Mainstreaming ethics in Australian enterprises

Brian J. Farrell and Deirdre M. Cobbin

University of Technology, Sydney, Australia
Introduction In 1992, the Ethics Research Group within the School of Accounting at the University of Technology, Sydney, commenced a programme of broad-based research into the ethical cultures and codes within larger Australian enterprises. The investigations focused on three areas of study. The first was an examination of the extent to which codes of ethics had been adopted by the enterprises. The predictors of code adoption were investigated in relation to variables of organization type, size, revenues and the particular sector of major activity. These investigations have been completed and the findings reported in Farrell and Cobbin[1]. In the second study the nature of the content of the various codes used by Australian enterprises was examined to determine the areas of focus of the codes and the level of their ethical content and guidance. Reports of other researchers were used for comparative purposes to allow findings on the Australian experience to be matched against the focus of content and the level of ethical guidance of US and UK codes reported by Robin et al.[2], Pelfrey and Peacock[3] and Schlegelmilch and Houston[4]. The second Australian study has also been completed, and our findings reported[1]. The third and present study consisted of an investigation into the responses of enterprises to a postal survey. The survey instrument was forwarded to all enterprises identified in the first study as having at the time a code of ethics currently in operation or a code in preparation. The aim of this study was to ascertain the level of comprehensiveness in the strategies, processes, procedures and structures which each enterprise put in place to support the effectiveness of its code of ethics and generate a cohesive and comprehensive ethical culture within the organization. We have elsewhere[5] provided our detailed views on the mainstreaming approach to ethics whereby an ethical culture is able to be developed and maintained within an enterprise so that, without such an approach, the culture is not sustainable. This strategy to ethical culture we have described as mainstreaming. This article reports on the extent of mainstreaming in Australian enterprises through the introduction of integrated strategies and processes. As this is the third study in a series of three, and in the reporting of the first two the pivotal issue of the meaning of the term ethics was examined, an extract is given from the earlier report:
While there are many definitions [of ethics] in the literature[5,6] the common thread is that ethics is about right and wrong, good and bad actions, and that ethics includes the

Mainstreaming ethics

37

Journal of Management Development, Vol. 15 No. 1, 1996, pp. 37-50. MCB University Press, 0262-1711

Journal of Management Development 15,1 38

philosophical reasons for morality stipulated by society. It goes beyond the area of the law, and provides guidance for resolving moral dilemmas with a fair, correct and right solution. The contents of codes as restatements of the law, prescriptions on behaviour, directions on management style and other non-ethical issues and the presence of values and ethical guidelines were a major issue in the research[1].

In this article the characteristics of the research subjects were investigated in relation to their ownership and industry-sector type, and size, as an indicator of their representative nature of Australian enterprises. In addition, the characteristics of the codes were examined in relation to predictor variables of their place of origin and the nature of their authorships, the frequency of code modification and processes of code review. As indicators of mainstreaming, five characteristics of codes were investigated as well as ethics education strategies, the presence of ethics committees and the appointment and operation of ethics officers. Other indicators studied were the nature and extent of the distribution of codes and the degree of their accessibility by stakeholders, the avenues employed to promote codes to the staff and public, the presence of formal procedures in the resolution of ethical dilemmas, and the use made of codes to impose penalties. Finally the respondents perspectives on the purpose and effectiveness of their codes were also investigated as indicators of mainstreaming. The justification for the selection of the elements chosen as constituting valid indicators is explained progressively for each element in the results and discussion section. In Farrell and Cobbin[7], mainstreaming was argued to occur only when a substantial number of the elements are present in the one enterprise, including a commitment by top management. The investigation resulted in findings on the level of mainstreaming of codes in Australian enterprises. These reflect the commitment and energy applied by those at the head of enterprises and their managers to the development and perceived importance of ethical culture in their dealings with and among the stakeholders of the enterprises. The investigation also provided an insight into the understanding of what ethics and an ethical culture are by those positioned to implement change in the ethical behaviour of business in the Australian environment. The activities of the Australian Competition and Consumers Commission, other agencies of government and industry groups to come to grips with ever-increasing amounts of blackletter law by way of codes of conduct presuppose an established environment in which business people understand the manner, and appreciate the advantages, of operating and doing business in an ethical world with ethical markets. Methodology Selection of subjects The subjects chosen for the postal questionnaire came from the Australian enterprises which provided their codes of ethics in response to requests for them. The original selection is detailed in the report on the first two studies. In brief, the subjects selected for the earlier studies were drawn from a database

