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From a speech by Colin Stewart delivered 15 September 2006 at the "Towards a More Ethical World Seminar" at the University of Glasgow.

In the wake of recent ethical debates across the business world, many people have come to the conclusion that in order to be successful, every business needs to have a code of ethics. Today, I want to examine this assumption, asking what are ethics…… looking at some of the reasons why people are tempted to break ethical boundaries…… and examining the steps that governments and businesses the world over are taking to ensure they have the right ethics and controls in place to safeguard business.

What are Ethics and why do they matter?

At heart, ethics are the fundamental principles of fairness, trust and good governance that underpin all effective businesses. It’s important to distinguish ethics and controls – ethics are what governs the spirit beyond the letter of the law.

The UK financial services sector has a strong ethical code which has been the foundation of its success for centuries. It can be traced back to the motto of the London Stock Exchange “dictum meum pactum” – my word is my bond. This motto came into action in the old coffee houses of Lime Street, where the idea of a stock exchange was first explored. In the coffee houses, business was conducted on the basis of so-called “gentlemen’s agreements” – agreed with a handshake and fulfilled thanks to mutual trust. In the 16th century coffee house, as in the 21st century boardroom, ethics were all about taking personal responsibility for an undertaking – setting a standard that you would stick to.

But of course, whilst the nature of ethics hasn’t changed much in five hundred years, the nature of business has transformed almost unrecognisably. Globalisation has brought businesses into contact with many different codes of conduct, from the principles-based ethical code here in the UK, to the US or continental model, which is based on rules. For a multinational organisation, operating across many different systems and regulatory structures these differing approaches can create pretty complicated problems.

Just imagine a banker who, under a rules-based code, is used to going right up to the line of the law to get a competitive price on a deal – and rightly so, that’s how a rules-based market is designed to operate. But when that same banker finds himself in a principles-based system, there are fewer lines or legislative barriers to push against, instead there are only principles – and those principles require a completely different philosophy. It’s not that one system is better or more effective than the other. They just require a completely different approach.

That’s without even considering those people who will always try deliberately to exceed the limits or break the law. As the famous quotation goes, “good people don’t need laws to act responsibly, while bad people will find a way around the laws.” If I asked you who said that? In fact, it was Plato back in 400BC. It just goes to show that the issue of ethics – what they are, how to embed them in an organisation, and how to safeguard ethical standards over the long term, is a perennial one. But it’s one that every business needs to tackle.

Why go against ethics?

It can be difficult to understand the reasons why people might want to exceed those limits but in today’s highly pressurised financial markets, there are a number of reasons that can tempt to people into breaking the rules.

The first of these is the pressure to produce results. In a global marketplace, businesses are under scrutiny at all times, their successes and failures charted minute-by-minute in the rises and falls of the stock price. On top of that, quarterly reporting means that they’re operating on a very tight margin – each manager has a target for the quarter that he must meet, for his team, for his sector, for the business overall. It’s easy to see how the pressure quickly mounts up, and in many ways short-term thinking is very important. You have to focus on the job in hand. But you can’t let that block out the long-term horizon. Recently, some firms like Coca Cola have announced that they’re moving away from the ups and downs quarterly reporting altogether to do away with this kind of conflict.

The second pressure relates to the way that managers are paid. Today, many companies’ senior management receive stock options meaning that they have a direct ownership of the company’s development. Ownership and responsibility is a good thing because it makes management focus on building value but as they’re also in a position to inflate the value of a stock in the short term, it also creates a conflict of interest. And business hasn’t yet resolved how to deal with that conflict although some people think that providing employees with straightforward equity holdings could reduce the issue.

The third pressure comes from the increasing sophistication of the financial markets themselves. With an almost limitless range of products and services on offer, targets always gnawing away at principles, there have been occasions when clients have been tempted to take on products or risks that they do not fully understand. And as you all know, it’s when business doesn’t understand the risks it is running that things can quickly start to go wrong.

