Tag Archives: Morals and ethics

Ethics and competition

EthicsThe report of The Senate Education and Employment References Committee report: A National Disgrace: The Exploitation of Temporary Work Visa Holders; released on the 17th March highlights a major National problem.

The report consolidates and affirms issues raised in some of our earlier posts including:

In a nutshell, the report confirms that large numbers of unethical employers are routinely exploiting 1000s of temporary visa holders to inflate their profits.  The report is worrying reading and hopefully will result in proactive government action to stamp out the worst of the excesses.   It’s in the government’s interest, many of the exploited visa holders in work are preventing an unemployed Australian from obtaining work; this is equally true in the unskilled categories and in skilled categories where skilled, older workers are frequently discriminated against.

What is more worrying, and the focus of this post is the ‘Coalition Senators’ total failure to understand business and competition.  One of the major areas of malfeasance with some of the worst exploitation of temporary workers is the Labour Hire business.  The committee recommendation #32 is that:

9.309 The committee recommends that a licensing regime for labour hire contractors be established with a requirement that a business can only use a licensed labour hire contractor to procure labour. There should be a public register of all labour hire contractors. Labour hire contractors must meet and be able to demonstrate compliance with all workplace, employment, tax, and superannuation laws in order to gain a license. In addition, labour hire contractors that use other labour hire contractors, including those located overseas, should be obliged to ensure that those subcontractors also hold a license.

In an annex to the main report, Coalition Senators state that they do not agree with this recommendation on the basis ‘it would punish those labour hire firms which are already complying with relevant laws’; and that the actions of a ‘minority of labour hire firms which are doing the wrong thing, in most cases, is already illegal’.

No one likes additional ‘red tape’ so superficially the Coalition Senators position is understandable.  What the Coalition Senators ignore is the effect the illegal activity is already having on the honest firms they purport to support!  The owners and operators of the dishonest firms using illegal and exploitative practices do not expect to get caught, and if they are caught expect the profits they make from their activities to significantly outweigh the penalties. Unethical is not synonymous with ‘stupid’ – the people making the decision to act illegally expect to make large profits. However, as a consequence of their illegal actions:

  • Honest labour hire firms cannot compete on price with the dishonest firms exploiting temporary workers and suffer as a consequence. The honest operators either make far less profit or go out of business.
  • The users of ‘hired labour’ from labour hire firms are also in competition and need to minimise input costs. They are incentivised to accept the low-cost offerings from the dishonest firms exploiting temporary workers and not to look too closely at their practices to compete within their market.  The alternative is to pay more for the workers and be at a competitive disadvantage to organisations that ‘turn a blind eye’ to the problem.

A licensing scheme will increase the cost of compliance for all of the businesses in the labour hire market, but if implemented properly, it will have the effect of largely eliminating the unfair competition created by the unethical exploitation of temporary workers.  Which will be hugely beneficial to those ‘honest’ businesses that are acting ethically and already fulfil their legal and moral obligations; both within the labour hire industry and the wider community.

The Coalition Senators do ‘support the prosecution of these illegal operations’ (as does everyone) the problems with implementing a clean up strategy focused on prosecutions alone are:

  1. The damage is done before the prosecution can take place.
  2. No prosecution stops illegal behaviour in the future. In an unlicensed regime the same unethical people can set up other businesses and carry on indefinitely through a series of ‘phoenix companies’.
  3. As suggested above, no criminal expects to get caught – deterrence is highly overrated.

Licences may not be ideal, but they do offer a practical way to support ethical behaviour that ‘prosecutions’ cannot. Good governance at every level is getting the balance between rules and flexibility right – the balance needs to support ethical behaviour without constricting innovation and growth. No one except the criminals benefits from the situation exposed in the Senate report that allows virtually unfettered unethical behaviour.

The art of ‘practical ethics’ is to develop systems that disadvantage unethical behaviour and encourage people to do the right thing. The combination of a beefed up ability to prosecute offenders and a licensing system that will make it difficult for unethical operators to remain in the labour hire business is the best way to drive the culture change needed in this industry, and in the businesses that rely on labour hire firms for their staffing needs.

