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Speaking up: after 32 years, reality finally caught up with Ray Kelvin.

Staff put the controversial, long-serving CEO on the spot over “forced hugging.” Some 2,500 staff dared  to speak up, signing a petition protesting the CEO’s intrusive actions. After three decades in power the serial hugger reluctantly stepped down in March 2019.

Ray Kelvin, ex Ted Baker CEO

The actions of the Ted Baker staff proved a healthy antidote to unethical leadership behaviour. Kelvin’s fate attracted little sympathy among the lower ranks:

“He hasn’t adapted to the times and neither has the business. It was still stuck in 1988.” 

Nor is this the first time employees have directly or indirectly called top management to account. At Barclays, CEO Jes Staley’s much condemned effort to uncover the identity of a whistle blower ran slap into laws designed to protect people who dare to speak up about unethical practices in business.

The result was a $15million dollars fine levied on the bank, with nothing to show for it except serious reputational damage. Adding insult to injury, the U’Ks Financial Conduct Authority handed out a further £642,350 penalty in May 2018.

The high profile punishment labelled Barclays as a place where speaking up about governance issues was not yet safe for employees. Since the CEO nearly lost his job over it, the message should reach even the most resistant company executives. When staff have the courage to speak up about bad performance issues they can make a considerable difference. In Barclays the bank ended up agreeing to a plan for improving its internal controls and its compliance arrangements. This included more robust protection for whistle blowers, including better senior management oversight.

More recently, Microsoft, has twice faced opposition from a group of unhappy employees. A large group spoke up through an open letter to the company’s chief executive, Satya Nadella, and its president and chief legal officer, Brad Smith. Their letter was commendably direct:

 “We are a global coalition of Microsoft workers, and we refuse to create technology for warfare and oppression.”

The two-page letter expressed alarm that the technology firm had signed a $479 million (€421 million) contract with the US army to supply HoloLens augmented reality headsets for combat environments. It continued:

“We are alarmed that Microsoft is working to provide weapons technology to the US military, helping one country’s government ‘increase lethality’ using tools we built. We did not sign up to develop weapons, and we demand a say in how our work is used.”

This was the second time in 12 months that employees had consigned their leaders to the ethical hot seat. Last June 2018 they openly complained about the firm’s contracts with the US immigration and customs enforcement agency (ICE). At the time, ICE was drawing criticism for its policy of separating families at the US-Mexico border.

Many business leaders subscribe to doing what’s right. In practice the drive for profits often outguns a commitment to ethical behaviour. A recent large scale example of this occurred at the Wells Fargo bank. 

The ethical constraints on high level executives continue to be fragile. Yet the climate is changing and employees can make a useful contribution to helping their leaders take ethics more seriously.

What gets in the way?

What stops employees from giving business leaders the vital information they need about ethics? Why do those below the top echelon of a company so often go along with unethical practices? Why do they become part of the problem, rather than being part of the solution?

Recent Australian research found more than one in three workers who knew of misconduct at work never-the-less stayed silent. The new research explains why.

Rather than stemming from  evil minded colleagues, the biggest cause for employee silence on ethical issues arises from time pressures and the need to follow orders.  In Europe too, around 16% of employees feel victims from such pressures.

When asked what influenced their decision not to speak up about unethical practices, one in three employees (32%) said it might endanger their job. More than a quarter (27%) felt that their company would anyway not take corrective action.

Whether people speak up about unethical practices they observe, rather depends on the company’s culture and whether there’s a proper ethics programme in place. Across Europe as a whole, for example, in companies with an existing ethics programme, almost three out of four employees (73%) employees who saw misconduct, would be likely to speak up. This compares to only 42% in companies without an ethics programme.

Strictly for the brave or stupid

Despite supportive legislation, whistle-blowers who do draw attention to unethical company practices, often suffer, bullying, harassment, inappropriate or unethical treatment, and other forms of discrimination. In many instances is also triggers a fatal career move.

Speaking up is therefore not for the faint-hearted. A study by Warwick Business School found that most (82%) whistle blowers reported being demoted or given more menial work. Almost all were eventually dismissed or resigned.  To make matters worse, recruitment agencies say that “getting a whistle-blower re-employed is practically impossible.”

To encourage speaking up the US Securities and Exchange Commission (SEC) awarded $111m to 34 whistle-blowers in the five years to 2016. More recently Ted Siedle a renegade employee of JP Morgan Chase the number one US bank, hit the jackpot when he received a staggering $78m from two financial regulators. The fortune came as a reward for blowing the whistle on his ex bank. The latter had failed to disclose that it was steering customers to its own investment products, rather than those offered  by rivals.

Money though, seldom comes as a reward for speaking up on ethical issues. Rather it’s a form of compensation for daring to risk the dire consequences that tend to follow speaking up. These can include damage to home, health, work and wealth. For example, in 2017 Ian Foxley blew the whistle over an alleged payment of bribes at GPT Special Projects Management, later a unit of Airbus.

Based in Saudi Arabia, Foxley had to flee the country when he uncovered what he believed was a multi-million-pound bribery scheme. He lost his job and seven years later the UK Serious fraud office continues to investigate. Hardly much help to Foxley.

Yet when employees do voice their concerns freely, organisations gain better staff retention and experience more productive performance. For example, after a checking numerous studies, the Harvard Business Review reported in 2016 that in several financial services firms where employees spoke up, these business units reported much better financial performance and operational results than others.

Putting Speaking Up on the map

It’s encouraging that more employees seem to be willing to put their firms on notice about ethical issues. Yet it remains a minority sport. There are plenty of reasons for that hot line staying silent, or people fearing to raise their head above the parapet.

The number one turn off for speaking up remains fear of retaliation or looking stupid. The second deterrent is worry about appearing to challenge senior management. Personal upbringing and company culture can exacerbate this. For example some employees may have learned from an early age never to question authority.

Previous bad experiences of speaking up reverberate in a company long after the actual incident has been forgotten. The challenge then reverts to a cultural one—how to overcome past horror stories and re-build employee confidence that speaking up makes sense.

Failure to act on adverse feedback may be yet another reason why employees fail to give feedback that could otherwise help protect a firm’s reputation. Perhaps a previous poor supervisor, or someone took feedback but failed to act on it. Consequently, employees conclude that the effort won’t be worth the effort.

The role of leaders proves to be critical for inducing employees to come forward with challenging feedback. Especially about ethical matters, such as corruption, or harassment. When they do, even the inhabitants of the C suite may find themselves called to account.

Sources:

  • Samuelson, Our best hope for companies with social conscience is their workers, Quartz at Work, November 21, 2018
  • Ethics at Work Survey The Institute of Business Ethics (IBE), in Partnership with The Ethics Centre, 2018.
  • Can Your employees Speak Freely, Harvard Business Review Jan-Feb 2016
  • Clegg, Whistleblowing can be life changing, FT, 3rd December 2018
  • Gallo, How to Speak up about ethical issues at work, Harvard Business Review, December 2015
  • Staff put Microsoft in ethical hot seat over army contract
  • Lillington
  • Net Results, Firm has been an ethics leader in big tech, but has some soul-searching to do, Irish Times March 4th 2019
  • Detert, E.Burris Can Your Employees Really Speak Freely? HBR Jan–Feb 2016
  • B.McLannahan, Best ways to encourage whistleblowers is to reward them, FT 6th March 2019
  • J.Eley et al, Ted Baker chief quits after 32 years. FT, 5th March 2019
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“Why should the citizens of this world keep companies around whose sole purpose is the enrichment of a few people?”
Paul Polman, the highly successful and far-sighted departing CEO of Unilever.

“Society demands that companies “serve a social purpose”
Larry Fink, CEO BlackRock, world largest asset manager

“In the eyes of many Americans and Britons, their style of capitalism has become too ruthless, too unequal and too focused on maximising short term returns to shareholders.
S Pearlstein, FT 27th January 2019

Like ripples in a pool pointed remarks like these spread ever wider. Staying relevant means ethical leaders needs to keep adapting and evolving.

A company wanting to do “good” in society at the expense of profits once seemed almost blasphemy. At least that’s how the powerful Chicago school of economists led by Milton Friedman viewed it. 

The neo liberals as they came to be called, considered making a social contribution at the expense of profits as irrelevant, or outrageous as a leadership aim.

Today we’re witnessing the complete erosion of the long-running “Chicago curse”. Its baleful influence has blighted and distorted company purposes for decades.

At the current 2019 World Economic forum in Davos, Paul Polman’s successor Alan Jope at Unilever seemed bent on emulating his ex-boss: Consumers: “…want to know how brands are making society and the planet a little better.”

Supporting him, fellow CEO at Walmart Doug McMillon claimed consumers wanted clarity about: “How the product was made and delivered and how people were treated in the supply chain.”

Not to be outdone, David MacLennan CEO of food trading giant Cargill reported that employees were starting to ask questions about a company’s ethical standards:“They want to know we respect the cultures and communities where we operate.”

Trends

Staying relevant means ethical leaders must adapt and evolve by responding to least six important trends. Each challenges a previously narrow view of what a company is for 

Staying relevant–changing role of ethical
business leadership

 

Acceptance of the Social License

The social license idea can no longer be confined to academics. Many business leaders now accept the “license” is a reality. Staying relevant requires them to accept that for all practical purposes, a community grants each company “permission” to trade. If abused, this may lead to an ending of the license.  

That notorious one-liner by the boss of GM, America’s largest US car maker in the 1950s, no longer holds sway:

“…for years I thought what was good for our country was good for General Motors, and vice versa.”
Charles Erwin Wilson, CEO GM, 1953

Though the social license may be intangible, a company can still encounter solid opposition to exploiting people and the planet solely for its own selfish ends.

Nor does employing people or creating useful products alone justify a company’s existence. In deciding what to do, smart companies now factor in concerns about the Environment, Social issues, and how they are Governed (ESG).

For example, concern about excessive executive rewards used to be confined to internal considerations. Now boardroom pay and the growing gap between the highest and lowest paid employees makes regular headlines. The ratio between highest and lowest pay even attracts talk of possible government intervention. Governments already set minimum limits.

In staying relevant responsible business leaders must be willing to consider pay differentials as part of their ethical focus. It matters to them if the gaps become excessive or ever expanding.

Changing employee expectations

What employees expect from their work also causes waves. Ethical leaders must adapt to these.  Younger and more demanding generations now expect a larger say in how they’re best employed. The so-called millennials for example, expect to make a worthwhile contribution to society. This desire may affect recruitment costs, retention rates and eventually profitability.

