International Society of Business, Economics and Ethics


HOW ETHICAL AUDITING CAN HELP COMPANIES COMPETE
MORE EFFECTIVELY AT AN INTERNATIONAL LEVEL

Sheena Carmichael, Harry Hummels, Arco ten Klooster, Henk van Luijk
European Institute for Business Ethics, Nijenrode University
Straatweg 25, NL 36 21BG Breukelen, The Netherlands
Email: scarmich@nijenrode.nl

Abstract
Ethical Audit
International Business
Consumer Power
Conseptual Framework
Stakeholder Perspective
Comprehensive and Integral
Conclusion

Abstract
Actions are dictated by values. Identifying organisational values - both proclaimed and actual - will assist a company to ensure that all its actions are commensurate with these values, and enable it to put in place a robust structure to support the operationalisation of the values. Many ethical problems for multinationals and companies trading far from their home base arise because of differing value systems: ethical audit will enable a company to establish clear guidelines about the limits of acceptable behaviour which are consistent world-wide, while recognising where appropriate local societal differences. Ethical audit determines the internal and external consistency of a company's values base. It begins internally, with a review of paper, processes and people. The findings of the audit are then tested out with stakeholder groups, to ensure that the values base is one which is shared by, or at the least acceptable to, all its key stakeholders. The results provide important management information, and can (and ideally should) be used to report on the company's social and ethical performance, either as part of the Annual Report or as a supplementary report.

1. Ethical Audit
Ethical audit is a new technology which is being developed at the European Institute for Business Ethics (EIBE), Nijenrode University, the Netherlands Business School. There is nothing new about ethical behaviour in business, nor about programmes designed to improve and perhaps formalise an ethical approach to decision making within companies. In the United States, in particular, in recent years many companies have appointed a senior manager with dedicated responsibility for promoting ethical behaviour throughout the company. In Europe, such appointments are the exception rather than the rule, but many, perhaps a majority, of Europe's major companies now have an ethical code or code of conduct.

The reasons for examining the state of a company's ethics are many and various. They include external societal pressures, risk management, stakeholder obligations, and identifying a baseline to measure future improvements. In some cases, companies are driven to it by a gross failure in ethics, which may have resulted in costly legal action or stricter government regulation. More often, however, companies choose to do it simply because it is right, it is important, and because it is likely to bring business benefits.

Ethical auditing is a process which measures the internal and external consistency of an organisation's values base. The key points are that it is value-linked, and that it incorporates a stakeholder approach. Its objectives are two-fold: It is intended for accountability and transparency towards stakeholders and it is intended for internal control, to meet the ethical objectives of the organisation.

The value of the ethical audit is that it enables the company to see itself through a variety of lenses: it captures the company's ethical profile. Companies recognise the importance of their financial profile for their investors, of their service profile for their customers, and of their profile as an employer for their current and potential employees. An ethical profile brings together all of the factors which affect a company's reputation, by examining the way in which it does business. By taking a picture of the value system at a given point in time, it can:

- clarify the actual values to which the company operates
- provide a baseline by which to measure future improvement
- learn how to meet any societal expectations which are not currently being met
- give stakeholders the opportunity to clarify their expectations of the company's behaviour
- identify specific problem areas within the company
- learn about the issues which motivate employees
- identify general areas of vulnerability, particularly related to lack of openness

2. International business
Multinational companies face special issues in relation to ethical auditing. It is, though, precisely these special issues which can make ethical auditing so valuable to multinationals. Executives of such companies are well aware of the added complications which operating across a number of cultures brings. But problems tend to multiply when differing value bases are permitted to take hold within different cultures. It may have seemed acceptable for Shell to apply differing environmental standards to their drilling in Ogoniland decades ago to those they applied in Europe or North America - but in an era of acute global consciousness of the interdependence of the world eco-system the same standards are rightly expected in every continent.

