Ethics, Schmethics!
Lots of interesting things going on these days, but I couldn't resist writing about the Ernst & Young auditors who were caught cheating on ethics (among other) exams. Because who's gonna know, right? Greed is (still) good. As usual, I hope you find it interesting, and thanks for reading! Subscribing is free, so please feel free to forward to anyone you think may also be interested.
A little over a month ago you may have read that the U.S. Securities and Exchange Commission (SEC) charged Ernst & Young (EY) for cheating by its audit professionals on exams – including ethics exams – required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during an investigation. EY admitted the facts and agreed to pay a $100 million fine.
Cheating on ethics exams. SMDH.
Some people, however, neither have the gene for ethical behavior (nature), nor were educated in its importance (nurture).
A few years ago I was in charge of communications for a company that owned dozens of renewable energy facilities around the Asia-Pacific region. I had been hired to rebrand all the company's (locally branded) assets in preparation for a sale, but throughout the sale process, the company continued with business as usual, developing and commissioning new projects in an effort to increase the value of the transaction (a significant portion of the sale price was expected to be based on projects in the pipeline).
While my main job was to drive the rebranding process as fast as possible, I also had to manage day-to-day communications at both the group and operating company levels. In theory, anyway. In practice there was not time to do everything that needed to be done, and some triage was necessary.
Each country had its own managing director who was responsible for operations and development, and the differing maturity levels of each market (as well as the scale of our operations in each market) meant the company's activities were different everywhere.
In Japan we had nearly a dozen operating solar power plants that were generating revenue, plus another two dozen solar and wind projects that were in various stages of development, but the partners also saw an opportunity to expand into biomass, and by the time I arrived at the company, development was underway of a plant that would be located in a small fishing town on the country’s west coast.
The project manager was a finance guy who was extremely bottom line-focused and – you may have seen where I was headed with this – ethically challenged.
He cornered me in the office one day and explained that there was a problem with the land acquisition; the local fishermen were opposed to the project. They worried that effluent cooling water from the plant might affect their fisheries.
This was a legitimate concern, though probably a minor one. My experience of living in a fishing village in Japan taught me that there are no more coastal fisheries in Japan; commercial fishermen travel hours offshore to find fish.
That said, the most powerful force in the universe is inertia, and for most people, (the prospect of) change is bad. It was certainly also true that we hadn’t undertaken any sort of persuasive environmental impact survey. We were pretty sure there the environmental impact of the plant would be minimal, but we didn’t have evidence.
I’m not an environmental scientist, I’m a communicator, so I suggested that we try to persuade the rest of the town, including the fishermen’s family members, of the benefits of the project, not least of which was cheaper, cleaner energy (plus jobs). We would then let the fishermen’s families and friends try to make our case for us.
My colleague had a better idea. “Let’s give the fishermen’s union free electricity.”
I pointed out that the structure of Japan’s electricity grid meant that our project could not provide electricity directly to the fishermen’s union building.
My colleague: “Let’s just give them the cash, then.”
Me: “You mean … bribe them.”
My colleague: “No, it would be an amount that would cover their electricity cost. It would be as though we’re providing them with free electricity.”
Me: “But it would look quite a lot like bribery.”
My colleague walked away, shaking his head at my stupidity.
We ended up not paying bribes, as far as I know, and although I left the company before construction began on the project, I believe the fishermen’s objections were overcome by our (talented and more ethical) local managers and the project did go ahead.
In some parts of the world, people will have you believe it’s impossible to do business honestly, that bribes are an integral part of local business cultures, and “everybody does it.”
Some of that is true. There are countries in which corruption is endemic, and it’s always interesting to skim through Transparency International’s Corruption Perception Index.
Denmark, Finland and New Zealand tied for first place last year, and by “first place” I mean “least corrupt”. South Sudan was “most corrupt”, and that’s not surprising, as South Sudan is essentially a failed state, along with Yemen and Somalia, the countries that ranked right above it.
And yet, there’s plenty of corruption in countries that rank as (relatively) incorruptible.
