By Agnes King

There is a difference between doing what’s legal and doing what’s right and, last year, the fallout from making the wrong choice landed with force on executives at Rio Tinto.

In May 2020, the miner destroyed ancient rock shelters at Juukan Gorge in Western Australia’s Pilbara, against the wishes of traditional owners. It obliterated archaeological evidence of 46,000 years of human occupation in the caves.

Rio Tinto’s actions were legal, but by the end of September 2020, its head of iron ore, the head of corporate relations and its chief executive in Australia, Jean-Sébastien Jacques, had all resigned because of anger among the public and shareholders. In March 2021, the company’s chair, Simon Thompson, announced he would depart the Rio Tinto board as a result of the episode.

The Juukan Gorge caves were seen as a significant archaeological research site, showing evidence of human habitation since the last Ice Age. But despite there being other options for expanding the mine, Rio Tinto chose to destroy the caves to access high-grade iron ore, worth an estimated A$132 million. 

A federal parliamentary inquiry into the scandal concluded that Rio Tinto “knew the value of what they were destroying but blew it up anyway”. It added that the decision reflected “a corporate culture which prioritised commercial gain over the kind of meaningful engagement with traditional owners that should form a critical part of their social licence to operate.”

“Rio knew the value of what they were destroying but blew it up anyway

The inquiry also criticised Rio Tinto as having a “legalistic approach to heritage protection, including a self-interested reliance on outdated laws and unfair agreements containing gag clauses prohibiting PKKP [traditional owners Puutu Kunti Kurrama and Pinikura people] from critiquing the operations of the company.”

Interestingly, pain from this public shaming has not been felt in the company’s share price, which climbed from A$82 in May 2020 to more than A$125 in June 2021 thanks to booming iron-ore prices. Rather, the sting has been reputational.

Reconciliation Australia revoked its endorsement of Rio Tinto, which once boasted about being the first resources company to obtain an Elevate Reconciliation Action Plan endorsement.

Losing that trust casts a long shadow. It will be a tougher ask gaining community cooperation next time Rio Tinto sits across the negotiating table.

“We continue to learn hard lessons from the events of 2020 and are determined to make significant changes across our company,” Rio Tinto Australia’s chief executive, Kellie Parker, said in a statement one year after the caves were destroyed. “We know this will be a long process to earn back the trust we lost.”

Picture: Kellie Parker, Rio Tinto Australia’s chief executive.

The rise of the ethical consumer

The notion that organisations should act ethically and with consideration to the communities in which they operate is not new. But the Juukan Gorge episode shows clearly how the public and investors now expect companies to go beyond what’s legally permissible in a bid to do what is right.

In the wake of Australia’s 2019 Royal Commission into unethical behaviour in its banking and finance sector, the then head of KPMG Law, Stuart Fuller, warned in an opinion piece published in The Australian Financial Review that “A ‘legal’ view will not be enough”.

“It will not bring the full context, insight and judgement that a client will need in order to adjust their business for the new world, to understand their customers and their people, to engage with regulators and to adapt continually to the changing expectations of the community.”

That move from simply complying with the law to asking “should we do this?” is a big change in commercial sentiment.

Ben Gleisner, the Wellington-based founder and CEO of the CoGo app (CoGo is short for ‘connecting good’), says consumers are shifting towards or away from brands based on the brand’s values. He adds that in the past two years, he’s witnessed tangible signs of an oncoming tidal wave of ethical consumerism.

“Values around people’s decision-making are becoming more and more prominent. Whether it’s their heightened concern about climate change because of bushfires, human rights, whatever, people are starting to ask, ‘What can I do about this? I’m not going to rely on government, they’re not doing enough’,” he says.

CoGo uses people’s banking data to match their spending to their values. It has just inked a deal with a major UK bank to white label its app (white labelling is when a product or service removes its brand and logo from the end product).

"Xero is investigating integrating CoGo into its platform and is in the early discovery stages looking at ethical metrics such as carbon footprint for small business."

Gleisner believes businesses and their advisers, right down to the suburban accountant, need to develop an awareness of community sentiment on ethical issues, and accountants need to build their understanding of non-financial performance metrics because small business clients will come asking about it.

ESG as a performance indicator

That migration of money to more ethical businesses is also playing out in financial markets. Global money invested in environmental, social, and corporate governance (ESG) assets soared to US$103 trillion in 2020, up from US$6 trillion in 2006, with more than half of global institutional investors now fully integrating ESG into their investment approach, according to CoreData research.

