Av Tore Audun Høie
This article outlines differences between US and EU ethics. Several business deals are discussed where these differences are central; more examples are expected.
As an introduction we will look at ISO 26000 Social Responsibility. It is a world standard, perhaps most accepted in Asia, but its perception in the USA has been negative. This may be costly.
ISO 26000 started development as a guide for Corporate Social Responsibility in 2005, but had difficulty defining the term Corporate. Therefore it was changed to address general organisations, an approach that was more ambitious but easier to understand.
ISO 26000 is also stakeholder oriented, breaking with the US shareholder view. Stakeholders include customers, employees, society, owners and indirectly the environment. The organisation is seen as being part of society, with advantages and obligations.
The standard was developed by 450 participants from 99 nations, most of them developing countries. It therefore has great authority; no other ethical project that I know of has an equivalent weight.
The method of development of the standard was by consensus, very difficult for an international project. In the end, the result was accepted by simple vote.
The representatives were volunteers, selected to represent typical stakeholder groups. In some cases one representative acted on behalf of a whole group of people, and topics were discussed within that group. Thus the overall membership was more than 4500. One member expressed the view of many: “This is more difficult than taking a PhD”.
One part of its development I was told about was the question that arose of why the standard was not certifiable. It was apparently an initial wish – or demand – from the US group, and I was not told why. But this applies only to the current version; future versions will hopefully allow certification. Invitations to discussions to create the next version have been issued.
Two major cases of opposition were reported. One was from China when the ISO target was moved from applying to corporations to organisations. The Chinese quite rightly suspected that the Communist party would be counted as such an organisation and thus be subject to the standard. This was resolved by an addition allowing sovereignty for countries.
The other issue was from Arab states wanting a special status for homosexuality; this was more troublesome, as it involved issues of Human Rights, but was avoided by adjusting wording. This was discussed even at national level and became a question of giving up a principle in favour of gaining final votes. A standard would be less standard if it did not command a strong majority. Ethics is not always a question of absolutes.
The final vote was – I think – 68 countries in favour, 6 countries against, among them USA, Cuba and Iran. The reasons for the voting choices were not communicated.
A reasonable Wikipedia page has recently been created looking as if it has come from US sources containing little on the environment and only a brief mention of stakeholders. It has nothing on the organisation view, and gives no reason why the standard is uncertifiable. But it is a major advance that the US is apparently involved at least at Wikipedia level.
The Wikipedia page mentions a co-operation with the UN Global Compact, apparently currently abandoned by the UN. However, this is a natural development and with luck the initiative should be continued.
According to ISO in 2019 the following are the contents of the standard:
• Concepts, terms and definitions relating to social responsibility
• The background, trends and characteristics of social responsibility
• Principles and practices relating to social responsibility
• The core subjects and issues of social responsibility
• Integrating, implementing and promoting socially responsible behaviour throughout the organisation and, through its policies and practices, within its sphere of influence
• Identifying and engaging with stakeholders
• Communicating commitments, performance and other information related to social responsibility
Figure 1: ISO 26000 contents
The start of the list is logical but radical. Very few books or documents in management or ethics contain definitions or a glossary. Reading a management book often requires a search for a definition of the basics. Normally the answer is easy to find: most books use the model of a car manufacture in the US in the 1950s. But this can be quite different from health work or schools in 2021.
An organisation is defined by ISO as: Entity or group of people and facilities with an arrangement of responsibilities, authorities and relationships and identifiable objectives.
Unfortunately, it is difficult to find an equivalent definition of corporations. What are they, and what are they not?
Note the three parts of the definition; one part is “facilities”. This can be translated as infrastructure. Computer systems are part of infrastructure, and are a headache if they are down. But what is their role in a corporation? If outsourcing to a country with poor infrastructure, problems are likely. But this may not be obvious to the manager who has never reflected on infrastructure.
The next interesting part is “arrangement of responsibilities, authorities and relationships”. Any manager will understand this but will a business school professor? In outsourcing, these arrangements need to be not only established, but agreed and documented. Very often they are not, which creates problems.
“Identifiable objectives” is a natural requirement, but are business strategies always easy to identify? Often, they are airy statements without connection to the real world. An example in Høie 2018 is GE, who have been investing heavily in coal equipment in recent years. Now they face a difficult future, not helped by accounting fraud.
Perhaps more direct is the statement of the purpose of the standard:
1. It contributes to sustainable development, including the health and welfare of society.
2. It takes into account the expectations of stakeholders.
3. It is in compliance with applicable law and consistent with international norms of behaviour.
4. It is integrated throughout the organisation and practised throughout the world
Figure 2: Purpose of ISO 26000 (Veritas)
The fourth statement was incomplete and the probable end wording added in italics.
Statement 1 is on sustainability and how it can prevail over time, both for business and in society. When mentioning health, probably health work is meant, radically different from car manufacture in 1950.
Stakeholders are employees, customers, society and owners. Environment is not part of this, and should perhaps be included as part of society. The assumption is that an organisation not working for its stakeholders may become obsolete.