Comminsure Scandal – just more of the same……

ComminsureThe Directors of the CBA Bank and Comminsure would appear to have a lot to learn about basic ethics.  You do not set the ethical standards for an organisation by:

  • Saying ‘we are focused on ethics’,
  • Confusing ethical intent with outcomes,
  • Meeting with people screwed as a consequence of unethical behaviour within the organisation,
  • Saying sorry and/or making belated payments years too late.

This approach is at best second rate PR and the belated payments may be necessary restitution (but rarely compensates for the pain an suffering caused by the CBA’s unethical behaviours extending over years). But none of these actions has anything to do with setting ethical standards – ethics are about doing the right thing when no one is watching and proactively correcting errors as soon as you are aware of them. Ethical standards have nothing to do with implementing a pathetic PR exercise after your extensive wrong doing has been exposed to the full glare of publicity and then only paying parsimonious compensation to a few of the victims.

The ethical standards of an organisation are set by the minimum standards of behaviour its managers condone.  CBA Directors and managers have condoned highly unethical behaviours and the CBA continues to employ many of the same people who have been responsible for the creation and sustainment of this unethical culture over many years. This is a fundamental failure of organisational governance.

The only real measure of CBA and Comminsure starting to cut out the unethical rot in its management systems will be the number of people in senior management ranks fired or otherwise sanctioned for either:

  • Condoning the behaviours outlined in the previous Senate enquiry and the latest ABC 4 Corners / Fairfax report, or
  • For incompetence in not knowing (or not wanting to know) the unethical practices were on-going.

A number of Comminsure Directors should be resigning for exactly the same reasons!

CrisisThe root cause of the Comminsure scandal highlighted over the last 24 hours is identical to the earlier CBA banking scandal (discussed in several previous posts) – CBA management designed incentive systems that paid its staff bonuses to screw their clients and inflate profits. The consequences may not have been intended but nothing was done to correct obvious problems once they became apparent, probably because the managers responsible for oversighting the behaviours were on exactly the same incentive structure. And, the bank continued to pay for behaviours that focused on short term profits over the needs of distressed clients for years. Simply leaving the same group of people who created the mess to clean it up is stupidity of the highest order.

As defined in our White Paper: The Functions of Governance, two of the most important aspects of governance are establishing (and enforcing) the ethical standards and culture of the organisation. These functions cannot be delegated for reasons outlined in Dr. Bourne’s post from last week Practical Ethics.

The question is what are the CBA Board going to do about the core problem?

Practical Ethics

EthicsA string of disasters over the last couple of years suggest many business and government leaders simply do not understand ‘practical ethics’.  Through naivety, undue optimism, or laziness, they have set up situations based on blind trust in the ethical standards of others resulting in deaths, injury and the loss of $billions.

Just a few examples:

  • The ‘Home insulation program’ of 2008/9 resulted in 4 deaths, numerous house fires and many well established businesses being destroyed. The naive assumption by the Government seemed to be that with $millions of government funding easily accessed, businesses would still act ethically, train staff and comply with occupational health and welfare standards. The failure by businesses to meet this expectation has resulted in numerous prosecutions after the damage was done.
  • The outsourcing of technical and further education training (TAFE) to the private sector. Private providers under the VET Fee-Help scheme are paid for students signed up to courses, not for students qualified from courses – the naive assumption by the Government seemed to be that with $millions of government funding easily accessed, businesses would still act ethically and only sign up students that could benefit from the courses and would deliver good training outcomes. $hundreds of millions of public funds have been wasted – most of which can never be recovered.
  • Downer EDI’s Board of Directors appear to have blindly trusted their management to run the disastrous $3 billion Waratah train project. Normal governance feedback seemed to have been ignored to the point where the Directors were unable to get information on the project when needed, blowing a $20 million loss into a $200 million loss.