Last week we learned that Japanese truck manufacturer Hino Motors, which is part of the Toyota Group, had falsified emissions data for the past nearly 20 years. Toyota Motor Corp., of course, had its own similar scandal, and last year was fined $180 million by the U.S. government for falsifying emissions data from 2005-2015. Nissan also falsified emissions data (as Volkswagen did in Germany, which ranks 10th in Transparency’s “least corrupt” listing).
And there have been plenty of other corporate scandals in Japan, ranked 18th by Transparency: Olympus and Toshiba have admitted massive frauds (Olympus had concealed $1.7 billion in losses, and Toshiba had overstated its operating profit by nearly $1.2 billion), and Takata and Kobe Steel had quality scandals – in Takata’s case, the company did not survive.
In the U.S. (ranked 27th) , we had Theranos, while Germany can be proud not only of Volkswagen’s emissions fraud, but also of Wirecard, another company that did not survive the discovery that $2.1 billion had “gone missing.” Oops.
The list goes on and on. In every country.
Except Denmark, Finland and New Zealand.
Just kidding. I presume that corruption and fraud does exist in those countries, but at less eye-catching levels.
Coming back to my story about my colleague, there are two types of corrupt businesspeople (and politicians): the ones who think they will never be caught, and the ones who don’t even understand that their behavior is unethical and may be illegal. My colleague was in the second category. He didn’t have an ethical bone in his body.
The trouble, of course, is that while ethics can be taught, their cultural importance is more important. If leaders don’t believe that ethical behavior (i.e. rules) matter, they may be tempted not to obey them. Japanese business leaders regularly excuse their bad behavior by blaming the “corporate culture”, and officials in the Trump administration regularly breached ethical standards (in many cases breaking laws), confident they would not be reprimanded or prosecuted. After all, the boss was setting the tone (and appointing the Attorney General).
If regulation and enforcement are the “stick”, investor, consumer and employee expectations are the “carrot”. Sixty-one percent of people trust “business”, versus government (52 percent) and the media (50 percent), while 77 percent trust their own employers. Seen from the opposite angle, though, a full 25 percent of employees don’t trust their employers. And nearly 40 percent of people don’t trust the business community.
Employers that are trusted by their employees can expect those workers to be more loyal, more committed and more engaged, as well as to be stronger advocates for the company and its objectives.
Among consumers, 67 percent agree that “a good reputation may get me to try a product, but unless I come to trust the company behind the product, I will soon stop buying it.”
To the suggestion that I/you/we should pay bribes and engage in other unethical/illegal activity because “everybody does it”, in my experience this is especially bad advice outside of one’s native culture. As a foreigner/foreign business manager/owner, you are an easy target for local businesses and politicians.
When times are tough, politicians blame the foreign interlopers, who are “stealing our jobs” and business opportunities. If your competitor “drops a dime” on you because he/she knows you have broken the law, you have few protections.
Plus, almost all of the time, it’s unnecessary and just stupid. Here’s my friend Dan, writing about (not) paying bribes in China. Dan has all sorts of great war stories, and his post is worth a read, but importantly, he notes (citing writing by a professional acquaintance) that the China of the late 1980s and early 1990s was a communist economy in which there was not a great difference between the salary of a CEO and a worker. The opportunities for a senior manager to live a better life came by leveraging his or her position. As China’s economy grew, and increasingly privatized, most people had legitimate avenues through which to earn more money. Most fascinatingly, Dan says, “In almost every instance these days, it seems it is the foreigner who initiates the bribe.”
Dan recently updated a blog post he wrote around 15 years ago, in which he outlined steps companies should take to minimize employee corruption. He wrote, “I had a client who hired a private investigator to determine whether any of his eleven overseas employees were getting kickbacks and he learned they all were. He fired four of them and warned the other seven. The other seven were caught again six months later and he shut down his office, largely because the kickbacks were making that office unprofitable.”
Presumably Dan’s client conducted an internal audit to determine that the office was unprofitable, rather than outsourcing the job to Ernst & Young.