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FOCUS: Ethics And Trust

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Integrity and values should be at the core of every business and each employee. Why? Because the right  values will steer your personal life, your business, employees and management in the right direction. It will promote a spirit of trust and influence others to do likewise. Ethical choices are like seeds that one plants that can potentially yield fruit that a whole nation can eventually feed from. Quite contrarily, one unethical decision not only ruins your reputation, but your family, company – and as we’ve witnessed- may ripple right to the economy. In this feature we discuss more about ethical behavior.

 

Maintaining business integrity in a post-truth world

The best place to start building sustainable businesses is fixing the systemic issues that have brought our professions into disrepute and future-proofing them against further potential damage. Let’s ensure integrity is the cornerstone of our businesses

Locally and internationally, the headlines of late have been disheartening, from politics to environmental news and even within the financial and accounting professions. Many firms have come under fire – whether for failing to uphold professional standards or even being implicated in accounting or auditing scandals. Some of the responsibility they’re shouldering may be fair; some might not. But in this age of ‘alternative facts’ and social media, protecting our integrity is more important than ever before, both as individuals and collectively in businesses.

Integrity can be defined in various ways. The Cambridge English Dictionary says it’s ‘the quality of being honest and having strong moral principles that you refuse to change’. Another idea that I like is that integrity is simply being the same on the outside as you are on the inside – no matter who or what you’re dealing with. In that sense, if you believe in honesty in your core, you will refuse to behave dishonestly, even if it means a bigger profit or better opportunity.

I think the answer to preventing any disrepute is to pursue systemic integrity in our professions and organisations. So how do we do that?

Integrity starts with you and me

First, it’s important to understand that business integrity is a collective endeavour. Each of us has a role to play – no matter what our job description or level of power. Integrity takes hard work sometimes. It means doing the right thing, even when it’s not easy, and we each need to be committed to making that choice, every day.

At an organisational level, ensuring integrity means everyone is willing to keep each other in check – and to be kept in check. Too often, we place responsibility solely on leaders. While they do shoulder great responsibility, employees and shareholders need to realise they are also responsible for maintaining and protecting the business’s integrity. We all need to help one another to weed out our blind spots.

In the financial world, we also help build structures where integrity can flourish through focusing on objectivity, impartiality and independence. I believe we should also pursue greater transparency. As openness increases, there are fewer ‘dark places’ where confusion and dishonesty can grow.

Next, look at the data level

Any decent data scientist or accountant understands the importance of clean data in drawing useful conclusions.

Dirty data muddies the water and makes room for unnecessary mistakes as well as deliberate obfuscation. As the saying goes, ‘Numbers don’t lie.’ But if the numbers aren’t accurate and clear, sometimes they might as well.

When you simplify the figures by cutting out the clutter and working only with relevant, clean data, you can use your numbers to flag potential problems and deal with them efficiently. If, however, you have inaccurate data and you’re not clear on your key metrics, you run the risk of missing those red flags, opening yourself to potential data manipulation.

Bridge data and people with smart systems

Even the most competent people will make mistakes, so to protect an organisation from human error, it’s wise to invest in experts and systems that provide a measure of automation and independence where possible.

This is actually easy to do in a number of functions, including finance, operations and HR. For example, automating various HR admin processes can protect against preferential treatment or the perception thereof. Similarly, automating key aspects of an organisation’s financial reporting can help to weed out common issues like Excel formula corruption, version control on documents and ultimately the misstatement of numbers.

Don’t forget the obvious

When it comes to business integrity, as in most things, actions speak louder than words. So, for those of us who want to prioritise business integrity, it’s important we don’t just say all the right things, but follow through and do them. This is no easy feat. It means meeting our commitments, treating everyone with respect – no matter their ‘rank’ – and putting in the time and effort to build and maintain trust with our employees, partners and shareholders.

To me, success without integrity is not true success. It also leaves us vulnerable when things go wrong. To state what every good leader already knows, integrity remains the true mark of leadership, so let’s bring the focus on it back into our organisations and professions.

