Measuring Ethics – many firms have a long way to go

A survey in 2011 of FTSE 100 companies found that while 91% did refer in some way to ethics in their annual report, only 8% reported some form of measure of their company’s ethical performance.

A more recent report in October 2012 showed a broadly similar result for a small set of European banks and insurers: 60% had no key performance indicators (KPIs) for ethics or ethical values, while another 30% had only a few, for internal use only.

So why are most firms reluctant to monitor their ethical performance? It is somewhat surprising, given the regulator’s interest in how both financial services firms, and the individuals who run them, conduct themselves. Three possible reasons come to mind.

Firstly, it may be that some firms do actually use KPIs to monitor certain aspects of their ethical performance, but don’t attach an ‘ethics’ label to them. This is somewhat reassuring (something is being measured), but only to a certain degree, for it could also indicate an unwillingness to fully appreciate what ethics means to their business.

Secondly, some firms may not understand why they should measure ethics. This would be worrying, for it indicates that ethics is not being taken seriously enough by the firm. How such firms then evidence certain aspects of their regulatory compliance is a mystery.

Thirdly, some firms may not understand how ethics can be monitored and measured. I suspect this is the main reason behind the two big non-reporting numbers in the aforementioned surveys.

Two factors could be at play here: firstly, these firms may see ethics as essentially qualitative in nature and so difficult to assign a substantive performance measure to, and secondly, their business performance or compliance managers may simply not understand ethics well enough.

Whichever reason holds true for any particular firm, the directors of most FSA regulated firms could be laying themselves open to some difficult questioning when  the regulator starts to act upon its frequently stated intention of challenging those firms who cannot show evidence of a culture of ethical behaviours. This year’s LIBOR fines for Barclays and UBS could be the trigger for that intention finally being acted upon.

One category of regulated firm could however be better off than most. Firms holding a chartered firm title from the Chartered Insurance Institute were provided with a self assessment toolkit on ethics in early 2012 (I have a conflict of interest here, as I wrote the toolkit).

While not stipulating particular KPIs, it did prompt chartered firms to think about the exposures they faced from ethical risks and to think about the internal controls for managing such risks, as well as how all this could be reported to their board.  It is from consideration of questions such as these that make KPIs the obvious next step for mid to large firms in the insurance and financial planning sectors.