Ethics; bridging the gap between rhetoric and reality

A CIMA survey of its members’ worldwide has found growing adoption of business ethics codes, but in South Asian companies there is also increasing pressure on accountants to compromise those very standards

By Echelon.

Published on October 16, 2012 with No Comments

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Lying and cheating will often get a firm in to trouble at some point. But it still happens in many because a firm’s leaders are seen to condone it or haven’t provided employees a clear set of ethical rules to follow. Recent global events reinforce this failure of ethical business conduct which has earned public distrust and protest. Global management accounting body CIMA has followed up a survey of its members first done in 2008 on business ethics this year, and has found some worrying trends.

Companies have realized that by ignoring sound ethical practices they are also risking their reputation and courting catastrophe. Despite this there is still a gap between rhetoric and reality about ethical standards.

CIMA’s Managing Director Andrew Harding says there is confusion worldwide in firms on who has formal responsibility for ethical standards across the organisation. He also says that survey respondents in South Asia often appeared to be more under pressure from colleagues or managers than accountants in European and US business to compromise the organisations standards of ethical business conduct. Excerpts of an interview with Andrew Harding…

You followed up a 2008 global ethics survey this year by asking the same questions, are you finding attitudes changing around the issue of ethics in business?

We are seeing a lot of movement, people are talking about it the whole time, we’re seeing more businesses adopting applicable codes and we are seeing them doing more to support those codes. While they’re doing more – there’s more needed, I think it’s very easy to setup a code, what’s much more difficult is making that code work, making it effective and seeing it benefitting business in a way that everyone in the company could trust it and have confidence to work with it.

So, you’re saying more needs to be done. What are you finding in your research and the conclusions you draw on that?

Over 80% of companies, which responded to our survey, have an ethics code – but we are seeing confusion among staff as to who owns that code. Ownership was closely identified with senior management and that’s not what we expect. To be taken seriously the tone from the top has to be right, so you need to identify ethics with the board, with the chief executive and senior people. If they’re not doing it, no one in the business is going to take it seriously.

Ethical decisions also aren’t easy and businesses need to train, they need to help people to make the right decisions. Sometimes you make a decision that at first sight is right and then you dig into it and find it’s actually wrong; how do you deal with it? So training which helps people to see examples of case studies is important, and then you have to let people seek advice. There is nothing wrong when a business says, ‘you know there’s this problem how shall we deal with it?’.

Often people are also frightened to be a whistleblower because they may be persecuted. I was at an American owned shared services sector firm in Bangalore recently, and the first thing I saw when I came in through the staff entrance was, a huge poster saying ‘Seen an ethical breach, you can report it in here, with no fear’. That was the first message everyone sees when they go in.

Some listed Sri Lankan companies have ethics codes, but it’s often limited to just a document. What are the one or two actions that companies can take to make a code practical? Can you give us a checklist?

The first is that you have a code and senior management demonstrates their commitment to the code. Next you provide training for staff on the code on how to use it, then you provide advice lines for the staff, you provide a whistle blowing line and the final thing is you can start rewarding people for their ethical behaviour. That’s, if you like, the hierarchy of things need to be gone through to get what you call best practice. Anyone can download from the internet a code and stick it on the wall and tick the box but this is about measuring behaviour. Once you start measuring behaviour you’re likely to see changes.

What have you found out from your survey, what are the gaps you see in South Asia and other regions in a similar state of development?

In South Asia we’re seeing large numbers of companies who have an ethical code. Equally we’re seeing 60% of accountants in those businesses, saying they feel under some pressure to compromise on ethics. So in Sri Lanka, India and Pakistan we have similar results, that’s saying we’ve got the codes in place but we’re not doing the other bits. Being an emerging economy is no excuse for not getting it right.

I think the best example is South Africa, and it’s got a great reputation for ethical practice. What South Africa has done over the last 15 years, is first recognize as a country it had a problem, and it appointed one of its best talents in Mervyn King to address the problem. By doing this it has placed itself in an absolutely amazing place. South Africa is an emerging economy, which is also the global leader in thinking around corporate governance and it does show what can be achieved if you’re serious about it and if you really want to do it.

I think this can be achieved in South Asia as well. I was asked at a round table discussion recently if we shouldn’t just accept this emerging markets issue, that weak ethical practices are just part of doing business in emerging markets. Emerging markets are seeing growth now because they can win business on wage arbitrage. But that’s not going to last forever and we’re seeing companies in Europe and North America starting to bring back processes which they had outsourced, because the cost advantage is being eroded by economic growth.

South Asian businesses need to think that in 10 or 20 years we are not going to have a wage advantage, and we’re going to be competing on the quality of our businesses and nothing else. If we fail to reach those greater standards then when the advantages South Asia currently has disappears there is going to be a crisis.

Asian culture is somewhat different to western culture and sometimes it’s highlighted that in this region we tend to accept things and not question authority. How does this, you think, impact ethical practice in businesses?

I grew up in the UK in the 1960’s-1970’s and I was brought up to respect my parents, my grandparents, respect the police and respect the authority, so I don’t think the differences are quite as big as people think they are. As far as business goes, its one world and we can’t afford to have those differences.

Singapore’s a prime example of it. You get that stuff right and you become a leading economic centre. Singapore is in terms of the corruption index number 3; its one of the best countries to operate in, they are just under those Scandinavian countries which are held out to be the absolute virtues. So many multinationals have their Asian headquarters there, because Singapore has got that piece right.

One of the observations in the ethics survey is that more than half of the people who responded in this region felt at some point under pressure to compromise their ethical standards. If you drilled down a little more, are you finding inflection points at which that the pressure is higher?

There are instances when finance people sit alongside other departments. So your operations manager has accountants embedded as part of this team striving for better results. Now, that it is absolutely the right way to do it, but we’re also seeing a lot of pressure there. The operations manager wants good results, he wants his finance business partner to show those good results, and as business partnering has emerged these risks are something that we have to recognise. Conflicts of interest start to grow so the protection of finance people through ethical codes is what makes the difference between someone who is a professional and someone who isn’t.

We are also seeing businesses say they are only going to work with other businesses who work ethically. So you’re seeing global businesses start to actually say, if you’re part of our supply chain, you’re part of us, therefore it’s important you operate on the same standards as us, and that’s a natural rise of standards. That’s not done by regulation, that’s done by best practice and companies recognising reputations are on the line.

Many listed firms in this part of the world tend to be family controlled. In your experience do you find that ethical standards are lax in such firms?

There are things you find around family firms like sometimes the patriarchal culture and that can work very well and be very effective. Traditionally those types of businesses have been run with a long term objective. It’s about passing on wealth from one generation to another, which automatically makes them very good at sustainable practices. There are great examples of that in the region, like India’s TATA and the work it does, it’s a world leader. There are also other businesses which are very much the opposite of that where an all powerful figure can actually be the biggest flaw in the business. So yes there are advantages and disadvantages. CFO’s and CEO’s in Asia have felt more under pressure to produce short term results, for short term success, than their counterparts in Europe and the U.S. Now that could in part also be the result of the financial crisis and the re-evaluation of the flawed Anglo American model. But what’s happening in Asia is very interesting.

The traditional Asian business model is changing – sometimes you see it if you speak to good universities, what do students want to do? They want to found a business, want to have an IPO and be a billionaire by the time they are 25! That’s not what Asians were talking about 15 years ago; they’ve been talking about successful business and not about making a quick buck. I think there’s a responsibility around business schools to really adopt syllabuses, adopt their thinking around long term sustained businesses, and that is already in the Asian business culture. To lose it would be tragic.

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