The employee as a stakeholder is different from the employee as a resource. And modern employees can be a company’s most important resource, such as doctors in hospitals. Some countries specify that in companies above a certain size employees must have board representation. In Norway this applies to companies with more than 30 employees.
Treating customers as stakeholders goes beyond customer care: customers can be partners or a source of important changes. They can also be consumers and must be safeguarded against toxicity and unsafe products.
Society as a stakeholder means that the organisation is part of society and has a societal role, something absent in banks before the financial crisis, and perhaps also absent in some business schools, even after the crisis.
This general requirement is clarified by the Appendix with examples of voluntary initiatives and tools for social responsibility, 75 in all. This was created in 2010. More initiatives can be found now and may be integrated in ISO 26000 version 2.
Examples of the 75 initiatives, showing their breadth and depth, include:
• Amnesty International
• United Nations Global Compact
• Centre for Business Ethics
• Global Reporting Initiative
• Rainforest Alliance
• International Chamber of Commerce
• Partnering Against Corruption Initiative
• UNEP – climate neutral network
• Electronic Industry Citizenship Coalition
• Extractive Industries Transparency Initiative
• Equator Principles
• Wolfsberg Group (anti money laundering)
• Marine Stewardship Council
Figure 3: ISO 26000 Initiatives
Diving deeper into one example, the Extractive Industries Transparency Initiative, EITI have made a report from Africa where there are 24 countries involved with EITI. From the report:
The EITI Standard requires the disclosure of information along the extractive industry value chain, from how extraction rights are awarded, to how revenues make their way through the government, and how they benefit the public.
This is no more than natural, but many African countries are not members. We wonder why.
The best among the 24 countries is Senegal, the only one to earn the rating “satisfactory”. Niger is alone in being deemed “inadequate progress”. The rest are grouped as “meaningful progress”, but not satisfactory.
Extractive industries are important to Africa, and could be better developed:
Africa’s extractive resources remain underdeveloped despite 30% of all global mineral reserves being located in Africa. The continent’s proven oil reserves constitute 8% of the world’s stock and natural gas amounts to 7%. Minerals account for an average of 70% of total African exports and about 28% of gross domestic product. The contribution of extractives to public finance is significant, with some African countries’ public revenue almost entirely dependent on them.
Not stated explicitly is the impact of the EITI: firstly, that it is creating the transparency implicit in its name. It is already evident from using the Initiative which countries struggle and which – only one – looks good. But there is material on several levels to evaluate governance at both national and regional levels. And there is evidence to show why some struggle.
Probably there is also material to evaluate companies and to discover if some are worse than others. That seems not to be a focus now, but could become important in the future. Seen by investors, the ensuing transparency is healthy; without it bad news may surface and impact earnings. Lack of transparency may hide bad management.
Norway’s Storting had a recent meeting with EITI on cobalt for electric cars, demanding that it be produced in a sustainable way. Norway has the highest per capita ownership of electric cars in the world and therefore some influence.
The introduction below is for one of the 75 “initiatives” in ISO 26000, Equator Principles. It may serve to evaluate both the bandwidth and the limitations of the guidelines. Note that guidelines may change; in what follows “a minimum standard” is described. And remember that formerly there were no guidelines: corporations did what they wanted within the law, and not always within.
Reference equator-principles.com January 2019:
The Equator Principles (EPs) is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making.
The EPs apply globally, to all industry sectors and to four financial products 1) Project Finance Advisory Services 2) Project Finance 3) Project-Related Corporate Loans and 4) Bridge Loans. The relevant thresholds and criteria for application is described in detail in the Scope section of the EPs.
Currently 94 Equator Principles Financial Institutions (EPFIs) in 37 countries have officially adopted the EPs, covering the majority of international project finance debt within developed and emerging markets.
To dive further down in details, this author’s bank DNB joined in 2017 and has the following statement (dnb.no January 2019):
DNB has adopted the Equator Principles, a common set of guidelines used by the majority of large international financial institutions for managing environmental and social issues in project finance. All project financing involving total costs of more than USD 10 million is to be reviewed according to the Equator Principles.
And yes, DNB provides a yearly report, although it can be quite difficult to read. In addition, their funds sold their parts of the “Dakota Access Pipeline” in 2016.
From Wikipedia January 2019.
In 2005 some NGOs said that one of the adopting banks, ABN AMRO (before it was split up in 2010), was the most climate-unfriendly bank in the Netherlands, with estimated annual indirect CO2 emissions of almost 250 million tonnes in 2005 from industries to which it provides financial services. NGOs said this was just over the annual CO2-emissions of the Netherlands and almost 1% of the total annual worldwide CO2 emissions at the time. ABN AMRO defended its environmental record and announced steps to reduce its direct emissions, but some NGOs say it is the indirect emissions through their clients that make global banks such important targets in climate change.
The importance of this is the principle that member banks are open to criticism, ie they are part of society and must observe societal principles and accept feedback.
