Sir Adrian Cadbury, architect of the world’s first corporate governance code, the UK’s, said that ‘Boards are the centre of the governance system.’ At Downing, we agree and place a huge amount of focus on strong governance given it has a fundamental role to play in the stability of British businesses, and in sustainable growth.

If we take Sir Cadbury’s statement further and assume the governance system is central in our universe, there are many other modules that orbit within it:  

• Director independence and effectiveness;
• Board operations and committees ;
• Roles of chairs;
• and pay that rewards value creating performance instead of short-termism.

There is one Pluto-like module that lies further out and gets less attention than it deserves: ethics codes.  

Preventing negative outcomes for clients

The scandals that led to the Cadbury report in 1992, and others since, show how unethical behaviour by companies with their customer, colleague and community stakeholders does not work out well in the long run.  

Remember these headlines from among many:  

• Robert Maxwell’s raid of the cash and shares of others to service debt and to artificially inflate shares prices of his companies
• Enron’s elusive $100bn annual revenue
• BP’s Deepwater Horizon oil spill
• Banks price-fixing LIBOR, an interest rate benchmark
• Allegations of harassment at the CBI, a trade body

Even a small number of examples shows the scale of judgments and diversity of interests that corporates must face, and highlights the need for taking ethics codes seriously.  

Investors have fiduciary duties of loyalty and care to their clients. Ask anyone who holds the CFA Charter and they’ll likely agree. The CFA ethics code’s concepts meet this duty:

• Being professional and following the law, without misrepresentation or misconduct;
• maintaining the integrity of financial markets;
• treating clients fairly and confidentially; providing investments suitable for their target outcomes;
• undertaking proper investment research that includes sustainability factors;
• and properly managing any conflicts.  

Which client wouldn’t expect all of this from their fiduciary? Or, from the investments that are selected on their behalf.

Real rules for real people

Embracing moral principles that govern behaviour and help to make the right judgment about conduct typically results in long-term benefits in two ways.  

First, embracing ethics creates financial benefits, almost certainly greater than the cost of creating, implementing and monitoring an ethics code. Ethical companies do not have to pay fines for bad behaviour. They have products that people want to buy and maybe even pay more for, and have reputations that attract and retain talented staff. And they receive less scrutiny from NGOs and regulators, or less resolutions for a vote like removing directors from activist investors, enabling management teams to focus on actually running the business.  

Second, embracing ethics creates societal benefits: negative externalities like pollution – imagine schoolchildren crying at pictures of birds covered in oil unable to clean themselves to fly and dying from ingesting the toxic sludge – are avoided. A company’s goodwill and its social licence to operate is not revoked. Authorities need fewer resources to enforce rules, freeing these up for other uses.  

But many UK small companies (almost half of the FTSE350²) do not have public ethics codes.  

Research by the Institute of Business Ethics from 2023 highlights a sparseness of frameworks that are either suitable, meet their standard for ‘good’ or are up-to-date (less than three years old).  

Your author might have convinced you by now to create an ethics code. But what does this actually mean? A clearly written framework that considers values, and is endorsed by the ‘tone from the top’ and the culture, and that all employees receive training on. Also:  

• It covers factors material to the company and sector, and achieves accountability through transparency.  
• It is regularly used by staff as a reference in their decision making.
• Importantly, protects staff if they blow a whistle to report concerns about unethical behaviour.  

Whistle-blower protection is a material ethics factor. The rule here is to never retaliate – look at what happened to the former CEO of Barclays Bank in 2018 when he tried to uncover a whistle-blower’s identity.  

Other content covers how to speak up and investigations to whistle-blowers’ concerns, steps to prevent workplace harassment, how DEI and respecting staff are considered, and approaches to labour rights. The ten principles of the UN Global Compact provide guidance too and extend ethical behaviour to the environment, labour and human rights and anti-corruption.

All of the above, surrounded by a compliance monitoring programme, will lead to the success of an ethics code.  

Our call to action  

Our goal in pursuit of supporting the UK economy thrive is to help the small companies that we invest in to create and adhere to a genuinely strong ethics code.

Through a combination of the CFA’s rules for investors¹, the IBE’s research² and toolkit³ and the UN Global Compact⁴, we will be able to achieve this framework, get the financial and societal benefits, avoid scandals and contribute to corporate governance as a material factor for Downing.  

After all, stewardship and a thoughtful dialogue to empower investees to achieve change is at the centre of the investment system.  

Find out more about our approach to responsible investment

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Footnotes:

^{1 CFA’s Ethics rules for investors}

^{2 IBE's FTSE 350 codes of ethics}

^{3 IBE’s Write a Code toolkit}

^{4 UN Global Compact} ‍