IDEA IN BRIEF

When it comes to business integrity, as in most things, actions speak louder than words. So, for those who want to prioritise business integrity, it’s important we don’t just say all the right things, but follow through and do them. This is no easy feat. It means meeting our commitments, treating everyone with respect – no matter their ‘rank’ – and putting in the time and effort to build and maintain trust

AUTHOR l FR (Rhys) Robinson, PhD is Executive Director, Infinitus Reporting Solutions (Pty) Ltd

 

Ethical dilemmas

With millennials starting to occupy the top organisational positions, it is important to consider and understand the impact this may have on the manifestation of unethical behaviour in organisations

In the next decade, millennials (those born between 1980 and 2000) will increasingly climb the corporate ladder or head their own successful businesses. This may be seen as contradictory to the popular stereotype that millennials are career-hoppers. However, a recent survey (Deloitte Global’s sixth annual Millennial Survey) showed that there is a growing need, especially in developing countries, for stability and job security.

Add to this the perspectives from another recent study about millennials in South Africa: almost 50% of the participants indicated that mentoring others is the most attractive aspect of leadership and nearly 60% seeked traditional management-track corporate careers (Universum South Africa). With more than a third of South Africa’s citizens being millennials, business-as-usual will very soon be led and influenced by a generation that brings new perspectives and changing priorities to leadership roles. In an often volatile and challenging work environment, leaders are continuously faced with ethical dilemmas. What will millennial leaders do in the face of these ethical dilemmas?

Leaders ultimately set the ethical tone of the organisation through their own actions. Unethical behaviour is driven by poor ethical decisions and is counter to the legitimate interests of the organisation and all its stakeholders. Decisions (or in this case then poor ethical decisions) are impacted by factors such as personal values, attitudes, life experiences, and intentions. The greatest predictor of unethical behaviour is the emphasis on self-gain. This is exacerbated in an economically driven business world with unrealistic performance expectations and in companies where the boss is perceived as a bully. Unethical acts are then often committed from a resentment and disillusionment perspective. Unethical behaviour also increases when employees feel that their actions will not harm a potential victim and that they will not be condemned by their peers for their actions. Putting the millennial lens on these factors yields an interesting perspective:

  • Millennials have an increased sense of social responsibility and believe that business should do more to alleviate society’s challenges. They want to be involved in good causes at the local level at work.
  • With a ‘work hard, play hard’ attitude, they demand flexibility in the workplace and require work to be meaningful.
  • Work/life integration is high on their priority list.
  • Millennials typically have a high expectation of the presence of positive traits such as trust and transparency in their environment.

Different approach to work

With millennials’ emphasis on flexibility in terms of working and a more relaxed intersection of ‘work’ and ‘life’, their leadership style and demands may seem, at least on the surface, more relaxed and less rule-oriented. Previous generations may interpret this as a lower level of work ethic, but perhaps it is just a new set of values-based guidelines, rather than specific rules and regulations.

Ethics is in the eye of the beholder?

One can perhaps argue that, as leaders, millennials will increasingly craft company cultures where the greater good is more important than individual needs. Their higher sense of social consciousness may impact their discernment of what constitutes ethical vs unethical behaviour. This was highlighted in an analysis of the generational differences in responses to the National Business Ethics Survey in 2015 in which millennials presented as having the highest risk of all the generations for non-compliance due to turning a blind eye to certain questionable behaviours. It seems that they simply do not put the same value on different forms of unethical behaviour and will ignore misconduct if it saves jobs, therefore deciding that the end justifies the means.

The slippery slope of unethical decisions

Put together, those small ‘ends-justified’ unethical acts can lead to bigger negative outcomes. In fact, many executives who end up facing the consequences of their poor ethical decisions will say that it started small − bending only a few ethical guidelines and not setting out to hurt anyone. Then along the way rationalisation helps to recast unethical acts as justifiable and it becomes more acceptable. When new employees join the organisation, they are socialised regarding the way business is conducted and together with rationalisation, this then leads to the acceptance and perpetuation of unethical behaviour.

Managing the risk

If business understands the drivers of unethical behaviour for millennials, it may help to prepare for and manage the potential future risk thereof. If their unethical behaviour is not necessarily fuelled by the emphasis on self-gain, but rather stem from the intention of helping others; if their flexible approach to work life translates into a flexible implementation of business rules; if they question the way things are done because they need their work to be meaningful − then that understanding can be incorporated into leadership development initiatives.

