Amity Insight Corporate Misconduct

Amity Insight

Corporate misconduct:When business ethics fail and shareholder value is destroyed

Can any businesses be trusted to act ethically these days?

1. OFGEM www.ofgem.gov.uk 2. The Guardian www.guardian.co.uk 16 May 20143. OFGEM www.ofgem.gov.uk 4. ibid5. Reuters www.reuters.com6. BBC www.bbc.co.uk/news

DID YOU KNOW?

“They (Credit Suisse) subverted disclosure requirements, destroyed bank records, and concealed transactions involving undeclared accounts by limiting withdrawal amounts and using offshore credit and debit cards to repatriate funds.”

Eric Holder, US Attorney General

Malfeasance (misfeasance) “Law: a transgression; especially the wrongful exercise of lawful authority.”

Business ethics Business ethics are moral principles that guide how a business behaves. The same principles that rule an individual’s actions also apply to business.

By Neville White Head of SRI Policy & Research, Ecclesiastical Investment Management Limited

At the time of writing, E.ON, the German utility giant and one of the ‘Big Six’ energy suppliers in the UK, has been fined a record £12m1 by OFGEM, the energy regulator, for ‘extensive poor sales practices’ among its staff. In addition to the fine, E.ON estimates a further £3-8m2 in compensation will be owed to customers mis-sold energy products. The regulator pointed to failures in training and that E.ON paid insufficient attention to energy sales rules and failed to audit results. Over the past four years alone OFGEM has imposed nearly £100m3 in fines and redress on UK energy companies for various rule breaches, £39m of which was for mis-selling4. In the USA, on 19 May, the Attorney General announced Credit Suisse had been fined $2.6bn5 for engineering tax evasion schemes stretching back ‘decades’, closely running the risk of losing its US banking licence. The fine reduced second-quarter profits at the bank by $1.8bn6. However, this is dwarfed by the settlement recently agreed by French bank BNP Paribas: $9bn to resolve accusations that it violated US sanctions.

These are just the latest in the seemingly unending series of corporate scandals that have convulsed businesses from banks to automotive and technology, and brought business more intensively into disrepute.

One of our nine Amity pillars for positive investment is business ethics. We decided to focus this Insight on why business ethics have failed so spectacularly over the past five years, what this means for the destruction of shareholder value, and what remedies could be put in place to help restore trust and integrity.

We believe this matters! There is a vital, symbiotic relationship between business and society that provides a ‘licence to operate’. We expect food retailers to offer products safe for consumption 24/7; we expect transport companies to put safety at the heart of what they do. So too with business ethics; we believe it matters that companies that sell, do so with honesty, straightforwardness and integrity.

The past five years have, arguably, witnessed the near breakdown of business probity. In this Insight we look at some key areas that have gone wrong and attempt to monetise, conservatively, just how much shareholder value has been destroyed by corporate malfeasance. We welcome your views.

1 Amity Insight July 2014

This Insight suggests that there has been a widespread breakdown in business ethics and probity, not just in the UK, but across many developed economies. The reasons for this are complex and multiple, and go far beyond banking and financial services. In our view, poor practices and in particular consumer-facing mis-selling have become endemic, if not systemic, where penalties have been inadequate to disincentivise poor behaviour. While restoring trust and probity is paramount, this is still proving elusive against a rising tide of fines, penalties and ongoing enquiries.

What happens when business ethics fail?

DID YOU KNOW?

“Lloyds Bank casually announced last week that it was setting aside another £1.8bn to meet potential claims from customers after knowingly selling them expensive insurance policies they could not need or use. The grand total of provisions it has made is now nearly £10bn for claims from up to 700,000 people. Yet there is little public angst.”

Will Hutton, The Observer, 9 February 2014

“As a matter of fact the ethics of the marketplace are almost by definition universal. Everyone knows about the importance of truth and honesty for a sustainable business.”

Stephen Green, former Chair of HSBC

“Firms must put the interests of customers at the heart of their business if we are to restore trust and confidence in financial services. True change in the culture within the financial services industry will only be achieved when firms and their management accept and deliver on their responsibility to ensure that customers are treated fairly.”

