The subject of ethics is very frequently linked and limited to moral principles. While morality is a crucial part of ethics, on a corporate level, there are several other factors and risks linked to it from a shareholder value perspective. As the business environment is getting more complicated i.e. extended enterprises that encompass more third parties, more interdependence among business partners, additional regulation and risk management requirements, the potential for misconduct or violations is increasing. Additionally, the workforce is rapidly skewing toward Millennials and Generation Z. That shift is going to alter how companies think about recruitment, training, and compensation, among many other aspects. One more change is likely to come about: abrupt demand for experienced and knowledgeable ethics, compliance and risk professionals. 

Moreover, the COVID-19 pandemic has also brought with it a lot of significant changes such as mergers, acquisitions, downsizing, restructuring, digital transformation, more health regulations, amendment of policies and procedures, as well as many other transformations. According to the global business ethics survey, organizations implementing big changes are two times as likely to witness misconduct. So, what is the real reason behind this, and how can we deal with the consequences? Why is business ethics a big part of our future? What is the role of Chief Ethics Officers and why are they the “future CEOS”? What are the real risks and costs of non-compliance?

In light of the above, ideas group (ig) hosted a webinar on September 15th to tackle the issue of business ethics. Our guest speakers, Mrs. Noura Alturki, Vice President of Nesma Holding Company and Dr. Serge Younes, Senior Vice President and Head of Sustainability at Investindustrial delved into the topic, and shared with us their experiences, lessons learned, and advice on dealing with potential ethical dilemmas.

The following is a summary of their answers to a series of ethics related questions. If you prefer to watch a recording of our webinar, you can access it on this link.

Host: Noura, you are very passionate about transforming the people of Saudi Arabia and making a positive change in your country. As a company, Nesma has pushed ethics a lot on the board of directors in order to implement ethical practices and make sure the lines are not blurred. So tell us, why is this a topic of interest to you personally?

Noura: The topic of ethics has been a passion of mine because I’m passionate about business and its ability to do social good. When Nesma was established forty years ago by my father, his goal was to promote social and economic development; to create jobs and to have an impact. And that is very much aligned with ethics. Ethics is the way you do business; the way you speak with your customers and employees, and the way you conduct yourself. Ethics is always aligned with business and if you compromise on ethics, it means you’re compromising on the quality of your product and that will soon show. If you compromise on ethics, you will lose employees. In the last four years, the ecosystem for our company, which is primarily Saudi Arabia, has been emphasizing anti-corruption. Very specific topics have been addressed as well, such as anti-harassment. If you don’t align yourself with ethical practices today in Saudi Arabia, it actually impacts your business growth and you will be pushed out of the market. If you think about it, if the ecosystem is corrupt, the company is in a situation where even if it has solid values, if the environment around it doesn’t enable that, then it’s basically forcing the company to shrink. Because you can’t grow unless you participate in these practices. Whereas, if the other case happens, which is what we are experiencing today in a very vivid way, it’s actually our customers who are requiring this of us in order to do business with them in the first place. And it definitely helps to be passionate about ethics, because otherwise it would just be regulatory compliance.

Host: Serge, you worked in consulting for a very long time, and now you’re on the client’s side, you’re the Senior VP of one of the largest private equity companies in Europe. Tell us, why is ethics important to you as an investor?

Serge: I think it all comes to the foundation of the firm where I work. It’s a company that was originally an industrial conglomerate since the mid-nineteenth century. And a southern European culture is very similar to a Middle Eastern culture. There is this view that we are here for the community; we are here for the future and to provide employment. One of our mottos is “building better companies”. We view our engagement with prospective investments as a way of helping those companies through their continuity. Typically they are founder-led and they are in their second or third generation and they don’t have, for one reason or another, the foundation to continue the business as it is or the competences to take the company international. We’re trying to work with those companies for five to ten years. And when you’re working with a company for this amount of time, it’s like getting into a marriage; you want to know who’s in front of you, you want to be comfortable with each other. Ethics and corporate culture come together here, when you’re trying to identify whether the potential counter-party in front of you has the same mentality as you do. It’s not just about shareholder return, it’s about stakeholder engagement. Which is why we always have to see whether there is something perverse that is hidden inside the organization. 

Ultimately, today most organizations are trying to find a sense of purpose, and what we have realized is that it’s not the shareholders that make that decision, it’s the customers: they will demand an ethical view of what you’re doing and if you’re not an ethical organization, they will take their business elsewhere. So, as an investor, I want to protect value, and therefore I want to ensure that we have all the right foundations in the organization. You can have a compliance officer, you can have all your policies and procedures in place, but if your leadership, if the people that you look up to are misbehaving, the rest of the organization will have complete disrespect towards the institution of ethics that you have embedded into the organization.