created from the All Ordinaries Index of the Australian Stock Exchange and the Mainstreaming first 500 entries on the Business Review Weeklys Top 1,000, both as current at ethics October 1991. When the lists were combined, duplicate listings were eliminated, as well as 61 New Zealand enterprises, and the result was a database of 537 Australian enterprises. Commencing in April 1992, the enterprises on the database were forwarded 39 requests for information as to whether they had a code of ethics, and if they did, it was further requested that it be made available to the researchers. When an enterprise provided a code for the studies, or indicated they had a code or that they had a code in active preparation, the survey instrument was sent to them with a request for its completion and return. Because an undertaking of confidentiality was given in the earlier studies (as a consequence of a pilot study which concluded that only a low participation rate would result from not giving such assurance), this aspect of the programme was continued in the third study. While in general the questionnaire findings suffered the usual qualifications in the lack of opportunity to verify the responses provided, a selection of responses was able to be subjected to testing against information on the public record. The testing in the areas of organizational type, the main activity sector and the revenue size, for example, showed a correlation between the responses and the public record. The verifications are reported at appropriate places in the discussion and findings section of this article. This aspect provided confidence in the reliability of the statistical information on which the findings were based. As to the survey instrument, this was a document of eight pages and its length might have caused a low response rate. However, the response was high, being a return of 102 usable returns from a mail-out of 123. The unexpectedly high return is explained by the fact that the mail out was only to those enterprises which had responded to the first request, and either had or were close to having a code of ethics. Profile of surveyed enterprises The respondents were analysed from the material in the questionnaire as to their ownership type, their main activity sector and size. The latter was ascertained from annual revenue and employee numbers. The information on the characteristics of the enterprises was available from the first four questions of the questionnaire. Profile of the codes The profile elements investigated were used as indicators of the mainstreaming of ethical cultures in Australian enterprises. The matters examined by way of survey involved the place of origin of the codes and two issues on code authorship. One was the extent of consultancy of those to whom the code was to be addressed. The other was from the perspective of the training and background of the authors. Finally, the extent of modification and review of codes were also investigated as criteria of mainstreaming.

Journal of Management Development 15,1 40

Mainstreaming The selection of indicators of mainstreaming the ethical culture and codes extended beyond the profile elements stated above. They also included the nature and extent of the education of those to whom the codes applied, the establishment of ethics committees, the appointment of ethics officers, the distribution and access of codes, and their use and application circumstances. The last item included the discipline of staff, the resolution of conflict with suppliers and customers, and the use of codes as a marketing technique. Research subjects perspectives on the value of ethical cultures In extending an opportunity to respondents to provide their perspectives on the merits of having a code of ethics and the advantage or otherwise of an ethical culture in an enterprise, an indicator of the level of commitment to achieving such goals was obtained. Results and discussion Profile of the research subjects The profile was investigated to ensure that the surveyed subjects were representative of the enterprise types and other attributes of the database. Only the largest of Australian enterprises were listed on the database. This focus had been established in the first two studies of the research programme to allow comparative studies with reported findings from the USA and UK, which had also used the largest companies in their countries for analysis. The profile provided by the investigation covered organizational type, sector activity and size. The analysis showed that, in these aspects, the respondents were a representative sample of the database. Organizational type. The database for all three studies in the project contained 537 enterprises. The previous article in the series reported that half of the enterprises on the database were publicly listed on the Australian Stock Exchange. Government and foreign-owned enterprises each comprised similar percentages of the database (17 and 19 per cent respectively). All other classifications accounted for about 14 per cent of the subjects. Reliability testing of the responses against independent information on the public record showed a high correlation, with r = 0.63 (p < 0.01). The responses to the questionnaire were drawn only from those who reported that they had a code or that a code was close to implementation. The earlier findings were that government ownership was a source more likely both to respond (68 per cent) and to have a code of ethics (49 per cent). Australian Stock Exchange-listed enterprises had a much lower response rate (38 per cent) and lower frequency of codes (20 per cent), while private enterprises had the lowest response rate (17 per cent) and the lowest percentage of codes (9 per cent). The response rate to the survey in this study for the different types of enterprise reflect the rates for having a code. With the questionnaire, 40 per cent of respondents were listed companies and 28 per cent were public-sector

