WHY IS BUSINESS ETHICS SO IMPORTANT IN THE 21ST CENTURY?

Nearly every business course in Australia offers or focuses on business ethics and corporate social responsibility. In fact, Business Schools seeking accreditation from international bodies must show sufficient emphasis in this area to be considered as credible providers of business education.

And while this increasing emphasis on ethics is important, the universities often fail to describe why ethics is so vital to business success in the 21st century.

I recall sitting in the audience of at a Deakin University oration listening to Ms Ita Buttrose speaking on the topic of “The Importance of Ethics.” Undoubtedly Ms Buttrose is an extraordinarily successful Australian business person and a compelling speaker, yet I left the presentation feeling she had missed the point. When speaking business ethics the only reasoning for its importance, was that business ethics was important. There was no reasoning or logic behind this statement. It was like business ethics is important … just because.

Here is the fundamental flaw behind education in business ethics. In none of my MBA studies did any of my professors explain the reasoning for business ethics. There was no link given between corporate responsibility and success. The reasoning given by professors, “business ethics is important … just because.” I have read plenty of research in this area and what I find is that many professors are unable to link business ethics with tangibles, such as profits and long term sustainability.

The problem here is of course that we all hear stories of greedy corporates making billions of dollars seemingly engaging in unethical behaviour. A cursory glance would seem to suggest that to really succeed in business today you have to cheat the system.

I recall one business owner who was personally making millions of dollars selling investment properties to mum and dad investors. This individual, who shall remain nameless, drove a $500,000 Bentley, wore a gold watch (which he flashed for attention) and was selling investment properties at $60,000 above market prices to unsuspecting investors. It seemed to me at the time that despite this individual’s obvious lack of ethics he was raking in the cash and living the dream.

It raises the question of course, are there any consequences to unethical behaviour in business. Fortunately, or unfortunately, depending on your perspective, there are major consequences following from unethical behaviour – the only issue is that it sometimes takes time to manifest.

Perhaps you remember the HIH Insurance collapse in 2001. At the time it was Australia’s largest corporate collapse. HIH had been in existence for over 30 years and its collapse resulted in a total loss of $5.3 billion, with thousands of employees losing their jobs and policyholders left stranded without insurance coverage[1]. A Royal Commission was established to uncover the cause of the collapse. What was found was a severe lack of ethics at the Board level resulting in criminal charges being laid against Rodney Adler, who spent two and half years in prison, and several other senior executives.

Amongst other charges Adler was accused with intentionally acting dishonestly. Adler as a director of HIH sought $2 million investment for another company in which Adler had an interest. Adler lied to the Board saying he had already raised $2.5 million and was about to invest $500,000 of his own money. The HIH board approved the investment and Adler failed to disclose that not a cent had been raised.

There were quite a number of other unethical behaviours going on at HIH including the board being unduly influence by senior management. This included charges of bribes paid to senior HIH officials to push through false insurance claims[2].

At the top of Australia’s largest business collapse was some severe unethical behaviour.

Looking across some of the other spectacular collapses over the past twenty years we can find unethical behaviour at the root of managements activities. Take one of America’s largest corporate collapses, Enron. An energy company that dramatically falsified profits, purposely manufactured California’s energy crisis, affecting millions of residents, and had a culture of greed above all else. Enron’s collapse brought down one of the world’s most prestigious accounting firms with it, Arthur Andersen, who were accused of reckless auditing due to a conflict of interest. Both companies engaged in unscrupulous behaviour and both are now footnotes in history.

I’ve personally been involved in managing a number of company turnarounds and behind each of these failing companies there was to a greater or lesser degree severe unethical behaviour at the board or senior management levels of the organisation.