Host: Noura, whenever we’re doing implementations of ethics programs, I often hear that ethics is never black and white, it’s usually grey. And I’m sure because you work within that scope, you often deal with such situations. What are the grey challenges that you have dealt with and how did you overcome them?

Noura: One of the things that we pride ourselves in at Nesma is being diverse. And diversity provides that grey area because you have employees coming from all of these different environments and who have worked for different companies before coming here, so they have different thoughts and expectations of how to do their job and how a business is run. And that grey area is what ethics officers and policies and procedures have been trying to address to add more clarity. For example, on the subject of gifts, many might question whether it’s OK to receive a gift. And this is where the policy comes in, stating for example that you can receive a gift as long as its value is under 300 Riyals. And that’s creating the black and white for the employees. So we learn as we go and we start to gradually create more and more clarity.

Host: Serge, your company invests in several countries and in your previous role as a consultant you used to write sustainability and ethics policies for companies in totally different cultures. How does culture play a role in creating an alignment in the implementation of these policies and what are the challenges that you face?

Serge: It’s not only about culture but also about generations. In fact what we found is that ethics and the implementation of ethics and the perception of what is ethical or not, differs from one culture to another and also across generations. I think while we are getting into a somewhat conversion into cultural pluralism, we are still far away from some form of universal ethical principles. While business grads and people who go through formal training get taught how to be culturally sensitive, how to negotiate in different cultures and how to manage a culturally diverse team, they don’t get trained on how to deal with ethics in different cultures. My view about this is that we should beware of a moral superiority approach where we say that what we believe is right and wrong is actually what is right and wrong. Avoid this ethics colonialism, as I call it, where large firms try to implement what works in the U.S. in India and vice versa. It doesn’t work and it sets you up for failure.  My typical view when it comes to policies is to understand what is applicable by local laws, even if they are far from perfect. We are going towards a direction with the ILO and other international organizations, where there are some fundamental truths that we seem to be aspiring to. Quite recently, the ILO has brought in some stringent regulations about bribery, ethics, and human rights that investors and asset owners have to push all the way down the value chain to companies that are first, second or even third suppliers of assets.  So, we should be aware  that now, in the internal law, the responsibility sits with whoever is the original investor.

Noura: I would like to add that as a business becomes more and more mature in an environment, the board of directors are accountable, and as the company grows larger and spreads out geographically, you need to create a system, you can’t just follow a trickle down approach. You should have other systems to make sure that you reach every single person and that they are all aligned. And  you need to be comfortable saying that yes it was this person or this group of people who did that and it doesn’t reflect back on the organization and the only way you can do that is if you have  a framework in place to manage that.

Host: Our Senior Learning and Development Manager will be sharing some recent statistics about Ethics.

ig Senior L&D Manager: The Ethics and Compliance Initiative (ECI) stated that when an organization experiences many significant changes, employees are more likely to experience pressure to bend the rules. And we can see that the COVID-19 pandemic has led to extraordinary challenges that increased pressure on employees to compromise their organization’s ethics standards and policies. Let me put that in numbers, on a global median, employees’  tendency  to bend the rules moved from 12 %  to 40%  in times of organizational change. Across the globe,  there is an increase from 41%  to 79%  (numbers almost doubled) where employees are likely to observe misconduct  when they perceive their direct supervisors as exhibiting weak leadership compared to strong leadership. And finally, a study by Hamburg University, that studied two thousand investment portfolios, has found a strong relation between implementing good governance and sound financial performance.

 Host: Noura, what do you think about these statistics?

Noura: These statistics make sense to me. It makes sense that governance does pay off. As Serge mentioned earlier, when you’re talking about any kind of investment, if you’re looking at a company, you want to check their governance structure. There’s this famous thing about mergers and acquisitions and how the majority fail due to lack of alignment in culture, and culture is all about people and values and such.

Host: Serge, what do you think of these statistics?

Serge: It absolutely aligns. One of the things we did in the first weeks of this pandemic was to do a complete reset to everybody’s business plans. What we realized is that you cannot deal with a crisis and still keep all targets and expectations the same because people would go over and above to cheat in order to meet these expectations which will cause long term damage that can cost millions to sort out. And this damage can be avoided by accepting that there is some kind of big change from the beginning and by resetting and revisiting all the processes that might cause people to misbehave and dealing with that from the start.

Host: Noura, in your experience what’s the importance of having an ethics committee and how can we enable that committee?

Noura: It’s all about ensuring that people know what the message is. If people think their leaders are not ethical, this impacts their behavior. In Nesma, the ethics committee plays two roles: the first is that it sends the message to employees telling them this is the channel to address any ethical matters. The other area is that in some of our companies we started to include the ethics committee in the board. Which means it meets quarterly and sends reports to the board to ensure that ethics is always on their agenda.

Host: Serge, what do you think is the commercial return, if any, of having an ethics committee in a company?

