15.07.2009 Business & Finance

The ethical balance

By myjoyonline
Openness and ethics go together and actions are unethical if they will not stand scrutiny.Openness and ethics go together and actions are unethical if they will not stand scrutiny.
15.07.2009 LISTEN

By Captain Sam Addaih (retd)
The possibility that ethical and commercial considerations will conflict has always faced those who run companies. It is not a new problem. The difference now is that a more widespread and critical interest is being taken in decisions of managers and in the ethical judgements that lie behind them.

Ethical signposts do not always point in the same direction. The rule that it is best to tell the truth often runs up against the rule that we should not hurt people's feelings unnecessarily. There is no simple, universal formula for solving ethical problems. We have chosen from our own codes of conduct whichever rules are appropriate to the case in hand; the outcome of the choices makes who we are.

While it is hard enough to resolve dilemmas when our personal rules of conduct conflict, the real difficulties arise when we have to make decisions which affect the interest of others.

We can work out what weight to give to our own rules through trial and error. But business decisions require us to do the same for others by allocating weights to all the conflicting interest that may be involved. Frequently, for example, we must balance the interests of employees against those of shareholders.

But even that sounds more straightforward than it really is, because there may well be differing views among the shareholders, and the interests of past, present, and future employees are unlikely to be identical.

Business is part of the social system and you cannot isolate the economic elements of major decisions from their social consequences. So there are no simple rules. Those who make business decisions have to assess the economic and social consequences of their actions as best as they can and come to their conclusions on limited information and a limited time.

Sir Adrian Cadbury defines ethics as the guidelines or rules of conduct by which people aim to live. He believes that it is useful all responsible for business decisions to knowledge the part which ethics plays in those decisions to encourage discussion of how best to combine commercial and ethical judgements. Most business decisions involve some degree of ethical judgement; few can be taken solely on the basis of arithmetic.

We refer to a company as having a set of standards, but that is a misnomer. The people who make up the company are responsible for its conduct and it is the collective actions which determine the company's standards. The ethical standards of a company are judged by its actions, not by pious statements of intent put in its name. The character of a company is a matter of importance to those in it, to those who do business with it, and to those who are considering joining it.

What matters most, however, is where people stand as individual managers and how they behave when faced with decisions that require them to combine ethical and commercial judgements. In approaching such decisions, Sir Cadbury believes it is helpful to go through two steps.

The first is to determine, as precisely as we can, what our personal rules actually are. The aim is to avoid confusing ourselves and everyone else by declaring one set of principles and acting on another. Our ethics are expressed in our actions, which is why they are usually clearer to others than ourselves.

Once we know where we stand personally we can move to the second step, which is to think through who else will be affected by the decision and how we should weigh their interest in it. Some interests will be represented by well-organised groups; others will have no one to put their case.

The rise of organised interest groups makes it quintessential that managers consider the arguments of everyone with a legitimate interest in a decision's outcome.

Interest groups seek publicity to promote their cause and they have the advantage of being single-minded. They are against water privatisation, for example, but take no responsibility for finding a better alternative. This narrow focus gives pressure groups a debating advantage against management, which cannot evade the responsibility for taking decisions in the same way.

In "The Hard Problems of Management", Mark Pastin perceptively refers to this phenomenon as the ethical superiority of the uninvolved. Pressure groups are skilled at seizing the high moral ground and arguing that our judgements as managers are at best biased, and at worst influenced solely by private gain because we have .direct commercial interest in the outcome of our decisions.

But as managers we are also responsible for arriving at business decisions that take account of all the interests concerned; the uninvolved are not.

Pressure to reduce complicated issues to straightforward alternatives, one which is right and the other wrong, is a regrettable sign of the times. But boards are rarely presented with two clearly opposed alternatives. Companies faced with the same issues will, therefore, properly come to different conclusions and their decisions may alter over time.

Companies whose activities are international face an additional complication in taking their decisions. They aim to work on the same standards of business conduct wherever they are and to behave as good corporate citizens of the countries in which they trade.

But the two aims are not always compatible: Promotion on merit may be the rule of the company and promotion by seniority the custom of the country. In addition, while the financial arithmetic on which companies base their decisions is generally accepted, what is considered ethical varies among cultures.

If what is considered corruption in the company's home territory is an accepted business practice elsewhere, how are local managers expected to act? Companies could do business only in countries in which they feel ethically at home, provided always that their shareholders take the same view.

But this approach could prove duly restrictive, and there is a certain arrogance in dismissing foreign codes of conduct without considering why they may be different.

If companies find, for example, that they have to pay regulatory officers in another country just to do their job, it may be that the state is simply transferring its responsibilities to the private sector as an alternative to using taxation less efficiently to the same end.

Nevertheless, this example brings us to one of the most common ethical issues companies face - how far to go in buying business. What payments are legitimate for companies to make to win orders and, the reverse side of that coin, when do gifts to employees become bribes? Sir Cadbury advocates two rules of thumb to test whether a payment is acceptable from the company's point of view: Is the payment on the face of the invoice? Would it embarrass the recipient to have the gift mentioned in the company newsletter?

The first test ensures that all payments, however unusual they may seem, are recorded and go through the books. The second is aimed at distinguishing bribes from gifts; a definition that depends on the size of the gift and the influence it is likely to have on the recipient.

The logic behind these rules of thumb is that openness and ethics go together and that actions are unethical if they will not stand scrutiny.

Openness in arriving at decisions reflects the same logic. It gives those with an interest in a particular decision the chance to make their views known and opens to argument, the basis on which the decision is finally taken.

This in turn enables the decision makers to learn from experience and improve their powers of judgement.

Society sets the ethical framework within which those who run companies have to work out their own codes of conduct. Responsibility for decisions, therefore, runs both ways. Business has to take account of its responsibilities to society in coming to its decisions, but society has to accept its responsibilities for setting the standards against which those decisions are made.

Credit: Captain Sam Addaih (retd) is a lecturer at the Ghana Institute of Public Administration.
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