The need for trust and transparency from their environment are millennial strengths that should be capitalised on when it comes to positioning and developing these future leaders as custodians of ethical behaviour. Some suggested actions are:

  • Ethical dilemmas should be discussed and debated and the link of unethical behaviour to the harm it causes clearly highlighted.
  • Codes of conduct with defined behavioural norms should be co-created and enforced.
  • Values should be given life through the strategic use of symbols or slogans to activate underlying moral standards.
  • Ethical behaviour should be rewarded.

Allow them to shine

There is a saying, ‘Power reveals who you really are …’. In the case of millennials, it may in fact reveal them to be the more caring and responsible generation who will ultimately deal with ethical dilemmas with a human touch. Hopefully they will be the generation of leaders who take a stand against toxic, profit-only, power-hungry organisational cultures. Perhaps, in the face of ethical predicaments, they will succeed in rationalising less, being more transparent and consistent, and ultimately acting in ways that enable ethical behaviour and have a lasting positive impact on the interests of all organisational stakeholders.

AUTHOR l Renate Scherrer PhD is a registered clinical psychologist with the Health Professions Council of South Africa and the managing director of JvR Consulting Psychologists, part of the JvR Africa Group

 

Ethical failures and the danger of over-regulation

Rules and more rules … Organisations should be encouraged to curb unethical behaviour by establishing a conviction-based approach that promotes ethical standards and behaviour rather than ascribing to mindless compliance to rules

It is easy to react to recent corporate ethical failures by calling for intensified regulation to prevent ethical transgressions. Such reactions are to be expected when stakeholders’ indignation at the seemingly shameless unethical behaviour in all sectors of the economy reach breaking point.

Lawmakers are called upon to amend laws and regulations to close loopholes and impose harsher sanctions on transgressors. Organisations are advised to create more and stricter policies or to amend current policies accordingly.

But can the knee-jerk responses that may follow really make a difference? Will such responses not lead to even more devious ways of beating the system? Does intensified regulation contribute to enhanced ethical behaviour? It must be extremely tempting for law- and policymakers to react to ethical failures by using fear and punishment as a default point of departure.

In this article, we analyse the role of fear as a means of curbing unethical behaviour as opposed to a convictions-based approach that promotes ethical standards and behaviour.

Fear

There is no question that rules and regulations are important to ensure order and prevent chaos in societies and organisations. A major outcome of over-regulation is the proliferation of rules, however. Organisations often attempt to prevent unethical behaviour by creating more and more rules via policies. This may even be based on the belief that most apples are ‘bad’. Such actions and beliefs are usually accompanied by an intensification of attempts to identify transgressors and to thereafter deal with them in no uncertain terms, in other words the big stick approach.

It cannot be denied that employees refrain from breaking the rules through fear of punishment for wrongdoing. Observing what happens to others that do wrong is after all an important form of social learning. This form of shaping behaviour is called vicarious learning. A typical example of how people learn vicariously in the workplace is organisations’ efforts to create safe work environments. Employees are indoctrinated on a daily basis to adhere to safety regulations. Individuals and teams who break these rules are punished or denied certain privileges. And so the rest of the organisation’s employees learn by observing what happens to their colleagues.

The big stick approach to preventing unethical behaviour may certainly curb unethical behaviour through fear. And certainly, punishment for transgressions is an inevitable and necessary consequence of wrongdoing. Organisations that follow this overwhelmingly compliance-based approach by and large rely on reactive ethics interventions such as enforcement of codes and policies, encouraging and rewarding whistle-blowers, and heavy-handed discipline.

But can such a fear-based organisational culture ensure ethical behaviour on a sustainable basis? Or may it merely fuel the adage that ‘what is not forbidden is allowed’? Will the mocking and defiant ‘as long as you don’t get caught’ belief of those with a propensity for deviant behaviour not result in such behaviour becoming even more devious and ubiquitous?

It is surely cynical of organisation’s to continually focus on what ‘they don’t want’. The temptation of over-regulation, the proliferation of rules and ‘catching those who do wrong’ may prevent unethical behaviour and maintain a highly regulated status quo. Employees know exactly what they are not permitted to do. They even do the right thing because ‘someone may be watching’. They are thus extrinsically motivated into doing the right thing. In a perverted sense this may provide them with a sense of security by virtue of the predictability of their environment. But can one’s sense of doing the right thing, and thus being ethical, thrive in such autocratic and fear-laden contexts? Is there not a more positive and constructive approach of getting people to do the right thing than by using fear to accomplish this?