Tracey McDermott, Director of Enforcement and Financial Crime, FCA

Business ethics set the tone

Business ethics promote high standards of business practice based on ethical values. These can cover a multitude of fundamental behaviours and issues including:

n Bribery and corruption

n Facilitation payments

n Whistleblowing

n Marketing, advertising and lobbying

n Tax

n Insider knowledge

n Supplier relationships

n Employee policies such as fairness, equality, diversity and anti-bullying

While it amounts, of course, to the way ‘we do business’, it inevitably goes much further. Integrity failure seldom ‘just happens’. More, it represents a gradual erosion of behaviour over time that develops into an ‘accepted’ unethical culture. The tone of ‘what is permissible’ within a business rests with the Board, the Executive and senior management. Undoubtedly there may be a short-term disadvantage from acting ethically, but the long-term implications from poor ethical behaviour can be catastrophic, not least when corporate behaviour is under public scrutiny as never before.

Amity Insight July 2014 2

We do not believe there is one simple cause for the malaise in business behaviour, more it amounts to a combination of circumstances, enabled by the competitive landscape of the globalised economy. However, in a very real sense, corporate malfeasance goes to the heart of the question ‘What is business for?’ Here we suggest some of the ‘nudges’ that may have contributed to the loss of ethical integrity:

n Globalisation and offshoring; the need to compete on price rather than product or service

n The scale of modern business adds complexity to the point where behaviours cannot be easily managed centrally

n Poor training and inadequate focus on customer service

n Performance pressure, management targets and commission-driven sales – perhaps focused on the wrong metrics

n Focus on acquisition and growth rather than on retention

n Poor or inadequate regulation with little material risk to ‘licence to operate’

n Few disincentives to cut corners when the penalties are generally not material

n Cost cutting and weak back-office support structures

n Poor or inadequate focus on business ethics, corporate culture and ethical behaviour

n Low wages, incentives and poor support may exacerbate poor behaviours

So why are companies behaving so badly?


“This is a serious case. HomeServe is another example of a firm that has acted without proper regard for its customers over a long period of time. HomeServe promises to provide customers with peace of mind when things go wrong. In fact the firm’s culture, controls and remuneration structures meant that staff were focussed on quantity not quality and there were customers that paid the price for that.”

Tracey McDermott, Director of Enforcement and Financial Crime, FCA

Case Study 1 – HomeServe Plc

In February 2014 HomeServe received the single largest individual fine imposed by the FCA (Financial Conduct Authority). The fine of £30.6m7 represented 44% of 2013 operating profit and 8% of group turnover. The FCA found that Homeserve had ‘serious, systemic and long-running failures extending across many key aspects of its business’. Between 2005 and 2011 the FCA noted that the company mis-sold insurance policies, failed to investigate complaints adequately and that the Board was insufficiently engaged with compliance matters. More damningly, the regulator said that management were reluctant to address risks to customers ‘if there was a cost implication involved’.8

7. FCA www.fca.org.uk 13 February 2014 8. ibid9. OFGEM www.ofgem.gov.uk 3 April 2013

Case Study 2 – SSE Plc

In April 2013, UK energy giant SSE received the largest individual OFGEM fine at that time of £10.5m for mis-selling9. The company had also set aside a further £5m for compensation and restitution of claims. For SSE, a FTSE 100 company, the fine represented a miniscule penalty; however it wrought considerable reputational damage.

“OFGEM found failings at all stages of SSE’s sales processes, from the opening lines on the doorstep, in-store or over the phone through to the confirmation process which follows a sale. In particular, SSE consistently failed, over a prolonged period of time, to conduct its sales activities in a way that would provide clear and accurate information to enable customers to make an informed decision.”

Sarah Harrison, OFGEM Senior Partner, Enforcement


Banking: at the heart of what went wrong

Our investigation and research concentrate on the widespread failure of business ethics, which as we will show, goes well beyond the banking sector. However, the banks have been at the heart of what went wrong. They have destroyed more shareholder value, and received more opprobrium than any other comparable sector, including energy, which is perhaps the second most mistrusted business sector at present.

Banking has proved particularly malfeasant with 6,000 bankers sacked or suspended for suspected fraud since the beginning of the financial crisis10. All the major UK banks have incurred significant fines and penalties and have material ongoing liabilities and provisions for corporate misconduct. PPI (Payment Protection Insurance) has dominated UK mis-selling with costs so far exceeding £22bn11; while 34 million PPI policies were sold costing £50bn, nearly half has now been repaid12. PPI has cost the banks double the cost of the 2012 Olympics, and more than the annual UK transport budget (£19bn)13.

