Damning Business Ethics Report from the USA

I am grateful to Norman Marks in his blog for bringing this latest annual report from the Ethics Resource Center to my attention. The team surveyed nearly 5,000 people across the USA.

Consider some disturbing headlines;

• 42% of respondents described their companies as having a 'weak ethics culture'
• 45% have witnessed misconduct. And we are not talking about pinching the odd pen
• 13% Health & Safety violations
• 12% Stealing
• 11% Sexual Harrassment
• 11% Substance abuse
• 65% reported the misconduct
• 22% suffered retribution as a result, including;
• 64% excluded from decisions or work activity by supervisor or manager
• 62% verbal abuse by supervisor or manager
• 55% not given promotion or pay rise
• 32% demoted
• 31% experienced physical harm to self or property 
• 29% harrassed at home

62% still have confidence in senior maanagement but 34% do not believe their line managers display ethical behaviour

So we have two worlds; the significant number of wrongdoers on one side and a substantial number of people who are outraged by it and will act to denounce it, regardless of the very real consequences.

Although this survey was conducted in the USA I very much doubt that things are much different in the UK. It is not news that whistleblowers often suffer for their ethical stand but I am cheered to learn that nearly 80% did not suffer consequences.

Financial Reporting Council paper on "Comply or Explain"

In February 2012 the UK's Financial Reporting Council published a report on the "Comply or Explain" approach applied to its Corporate Governance Code. Compliance with the Code is a statutory requirement for listed companies and the report considers two discussion groups, involving representatives of investors and listed companies, that met to discuss the workings of "Comply or Explain".

There are two reasons for producing this report; the first is that the European Commission has asked for views on a proposal that regulators and not shareholders should decide if explanations of non compliance are adequate; the second is that a review of a sample of UK annual reports found a minority of those that had not complied on one or more principles had given only a 'perfunctory' (i.e. inadequate) explanation.

I offer two contrasting thoughts; firstly, that there is a risk that yet more regulation and bureaucracy will simply make declarations even more legalistic and unhelpful (defeating the object of the change); the second, that it is astonishing that company bosses can be so inept and so arrogant as to resist giving proper explanations in the first place. It reminds me of the unhelpful legal boilerplate approach that has been adopted by companies in response to requirements that they disclose the principle risks facing their business. GSK, as I have written before, provides a particularly risible example of this.  I wonder whether the company secretarial staff who produced the 'perfunctory' explanations attended the discussions hosted by the FRC - I bet not.

Baroness Hogg, who chairs the FRC, might ponder whether the answer is for her organisation to adopt a more assertive approach - how about giving those companies whose explanations are inadequate a right kick up the arse? Hauling them in and admonishing them would be a useful first step, followed - if they don't release an adequate statement - by a public shaming. Try that for a while before laying on the dead hand of bureaucracy.

Maybe customers don't care about ethics at Goldman Sachs

I wonder whether my strictures against Goldman Sachs ethical standards are mere self-righteousness on my part. The thought arises from the evidence: a tidal wave of criticism and bad publicity after Greg Smith resigned from the bank and published a valedictory letter in the New York Times shifted the share price not one jot. See here.

It has long been an article of faith with me that dedication to the well being of your customers is what leads to success. Of course you worry about your own profitability but you put your faith into building a loyal customer base that does business with you because they trust you and because you deliver what they want at a good price. But why do they not desert Goldman? They probably believe the tenor of the letter, that they are described disparagingly as 'muppets' and that Goldman Sachs focuses exclusively on what can be earned from them. After all there has been plenty of previous publicity given to Goldman Sachs selling securities that the bank analysts thought were a very bad deal. Maybe customers believe it is only other customers who are patsies. Maybe they believe all Wall Street firms are the same. Frank Partnoy writes in the FT that clients you deal with through the markets are a very different thing from those you advise and to whom you have a fiduciary duty.

But, despite the evidence, I am unreformed and unrepentent. Even without evidence to support me I believe that unethical attitudes to outsiders (customers, suppliers, competitors and regulators) lead to unethical attitudes to insiders (colleagues, shareholders and the organisation). I believe that governance and performance are damaged in the long-term.

Robert Peston, for the BBC, points out that Goldman Sachs reputation for being a bit too sharp for its own interests has been around for a long time. But he too ends his article by expressing the view that they must mend their ways if they are to survive and prosper. Perhaps, like me, he clings to his moral certainties over the evidence of his eyes.

We will have to wait and see...I'll check that share price daily

PR Disaster at Goldman Sachs

Today a senior executive at Goldman Sachs has resigned and published a damning article in the New York Times explaining his reason; which is that he can no longer stand the culture of screwing the clients. According to him this is not the way it used to be and that the company grew with a culture of "teamwork, integrity, a spirit of humility, and doing right by our clients"

But to see this article as a PR disaster is to miss the real point. This is merely the broadcasting of a long-running corporate governance disaster arising from an inappropriate culture - sometimes referred to as a toxic culture. The writing was on the wall when the financial crisis broke and it was publicised that Goldman Sachs was knowingly offloading poor quality investments on to its clients.