(government) enterprises; 17 per cent were foreign owned and only 5 per cent Mainstreaming privately owned. ethics Activity type. Respondents could indicate the dominant activity of their enterprise among 24 classification types. The responses showed a broad diversification with the only strong concentration being in finance/investment (17 per cent). Otherwise, for the other activity types the range was from zero 41 (both construction and clothing/textile manufacturing) to nine (chemicals/coal). Tests of reliability of the responses on activity type against independent information on the public record showed a correlation, r = 0.20 ( p< 0.05). Size. The size of an enterprise was indicated by two variables, gross revenues and employee numbers (where an enterprise consisted of a group, the indicators were of the group and not an individual member): (1) Revenue: 33 per cent of the respondents had immediately previous annual revenues falling in the A$251,000,000-500,000,000 band. The range of revenues reported by respondents was from less than A$50,000,000 to an amount exceeding A$5,000,000,000. The median was in the band A$501,000,000-1,000,000,000. There was a very high correlation, r = 0.81 ( p< 0.01), between the responses given on the size of revenue for the enterprises and the information on the public record. The accuracy of the responses in the areas available for testing was a pleasing aspect of the survey work. (2) Employee numbers: 16 per cent of enterprises had more than 10,000 employees. The mean number of employees for respondents was 6,649 with a range of 0-77,000. In the collection of data on employees, the practical view was preferred to the strictly legal position. Thus two cases were included where a management company was the employer of the respondents workforce. Codes profile Six items were included in the questionnaire on the characteristics of the codes used by the respondents. Five items related directly to mainstreaming, while the other item, the date of implementation of the codes, provided information on the time span enterprises had had to establish an ethical culture if mainstreaming strategies had been put in place. 1. Place of origin. A local origin means an opportunity for a code to reflect the values of its host community and of those bound by it, and for the latter to have a proprietary interest in what is, to the greater extent, their code. Whether the opportunity was taken is reported under the headings of authorship and consultancies. The imposition of a foreign code without modification denudes the code and its culture of these important aspects. The enterprise codes were overwhelmingly Australian in origin (81 codes or 79 per cent). Nineteen per cent were written elsewhere. Furthermore, while 36 per cent of all codes involved a substantial adaptation of another code, the

Journal of Management Development 15,1 42

adaptation in 25 per cent of all codes was based on a code which originated in Australia. The responses included codes in preparation. 2. Date of implementation. A significant feature of the enterprise codes was their recent date of commencement (see Figure 1). This is clearly evident in that the median year was 1990 and the mode 1992. The earliest code was 1928. Seventeen codes had been adopted up to 1980. The publication dates, where shown on the codes themselves and used in the first study, confirmed the accuracy of the responses in the questionnaire. 3. Authorship. There were two notable features of authorship: (1) There was a disparity between who the author types were and the types covered by the codes. Of the categories of author types, managers were the most frequent group directly engaged in the writing of the codes (60 per cent). On the other hand other employees were only directly involved in 23 per cent of cases, and directors in 34 per cent. Yet, while 95 per cent of the codes applied to managers, 89 per cent applied to other employees, and 73 per cent to directors. So all the groups were substantially under-represented in the direct writing of the codes. (2) The other feature of direct authorship was that lawyers were the most frequently represented profession, with 32 per cent, while accountants rated 23 per cent. This contrasts with the experts in ethics, ethical philosophers, who were involved in only 8 per cent of codes. Others who had an ethical training were used for 8 per cent of codes as writers also. The other category in the list was used for 28 per cent of author type (see Figure 2). 4. Consultancies. In line with author type there was an imbalance in the representation of consultant types for those covered by the codes. All consultant types occurred with less frequency than author types. Thus managers were consulted at the time the codes were written in 24 per cent of enterprises,