In each of these cases the government and business leaders seemed to have either assumed everyone would act ethically or relied on Adam Smith’s ‘Invisible hand’ (a flawed theory much loved by the rabid right, particularly in the USA). Unfortunately ethics is not that simple!  Writing a code of ethics[i] is a relatively simple process; encouraging people to live up to the code is far more difficult. There are several factors needed:

  • First, the organisations leaders need to lead by example. The ethical standards of the organisation and its supply chain are unlikely to exceed the standards set by the leadership (see: Ethical Leadership).
  • Second, the expected standards need to be clearly and unambiguously articulated. Saying you require one standard of behaviour and then paying people to perform differently will inevitably lead to the organisation getting what it has paid for (see: The normalisation of deviant behaviours).
  • Third, the governance and management systems need ‘real-time’ feedback to both encourage the desired standards of behaviour and to detect any ‘slips’ very early in the process so corrective actions can be implemented before there is a major issue (see: Self Correcting Processes).

Unfortunately governments in particular are reasonably good at enforcing standards years after the breach took place and seem to assume that the ‘deterrent effect’ will suffice to maintain ethical standards – this assumption patently does no work!  I doubt the £2.25m fine imposed on UK consultancy Sweett Group[ii] for bribing a prominent United Arab Emirates (UAE) businessman in return for work will have much effect on other unethical business people contemplating paying a bribe – for a start, no one expects to get caught. The ‘pink batt’ prosecutions occurred years after the scheme was closed, prosecutions under the VET Fee-Help scheme are still to eventuate (and rip-offs are still continuing). The simple fact is the fear of a potential prosecution in a few years time compared to the opportunity to make $millions now has very little effect on unethical people.

Conversely, over policing ‘ethics’ and watching every move can be as destructive as ‘blind trust’. If people feel they are not trusted, there is no incentive for them to act ethically.  Micro management is a major de-motivator and will inevitably lead to suboptimal performance with people doing ‘just enough’ and seeing how much they can get away with[iii]. This approach stifles innovation and creativity.

Practical ethics requires pragmatic trust. You need to trust the people you are working with, governing or managing, but have agreed processes that provide feedback and monitoring, that demonstrates your trust is being honoured.

  • In my ‘Six functions of governance’ management control functions are expected to provide feedback to the governing body that allows it to hold its management accountable and ensure conformance by the organisation being governed. Had these functions been implemented effectively EDI-Downer would be in a much better position today.
  • Demand feedback – even if you do not want to hear bad news! The recent announcement by CSIRO that its climate division will be virtually eliminated may be a pragmatic response to government initiatives and cost cutting but serves no one in the long term. Governments and business rely on climate science to make billion-dollar decisions. Without it, they will be relying on guesswork. Shooting the messenger simply means everyone is ‘flying blind’.
  • Build feedback into management systems. In the various government debacles mentioned above (and others) simple changes in process could have reward desirable outcomes rather than rewarding unethical behaviour. The purpose of any TAFE course is to educate a person and demonstrate learning by success in an exam.  Why not pay most of the money on completion of the course? Then make sure audit processes are in place to validate the exam performance is genuine – these exist and are easily applied.

Pragmatic trust is a graduated process – as people demonstrate their trustworthiness and ethical standards less oversight is needed (but less does not mean no oversight); the challenge is to design systems that reward desirable behaviours and outcomes creating a win-win, people who demonstrate high ethical standards are rewarded.

This approach is the antithesis of the current government approach which seems to rely on blind trust, assumes everyone is ethical, and as a consequence directly benefits unethical behaviours (at least in the short term). Not only have the $millions paid out in VET Fees to unethical providers resulted in minimal return to the government; they have actively encouraged unethical standards and have damaged businesses and organisations that do offer quality courses. A lose-lose outcome in which the only winners are the unethical businesses that have ripped off the system – the Pink Batts Royal Commission found a similar effect on the insulation businesses.

