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tion™s management system.
The IBE (Institute of Business Ethics) findings strengthen the argument that companies
must take a thorough approach to corporate ethics. (Alastair Ross Goobey, 2003 Quote
from a Institute of Business Ethics Press Release about Does Business Ethics Pay? by
Simon Webley & Elise More. http://www.ibe.org.uk/DBEPpr.htm)

There is strong evidence that those FTSE350 companies which are clearly committed to
ethical behaviour perform better financially over the longer term than those lacking such
a commitment. (Institute of Business Ethics (IBE), ˜Does business ethics pay?™ 2003)

19 out of 24 companies which have figured consistently in ˜Management Today™s™ annual
˜most admired company™ league table over the past five years have codes of ethics, and
are rated more highly by SERM than those without codes. (Simon Caulkin, Business &
Media, The Observer, 20 April 2003)


Social and ethical risks and trends
General comment
All organisations are at risk from a range of social, cultural and ethical impacts
and different sources, even if they are only from, for example, the local news-
paper or planning authority. These impacts can be significant and the direct
Chapter 12 “ Social and business ethic risk overview 275



and indirect costs to businesses have been assessed as being 5.1% of the value
of the top 500 US and EU listed companies. This has been reduced from a
potential 9.0% by the risk management activities of companies.
This risk to an organisation™s value increases as the amount of legislation,
volume of litigation and level of awards increases. The level of activism by the
public or stringency from the government or stakeholder groups, like the trade
union movement on labour rights, are all on the increase. There is also the view
that the power of businesses is outstripping all other checks and balances, and
that political power is now becoming subservient to corporate interests.
Indicatively it is now said that 52 of the 100 largest global economic entities are
companies and that correspondingly there is an increase in the degree of
responsibility, accountability and ethical conduct expected of organisations
with so much power and influence.

Types of social and ethical risk
As society is always changing, the risks it poses to an organisation are continu-
ally changing too. However, the main types of risk companies need to review
are: liabilities; operational risks; financial penalties and enforcement costs; dam-
age to the public perception of the company (see also Chapter 9); emerging
social issues (human rights, employee welfare and community issues); tradi-
tional ˜ethical™ issues concerning products or areas of activity; countries of
operation and company activity (tobacco, armaments, gambling, pornography,
alcohol); and newer emerging issues (e.g. animal welfare, directors™ pay).
It should be emphasised again that in this chapter there is a brief overview
of social and ethical risk issues, although most are covered in more depth in
other chapters indicated in brackets:
Risks from a lack of community involvement (in this chapter);
Human resources and workforce human rights, including the avoidance of
forced or child labour (Chapter 14);
Wider human rights issues outside of the organisation, including the avoid-
ance of suppliers (Chapter 15); and
Health and safety for staff, and historic liabilities (Chapter 16) and customers
(Chapter 17).
Other issues that have large ethical dimensions but which are not covered in
this section are:
Involvement in bribery and corruption (covered in more detail in Chapter 7)
and anti-money laundering measures (www.jmlsg.org.uk/);
Use of corporate power (Chapter 10);
Business and marketing practices and fines for non-compliance (Chapter 10);
The impacts of new technologies on customers and the wider public
(Chapter 11);
Natural resource degradation risks (Chapter 18 and 19); and
Corporate governance risk and codes of corporate behaviour (Chapters 21, 22
and 23).
Part C “ Overview of the Social Aspects of Business Risks
276