Serge: Our ethics committees also report to the boards. It’s important to understand who forms the committee; we tend to favor external people/ independent directors and have a representative from the organization, typically a general legal counsel or a head of HR and ultimately to have the right amount of diversity whether its cultural, age, or gender.

For us, it’s one of the processes around risk management. You could be assessing various risks on the organizations and a reputational damage caused by an ethical breach could be highly damaging to the organization. Typically, our boards meet monthly and discuss: first health and safety, second, Environmental, Social, and Corporate Governance (ESG) which includes ethics, and third the financials.

Host: Serge, since you operate a lot in Europe, can you tell us about the impact of GDPR on your internal policies, i.e. the guidelines for data protection that European Union has instilled for data protection?

Serge: This is a great strict mechanism that we are provided with and it’s one of the many areas we have to look into. It’s not just employee data, but also customer data. But that’s not the only aspect we look at; we also pay a lot of attention to cyber-security. The fines for being hacked and not engaging with authorities after the hacking event in Europe are phenomenal and could reach ten to twenty percent of the company’s global revenues. We tend to link senior management incentives to GDPR and ethical compliance to ensure that all ethical practices are followed. However, a lot of our medium sized organizations, either their founders or management teams don’t have the competences to understand such complexities or are too swamped by other tasks. So there’s more heavy lifting there in terms of education and making their management team grasp the complexity of the situation and cascade that down to the teams.

Noura: That is true. In the case of Nesma, our companies are of varying sizes and maturity and the CEOs are swamped. So, the Nesma name is intertwined in all of these companies, and it could be that the weakest company can weaken the brand to their level. And we can’t have that. So, what we’ve decided is that the head office steps in to take over some of the heavy lifting so that we can elevate all of the companies together. The complexity in our case is managed when we start breaking the audiences down into smaller groups.

For example, with ideas group, when we launched our virtual ethics training for Nesma employees, we divided the workforce into blue collar and white collar because the messages should be different. In our case, it’s a way of respecting all employees who come from different countries. So, ideas group managed to deliver the training in eight different languages to ensure that everyone fully grasps the messages. 

Host: Serge, we know that 2021 is going to be the year of mergers and acquisitions. After recessions, we tend to see the number of mergers and acquisitions increasing. What is the role of ethics during mergers and acquisitions?

Serge: The large majority of mergers and acquisitions fail. I’ve done my fair share of transactions. A large majority disappear after five to ten years after the mergers have happened. In our case, there are expectations from our investors and investing policies that ethics and corporate culture be looked at as one of the fundamental aspects of the investment thesis. Compliance, ethics and culture can sway the investment decision regardless of how good the financials are. In our arsenal we use every possible tool, such as external resources, interviews, external investigators, reputational due diligence, etc. We do everything possible to see if there is anything rotten at the core of the organization. We’ve created a proprietary approach to culture, ethics and due diligence that looks at seven aspects of ethics, some of them are hard-coded, such as compliance, code of ethics, processes, policies while there are others that we call soft, such as: ethical role-modeling within the leadership of the organization, how do the customers view your organization, is the company paying suppliers correctly, etc. What you tend to find by chatting with various people is that “hear-say” actually leads to discovering serious cases of ethical breaches. When a company is putting itself for sale, it tries to paint the best image of itself, so it’s important to dig deep for more information.

So at the end, it all goes back to the investment committee, and in the last few years we’ve reviewed fifty plus deals and a good handful have collapsed because of ethical issues or we’ve had to make severe interventions such as complete change of management team, serious re-negotiation on price, etc. We’re here to buy cheap and sell high and make profit for our investors but at the same time what we don’t want is for the company to fizzle out after a few years. We are trying to leave it to the next owner in better shape.

Host: Noura, as an Arab culture, we come from tribal societies, and we tend to work in groups and care for one another and I know how much you try to tell people to report in good faith. Sometimes, you can do bigger damage if you don’t report. When you investigate, how do you direct your team members on distinguishing between what’s nice to be done versus what should be done?

Noura: I’ve found that people hold our company to a very high standard and they respect the Nesma name. And people usually do report, because they feel that what they’ve observed does not align with what they hold us to be as a standard. But the discomfort of addressing things directly is in the culture, and it shows especially in performance appraisals. The way that I deal with that is by always distinguishing between the act and the person. When you talk to someone about something they’ve done, you can simply address the act and explain that this does not reflect on them as a person. However, obviously, there are some cases when the position of the person is too high or the act is too grave, so we have to make the decision to part ways and deal with things head on.

Host: Noura and Serge, what do you do when the head of the company commits an ethical breach?

Noura: You can’t ignore it otherwise it will get worse. The more you wait, the more damage you have to address. These are the kinds of things that leadership has to accept.