Many employees also wish to work in a company that takes an ethical approach to doing business. For example, research consistently shows most employees will accept less pay if they can work for trustworthy firms. Employment specialist Unum surveyed 3000 people in 2018. Over half felt companies also had a duty to make a positive contribution to society.

Advances in technology also keep influencing workplace attitudes. Any firm fixated on short-term profits at the expense of its long term future may find itself failing to recognise the extent of technical support and learning its employees need.

Legislation such as the minimum wage, paternity leave and the extension of maternity leave, has also transformed what employees expect from their employer.

For instance, not only do they expect to be treated fairly and with respect, but they want to be fulfilled, empowered and to work flexibly. This means the company being willing to amend the social and legal contract between employer and employee.

Millennials with spare money are twice as likely as conventional investors to place their funds where they generate a positive social impact. Staying relevant as this younger age group gains power demands that ethical business leaders work harder on pursuing social impact projects.

Growth of social impact investing

“There is mounting evidence that funds which observe Environmental, Social and Governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin.”
Financial Times, Sept 3rd 2017

click here

Directing resources into socially desirable projects once generated a negative response from most financial experts. They saw such decisions as a misdirection of resources for which: “You can expect a worse return on your investment.” 

This is no longer true. Financial returns from social impact investing often exceed those from conventional investments. News that investors who integrate ESG into their decisions win better returns keeps invading capital markets. Consequently many firms and fund managers report regularly on their social and environmental contribution.

It’s also becoming easier to learn what impact the newly directed resources actually achieve. As a result of this transition thousands of professionals from around the world now hold the job title “ESG Analyst”. The continual media coverage, including within the financial sections of the world’s leading newspapers, partly reflects this change.  

However, despite the interest in ESG, reliable performance metrics remain in their infancy. Almost seven in 10 asset managers lament the lack of quality information.   There are signs new technology based on machine learning will help to redress this shortfall.

Given these developments, ethical business leaders must adapt and learn to talk about the numerous demands of ESG. Staying relevant implies helping their companies focus on the critical factors where a company can indeed make a useful social contribution.

Moves to long-termism and sustainability

“At Amazon the customer comes first, ahead of “short-term profitability considerations or short-term Wall Street reactions.”
Jeff Bezos  CEO Amazon

Taking more account of the long  term continues to invade the thinking of many CEOs and of regulators. For example, when experts sat down to write the UK’s new Corporate Governance Code in 2018, they drafted a critical first principle that the role of a board is:

“To promote the long-term sustainable success of the company. Boardroom members should generate value for shareholders, but they should also be contributing to wider society”.

Such an approach puts values and the principle of sustainability at the heart of running a company today. This trend has important implications for the role of ethical business leaders. A responsible leader must now accept the multifaceted nature of sustainability. It embraces the long-term interests of shareholders. It also includes responsibilities to society, customers and local communities.

Core message

This core message of the need to build sustainabillity into company strategy keeps filtering through to investment managers. The latter for example, often express concern that companies should be building new strategies. That is, ones taking into account risks involving  environmental, social and governance (ESG) factors.

Ignoring such risks may make it harder for a company to attract capital. Among 2,200 studies undertaken since 1970, most (63%) reported a positive link between a company’s ESG performance and its financial performance.

Apart from the trend to take into account ESG factors, there’s the ongoing tension to be resolved between short-termism and the long-term

On the one hand in a survey of over a thousand C-level executives and board directors, most believed they faced more, not less pressure to focus on the short term. Yet there is also the desire of many leaders and investors to give more weight to the long term. Consequently, ethical business leaders need to become more aware of the downside of short-termism and its negative impacts. As ethical leaders part of staying relevant includes talking openly about these issues.

Rise of Anti-globalisation

“The rules of the game have been largely set by the advanced industrial countries”, who unsurprisingly “shaped globalisation to further their own interests.”
Nobel economist Joseph Stiglitz, Making Globalization Work: The Next Steps to Global Justice 2006

There’s a shortage of favourable views of capitalism. For instance, only a slim majority of Americans retain a positive view of it. Countless and seemingly endless business scandals undermine trust in finance or companies to decide what’s best for society.

Many sectors of society regard globalisation as a negative force because it distributes the gains unevenly across society. Opponents of globalisation believe it mainly benefits an elite.  The post Lehman crash of 2008/9 shook capitalism to its roots.

For ethical business leaders globalisation and people’s strong reaction to it demand yet more adaptation. Empathy and understanding are not enough. Ethical leaders need to promote positive counter measures.

Advances in technology

We are starting to understand how technology affects ethical leadership. Technical changes prompt the alert leader to think and act in adaptive ways. For example, they must evolve their approach to embrace learning, communication and diversity.

At a world-wide level, successful ethical business can stay relevant by understanding how technology can aid them in managing people. For example, in building teams and keeping track of work across all channels and in any location of the world. The advances continually present new kinds of ethical dilemmas to which business leaders must respond.

Developing self-drive vehicles might seem to pose mainly a technological challenge. For leaders there are less tangible issues that cannot be delegated elsewhere, such as ensuring that controlling software reflects basic human values.

Or take drug development.  New technology using genomic data, poses ethical choices that leaders cannot just offload to committees.

Artificial intelligence (AI) presents many ethical choices to which business leaders must respond. For example, voice recognition may seem to deliver an obvious gain in some business situations. Yet there are critical ethical choices around openness and potential invasions of privacy. 

Machine learning and big data also may unlock valuable insights. For example, by helping to obtain better ESG financial information.

Yet as the public row over Facebook’s use of big data and the case of Cambridge Analytics showed, ethical leaders need to play an important role in the sort of choices to be made about the use of such material. 

AI also offers ways companies can improve the quality of their governance. For example, in achieving higher standards of employee compliance. Yet should employees be informed they are being monitored and in effect “watched” by a machine?

As Google and Amazon learned, AI in particular creates ethical dilemmas requiring a leadership response. For example, to be more open and transparent about the application of these advances. The changes also stimulate new pressures for increased collaboration, better communication and more readiness to listen to people’s concerns. 

The changing role of ethical business leadership

The six trends described generate a major pressure wave for ethical leaders to focus on staying relevant. This is itself a trend and prompts the question:

What does it now mean to be an ethical, or responsible business leader?

As we have seen, in today’s transparent, and social media-driven world, senior executives face constant challenges over their morals and ethics.  For example most (63%) managers reported in a 2013 Business in the Community study they’d been asked during their career to act contrary to their own ethical code. Nearly one in ten (9%) said they’d been asked to break the law.

Around the world society and interest groups regularly confront businesses and their leaders. How leaders behave and interact with those around them can win or lose the trust of stakeholders. Lack of trust can damage a company’s reputation and deter the recruitment of new talent.

Leader behaviour

Individual leader behaviour may also come under the microscope of employee judgement. For example, at the end of 2018, Ray Kelvin founder and chief executive of Ted Baker stood down. His departure followed complaints from over 100 staff and an on-line petition demanding:

“…an end to forced hugging by the CEO. …so many people have left the business due to harassment whether that be verbal, physical or sexual.

This internationally high profile event came on the back of reports of retail entrepreneur Philip Green’s alleged misconduct. And of course the notorious Weinstein downfall over alleged sexual misconduct.

Faced with a complex pressure wave of many different forces, how should an ethical business leader keep changing? Singly or together the trends here deliver a sizeable impact on the typical ethical business leadership role. 

Riding this transition to stay relevant will test the most astute and self-aware executive. Google, for instance, faced protesting workers in numerous nations. They united against the company’s handling of sexual misconduct and its business strategies.  

The pressure wave represents a shift towards values. It’s why the ethical leader role must keep adapting and evolving. Shareholder primacy  once gave an leader a clear sense of direction. This no longer holds true.

Thankfully we are mainly free of the urges of the original Chicago economists. For decades their baleful influence, some would say “curse”, distorted what ethical business leadership meant in practice. If culture meant anything it focused almost exclusively on maximising profits. 

Today, culture takes centre stage in ethical business leadership. Even regulators seek assurance about it, and CEOs readily declare its importance. This translates as leaders staying relevant by adjusting their role to

Honour human rights, demonstrate care, prevent long term harm, anticipate unintended consequences, honour sustainability, lead with transparency, promote diversity, and “do what’s right.”

 

FOR A LIST OF SOURCES 

 

Check out these other posts at this site:

Why ESG now helps define ethical business leadership, November 22, 2018 Social Concern: A wake-up call for ethical business leaders October 22, 2018 How to make sense of the social license, November 12, 2015 How ethical..
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It has cost $15 million dollars and with nothing to show for it. Except serious reputation damage. source: FACUNDO ARRIZABALAGA/EPA-EFE/REX/Shutterstock

Barclays’ CEO Jes Staley  tried discovering the identity of a whistle blower. He ran slap into laws designed to protect people who speak up about unethical practices in business. 

The resulting $15  million New York Department of Financial Services fine was topped by a further 642,350 penalty from the UKs Financial Conduct Authority in May 2018. This sorry saga confirms Barclays is no place for employees to highlight governance issues.

The misguided CEO nearly lost his job. His much publicised experience sends a message to even the most senior company executives.

When staff speak up about unethical practices they can make a considerable difference. Barclays was forced to agree a plan for better internal controls and an improved compliance programme. This included more robust protections for whistle blowers. Senior management oversights of the programme must also be upgraded.  

Elsewhere in the USA, a 2,500 strong staff petition at Ted Baker, which makes designer clothing and accessories, became a collective whistle blower. The staff condemned the actions of its CEO as forcing people to hug him and others. A law firm will conduct an investigation into the allegations and report back to several company non-executives.

Many business leaders subscribe to doing what’s right. In practice, the drive for profits can sometimes be a trade off with ethical behaviour. The most obvious recent large scale example was at Wells Fargo bank. In search of sales, bank bosses pressurised staff to push services at clients, which were not requested. While it made short-term money, it also proved a reputation destroyer. The bank has yet to fully recover from the debacle.   

The ideal business leader is both financially smart and also ethical.  Many responsible business leaders understand what this  means in practice. Good intentions can surface in two important areas of influence: company strategy and through their personal moral compass.

With strategy, ethical business leaders set the ethical tone and re-enforce it in numerous ways. They can ensure there are robust  systems in place which apply to all employees and with vigorous policing.  They have the power to make compliance into a force that no one can ignore.