Convictions

An alternative to a fear-based culture is a conviction-based culture. The latter type of culture is characterised by organisational values that are clearly articulated and translated into tangible, desirable behaviours that reflect these values. Adherence to policies occur because people subscribe to the ethical values of the organisation, and not out of fear for punishment.

The focus on the prevention of unethical behaviour is shifted to leadership promoting ethical behaviour through talking the ethics talk and walking the ethics walk, thus leading by example. Employees who demonstrate exemplary ethical behaviour are identified as such by their peers and recognised by leadership. This does not necessarily require reward in monetary form, but employees receiving recognition for being good organisational citizens that live the espoused values of the organisation. ‘Catching those who do right’ is a way of reinforcing the ethical values of the organisation. Employees do the right thing ‘even when no-one is watching’. They are thus intrinsically motivated.

An organisation consists of many individuals though. In conviction-based ethical cultures a shared meaning of what is good, right and just exists among employees. There is a collective aspiration to create an organisational culture that sustainably results in a solid reputation marked by stakeholder trust.

Establishing conviction-based cultures do not necessarily have to be triggered by scandals and large-scale ethical failures. Nor are they built on the naïve belief that all apples are unconditionally good. Rules and policies exist where necessary and are respected rather than feared or blindly adhered to.

Conviction-based cultures come about when leaders focus on the positive ethical values and standards that they wish to entrench in their organisations. The focus thus is on the ethical standards that the organisation wishes to achieve, and no longer on what ‘they don’t want’, in other words undesirable behaviour.

Principle 2 of the King IV Code on Corporate Governance (2016) reads: ‘The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture.’ This reflects encouragement to organisations to establish conviction-based cultures rather than ascribe to mindless compliance to rules. Conviction-based ethical cultures require leadership courage, trust and patience, though. Strong barrels that hold good apples may thus take several years to be coopered. Yet, such an approach is built on a solid basis of values and trust rather than on a precarious basis of fear and punishment.

AUTHORS l  Professor Deon Rossouw, CA(SA) is CEO of The Ethics Institute and Professor Leon van Vuuren is Executive Director: Business and Professional Ethics at The Ethics Institute

 

The ethicality of CAs(SA) serving on boards

The ethical conduct of CAs(SA) has a direct or indirect impact on the organisations that they lead and is strengthened and governed by the SAICA Code of Professional Conduct (CPC), which strives to ingrain high moral fibre in all SAICA’s members. This article considers the ethicality of CAs(SA) serving on the board of directors of the Top 40 JSE-listed companies

Good governance and ethical leadership are critical for successful economies and business growth. This is supported by Kallinowsky, who as far back as 2007 subscribed to this: ‘It is universally acknowledged that eliminating corruption is a prerequisite for societal and economic development. Good governance and transparency are building blocks of modern democratic societies. The question is no longer whether corruption hinders sustainable development, but much more how societal actors can collaborate to eliminate corruption in all its forms, including bribery and extortion.’1 The allegations of state capture and private sector organisations that have fallen prey to corrupt activities raise the question whether professions are successful in their attempts to eliminate corruption and act ethically in everyday business situations.

Chartered accountants in South Africa (CAs(SA)) play a critical role in business and governance structures and the CA(SA) qualification is held in high esteem. This is reflected in the words of the CEO of SAICA, Dr Terence Nombembe: ‘We surveyed all the companies listed on the JSE; there were 4 035 directorships in all, of which 1 025 (23,8%) are held by Chartered Accountants South Africa CAs(SA). That’s almost a quarter of the total and CA(SA) is the most predominant business qualification represented. When we look at CFOs or financial directors, CAs(SA) constitute 74,3% and 21% of CEOs or managing directors are CAs(SA).’2

Thus it is evident that the CA(SA) designation commands a high level of trust and respect in organisations in South Africa. The ethical conduct of CAs would consequently have a direct or indirect impact on the organisations that they lead. The ethical conduct of CAs(SA) is further strengthened and governed by the SAICA Code of Professional Conduct (CPC), which strives to ingrain high moral fibre in all SAICA’s members.