Why is this an issue of governance? Because "governance describes the systems, procedures and behaviours by which an organisation is directed and controlled". Because abusing one set of stakeholders - customers - also implies an attitude to integrity that must permeate the organisation and affect the behaviours of staff and management in other ways.

Three particular quotes from today's Telegraph article are must reads;

"... These days, the most common question I get from junior analysts about derivatives is, 'How much money did we make off the client?' It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave.

"Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about 'muppets', 'ripping eyeballs out' and 'getting paid' doesn’t exactly turn into a model citizen."

 Mr Smith believes the decline in the firm’s moral fibre represents the single most serious threat to its long-run survival and see his article as a wake-up call to the board of directors. 

EU Audit Reforms

I may seem a little late responding to the EU Commission's proposed reform of auditing for public companies that was announced on November 2011. However, it often seems best to let the dust settle after the first outpouring of responses, to get a clearer view.

This is an important corporate governance issue, or rather several;

• are boards too close to their auditors, preventing necessary criticism?
• do auditors have conflicts of interest?
• is there sufficient competition for audits?

The Commission is responding to the undeniable fact that banks that collapsed or have had to be rescued as a result of the financial crisis had clean audit reports. They believe those banks had not adequately assessed their risks and nor had their auditors and that SOMETHING MUST BE DONE!

Always beware when there is an outcry that "something must be done": it will usually be the wrong thing aimed at the wrong target. For example, the global financial crisis was not fundamentally a result of poor bank regulation but the result of global trade imbalances - which are the fault of governments (who do not seem to be in the firing line). If it had not been an investment bubble in US mortgages it would have been an investment bubble in dotcom businesses or in something else.

Two little questions I would pose to the Commission;


1  Where were the regulators in all this?
If the banking regulators failed to notice the levels of risk being taken on by banks what makes you think that auditors would do any better?

Oh, and by the way, the banks own executives and risk committees failed to assess the risks correctly.

2  Will the proposals achieve what they hope without unacceptable consequences?
The main proposals, applicable to all listed companies, are to;

1. rotate audits every 6 years
2. forbid auditors from offering consultancy services
3. mandate open tenders for audit work
4. commission supervision of auditors

Auditors argue that it takes some time to get up to speed with a new client and that rotation every six years will add to costs. I am a little dubious about this argument; are they saying that we can't trust an audit in the first year - I hope not? The problem with consultancy services is that they create conflicts of interest and contribute to development of an oligopoly of huge firms. On the other hand, if a firm develops tax expertise, for example, in order to audit a client's tax affairs, how can you reasonably forbid them from offering that expertise in advance? The same argument applies to other consultancy services and, if implemented, must create duplication of work and added cost. Further, you would expect the development of expertise for provision of consultancy services to improve the quality of expertise available for auditing as well; so if you prevent that you are reducing not improving auditors expertise and the probability they will get it right. As for open tenders, how do you deal with simple dislike of a client for the auditor: are they to be forced to take the lowest bid? In practical terms you have to get on with your auditor if the relationship is to work but how do you write that into legislation? And finally to commission supervision of auditors....hmmm....not so sure that's the sort of thing we want the EU to be getting into.

But finally - what about behaviours? The thing is that people change their behaviour when there is legislation. So, in Italy, it is common for an audit team to jump ship to a new audit firm when the audit transfers. How do you stop that in a free society and does the practice not make a nonsense of rotation? And if auditors only offer consultancy to non-audit clients how does that reduce the dominance of the the big four auditors? Or if the cost of consultancy is pushed up due to duplication of expertise how does this help anyone? How else might behaviours change in ways that would thwart the intention of the proposed legislation?

But let us not throw out the baby with the bathwater. As executives, directors and investors we must ask whether any of the proposals could be sensible improvements to governance. Some rotation of audits seems a sound idea and audit committees should keep an eye on whether they are putting so much business with one firm that their independence is compromised. How about requiring audit reports in the annual accounts that report on these issues and that give a genuine assessment of risk rather than legal boilerplate?

Board diversity and female executives

It is a rather unattractive characteristic of a blogger to say 'I told you so'. You come over as a smug know-all. But I can't resist it. All of a suddent there is a flux of reports (see recent study published by "Women Like Us") and articles taking the same line on female representation on boards that I was promoting a year ago and, no doubt, others were trying to get heard in the public debate long before that.

Surely it is obvious that improving the representation of women on boards is about much more than merely opening up those board positions? It is primarily about encouraging the appointment  of more senior female executives who will be available to fill the higher roles. If that does not happen first then the boards appoint 'token women'; you find a small group of women have many board appointments (to make up the numbers) and companies do not benefit from the improved diversity.