When it announced a record full-year profit in May 2021, Macquarie Group also outlined a bold plan to accelerate its push into green financing, including plans to exit coal investments by 2024.

Organisations are starting to acknowledge how a strong approach to good decision-making can futureproof the business for stakeholders.

Wesfarmers chair Michael Chaney told shareholders at the AGM in late 2020 that the company could only achieve good returns in the long term if it looked after the interests of all stakeholders, from suppliers and employees to customers and the communities in which it operates.

“To deliver top quartile returns over the long term, you simply have to operate your business in a sustainable way,” Wesfarmers group chief executive Rob Scott CA told the Australian Institute of Company Directors’ Company Director publication in May.

Scott’s remuneration package is tied to sustainability objectives – something increasingly common among the executive team at ASX- and NZX-listed companies,

“Ultimately, your performance in sustainability becomes a critical factor in whether a consumer will deal with your business, whether a worker wants to work for your business, or whether a shareholder wants to invest in your business,” Scott said.

Picture: Rob Scott CA, Wesfarmers group chief executive.

“Ultimately, your performance in sustainability becomes a critical factor in whether a consumer will deal with your business, whether a worker wants to work for your business, or whether a shareholder wants to invest in your business.”

Embedding ethics in an organisation

Research by the Institute of Business Ethics (IBE) found that new generations entering the workforce had a different approach to ethics than their predecessors.

“The younger generations often take for granted that we as business leaders care about business ethics and our impact on society,” observed John Penno, the then chief executive of New Zealand dairy processor Synlait, in the IBE’s 2017 Setting The Tone report.

CA ANZ’s 2021 report, Give It a Nudge – Behavioural Insights into an Ethical Workplace emphasises that unless ethics is elevated to the boardroom agenda, organisations are missing a critical element of embedding it into their culture. Ethics measures should be linked to organisations’ strategy and reported to senior management and the board, it advises. It comes down to the old adage that what gets measured gets managed.

The report also recommends that organisations brainstorm ethical blind spots – and how to address them – in an effort to make ethics part of the everyday conversation.

“An unethical culture is a consequence of a poorly designed organisational culture rather than poor compliance or unethical individuals,” the report states.

Nikolas Hatzistergos, NSW managing director at accounting firm William Buck, agrees that it’s leaders who must model an ethical culture and show what good decision-making looks like. That includes encouraging people to admit missteps.

“We’re in the advice business; we will make mistakes,” he says. “If you do, no matter how small, you can’t try to cover it up. We have a professional indemnity [PI] policy to cover that.

Picture:Nikolas Hatzistergos, NSW managing director at accounting firm William Buck.

“We’re in the advice business; we will make mistakes. If you do, no matter how small, you can’t try to cover it up.”

“You disclose it, then we’re on the same team. Once you act independently [to try to fix it] the first thing that happens is we don’t have PI cover.

“You need to have an open and supportive environment to achieve that. I’m not saying we’re perfect, but we would notify multiple matters out of an abundance of caution each year, and we’ve not had a single claim,” Hatzistergos says.

It’s also important that individuals within an organisation are empowered to do the right thing.

A recent example of this is a new policy at commercial explosives business Orica which permits workers to stop laying charges at mine sites if they have any concerns about impacting Indigenous heritage. This acknowledges the power of each individual contribution to an ethical culture.

When scandal turns to mistrust

Consulting giant McKinsey & Company felt a reputational sting earlier this year when it settled, for about US$600 million, claims about its role fuelling America’s opioid epidemic.

McKinsey was under investigation for its work for the Sackler family company Purdue Pharma. US prosecutors said it had worked on strategies to “turbocharge” OxyContin sales, advising Purdue to increase sales calls to doctors known to be high prescribers, at a time when more than 90 Americans were overdosing each day.

Shortly after the announcement, McKinsey global managing partner Kevin Sneader was voted out by the firm’s 600-plus senior partners in February. 

There are mixed views about Sneader’s exit. Sneader had overseen the introduction of measures aimed at preventing controversial projects, including new procedures on reviewing prospective clients. One of these measures was a decision in 2019 to stop work on opioid-specific business, anywhere in the world.

So was he shunted from the top job as a scapegoat for McKinsey’s string of scandals? (Along with OxyContin, the firm had been criticised for its work in South Africa, Saudi Arabia and with the US Immigration and Customs Enforcement agency.) Or was it part of a partnership revolt under Sneader’s new rules, which could result in lost income due to the rejection of unethical clients?