THE CONCEPT OF ETHICS AND ITS COMPONENTS

Ethics defined. For centuries philosophers have attempted to formulate a definition of ethics. Some of the definitions are as follows:

  • ‘Moral virtue is a disposition to behave in the right manner and as a mean between extremes of deficiency and excess, which are vices’ (Aristotle, 340 BC).
  • ‘There are two questions that we must ask ourselves whenever we decide to act: Can I rationally will that everyone act as I propose to act? If the answer is no, then we must not perform the action’ and Does my action respect the goals of human beings rather than merely using them for my own purposes? Again, if the answer is no, then we must not perform the action’ (Kant, 1797).
  • ‘Human well-being (eudaimonia) is the highest aim of moral thought and conduct, and the virtues (aretê: ‘excellence’) are the requisite skills and dispositions needed to attain it’ (Plato, 387 BC).

From the above it is evident that ethics has been a topical concept in society for many centuries.

Business ethics defined. The concept of business ethics has evolved from ethics and business over the years and is a topic that is widely defined. Investopedia describes business ethics as the study of the practices and policies of an organisation that govern potentially controversial issues such as insider trading, corporate governance, fraud and bribery and as such relates to an organisational framework in order to ultimately gain public approval.3 Another definition of business ethics is standards of conduct that govern an organisation and result in the stakeholders’ interests being respected.4

In an attempt to guide organisations with a code of best practices, the first King Report on Corporate Governance was issued in 1994. This report was internationally recognised as a comprehensive publication that adopted an inclusive approach to corporate governance.5 Since 1994 there has been three revised reports, and the King Report on Corporate Governance remains the compass for business ethics in South Africa.6

King IV states that the responsibility for overseeing ethics in an organisation lies with the governing body, which includes the board of directors.7 Good corporate leadership results in an embedded ethical culture, which starts with the board members setting an appropriate example.8 It can be deduced from this that the board of directors will need to adhere to King IV requirements to attain good corporate governance, and, accordingly, ethical behaviour.

Business ethics is important, as stakeholders do not want to be associated with unethical organisations. Whenever an organisation does not adhere to high business ethics standards, its reputation is damaged, which in return reflects as lost sales.9 The conclusion can be drawn that a weak business ethics environment may lead to sustainability problems. Marx and Els substantiate these conclusions by emphasising the necessity of business ethics, as it ensures the long-term survival of modern organisations.10

Professional ethics defined. An organisation is made up of individuals, and in order to establish an ethical culture and adhere to business ethics, the individuals of such organisations should have a strong moral sense of right and wrong.11 Every profession has its own set of rules that members need to adhere to in order to operate within their profession. This set of rules is referred to as professional ethics.12

The accountancy profession in South Africa is distinguished by its responsibility to act in all stakeholders’ best interests. As such, all CAs(SA) are required to comply with the SAICA CPC. The SAICA CPC consists of three parts. Part A of the CPC is the general application of the Code, which outlines the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Part B of the Code is applicable to CAs(SA) serving in public practice, and Part C to CAs(SA) in business. Parts B and C of the CPC address specific ethical issues that the relevant CA(SA) might be faced with.13

There are several reasons why professional ethics are important. This was very well defined as far back as 1991 by Davis, who sums up the different reasons in one statement: ‘The code is to protect each professional from certain pressures (for example, the pressure to cut corners to save money). A code protects members of a profession from certain consequences of competition. A code is a solution to a coordination problem’.14 This still holds true today, and accordingly professional ethics should serve as a moral guide and provide the necessary and appropriate guidance for the professional individual in order that he/she does not misuse the information advantage.15

Given the prominence of CAs(SA) in business, it is reasonable to argue that ethics and business ethics are an integral part of their everyday life and work responsibility.

OBJECTIVE AND METHODOLOGY

The objective of the article is to assess the ethicality of CAs(SA) serving on the boards of directors of the Top 40 JSE-listed companies. This was done by means of a qualitative research method.

The study comprised analysing recent corporate scandals (up to 23 November 2017) to ascertain whether CAs(SA) were on the board of directors and/or took part in unethical conduct. This was done through a Google keyword search of the Top 40 JSE-listed companies paired with unethical terms.