Slippery-slopeEthics are by definition based on the standards of behaviour considered acceptable by a group[iv].  When a significant proportion of the groups members start to let standards slip, they will tend to drag the rest of the group with them down the slippery slope – it is very hard to stand out against the normally accepted behaviours of your group. And as with any slippery mountain slope, it is far easier to slide towards the bottom than to keep your footing and climb towards the top.

The role of ethical leaders is first to set the ethical standards, then live up to the standards themselves, and finally require their followers to conform to the standards using pragmatic trust and encouragement rather than after the event punishment.


 

[i] The PMI Code of Ethics and Professional Conduct is a good example: http://www.mosaicprojects.com.au/PDF/PMICodeofEthics.pdf

[ii] See: http://www.globalconstructionreview.com/news/sweett-group-must-pay-32m-bri7bery-a7bu-dh7abi/

[iii] For more on motivation see: http://www.mosaicprojects.com.au/WhitePapers/WP1048_Motivation.pdf

[iv] For more on ethics and leadership see: http://www.mosaicprojects.com.au/WhitePapers/WP1001_Ethics.pdf

Making Ethics Effective

EthicsAn organisation can espouse the highest ethical standards but if these are not supported and enforced they are simply nice statements that look appealing. The challenge is to have the right levels of support and just enough enforcement.

Headline news in Australia over the last couple of weeks (with months to run) is the appalling treatment of franchisees and their staff by the 7-Eleven chain.  To survive (and in some cases profit) many 7-Eleven franchisees resorted to underpaying staff by a standard 50%.  The TV expose and press reports indicate multiple breaches of employment legislation, occupational health and safety legislation, corporations law and taxation legislation.  Most of the focus at the moment is on the students who allowed themselves to be trapped into the wages scam.  This post will suggest these people are not the ‘biggest losers’.

The whole 7-Eleven chain was benefitting from the scam.  Head office made more profit, the franchisees reduced their wage bill by up to 50% (their primary cost under the franchise arrangements) and the students received their reduced pay.  Whilst in some cases there may have been elements of coercion used to keep the students employed, everyone got into the deal voluntarily.

The major losers in this scam were people who rely on the workings of the law and run their businesses honestly.  Two major groups are the corner shop-keepers who paid the lawful minimum wage and saw their businesses destroyed because the 7-Eleven ‘model’ undercut costs illegally and the unemployed people who did not get jobs because they had the audacity to expect to be paid their legal entitlements.

People in these groups faced a major ethical dilemma, go out of business (or remain unemployed) or ‘bend the law’ to survive in completion with chain that was prepared to allow widespread malpractice.  Not an easy decision!

I would suggest the major failing was not the ethics of the 7-Eleven chain: the erosion of ethical standards is usually slow and insidious. The real problem appears to be the government agencies tasked with enforcing the law.  Over several decades government departments have been steadily stripped of resources and these days can only adequately respond to ‘major issues’ –  they are forced to assume ethical behaviour by most people most of the time and even when advised of blatant breaches will generally ignore the issue if it is considered minor.

One example we confront regularly is breaches of the Australian Competition and Consumer Act 2010 – one of the Act’s primary requirements is honesty in advertising, the advertised price of any goods of services should be the minimum price the consumer has to pay.  We routinely see Google advertisements targeted at our training market in Melbourne offering ultra cheap prices.  Click through to the related web page listing the training courses in Melbourne and the price increases, spend 15 minutes filling in registration forms and you eventually see the price you are required to pay (with all of the taxes and changes now added)!   This is a deliberate strategy by unethical organisations – the low price gets people onto their web site, and inertia keeps them there (particularly after spending effort on filling in the forms) so they end up paying far more than is necessary for an equivalent course.  The practice is so widespread, particularly with overseas based training providers, we regularly find people asking us if our prices are ‘real’ and ‘how much will they actually pay’ – the answer is simple, we conform to the law and charge the advertised price.

However, this was not an easy decision to make! We have had to reduce prices and increase advertising to attempt to off-set the illegal practices of others. Complaints to authorities go unheeded because they simply do not have the resources to deal with a relatively minor issue and business suffers.