I know, I keep going on about this and getting really irate when David Cameron goes for the easy soundbites or Vince Cable threatens to legislate (again). Of course these folk don't want to address the hard part; which is improving childcare; and not penalising women for taking career breaks; and encouraging flexible working arrangements. The macho culture of working eighteen hour days, six days a week and dealing with emails on your mobile for much of the rest of the time is unhealthy, ineffective, inefficient and is almost as if designed to exclude women. However, changing attitudes is hard to legislate for. EU Commissioner Barnier, who loves threatening to legislate, might also take note.

Anyway...Kate Walsh in The Times writes (11 March 2012);

"THE proportion of women holding senior executive management positions in FTSE 100 companies fell last year despite the government’s efforts to address the gender imbalance.

Research from Korn Ferry Whitehead Mann, the headhunter, found that female representation on the management board — the level just below the main board — fell more than 2% last year to 15%.
This was not on the agenda at the London Stock Exchange’s event to mark International Women’s Day last Thursday and will make for uncomfortable reading for Lord Davies, the former banker and trade minister, who has been pushing companies to have more women at the top level.

Despite an increase at the most senior level — where female representation grew from 12.5% to 15% in the past year — the board below, which provides the pipeline of future talent, has seen a 2.2% decline.
The research also identified 17 FTSE 100 companies with no female representation at management board level. These include Associated British Foods, owner of Primark; Wm Morrison, the supermarket chain; Schroders, the fund manager; Tate & Lyle, the food giant; and Shell."

 There is no sensible reason why women cannot have children and hold senior jobs. Yes there will be compromises, they will need family help or childcare and will miss some family occasions but really the myth that 24/7 dedication to work is essential is just that, a myth. It benefits timeservers over balanced and capable; and favours men over women.

A good quote from David Frost (the one who was director general of the British Chambers of Commerce) "Our flexible labout market has long been acknowledged as a significant competitive advantage and a driver of investment and growth in this country - it's time we made best use of it"

Communication, social media and crisis management

In the new world we live in, companies need a policy on social media. I can imagine the reader of that sentence looking aghast, thinking about the extra burdens already faced as a result of new legislation ranging from health and safety to employment and beyond. Social media too?

Social media is a part of our environment and also a new tool for us to use. In its first role we have to control the way our staff use it. We cannot have them publicly criticising the company or their line manager or bullying a work colleague through their Facebook page. Nor can we have trade secrets or new marketing initiatives betrayed through unrestricted chatter on online forums. Of course actions such as these are already covered by specific or implied terms in employment contracts so you can argue that nothing new needs to be done. Why is something written on a Facebook page any different from writing a letter to a newspaper when either would be a breach of discipline? I think the difference lies in the lower barriers to on-line action. It is so easy to say something rude about a colleague in an off-the-cuff comment on Twitter: you are typing a short message and add a few different keystrokes and hit send; and it has gone, irretrievably. On the other hand, getting out a sheet of paper and a pen and sitting down to write a letter takes that bit more effort and intent. It then requires the result to be folded and put in an envelope, a stamp put on and the final missive taken to a post box. Even at the last moment it requires a physical movement to post it which gives an instant to reconsider.

The ease of use of social media creates a case for giving staff simple, clear policies on what they may not do online. But we may not want to put everything out of bounds. A company may, for example, be quite happy for its software engineers to discuss a technical problem through an online forum and get a solution, as long as that does not mean giving away trade secrets. Good intent, however, is not enough on its own. If your company faces the misfortune of a serious accident or some other crisis you actually may not want your staff defending you online any more than you want them criticising you. It muddies the message and may have legal consequences.

Social media also provide tools to engage with customers and employees in the normal course of business. You can build loyalty, win repeat business or access your customers networks. Facebook provides the space for discussions, offers, news and competitions. It can be linked with Twitter, Youtube, LinkedIn, Google+ and others. When Carnival Cruises sister company Costa Cruises suffered a disaster off the coast of Italy its Facebook and Twitter presence gave it a platform for expressing regret, concern and reassurance without saying anything that might give rise to legal repercussions. Yet they made a mistake; after five days the company announced a pause in its online communications, forgetting that online never pauses: it just continues without you. The next five days merely provided space for negativity to expand so that when it returned to communication mode its posts attracted hundreds of negative comments. A more sensible policy would have been to view this media as a communication and not an advertising platform. Once a company recognises the online environment as a channel for genuine and sincere communication it is obvious that you cannot tune out for a bit. You don’t turn to a friend and say, “I don’t want to talk to you for a few days, I have stuff to do.” So companies must ask themselves what they want to achieve from these channels and understand their side of that bargain before setting out on this journey. As I said at the beginning, companies need a policy on social media. Online is out there with or without you and it makes sense to think through how to use it and how not to use it and to express that clearly to your staff.