By inspecting integrated reports, the researchers obtained the names of all the board members and verified their SAICA membership on the SAICA website. Thereafter a Google search was performed on their names, followed by carefully selected phrases that are most commonly used when unethical behaviour occurs in organisations, for example bribery, tax evasion, collusion, fraud, price fixing, fronting, and related party fraud.

POSSIBLE LIMITATIONS OF THE STUDY

The Top 40 JSE-listed companies as at 23 November 2017 were selected because this group comprises the largest companies based on market capitalisation and the JSE is also South Africa’s best-known and most closely watched local exchange index.16 This study is thus limited to the Top 40 JSE-listed companies’ board of directors and may not be representative of the whole population. It should also be noted that the study was done before the reporting of irregular conduct in December 2017 in Steinhoff, many of whose directors are CAs(SA).

FINDINGS AND CONCLUSION

The research data revealed the following. It is alarming to observe that, as the findings indicate, CAs(SA) were involved in or were associated with such reported unethical and irregular activities, even if the reported findings are low numbers. The issue that also arises is where the governance processes were that should have ensured that company directors and officials are persons of the highest moral compass.

It must also be acknowledged that, from an audit point of view, the difficulty is that there is not always an audit trail to follow when it comes to unethical behaviour, as such activity usually takes place outside normal business discussions. As such, these conspiracies are by nature secret and difficult to detect.

One of the major developments is the inclusion of a section named ‘Non-Compliance with Laws and Regulations’ (NOCLAR) in the SAICA CPC. The NOCLAR section is a framework that has been established to assist auditors and other CAs(SA) in business on how they should act in the public’s best interest and what actions they should take when they are aware of potentially illegal acts committed by their clients or employers. NOCLAR will provide a clear guideline for auditors and other professional accountants to disclose potential non-compliance without being constrained by the ethical duty of confidentiality. It also places renewed emphasis on the role of senior-level accountants in businesses to promote a culture of compliance with laws and regulations, and to prevent non-compliance within their organisations.

TABLE 1

The research findings demonstrate that the CA(SA) profession is one that exhibits high moral values. However, the fact that there are some CAs who are involved in irregular activities is alarming. This is something that each individual CA as well as SAICA should work vigorously to eliminate.

AUTHORS l  Izel van Loggerenberg, Alicia van der Walt, Khosi Hlongwane (UJ Academic Trainees 2017), Professor Ben Marx CA(SA) is HOD of Department of Accountancy at UJ (supervisor)

NOTES

  E Kallinowsky, Business fighting corruption: experiences from Africa, Pretoria: Global Compact Regional Learning Forum, 2007.

2 South African Institute of Chartered Accountants, Influence: SAICA Survey, 2014,

http://www.accountancysa.org.za/influence-saica-survey/ (accessed 24 November 2017).

3 Investopedia, Business ethics,https://www.investopedia.com/terms/b/business-ethics.asp

(accessed 24 November 2017).

4 Rossouw and L van Vuuren, Business ethics, 4th ed, Cape Town: Oxford University Press, 2010.

5 The Institute of Directors in Southern Africa, 2016. King IV Report on Corporate Governance for South Africa, Johannesburg: LexisNexis, 2016.

6 Michalsons, King Report and King Code on Corporate Governance, 2017,

https://www.michalsons.com/focus-areas/information-technology-law/king-report-king-code-on-corporate-governance (accessed 24 November 2017).

7 The Institute of Directors in Southern Africa, King IV Report on Corporate Governance for South Africa, Johannesburg: LexisNexis, 2016.

8 Deloitte, King IV: Ethical leadership and the governance of ethics, https://www2.deloitte.com/za/en/pages/africa-centre-for-corporate-governance/articles/kingiv_ethical_leadership.html (accessed 24 November 2017).

9 G Singh, Why is ethics important to business?, 2014,https://blogs.accaglobal.com/2014/11/25/why-is-ethics-important-to-business/

(accessed 24 November 20170.

10 B Marx and G Els, The role of the audit committee in strengthening business ethics and protecting stakeholders’ interests, African Journal of Business Ethics, 4(1)2009:5−15, at 6.