When ethical standards start to slip several things tend to happen, ethical people move away to somewhere where their standards are not being challenged, less-ethical people move in and further degrade standards and many other people simply learn to ignore the problem (see The normalisation of deviant behaviours ). And once unethical or corrupt behaviour becomes normalised, reversing the situation is extremely difficult. Press reports suggest that some 7-Eleven franchisees who have been forced to pay proper wages are now using extortion to demand 50% of the money back from the employee (outside of the premises so the extortion is not recorded), or the worker loses his/her job.

At a national level one hopes the 7-Eleven furore when added to the construction of a refuelling wharf in the Tiwi Islands without environmental approval (the government agency did not have the resources to investigate in a timely way), the blatant abuse of the vocational training scheme by some commercial organisations and numerous other failures will cause a re-think of the way business and government approach regulation.

Certainly the removal of unnecessary bureaucracy, regulations and other forms of red tape is to be encouraged. However, if the government decides a regulation is desirable, proper and comprehensive enforcement should be automatically provided. The failure to enforce regulations penalises the honest, ethical organisations who feel obliged to comply; and advantages the dishonest who chose to breach the regulation and balance the low cost of getting ‘caught’ against the additional profits garnered from ignoring the provision. Prosecuting a few ‘rule breakers’ 5 or 6 years after the event is not an appropriate way to govern – the damage is already done.

What does this mean within organisations and projects?  Effective governance sets the ‘rules and objectives’ for the organisation (see: The Functions of Governance). Management and staff operate within those rules to achieve the objectives. A key element in a well designed governance framework is the feedback loop providing assurance of management accountability and compliance.  This loop needs three elements:

  • A clear articulation of acceptable and unacceptable behaviours at all levels of the organisation, with senior leaders ‘walking the talk’.
  • Proactive surveillance to identify issues and opportunities as early as possible backed up by effective improvement processes (see: Proactive Project Surveillance.
  • Rigorous, but fair, enforcement processes to deal with breaches.

The last point is the most difficult to get right.  The system needs to be open and accountable, apply both natural justice and the ‘presumption of innocence’, deal with the root cause of the breach, avoid scapegoating, and be trusted.  One element is ensuring effective reporting and ‘whistle blowing’ processes are available so that people (both internal and external to the organisation) who believe there is an issue can raise the matter safely – its impossible to enforce rules if people in authority don’t know (or don’t want to know) about the breach.

The good news is that if these types of system are in place, the organisation will develop a self-reinforcing ethical culture.  Unethical people will leave to find somewhere easier for them making way for people who want to work in an ethical environment.  Fairly soon, everyone holds both themselves and other accountable.

However, this situation cannot be taken for granted! The presence of the surveillance and enforcement processes underpin these highly desirable behaviours.  If the organisation makes the same mistake the Australian governments have repeatedly made over the last 10 years of deregulation and simply ‘hope’ everyone will do the right thing it won’t take long for the slide into unethical behaviour to start.  Hope is not a strategy, good governance requires assurance that the organisation’s objectives are being achieved, and effective assurance needs both surveillance and enforcement capabilities.

Ethics, Culture, Rules and Governance

RulesFar too many governing bodies spend far too much time focused on rules, conformance and assurance.  While these factors are important they should be an outcome of good governance not the primary focus of the governors.

When an organisation sets high ethical standards and invests in building an executive management culture that supports those standards the need for ‘rules’ is minimised and the organisation as a whole focuses on doing ‘good business’ (see: Corporate Governance).

The order of the functions outlined in The Functions of Governance, places: ‘Determining the objectives of the organisation’, ‘Determining the ethics of the organisation’, and ‘Creating the culture of the organisation’ ahead of both assurance and conformance.  The rational being creating a culture of ‘doing the right thing’ that extends from the very top of the organisation to the very bottom, means most people most of the time will be doing the ‘right thing’ making assurance and conformance a relatively simple adjunct, there to catch the few errors and malpractices that will inevitably occur.

