The Long Road to Ethical Compliance

Although the UK has had a powerful code of corporate governance since the early 1990s these have taken longer to establish in the rest of the world, especially the USA. However, in 2017 along came two competing US codes. The “Commonsense Principles of Corporate Governance(CPCG)” and “Corporate Governance Principles for US listed Companies (CGPLC)”. These differ significantly – especially over executive pay which is barely covered by the CGPLC. Yet the main thing they have in common is the absence of any external mechanism for enforcement.

This contrasts with the UK where, back in1992 there was introduced by the Cadbury Committee the principle that companies should “comply or explain” – a principle that was backed by the UK Stock Exchange and latterly the Financial Reporting Council (FRC).

Where a code of corporate ethics exists it normally covers a range of purely governance issues such as the rights of shareholders, the operation of the Board, the role of the CEO and audit procedures. However, increasingly they include issues that are of direct concern to the HR function. Take, for instance, the Brazilian Institute of Corporate Governance Code. This includes references to CEO and Board remuneration, the management of employees and their representatives and a range of ethical principles about such matters as bribery, receiving and giving gifts, discrimination, sexual harassment, workplace safety, employee privacy, substance abuse and child labour.

Ethical codes are increasingly embracing employment-related fields and applying to those below Board level. But how many HR professionals take into account corporate codes when they review their company policies?

FedEE’s Employment Standards Institute (ESI) lists several codes in operation for major corporations around the world. In Airbus, for instance, the code applies to “all employees, officers and directors of Airbus and entities over which Airbus has full or joint control.” It spells out that “Individuals are selected for career advancement on the basis of their potential, their performance, their behaviour, and their willingness to work in and across different functions and countries.“

The Airbus code also contains some of the best worded expressions for standards of conduct – such as its statement about bribery… “We may never offer, attempt to offer, authorise or promise any sort of bribe, facilitation payment or kickback to a public official or private party for the purpose of obtaining or retaining business or an improper advantage. Likewise, we must never solicit or accept a bribe or kickback from a public official or private party.” And moreover “We must never hire someone else to do anything that we cannot ethically or legally do ourselves.” Microsoft’s approach is to offer greater explanation for its principles and, in the case of bribery, it states that “in some parts of the world, paying a bribe to get business may be something that others are doing. We won’t. We would rather lose the business than secure it through a bribe, kickback, or other improper benefit.”

Companies differ somewhat about the protected categories that they recognise – Airbus cites, for instance, “social origins, political opinions and national origin” (not just nationality), Kobe includes “wealth”, whilst Bombardier includes “family situation” and “citizenship”. Most curious of all is Google’s statement that it is “a dog company”, although “before bringing your canine companion to the office, please make sure you review our Dog Policy”.

In July the FRC finally released its latest “shorter and sharper” version of the UK code. Back in December 2017 there was much talk about the next revised code incorporating the obligation to appoint employee Directors, plus an improvement of the representation of women (following the Hampton-Alexander Review) and “ethnic minorities” to company boards (following the Parker Review Committee report)). But in the final version this is simply replaced by a recommendation for companies to seek the views of employees and to promote diversity.

The only significant foreseeable change will be through new UK regulations that are due to become effective on January 1st2019 requiring companies to begin reporting pay ratios between senior executives and the workforce as a whole. These will not require such data to be available until 2020. Meanwhile the Investors Association continues to maintain its “name and shame” list of CEO’s in FTSE 100 companies where Board pay policies have produced at least 20% shareholder dissent at annual meetings. Although this list has grown from 9 last year to 18 in 2018 it has done little to rein-in remuneration committees that continue to approve salary policies that relate more to external comparators than ability to pay.