Global Ethics Day 2024
Published: 16 October 2024
8 minute read
In this latest episode, Kate O’Neill, Director of Stakeholder Engagement and Corporate Affairs and Mark Babington, Executive Director of Regulatory Standards, who also chairs the International Ethics Standards Board for Accountants Sustainability Taskforce discuss why a positive ethical culture is the foundation for long-term corporate success and how the right behavioural framework can guide organisations toward optimal outcomes.
You can also listen on Apple Podcasts and Spotify.
Transcript
0:10
Hello and welcome to another FRC In Conversation podcast.
0:13
My name is Kate O'Neill.
0:14
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.
0:18
And today is International Ethics Day and I'm delighted to be joined by Mark Babington, our Executive Director of Regulatory Standards, who also has another role that's particularly relevant to ethics because he chairs the IESBA’s Sustainability Task Force and is a member of the Board.
0:37
The full title of that acronym, and you'll find out why it's so relevant to today's discussion, is that it is the International Ethics Standards Board for Accountants and it has links to national standard centres in each country where the IESBA code is adopted, which is pretty much globally.
0:54
Mark, I think you'd be happy for me to say.
0:58
Absolutely, Kate.
0:59
And I think before we kind of get into some of the more specific questions, I mean, looking at it across financial reporting, auditing, corporate governance and everything in the FRC’s remit, a positive culture around ethics is key for companies to succeed in the long term.
1:18
So as the regulator responsible for things like the UK Corporate Governance Code and for the setting of standards for actuaries, auditors and accountants, I guess that culture is where it all begins, Mark.
1:29
Yeah, I think absolutely right, Kate.
1:30
And I think we've said before on previous podcasts, ethics are the sort of cornerstone, the foundation of many professions.
1:39
And we've said before when talking about the ecosystem, companies that are well run, well governed, well managed and have strong ethical principles are generally those companies that are able to communicate and report better and that better information lends itself to a better audit.
1:57
So it's about having the right behavioural framework to make sure that people are doing the right thing.
2:04
I guess it should be at the heart of things.
2:06
It shouldn't be an afterthought.
2:07
Oh, am I being ethical?
2:09
It just should be almost like breathing Mark.
2:11
Yeah, it should be, Kate, because you can be really skilled, but if you don't have the right mindset and if you don't approach things from a positive ethical framework, you're not necessarily going to deliver the right outcomes.
2:24
You've got to think about, as you said, about how do you create a positive culture that gives strong organisational purpose, helps an organisation articulate what its values are, and that in turn has a direct approach on how an organisation engages with its people, its stakeholders, its investors and others.
2:44
Mark, we’ll come onto the Corporate Governance code in a minute.
2:46
But when auditors, actuaries and accountants are setting standards, I mean, many of those are very technical in relation to a particular part of the work.
2:55
But the ethical standards I think are super interesting because a lot of people would say, well, why do you have to set standards on ethics?
3:02
I mean, shouldn't, as you've just said, this just be something you do as a matter of course?
3:07
Well, I think one of the reasons for having an ethical framework is to make sure that when people are carrying out professional work, regardless of the discipline, are they doing so in a way that means that they are not biased, that means that they don't have conflicts of interest that might lead them to act in a way that they shouldn't.
3:25
And one of the things I think as well is that having an ethical framework that operates both in jurisdictions and globally provides a high benchmark for consistent good behaviour.
3:38
Does that also underpin the need for those three professions to have scepticism challenge in the way that they look at the work of companies and other preparers in the system?
3:50
Yeah, absolutely.
3:51
And, you know, regardless of whether you're a director on the board of a company, an auditor carrying out its audit, or somebody preparing its financial information, you know, the most important thing you have is your judgement.
4:04
So how do you exercise that judgement and how do you do it well?
4:08
And the point you just raised there, Kate, about the importance of professional scepticism, about having the right mindset, about how you use that judgement is absolutely key.
4:18
Just moving on to the Corporate Governance Code, I mean, we've defined what corporate culture is.
4:23
We've done a number of interesting thought leadership pieces that I guess we hope boards and management of companies can use to really help them put together an ethical framework by which to govern the company.
4:36
But do you think you can teach ethics, or does it come back to this theme you've really opened up here, which is it's got to be at the core of what you do?
4:44
I think you're right in saying it needs to be at the core of what people do because we're all aware of examples where failures happen.
4:52
And in some of these organisations they point to policies and procedures and they've told people about the need to do something, but it's not embedded into the way they work.
5:04
It's not part of their sort of DNA.
5:07
What's really important from an ethical perspective is that an organisation is able to embed it.
5:13
And in order to do that, I think it's really important that the people in that organisation are part of that dialogue.
5:21
They understand what's important and also their own values are ethical and reflected in the way that the company or another organisation behaves.
5:31
I guess in the articles, which of course can be found on the FRC website, we talk about what are the warning signs to look out for the behaviours of management, creating codes of conduct that employees should be undertaking their day-to-day work by.