So there really are tangible reasons to practice ethics and corporate responsibility in business. In my experience unethical behaviour always catches up with the perpetrators. Justice may not be instantaneous but it always arrives. But why? Because we live in an economy of exchange. If you run a bakery people will only exchange money with you if you provide something of value. While it is possible in the short run to deceive people and present an appearance of value, ultimately if you don’t exchange value with those around you people will stop supporting you. And in our society laws are in place to punish people who attempt to deceive others.

Enron collapsed ultimately because the company provided little value and was run on inflated profits and results. Eventually the truth was uncovered and the entire business came crashing down.

HIH collapsed because some of the directors were too interested in personal greed and neglected to actually manage the business, failing to see the financial writing on the wall.

If I promise to sell you diamonds but you later find out it was just glass at the very least you will not buy from me in the future. Eventually as word spreads that my diamonds are worthless my entire market will dry up and I will be out of business. The same applies to any business in any situation. A business cannot engage in unethical behaviour and expect people will not eventually find out and turn on the perpetrator.

And that is why business ethics is so important. Because it violates the very essence on which our economy is built – exchange. Unethical or even criminal exchange cannot go on unnoticed forever.

And now in the 21st Century, where the world is interconnected, unethical behaviour in one quarter of the world can have a global impact. Some time studying the global financial crisis of 2008 will reveal extraordinary levels of greed and unethical behaviour at the pinnacle of the US financial system. The problem was the extent of the unethical behaviour was so widespread it took an entire collapse before it was brought to light. It was so insidious that it invaded the banks, federal reserve, government and SEC. It was so pervasive that the rate of fraudulent mortgage application in the US doubled between 2006 and 2008[3].

It is therefore important that as individuals we do not tolerate unethical behaviour in our managers, business owners and directors, because the consequences are usually quite pervasive and effect many more than just those who perpetrated the crimes. And so business ethics is not just about our own personal behaviour, but by ensuring those around us maintain a very high standard of ethics. It is really just as bad to see something wrong and say nothing.

By the way, my good friend the property investor with his Bentley and gold watch was out of business six months later when people got wise to his shady operation and his business collapsed.

[1] Reference: “Aftermath of the HIH Collapse”, Australian Governement, The Treasury , http://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/Economic-Roundup-Issue-1/HTML/article-3/3-Aftermath-of-the-HIH-collapse

[2] http://www.asic.gov.au/asic/asic.nsf/byheadline/06-210+Bradley+Cooper+sentenced+to+eight+years%E2%80%99+jail?openDocument

[3] http://www.asic.gov.au/asic/asic.nsf/byheadline/06-210+Bradley+Cooper+sentenced+to+eight+years%E2%80%99+jail?openDocument

 

author - kane

Kane Hooper is an entrepreneur and owner of Cloud Accounting Partners, specialising in providing real management information to SMEs. He has extensive experience in turning around failing companies, achieving profitable and sustained growth. Kane has run eight businesses and consulted many more across of wide range of industries.

Author of the Business CPR Series, books designed to assist owners of distressed business.

He graduated with an MBA from Deakin University in 2014, being awarded the prestigious Brookes Scholars Medal.

Kane is a member of several boards and has a strong interest in the Not-For-Profit sector.

Please visit: www.kanehooper.com

Kane Hooper

Kane Hooper is an entrepreneur and owner of Cloud Accounting Partners, specialising in providing real management information to SMEs. He has extensive experience in turning around failing companies, achieving profitable and sustained growth. Kane has run eight businesses and consulted many more across of wide range of industries.

Author of the Business CPR Series, books designed to assist owners of distressed business.

He graduated with an MBA from Deakin University in 2014, being awarded the prestigious Brookes Scholars Medal.

Kane is a member of several boards and has a strong interest in the Not-For-Profit sector.

Please visit: www.kanehooper.com

One thought on “WHY IS BUSINESS ETHICS SO IMPORTANT IN THE 21ST CENTURY?

  • August 30, 2017 at 2:22 pm
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    While adopting ethical practices an organization ensures that it takes steps which are presumed correct by their customers, stakeholders, community as well as the society.

    Reply

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