Transcript of Elizabeth Proust's address to the Ethics in Business Conference

13/11/2018
Read the full address of Elizabeth Proust AO, chairman of the Australian Institute of Company Directors, to the Ethics in Business Conference at Melbourne Business School.
 
I would like to begin by acknowledging the traditional custodians of the land on which we gather today, the Wurundjeri people, and pay my respects to their Elders, both past and present.

Over today's conference we will hear from a number of esteemed speakers about contemporary issues of ethics and trust. Over the course of this year these issues, particularly in the business community, have come to the fore. And we cannot begin to discuss ethics in business, without acknowledging that we are experiencing a period of extremely low trust in our society. 

The 2018 Edelman Trust survey found that trust in institutions of all kinds – business, government, the media and not-for-profits – had reached record lows in Australia. Together with, interestingly, Singapore, Australia was one of just two nations to register consecutive falls in trust across those four key institutions.

Worryingly, Australian institutions are now among the world’s least trusted, ranking only a few points higher than those in Russia. And the Australian public does not trust business to do the right thing – at 45 per cent, Australia’s trust in business is significantly below the global average. 

The Australian Election Study series, which tracks trends in Australian political opinion and behaviour over an extended period of time, has also found that there has been a significant rise between 1987 and 2016 in the belief that big business has too much power, as well as a worrying increase in people who say they are not satisfied with democracy. 

Research from the Museum of Australian Democracy and University of Canberra released in September found that distrust and disillusionment surpassed 80 per cent among some communities. While focused on faith in democracy, the study found that many were deeply distrustful not only of politicians, but of almost every major institution and authority figure included in the survey – with the exception of their local GP. 

These figures are alarming. They show that trust in our society is in a dire state. We won’t begin to ameliorate this trend until we both accept that there is a problem, and take action – both individually and collectively – towards rebuilding trust through ethical leadership.  

Now I firmly believe that the vast majority of those who sit at the apex of our organisations conduct themselves as individuals in an ethical manner, however ethical leadership is more complex than any one individual acting ethically.

In small groups, the words and actions of a leader can be conveyed face-to-face, the desired impact felt and measured directly. However, as organisations become larger and more complex, the challenge for leaders grows exponentially. They must reach and affect larger, more diverse audiences over longer periods of time to achieve their desired influence. 

The ability to achieve this goes beyond the capacities of any one individual. It takes more than solely modelling and communicating the standards of ethical behaviour you want to see. It requires those in the boardroom, and in senior management, to work together, to create and maintain systems, processes and cultures that support ethical behaviour throughout what are often complex, sprawling and diverse organisations. 

What is clear is from the survey results I covered earlier is that somewhere along the way the ethical behaviour of the organisations we lead – their systems, processes and cultures – has been judged to be lacking by the community. 

Ethical leadership needs to be strengthened in order to rebuild trust and confidence in our institutions – not just in one sector or industry – but across many. This has been evidenced by the fact that when I stand here today and refer to a royal commission, I have to specify whether I mean the one into Institutional Responses into Child Sexual Abuse which recently came to a close, the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which has recently released its Interim Report, or the Royal Commission into the Aged Care sector which has just had terms of reference released. 

So where do we begin? In my view, a focus on culture is crucial. Culture is at the heart of ethical decision-making – 'how we do things around here' is really just a reflection of what we have decided is the right thing to do, or the wrong thing to do. 

Corporate failures or activities that lose public trust or result in royal commissions are not the result – usually – of people setting out to do villainous deeds. They are the result of people following the way things are done and what is and isn't considered acceptable. 

A good culture can be a competitive advantage. Conversely, poor cultures damage employee and stakeholder outcomes, and when they result in visible failures – be they regulatory or ethical – they erode trust.

I don't want to suggest that ethical leadership, or a strong culture, can prevent all instances of wrongdoing. Indeed research suggests that while 20 per cent of people in an organisation will almost always do the right thing, another 20 per cent will engage in unethical or illegal behaviour where the opportunity exists or the rewards are great enough. For that latter 20 per cent, it will always be a challenge in regards to detecting and preventing wrongdoing. 

But we need to look at the remaining 60 per cent – these are the ones who decide on how to act based on their work environment: elements such as rewards systems, managerial or peer pressure, culture, or a belief that their actions are in the firm's interests. The presence of an ethical culture, where core values have meaning and are reflected in decisions, practices and processes – those practices of leadership will have a powerful impact on those people. Creating the right culture – and maintaining it – can lessen the instances of wrongdoing, increase chances that such conduct is reported, and then managed in a way that rebuilds trust. 

There is no doubt that the board's role in governing culture is complex. After all, culture is about people and their behaviours. But as we do on so many issues, boards must embrace this complexity in setting expectations and supporting the outcomes that are important for their organisations. 

So in regards to culture, modelling the culture we want to see and putting in place the frameworks to support it, not undermine it, there are clear steps that leaders can take towards creating ethical cultures that support ethical behaviours. 

However, I also do not want to suggest that a complete absence of misconduct is a precondition of rebuilding trust. Firstly, it is irrational to suggest that all wrongdoing, of any kind, intentional or unintentional, can be prevented indefinitely. Rather there is much to be said for the accountability and transparency leaders and organisations show when the wrong thing has been done. 

Accountability and transparency sound like simple concepts. Yet when stakeholders or politicians or commentators have asked who is being held to account for failures – whether it be in corporate Australia or in not-for-profit institutions – the answer has too often sounded hollow. 

This perceived lack of accountability and transparency in instances of financial or ethical wrongdoing is undoubtedly a driver of the trust deficit between Australians and their institutions. 

Without greater accountability and transparency on a consistent and ongoing basis, there is no pathway towards regaining community trust. 