The second way of demonstrating integrity as a CEO stems from personal behaviour. This may include setting an example by insisting the company does the right thing, ensuring people are treated with respect and insisting on transparency for all important decisions.

Until recently ethical constraints on high level executives have tended to fray at the edges. Employees are showing they can collectively make a useful contribution to helping their leaders take ethics more seriously.

Google workers protest

Silicon Valley firms, for example, face rising employee anger about unethical or questionable practices.  Tech firms such as Google, Amazon, Microsoft and Salesforce have all experienced significant employee protest campaigns.

These have an ethical dimension but are also political in nature. For example, Google employees recently took a collective stand against their company’s high-level executives accused of sexual harassment.

They also opposed the sale to police of the company’s facial recognition software, and to the company working for the Pentagon.

Technology workers have lambasted contracts their firms have won from both the military and law enforcement. Drones using AI as well as work for certain government agencies have all attracted large scale employee protest.

Employee feedback on ethics can be like gold dust. Sensible business leaders treat such views as a precious asset not a subject for criticism.

What gets in the way?

What stops employees from giving business leaders the vital information they need about ethics? Why do those below the top echelon of a company go along with unethical practices? Why do they become part of the problem, rather than being part of the solution?

Recent Australian research by the Institute of Business Ethics found answers to to some of the important questions. For example, more than one in three workers who knew of misconduct at work nevertheless stayed silent. The new research explains why ordinary employees often feel pushed into acting unethically. The largest cause stems from time pressures and the need to follow orders, rather than evil minded colleagues—see graphic. In Europe as a whole some 16% of employees feel victims from such pressures.

Source IBE Study 2018

When asked what influenced their decision not to speak up about unethical practices, around one in three employees (32%) said it might jeopardise their job. More than quarter (27%) felt that their company would anyway not take corrective action.

Whether people speak up about unethical practices they observe depends on the prevailing company culture having a proper ethics programme in place.

Across Europe as a whole, for example, in companies with an existing ethics programme, almost three out of four employees (73%) employees who knew of some misconduct, would be likely to speak up. This compares to only 42% in those firms without an ethics programme.

Strictly for the brave or stupid

Despite supportive legislation, for any one individual to step out of line and speak up about ethical abuses can and often is a fatal career move. So damaging in fact, that it’s not for the fainthearted. Whistle-blowers often suffer, bullying, harassment, inappropriate or unethical treatment, and other forms of discrimination. 

The US Securities and Exchange Commission (SEC) awarded $111 m to 34 whistle-blowers in the five years to 2016. Money though, seldom comes as a reward. Rather it’s compensation for daring to speak up and risking the dire consequences that tend to follow. These can include damage to your home, health, work and wealth.

For example, in 2017 Ian Foxley blew the whistle over an alleged payment of bribes at GPT Special Projects Management, later a unit of Airbus. Based in Saudi Arabia, he uncovered what he believed was a multi-million-pound bribery scheme. He tried to blow the whistle, choosing to flee the country rather than risk staying. He lost his job and seven years later the case is still being investigated by the UK Serious fraud office.

A study by Warwick Business School found that most (82%) whistle blowers reported being demoted or given more menial work. Almost all were eventually dismissed or resigned.  A recruitment agency view is that “getting a whistle-blower re-employed is practically impossible.

Yet when employees can voice their concerns freely, organisations see increased staff retention and stronger performance. After checking numerous studies, the Harvard Business Review reported in 2016 that in several financial services firms where employees reported speaking up, these business units had significantly better financial performance and operational results than others.

Sources:

  • Samuelson, Our best hope for companies with social conscience is their workers, Quartz at Work, November 21, 2018
  • Ethics at Work Survey The Institute of Business Ethics (IBE), in Partnership with The Ethics Centre, 2018.
  • Can Your employees Speak Freely, Harvard Business Review Jan-Feb 2016
  • Clegg, Whistleblowing can be life changing, FT, 3rd December 2018
  • Gallo, How to Speak up about ethical issues at work, Harvard Business Review, December 2015

You may also like:

The high cost of leaders who lose their moral compass: http://www.ethical-leadership.co.uk/the-high-cost-of-leaders-who-lose-their-moral-compass/

Is speaking u p in your company a mug’s game?: http://www.ethical-leadership.co.uk/speaking-up/

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Larry Fink CEO BlackRock “Sustainable investing will be a core component for how everyone invests. We are only at the early stages.”

When the boss of the world’s largest asset management company routinely thinks in terms of Environmental, Social and Governance factors (ESG) then other CEO’s would be sensible to take notice.

It makes even more sense for any business leader wanting to burnish their ethical credentials.  

For countless years responsible investing hardly hardly showed on the radar of business leaders, let alone ethical ones. It’s all different now. Corporate scandals such as the VW emissions saga, or the reputation shredding of consumer trust at Wells Fargo have transformed what it means to be ethical in business. 

Today, the business case for ESG investing has become far more robust, if not entirely irrefutable. Otherwise why have ESG funds raced past the $1 trillion mark? As one leading investment manager puts it: “It feels like ESG is at a tipping point.”

“There is mounting evidence that funds which observe environmental, social and governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin.”
Financial Times, Sept 3rd 2017

Activist investors such as growth-orientated hedge funds have woken up to environmental, social and governance (ESG) concerns. There is nothing philanthropic about such awareness. Stakeholders are following the money. ESG driven investments now often surpass conventional benchmarks:

So it’s increasingly in the interests of mainstream investors to pay attention to (ESG) factors. Bloomberg, Morgan Stanley, Goldman Sachs and other financial giants are busily expanding their ESG product and service offerings.

And in the coming years, women and millennials will start to manage a greater share of global wealth. They’ll also want to align their actions with their values about fairness, the environment and human rights. 
“Almost three-quarters of investment professionals worldwide (73 percent) take environmental, social, and corporate governance — ESG issues–into consideration in the investment process. Only 27 percent do not consider ESG issues.”
CFA Institute ESG Survey, August 2015

The Ethical Leadership Impact

Senior executives with a claim to be ethical practitioners now face a new kind of demanding investor.

These are activists wanting higher returns who have realised that the route to this is through integrity and ethical business performance.

Such investors may not be experts on leadership. Nor would they talk about ethical leadership perhaps. Yet they know what to look for in company leaders. They expect to encounter ones who talk regularly about integrity and then demonstrate it through daily performance.

More specifically they want signs that a business leader knows how to reduce the risks associated with ethics or compliance failures. A commitment to ESG is one clear sign that the leader is pointing in the right direction. 

Demand for risk reduction comes within a context fraught with significant levels of uncertainty. For instance, Swiss Re, one of Europe’s biggest insurers, now benchmarks its entire $130bn portfolio against ESG indicators.

The ESG phenomenon continues despite an absence of detailed, globally agreed definitions of either ethical leadership or what constitutes ESG standards. The overall trend to take into account ESG continues to bring ethical leadership in business into ever sharper focus.

Mirage or reality?

As a source of profits is ESG real, or mere mirage?

Sceptics argue the current enthusiasm for investing which takes into account ESG factors stems from a mere statistical distortion. This they say, combines with a vanity urge to be part of the latest investment bandwagon.

Yet consultancy Create-Research, reports 60 per cent of investors say they plan to increase their allocation to responsible investment over the next three years. That’s a lot of investors living an ESG delusion.

Similarly MSCI another research organisation recently concluded:

“…ESG has affected the valuation and performance of companies both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk.)

Other studies too have consistently shown how ethical leadership and its form of decision-making fosters employee morale, boosts brand reputation, encourages loyalty in customers and employees, and improves a company’s bottom line.

In summary, ethics and ethical leadership are more than the right thing to do: it’s also the smart thing to do.

The E of ESG

Broadly the E of ESG  means the environment  which includes

  • Sustainability
  • Globalization effects – e.g., exploitation, child-labour, social and environmental damage anywhere in the world
  • Corruption, armed conflict and political issues
  • Staff and customers relations – for instance education and training, health and safety, duty of care, etc.
  • Local community
  • And other social impacts on people’s health and well-being

Business needs leaders able to make sense of these diverse factors. Rather than ignore them, as many businesses still seem prepared to do, ethical leaders embrace the challenge. They also often take a highly personal interest in the implications.

To be an ethical leader is therefore to be concerned with the organisation’s own culture and environment in which employees work. This shows up in the increased interest in employee engagement as a clear route to financial success.

The S of ESG

The S of ESG refers to how a company treats its labour and how it responds to the human rights of the people and communities it touches. Various international instruments define these rights. They include the Universal Declaration of Human Rights and the eight Core Conventions of the International Labour Organization.

While originally developed for governments, these standards now affect the business context. They provide a strong foundation on which to clarify the scope and meaning of a company’s “social” performance. 

E- and G-factors of ESG have achieved considerable traction with both investors and business executives. In contrast, the S-factor, has yet to make a lasting impact. This is against a backdrop of rising economic inequality and mounting evidence of the negative forms of many business practices.

So it’s entirely relevant to ask: can business deliver value in today’s global economy in ways that work for people and communities around the world?

Once CSR, or Corporate Social Responsibility seemed like the start of a sustained shift. It seemed to herald a move by business to showing a genuine social concern for the company’s effects on environmental and social well being.

In practice, CSR has acquired a serious credibility gap. There remain few examples where CSR has delivered measurable business gains, let alone sustained benefits for the community. See Goodbye to CSR, welcome to Social Commitment.

The current lack of interest by some business leaders in the “S” of ESG partly reflects a disbelief that social commitment can pay. Many still view it as a check-the-box exercise, one where investors and companies only appear to comply with rising consumer expectations.

Despite this roll call of negative forces constraining social investment, leading corporate CEOs do emphasize for example, positive reasons they are considering human rights in their business models and operations:

 “…we firmly believe that if we focus our company on improving the lives of the world’s citizens and come up with genuine sustainable solutions, we are more in sync with consumers and society and ultimately this will result in good shareholder returns.”
Unilever’s CEO Paul Polman

Others argue that sustainability and human rights investments have led to increases in their company’s ability to recruit and retain outstanding employees, They also point to improved quality control, and better worker retention throughout their supply chains.

The G of ESG

Corporate governance used to be a response to corporate scandals. Now it’s making important inroads on leadership accountability, especially in Europe.

Corporate governance has shifted from the wings where is was seen narrowly, in a legalistic sense of rules and regulations that must be obeyed.  Today it has evolved into a whole new approach. This now includes general support for better run companies and in particular support for sustainability.

