Ethics uplift touted as key to regulatory reform

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.”