One of the issues which most concerns multinationals is that of corruption - how to do business in countries where backhanders are expected in the common course of events. The United States has brought in legislation - the Foreign Corrupt Practices Act - which forbids US companies to engage in this when dealing with the public sector in other countries. This, perhaps, more than any other, is an area where executives might like to set themselves the publicity test - how would I feel if my behaviour were headlined in my city's local newspaper? How would I feel if my family knew about it?

Working practices and human rights are other major areas of concern. Some companies make a principled withdrawal from countries where they could otherwise manufacture profitably, because they are not prepared to work within that regime, as Levi Strauss did in China. Some companies withdrew from South Africa, because they would not cooperage with apartheid; others believed that they could set an example and give opportunities to black people they would not otherwise have had. Protest from outraged consumers may force companies manufacturing in India or Thailand to sack the underage children they were previously employing as machinists - but what if the 12 and 13 year old girls are then forced into prostitution to survive?

Companies alone cannot right all the evils of society. Many of the decisions they have to take have no ideally right or ideally good answer. What matters is that they should have a clearly thought out framework of values, and that these values should be consistent wherever they operate. A multinational company must test its values across all its areas of operation, if it wants the findings of its ethical audit to be comprehensive and provide the greatest payback in terms of identifying potential areas of vulnerability to consumer pressure.

3. Consumer power
Consumer power is increasingly being wielded to affect company behaviour. The boycott mechanism has long been a way of protesting politically; for many years, a significant number of consumers avoided buying South African produce. But now boycotts are called to protest against specific company actions: Nestle's sales suffered from the boycott protesting about their policy on selling baby milk in the third world, and Shell were forced to change their plans for disposal of the Brent Spar oil platform when German consumers stopped buying Shell petrol. A 1995 poll of 30,000 consumers in the UK showed that one in three had boycotted stores or products in the past because of concerns about ethical standards, and six in ten were prepared to boycott in the future. Almost two in three of those surveyed were more concerned about ethical issues now than five years ago.

Pressure groups are growing more professional and more vociferous. Where in the past unethical behaviour by a company might have been kept quiet by skilled public relations people, there is now greater likelihood that someone within a company will alert the relevant pressure group (loyalty to employers being lessened, and concern for the public good being greater) and that the pressure group will succeed in generating significant publicity about the incident. One of the greatest benefits of the ethical audit is that it assists the company to scan the environment to identify the issues which are most likely to provoke action by pressure groups, and in turn gives the company the opportunity to encourage such groups to participate in the decision making process, or at the very least to inform them fully of the company's position.

In the move to total quality, suppliers become key stakeholders. The quality of components or raw materials used is crucial. Their timely delivery is crucial. Their reliability is crucial. The best suppliers want to develop long term relationships with customers whom they can trust to deal fairly with them and to pay on time.

The picture which develops here is of a company at the centre of a network of relationships - relationships with employees, with customers, with shareholders, with society at large. Each company may have other groups of people whom it considers to be key stakeholders - for example, a company with particular environmental concerns may consider future generations to be key stakeholders: other companies may see their retired employees as being important, while still others may have strong links with pressure groups and voluntary organisations.

Ethical auditing enables companies to better comprehend these relationships. All relationships are based on values such as trust and an expectation of fair dealing - understanding these dynamics and finding out where expectations and perceptions differ give a company a head start on maintaining strong and stable relationships.

4. The conceptual framework
In contrast to social auditing which aims primarily at measuring the social impact of a company on its environment, the ethical audit from the outset is value-linked. It measures the "ethical climate" of a company by analysing the values on which the organisational actions are based and by testing the moral quality of these actions against values that should be taken into consideration.

Since someone's values form the basis of his or her ethical behaviour, aligning workforce values is important, if a company wants to behave ethically across the board. This requires openness about values and consistency between them. Furthermore, if a company wants to establish relationships with its stakeholders based on trust, stakeholders need to know the values that a company has committed itself to, in order to have confidence in what future actions the organisation will take. Therefore, the values that a company wants to incorporate must be made explicit, although it is no easy task to determine what the prevailing values in a company are and/or what they should be. In this sense, the ethical audit is organisation-centred, meaning that organisational values are to be found within the company at all levels in stead of being inculcated from outside or by senior management alone. In part these values are connected with public opinion on matters such as respect, justice and responsibility and can, to some extent, be derived from the rights and interests of stakeholders, but the bottom-line is that the organisation must formulate its own set of basic values.

