Speaking at a Pritchitt Partners event on Wednesday (30 January), the executive director at The Ethics Centre, Dr Simon Longstaff, argued that ramping up compliance would not necessarily ensure ethical conduct in the financial services industry.
“It’s not enough to rely on the law and its loopholes because if that’s what you think you’ll do, whether it’s through a complicated set of documents around product disclosures or agreements, then you’re missing the point,” he said.
The executive director further noted that businesses cannot combat the consumer trust deficit that has resulted from the litany of abuses exposed through royal commission hearings simply by “improving the service standards, by being better in your product design, by just getting all the nuts and bolts right”.
“The banks have known for a long time that lots of people, whether with good evidence or otherwise, consider them to be bit nasty, a bit greedy and a bit high-handed. What’s changed over the last 12 months is they’re now perceived to be dishonest,” Dr Longstaff said.
Rather, he suggested that, as the final royal commission report looms, financial services firms should question their purpose, as well as the values and principles that underpin it, as these shape conduct.
It’s the organisations who have clear values and principles and consistently apply them that earn “the dividend of high trust”, which is ultimately good for business.
“Low trust environments are very expensive… [when you consider] all the costs of enforcement provisions and supervision,” the executive director said.
“High trust, where you can shake someone’s hand and know that the agreement will be met, that’s a low-cost environment.”
Dr Longstaff admitted, however, that this is a “half truth”, adding that the paradox the industry cannot ignore is that acting ethically for the sole purpose of boosting profits will not work out favourably for businesses in the long term because it doesn’t encourage trust.
“If you do it for the dividend, you don’t get the dividend. If your only reason for being true to your declared values and principles, for being ethical, is that you think it’s good for the bottom line, then you will not get the benefits for the bottom line because no-one will really trust you,” he said.
Good ethics are only good business if the business is committed to those values and principles, the executive director argued, adding that businesses need to be prepared to bear the cost of ethical choices.
“We do not live in a Pollyanna-world universe in which every ethical decision is met by instant reward,” Dr Longstaff said.
“Inevitably, there [will be] times when you will say no to things that could be profitable [or] opportunities that you would love to pursue because it’s just not consistent with the claims of who you are and what you stand for.”
He presented the example of Johnson & Johnson’s Tylenol crisis in the US in 1982, when seven people died in Chicago after taking cyanide-laced capsules of Extra-Strength Tylenol.
James Burke, the publicly listed company’s chairman at the time, decided to pull 31 million bottles of the Tylenol off the market despite it being Johnson & Johnson’s best-selling product, accounting for 17 per cent of its net income the year before the crisis. The decision to pull the product and relaunch it cost the company $100 million, but ultimately paid off as it eventuated in greater trust by consumers and investors.
Dr Longstaff’s colleague at The Ethics Centre, Cris Parker, last year pointed to international research from Calvert Investments that suggests a correlation between increased corporate engagement with environmental and social challenges and positive financial performance and stock market valuation. Regnan’s research in Australia indicates a similar connection between share price and conduct among ASX200 companies.
The executive director also stressed that the financial services industry is “not populated by monsters” who set out to “do something terrible” every day.
Rather, he claimed that “these are invariably good people who have been led by a series of institutional arrangements to do bad things”.
His view is that clear values and principles that encourage staff to make ethical decisions is one of the keys to deterring misconduct.
“You have to do this exercise of discernment and discretion across a whole spectrum of relationships because we know that the exception – wherever it might be across your range of stakeholders – is the thing that will sting you,” Dr Longstaff said.
“You can have all these wonderful experiences and you will find those few egregiously bad moments [that have] become synonymous [with] the conduct of a whole organisation, sometimes a whole industry. So, this consistency has got to be rigorous.”
He continued: “This is not something [that] is achieved through compliance. You cannot manage these risks… by saying we’ll have a series of boxes that we can check. You cannot achieve these by removing any capacity for individuals within a business to exercise discretion.
“In fact, the more you rely on that kind of compliance, the greater the risk will increase because you throttle capacity over time to make responsible decisions.”
[Related: Regulators to focus on misconduct in 2019]