A very strong endorsement of this approach to governance has recently come from one of the world’s most successful business people, Warren Buffet.  His recent memo to the top management of his holding company, Berkshire Hathaway’s subsidiaries (his ‘All Stars’) emphasised that their top priority must be to ‘zealously guard Berkshire’s reputation’ (read act ethically). He also reminded his leadership team that ‘we can afford to lose money–even a lot of money. But we can’t afford to lose reputation–even a shred of reputation’.

His advice to managers also included this good advice ‘There’s plenty of money to be made in the centre of the court. If it’s questionable whether some action is close to the line, just assume its outside and forget it’. This is a simple ethical guideline that avoids the need for pages of precise ‘rules’ designed to map the edge of legality drafted by lawyers and argued over endlessly.  See more on Ethics.

Rule#1Reading the memo, its clear Buffet has built a massive organisation based on an ethical culture, employs executives that reinforce the culture, and still makes a very good profit. It’s a long term investment but infinitely preferable to the sort of issues that confronted Salomon Bros., 20 years ago (see: Warren Buffett’s Wild Ride at Salomon), the banks associated with the GFC, and the on-going damage continuing to be suffered by the Australian banks as more ethical failures come to light. I’m sure they all had hundreds of ‘rules’ some of which may even have been sensible.

A copy of Warren Buffet’s memo can be downloaded from:  http://www.mosaicprojects.com.au/pdf/Ethics_Culture_Rules-Buffet_Memo.pdf

The moral underpinnings of good policy.

Over the last couple of weeks I’ve needed to look at the relationship between morals, ethics, values, principles and policies to help define several of these terms for use in ISO 21503, Guide to the governance of projects, programs and portfolios.  All of these terms are important aspects of governance but the interrelationships are far from clear.

The best construct seems to be something along these lines, but any thoughts or suggestions to the contrary will be appreciated.

Morals and ethics are the starting point, both deal with distinguishing between ‘right and wrong’ behaviours, but morals are internal to a person, ethics are rules developed by others:

  • Morals are the internal code of behaviour that define what is considered right or acceptable by the person, usually derived from a religious or philosophical base. The choice of which morality to follow is made by the individual, and therefore ‘morals’ tend to refer to that person’s ideals regarding right and wrong; within the framework of the society they live in – there can be different moralities.
  • Ethics involves systematising and recommending concepts of right and wrong conduct, and refers to the series of rules provided to an individual by an external source, typically in a ‘professional code of ethics’; eg, the PMI Code of Ethics and Professional Conduct.

Values are an expression of a person’s fundamental beliefs, founded on their ethical and moral framework. Values are used to define and differentiate right from wrong, good from bad, and just from unjust based on what is important to the individual – things the person ‘values’. Where are group of people operate within an organisational culture, the ‘values of the organisation’ are derived from the values of the members of the organisation. An organisation’s values are the standards used to provide guidance to the members of the organisation as they determine what is the best decision or course of action to take.

Principles are similar to ethics; they codify a fundamental truth or proposition to define an aspect of an organisation’s overall values in an objective way. They are positive statements of what will be done or achieved. An organisation’s enunciated principles serve as the foundation for its policies, behaviours and reasoning.

The final link in the chain is the organisation’s policies. These are a set of rules used by an organization to define how its members will implement aspects of its principles or objectives. Policies provide the guidance and constraints needed by management to operate he organisation effectively.

Ideally, in a well governed organisation, the connections between morals and ethics, values, principles and policies are direct and free of contradictions and ambiguities; with each policy clearly supporting the underlying ethical and moral foundations of the organisation’s culture. In reality there are frequently conflicting pressures and imperatives within the policies that make choosing the best option difficult – in these circumstances the decision maker’s personal morals and ethics come to the fore.  For more on ethics see: http://www.mosaicprojects.com.au/WhitePapers/WP1001_Ethics.pdf