Serge: For me, if that happens, it’s such a catastrophic event that one needs to question why it happened in the first place by using the toolkit we have in solving management problems. Anyone at VP/C level will end up in situations that either they’re uncomfortable with or will cause them to make an unethical action in one way or another. So, my view typically is to look at the act and the situation around it and to try and understand why the individual made the wrong kind of judgement. When you’re creating an investigation, no matter who is being investigated, you are not there to judge. You are simply there to look at the facts and try to deal with it with empathy. Compliance committees are not the police, they are your council and can help you make the right judgement or decision, before things escalate to the audit committee.

Below is a summary of our guest speakers’ answers to questions from the audience.

Q1: What about nepotism, not only in terms of employment, but also in terms of appointing subcontractors and suppliers within the organization, how does it affect the credibility of your supply chain?

Noura: We are still building these systems and improving them. Our ethics committee is a more recent development. But basically, we have ethics officers, where the number of ethics officers depends on the size of the company. Then, we ensure that these officers are trained up to standards so that they can distinguish whether an issue is correct or not. And nepotism is one of the elements of ethics, and it’s there along with sexism, discrimination, harassment, anti-money laundering, protection of intellectual property and others. For white collar workers for example, we’ve linked their email to the code of conduct so that if they don’t renew their signature after the two year mark, they get locked out of their email. These kinds of small practices help us embed ethics more and more into the organization.

Q2: What are the repercussions of a bad investigation?

Serge: The best way is to avoid this is to have external parties involved. Internal employees act as observers of outcome rather than identifying input. This is the best way to avoid biases and internal conflict within the organization. And it usually results in impartial investigations.

Noura: You need to have a proper plan, and ensure that the people who are doing the investigation are experienced enough. For example, I usually refer to one of my colleagues who has the demeanor to perform this task.

Q3: What is the relationship between HR and Ethics Officers?

Noura: This is something we are in the process of managing now. Sometimes it depends on the company size and number of employees. Right now, our ethics policies are part of the HR policies and so is the code of conduct. It gets reviewed regularly by our HR people, but at the same time, it’s on the board, so it’s kind of a mix. And the ethics officers are from across the organization. So, perhaps that’s the best way to address it: to avoid it being “siloed” into one part of the organization.

Q4: Ultimately, what would be the difference between creating a culture of ethics and whistle-blowing?

When the employees’ values are aligned with the values of the organization, this will create a culture of ethics where they feel responsible enough to report any issues that might affect the company negatively. Whistleblowing is a procedure or a tool that they can resort to, and it is more likely to happen when the culture of ethics is already there, and when the employees feel safe and included enough to do so.

Q5: How does the fairness of compensation impact the ethical practices?

ideas group L&D: Based on our research, across all countries, a median of 67% of employees agreed that their organization takes into consideration ethical behavior when rewarding employees through promotions, bonuses or raises. This means that compensation and ethics are interdependent. Organizations that have a fair compensation system take ethics into consideration, among other factors, when setting their compensation and benefits strategy. This usually encourages an ethical culture in the organization.

Q6: How would you recommend that an employee of lower grade report ethical issues about an employee of a higher grade, without being fearful?

Noura: You need to create a culture within the organization where people don’t feel like the words “audit” or “whistleblowing”, or any of those are equivalent to a police. It’s actually part of good faith to protect the organization. So one of the things we’ve been working on is a platform titled “I am Nesma” where employees grasp the idea that if they say I am Nesma, how I act and how I behave is what the company is. So, it’s a reflection of all of us. So, if someone is not in line with that, it’s usually due to them not feeling engaged or empowered enough to do so. It’s a matter of respect and ensuring that, yes, there is a hierarchy but as people we are all equal. As the company gets larger, this becomes more difficult to do, but at the end of the day, people need to feel that they are seen and respected as humans.

Serge: I would like to add the generational issue. Also, in the Middle East, having worked there extensively, you have the “locals versus the expats” mentality. For me this situation is about the older generations, and sometimes the locals, viewing this as a job for life. There’s the historical concept of belonging to the company and seeing it as their second home. Whereas, with the younger generations and with expats, they are usually loyal to the role and not the organization as a whole because they don’t view it as a place for life. So what the company needs to do is to create a purpose that will lead to employee engagement and an inclusive culture. It’s all about culture not about processes and policies. You could have everything in place; you can have whistleblowing that is protected by law, like we do in Europe, yet nobody will come up and report ethical issues. You can only achieve that if people believe in the firm enough that when they see something that could affect its future, they would feel responsible to speak up about it.

Host: So your final words Serge are: ethics is culture and culture is human. Noura, what are your final words?

Noura: This matters. It matters now more than ever. It matters not only for CEOs and established companies. It also matters for entrepreneurs who want to have investors looking at their company. If you want any transaction to be successful, focus on ethics, because it pays.

 

 

 


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