Ethics man takes on the fat cats

This week we saw the Eighties confronted head-on by the Nineties. There were the National Grid's top executives enriching themselves shamelessly, avoiding tax by transferring hundreds of thousands of pounds' worth of shares to their wives. Like true Eighties men, they could not understand what all the fuss was about, as they went about the business of making as much money as fast as they could. The free market was operating, so all was well as far as they were concerned. And the Prime Minister was right behind them, justifying their greed.

Meanwhile, the rest of us looked on angrily, fed up with a bunch of characters who did not seem to know the difference between right and wrong. The issue was not whether the tax wheeze was legal. What mattered was that it failed to pass the Nineties test. It was not fair. So the executives should not have behaved in the way they did.

The row demonstrated the great cultural gulf that has opened up between most people and those who run industry and the Government. Suddenly, those who sit in the Cabinet and in boardrooms are looking like yesterday's men and women. They do not understand how much Britain has changed. People now want more than the simplistic liberal economics that those who forged the Eighties revolution proclaim. They are not hostile to capitalism, but demand that business should also operate according to certain additional ethical standards. They want integrity and high-mindedness. Companies must not only be profitable. They should also be good.

The new morality has been growing for many years among consumers. It dates back to the student boycotts of Barclays because of the bank's links with apartheid, campaigns against Nestle over baby milk formula and the legal battle for compensation in thalidomide cases. Now, according to recent research by the Cooperative Wholesale Society, three out of five consumers say they are prepared to boycott firms or stores over their ethical standards. A survey of 1,000 heads of households in the United States found that 75 per cent actively blacked certain products.

Institutional shareholders also expect more of the people who run the companies that they own. Next week, at the annual meeting of British Gas, shareholders will debate a motion condemning the huge pay rises awarded to Cedric Brown, the company's chief executive. The motion is sponsored by Pirc, a corporate governance consultancy that advises on ethical investment. Anne Simpson, Pirc's joint managing director, argues: "We believe that the integrity of the board rests on its ability to lead by example. If you see directors taking long lunches and walking off with corporate umbrellas, we don't see how they can hold the respect of the employees."

Launched in 1986, Pirc now has clients worth more than pounds 70bn. But instead of telling investors to get out of certain distasteful companies, it encourages them to buy shares and change the company's policies. This new type of activism is taking place at a time when shareholders are flexing their muscles across all of British industry. It is no longer rare for an AGM to dissolve into acrimony and bitter exchanges.

There are good commercial reasons why shareholders should become concerned when their executives fail to practise high ethical standards. Downsizing and delayering have severely undermined the staff loyalty that acted like a glue keeping organisations together. Yet companies need their staff to be honest as never before. This is because companies are typically devolving decision-making down to the lowest possible level in an effort to hold down costs. The collapse of Baring's bank was a good example of the heavy price paid when those with delegated powers could not be trusted to behave properly.

If companies cannot offer job security, the only way that they can weld together a structure is by being clear about their values and maintaining a high standard of corporate ethics. The example for the rest of the company must come from the top. Any suspicion about senior management, any rumour that they have their hands in the till, will destroy the fabric of the company. Thus, British Gas shareholders became worried about the Cedric Brown pay rises when they realised that complaints to the Gas Consumers' Council had risen sharply. Employees, facing the sack and, in some cases, pay cuts have, not surprisingly, been giving less than their best after Mr Brown's generous award. Why make the effort to fix an old granny's boiler late on Christmas Eve when your boss seems interested only in lining his own pockets?

All these factors are part of a broader change in society. In the face of increasing fragmentation and individualism, people seem to crave a holistic, ethical approach to life. Given that it is more and more difficult to build longstanding relationships, people need to know that they can have confidence in the people they encounter. Trust and reliability are becoming valuable commodities in a fast-moving world. And once a reputation for trustworthiness is lost, it is difficult to restore. Politicians involved in sleaze are appreciating this reality, and business is also slowly coming to recognise the problem.

We are experiencing "the move from expediency to integrity", according to John Drummond, managing director of Integrity Works, a business ethic consultancy firm. "Every time we debate ethics in companies, it is almost impossible to bring discussion to a tidy close," he says. "People have so many things that they are concerned about. Raising the subject of the company's values is like presenting someone parched and dying of thirst with an oasis. You can't take philosophy out of business, yet in so many companies it is neglected and there is no forum for discussion."

The company of the future will be "high trust, low cost", says Mr Drummond. Those companies where there is plenty of trust will not require as much bureaucratic control as their competitors and will therefore enjoy a competitive advantage.

Such ideas do, however, seem to have been lost on those who run the National Grid and many of Britain's formerly nationalised industries. In these areas of industry, disenchantment has grown most rapidly because we are accustomed to thinking of the utilities as being public property. We are, in many ways, still right to think this way. Most of the shares are owned by us, via the savings we have invested in institutional pension funds.

John Major's problem is that he seems unable to empathise with the new collectivism the public feels. As a battle-hardened privatiser, he seems to suffer from a psychological block. He has failed to understand that disillusioned members of the public want morality, not taxpayers' money, injected into industry. Ideologically, the Labour Party has no problem in reconciling private industry with publicly determined ethics. If the Prime Minister - and those at the top of British business - cannot change quickly, others will seize the new agenda.