Before1932 1933-1942 1943-1952 1953-1962 1963-1972 1973-1982 1983-1992 Figure 1. Year in which code was implemented 0 20 40 Percentage of respondents 60 80 100

Director Manager Other employee Lawyer Accountant Philosopher Ethics trained Other 0 10 20 30 40 Percentage of respondents 50 60 70

Mainstreaming ethics

43

Figure 2. Authorship of code

directors 21 per cent and other employees 12 per cent. Government agencies and professional associations were consulted with similar frequencies (10 per cent and 7 per cent respectively). The other important aspect in consultancies was the low frequency of input from the ethics profession. For both ethical philosophers and others trained in ethics, only 8 per cent of enterprises used their expertise in each case. The use of lawyers (27 per cent) and accountants (15 per cent) as consultants was less pronounced than the frequency of their presence as direct authors. (See Figure 3.) 5. Review. Bygrave[8] has observed that:
Ethical issues are of a developing nature and any code will require regular assessment of new challenges which may arise from accelerating change among customers, competitors, government regulation, the economy, etc. and necessary revision in order to maintain its value[8].

Ethical cultures and codes are part of an evolutionary process. They need to change as the environment in which they exist alters for any number of reasons. It is a healthy sign that codes and cultures are reviewed regularly and changes made as a consequence. The codes and their cultures would then be so much more alive and thriving as they continue to be adjusted to match their environment. Even though, generally, the Australian codes were of recent origin, their review as an ongoing activity had a very high frequency, with 69 per cent of respondents reporting that their codes were regularly reviewed. The review function was evenly spread among committees, directors, managers, a designated officer and others. There was no combination of the various personnel types reported by respondents at a significant level. Given the recent date of the codes, it was noteworthy to find that 39 per cent of the codes have been modified since their inception. The frequency of

Journal of Management Development 15,1 44

Director Manager Other employee Lawyer Accountant Philosopher Ethics trained Government Association Other

Figure 3. Those consulted in writing the code

0 10 20 Percentage of respondents

30

40

50

modification is relatively high and may indicate that constant reviews were being maintained. Mainstreaming Indicators of mainstreaming included five of the elements in the code profiles reported above. Yet mainstreaming involves more than just these aspects. It involves a full and comprehensive network of integrated activities, procedures and strategies. These other indicators investigated are described below. Ethics training The views of respondents on the need for ethical training for various stakeholders of an enterprises ethical culture were examined and, then, by way of contrast, the level of actual training engaged in by enterprises. Views of respondents on the need for ethics training. The respondents expressed a strong view that employees should receive training in ethics (82 per cent of respondents). The opinion of 72 per cent of respondents was that there should be training conducted by the enterprise itself. Thirty-five per cent believed that ethics training should be part of a formal business course and 48 per cent did not agree with this. Seventy-five per cent took the view that ethics training should not be by other than these two means (see Figure 4). There was a high frequency (68 per cent) against the training of managers only, and 74 per cent considered all employees should be trained in ethics. On the training of directors 75 per cent believed they ought to be trained, with only 9 per cent against.

Corporation

Mainstreaming ethics

Formal course

45
Other Figure 4. Preferred training method

0 20 40 60 Percentage of respondents

80

100

Actual ethical training. In contrast with the strong views expressed on the need for ethics training, only 46 per cent of respondents had made arrangements for ethics training in relation to people within the organization, while 35 per cent had not. The number of people trained through each organization ranged from one to 9,000, with a median of 550. Only 11 respondent enterprises had trained in excess of 1,000 of their people. The most common training method reported was in-house induction of managers and employees. Seminar and courses conducted by others were used by only 8 per cent of enterprises. More enterprises trained managers (42 per cent) and other employees (37 per cent) compared with directors trained (22 per cent). Ethics seminars. Given the indicators on ethics training, the frequency of enterprises conducting seminars on ethics matters could be expected to be and was low. Only 18 per cent of enterprises conducted such seminars. Other training sessions on business ethics. In this area the frequency reported by respondents was again low 25 per cent of enterprises had held training sessions other than by seminar. Ethics incorporated into other training programmes. The level of activity reported in this aspect of training showed a higher frequency than others, with 37 per cent of enterprises handling ethics training in this manner. Attendance at ethics seminars by other organizations. Twenty per cent of enterprises reported that opportunities were given for attendance at ethics seminars conducted by other organizations. Ethics committee An ethics committee may be charged with a number of functions, including the oversight of the operational aspects of the code. A major function might be for it to consider, in the light of the code and enterprise values, the types of commonly encountered ethical dilemmas in daily business operations and to communicate its deliberations to all stakeholders within the enterprise. The frequency of ethics committees among the enterprises was low (10 per cent) 65

