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Management

The moral maze: How poor company ethics can cost investors

FTSE100 companies are failing to provide investors with clear measures of how they maintain robust ethical standards, according to a study by the Chartered Institute of Internal Auditors.

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The Chartered Institute of Internal Auditors’ study shows that while 91 per cent of the FTSE100 refer in their annual reports to their high standards of business ethics and integrity, only 8 per cent provided a specific metric of their company’s ethical performance.

This low level of reporting comes despite the mounting evidence from scandals, such as the mis-selling of financial products, that a company’s poor ethical standards can cost shareholders dearly.

Dr Ian Peters, chief executive of the Chartered Institute of Internal Auditors, says: “Recent corporate scandals have provided ample demonstration of the material risk that poor ethical standards can pose to businesses.”

The Chartered Institute of Internal Auditors points out that performance metrics, whether financial or non-financial, are crucial in enabling shareholders to understand whether a company is improving in a particular area or getting worse.

The specific measures on ethical performance provided by companies included indicators of employee awareness of ethics, and industry-specific measures such as supplier and factory visits.

Although 56 per cent of FTSE100 companies that stated in their annual report that they have an ethical code or policy, only 3 per cent of them provided information to demonstrate that their employees had actually read and understood the code.

A further 4 per cent of companies provided figures showing what proportion of their workforce had undergone some form of training on proper ethical standards, and one company said that it monitored employee awareness of ethics, without explaining how.

Internal auditors are responsible for providing an independent opinion to the company’s board on how the organisation’s risk management and governance is working, including systems to manage reputational and legal risks.

But it is not all bad news. A separate survey showed internal audit departments in the financial services sector scored higher than other sectors on measures which ensured they were independent from their organisation’s executive management. The IIA notes that since the introduction of its Code (Effective Internal Audit in the Financial Services Sector) in July last year, there have been significant improvements in financial services internal audit teams’ strength and ability to provide the board with independent assurance on the effectiveness of the organisation’s risk management.

The Code was introduced to help financial services firms improve their management of risks as they respond to intense public, investor and regulatory pressure to improve corporate governance.

Peters says: “The level of regulatory and public scrutiny of the financial services sector, including moves to increase the personal accountability of directors means that boards will need to rely on their internal audit team even more to ensure they have a tight grip on risks.

“But it is important that organisations in other industries learn from the experiences of financial services and the increase in the numbers of internal audit chiefs reporting to non-executives suggests this is happening.”