11 Speedupyourcareer.com, http://www.speedupcareer.com/articles/professional-ethics.html (accessed 24 November 2017).

12  C Gilley, What are professional ethics?, 2014, https://www.quora.com/What-are-professional-ethics (accessed 24 November 2017).

13 International Federation of Accountants, Code of Professional Conduct of the South African Institute of Chartered Accountants, 2016, in SAICA student handbook, Johannesburg: LexisNexis, pp ET1−ET109 .

14 M Davis, Thinking like an engineer: the place of a code of ethics in the practice of a profession, Philosophy and Public Affairs, 20(2)1991:150−167.

15 J Fisher, Why are professional ethics important?, 2015,https://jamesefisher.wordpress.com/2015/11/09/why-are-professional-ethics-important/

(accessed 24 November 2017).

16  Johannesburg Stock Exchange, What is the JSE Top 40?,https://www.jse.co.za/grow-my-wealth/what-is-the-jse-top-40 (accessed 24 November 2017).

 

The profit in business ethics

‘What is called standard practice in the private sector is corruption in the public sector’ is an argument that one commonly hears from apologists of state corruption. But it’s wrong, says Mike Brown CA(SA)

Public sector and private sector corruption differ in who suffers the consequences, but they are also fundamentally linked. ‘Society is the sum of all its parts,’ says Mike Brown, Chief Executive of Nedbank Group. ’After all, the same people make up both sectors, being the people from which we draw our customers and hire our staff. It would be wrong for the private sector to believe it is fundamentally different to the broader society in which it operates. Corruption in every instance is to be denounced, but corruption at a state level is of a different gravity in that the state has a regulatory and policing role to play in an economy. It must set the rules and regulations by which business must conduct itself, and it must police those rules and regulations through the legal framework when anyone falls short.

‘When the state itself is seen as complicit − as we have seen in South Africa with state capture, and where up until December 2017 the prosecuting authorities seemed inactive – the cancer will spread throughout our society,’ says Brown.

‘When those given the responsibility of policing our society are themselves corrupt, it means the private sector loses critical checks on its behaviour.’

Then there’s the scale of the problem: ‘If you look at the extent of corruption that’s been exposed by investigative journalists drawing on documents like the GuptaLeaks, it has now become apparent that the corruption of the state is significantly larger than anyone had imagined. Something of that magnitude will reach all facets of our society, so the private sector cannot imagine that it is immune from the challenges of the public sector,’ explains Brown.

Obeying rules isn’t enough

Brown believes that while there are exceptions, corporate ethics in South Africa is at best ‘average’, ‘and if any of us takes a serious look at what’s been going on in our society, business ethics have probably also been declining over the past few years’.

The recent history of South Africa has demonstrated that business and investor confidence − and as a consequence economic growth and job creation − freezes in the face of corruption. ‘Society needs trust before it will have the confidence to invest and create jobs, so corruption really goes to the core of damaging the economic progress of our society. Therefore, business should not blindly focus on compliance with rules of governance as its major tool to fight corruption. It’s too easy for business to hide behind behaviour which is fully compliant with the law but is unethical. The gauge that business measures itself by should be to look beyond the rules, as an absolute minimum standard, and rather ask themselves how society thinks business should be conducting itself,’ says Brown.

For instance, statements such as the following issued on behalf of former Public Service and Administration Minister Faith Muthambi reported in TimesLive (8 February 2018) do little to instill trust: ‘We wish to repeat for the record‚ again‚ that the minister has not deviated from the law and regulations provided for in the ministerial handbook.’

The law is a minimum standard for good conduct – ethical, honest conduct in both the private and public sectors is a much higher standard than the law alone, says Brown.

How times have changed

One reason businesses need to adopt a truly ethical approach as opposed to a tick-box one is that the bar of transparency has been raised extraordinarily in recent decades. This is due to the multitude of social media platforms in the digital age.

It may well be that certain types of behaviour slipped under the radar 30 or 40 years ago, whereas today they are bound to come to the notice of a social media savvy public. ‘These things are today out in the open,’ says Brown, ‘and that’s good for society.’

