7 things you need to know about ethical business

There is a strong movement towards commercial entities basing their whole mode of operation on their social purpose, and ensuring that they have a culture that is ethical and will achieve that social purpose. The relevance of this is easy to see for firms that provide public goods – such as water. The need for humanity to manage water well and sustainably for the benefit of all in society is both a social and existential imperative. Delivering social purpose in management of water should be the driving imperative from which issues of outcomes, who does what, who pays what and who is paid what all flow. So it is exciting to see Ofwat and leading UK water companies engaging strongly with these ideas.

These developments change the way we ‘do’ regulation. We are evolving from a system based on rules, identifying breaches, taking enforcement action on the assumption that sanctions will deter future breaches and so achieve compliance. In price reviews, the mode of engagement is moving away from a hugely complex argument about economics that can end simply in a negotiation about money to a wider discussion about what society generally needs and how to deliver and fund the desired outcomes.

Here are seven things you need to know about social purpose and its ethical delivery.

1. Doing the right thing needs more than just good intentions

The new approach starts with defined social purpose and desired objectives, agreed through engaged discussion, and to deliver these through ethical values and organisational cultures. Getting these elements right means that organisations should do the right thing in all their actions and behaviours.

This approach engages organisations as a whole – all the people in them or who are involved with them, all of the time. Organisations should be open and produce evidence that their behaviour is ethical, including when things go wrong. Problems should not be hidden but identified and solved collectively.

2. Profit is not bad, when you comply with society’s rules

Ideas on how a commercial company should operate have evolved considerably in the past 70 years. The idea that the sole purpose is to make profit (maximise shareholder value) has been consistently widened over time to reach the understanding that organisations and people who work in them are all an integral part of a connected society (and economy).

The objective of maximising stakeholder value involves making sure that all staff, contractors, customers, communities, government bodies and so on are not only affected by the activities of the organisation but should also be involved in the achievement of its outcomes. This was recognised by the ‘Statement on the Purpose of a Corporation’ by 185 CEOs of major U.S. companies in August 2019, in which they set out a “fundamental commitment to all of our stakeholders”.

This way of thinking recognises that both profit and compliance with society’s rules are outcomes – products of an ethical approach, rather than ends in themselves.

3. Tone from the top is important – bottom up is critical

The way that such a commitment to social purpose and to all stakeholders is best achieved is through the organisation constructing a culture that frames all of its deliberations, decisions and actions. The culture will be based on the ethical values of all staff. Having a Code of Ethics is important, but its content needs to emerge from a deliberation involving all staff, not a document that is imposed on them.

Having leaders that demonstrate “tone from the top” is important, but the values of the organisation need to be demonstrated by and to all staff and external stakeholders through the actions of those involved in the organisation.

4. Ethical Business Practice is growing across the world

The model that encompasses this holistic mode of operation based on ethical culture is Ethical Business Practice (EBP) and the relationship between regulator and companies that supports EBP is Ethical Business Regulation (EBR). It is what is called an ‘open and just culture’ in aviation safety.

These models are being solidified by commercial and public organisations across the world. They are involve building trust, which is based on evidence of intentions and actions that show that an organisation, and the people in it, can be trusted.

Find out more in ‘Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement’ (Hart, 2017) by Christopher Hodges and Ruth Steinholtz.

5. The voice of consumers, staff and others is critical

The new approach sometimes needs new structures (for voice, debate, monitoring, interventions and responses) and new forms of evidence (that an organisation can be trusted, including showing how it has reacted when things went wrong).

The voice of consumers, staff and others is critical in these ongoing interactions. There are already signs that new structures are emerging so that the consumer voice is consistent across all utilities sectors.

6. Regulatory decisions may become more complex and need new structures

Decisions on what is fair may be far more complex than binary ones based on whether a legal rule has been broken. They may need wide debate, extensive evidence and sophisticated nuancing.

Ombudsmen, rather than regulators, are an important mechanism for making decisions on fairness, supported by increasingly extensive consumer and general involvement.

7. Organisations that embrace open and ethical cultures deliver success for themselves and society

Organisations that embrace open and ethical cultures should expect to do well. Better outcomes should be achieved. All staff, customers and other stakeholders should be more engaged and content, trusting the organisation. That leads to wide success in delivering socially welcome outcomes.

 

Chris Hodges is Professor of Justice Systems, Fellow of Wolfson College, Oxford, Head of the Swiss Re Research Programme on Civil Justice Systems at the Centre for Socio-Legal Studies, Oxford, and Fellow of the European Law Institute. He also helps lead the International Network for Delivery of Regulation (INDR).

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