For example, there have been unintended consequences of remuneration frameworks and structures that it has been argued has driven poor behaviour and prioritised short term profits over people. Where those frameworks have been found to be flawed, ethical leaders will need to demonstrate accountability and transparency – explaining why mistakes were made and what will change. 

And when we think about organisational culture, through a lens of transparency and accountability, a clear area for improvement is creating a culture of disclosure. Too often good news miraculously makes it to the boardroom at three times the speed as bad news. It's up to leaders to make clear that this isn’t acceptable. It's up to leaders to act transparently and accountably when the bad news does arrive.  

Creating a culture of disclosure, where mistakes are acknowledged, and where wrongdoing is detected and addressed, or ideally prevented, is easier said than done. It requires senior management and boards to share a genuine commitment to transparency and disclosure. 

That is one of the reasons why the Australian Institute of Company Directors strongly supports the introduction of more robust whistleblower protections as a good governance step. The current legislative environment fails to encourage a culture of disclosure or adequately protect those bringing concerns to light. It expects a whistleblower to be an expert in the Corporations Act, it doesn't cover former employees, and it places more value on an individual's motives than the information they provide. Such a framework provides inadequate encouragement for companies to implement their own strong internal practices and woeful protections for those who call out wrongdoing, often risking their livelihood as a result. 

Indeed the Australian Council of Superannuation Investors released findings earlier this year which found that only 55 per cent of ASX 200 companies had policies allowing whistleblowers to remain anonymous, and 71 of our largest companies did not even have statements making clear that retaliation against whistleblowers was unacceptable.
 
It is in the interest of all organisations to have a whistleblowing framework that protects and encourages disclosures, within reason, and which incentivises internal disclosures. 

These are all issues which should be occupying the minds of those in leadership positions now. And we need to tackle them now so that we are in a position to approach oncoming challenges of the changing nature of work and the workforce in an ethical manner. 

These challenges are many and varied. For example the next session this morning will look at the ethical challenges posed by the interface of health information, technology and privacy. But there are many challenges the fourth industrial revolution will bring for businesses. 

Take for example the ethical issues arising in the development of facial recognition technology. Research by M.I.T. PhD candidate Joy Buolamwini, published earlier this year, looked at three leading pieces of facial recognition software from Microsoft, IBM and China’s Megvii. 

So how good are these companies' AI software at identifying a person’s gender from a photograph? Well, the error rate is less than 1 per cent, if you're a white man. 

For a woman with light skin, the error rate was 7 per cent. When taking a sample of darker skinned males, gender was misidentified in 12 per cent of cases. 

And if you’re a dark skinned woman? Facial recognition technology will misidentify your gender 35 per cent of the time. Over a third, compared to just 1 per cent for a Caucasian man. 

Considering the practical applications of facial recognition technology – for example law enforcement, identity checks to access accounts, and smart advertising, amongst others – the ethical blindspots in these pieces of software are not just oddities or quirks, they could be truly harmful. 

This is just one small example designed to illustrate how the decision making of boards and governance leaders can have socially undesirable outcomes if we don’t factor in ethics and inclusiveness into business decision making. 

Put simply, technology is developing at what feels like light speed, but it does not have its own in-built ethics. It has the ethics and the outcomes that our decisions cause it to have. And as it stands, we're not doing a very good job of building ethical technology. 

We need to ensure our boards and leadership teams value ethics in the decision making, are diverse enough to challenge each other's assumptions, and are capable of challenging their own decision-making processes. 

Too often we think of ethical challenges framed in terms of risk and reputation. That is to say, asking how we would feel about it being on the front page of a Fairfax newspaper, rather than asking why are we making this decision, how are we making this decision, and in whose interests are we making this decision?

How we make decisions, why we make decisions and who is making the decisions matters. And asking ourselves those questions and answering honestly is important, because otherwise we can't hope to challenge or change the underlying assumptions that have guided our collective decision making to this point. 

In this sense, ethical leadership in a rapidly changing world requires a willingness to change our governance mindset. We need to get ahead of community expectations, not be playing catch up to them. We need to reconsider how we make decisions and in whose interests we make them. 

Without that, the trust deficit we face will only widen. 

The danger in that scenario is that distrust drives demand for regulation, without much regard for how that regulation is designed. 

Coming demographic and technological changes will, by themselves, drive new forms of regulation. The chances of that regulation being holistic and well designed, as opposed to interventionist and knee-jerk, will be low if we remain in a low-trust environment. 

Aggrieved and sceptical communities will question the "social licence" of organisations that lose or exploit their trust. This creates an environment where politicians feel compelled to act, with potentially significant financial, legal and compliance costs.

It will require leaders to think actively about ethical decision-making and their role in facilitating ethical behaviour throughout their organisations – not just at the top level. It will mean we need to listen to what our employees, our customers, and our stakeholders are saying. Importantly, it will require diversity around the board table and the ability to ask whose voices are not being brought to the debate. 

We have an obligation to remain conscious that the decisions we make as leaders have a real impact on the lives of individuals and communities, and the faith they place in our institutions. 

There must be a shift in our governance lens, and a new way of viewing the social contract. 

We need to think beyond our own boardrooms and further afield than our own immediate stakeholders. To stop asking, will this risk our reputation? And instead ask, are our actions fair and responsible? And will the community agree with our assessment?

Of course there will be times when the board decision and the community assessment of that decision diverge, but it shouldn't occur as often as perhaps it has over recent years. 

And the narrower the gap is between expectation and actuality, the behaviour expected of our organisations and that which we exhibit, the more likely we are to regain the trust that has been lost. 

The Ethics in Business Conference was held at Melbourne Business School on November 13. Guests and speakers included Ms Proust, Professor Cordelia Fine and Professor Paul Kofman, Dean of the Faculty of Business and Economics at the University of Melbourne.