That we are now on the fourth iteration of the King Report on Corporate Governance reflects this ongoing rise in transparency. How they adopt King, says Brown, accords with each company’s different level of maturity around ethics and sustainability thinking. Brown suggests King IV will require boards of directors to think a lot more about their purpose statement. ‘This essentially prompts a company to reflect not just on what are its products or services and customers, staff and shareholders, but on what is its role in society: what is the company doing to enable the achievement of society’s objectives? If companies are not seen to be acting in the interests of the societies in which they operate, over time they will lose their social license to operate.’

King IV is driving much greater focus on a number of other areas, including:

  • Board responsibility for the culture and ethics of a business, and
  • The ethics of pay rather than just the level and fairness of pay

It’s about culture and leadership

‘You have to get the culture of an organisation right,’ he says. ‘It’s critical. Managing the values of an organisation is a key role of the chief executive.’ Sometimes poor governance seems to go hand in hand with a charismatic leader, when too much trust is placed in a single individual rather than in a company’s governance systems. While charisma can be a red flag in the presence of poor governance, it is not in itself a cause of corruption. Brown notes that there are as many instances of a charismatic, ethical leader performing incredible feats building businesses over time, as there are charismatic, unethical leaders who have done a dismal job of it.

More of a red flag is where potential whistleblowers feel unwilling to report malfeasance due to perceived intimidation. ‘In such an instance the culture of the organisation is clearly inappropriate, and that culture is a reflection of the behaviours of its leadership. If an organisation cannot be transparent enough to run an appropriate whistleblower line in our modern society, clearly it has a culture whereby that organisation is unlikely to be sustainable over time.’

King IV will drive greater thinking around integrated strategies that look at all a business’ stakeholders, whether shareholders, customers, staff, regulators or communities in which it operates. ‘When boards focus on more integrated thought processes, over time such a company will inevitably be more sustainable and a better company.’

This is because there is ‘a very definite correlation between a focus on sustainability and positive long-term performance of an enterprise’, says Brown. What may disguise this correlation is the factor that too many companies and analysts have a greater focus on short-term performance. ‘The job of a board and the CEO is to think much more long term than that, effectively to try maximise the present value of all of the future earnings of an organisation, and in so doing to think about the balance between all the stakeholder groups they’re responsible for. If you can balance the interests of all these stakeholder groups, that is the way to sustainably generate value over time.’

The hidden cost of unethical behaviour

‘Ethical behaviour’ is an individual value, with each person having his or her personal moral compass and consciousness regarding the subject. However, that does not mean it is a complex issue. Brown defines it as follows: ‘Ethical behaviour is doing what you know is the right thing, taking account of all stakeholders that are likely to be influenced by your decision. So, it isn’t something you can refer to a rulebook or textbook to see what you’re allowed to do. Deep down, irrespective of various community’s customs or behaviours, human beings intuitively know what is the right thing to do,’ he explains.

Some will argue that ethics doesn’t matter so long as an economy is growing and creating jobs. In 2016 (the latest published) South Africa was ranked by Transparency International in its Corruption Index ahead of all its BRICS partners – India, China and Brazil all rank joint 79 strangely, while Russia ranks 131, compared to South Africa’s ranking of 64 out of 176. Most of these countries are growing faster than our local economy.

‘There are many reasons why countries grow at differing rates at points in time and many reasons why countries fail to achieve their potential growth rates. Corruption is certainly one of them, but it is hard to measure precisely what the impact of higher or lower levels of corruption contributes to preventing a country reaching its potential growth rates is.

‘Certainly, I strongly believe that unless a society has at its foundations ethical behaviour and zero tolerance to corruption, you will have a breakdown of trust among certain segments of society. This leads to lower confidence and lower economic growth than you would otherwise have had and this, in turn, creates a lack of social cohesion.

‘While economic activity can actually be stimulated by elements of corruption, in the long term this is unsustainable,’ concludes Brown.

People and companies employ humans and will inevitably make mistakes. Despite all the screening that is done, they will also inevitably employ a small percentage of people whose ethics are not aligned to those of the company. The challenge, however, is to make sure you have the governance systems in place to deal with them, hold people accountable and learn. The private sector may not be perfect, but the vast majority of our businesses have strong ethical intent and where they fail they will corruption quickly and genuinely try to learn and improve.

Words Eammon Ryan

Illustrations Liézel Els