By March 2014, the cost of PPI mis-selling had cost Lloyds Banking Group, the most exposed UK bank, £10bn with the final cost upwardly estimated seven times14. Lloyds’ most recent announcement forecasts a further 550,000 claims and complaints. It was fined a further £4.3m in 2013 for delaying PPI compensation to 140,000 customers15. At the end of 2012 it was spending £200m a month on compensation, employing 6,000 staff to administer claims16.

10. The Times 10 February 201411. The Guardian www.guardian.co.uk

3 February 201412. FT www.ft.com UK banks count climbing

cost of PPI mis-selling 3 February 201413. UK Public Spending

www.ukpublicspending.co.uk14. FT www.ft.com 3 February 201415. FSA Press Notice www.fsa.gov.uk

19 February 201316. The Guardian www.guardian.co.uk

4 March 2013

PPI provisions as % of market capitalisation

£12,000

£11,000

£10,000

£9,000

£8,000

£7,000

£6,000

£5,000

£4,000

£3,000

£2,000

£1,000

£0

£0 £20,000 £40,000 £60,000 £80,000 £100,000 £120,000 £140,000

Source: EIM

PP

I Pro

visi

ons

(£m

)

Market Cap (£m)

Barclays

6.7%

Lloyds Banking Group

17.5%

RBS

6.5%Santander

0.8%

HSBC

1.3%

LIBOR (the London Interbank Offered Rate) is the average interest rate estimated by leading banks in London that they would be charged by other banks. LIBOR underpinned $350 trillion in trading, and its manipulation is a violation of law in the UK and USA. An investigation by the US Department of Justice found ‘significant fraud and collusion’ connected to rate submissions, although one trader alleged that ‘rate-fixing’ had been going on since 1991. Barclays became the bank most closely associated with LIBOR rigging, and was fined $360m in the USA, and £60m in the UK17. The scandal led to the resignations of both the company Chairman and its Chief

Executive. But Barclays was not alone; Dutch mutual Rabobank was fined $1bn by US, UK and Dutch regulators, and Swiss bank UBS was fined $1.5bn18. Six banks have been named by the European Commission (EC) for operating a LIBOR-linked cartel, leading to fines of $391m for Royal Bank of Scotland and $80m for JP Morgan19.

Total LIBOR-related fines and penalties now exceed $5.8bn, or 15% of 2014 forecast pre-tax profits for the six European banks so far fined20. The final cost is unknown, as significantly, several banks have still to settle.

LIBOR: when the unthinkable happened

Money laundering and sanctions busting

Global banks face serious risks from perceived or alleged ‘sanctions busting’ in failing to follow strict US sanctions rules with certain regimes. Both HSBC and emerging markets bank, Standard Chartered, incurred sizeable penalties and damaged reputations from failed compliance. HSBC was fined $1.9bn in December 2012 as settlement for alleged money laundering21. The US Senate criticised HSBC for its inadequate controls and exposure to Mexican drug-linked money laundering. The New York regulator accused Standard Chartered of $250bn of ‘illegal’ transactions with Iran.

The bank demonstrated that 99.9% of transactions complied with the law, and only a small minority were questionable. The bank agreed to settle a $340m penalty even though its own assessment of infringement amounted to no more than $14m22. Money laundering and sanctions busting charges highlight the critical importance of effective compliance processes, and the economic and reputational consequences of getting it wrong.

Total US money laundering fines handed down between 2009 and 2013 are put at $4.8bn.

17. Investment Week www.investmentweek.co.uk 27 June 201218. FT www.ft.com 22 October 201319. European Commission www.europa.eu 4 December 201320. PIRC Alerts 8 January 201421. Forbes www.forbes.com 8 August 2013 22. FT www.ft.com 15 August 2012


Money laundering settlements as % of market capitalisation

$800

$700

$600

$500

$400

$300

$200

$100

$0

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000

Source: EIM

Mon

ey L

aund

erin

g S

ettle

men

ts ($

m)

Market Cap ($m)

RBS

1.6%

Standard Chartered

0.7%

Credit Suisse

1.1%

ING

1.1%

Barclays

0.5%

Lloyds Banking Group

0.6%


US banks continue to pay heavily for misleading mortgage lenders

The major US banks have been caught in the headwind of multiple scandals. Some examples include JP Morgan Chase which settled a fine of $5.1bn in 2013 in respect of bad mortgages, and made $23bn of future provisions23. Eleven banks including Bank of America, Wells Fargo and Citigroup made settlements of $8.8bn, while Bank of America made a further settlement of nearly $10bn that it misled US mortgage lenders24.

