Are independent ethics committees valuable or window dressing?

What makes an ‘independent ethics committees’ work? Can they act as an effective counterbalance to business ventures that operate close to the letter of the law? If you’re going to scrutinise one, what questions should you consider asking?

One UK insurer (Ageas) has established an ‘independent ethics committee’ to oversee the activities of an ‘alternative business structure’ (ABS) set up in partnership with a law firm to provide legal services to its claimants. It’s a move seen by many as controversial and designed to circumvent legislation that banned the payment of referral fees to personal injury claimants. Ageas see it as part of a seamless service for their customers.

In this post, I’ll be examining what makes independent ethics committees effective and what makes them resemble window dressing. Here are six key questions that need to be asked.

How is the committee positioned? Is it positioned close to key decision makers in the parent company?  And does it have a status similar to other committees, such as risk and audit, or is it stuck out on a limb and so easily ignored?

What remit does it have? This needs to be formalised so that its members understand what their role and responsibilities are. Does it have the authority to proactively investigate and challenge or is it expected to adopt a largely reactive approach, giving feedback on what has been presented to it?

How is its membership composed? For its ‘independent’ status to mean anything, it needs to be led by a senior non-executive director and have a majority of non-executive directors as members. Given the nature of the ABS’s business, an external member or two should be included, recruited from outside the partner firms and with practical experience in business ethics.

How informed will its decisions be? Can it access outside expertise in ethics, with the necessary budget to make this a reality? Has it orientated its work around a clear understanding of the ethical risks to which the ABS is exposed? Without substantive management information on those risks and their associated controls, its ability to make informed decisions will be limited.

For a committee to be recognised as independent, there needs to be some transparency about its activities. That transparency should at least cover its positioning, remit and membership. Ethics committees in other spheres of business have learnt that unless they are open about, for example, any conflicts of interest its members are under, they will inevitably be seen as ‘castles of sand’.

And finally, what relationship does the committee have with those whose interests the ABS has ultimately been set up to serve: customers. Can the committee receive emails from customers and listen and respond to their concerns, or is it a purely internal, closed arrangement? If the committee has no one on it from outside the ABS or its partner firms, then it needs to have some way of hearing the customer’s voice.

Some are of the opinion that ABSs don’t need ethics committees because they are regulated by the Solicitors Regulatory Authority (SRA). However, the SRA has said that it will regulate ABSs purely by the letter of the law and has no interest in the ‘spirit of the law’. In some ways, this need not be a surprise: the SRA is sticking rigidly to its remit. However, given the complexity of the business environment within which ABSs have been established, and the huge imbalance of understanding between provider and consumer about motor insurance claims, that remit seems inadequate for protecting the public interest. The SRA’s position seems to resemble the rear view mirror of a vehicle, through which you see little of the direction in which public opinion is moving.

Ethics committees are worthwhile and valuable if they are transparency, authoritative and accountable to the public interest. Without qualities like those, they risk moving ethical issues backwards rather than forwards.