5. Stakeholder perspective
The objectives of the ethical audit are two-fold. On the one hand the audit is intended for accountability and transparency towards stakeholders; on the other hand the audit is intended for internal control in order to meet the ethical objectives of the organisation.One of the aims of the ethical audit is to give a company the opportunity to track progress through the years and to find out where there is still some work to do with regard to the company's ethical objectives.

Accountability requires that stakeholders are provided with such information as they have a right to. The rights to information are determined by (a) the social environment within which the relationship between the organisation and the stakeholder is set, (thus current legal standards would represent a minimum basis for accountability); plus (b) the organisation's own decisions about which stakeholders it particularly wishes to recognise and emphasise. Thus, stakeholder groups do not have an absolute claim on businesses to provide them with information, because the extent to which a company is accountable to stakeholders depends on the particular social environment of the company, on the company's conception of relevant stakeholders and on the social responsibility the company is willing to take for justifying its actions towards a particular stakeholder-group. Therefore, stakeholders' right to information is in a large measure related to a positive duty that the company has committed itself to.

It is possible and justified to assign different weights to the interests of different stakeholder groups. Firstly this is evident, because not all stakeholders are actually involved in the auditing process. For most companies the external stakeholders which are included will be restricted to the minimum of: shareholders, customers, suppliers and the wider community, although one could think of many more groups that could be of importance to a specific organisation. The fact that the number of stakeholder-groups taken into consideration is limited, indicates that certain stakeholders are perceived as being more important than others. Secondly stakeholder concerns will differ between groups. It is obvious that more important stakeholders will have greater influence on the company's actions and that in the case of conflicting concerns the interests of the stakeholder group with the most influence will prevail. Dialogue with stakeholders is carried out in the external ethical assessment process and in this process the interests of stakeholders are identified and balanced according to the weight the company assigns to each stakeholder group.

The objective of accountability towards stakeholders requires information about general issues such as product safety, the environment, employee relations, etc. An ethical bookkeeping system collects data systematically about the organisation's ethical behaviour, which is relevant for stakeholders. This process is most likely to include "hard" information, including for instance complaints of stakeholders, business accidents or fines for unethical behaviour. A significant quantity of this data will already be present in the organisation's "normal" accounting and management information systems (e.g. human resources information: number and level of female employees, payment ratios for employees of different ethnic origin, etc.). By collecting this kind of information a company is in fact keeping some records on the social impact of its actions and policies and therefore we might consider this social accounting.

We use the term 'ethical accounting' to refer to the process in which data is gathered with regard to the organisational values. This will include looking at the information provided by the bookkeeping system and looking at the paper and ethics-related processes in the organisation, in order to lay bare the (explicit and implicit) value-system of the company through analysis. Value-linked corporate behaviour derived from bookkeeping records, will be tested against current guidelines and opinions on environmental issues, hiring/firing policies, etc. Furthermore, a second moral opinion will be developed on the documentation in the organisation, meaning that the "paper" will be reviewed to make values explicit, to test their consistency and to find moral gaps, if there are any. This also applies to value-linked processes in the company. A comprehensive check-list (with regard to lines of communication, reward systems, chain of command, etc.) is used to determine what behaviour the company values. This is done by looking at the formal and informal structures and processes in the organisation, using organisational development theories to underpin the findings.