23. BBC www.bbc.co.uk/news 25 October 201324. The Guardian www.guardian.co.uk 7 January 2013

Settlements with US regulators in 2013 alone amounted to $17bn

Re-engineering banking standards

In the UK, the total bill for corporate malfeasance among the ‘big five’ banks stands at £25.4bn. The need to re-engineer what responsibility in the banking sector looks like is pressing and urgent. To that end, the main UK banks agreed to establish a Banking Standards Review, which emerged out of the Parliamentary Commission on Banking Standards. Headed by Sir Richard Lambert, this has been positioned as the ‘last chance saloon’ for self-regulation. A new banking standards oversight body, supported and funded by the largest six banks plus the Nationwide Building Society, will be created and self-report on banking behaviour and competence. The body will not have powers to verify the reports or be able to impose sanctions, so its lasting effectiveness at engineering change may be muted.

“This new body... will set out what good practice looks like, and encourage, chivvy, nudge, [and] bully banks to take it forward.”

Sir Richard Lambert

Litigation costs as % of market capitalisation

$45,000

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0

$100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250,000

Source: EIM

Litig

atio

n C

osts

($m

)

Market Cap ($m)

Citygroup

Pending

22.6%

Citygroup

Settlements

3.7%

Bank of America

Pending

15.0%

Bank of America

Settlements

8.2%

Bank of AmericaPending

8.1%

JP Morgan Chase

Settlements11.7%

Corporate malpractice: sector-wide contagion

Arguably, the banking sector is just the most visible and most contaminated when it comes to the widespread malaise in business ethics, but it is far from unique. We strive to show in this Insight that corporate misconduct is a widespread contagion that has affected many disparate industries and sectors.

GSK, the world’s second largest pharmaceutical company paid a settlement of $3bn to cover criminal and civil penalties in the USA relating to safety and marketing failures25. The Deputy US Attorney General described the penalty as ‘unprecedented’ as GSK admitted promoting antidepressants for children and adolescents for whom the drugs were not intended. While the fine led to significant soul-searching within

GSK and root & branch reform of sales & marketing practices, the company has since been hit with a wave of further allegations concerning sales & marketing practices in China, Poland, Jordan and Iraq. Pharmaceuticals have proved febrile for fines handed down with significant penalties paid by leading players including Abbott, Pfizer, J&J, Merck and Sanofi. The graph below shows fines paid relative to market capitalisation.

We estimate that approximately 15% of pharmaceutical revenues have been destroyed since 2009 through corporate misconduct. The four biggest penalties represent nearly 30% revenue destruction among the four companies concerned below.

GlaxoSmithKline

Fine of $3,000m

Fine of $2,300m

Fine of $2,200m

Fine of $1,500m

Johnson & Johnson

Abbott Labs

Pfizer

37% of revenue

23% of revenue

32% of revenue

27% of revenue


25. BBC www.bbc.co.uk/news 2 July 2012

Other industries are guilty too

Other industrial sectors affected over time by consistent wrongdoing include technology and automotive. Samsung, Philips, LG and Panasonic, for example, were fined €1.4bn by the European Commission for cartel price fixing, while Samsung incurred a penalty of $1bn for patent infringement26. Microsoft, the US giant, has not escaped; it was fined $732m and €1.6bn for anti-competitive practices27. Engineering companies supplying the lucrative automotive industry have been hit with a wave of anti-competitive penalties. SKF, the world’s largest ball bearing maker, and Schaeffler AG were fined €1.3bn for price fixing28. Five companies were named as ‘colluding to co-ordinate pricing strategy over seven years’29. A global probe into price fixing in automotive supply caught 26 companies resulting in $2bn of fines, and resulted in Japanese tyre company Bridgestone reporting a ‘special loss’ of $7.4bn in 201330.