The government and industry response

In the wake of the most recent ethics failures, governments and industry across the world have changed their procedures. In America, the new Sarbanes-Oxley legislation acts as a safeguard against creative accountancy that can disrupt stock prices. In ethical terms, it forces CEOs and CFOs of listed companies to take personal responsibility for their balance sheets by signing declarations that they have examined them personally and found every element to be correct.

In the city of London, that kind of personal control and oversight remains implicit rather than explicitly detailed by law. But this is not to say that ethics have been overlooked – rather that here in London, business ethics are founded on principles and control is seen as the business of business itself. So it’s vital to be able to demonstrate effective business principles and policies, because they are a critical tool for building investor confidence.

My own company, Citigroup, learned this lesson the hard way as a result of two very different ethical lapses a couple of years ago. In the first case, a handful of employees in our Private Bank in Japan repeatedly ignored the rules and didn’t comply with warnings from regulators. In the second case, a team of traders in London executed a trade that was deemed to have gone against the principles of business of the Italian exchange MTS, which damaged our competitors and government clients. The two cases are very different, one was clearly against the law, the other was a violation of principle but both were characterised as ethical lapses. And both did us a great deal of reputational damage and brought much criticism.

Following these challenges, our CEO, Chuck Prince launched a thorough re-examination of Citigroup’s operating principles and beliefs. Our management drew up three shared responsibilities, designed to embody our business principles and the standards we hold ourselves accountable to.

The three responsibilities are:

To our clients – to put them first, provide the best advice and the greatest integrity

To our colleagues – to respect and support our team-mates and take responsibility for our actions

To the Citigroup Franchise – to put long term benefits before short term gain and provide true and lasting shareholder value, honouring and carrying forward Citigroup’s legacy.

In addition a “Five Point Plan” was developed to educate people and to embed the Shared Responsibilities throughout the company. Every employee undertook “franchise training” and signed a statement that they understood the Shared Responsibilities. Our long-term aim is for Citigroup to be “the most respected financial services company”.

Citigroup is not alone in having made this kind of commitment. But upholding ethical standards is inevitably a challenging business and requires the support of each and every employee, every day. As the former CEO of McKinsey Dean Bower said “if you’re not prepared to take the pain of living by your principles, there’s no point in having principles!” Bower meant exactly what he said. A few years ago, one of his colleagues recalled a strategy meeting with a particularly difficult CEO. The meeting had dragged on for some time… and Mr Bower was becoming exasperated. Eventually, Bower could take no more. He turned to the CEO and shouted, “The problem with this company, Sir, is you!” It’s safe to say that McKinsey and Company were never asked back to that particular organisation. But that day Bower put into practice his belief in what he called “Blunt Integrity” – not taking on work or giving advice that would bring McKinsey into disrepute. And his ethical standard has become the foundation of McKinsey’s reputation for straight-talking success.

Ethics and the long-term – Creating lasting value

Bower’s idea of blunt integrity brings me to my final point – how ethics can help to build lasting value for a company or institution. Because every enterprise needs principles and values that are embedded in its culture, celebrated widely, that enable its members to make good decisions. In this way, ethics can be the foundation of business success. But ethics aren’t an overnight phenomenon. Embedding an ethical culture throughout a firm takes time and energy. And certainly there are no quick-fixes once things go wrong. You have to build up from scratch. As Chuck Prince put it: “In a company like Citigroup with 300,000 people, you can’t hire enough cops. It’s not about writing one more rule. We have to start with values embedded in the business, then view controls as a safety net..”

And if you do work at it, if you can get the ethical formula right, then it can bring real competitive advantages. First, people have greater drive to achieve their goals, they know they can do the right thing with confidence. Second, successful, ethical companies attract high calibre people, which is a natural advantage. And third, ethical companies can develop better and more profitable relationships with their clients and stakeholders. In this way, ethics build shareholder value. It’s as simple as that.

If I had to sum up the essence of ethics, therefore, I would say that they are about individual responsibility, plus shared ethical values and business standards, plus effective management controls. Put those three things together, and more often than not, you’ll achieve lasting success.

Colin G Stewart
Managing Director/Country Head
Citigroup Scotland
colin.stewart@citigroup.com

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