Case studies and surveys analysed by SERM have shown that there is little con-
sensus around either the scope or the validity of social and ethical measures of
business performance. As an area of concern or risk, it is often perceived by the
business world merely as the product of highly politicised and altogether unre-
alistic non-governmental organisations (NGOs) “ not as a serious set of business
risks. However, companies can face serious financial penalties from operating
in an unethical manner:
Unethical practices escalate the risk of consumer boycotts;
NGO activism can deplete the morale of employees;
Failure to engage with the concerns of the communities in which they oper-
ate can lead to regularised vandalism and theft of the company™s assets;
Prolonged mistreatment and abuse of employees can lead to the politicisa-
tion of the workforce and the proliferation of restrictive practices;
Failure to self-regulate can lead to harsh government-imposed restrictive
laws; and
Failure to set ethical standards of business with corrupt governments can
lead to ever-escalating bribery costs.
Looking at just one of the risk categories “ unethical business practices “ demon-
strates how active these risks can suddenly become. Within only a year, a wide
range of business scandals and misbehaviour almost destroyed public confi-
dence in businesses per se. The business world seemed a very different place
before Enron, Elan, Railtrack, Tyco, WorldCom and certain sections of society
became more engaged in activism and terrorism. These social and ethical issues
have become part of the mainstream, but few analysts or researchers have
incorporated these issues into their risk assessment methodologies, and even
fewer predicted the highest impact events.
Understanding socio-economic activities through a risk prism may help to
appreciate the risk posed by misunderstanding cultures. Recently the costs
have greatly increased. The September 11 attacks demonstrated this when the
New York Stock Exchange was shut down for four trading days and cut nearly
1400 points from the Dow Jones Index by 21 September 2001.
The consequences of business interruption are estimated at 90% of
medium to large companies. If they cannot resume near-normal operations
within five days of an emergency, they are out of business within a year (Neal
Rawls, security columnist and author writing about Avoiding Disaster by John
Laye, 2002). This is covered in more detail in Chapter 8.

Interconnecting risks
Just as different elements of society are interconnected so are the risks they
pose, and several of the risk categories overlap. This is demonstrated by human
rights risks, as they permeate throughout the other chapters of this book, as
most risks ultimately involve human beings, as reviewed in Chapter 15:
Environmentally related human rights: pollution and environmental degra-
dation caused by operations. Peripheral pollution in the UK such as recent
odour-related infringements of the Human Rights Act 1998;
Chapter 12 “ Social and business ethic risk overview 277



Health and safety-related human rights: consumer protection and the improper
use or distribution of products that may be a danger to consumers; and
Social and ethical related human rights:
Business issues such as the misuse of products by private organisations
and/or public bodies in a manner which violates human rights, e.g. prod-
ucts for warfare and taking advantage of absence of, or poorly enforced,
laws/regulations. Sourcing from suppliers with lower standards of opera-
tion, lower than the norm. Use of local security forces to protect company
interests that operate contrary to human rights standards;
Community issues like the displacement of local communities and indige-
nous peoples. These can extend to intellectual property issues and the
appropriate use of indigenous knowledge; and
Transparency issues, including involvement in bribery and corruption,
facilitation payments. Also the lack of effective controls on advertising or
engaging in improper advertising.


Stakeholder and reputational risks
The human rights implications of corporate conduct are attracting focused
attention from a variety of interested parties, such as national and NGOs, gov-
ernments, community groups, consumers, shareholders, the media and the
investment industry. With the increased expectations, ignoring human rights
risks can have adverse effects upon companies in a number of key, inter-related
areas. For an in-depth exploration of these issues reference to Chapter 9, which
discusses reputational issues in more detail, can also be made.


The SERM stakeholder template
* Academic and research organisations.
* Business partners, suppliers and trade bodies;
* Customers and their representatives;
* Direct action groups and NGOs;
* Employees and their representatives;
* Financial institutions (banking, investor and insurance criteria);
* Governmental organisations;
* Local and regional governmental organisations;
* International governmental organisations;
* Journalists and media organisations;
* Key competitors; and
* Local communities.