26. BBC www.bbc.co.uk/news 25 August 201227. ibid BBC 6 March 201328. LexisNexis www.law360.com 19 March 201429. ibid30. BBC www.bbc.co.uk 13 February 2014


Fines levied as % of market capitalisation

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0

$0 $25,000 $50,000 $75,000 $100,000 $125,000 $150,000 $175,000 $200,000 $225,000

Fine

s Le

vied

($m

)

Market Cap ($m)

Source: EIM

Schaeffler 3.3%

SKF 3.7%

Toyota 0.6%

Mitsubishi 0.8%

Hitachi 0.6%

Bridgestone 1.4%

GM 0.1%


“Banks on both sides of the Atlantic are being hit by huge litigation costs, with some investors taken by surprise by the high legal provisions announced recently by [the likes of] JP Morgan and Deutsche Bank.”

Rachel Hopkinson, Head of Practical Law Dispute Resolution, Thomson Reuters

31. The Guardian www.guardian.co.uk 12 March 201432. The Independent www.independent.co.uk 10 January 201433. Daily Record www.dailyrecord.co.uk 6 December 201234. FT www.ft.com 12 February 201335. ibid 3 February 201436. ibid37. ibid38. ibid 5 February 2014

Penalties, compensation and legal provisions

Of the total value destruction caused by corporate scandal, the penalties handed down by regulators are just the most visible tip of the iceberg. Cases normally comprise the fine, compensation to consumers or other third parties, and provision for future liabilities. It is this last category that is the most open-ended and unnerving for the market to price. Lloyds Banking Group has upwardly increased its projected liability for PPI claims seven times! Legal provisions are at an all-time high in the UK, standing at £24.6bn for the FTSE 100 – 12% higher than in 201235. Legal provisions, while a ‘best guess’ at future claims, also detract from profitability, investment and potential shareholder returns.

The increase has been driven by a sharp jump in banking and financial provisions which rose by 44% to £9bn, or 37% of the total. The big four UK banks (HSBC, Barclays, Lloyds and RBS) set aside £2.5bn of all banking sector liabilities in 201336. As if to emphasise just how open-ended legal provision is in reducing shareholder return, the largest single sector for liability provision is oil & gas at 40% of the total, where BP accounts for over half (58%) of the near £10bn total37. BP has already spent $19.3bn of its $20bn compensation fund for the Deepwater Horizon explosion in 2010, with a total bill so far of over $42bn38. The final costs are still uncertain four years on, and BP’s share price has not returned to pre-Deepwater levels. BP’s total costs equate to 68% of the UK education budget and 128% of the defence budget, and represent a huge ongoing destruction of value for shareholders.

In the UK, the support services sector responsible for managing many outsourced services formerly provided by the State has been hit with a plethora of serious failures and the removal of at least one licence to operate. To date, G4S and Serco have been fined £180m for electronic tagging charging errors31, while a Serious Fraud Office enquiry continues to look into G4S and Serco practices. Other penalties include them both facing a £4m fine for sub-standard contract provision associated with secure accommodation for asylum seekers32, a £350,000 fine (G4S) for poor service delivery and failing to meet contract demands33, and settling $112.9m for Olympics failures34. The UK government has appointed a ‘minder’ to the Board of G4S and the company was temporarily suspended from government contract tendering.

The staggering amount of money lost to misconduct by corporates

For the amount of money that key corporate businesses have wasted over the past five years in the UK and USA – about $150bn – you could afford to buy any of the companies featured on the right (which are listed in the world’s top 100 largest companies by revenue).

Amity Insight July 2014 10*1 billion = 1,000 million

$150bn*

With this amount, you could...

The amount of money wasted through

corporate misconduct:

Launch a space shuttle 333 times

($450m each)

Buy the entire Boeing company and fleet

($100,815bn)

Buy all of Siemens’

electrification, automation

and digitalisation ($114,384bn)

Buy global software mammoth,

Intel Corporation ($140,230bn)

Train 1.76 million guide dogs

($85,227 each)

Pay 4,724 neurosurgeons’

salaries for 60 years ($529,176 average wage)

Buy McDonald’s ($100,777bn)

Buy consumer goods giant,

Unilever ($122,376bn)

Build 120 Wembley Stadiums ($1.25 bn)

Buy 1,802 of the world’s most

expensive diamonds (sold for $83.2m)

Celebrate Kate and William’s Royal Wedding 4,398 times ($34.1m)

The scale of corporate misbehaviour and the failure of business probity have been immense. We have concentrated on looking at the evidence over a five-year period across developed markets in Europe and the USA. We have estimated the full cost of corporate malfeasance to be in the range of $150-250bn over the past five years39. This represents approximately 15% of global dividends of $1.03trn in 201340. At the lower end it is an amount equivalent to the UK education budget or 12% of UK government spending; towards the upper end ($200bn) it exceeds UK pension spend and is almost

25% of annual UK government spending41. The cost of corporate misconduct is vast, resulting in reduced profitability, limiting the ability to invest, and eroding total shareholder returns. But it is also an issue for society.