Sustainability is one of those phrases that can  mean what you will. In practical terms it means looking at social, environmental and economic impacts and making decisions using a broader perspective than in the past.

When sustainability permeates governance in this way, business leaders become accountable for environmental, social, and economic performance. 

Using the sustainability lens to view governance changes how the organisation approaches issues such as:

  • Land use, energy, water, and emissions
  • Human rights, equal opportunity, and health, safety, and wellness
  • Charitable giving and volunteerism
  • Systems and strategies for engaging with stakeholders,
  • Product development, procurement, and innovation
  • Board composition and compensation
  • Ethics, standards, and codes that apply within an organization and to its value chain. 

With these multiple factors to consider, how can ethical business leaders make sense of the current ESG landscape? How can they better include such information into their approach to business?

The sheer diversity of the ESG landscape explains why governance tends to be its least understood aspect. Yet at its core,  governance prompts business leaders to pay attention to the culture of the organisation.

Investors too increasingly recognize that companies practicing good governance as part of a larger ESG-aware strategy will be more likely to see these factors translate into improved long-term investments. 

Nobody invests in governance for its own sake. Instead stakeholders look to ethical leaders who will place a high priority on good governance as a way of achieving long term financial benefits.

Sources:

  • G.Lofts, Who cares wins in the brave new world of ESG rules, FT 19th November 2018
  • A.Mooney and P Smith, As the climate turns, ESG powers into the mainstreamFT 19th November 2018,
  • Giese, Executive Director, Applied Equity Research
  • Has ESG affected stock performance? MSCI, May 2017
  • L.Portado, Activists look to the ethics route for higher returns,  FT 27th December 2017
  • Kynge, The ethical investment boom, FT, Sept 3 2017
  • Ethical Leadership Around the World, AND why it matters, ECI 2017
  • Jackson-Obot, Ethical investments still on trend, FT Adviser Nov 2017
  • O’Connor and S.Labowitz, Putting the “S” in ESG: Measuring Human Rights Performance for Investors, Centre for Human Rights, March 2017
  • Explaining the G: Putting Governance in ESG, FlexShares, Jul 31, 2017
  • ESG Investing: Should Start with the “G”, Magni Global Asset Management
  • Hale and J Glase, Sustainable investing trends for 2018, Morning Star, 21st December 2017
  • R Sullivan, Which direction for corporate governance?, Board Agenda, February 2018
  • A. Filabi, Prioritizing Social Responsibility in Companies: A coming firestorm? Ethical Systems, 17th January 2018 

This is a revised version of the article on ESG published at www.ethical-leadership.co.uk in April 2018.

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Recently, PayPal killed the accounts of anyone pushing racist views. 

“You have to have the courage to make those decisions”
PayPal CEO Dan Schulman.”

The action shows how ethical leaders can take relevant actions to promote social responsibility by their companies and key stakeholders.

Echoing these concerns about social responsibility, Larry Fink CEO of the world’s biggest fund manager Blackrock sent a letter to colleague CEOs of public companies in 2018. It stressed their responsibility to deliver profits and make “a positive contribution to society.” Fink explained: 

“…without a sense of purpose, no company, either public or private,
can achieve its full potential. It will ultimately lose the license to
operate from key stakeholders.”

He reminded colleagues that the “social licence” is real–no mere fiction. What underpins it is a firm’s readiness to show real social concern and care for the local community.

Such an approach shifts the present role of corporate executives.  For instance, a recent Ethical Corporation report found more than half (69%) of its global corporate audience were already working to integrate Social Development Goals (SDG) into their business strategy.

Around the world forward thinking companies build social commitment into the core aims. Multi-national Indian firms such as Tata, Wipro, Mahindra, and Deshi Mahila Bank have pioneered this behaviour.  Chetna Sinha, Founder and President of Mann Deshi Mahila Bank for example, has spent over two decades promoting financial services for women in rural areas of India.

This social concern partly explains why the major Indian firms continue to win a high degree of customer trust around the world.

From American Airlines to Nordstrom to Walmart hundreds of US company bosses have also begun speaking out on social concerns. These include anti-gay discrimination, immigration and race relations.

No Luxury

Showing social concern is therefore no longer a corporate luxury. It has commercial value. Companies showing a genuine social commitment tend to report better financial returns than ones staying silent. 

A 2017 study of 1,000 consumers found nearly half (41%) believed it’s important for brands to take a stand on social or political issues. A further quarter said it is very important for them to do so. By contrast, only a quarter of respondents said that it is not very or not at all important.

“We are seeing a rising tide in this kind of behaviour from brands, which I think is not just in the US… behaviourally we are seeing it happen more and more.”
Andrew Caravels, Vice President of Strategy and Brand Engagement at Sprout Social.

In the UK more than 9 out of 10 people (92%) say businesses should take a stance on social issues, such as immigration, climate change and gender equality. In fact, 72% of the public are prepared to champion companies which stand up for what they believe and challenge politicians.

It’s the companies with a clear purpose, beyond profit, that create the greatest resonance with consumers.

A majority of millennials for instance, expect their CEOs to take a stand on social issues. Those who do, benefit from sales boosts and lower staff churn. Consequently CEOs in search of competitive advantage may have no other choice but to pursue social concerns.

It’s also about a week since the Intergovernmental Panel on Climate Change shook the world with its urgent message on global warming. And now financial regulators expect banks and insurance companies to take action against the threat from rising temperatures.

The Bank of England told institutions they need to have “credible” plans or policies in place to manage exposures to climate change. That is they must make a serious social impact soon.

There was also a direct appeal to boardrooms who were told they will be expected to “understand and assess the financial risks” inherent in climate change.

Risk of speaking up

The fate of Grant Thornton’s CEO highlights the dangers a leader may face through speaking up on social issues. Sacha Romanovitch encouraged the staid UK accountancy firm to make space to focus on social purpose. She spoke out publicly on issues such as mental health and social mobility. One of the firm’s many partners claimed:

“She did some really progressive stuff that people can laugh at or smirk and say it’s socialist—but I thought it was good.”

Sadly Romanovitch was fired in 2018, apparently for failing to bring in sufficient profits. She was also accused anonymously of pursuing “a socialist agenda.”

Socially concerned, Starbucks CEO Howard Schultz launched a Race Together Initiative in 2015, calling it

“An opportunity to begin to re-examine how we can create He more empathetic and inclusive society – one conversation at a time.”

Schultz’s good intentions drew a deluge of criticism. The humbled CEO ended the campaign almost as soon as it began.

If you’re going to speak out on social issues it helps to be sure your values align with corporate ones. It can be easy to assume that corporate values and personal actions match. They may not. 

A more recent study by the Global Strategy Group provocatively called, A Call to Action in the Age of Trump, found about 6 out of 10 supported the firm taking positions on immigration reform and LGBT equality.

Despite the clear benefits of CEO activism on social concerns, there may still be unexpected risks. For example, activism may trigger the need for a company to react publicly during rapidly-evolving situations. 

Apart from making shareholders and stakeholders uncomfortable, adopting certain positions, or activism, can strain supplier and customer relationships. In some cases it nay generate career-derailing scenarios.

For ethical leaders to feel more at home with activism it’s worth becoming an advocate at an earlier stage of one’s career. This allows more room to recover from mistakes, and to perfect one’s communication style and message.

Demonstrating the right behaviour may trigger resistance as this table shows:

Failing to speak out on socials issue may also create reputation damage. In 2017 for example, when President Trump’s ad hoc travel ban was causing havoc at airports around the US, cab drivers at New York’s JFK Airport went on an hour-long strike in protest.

Ride-sharing app Uber did not take part. Many saw its reluctance as undermining the strike. The company suffered a swift and strong backlash. A vigorous online campaign persuaded people to delete the app from smart phones and other media devices.

Uber’s main competitor, Lyft, capitalised on its rival’s mistake. It drew a line between the two companies with a $1m (€860,000) donation to the American Civil Liberties Union.

The sheer variety of what counts as social concern creates pressure to adjust the role of ethical business leaders. 

Leaders with social concerns
  • Google: Its workers pushed the company to create new rules for the ethical use of Artificial intelligence.
  • Patagonia: The outdoor apparel company mounted a strong protest against the president’s decision in 2017 to substantially reduce the size of two national parks.
  • The World Economic Forum: Called social concern the New Age of CEO activism. The Forum stimulates CEOs and their companies to take more interest in addressing social problems around the world.
  • Merck: CEO Ken Frazier resigned from President Trump’s American Manufacturing Council objecting to the president’s response to the violence in Charlottesville. An avalanche of fellow council CEO resignations followed and the council collapsed/.
  • Alianze: One of Germany’s major insurers announced in May 2018 it would stop covering single coal fired power plants and coal mines. Oliver Bates the group’s CEO said the company expected to “cut the biggest climate killer out of the core business over time.”
  • Boeing and IBM were among large employers in South Carolina in 2015 calling for the Confederate Flag to end its reign over the state capital. The state House of Representatives’ subsequently voted to send the flag to a museum.
  • HSBC & Standard Charter and other big-name City chief executives pulled out of a major investment conference in Saudi Arabia in protest at the Kingdom’s alleged involvement in the disappearance of journalist Jamal Khashogg
  • Salesforce: CEO Mark Bentoff endorsed a San Francisco state Proposition C to raise money to tackle the city’s homelessness crisis via a small extra sales tax. “Homelessness is all of our responsibility.” he tweeted.
Social Investing

Assets held in ethical funds keep surging ahead. They have more than trebled over the past decade. UK investors keep pouring money into green and socially responsible companies.

Funds held in UK ethical funds rose from £4.5bn in 2008 to £16.7bn today.  This dramatic advance should warn business leaders that future sources of capital may depend in the extent of a company’s social commitment.

A business leader’s role must now include a concern about green and socially responsible practices. A poor record on environmental and social issues is

“Now widely seen as a red flag by investors from a risk perspective, as well as an ethical one”.
Laith Khalaf, senior analyst at Hargreaves,

Going through the motions of expressing a social concern may no longer satisfy more demanding stakeholders and potential investors. Increasingly they expect ethical leaders to turn concerns into observable social action.

This may include disposing of assets that fail to align with rising stakeholder expectations. At one university endowment fund for example, senior investment officers recently stepped down from their roles. Stakeholder awareness forced the university to dump its investments in fossil fuels.

There is no longer an obvious trade-off between seeking good company financial returns and pursuing strongly held principles. For example ethical investing often protects investors from damaging price falls. The growth of ethical investing that tracks normal indices is another sure sign of current relevance.