Journal of Management Development 15,1 46

per cent of respondents reported that no ethics committee had been established in their enterprise (see Figure 5). Formal procedures within the enterprise for staff facing business ethical dilemmas Formal procedures require a commitment by senior management in terms of time, staffing and funds to ensure quality support and confidential counselling for those enterprise members who face ethical dilemmas in the conduct of the enterprises business. This function is an important aspect of an ethical culture supporting an ethics code. In only 19 per cent of enterprises were formal procedures in place to assist staff in resolving ethical dilemmas they confront in business (see Figure 5). Appointment of a specific officer to deal with ethical matters Ethics officers are those who are:
Assigned the role and responsibility of devising, implementing and administering ethics programs within their organisation[9].

Their ethics work can cover counselling, education, quality assurance and confidential internal investigations on ethical matters. They are both a focal point in the development and maintenance of ethical cultures, and part of the strategies that might be put in place in order to mainstream ethics in an enterprise. A low of 15 per cent of enterprises had appointed a specific officer for ethical matters (see Figure 5). Uses made of codes The frequency reported of the number of codes used for resolution of an ethical question and for revision of an organizations policy on any issue were the same, at 30 per cent. In 10 per cent of respondent enterprises the code was used to sanction a director. The greatest frequency reported of the use of codes was in relation to the sanction of employees. The particulars are shown in Table I.

Ethics committee

Support mechanisms

Ethics officer Figure 5. Frequency of some mainstream indicators

0 10 20 30 40 Percentage of respondents

50

The reported frequencies of enterprises which had used warnings and Mainstreaming reprimands were the highest. However, those for discharge and referral for ethics criminal prosecution were substantial. What is worthy of note is that the most frequently reported use of the codes in Australian enterprises is the sanction of employees. This did not mean that other less tangible outcomes were not considered more important by enterprises.

47

Promotion of the existence of a code to the public Enterprises were almost evenly divided on the matter of promoting the existence of their codes to the public 50 per cent did and 45 per cent did not. Most of the promotion was by way of inclusion in the enterprises annual report, which was used by 39 enterprises out of the 51 that reported the public promotion of their code. Only 2 per cent disclosed the existence of their codes in general advertising. Seven per cent used their codes as part of their marketing strategy, Only 3 per cent use their codes as a basis to resolve disputes with customers. Public access to codes The number of enterprises (40 per cent) which made copies of their codes available to the public generally was a similar rate to enterprises which promoted their codes to the public. Fifty-five per cent did not allow public access. The reticence in providing access to the general community is contrary to the pride and proprietary interest stakeholders ought to have in their codes. There was, not unexpectedly, a correlation between those enterprises which promoted the existence of their codes to the public and those which provided wide access to their codes (r = 0.58).

Result Warning Reprimand (recorded on file) Probation Demotion Temporary suspension Discharge Reimbursement to enterprise Referral for criminal prosecution Civil action taken

Frequency enterprises (number) 38 34 6 10 9 29 10 17 3

Percentage frequency (per cent) 38 33 6 10 9 28 10 17 3 Table I. Code use to sanction employees

