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Failures in ethics are shaking politics and business – but will anything change?

21 March 2009

By Liza van Wyk

The collapse in business and political ethics is costing economies dearly – but have business and political leaders learnt their lesson?

Before the global economic meltdown mega-companies in the United States like Enron and Arthur Andersen collapsed on the back of extensive financial mismanagement and corruption. What we now know is they were not the exception, they were early warning beacons.

Fifteen years ago South Africa attained democracy in a political settlement hailed as a miracle. Hope was a stronger currency than the rand, which grew in strength on the back of pride, but today as one political corruption scandal after another hits the headlines we face a gloomy election.

The examples of a failure in ethical leadership are everywhere: a political party leader being appointed to a high position despite his seniors knowing of a string of fraudulent activities, US and British bankers giving themselves significant bonuses despite their banks being bailed out with taxpayer money, members of parliament abusing travel allowances…

Despite companies claiming they abide by corporate governance rules and financial regulations from FICA onward, ethics and discernible values driven leadership is infrequently seen.

In the United States, Barack Obama has put a US$500 000 cap on the annual earnings of those in companies the US government bails out. That translates to R5m a year, how many of South Africa’s corporate leaders would be able to get by on that amount?

Obama has asked corporate America if they can justify multi-million rand salaries and bonuses when in the three months to the end of January, 1,7m Americans lost their jobs. Should we contemplate similar questions in our country with its persistently high unemployment rates?

But are earnings the problem or the way we structure reward schemes? Very often there is a short term focus aimed at getting results that will benefit shareholders for that year – but a high dividend today does not necessarily equate with long term sustainability or profitability.

And employee interests don’t always coincide with shareholder interests. Sometimes bonuses can distort performance. Employees may focus on that which gets them the biggest reward and that does not always add value to a company.

When Enron collapsed it was revealed that each year they shaved off the lowest performing 15 percent of the workforce, this measure, supposedly to ensure excellence, guaranteed the opposite. Employees would collude to give good performance scores to each other – the ethical however, refused to do that and wound up getting sacked. This meant that at the end of the day Enron was populated by staff that would lie, cheat and manipulate figures to get what they wanted – it built a corporation populated with lies.

Part of the reason why some banks collapsed recently is that staff were writing up extra loans for which they were rewarded: but those loans were not viable.

An ethical organisation is a powerful enterprise. And yet one of our training courses that has seen the least interest in recent years is that on Business Ethics – and the consequences of the failure in educating managers in paying principled attention to the way they do business is showing in failures everywhere.

A lot of attention has been given to often small ethical issues. Some companies have issued notices to suppliers prohibiting gifts of any kind. Others have a register commonly referred to in jest by many employees as “the bribe book.” Some companies pool gifts and distribute them evenly among all staff.

Some companies organise simple business breakfasts, others fly clients and their partners to exotic international destinations all expenses paid for three days to attend a one-day conference.

We didn’t hire a job applicant who had not reported a colleague in his previous company for stealing, although, he said, he addressed the problem with the employee and prevented further transgressions. Another employer may have taken a different view.

As a management team we had differing views on a job applicant that had put on his curriculum vitae: “Highest standard: matric”. It transpired that the applicant hadn’t passed matric, although, this was the assumption we had all made when reading the CV. Some of the management team felt that the applicant was blatantly attempting to mislead us while others felt the CV was factually correct since the highest standard that the applicant had attended at school was matric. He just hadn’t passed but the CV didn’t explicitly claim that he did.

You can’t write rules for every eventuality and you generally don’t want to anyway. That is why clarity on company values and consistency in application of values is so important. Corporate governance has meant that in recent years companies are looking closer at ethics, but often earnest attention to ensure that paper clips are not stolen, miss traders who are selling paper companies that don’t exist for billions. Acquisition, entitlement and a failure to look at the big challenges have created major problems for economies.

What is needed is no less than a radical re-evaluation of the principles governing businesses, careful thinking about the application of ethics at all levels of business and government. We need fewer pronouncements of intent and more action against the corrupt. Leaders need to set the example.

Liza van Wyk, is CEO of major training organisations, AstroTech and BizTech and the AstroTech Conference Centre, liza@astrotech.co.za or www.astrotech.co.za