Ethics in European Treasury and Financial Affairs

by François Masquelier, RTL Group Head of Treasury, Corporate Finance & ERM, and Honorary Chairman EACT

A company can hardly expect to apply principles if the conduct of its employees does not respect them.

Generally speaking, ethics have acquired great importance, and particularly in the financial world, in the wake of the widely-publicised and explosive scandals of the early 21st century. It is important to remember that the cases of Ahold, Enron, Arthur Andersen, Parmalat and Vivendi (among others) have shown that accounting fraud and financial malpractice can either sink a company or cause it serious harm, due to the actions of a handful of irresponsible individuals. America’s celebrated market watchdog, the SEC, has imposed its view of the situation and the American Senate has issued legislation in the form of the much debated Sarbanes-Oxley Act (or SOX, named after its main architects). Distorting a company’s reputation, particularly with regard to financial affairs and accounting, can have extremely serious consequences for its shareholders and employees.

Clearly, as is often the case, the answer has come in the form of heavy penalties (even custodial sentences in the USA) and the divulgence of financial information (disclosure, to coin the American term). The rules have even become nightmarish to implement, and the quantity of information published makes for time-consuming and laborious reading of annual reports and internet sites. Surely, even in finance, you can have too much of a good thing? We are entitled to ask ourselves the question, even though some maintain that there is a need to legislate in order to impose what companies and their shareholders do not seem to be able to do of their own accord in the field of internal audits. The risk to reputation has loomed large and heavy. Moreover, it often features prominently among the top three places in the classification of general enterprise risks.

Ethics and the treasury

A company’s treasury department is not exempt from this risk of fraud. It must, even more so than its colleagues in the financial world, respect a certain level of ethics, given the amounts at stake and the importance of its transactions for financial survival. Nobody can deny the importance now granted to the treasury department in a company such as Ahold, nor the huge growth in its treasury staff. The values which a company wishes to transmit must support the ethical rules of the business area in which it intends to operate. A company can hardly expect to apply principles if the conduct of its employees does not respect them. The actions of all employees, particularly in finance, translate and express these basic values. If the actions conflict with the values, the corporate image can be distorted or even tarnished, if the conduct is unlawful or fails to comply with generally accepted principles. [[[PAGE]]]

Each of us, as an employee of a company but first and foremost as human beings, should have our own ethical principles (often similar in our Western societies). These values and principles can vary from one individual to another. Each of us has our own moral values in the form of an informal code of ethics, which governs our everyday lives, but also our work. Treasurers and financial officers are not exempt from this personal code of ethics. Problems can arise if the company’s code comes into conflict with our personal rules. An individual’s personal reputation is also exposed. Apart from anything else, our reputation is what we hold most dear, and is something that we should never lose.

Moreover, these ethical rules should be applied to the different categories of individuals with whom a treasurer comes into contact.

Codification of ethical principles

Certain ethical principles (the main ones) are laid down in a variety of documents. Others (usually the less important ones) are not even written. They remain verbal principles, generally accepted or transmitted, most often by management.

[[[PAGE]]]

This codification, often a consequence of SOX, has had a major impact on the everyday lives and functions of a treasury department and the rest of the financial world in general, and will continue to do so. The dominant idea is still to avoid incidents and prevent fraud. The responsibility has been placed on the shoulders of management (in this particular case, on the CFO - Chief Financial Officer).

Following in the footsteps of the accounting standards, the American ethical culture, more rules-based than its European counterpart, is now leaving its mark on European treasury departments. We prefer to formalise a system of rules rather than preserving a few discretionary, unwritten principles and values. Unfortunately, these new rules involve more paperwork than in the past.

Respect for ethical rules

In order to respect this system of rules from a range of sources, written or unwritten, formal or informal, the financial official, treasurer or other employee must ensure transparency, impartiality and task segregation, among other things. For instance, it is important for a treasurer to respect the impartiality required during a call for tenders, and guarantee fair competition among all suppliers. The price set may be unusually favourable, due to a bank error. An ethical treasurer should ask for the quotation to be checked before proceeding to trade. When using trading platforms, ethical compliance can be more problematic, and can present a dilemma for the treasurer. Another example would be the refusal of gifts which could suggest bias in making decisions. Money laundering is another risk that weighs upon a treasury department, and one that it must guard against. The interests of the company must always be put first, as long as these interests do not obstruct or contravene any laws in force. As with accounting standards, transparency is necessary in order to ensure control and demonstrate respect for the rules. The protection of data (printed or computerised) is crucial in order to guarantee compliance with rules. [[[PAGE]]]

Code of ethics

It is essential to codify ethical rules as comprehensively and exhaustively as possible. These rules must be known to their recipients and easily accessible to all. On occasion, the code must be able to adapt to the requirements of a particular region or country. The rules which apply in the United Arab Emirates may differ from those administered in China or Germany. There is sometimes a need to accept differences, in most cases through integrating typically local conventions (such as positive discrimination, although religious laws, such as the case of Islam, can sometimes be stricter). However, in any exceptional case, there is a need to give a very precise account of the difference, and its context, in order to avoid any abuse or misinterpretation by employees or the possibility of it being used as a defence in the event of a dispute. They must also apply to the majority without exception (except for the legal exceptions referred to above). ‘The rules of ethics apply to everyone’», just like the law.

It is also clear that codification can be counter-productive, if it alters previous modes of operation. Ethical rules can put a stop to long-standing traditional practices. And what about the choice of the less well-established path, a fiscal principle often put forward to justify sidestepping a more unfavourable local law? A classic dilemma can arise, in which the Compliance Officer or Internal Auditor may have to step in.

Conclusion

Complete and exhaustive codification of rules is probably not the ideal. The right path lies, as is often the case, somewhere between the two extremes. A small amount of codification is better than none at all. However, if done to excess, it can also cause harm to the extent that operations become impossible. The art consists of summarising the essential basic rules in a few pages. There are examples illustrating our ideas, produced by large companies, to which we refer you. Once prescribed, the rules must be explained, transmitted and accepted by staff before they are enforced. This process will take a little time and will cost money, but the result is worth the effort. It must not be forgotten that at times this is even a necessity, an unavoidable regulatory or market requirement.

Therefore, whether we like it or not, the rules of morality in the world of business and finance are becoming applied with ever increasing frequency. Their formalisation clarifies grey areas and prevents risks, while enabling punishments to be applied to wrongdoers. Even if you are not obliged or forced to comply, a treasury department should have laid down its internal rules so that it can set an example to other financial departments. A treasurer handles vast sums of money, a fact which in itself justifies a higher degree of ethical conduct than that of other people. Treasurers can show that they have become more virtuous than ever, and that the phenomenal developments which have affected their jobs over the past few years have forced them to become so. Moreover, every manager must transmit his or her own style and ethical principles, if they are valid. Reminders are often necessary to ensure that nobody forgets to comply with the basic rules of professional morality in the world of business.