For years, socially blind investment managers ignored or even denigrated ethical investing. Consequently CEOs felt reluctant to embrace this form of action. They accepted the superficial argument that it made little financial sense.

It’s a new world now. Popular movements, beliefs, and social media impact have measurable impacts on financial outcomes.  As a result companies are adjusting to new criteria of what it means to be ethical. Their activism will often convert into strategic implications: 

For example Nestlé is investing billions of R&D dollars to invent a new industry that straddles food and pharmaceuticals. Novartis is expanding access to medicine by introducing equitable pricing in low- and lower-middle-income countries at a price of $1 per treatment per month. And Enel, an Italian utility giant, is shaping the future of energy through advanced technologies that expand the market for renewable energy.

Obligation versus profits

Can ethical leaders make a difference through expressing social concerns? Occasionally turning them into some form of action on the ground. Should they even do so?

The legacy of Milton Friedman the late US economist, turned profits into the only acceptable criteria for judging companies and their leaders. Yet even he backtracked as the sheer scale of damage caused by a “profits only” measure of business performance came into sharper focus. 

So big questions keep re-surfacing about what contribution business can or should play in their local communities. 

Within the UK and US many people have been “left-behind”. The causes are diverse and include globalism–the gift that keeps giving.  The “greed is good philosophy” still drives much of business.

In the UK, the dreadful failings of Universal Benefits, an unequal regional distribution of the nation’s wealth, and the disproportionate support for bankers and others of excessive wealth still blight society.

Some like Paul Collier, Oxford Professor of Economics urge new policies for the “left-behind”:

“What happened to the fine tradition of industrialists who recognised their obligation to their local communities?

What indeed? Now we have the manifest failings of once respected professions with a previously strong ethical component. These include  banking, auditors and the City with dishonesty baked into their culture. Capitalism need to rediscover what Collier calls reciprocal ethics:

“The ethical firm retains loyal customers and workers, but recognises its obligations to them, not because it may turn out to be good for business but because it is at the core of their purpose.”

Taking a stand is now a principled position and a sound business choice. 

Sources

  • Insurers act to mitigate risk exposure, FT 9th October 2018
  • Mihelič, Ethical Leadership, International Journal of Management & Information Systems; 2010 Volume 14, Number 5
  • Grant Thornton Lead to be probed, FT 17th October 2018
  • Ziv, Starbucks ends phase one of race together initiative Newsweek 3/23/15
  • Gogo, The new age of CEO activism, World Economic Forum Jan 2018
  • O’Brien, A Force for Change? CEOs Speak Out on Social Issues, Business Ethics, Sep 21, 2017
  • O’Brian Why more companies are-speaking out on social issues, Business Ethics, July 2015
  • Taylor, If Humility Is So Important, Why Are Leaders So Arrogant? HBR Oct 2018
  • Williams, UK ethical fund assets surge to £16bn, FT 29th Sept 2018
  • Waters, San Francisco tech giants clash over levy to fight homelessness , FT 2018
  • Schulman, Taking on critics and dissenters, FT 10th September 2018
  • Championing Change in the Age of Social Media, Sprout Social, conducted in 2017, published 2018
  • E. Kossek, Work and Life Integration: Organizational, Cultural, and Individual Perspectives, Laurence Erlbaum Associates 2008
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“Data ethics” hardly has the ring of romance.

Or of great urgency. Yet business leaders world-wide face a minefield. They must traverse it with their integrity in tact.

It’s no longer a matter of personal choice of whether or not they want to enter this territory.  

There are new persistent, growing and hard to resist demands from stakeholders, employees, politicians and others. They expect business leaders to consider what data ethics means for them and their companies. Whether it’s Facebook being challenged over user privacy; or Google attracting criticism for how its search engines distort findings to its own advantage. We simply cannot go on ignoring data ethics.  

Take for example automated decision making. Or the use of artificial intelligence (AI). How decisions emerge from complex algorithms can have serious ethical implications. Yet often the exact consequences remain cloudy. Even to those most concerned. 

AI experts admit to problems keeping up with what’s happening. Or what might happen—-“if it can go wrong, then at some point it will go wrong”.

Back in 2016 for example, there were 40 acquisitions of companies working on AI. Then the  market valued AI as worth around $644 million. The best guess now is that it has since doubled. Beyond that the projections become meaningless trillions. 

As for economic displacement in which robots take over jobs done by humans, that seems inevitable. A study by the University of Oxford in 2013 found nearly half (47%) of all job categories at risk from automation. 

Since May 2018 the General Data Protection Regulations (GDPR) expects the new breed of Data Controllers to explain the logic behind any automated decision making systems decision making with an unknown ethical component.

Likewise a new UK Centre for Data Ethics and Innovation in the UK will soon put an informed and sustained spotlight on this issue. This work will include concerns about the expanding influence of “big data”.

The Institute of Business Ethics has also tried to explain what an ethical dimension for AI means. Using a somewhat elaborate mnemonic it offers 10 signals for the ethical dimension. Each has a clear explanation which appears when you click on the term shown in the original pdf document.  Click on “Accuracy ” for example. Up comes a simple statement such as ” a company needs to produce clear, precise and reliable results.”

Building in data ethics

A clear need exists to build the ethical dimension into each stage of our AI journey. Without this we can expect the current polarisation of wealth and resources to worsen. In turn this may have major adverse society consequences further on.

Vast flows of millions of bits of data can be too opaque or complex for any human being to unravel. Only an AI or learning mechanism may be able to uncover the trends hidden in the material. 

Concerns about data ethics and AI implications already attract public concern. For instance enthusiasts for face recognition technology cannot escape its ethical dimension: Is it safe, can you trust the results?

This year, for example, German hackers tricked a Samsung Galaxy S8 iris scanner with a picture of the device owner’s eye and a contact lens. This was in the same month that a journalist fooled HSBC’s voice recognition security system. 

Nor are computer scientists immune to finding AI over whelming.  For example, some of them gave a computer an impossible task.  They told an AI to make a robot walk without its feet touching the ground. To their surprise the AI just flipped the robot upside down, so it could use its elbow joints as feet. No immediate ethical issues here. But what if one day the instruction becomes: “Find a “legal” way around the law?”

Worries about how AI works keep surfacing. There are dire warnings of an existential threat to humanity.  For example some top technology bosses privately believe that advances in AI may ultimately harm humanity. Yet many may feel constrained from saying so out loud for fear of affecting company profits.

Ethical business leaders cannot ignore the changes happening before their eyes. Even if they do not fully understand what’s at stake. In the last two years, for instance we’ve seen widespread use of the new technology. It includes fingerprint and facial recognition, driverless cars and other breakthroughs with ethical implications. As a new report from the Chartered Accountants institute in Australia and New Zealand puts it:   

“We are without doubt heading towards a new decade of disruption.”

In reviewing the coming changes the well-written report warns that AI can: 

…totally reshape our existing social landscapes as well as our economic order that brings with it serious ethical challenges.

It too demands that tech giants alone should not decide alone on the future advances.  

Moral Machines

A large leadership challenge lies ahead to build ethics into robots and AI. This one is not for the techies alone to resolve.

Leaders too need to stay awake to the ethical implications of AI. Machines can already do much of what humans can do. They drive, fly aircraft, run recognise images, process speech and translate. Yet there remains the missing ingredient of moral reasoning.  Those business leaders who ignore this ethical dimension may reap a whirlwind of public disfavour.  

Artificial morality though, remains a controversial next step.  It’s unclear whether we can teach robots how to tell right from wrong.  So far, there’s no firm regulatory framework within which this work might develop. 

Isaac Asimov had a go in 1940 with his three laws. Robots must:

  1. Not injure a human being or, through inaction, allow a human being to come to harm.
  2. Obey the orders given it by human beings except where such orders would conflict with the First Law.
  3. Protect its own existence as long as such protection does not conflict with the First or Second Laws

But these cannot deal with the dilemmas of say, driverless cars. A vast number of new questions keep surfacing around our relationships with these “intelligent” machines. They possess no social conscience. They may not be people, yet they still make decisions. They possess a kind of autonomy and independence yet without a moral or ethical dimension. 

In 2017 US and European experts outlined seven principles on transparency and accountability for AI systems. See panel.  While these can be helpful, the approach still misses an ethical component that human beings can bring to tech development. 

One way forward may be to use public engagement to pursue data ethics. 

Ethical business leaders can play a useful part here. They can encourage a debate, and not allow the issues to stay hidden with the techies. As a recent report from the RSA explains, there needs to be attention on 

  • AI safety–making sure the systems do not harm society
  • Malicious uses–guarding against malign influences using AI 
  • Data overlap and protection –overseeing the use of personal data by AI systems 
  • Algorithmic accountability–clarifying who is responsible for the computer instructions
  • Socio-economic impact–such as worsening inequalities of wealth and power
The role of Business Leaders

Business leaders of non tech companies therefore have an important role to play in how AI and machine learning advances. They can help protect humankind. In particular they can ensure these technologies stay in step with our human understanding. Even focusing on better standards of privacy can be an important leadership action.  Leaving the responsibility with the techies is not a viable option.

So what exactly should the ethical business leader be concerned about? And where should they direct their attention? The panel below outlines some areas where ethical business leaders can seek to make an impact.

These 5 concerns and others mean, business leaders must clarify their own ethical standards. Not just those of the companies they run. Issues of fairness, respect for others, openness, integrity and building trust will matter more than ever before.

To be an ethical business leader in the age of AI and machine learning means being willing to re-invent oneself. So a fair question for any concerned business leader is:

“How do I re-invent myself?”.

While each leader must find their own way forward the route includes:

  • Concern to protect customers
  • Preserve the common good
  • Be socially responsible
  • Take new levels of care over the design and planning of new products and services.

For instance responsible business leader can ask simple questions such as:

Do we have a viable AI ethics code?
How strong are our existing governance rules?
Can we find a third party to help us avoid manipulation and bias in AI and machine learning?
Can we unravel what lies behind our chosen AI algorithms?
Are we spending enough time assessing the impact of what we’re doing in the area of development?

As with so much of what leadership is about, what matters most is willingness to ask the right questions. And keep paying attention.