Material shareholder value destruction

Business and the breakdown of trust

Wrongdoing is cited as the main reason for the breakdown of trust (27%), whilst globally, trust in financial services is lower than trust in business overall (46%). In the UK, trust in financial services stands at 35%, but is as low as 29% in the wider EU; banks are rated ‘poor’ or ‘very poor’ by 59% of those surveyed43.

59% of survey responders put the causes of scandals down to behaviour and within business control; 23% driven by corporate culture, 25% by corruption and 11% through

conflicts of interest. Only 20% claimed regulation failure or banks being too large (13%) as causes for corporate malfeasance44. These findings strongly suggest that for many, business ethics failings are something business needs to fix from within!

Whether business is trusted and supported matters. As responsible investors, we believe business has a responsibility to operate to the highest standards of integrity and probity,

and this has been lacking in some sectors. Our belief that this is important is strongly supported by survey evidence that trust in business is declining42.

39. EIM40. Henderson Global Dividend Index www.henderson.com

24 February 2014 41. UK Public Spending www.ukpublicspending.co.uk42. Edelman Trust Barometer 2013 Global Study www.edelman.com43. ibid44. ibid


Trust in financial services industry sectors by region

BRIC APACNorth America Latin America EU

5. Financial Advisory

1 2 3 4 5

80

70

60

50

40

30

20

10

0

44

55

60 61

29

44

5855

69

63

69

60

28

3839

45 45

53 53

605757

55

31

27

1. Financial Services 2. Banks 3. Credit Cards 4. Insurance

“We estimate the full cost of corporate malfeasance to be in the range of $150-250bn over the past five years.”

Ecclesiastical research

Our contention is that the scale of corporate misconduct represents an acute crisis of trust. Collectively, it also represents a catastrophic destruction of actual and potential value. The FCA handed down fines totalling £472m alone in 201345. This does not include claims, compensation or provision for losses incurred. We have put the total bill for malfeasance at a conservative $150bn over the past five years. We also contend the market has been largely ambivalent, with malfeasance effectively ‘priced in’, except in a few isolated open-ended cases, such as the BP Deepwater

Horizon accident. Solutions have so far proved elusive, although there is some evidence that the worst excesses of untrammelled risk taking are now abating. We contend that better and more concentrated focus on ethics together with tougher penalties may be effective. Culture, behaviour and reward need to be more closely aligned where a culture of integrity is driven by the Board. Business urgently needs a ‘no prisoners’ approach to wrongdoing, and renewed efforts with training. Some remedies for ‘rewiring’ are set out below:

Remedies: how to rewire business

Engagement – Treat customers wellRetention should be a key performance driver rather than a sole focus on new customers.

Customers not seen as a ‘cash cow’ for ancillary products and services which are irrelevant.

Communicate well, frequently, directly and via informed, well trained, customer-centric employees.

Integrity – Well-articulated and embedded ethical business practicesEmployees know what is expected and what is not acceptable.

Action taken swiftly to address issues and provide redress.

Transparent and open business practices; clearly stated Codes of Ethics that are audited and reported on.

Clear disciplinary and actionable process for wrongdoing – a consequences regime.

Products and services – High-quality products and servicesCommission-driven sales culture is strictly controlled.

Products and services correlate to customer needs and requirements.

Leadership – Corporate leadership exemplifies the ethical culture of the business; driven from the topEthics training forms part of corporate-wide leadership throughout the management chain.

45. FCA www.fca.org.uk


In its biennial briefing, the Institute of Business Ethics (IBE) identifies major ethical concerns and lapses recorded as part of its media monitoring. For the two years 2012-13, it identified over 500 instances involving UK companies where there had been ethical failings. Of the 19 sectors these stories covered, the financial services industry dominated, accounting for 37% of all business ethics news, with 404 separate allegations of misconduct46.