Since corporate ethical behaviour depends on the ethical behaviour of individuals, looking at the people in the organisation is essential for laying bare organisational values. In the internal ethical assessment process the prevailing values of employees are examined through interviews, surveys, questionnaires etc. The outcomes are then related to the value system of the company, revealed by the accounting process. By doing this the ethics gap (different perceptions on the company's ethics) is identified, as well as conflicting interests within the organisation and values that are inconsistent with each other. But internal ethical assessment is not only concerned with uncovering prevailing values, it also looks at what the organisational values should be. Since the purpose of internal auditing is to measure the compliance of facts with norms, these norms - being the values the company wants to incorporate - must be clear. This might be the case as a result of an earlier participative process (written down in a values statement or not), but it is important that this is an on-going process in order to make sure that the company perseveres with these values. So, internal ethical assessment is also concerned with internal audits. This is done by listening to employees (the original meaning of the word audit being derived from the Latin word Audire = to listen). Workshops and small group discussions will further raise ethical awareness and can be an important tool for building consensus.

Since accountability is one of the objectives of the ethical audit, the results of the process which are relevant for stakeholders should be disclosed to them. By using focus groups, stakeholders can then provide important feedback, which automatically sets the audit results in a wider context. Focus group discussions should be about general issues, backed up with information provided by the bookkeeping system, as well as about the underlying values of the company's actions. This is done in the external ethical assessment process in which the organisational set of values is tested against the opinions of relevant stakeholders. Feedback is absolutely necessary for a company that wants to promote organisational learning and the results of the ethical audit exercise (including the findings from the internal audits) should also be reported to all employees, simply because this is the right thing to do. As a result the company as a whole will be able to set goals for further improvement in ethical behaviour.

So, the ethical audit will result in the identification of (actual) organisational values on the one hand, and in a general direction as to how the company wants to develop its value system on the other. The findings will therefore need to be translated into action planning for the following year. If the ethical audit is performed every year or every other year, a company should be able to track its progress based upon the baseline information provided by the different elements of the ethical audit. Hence, the ethical audit provides a snapshot of the ethical behaviour of a company, but at the same time ethical bookkeeping, ethical accounting, internal and external ethical assessment, external validation and the resulting action planning can influence organisational values and thus corporate ethical behaviour.

6. Comprehensive and integral
It is important to note that ethical auditing is a comprehensive and integral approach: integral, because it combines different approaches with different methodologies and comprehensive, because it takes the entire organisation (including its environment) into consideration with all the different perspectives that prevail in different functional areas. The latter especially finds expression in the ethical assessment process. The fact that values and policies are discussed will make sure that they are looked at from different angles, taking various fields of interest into consideration. It is particularly critical that values are checked for economic viability as well, to balance social and ethical aspirations, because ethical policies which are not based upon solid business economic grounds will not endure very long. It is essential that the social mission and the economic mission of a company go hand in hand.

7. Conclusion
The findings of the audit give a snapshot, a view at a particular point in time, of the company's ethics. In the case of a first audit, they will necessarily be of less value for comparison purposes than would future audits, but they ought to give a clear picture of both values and vulnerabilities. An audit report is a factual document. Obviously it reaches a judgement, but it is not intended to be judgmental, in the sense of condemning a company for moral failure. The assumption which EIBE would make is that any company which commissioned an ethical audit is concerned about its moral standing and therefore intends to take action, where necessary, if moral failings become apparent. This is a stance which is praiseworthy and should be supported: the report's findings will give the company the knowledge necessary to take appropriate action. In this respect, the EIBE ethical audit is very far removed from the original social audits which were carried out on companies in the 1960s. These were undertaken by outsiders critical of company behaviour, who were seeking ammunition to bring external pressure on the company to change.

We believe that ethical audit will have particular benefits for multinational companies, but it could also be of great value in take-over and merger situations, especially ones which involve partners from different countries where there may be conflicting value systems.Other benefits include enhanced corporate reputation, making the company fraud resistant, and improving staff morale and motivation.

The technology of ethical auditing is still in its infancy. The full payback is not yet known. The benefits listed here derive from a number of experiences of consultancy work by members of the European Institute for Business Ethics, plus benefits about which we have been told by colleagues elsewhere. Our experiences have convinced us that this is one of the most exciting developments in management in decades - and that it is not simply another fad. Values are the basis of all organisational behaviour, and focusing on values will enable management to create an organisation which is excellent in every possible sense.


This paper is online: http://www.nd.edu/~isbee/papers.htm


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