EY Oceania fellow for trust and ethics, Clare Payne, says the McKinsey example should be a warning to advisers and consultants that their guidance to a business can be subject to a higher ethical obligation beyond the immediate interests of their client. They must consider the broader societal outcomes that may result from someone taking their advice.

Picture: Clare Payne, EY Oceania fellow for trust and ethics.

Weighing it all up

Chris Townend FCA, a CA ANZ board member who sits on a number of not-for-profit boards including UnitingCare Queensland, thinks value-based organisations may have an easier time making ethical decisions because economic rationalism isn’t the priority.

Having a decision-making framework for thorny issues helps boards and management work out who their stakeholders are, who their decisions affect, and the trade-offs involved, he says. That’s particularly helpful as the diversity of values in society increases.

Payne points out that using an ethical decision-making model or framework doesn’t guarantee everyone will be happy with an outcome. “However, if people can see the process of enquiry has been genuine then they will be more likely to accept the decision,” she says.

Importantly, ethical decision-making involves reflection and staying open-minded to adjusting a position. “This chance for review can make people feel better about the outcome of an ethical enquiry,” Payne says.

So why is ethical decision-making so much harder for some than others?

It all comes back to the ‘grey areas’ and how comfortable you are dealing in them, says Payne. In her 20 years observing business ethics, she’s found that those more comfortable with the grey areas of life tend to be more at ease discussing the ethics surrounding executive decisions, while unquestioning rule-followers can struggle.

“Reducing matters to ‘black and white’ can seem easier and safer but it’s not,” she says. “Ethics requires thinking – most often dialogue between people with opposing views – and ultimately requires us to exercise judgement.”

“Reducing matters to ‘black and white’ can seem easier and safer but it’s not. Ethics requires thinking.”

For organisations, the challenge remains how to strike a balance between commercial and ethical considerations, and come to a position that can be justified in the public domain.

5 steps of ethical decision-making

1. Frame

To define and understand the precise nature of the issue to be decided.

• What are the facts?
• How are these facts linked to the organisation’s core values?
• What assumptions are being made about the world in which this issue is being decided?
• Are there any ‘non-negotiables’ (e.g. relevant laws that must be obeyed)?
• Whose ‘voice’ should be heard (i.e. who has a legitimate interest in this matter)?
• What is the nature of each legitimate interest? Are the interests aligned or divergent?

2. Shape

To develop options that could resolve the issue.

• What kind of issue are you dealing with? Is it just a moral temptation (the possibility to benefit from doing something questionable)? Or is it a genuine dilemma in which competing values and principles seem to require incompatible outcomes?
• What are the options? This is both the most creative and difficult part of the process because nothing should be ‘off the table’. Every option, including the apparently outlandish, should be considered.
  
  

3. Evaluate

Apply a matrix of values and principles to evaluate the options.

• Take two or three of your best options and apply the matrix (shown below).
• Using the matrix ensures that an organisation’s values and principles are used as the ‘index for judgement’.

The simple form of the matrix is shown here.

Once the matrix is populated, it’s relatively simple to determine which options best accord with the nominated values and principles.

4. Refine

Identify and eliminate weaknesses in the proposed course of action.

• Play the devil’s advocate by taking up the option that has fared best in the matrix in order to identify its major areas of weakness.
• Adjust the proposal to eliminate the weakness without damaging the overall integrity and utility of what has been proposed.
• Put the proposal to some final ethical tests, such as: Would the person you admire most in the world take this course of action? How would you feel if this was done to a loved one?

5. Act

All ethical decision-making is practical – it ultimately requires that a decision be given effect.

• Give effect to your decision.
• Monitor the outcome.
• Offer reasons for your decision, even if it’s not challenged.
• Reflect on the decision and what can be learned from the process and applied in the future.

Source: Edited extract from Ethics in the Boardroom: A decision-making guide for directors, Australian Institute of Company Directors and The Ethics Centre, October 2019.

Picture: Australian Test cricketer David Warner became emotional as he addressed his role in the 2018 ball-tampering scandal that appalled the public and rocked Australian cricket. Warner reportedly instructed teammate Cameron Bancroft to use sandpaper in an illegal attempt to scuff the ball in a Test against South Africa. Warner was suspended for a year.

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