶⁸    The Observer, 13 October 1996.

⁶⁹    Evan and Freeman, see note 2, above, p.261.

⁷⁰    Freeman R E (1984), Strategic management: a stakeholder approach (Pitman, Boston), p.25.

⁷¹    Wheeler D and Sillenpää M (1997), The stakeholder corporation - a blueprint for maximising stakeholder value (Pitman, London).

⁷²    Wheeler and Sillenpää, quoted in Goyder M (1998), Living tomorrow's company (Gower, Aldershot), p.27.

⁷³    Evan and Freeman, see note 2, above, p.264.

⁷⁴    Goyder, see note 10, above, p.27.

⁷⁵    Parkinson, see note 2, above.

⁷⁶    Kaku R (1997), "The path of kyosei", Harvard Business Review, July-August, pp.55-63.

⁷⁷    "Seven members of the Inclusive Partnership", letter to customers, Co-operative Bank (1997).