In this Insight we have asserted that corporate malfeasance has become endemic – if not systemic – across UK plc, representing a concentrated failure in business ethics and probity. While the reasons for this may be complex, it nevertheless represents a collective business failure. In his notable article in The Observer on 9 February 2014, the industry commentator, Will Hutton, in speaking about Lloyds Bank and PPI rightly draws attention to their “loot[ing]… customers with policies cynically designed to offer nothing of value, nothing less than organised theft”47. While there is evidence that temperance is returning to sales & marketing practices, each day presents new allegations of corporate misdemeanours, fines and liabilities that represent a very significant destruction of shareholder value. While regulatory penalties and fines are at an all-time high, these (at least in the UK) have seldom been material enough to deter unethical behaviour. In many cases, fines handed down have not moved the share price or impacted business performance. If the market prices in malfeasance, it is tantamount to ‘business as usual’; we therefore argue that tools for deterring or disincentivising poor practice have been typically absent or weak.

This affects us all, not just shareholders who, we argue, have seen at least $150bn of value destroyed through behaviour failures in the past five years. It matters to society that business is trusted, and earns its ‘licence to operate’. As I write, three banks – JP Morgan, HSBC and Credit Agricole – have been accused by the European Commission of collusion in the key Euribor rate, a measure used to set trillions of dollars of financial contracts within the Eurozone48.

We set out in this Insight some remedies for rewiring business along ethical lines; business management schools need to focus on the ‘how’ of doing business in an ethical and sustainable way and management qualification regimes need to lead on behavioural ethics; and regulatory strategies need refreshment that impose penalties that are meaningful and aimed to deter.

As responsible investors, we look for companies that operate responsibly and have high standards of corporate governance and business ethics. Where these fail, we will, on behalf of clients, continue to engage with rigour for improvement and change. We will also continue to vote our shares opposing remuneration policies that reward undue risk taking or reward excessively for poor performance.

Neville White, Head of SRI Policy & Research

View from the top


46. IBE Ethical Concerns & Lapses 2012-2013 www.ibe.org.uk47. Will Hutton ‘The public sector isn’t perfect but at least it doesn’t

fleece us’ The Observer 9 February 201448. BBC www.bbc.co.uk/news 20 May 2014

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Why Ecclesiastical?


Ecclesiastical Investment Management Limited (EIM) Reg. No. 2519319. This company is registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, UK. EIM is authorised and regulated by the Financial Conduct Authority and is a member of the Financial Ombudsman Service and the Investment Management Association.

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0845 604 4056 020 7528 7365 [email protected] www.ecclesiastical.com/ifa

Sue RoundDirector of Investments and Amity UK Fund ManagerSue Round is the UK’s longest-serving retail SRI Fund Manager. With the benefit of extensive experience, Sue has made the Amity UK Fund one of the leaders in the increasingly important socially responsible investment sector.

Meet the TeamAndrew Jackson UK Equity Growth Fund ManagerAndrew joined Ecclesiastical in 2003 and manages the UK Equity Growth Fund. His wealth of experience includes roles at Canada Life and Lloyds Investment Managers. Andrew is AAA-rated by Citywire.

Please note that past performance is not a reliable indicator of future results and that the value of investments can fall as well as rise and you may get back less than the amount invested.Source & Copyright: CITYWIRE, for the three years to 31 May 2014 based on risk-adjusted performance.

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Ketan Patel, CFASenior Socially Responsible Investment AnalystKetan began his career at JP Morgan in 1998. He moved to Clerical Medical (now Insight Investment) as an Equity Analyst. Ketan has worked for Ecclesiastical for ten years and is a CFA Charterholder.

Chris Hiorns, CFA Amity European Fund Manager and co-manager of the Amity Sterling Bond FundChris started working for Ecclesiastical in 1996 and has been a CFA Charterholder since 2004.

Neville White Head of SRI Policy & ResearchBefore joining Ecclesiastical in 2010, Neville was responsible for developing and managing global corporate governance proxy voting with CCLA Investment Management. Prior to this, he worked for the Church Commissioners, latterly as Secretary to the Church of England’s Ethical Investment Advisory Group.

Robin HepworthChief Investment Officer, Amity International Fund Manager and co-manager of the Amity Sterling Bond FundRobin has been with Ecclesiastical for 24 years. He is recognised as one of Citywire’s top 10 Fund Managers of the past decade and is also a Trustnet Alpha Manager, placing him in the top 10% of all UK unit trust and OEIC managers.

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