You may also like: 

How ethical business leaders can make sense of
Artificial intelligence (AI), March  5th, 2018,

Sources
Machines can learn, but what will we teach them, 20018, charteredaccountantsanz.com
Artificial Intelligence: The ethical dilmension, IBE, 26th January 2018
The State of Artificial Inelligence 2017, Insidesales.com
Sizing the market value of Artificial Intelligence , Forbes April 2018
Valuing the Artificial Intelligence Market, Graphs and Predictions, TechEmergence, last updated on August 12, 2018 by Daniel Faggella,
Jon Carol, A new company every Week, Guardian May 2017
C. O’Neil, Audit the algorithms that are ruling our lives,  FT 31st July 2018
Andrew Leigh, How ethical business leaders can make sense of Artificial intelligence (AI), March  5th, 2018, www.ethical-leadership.co.uk
Artificial Intelligence, Real Public Engagement, RSA 2017
J.Titcomb, Tech giants need to build ethics into AI from the start Daily Telegraph, 14 May 2018

 
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James Comey, the ex FBI director continues to arouse extreme reactions about his particular form of leadership and ethical performance.

At the start of his recent book A Higher Loyalty, he expounds at length about ethical leadership. It’s good to see this topic receive an airing from someone who, in theory, should know what it means to be an ethical leader.

Others are far less sure. In a scathing commentary in the New York Times, David Harsanyi accuses Comey of protecting his ego at the expense of the FBI and the nation.

In particular, Harsanyi refers to the proceeding of the most recent Senate Judiciary Committee. The latter focused on the Justice Department Inspector General’s report of how the FBI handled the Hillary Clinton investigation in the run-up to the 2016 election. 

The Inspector General Michael Horowitz claims that at key moments Comey clearly departed from FBI norms. His decisions, says Horowitz

“negatively impacted the public’s trust in the Justice Department and FBI.”

In his readable book, Comey claims no matter how he handled the accusations against Clinton, he just couldn’t win.  On the one hand Clinton haters expected nothing less than putting her on trial. This would be based on her security failures of using private mails for state business.

But Clinton supporters on the other hand would conclude any prosecution prompted by the FBI investigations would be a deliberate attempt to undermine her and her campaign.  

One definition of an ethical leaders is someone who “does the right thing”. 

Comey’s actions though,  remain open to various interpretations. For example, he claims to have sought to maximise transparency about how the FBI handled the Investigation task.

Yet in the book he admits to concluding privately that there was nothing deliberately criminal in Clinton’s actions. Procedural purists argue the role of FBI should have been restricted to reviewing the evidence, then handing it on to the Justice department to decide what to do next.

The longer this sorry e-mail saga continues, the more convoluted it gets. One of the final questions at the Committee posed to the Inspector General Michael Horowitz was: 

“Mr. Horowitz, do you think it’s time to move on past the Hillary Clinton emails?”

The answer for many is almost certainly “yes please.”

The fundamental  question of whether Comey was an ethical leader has become a lost cause. Only history will give the final verdict.
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Scientists recently announced the arrival of light from 10.5 billion years ago. 

It reached earth from the most distant known supernova. It had been travelling all that time. Such a journey offers a sobering insight on personal ambition. No human being can hope to make an impact lasting for even a smidgen of that total. 

Someone asked China’s leader in 1971 about the impact of the French Revolution. Premier Zhou Enlai replied: 

Chinese premier Zhou-Enlai

“It’s too early to say.” 

Despite these daunting perspectives business leaders still get asked:

“Once you depart, what kind of a legacy do you want to leave behind?”

A legacy is central to what it means to be human.  Without a sense of working to create a legacy, adults can lose meaning in their life. It offers a glimpse into human relationships, communities, and the human spirit.

A positive legacy could be the most important thing a business leader can achieve in life. It means exerting an influence well into the future. Beyond one’s short stay here on earth. Yet creating such a legacy proves both complicated and difficult.  Most FTSE-100 company CEOs only last about five years. Not much time to build a strong legacy.

Remember me? Alfred Nobel

How will Martin Sorrell now ex CEO of WPP be remembered? Is this empire of 130,000 people really his legacy? Or is there more to life than making a fortune from advertising? 

Alfred Nobel read a bleak obituary about himself before the died.  It trashed Nobel for inventing dynamite and selling arms. Worried how history would judge him, Nobel left his entire fortune to the Nobel Prizes. And that’s how most of us remember him today.

Answering that question:   “What do you want to be remembered for?” 

can be the start of defining a worthwhile legacy. For millennia, leaders everywhere have wrestled with this issue.

The greatest of the Egyptian Pharaohs was Ramses II, or Ozymandias.  None of his great works have survived. In a famous poem Percy Bysshe Shelley evokes a picture of a single pedestal half buried in the desert. On it are the words:  

“My name is Ozymandias, King of Kings;
Look on my Works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal Wreck, boundless and bare
The lone and level sands stretch far away.

Three other Pharaohs did rather better. They built the pyramids at Giza to endure an eternity. So far they have done just that.

Talking of builders, you can still visit Sir Christopher Wren’s famous legacy. In London’s St Paul’s Cathedral there’s a wall plaque with a Latin inscription. It translates as:

          “If  you seek his monument, look around you.”

Leadership legacies can be be almost anything. From a building, to a resilient reputation, such as Nelson Mandela’s.  Alexander the Great conquered half the world and cut the Gordian Knot. The latter was a metaphor for solving intractable problems. A less impressive side of his legacy was destroying Persepolis .  The Greek city was one of the most advanced and civilised in the world.

Henry Ford’s legacy was a process. His moving assembly line slashed the time it it took build a car. Instead of more than 12 hours, Ford did it in two and half.  His legacy lives on in countless factories around the world.

More recent business legacies? How about Anita Roddick’s Body Shop, Steve Jobs’ iphone, and the Internet of Tim Berners-Lee?  

The legacy puzzle 

Only the most committed business leaders crack the legacy puzzle.  Many struggle to make a significant difference in the short time they have at the top.  For instance, how do you leave a long-term legacy of sustainability

What at the time can seem so permanent, may soon fade into insignificance.  The much admired “HP Way” once described the approach of the two founders of Hewlett Packard.  Yet what’s left of “The Way” resides in history, not daily practice.

Jack Welch of GE

In the 1990s Jack Welch must have thought his legacy was secure. After all, Fortune magazine named him Manager of the Century .  Admired for leading the best-run company in the world, he generated double-digit earnings. Meanwhile other conglomerates fell apart. 

Yet within a few years his successor dismantled Welch’s legacy. Worse, a relentless re-examination of that legacy marked him a bully and a tyrant.

This paragon of managerial expertise often humiliated people in GE meetings. Many witnesses confirm that Mr Welch could be a formidable, even terrifying, boss.  One former GE executive confessed that one of his boss’s attacks “caused me to soil my pants”.

Few business leaders leave anything approaching a worthwhile,  lasting legacy. Once they’re gone, they’re gone. Even in the firm they ran no one may even mention their name, especially if they die or get fired. 

Leaving a negative legacy

No so those who bequeath a negative legacy. Years later people still talk about them.  Their harm and the hurt they caused may live on  It’s like lava from a volcano. Their terrible reputation slowly sets hard, becoming immovable.  

For example, Al Dunlap, also known as the Chainsaw, continues to appear on lists of the worst ever CEOs. He spent his career hopping from one corporate boardroom to the next. Dunlop made thousands redundant without a second thought. Finally, he engineered a massive accounting scandal at Sunbeam Products. The firm never recovered and filed for bankruptcy in 2001.

Fred Goodwin of RBS

For almost destroying the Royal Bank of Scotland, CEO Sir Fred Goodwin, was dubbed “Fred the Shred”. The Queen undubbed his knighthood. 

He may not have been a shouter. But he bullied senior managers during his daily 9.30 am meetings. He questioned their competence. He too could reduce a senior executive to tears. 

How does legacy building work?

How people make decisions that affect future generations suggests some specific strategies. Ethical leaders will be the most likely to leave an ongoing legacy. They do so by refusing to go for the quick fix. They maintain a relentless focus on the long term. They show personal respect for others, and a determination to do what’s right. 

Through social commitment business leaders make more than a passing impression. See panel on the right: What sort of legacy?  

Social commitment now appears on many corporate agendas. There’s a growing resistance when short-term comes at the expense of senior employees and shareholders.

Yet few companies have taken the necessary step back. Only the most insightful business leaders see the link between short termism and social inequality. 

In fact, short termism can distort corporate strategy. Many business leaders feel compelled to focus on satisfying activist owners. Or to pursue corporate arrangements such as mergers and acquisitions.

Legendary investor Warren Buffet

Not all companies and leaders though, succumb to the siren voices calling for short termism. Famous investor Warren Buffet sets the CEOs in whom he invests some hard to ignore goals. These stress the long term--“you can’t sell it or merge it for at least a century”.

Major Indian firms like Wipro and Tata Group build social commitment into their culture. They have won the trust of their stakeholders with such commitment. It has helped develop their legacy.
 
Jamsetji Tata founder of Tata Group
People still talk of the ethical approach of the founder Jamsetji Tata of Tata Group.  Business he believed, must respect the rights of all its stakeholders. It was there to create a benefit for society.

Ethical behaviour remains intrinsic to how the company conducts its business. It’s part of the founder’s legacy.

  A research perspective

In studying the legacy issue PwC  described an

“increased attention to the relationship between business and society as part of a company’s ethical legacy”

Over seven years to 2014, PwC found that CEO’s responses to the legacy issue had changed.  Creating social value had become more important. Many wanted their legacy to be a long term one. It included:
  • Making their business a pioneer in its field
  • Introducing a culture of innovation
  • Entering new markets
  • Growing a company against all odds.
Many CEOs felt personal attributes were important for their leadership legacies. Such as integrity, honesty, ethical leadership, transparency, and fairness

   ESG–a possible route to a legacy

One way to help identify a possible legacy is by focusing on ESG factors. These refer to Environmental, Social and Governance issues. Many investors now take these into account when making their investment choices.

Stuart Rose, ex CEO of M&S

Using the E of ESG, a leader may decide to make a difference in areas dealing with environmental factors.  For example, Sir Stuart Rose, then CEO of Marks and Spencers produced his Plan A for the company. This steered the entire organisation towards sustainability practices.

The S of Social Commitment might include: make a difference in how a company treats its employees. Or how it responds to the human rights of the people and the communities it touches.
 
Finally, Governance can be yet another route to a legacy. No longer confined to rules and regulations it encompass a far wider remit. Land use; energy; water; emissions, human rights, equal opportunity, and health, safety, and wellness, volunteerism and so on.
 