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Respondents perspectives The responses to the questionnaire by enterprise management provided an insight into the level of commitment and attitudes towards ethics codes and culture in Australian enterprises. In this way they are further indicators of mainstreaming. Ethics education. The responses on the perceived need for education in ethics have already been reported in this article. The purpose of codes. Respondents were given six possible objectives of codes and asked to indicate their order of preference. Overall, the most highly rated objective was to provide guidelines for employees and directors behaviour (61 per cent first preference). The lowest rated was to maximize profits (3 per cent first preference). The rankings of the others were as follows: 2 = to be a socially responsible organization. 3 = to establish a better corporate culture. 4 = to improve management. 5 = to ensure employees comply with local, state and commonwealth laws. The preferences shown by respondents did indicate some outward-looking traits in their perspectives of a codes purpose. In this outward-looking aspect, the respondents were also requested to provide an indication of their view on the purpose of their codes in another question in the survey whose ethical behaviour towards whom was the code intended to improve? Seventy-two per cent of respondents indicated that the code was intended to improve the ethical behaviour of employees towards the organization an expected response. However, 78 per cent also answered employees towards the general public. Fifty per cent said, directors towards the organization and 57 per cent directors towards the general public. The effectiveness of codes. Respondents were given the opportunity to record their opinions on the effectiveness of their codes in resolving ethical issues relating to various groups of stakeholders in the organization. A five-point Likert scale was used from always effective (5) to ineffective (1). The results fell into two groups, with a sharp difference in perceived effectiveness between them. Within each group the ratings were only marginally different. A code was seen as more effective when it applied to people who were closely aligned with the organization and, consequently, more easily subjected to the operations of the code and its sanctions. The results are shown in Table II. Conclusion As reported in our previous article, codes of ethics are a growing feature of business life in Australia. The attitudes of business leaders in enterprises towards the presence of a code in their individual organizations are a crucial element in the way a code is positioned as mainstreamed or not.

Effective percentage frequency Managers Directors Employees Organization General community Suppliers Customers Shareholders 62 59 59 58 42 41 39 31

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Table II. Code effectiveness

The findings of this study include the relative newness of codes in Australian big business, with a median origin date of 1990. This has not provided a long time-scale for enterprises to get it right, with all the supportive structures that a successful code needs. Even the writing of the codes themselves was done by non-trained people, often lawyers. The lack of ethics committees, ethics officers and ethics training for those to whom the codes relate might be taken as a sign that enterprises have rushed to take up the ethics banner without sufficient thought and planning on the elements needed to create a successful ethical culture. The findings show a considerable gap between the expression by management of their ideals and perceptions of an ethical culture on the one hand, and the lack of action reported by them to mainstream ethics in their organization on the other. The establishment of a code is but a first step. It is regrettable that many enterprises did not consider the need for ethics training and proprietary possession of codes as major contributions towards an effective ethical culture. Yet the opportunity remains for the enterprises with codes to build such a culture and to foster and strengthen its growth with ongoing mechanisms of training, regular communication from the ethics committee, an ethics officer, annual reviews and audits. Otherwise the opportunity is squandered to build ethical markets with honourable standards of trust and ease of operations without massive blackletter law and overburdening self-protective strategies, which are less effective, time consuming and costly. In any case, it is not the way people, destined to be a community, ought to live.
References 1. Farrell, B.J. and Cobbin, D.M., Evaluative study of ethical codes and cultures in Australian enterprises, paper presented to the Ethics in Business and the Professions Conference, Massey University, New Zealand, 1993. 2. Robin, D., Giallourakis, M., David, F.R. and Moritz, T.E., A different look at codes of ethics, Business Horizons, Vol. 32 No. 1, 1989, pp. 66-73.

Journal of Management Development 15,1 50

3. Pelfrey, S. and Peacock, E., Ethical codes of conduct are improving, Business Forum, Spring, 1991, pp. 14-8. 4. Schlegelmilch, B.B. and Houston, J.E., Corporate codes of ethics in large UK companies: an empirical investigation of use, content and attitudes, European Journal of Marketing (UK), Vol. 23 No. 6, 1989, pp. 7-24. 5. Singer, P., Practical Ethics, Cambridge University Press, Cambridge, 1979. 6. Beauchamp, T.L. and Bowie, N.E., Ethical Theory and Business, Prentice-Hall, Englewood Cliffs, NJ, 1988. 7. Farrell, B.J. and Cobbin, D.M., Mainstreaming (Ethical Codes and Cultures), University of Technology, Sydney, 1993. 8. Bygrave, C., Corporate ethics, paper presented to the University of Technology, Sydney and Ernst & Young, 29 March 1994. 9. Federick, R. (Ed.), News, Centre for Business Ethics, Bentley College, Waltham, MA, Winter 1993.