Mitshubishi Heavy Industries (2017)
Notice the emphasis on stakeholders, sustainability and value (not values):
As a company responsible for developing the infrastructure that forms the foundation of society, MHI Group’s basic policy is to execute management in consideration of all stakeholders and strive to enhance corporate governance on an ongoing basis in pursuit of sustained growth of the MHI Group and improvement of its corporate value in the medium and long terms. In accordance with this basic policy, MHI endeavours to improve its management system, such as by enhancing its management oversight function through the separation of management oversight and execution and the inclusion of outside directors, and develop “Japanese-style global management,” focusing on the improvement of the soundness and transparency of its management as well as on diversity and harmony.
As part of a corporate governance reform, in 2015 MHI transitioned to a company with an Audit and Supervisory Committee, with outside directors numbering five, including three who are Audit and Supervisory Committee members. In 2016, we established the Nomination and Remuneration Meeting and reduced the number of directors from 14 to 11 (maintaining the number of outside directors at five). Through this reform, we aim to accelerate decision-making and strengthen the supervisory function.
They maintain that they are certified by Veritas which is internationally accredited. This is probably not accurate. However, it shows that an assessment can be made.
Air France Industries is actually the World’s First MRO (Maintenance, repair, overhaul) to “Adopt ISO 26000”. More precisely, an “evaluation” against ISO 26000 standard guidelines has been conducted in the AFI facilities in France from 2 to 5 November 2010. The results were considered by Bureau Veritas Certification (BVC) through its methodology CAP 26000 as positive ones. Gilbert Labroye, Technical VP from Bureau Veritas Certification, said: “The evaluation we carried out showed that AFI has worked in a carefully controlled manner to structure and organise its Corporate Social Responsibility programme.” That’s why, beside the eight international standards already renewed in May 2010, the “Attestation” delivered to Air France Industries by BVC, includes the ISO 26000 evaluation reference. Definitely, we adopt this new Social Responsibility international standard. For us, next step will deal with CSR continuous improvement.
From Edgecliffe-Johnson 2019:
Over the past year I have had business leaders lament to me that no Wall Street analyst ever asks them about their efforts to tackle climate change; I have seen companies such as Merck and Johnson & Johnson remind investors that their pre-Friedman founders believed profits would only flow if they attended to other priorities first; and I have heard Unilever’s outgoing CEO Paul Polman ask provocatively: “Why should the citizens of this world keep companies around whose sole purpose is the enrichment of a few people?” Strikingly, their arguments have been echoed by the world’s biggest investors, the very people who seem most at risk in any shift from shareholders’ interests.
— the catalytic text for the new era of purposeful capitalism was a letter sent to chief executives a year ago by BlackRock’s Larry Fink, who with $6.3tn of assets under management counts as the biggest investor of them all. With governments failing to prepare for the future, he wrote, people were looking to companies to deliver not only financial performance, but a positive contribution to society, benefiting customers and communities as well as shareholders. Without a social purpose, he contended, companies fail to make the investments in employees, innovation and capital expenditures needed for long-term growth — and above-par returns to the likes of BlackRock.
In other words, a rather strong movement is coming even in the USA, and is strongest among young people. It is even evident in Academia which is finally starting to question old “truths”, for instance the efficiency of Anglo-American capitalism. Since around 1985 the Nordics have done better and at the same time they have scored well on social indices, for instance in health where the US is number 35 in the world despite having the highest spending (Lancet 2017). In engineering you will be booed for statements like “It’s so because I say so”, but apparently it is still valid in economics.
An article in the Financial Times helpfully points to a number of businessmen feeling positive towards change, some of whom have talked to the Norwegian Oil Fund owning 1.5% of world share value. The Fund wants better management, and is pushing for that. They also want to avoid “ethical risks”; some companies and some bosses are such risks.
Not all is well but there are several excellent initiatives apart from ISO, especially from the UN. Work is in progress to align such documents and ideas.
Another issue is how to measure sustainable performance. ISO 26000 has some helpful definitions which need to be expanded and improved so they can be used for measurements. An organisation’s “greenness” should in the future be measurable as it is an important part of its value. There are already “green” funds, but their investment choices are sometimes disappointing.
Accepting that organisations are part of society is a good beginning. The next step is to make better playground rules. In some cases, such as privacy in the US, there are currently no rules. The next article will address some of these issues.
Aristotle Ethics. Penguin classics 1955.
Schumpeter Column ‘Out with the Old. Management Theory is Becoming a Compendium of Dead Ideas’., The Economist 17/12-2016.
Edgecliffe-Johnson, Andrew. ‘Beyond the Bottom Line’. Financial Times 5-6 January 2019
EITI EITI in Africa. EITI September 2018.
Høie, Tore Audun Ethics – The Foundation of Management. Fringilla Publishing 2015.
Høie, Tore Audun Ethical Management- Creativity, Sustainability, Governance. Fringilla Publishing 2018.
ISO 26000. Guidance on Social Responsibility.
‘Lancet Healthcare Access and Quality Index Based on Mortality from Causes Amenable to Personal Health Care in 195 Countries and Territories, 1990–2015: a Novel Analysis from the Global Burden of Disease Study 2015’ The Lancet May 2017
OECD. OECD Guidelines for Multinational Enterprises. OECD 2010.
UN. Global Compact unglobalcompact.org