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Do Corporate Values Shift in a Recession?

Posted by Bhushan Singh on Tuesday, 17 May 2016 in General

Consider the following two examples. When Costco was expanding into the UK, its bankers brought to their attention that if they structured a loan transaction in a certain way both the loan and principal could be booked as a tax deductible as opposed to the interest only. Doesn’t this sound great? However when Costco’s executives examined the issue deeply it became clear to them that while it was a legal loophole in the tax code it was not in keeping with the spirit of the law and they did not take advantage of the legal loophole. Good for them.

In 1999 Enron was faced with an earnings crisis. The company called its bankers Merrill Lynch (ML) and asked them to purchase three barges containing electricity generators. Enron would then book the sale in that year’s accounts and buy back the barges in the next financial year. One ML executive pointed out that what they were doing was aiding Enron in “income statement manipulation”. He was overruled, as the fees to be earned affected Enron’s judgment. ML’s other executives justified the decision as helping a deserving client. ML then participated in the deal. No one expected these decisions to come back to haunt them.

I am of the opinion that if you do not have a strong sense of personal values it is quite possible that you would be a product of the environment instead of being an influence on it. A weak sense of values can make you an easy target for swaying. Now this can be both a positive or negative influence. How is this reflected in the corporate world?

Corporate scandals are nothing new. When they do occur, of course they claim that no one is at fault. You may recall several debacles both locally and abroad with no one being held accountable. On the financial meltdown in 2008, President Barack Obama lamented that no one was held accountable. Locally, we have had the CLICO and HCU scandals and likewise no one is to blame. Even those that we thought were accountable have avoided giving their side of the story and those who did, were not very convincing.

How does the acceptance of corruption get into organisations? After all, they are all staffed by good people just like you and me. In a paper published by Vikas et al 2004, it stated that “fraudulent acts involved knowing cooperation among numerous employees who were upstanding community members”. They did not have any criminal profile. Oftentimes transgressions happen incrementally over time until it becomes the norm and then part of the corporate social cocoon.

According to former President of the Certified Fraud Examiners, Tony Bishop, people who have engaged in corrupt acts excuse their actions to themselves, by viewing their actions as non-criminal, justified or part of a situation which is beyond their control. Hence my point earlier; what happened to personal values in such instances? Because corrupt acts can make individuals appear bad, they are motivated to find examples of others who were worse to minimize their actions. It is also very hard to say “no” to the boss. Your job may depend on it. Research has shown that in such instances most people are followers. Everyone is susceptible without realizing it. In industrial relations it is said you should comply and then complain. You cannot refuse to comply with a reasonable instruction which only in hindsight you realized was a wrong decision.

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Peer pressure is very strong. So ethical may mean unlikable. Ethical decisions are difficult and moral awareness is required to make difficult decisions due to the fact that many may not appear to be compromising at first glance.

There is always a lot of pressure in the boardroom to increase shareholder value. Many times this shareholder value is directly translated to mean higher revenue, higher profits and higher dividends. Especially in a recession where the temptation is to focus on the bottom line, I believe that there is a difference between shareholder value and profit. For this discussion I am focusing on profit. My very real question is: does ethics trump profit?

I would perhaps get a resounding “Yes!” from many people. But be mindful that “Yes” is coming from someone who is perhaps reading this article from a position of comfort- both material and psychological. But in the case of an economic downturn as we are experiencing now, where there is a strong likelihood that you and your company are facing difficult financial obligations; is it still the same? Your Board is breathing down your back and the shareholders are holding the Board to account.

How then does this new scenario colour the picture? Does it still have the same rose hue? Ethics versus bills? Which one would win?

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It may not be easy to be ethical. That is a fact. You may very well have to stand alone. There is also the issue of unethical but not illegal. There is the letter of the law and the spirit of the law. This especially is a grey area where many get lost and a corporate code of ethics have not been much help to many trying to navigate these waters. What is the tone at the top of the organisation? What is the role of the Board and Executive Management? This has proven to be the lighthouse in many instances that have guided decisions both positively and negatively. Because, after all it’s not the janitor who runs a company to the ground in most instances.

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