A new report has highlighted the economic benefit to be derived from lifting ethical standards, and suggested doing so could lead to an unwinding of the regulatory restraints that increase the cost of service across industries.
The Ethical Advantage report, released by Deloitte and commissioned by The Ethics Centre, attempts to quantify the effect of ethical improvement and concludes that lifting trust levels in Australia to that of countries like Sweden would increase GDP by $45 billion, wages by 2.7 per cent and mental health by one per cent.
Australia scored a “somewhat ethical” +37 on the Governance Institute’s Ethics index in 2019 according to the report, a slight improvement from 2018’s +35 but below the all-time high of +47 in 2017. Only 54 per cent of Australians generally trust people they interact with, the report continued, which is better than the UK and the US but worse than the leading Scandinavian nations.
A key benefit to lifting these figures would be a “potential” reduction of regulations.
“Improving trust and social capital allows for the smoother functioning of markets and reduces the cost of regulation and compliance,” the report stated.
Corporate culture erosion
On the same day the corporate watchdog’s two top executives, chair James Shipton and commissioner Daniel Crennan, resigned over expenses scandals brought to light on Friday, the report highlighted Australia’s “uneven ethical performance in corporate culture”.
The report recalled the $2.4 billion in compliance, fines and remediation paid by the big four banks in the wake of the Hayne Royal Commission, noting that while all ASX200 companies disclosed a code of practice, only six per cent had ‘leading’ practice. “The rest were either infrequently updated or had little CEO buy-in.”
“In some respects, Australia’s relative ethical performance is no surprise,” the report explained. “A steady stream of state and federal political scandals has eroded trust. Royal Commissions have uncovered unconscionable behaviour in religious and other institutions, widespread misconduct in the banking, superannuation and financial services industry, and most recently, alarming activities relating to aged care quality and safety.
“Adding to these issues have been an ongoing series of scandals,” the report continued. “These issues highlight the ethical challenges Australia is facing now.”
During a webinar held to discuss the report on Monday, The Ethics Centre executive director Simon Longstaff said the timing of the report’s release was “perfect”, given the nation’s effort to plan a post-pandemic rebuild.
“How often do we check the foundations of a building, let alone a society?” Longstaff said. “It’s really an important time for Australia.”
Building an ethical infrastructure
The report described a 5-step process to building a more ethical Australia that includes developing an ethical infrastructure index, elevating public discussion, strengthening education, embedding ethics in institutions and supporting it in government.
Particular attention was paid to creating an “ethical infrastructure” in society based on formal factors (legislation, regulation, standards) and informal factors (media, education, activism).
For businesses and organisation, an ethical infrastructure would include formal factors such as codes of conduct, whistleblowing systems and ethics leadership, while informal factors would encompass leadership “tone”, ethical role modelling and “speak-up cultures”.
Yet there are limitations in trying to plan an ethical infrastructure, the report admitted. It’s not just the factors described, but the way they fit together.
“If a society or business just assembles the ‘bones’ of ethical infrastructure, without the muscle tissue that sits between components, it may still have weak ethical infrastructure,” the report stated.
Just assembling the “bones” of ethical infrastructure ticks the boxes, the report argues, but could actually do more harm than good because it gives a false ethical veneer.
“A compliance-focused approach to ethics will have limited effectiveness because it can only drive behaviour that conforms to regulations or codes without fostering an intent to do what is right.”
The crass movie, Wolf of Wall Street, once you looked past the outrageous behaviour, was a good indicator that all the Regulation and Ethical standards required, fell flat on unethical people.
Unethical people do not care about anything other than themselves and all the Regulation in the world will not stop them. They will continue until they are caught and prosecuted and as usual, the vast majority, are punished for the actions of a few.
Ethics is inherent in most people and yet, we are all being smothered under a mountain of theory based ethics that is irrelevant to the vast majority of advisers who for decades have provided great service to their clients.
It is Ground hog day if we continue with endless discussion by vested interest Education groups, Lawyers, Auditors etc, who have never been in front of a client and are a drain on advice practices with their never ending pursuit of what benefits their own interests, at the expense of advisers and all Australians, which is exactly what has occurred, with Advise now being too expensive for most Australians to attain.
What these theory guru’s seem to ignore, is that the greatest ethical dilemma, is what is happening now, with thousands of decent, experienced advisers being forced out of the Industry with a Regulatory framework that is killing them and leaving only the top 10% of Australians being in a position to attain advice.
Ethics and Ethical behaviour are not theory, though the world has become one endless paper shuffling exercise, that is designed to being “seen” to be doing something, rather than just getting on and doing it.
“A compliance approach to ethics will have limited effectiveness”. Unfortunately, this is how parts of the industry are approaching the FASEA Code.
Using the same old legal team armoury to discover what is the base line that must be done to comply. Instead of embracing the Code from the perspective of what it is asking of (individual) behaviour and challenging welded on conventional thinking and practices.
Advisers must take the journey personally and once they get it, the industry will start moving toward a profession. Being a profession is the gold standard as it is less regulated – because it doesn’t need to be – individuals take more responsibility for upholding the profession.
Standard 3 is hotly debated and used as the reason FASEA has failed and the trigger to demand more from our Regulators. If instead of comparing it word for word with the Corps Act, an Advisers looks at the requirement from their usual practice and then asks “what would a virtuous person do”, the confusion (dare I say, conflict) would dissipate.
An ethical adviser will comply with the law – Corps Act etc, etc – but that will never be enough to demonstrate ethical behaviour otherwise there wouldn’t be some much tension within the industry, with the Regulator, and the with the public.
The ethical adviser undertakes a self-reflection before every client interaction and goes into the engagement with their eyes wide open. Conflicts, biases rationalisations, are still there, but, the awareness is the difference, as the Adviser has these front and centre.
Proponents of the “compliance approach” to the Code will state firmly that the Code extends the law, etc. However, in my view, this interpretation of FASEA’s Guidance is faulty. My reading of it is it extends the existing laws from a behavioural perspective not applying additional or “new law”. Since 1 January, it is nolonger enough to tick off the black letter law, the ethical overlay is an essential element of an Adviser’s practice (and obligations). The extension of the law is a solid attempt to shift Advisers out of simple compliance and catapult them into taking personal responsibility for their conduct. It is a monumental shift and we are yet to see it play out.