See also ESG: How just three letters can help define your ethical leadership

Keep the end in sight 
Anyone wanting to leave behind a legacy might best start by reflecting on the shortness of life.
 
Second, hold onto the aim of remaining in other people’s memory. Turning such thoughts into action play an essential role in a sustained legacy. Committed ethical leaders must therefore aim to create something meaningful–that is leaving something that will outlive them:

“Your legacy touches people you do not know and may never meet”
E.Bell Smith, Professor of Business Administration, Centre for Leadership

The right time to start building a business legacy is now!

 

Sources:

  1. Wade-Benzoni, Create Your Legacy as a Leader HBR December 2016
  2. Chesley, Legacy: what CEOs say they want to leave behind, PWC, Sept 2015
  3. J.Boss, 6 Principles Of A Leadership Legacy, June 12, Forbes, 2014
  4. T.Blackwell et al, Markets need to thing long-term to benefit society, Daily Telegraph, 31st May 2018.
  5. Martinuzzi, What type of legacy do you want to leave? Open..
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 “We want to stay a family business. We want to be able to think long term. We want to be able to concentrate on the values—the ethical and moral values, of course that we have…”
Sir James Dyson, in Boldness in Business, FT.Com March 2018

 

Ethical business leaders develop their resilience to impressive levels.

Apart from being adept at bouncing back from adversity, they know resilience helps define their existence and inspires it. Dyson’s personal story is not unique. Other leaders too grow their resilience, often without ever bothering to think: “I’m being resilient.”

His now familiar tale from struggling inventor to world acclaim combines remarkable determination with consistent creativity. Togetherthese add up to formidable levels of resilience.

And if there’s one consistent piece of advice about success, he and other leaders receive from those they admire and from an ever-expanding army of leadership “experts” it’s

The Harvard Business Review for example, confirms its “authors over the years have offered “an astonishingly wide range of advice” about bouncing back from setbacks, both large and small.

Route to resilience

We can view resilience through two lenses. The first is Bounce-back-ability. This is your ability to rebound  despite set backs, obstacles and a rock-strewn route to success.

The second lens is Lack of resilience. This shows lessons arising from leaders who don’t bounce back. We may briefly glimpse them before under-powered resilience forces them into some other mode or role—permanent or temporary.

For example, in 2011 Lloyd’s Banking Group won a blaze of publicity by appointing Antonio Horta-Osorio as CEO. He was hired to guide the part state-owned Group back to health.

Within a few weeks though, after suffering five sleepless nights, Horta-Osorio finally agreed he had a problem: unacceptably high levels of stress. Just eight months in at Lloyd’s top job he took a much-needed stress break.  To the shock of the banking industry he admitted himself to a London clinic,

The bank’s terse statement to the stock exchange merely said its chief executive was temporarily stepping back “due to illness”. He was done in by stress and exhaustion, brought on by working round the clock, seven days a week. Ironically, the news came on National Stress Awareness Day.

His career as well as his marriage seems to have survived the experience. Now he claims to arrive home with his family every night and is in bed by 10:30 p.m. He doesn’t read emails or take calls between 7 p.m. and 7 a.m. He eats more protein and less carbohydrates, and has learned how to be more patient.

“And I became a better person, more patient, more understanding and more considerate. It was humbling but you learn…. I thought I was Superman. I felt I could do everything. The burnout showed me I was not Superman.  

 

“Many CEOs I speak to are on the verge of exhaustion “says Steve Tappin, an executive coach and co-author of a book about CEOs. He points to the large number of CEOs who must deliver against a background of high expectations and low or zero growth. For example 2017 saw a raft of chief executives leave their companies.

Some exits were expected and came after years of service. Others were more surprising, victims of low levels of resilience,  brought on after the shock of wrongdoing—theirs or someone else’s in their companies. The failures offer lessons about the importance of transparency, accountability, how to handle shifting marketplaces, and stress management.

A poster child for these lessons is Uber’s controversial founder and now ex CEO. He appeared resilient. Until he wasn’t.

Travis Kalanick officially resigned in June when important personal survival lessons emerged. The main one being that simply staying resilient in the face of reputational disaster seldom works. It takes much more than that.

Senior leaders whose resilience
was sorely tested

Jeff Kinder, CEO of Pfizer who resigned saying the demanding role had worn him out; “The combination of meeting the requirements of our many shareholders around the world and the 24/7 nature of my responsibilities has made this period extremely demanding on me personally.”

Andy Hornby, former CEO of HBOS then Boots resigned to take a break “After an intense last five years as CEO of two major companies, I have decided to take a few months break and, having discussed it with the board of Alliance Boots, to stand down from my post as group chief executive.”

Jospeh Lombardi, Chief Financial Officer Barnes and Noble, abruptly quit the struggling US bookstore change as a result of “exhaustion depression – “it was like disappearing down a dark tube”. He couldn’t make decisions, lost weight and everything seemed pointless.

John Binns a high-flying partner at accountancy firm Deloitte for more than five years suffered from a worsening depression – “it was like disappearing down a dark tube”. He couldn’t make decisions, lost weight and everything seemed pointless.

James Green, former CEO of Giant Realm, began dreading his daily commute through New York’s Penn Station. Though emotionally drained, he never hinted at his condition. Instead, the stress led him to sell off his company.

Yishan Wong CEO of Reddit, a social news site, resigned saying “I’m basically completely worn out, and it was having significantly detrimental effects on my personal life,”

 

  

The VUCA challenge

This cumbersome acronym was invented by the US military in the late 1990’s. It describes an environment that’s Volatile, Uncertain, Complex and Ambiguous. Just right for battle fields. Yet it’s also caught on in business since in various forms VUCA happens there too.

All business leaders must deal with VUCA but ethical leaders tend to have a more sophisticated appreciation of it. For instance they usually make more systematic effort at risk assessment. They also seek out longer term strategies that can help them cope with set backs and obstacles.

On its own, being ethical is not enough to ensure a leader’s personal success. Though it certainly helps, particularly over the longer term. There are two key facts emerging from research factors that can make a big difference to whether the leader is resilient when facing a VUCA challenge:

  • Desire to leave a legacy
  • Strong personal values

These drive many ethical leaders. They help feed their relentless focus on making a social difference. It also primes their longer term view. For instance in 2017 Unilever’s chief Paul Polman came out fighting fending off the Kraft Heinz’s £115bn hostile takeover bid. His heroic efforts defeated the unwelcome invasion in a weekend. 

He continues to defend his company’s “inclusive capitalism” business model.  He persists in championing the returns Unilever shareholders have enjoyed during his eight years at the head of the Dove soap-to-Lipton tea consumer goods giant.

And he keeps trying harder than ever to provoke a wider debate about the perils of short-termism in business. This is CEO resilience in action.

Measuring Resilience

Resilience is more than just recovering—the bounce back. It also includes reacting in responsible and mindful ways to serious setbacks and challenges. Almost without exception Boards of Directors say they want two qualities in a CEO:  Integrity and resilience.

Why? Because they transcend any single business situation. Quite simply they help leaders to handle almost any adversity.

But such valued qualities are still hard to measure.Any metric will be an approximation, not a sure-fire statistic.  Most of the attention around choosing a CEO for example, relies on observable personality traits, such as charisma, influence and passion.

If we use approximations for resilience what should we choose? According to some recent research on integrity and resilience of leaders, there are contradictory traits of leaders who can navigate through VUCA. 

First, executives high in integrity—i.e. ethical leaders, tend to be more likely to score high on the ability to

  • Connect with others
  • Be vulnerable
  • Be reluctant to take risks

Second, leaders those leaders perceived as having strong integrity do not necessarily score well on: the ability to galvanize people into action; having a high tendency to take risks, or the ability to be disruptive.

In an effort to produce an approximate measure of resilience Management Institute Roffey Park created a Resilience Capability Index. This uses an ultra simple questionnaire approach—see below 

An approach developed by PWC looks at resilience from an organisational rather than a personal perspective. This relies on variables such as the ability to respond to change and the organisation’s relationships with customers, business partners, and other stakeholders.

The PWC variables for measuring organisational resilience uses six forms of organisational behaviour: Coherence, Adaptive Capacity, Agility, Relevance, Reliability, and Trust

Zenger Folkman a US consultancy specialising in strengths-based leadership has developed further ways to identify resilience  These include leaders who must be coachable, build trusting relationships, develop others and are decisive. It collected data on more than 500 leaders. Using views from managers, peers, direct reports and others on 40 behaviors. What emerged was

  • “Most resilient leaders are also viewed as the most effective leaders”.

Yet few attempts to measure resilience fully acknowledge the importance of integrity, and ethics as underpinning the ability to be resilient. 

Distilled Wisdom

Recent years have seen considerable advances in understanding the pressures and resilience demands face by leaders. These plus the large amount of practical wisdom offered by leaders themselves, suggest some practical ways ethical leaders can build their resilience. 

 

  • CHANGE: Build situational awareness through embracing change; accept the need to adapt and maintain a realistic perspective
  • VALUES: Be guided by your values and trust your judgement; resist short term pressures to cut corners or just go through the motions in some way
  • STEPS: Focus on concrete steps to bring ethics and compliance alive for others; don’t be satisfied with elaborate rules and words.
  • CHALLENGE: Be willing to challenge other senior leaders to embrace accountability and transparency
  • SIGNS: Demand evidence that ethics and compliance programs are effective and responsive to change
  • WALK: Get out there and make contact with stakeholders i.e. walk the walk.
  • CONSCIENCE: Pursue corporate conscience through promoting values and ethical culture, if necessary against the resistance from other stakeholders.
  • RESIST TRADE OFFS: Refuse to accept a trade off or “choice” between ethical business practices and profitability. The two are inextricably linked.
  • LEARNING: When misconduct occurs make sure it’s properly analysed and the lessons learned and shared with employees.
  • NO QUARTER: Support effective sanction or penalties on senior executives and high performers involved with misconduct
  • CELEBRATE: Ensure there is proper reward and recognition for ethical conduct, don’t just take it for granted.
  • GOALS: Set realistic goals and establish a clear sense of purpose that you can explain with enthusiasm to others; each day, take one small action to move forward.
  • CHALLENGES: View challenges as opportunities, not rocks in your way; take positive action to tackle them and avoid passivity
  • NETWORKS: Build your networks and set out to connect with others and encourage collaboration, not isolated working
  • STRESS: Accept it’s a real factor in your life and must be managed; practice optimism; don’t blame yourself and resist thoughts such as “I can’t do this”. 

