"We don't do ethics"
Hector exhumes an ethical interest

Integrity is back in fashion, finds ROGER STEARE. Suddenly, it’s high on the regulators’ agenda.

I’ve always liked Hector Sants. We’ve had a regular dialogue over the years about the importance of ethics in financial services. So it came as no surprise to me that, in his last conference speech as CEO of the FSA, he addressed the thorny question: “Do regulators have a role to play in judging culture and ethics?”

Before answering this question, he revealed that, when he arrived at the FSA in 2004, he was told by “senior management” that “we don’t do ethics.” This came as no surprise to me, not least because, even before Hector had arrived, the FSA had buried a paper that I and a colleague had been commissioned to write on “What is integrity?”.

Now, those of you who are familiar with the FSA’s high-level principles, will know that Principle 1 states: “A firm must conduct its business with integrity”. Yet, the FSA has never defined what the word “integrity” means. You won’t find it in the FSA Handbook Glossary and you won’t find any reference to our paper. We did indeed define integrity, but the paper was never published. Perhaps this is why the FSA has never attempted an enforcement action on a breach of Principle 1. I think even a newly qualified solicitor would have no problem in mounting a robust defence!

Returning to Hector’s speech, he did indeed assert quite forcefully that regulators do have a role to play in judging culture and ethics, referring directly to tools and research that have already been developed:

“There are academic studies in this area, such as the work by Roger Steare, which provide a useful framework for regulators to judge culture. It should also be remembered that culture is a function of individual behaviour. Behaviours can be assessed through three elements: the character of the individual; the judgements of the individual; and the outcomes of their decisions.”

Hector’s call for judgement on culture and ethics is also strongly supported in the Bribery Act 2010. All UK companies and all foreign companies operating in the UK must now ensure that “adequate procedures” are in place to mitigate the risk of bribery, corruption and fraud.

The Serious Fraud Office (SFO) has strongly indicated that such procedures must be evidenced in the observable culture and ethics of the firm. Tick-box compliance training will no longer be regarded as adequate. The penalties for any company prosecuted under the Act and failing to ensure “adequate procedures” are unlimited fines and a jail term of up to 10 years for directors.

So there you have it. Hector Sants will soon be a Deputy Governor at the Bank of England and has made clear his views on culture and ethics. The SFO has also made it clear that tick-box training will no longer provide directors and senior executives with the “Get-out-of-jail” card such an approach represents.

We do “do ethics” now...

Hector’s speech can be downloaded at: http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2010/0617_hs.shtml
The buried paper "Integrity in Practice" can be exhumed by downloading it from: www.ethicability.org/mediashowcase/

ROGER STEARE is a Corporate Philosopher and Professor of Organisational Ethics at Cass Business School, London.
He can be contacted at: roger.steare@ethicability.org
You can try his integrity test at www.ethicability.org
Watch Roger Steare's new video on YouTube:
www.youtube.com/watch?v=unufsY1HZh8

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