5:48
But I guess as you said, though, failures happen.
5:51
You know, you hear of scandals, you hear of bad behaviour or bad systemic practises in companies still.
5:58
Do you think there's anything that runs through these scandals where people have either just ignored the requirements for an ethical culture and making that important at a company, or do you think there are some organisations which have lost their way and don't have the framework needed to really underpin an ethical culture?
6:17
I think where organisations lose their way, it's because people don't act in accordance with the values and their behaviours that they say are important.
6:27
I think when we look at examples where organisations fail, it's usually because people did the wrong thing.
6:34
You know, there was a board that didn't appropriately challenge management.
6:39
There was an auditor who didn't ask the right searching questions and just accepted the first thing that they were told.
6:47
There's the actuary signing off matters to do with pension schemes.
6:52
And they're not, again, being sufficiently searching and challenging in what they do.
6:57
And you've got to be able to demonstrate that this is front and central to your thinking.
7:01
It's not a compliance exercise.
7:03
It really is about how you go about doing your business.
7:07
I guess to that point, I mean some companies will call it the compliance function, others it might be internal audit.
7:13
It can't just lie with one function, the ethical culture of a company.
7:17
It's got to be embedded across everything, human resources, internal audit, risk, etcetera.
7:24
And this year's theme for International Ethics Day is Ethics empowered.
7:29
So do you think that this kind of putting it at the heart of the company values and behaviours is the best way to empower or some companies going to have to put some effort and time into really helping people understand what it means for themselves individually as well as the jobs they do?
7:45
Yeah, I think that's absolutely right.
7:46
And you know, from the perspective of our own Corporate Governance Code, we've emphasised the importance of the board leading the organisation to develop a consistent understanding about what culture and ethics mean to that organisation.
8:01
And that allows the board to then understand what are the factors that influence that, what's happened in that business, what are its local traditions, ways of working, what are the regulatory needs it has to meet.
8:13
And I think in doing that, we also flag what are the warning signs that boards can look out for?
8:19
How do they avoid a silo mentality?
8:21
How do they avoid allowing one person to be too dominant or too arrogant in an organisation?
8:28
And I think one of the things that is really important is that when boards are carrying out their own evaluations of how they operate and what their culture is like, are they explicitly considering how ethics works?
8:42
I think that's a really interesting point, Mark, because globally there are different governance arrangements that various codes throughout the world adopt.
8:50
And certainly we're always pleased to hear that the FRC's UK Corporate Governance Code is used as a standard for other countries to adopt when looking at their own code.
8:59
But that cultural overview, and I guess that's why so many boards really rely on the board cultural review that they undertake almost every couple of years to look for those warning signals that you described within the board, but within management as well.
9:15
Yeah, that's it.
9:16
Because it's one of these that it's really important that boards are proactive and don't allow the rock to set in.
9:24
Because if that happens, you can have an organisation that's successful that can be undermined because it ceases to operate ethically.
9:33
And I think that shows the importance of an ethical culture.
9:36
And your point as well, Kate, that you made about different things in different jurisdictions.
9:41
One of the things that we're very aware of, of course, is that businesses need to attract capital and capital is global.
9:48
So therefore capital will find its way to where ethical standards are high because an investor can have comfort that a business is going to be well run.
9:57
You know, that's so true.
9:58
And also people want to be able to compare and contrast approaches that organisations take to having an ethical culture, doing the right thing, driving the right behaviours.
10:09
I mean, a lot's made of whistle blowers, Mark, and they're an important part of any organisation structure.
10:15
But I suppose creating that environment where people feel that they can be a whistleblower is very, very important because there has to be that safety mark.
10:25
How do you think the way in which whistleblowing is being used as a tool to underpin an ethical culture and call things out when necessary?
10:34
I guess there's some real outliers where it works very well through to have less well developed whistleblower policies and cultures in some organisations.
10:43
I think what would really worry me, Kate, is the organisation that comes out and tells you that it's got a whistleblowing policy.
10:51
And yet if you go around in that organisation, very few of the staff seem to be aware of it.
10:56
And it's a bit like what I said about the compliance function.
10:59
There's no point in having a whistleblowing policy if it's stuck away on a shelf and it's covered in dust.
11:05
And I think one of the things about organisations that do have good whistleblowing arrangements is it also helps them to have a positive stand-up culture.
11:14
You know, there's a willingness on the part of all of the people in the entity to ask difficult questions where they feel the right things aren't being done.
11:23
You're right.
11:23
If it's in a policy hidden on an intranet or up on a shelf, it's not being brought to life and isn't part of the organisations DNA.
11:31
Well, Mark, thanks for sharing a really interesting look at ethics because I think it can be and should be at the heart of the corporate governance of a company.
11:38
But your reflections on how ethics underpins everything from standard setting to the behaviour of auditors, actuaries and accountants in helping organisations put together financial reporting they can be relied on by their stakeholders, including investors, is so important.
11:56
So thanks for joining us on International Ethics Day, Mark.
11:59
Thanks very much, Kate.