Ethics Reporting. A Review of FTSE 100 Annual Reports

Transcription

1 Ethics Reporting A Review of FTSE 100 Annual Reports

2 Introduction The Chartered Institute of Internal Auditors conducted a study of FTSE 100 companies disclosures in their annual reports on ethical standards and how they maintain and enforce them. The purpose of the research was to explore whether investors are being provided with information that helps them to make an assessment of a company s ethical culture. Regular reporting by a company to its shareholders on how well it is managing its ethical performance, enables investors to monitor the board s intent in developing high ethical standards. Recent months have highlighted how poor corporate ethics standards can impact on a company s bottom line. These scandals, as well as legal and regulatory developments, mean that ethics are of increasing importance to mainstream investors. Despite the growing importance of corporate ethics, the Institute s research suggests that although the vast majority of FTSE 100 companies are aware of the importance of ethics, only a small proportion provide their investors with metrics to help them to monitor the company s record in enforcing and maintaining ethical standards. Objectives and Methodology The Institute wanted to establish the extent to which FTSE 100 companies have measures in place to monitor and evaluate their stated ethical standards. Annual reports were studied as they are a company s key platform for communication with investors, and are required to be made available to all shareholders. The latest annual report of each FTSE 100 company was reviewed to identify references to ethics and integrity, and the means by which the company ensured standards were being upheld. Particular attention was given to companies efforts to measure their progress in maintaining and improving appropriate ethical standards. By providing specific measurements of their ethical performance, companies enable investors to monitor changes in performance, and potentially also to compare an organisation with its peers. Some companies include information on ethics in a separate, non-mandatory Corporate Social Responsibility (CSR) report. Our analysis noted a very small number of companies who crossed-referenced their CSR report in their annual report. 2

3 What are business ethics and why do they matter? Ethics in business describes the culture and behaviour within an organisation that helps it to maintain open, honest and fair interactions with all the organisation s stakeholders. High ethical standards within an organisation enhance its reputation and builds commitment and trust in it. It is also good for investor confidence and good for the long term success of the organisation. Poor business ethics on the other hand pose a significant risk to a business, and recent corporate ethics scandals, such as the News of the World hacking investigation and numerous financial services mis-selling scandals of which PPI is only the latest, have highlighted the impact that a perception of poor ethics can have on a business s bottom line. While reporting on ethics is not a specific requirement of listed companies in the UK, they are required to report on the key risks facing their business. For many businesses, poor ethical behaviour may be a significant risk. Evidence of poor corporate ethics, and a company s inability to demonstrate that it has adequate controls in place to prevent unethical behaviour on the part of its employees can be a major business risk. As well as severely damaging customer, supplier and other business relationships, corporate scandals can leave a company exposed to legal or regulatory action. It may also lead investors to question their financial commitment. Recent legislative changes, such as the 2010 UK Bribery Act, have significantly increased the legal penalties facing businesses with poor ethical standards. Poor business ethics can also be an indicator of likely poor performance, as they raise concerns that important business decisions, such as the awarding of new contracts, incentive schemes for senior executives or the location of new outlets or facilities have not been subjected to a transparent and objective decision-making process. Regulatory changes such as the Financial Reporting Council s 2010 UK Stewardship Code place a greater onus on investors to engage with companies on a range of issues including governance and ethics. This means that companies discussions with institutional shareholders will increasingly be conducted in the open, enabling them to account for their decision-making to investors. Organisations like investment research providers EIRIS already assess companies according to their ethical standards. Additionally, proxy voting agencies that provide institutional investors with recommendations on how to vote on key AGM and EGM motions such as Manifest (which administers 3 trillion worth of equity assets) and PIRC, both consider ethical issues as part of their corporate governance scrutiny on behalf of institutional investors. Increasingly, fund managers also offer specialist ethical investment funds for private investors. There are now around 60 such funds in the UK, offered by both specialists such as the friendly societies or the Co-operative, and mainstream providers like Scottish Widows and Aviva. Recent research by Eurosif (the European Sustainable Investment Forum) found that 56% of corporate pension funds currently have a policy in place on Socially Responsible Investment, and around a quarter of those remaining plan to introduce one over the course of Corporate ethical standards are increasingly seen as central to a company s social and environmental impact, as they inform individual business decisions on a range of issues. 3