 

  SOURCES

  • J. Folkm, 7 Ways To Become A More Resilient Leader, Forbes, New Research: April 6, 2017
  • The Resilient Leader Debunking the myths and growing your capabilities, Roffey Park
  • N. Pratly, Paul Polman: ‘I could boost Unilever shares. But cutting costs is not our way’, The Observer, 20 May 2017 
  • Chesley, Creating a Culture of Resilience, What really enables organizations to survive and thrive? Insights Ethisphere
  • Roffey Park, The Resilient Leader, Debunking the myths and growing your capabilities
  • 6 traits that define a resilient business leader, Laura Gitman and Anita Hoffmann, Greeen Biz, Monday, July 13, 2015
  • C. Alexandrakis and D. Stamoulis, Integrity, Resilience, and the Power of Quiet Leadership, Board & CEO Advisory Group, December 18, 2017
  • A.Hill, Do not take it personally: business leaders working under pressure, FT 11 March 2018
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“There is mounting evidence that funds which observe environmental, social and governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin.”
Financial Times, Sept 3rd 2017

Activist investors such as growth-orientated hedge funds have woken up to environmental, social and governance (ESG) concerns. There is nothing philanthropic about such awareness.

In simple terms, stakeholders are following the money.  In emerging markets for example, as the ever vigilant FT points out, ESG driven investments now do better than conventional benchmarks:

It’s increasingly in the interests of mainstream investors to pay attention to (ESG) factors. Financial giants such as Bloomberg, Morgan Stanley, and Goldman Sachs are all busy expanding their ESG product and service offerings.

And in the coming years, women and millennials will start to manage a greater share of global wealth. They’ll also want to align their actions with their values about fairness, the environment and human rights.

ESG is now part of investment jargon. It describe the performance of investment and fund portfolios using environmental, social and governance criteria.

The quality of these portfolios can be measured against specific ESG factors and duly reported to shareholders.

ESG analysis can provide important insights into the long-term prospects of companies. Investors can find new market opportunities with companies placing the management of ESG factors at the core of the business.

“Almost three-quarters of investment professionals worldwide (73 percent) take environmental, social, and corporate governance — ESG issues–into consideration in the investment process. Only 27 percent do not consider ESG issues.”
CFA Institute ESG Survey, August 2015

The Leadership Impact

While under pressure from so many diverse sources, senior executives are encountering yet a new kind of demanding investor. These are activists wanting higher returns who have realised that the route to this is through integrity and ethical business performance.

Such investors may not be experts on leadership. Yet they know what to look for in company leaders. They expect to encounter ones who talk regularly about integrity and then demonstrate it through daily performance.

More specifically they want signs that a business leader knows how to reduce the risks associated with ethics or compliance failures.

Demand for risk reduction comes within a context fraught with significant levels of uncertainty.

High profile cases such as VW or Wells Fargo are already part of business history. Devastating weather events continue to make their presence felt. The relentless decline in the coal industry has meant investors have lost 85 per cent of their money since June 2014. Once a sure money loser, renewables now look a sound bet.

These are storm force gales, whose waves continue to batter the investment shores. In consequence, the pull of ESG has reached critical mass.

For instance, Swiss Re, one of Europe’s biggest insurers, now benchmarks its entire $130bn portfolio against ESG indicators.

The ESG phenomenon continues despite an absence of detailed, globally agreed definitions of either ethical leadership or what constitutes ESG standards. Meanwhile the overall trend to take into account ESG continues to bring ethical leadership in business into ever sharper focus.

Mirage or reality?

As a source of profits is ESG real, or mere mirage?

Sceptics argue the current enthusiasm for investing which takes into account ESG factors stems from a mere statistical distortion. This they say, combines with a vanity urge to be part of the latest investment bandwagon.

Yet consultancy Create-Research, reports 60 per cent of investors say they plan to increase their allocation to responsible investment over the next three years. That’s a lot of investors living an ESG delusion.

Similarly MSCI another research organisation recently concluded:

“…ESG has affected the valuation and performance of companies both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk.)

Other studies too have consistently shown how ethical leadership and its form of decision-making fosters employee morale, boosts brand reputation, encourages loyalty in customers and employees, and improves a company’s bottom line.

In summary, ethics and ethical leadership are more than the right thing to do: it’s also the smart thing to do.

The E of ESG

Broadly the E of ESG  means the environment  which includes

  • Sustainability
  • Globalization effects – e.g., exploitation, child-labour, social and environmental damage anywhere in the world
  • Corruption, armed conflict and political issues
  • Staff and customers relations – for instance education and training, health and safety, duty of care, etc.
  • Local community
  • And other social impacts on people’s health and well-being

Business needs leaders able to make sense of these diverse factors. Rather than ignore them, as many businesses still seem prepared to do, ethical leaders embrace the challenge. They also often take a highly personal interest in the implications.

To be an ethical leader is therefore to be concerned with the organisation’s own culture and environment in which employees work. This shows up in the increased interest in employee engagement as a clear route to financial success.

The S of ESG Larry Fink CEO of Blackrock

In January this year (2018),  CEOs of the world’s largest public companies received a letter from Larry Fink, CEO of Blackrock. It’s  one of the largest asset and risk  management firms, so a letter from Fink was at least likely to be read.

He urged his fellow CEos to give priority to their company’s social responsibilities. The S of ESG refers to how a company treats its labour and how it responds to the human rights of the people and communities it touches. Various international instruments define these rights. They include the Universal Declaration of Human Rights and the eight Core Conventions of the International Labour Organization.

While originally developed for governments, these standards now affect the business context. They provide a strong foundation on which to clarify the scope and meaning of a company’s “social” performance. Fink’s appeal was emphasised the role of public companies in growing economic inequality.

He argued for long term value creation since ethical companies have a better financial performance in the long run. 

“It’s the right thing to do”
argued Fink.

E- and G-factors of ESG have achieved considerable traction with both investors and business executives. In contrast, the S-factor, has yet to make a lasting impact. This is against a backdrop of rising economic inequality and mounting evidence of the negative forms of many business practices.

So it’s entirely relevant to ask: can business deliver value in today’s global economy in ways that work for people and communities around the world?

Once CSR, or Corporate Social Responsibility seemed like the start of a sustained shift. It seemed to herald a move by business to showing a genuine social concern for the company’s effects on environmental and social wellbeing.

In practice, CSR has acquired a serious credibility gap. There remain few examples where CSR has delivered measurable business gains, let alone sustained benefits for the community. See Goodbye to CSR, welcome to Social Commitment.

The current lack of interest by some business leaders in the “S” of ESG partly reflects a disbelief that social commitment can pay. Many still view it as a check-the-box exercise, one where investors and companies only appear to comply with rising consumer expectations.

Despite this roll call of negative forces constraining social investment, leading corporate CEOs do emphasize for example, positive reasons they are considering human rights in their business models and operations:

 “…we firmly believe that if we focus our company on improving the lives of the world’s citizens and come up with genuine sustainable solutions, we are more in sync with consumers and society and ultimately this will result in good shareholder returns.”
Unilever’s CEO Paul Polman

Others argue that sustainability and human rights investments have led to increases in their company’s ability to recruit and retain outstanding employees, They also point to improved quality control, and better worker retention throughout their supply chains.

Yes as the Centre for Business and human rights comments, more work is needed to :

“…reconcile the myriad approaches that currently exist for defining and measuring social performance.”

The G of ESG

Corporate governance was once merely a response to corporate scandals. Now it is making important inroads on leadership accountability, especially in Europe.

Corporate governance has shifted from the wings where is was seen narrowly, in a legalistic sense of rules and regulations that must be obeyed.  Today it has evolved into a whole new approach. This now includes general support for better run companies and in particular support for sustainability.

Sustainability is one of those phrases that can  mean what you will. In practical terms it means looking at social, environmental and economic impacts and making decisions using a broader perspective than in the past.

When sustainability permeates governance in this way, business leaders become accountable for environmental, social, and economic performance. 

Using the sustainability lens to view governance changes how the organisation approaches issues such as:

  • Land use, energy, water, and emissions
  • Human rights, equal opportunity, and health, safety, and wellness
  • Charitable giving and volunteerism
  • Systems and strategies for engaging with stakeholders,
  • Product development, procurement, and innovation
  • Board composition and compensation
  • Ethics, standards, and codes that apply within an organization and to its value chain. 

With these multiple factors to consider, how can leaders make sense of the current ESG landscape?

How can they better include such information into their approach to business?

The sheer diversity of the ESG landscape explains why governance tends to be its least understood aspect. Yet at its core,  governance prompts business leaders to pay attention to the culture of the organisation.

Investors too increasingly recognize that companies practicing good governance as part of a larger ESG-aware strategy will be more likely to see these factors translate into improved long-term investments. What that means in practice is up for debate. For example, some critics say we need a complete overhaul of corporate governance:

Bob Garratt, Professor Extraordinaire; Chairman Centre For Corporate Governance

“I can’t find a single corporate governance model that works well,” 
Bob Garratt, Visiting Professor at Cass Business School 

The direction of change would put more weight on directors doing their job responsibly and professionally. This would include developing corporate governance to include a social audit–in simple terms more focus on the E and S of ESG.

Better governance would also mean more focus on new challenges such as cyber security and the shift to digital.  

Nobody invests in governance for its own sake. Instead stakeholders look to ethical leaders who will place a high priority on good governance as a way of achieving long term financial benefits.

Sources:

  • Giese, Executive Director, Applied Equity Research
  • Has ESG affected stock performance? MSCI, May 2017
  • L.Portado, Activists look to the ethics route for higher returns,  FT 27th December 2017
  • Kynge, The ethical investment boom, FT, Sept 3 2017
  • Ethical Leadership Around the World, AND why it matters, ECI 2017
  • Jackson-Obot, Ethical investments still on trend, FT Adviser Nov 2017
  • O’Connor and S.Labowitz, Putting the “S” in ESG: Measuring Human Rights Performance for Investors, Centre for Human Rights, March 2017
  • Explaining the G: Putting Governance in ESG, FlexShares, Jul 31, 2017
  • ESG Investing: Should Start with the “G”, Magni Global Asset Management
  • Hale and J Glase, Sustainable investing trends for 2018, Morning Star, 21st December 2017
  • R Sullivan, Which direction for corporate governance?, Board Agenda, February 2018
  • A. Filabi, Prioritizing Social Responsibility in Companies: A coming firestorm? Ethical Systems, 17th January 2018 
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