Although all stakeholder groups have a part to play in the dynamics of social
and ethical risks, the following stakeholder groups are of particular note:
Business partners and suppliers: the purchasing company™s approach to its
suppliers™ social and ethical performance varies. There are also trade and
Part C “ Overview of the Social Aspects of Business Risks
278



industry associations such as the Association of British Insurers, Apparel
Industry Partnership, Forge II and the banking sector™s Equator Principles which
seek to develop standards of social and ethical behaviour.
Customers and their representatives: these are one of the ultimate drivers of
change within society. Change can come from the election booth, the consumer
boycott or the groundswell of public opinion on an issue. It took years of
activism by members of the general public and consumer boycotts of compa-
nies like Barclays (during the anti-apartheid campaign) to bring this issue to the
forefront of the political agenda. In the UK and Ireland it has been announced
that McDonald™s will start serving some 143 000 cups daily of Kraft Kenco fair
trade coffee sourced from Rainforest Alliance Certified farms in Colombia,
Brazil and Central America. The company perceives this will raise its ethical
footprint in areas where its market share has been under pressure from com-
petitors deemed by customers to be more ˜ethical™.
Direct action groups, including NGOs: NGOs and their recommendations for
good practice include: the Voluntary Principles on Security and Human Rights,
the Amnesty International Human Rights Principles for Companies, Global
Sullivan Principles, Ethical Trading Initiative, etc.
Employees and their representatives: trade unions and workers™ councils cam-
paign for the raising of labour standards and the ethical conduct of businesses.
Governmental organisations: a variety of government departments and agencies
are responsible for the establishment of standards seeking to reduce the level of
damage to society from activities or business behaviour. These are agencies that
can have an impact upon an organisation. In the UK, for example, there are:
Enforcement agencies such as the police, Serious Fraud Office, Office of Fair
Trading (OFT), Trading Standards and Competition Commissions which try
to keep criminal and unethical practices out of market places and societies;
Industry regulators like the UK™s Ofgem, Ofwat, Oftel and the newly invigor-
ated Financial Services Authority (FSA), organisations that will become
active when consumers are at risk from a company™s activities; and
Tax officials, like the UK™s HM Revenue and Customs, can launch investiga-
tions by officials who may believe that a company is failing to make true dis-
closures of its tax liabilities.
International governmental organisations: the UN Norms are of increasing
importance and the advice is to improve human resources risk management
and the uncertainties of the world by companies:
Adopting a proactive approach;
Applying the UN Norms to their operations, and
Learning from them.
Journalists and other media: reporting on the social implications and what is
going on in society is a key method and the wider community can become
knowledgeable about the changes occurring in society and the causes of these
Chapter 12 “ Social and business ethic risk overview 279



impacts. There is also a role of researching and reporting on the ethical stances
of the public.
Local communities: the elements of society that are close to organisations™
operations can have a direct impact, i.e. rejecting planning applications for
expansion, etc., but also indirectly as they will have a view of the organisation
that will affect things like staff attraction and retention.


Risk management best practice
Social and business ethical risk concerns an organisation™s impacts on the social
systems within which it operates. Social performance can be gauged through an
analysis of the organisation™s impacts on stakeholders at the local, national and
global levels. In some cases these risks can influence the organisation™s intangi-
ble assets, such as its human capital and reputation.

Management structure
The organisation™s approach to managing internal corporate governance (see
Chapters 6 and 21“23) and indirect economic, environmental and social
impacts from social and ethical risks resulting from its activities should
include the following:
Company/CEO statement;
Adherence to codes of conduct;
Organisation-wide policies;
Major programmes to improve performance;
Internal communication and training;
Performance monitoring; and
Internal and external auditing and senior management review.
Ethical policies include:
Codes of conduct;
Communication of standards through training;
Methods to encourage employees to report possible violations to management;
Enforcement mechanisms through investigation and discipline; and
Oversight and review to achieve ongoing improvement.


Social and ethical management systems
The financial benefits of social and ethical management systems have not been
clearly proven yet. Most are still in their development stage. This chapter
reviews the systems deemed relevant to managing the associated risks. They
are mostly voluntary guidelines on managing and reporting on social and ethi-
cal issues, as well as the environmental and health and safety management sys-
tems discussed in other chapters. Organisational cultural risk management
systems are discussed in the next chapter.
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280



Reporting the benefits to stakeholders
There are numerous, although presently unquantified, benefits from communi-

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