4 Key Findings References to ethics The vast majority of companies (91%) make some form of reference to ethics and ethical integrity in their annual reports, suggesting that they are aware of the increasing interest in corporate ethical standards. References to ethics in FTSE 100 annual reports 9% Make no reference to ethics/ integrity in their annual report 91% Make a reference to ethics/ integrity in their annual report However, only 8% of FTSE-100 companies report to shareholders some measure of the company s ethical performance. These were most commonly related to tracking employees understanding of the company s code of ethics, though one company provided data on the number of factory and supplier assessments they had conducted. This lack of hard data published in annual reports suggests either that companies do not monitor their ethical performance and ensure that processes are in place to manage the risk of poor ethical performance, or they do not think that investors are interested in this activity. FTSE 100 companies providing a metric on ethics in their annual report 1% Provided figures on supplier assessments 3% Provided figures on employees signing Ethics Code 4% Provided figures on employees undergoing online ethics training 4 92% Provided no metrics

5 Demonstrating employee understanding of ethics Corporate ethics codes are commonplace, but less emphasis is placed on measuring employee understanding and subsequent behaviour. Just 15% of FTSE100 companies explain in their annual reports how they communicate corporate ethical standards to their staff, and just 7% of FTSE 100 companies provide hard data on the extent of their employees ethical awareness. This leaves investors with little information to help them assess a company s potential exposure to ethical risks, such as activities proscribed under the UK Bribery Act. FTSE 100 companies communicating ethical standards 60% 50% 40% 30% 20% 10% 0% 56% Have an Ethics Code 12% Have an Ethics Committee 15% Explain how they make employees aware of ethical standards 7% Provide metric on employee ethical awarness 5

6 Boilerplate Selected survey statements findings 13 companies made no reference to ethics or integrity in their annual report beyond a general assertion or statement with no supporting evidence. These boilerplate statements do not provide investors with any insight into the practical measures and processes that the company has in place to support its ethical ambitions, or its performance against standards it has set. Some examples of statements on ethics in the annual reports reviewed include: The Board takes regular account of the significance of social, environmental and ethical matters to the businesses of the Group. We operate ethically, taking the long-term view to achieve growth while safeguarding the environment. The Group is involved in carefully evaluated and fully negotiated business partnerships with companies of suitable stature having similar business ethics, both in the UK and overseas. We work with our suppliers to ensure the integrity of the products supplied. Our business involves us in a wide range of social, environmental and ethical issues. Most of these are familiar longstanding subjects that we are experienced at managing. Acting responsibly, operating safely and doing the right thing also play important roles in enhancing our reputation with our stakeholders. It therefore makes sense to make ethical and responsible business practices an integral part of our strategy, incorporated into our business planning and risk management. 6

7 Conclusions The Institute s research reveals a gulf between the growing interest that regulators and investors are showing in corporate ethics, and companies reporting on the measures that they have in place to uphold high ethical standards. The lack of straightforward metrics on ethical standards is at odds with the increased emphasis that the Institute s members say is required in reviewing and improving the controls companies have in place to ensure that high ethical standards are being maintained. The research suggests that providing clear metrics on ethical standards as part of companies risk reporting requirements within annual reports will help to bridge the gap between the work that companies are doing on ethics, and their investors appreciation of it. 7

8 About the Chartered Institute of Internal Auditors Established in 1948, we became the Chartered Institute of Internal Auditors in We are part of a global network of 170,000 members in 165 countries. All members across the globe work to the same International Standards and Code of Ethics. We have 8,000 members in all sectors in the UK and Ireland. Each year over 3,000 of our members take training with us or study for our qualifications. Over 2,000 members are Chartered Internal Auditors and use the designation CMIIA. Over 1,000 of our members hold the position of head of internal audit. The majority of FTSE 100 companies are represented in our membership. Chartered Institute of Internal Auditors 13 Abbeville Mews, 88 Clapham Park Road, London SW4 7BX tel fax info@iia.org.uk Registered in England and Wales, no November Information can be made available in other formats.