Corporate corruption - stopping the rot

China's Democracy and Law Times recently reported that 60 per cent of the prosecuted 500,000 cases of bribery and corruption in China during the past decade involved international trade and foreign businessmen. But, the newspaper lamented, China's laws are inadequate when it comes to prosecuting multinational corporations and so their involvement in such crimes goes unpunished and consequently may be on the rise.
This is a pity because many in China look at foreign companies as having higher principles and standards compared to local firms. Indeed, many young Chinese who seek to work at foreign companies do so in the hope of escaping the moral morass of domestic companies. The clean perception of foreign companies may be about to decline.
Even Germany's image as an efficient economy driven by squeaky-clean corporations has been left in tatters in recent months following a number of scandals involving some of its cornerstone corporations. In the past two weeks six senior executives of engineering firm Siemens were arrested by German police and more than 36,000 documents seized in relation to a €200 million slush fund used to bribe customers in international markets. This follows similar scandals gripping automotive manufacturers DaimlerChrysler, BMW and Volkswagen, and utility firm E. On. According to a recent Wall Street Journal article, white collar crime in Germany is on the rise (it apparently rose 10 per cent over last year) and it is estimated that 80 to 95 per cent of crimes go unreported.
But Germany is not the most corrupt of countries. Transparency International, which compiles the World Corruption Index, listed Germany as the 16th best nation on its list of 163. Germany came in ahead of the United States and Japan, and, according to the Wall Street Journal, has not had scandals of the scale that led to the collapse of America's Enron Corporation over accounting fraud.
Business school theories
What is dragging down so many Western nations that were thought to be above corporate corruption because of the strong ethics bent of their national cultures and firm beliefs in the rule of law? And what can be done to fix the problem?
Answering the first question, many commentators have suggested a lack of appropriate ethics modules taught at business schools around the world.[i] The argument goes that leading business schools fail to teach executives about the moral and ethical dimensions of doing business, focusing too much on business success drivers such as finance, marketing and human resources. An extension of that argument paints a more dismal picture -- that business schools not only fail to teach ethics but in fact teach the very opposite.
According to one such commentator, Sumantra Ghoshal, himself a professor at the prestigious London Business School until his death last year, too many business programs push individual self-interest and shareholder value as the ideals to be achieved. Ghoshal said many of the "worst excesses of recent management practices have their roots in a set of ideas that have emerged from business-school academics over the last 30 years." These theories -- many of them based on the homo economicus view propounded by Milton Friedman and his Chicago School economists -- freed many students from "any sense of moral responsibility."
But the failure of our business schools is only part of the answer. There are another two factors I believe could be driving boardroom ethics down.
Performance before ethics
The first of these is that the West has given in to the "greed is good" culture -- maybe itself a result of the homo economicus school of thought. We pay our top executives astronomical salaries while corporate boardrooms become more and more opulent. CEO's earning million dollar packages lay off the lowest paid employees in the blink of an eye "for the good of the company" or "to improve shareholder value" -- and then are often rewarded with huge bonuses for having done so. Maybe corporate downsizing was necessary, but it might be more palatable for society if those taking the decision were not rewarded as extravagantly as they are.
Not surprisingly, two important business and human resource success measures have fallen into the greed-is-good trap as well. The first: key performance indicators, or KPI's, for companies and departments within companies. These rarely, if ever, measure whether corporate objectives were achieved ethically -- that is, fairly. The second: the individual employee's annual performance review. This does not measure how success was achieved or, if the employee failed to achieve a goal, whether failure was due to regard for a higher good, such as business ethical considerations. Success is only measured, ultimately, by looking at the bottom line -- at the dollars and cents, at profit and loss.
In the modern business world doing the right thing is often subservient to profit margins. Indeed, Germany's top business and political journal, Der Spiegel, speculated last month that the situation at Siemens worsened even as the company's code of ethics was being tightened. The reason? Former CEO Heinrich von Pierer had introduced more rigorous profit margin targets to be achieved over a three year period. Siemens executives no doubt found themselves under the hammer.
Teaching ethics at business school might help, but only if the business world also changes the way in which it measures success. Unfortunately the focus companies have recently placed on corporate social responsibility is not yet embedded in the cultures of most corporations, which tend to approach CSR in a somewhat schizophrenic manner: "The voices in the PR department are telling us to do something good, so we had better do it, but let's keep making money at all costs." Consequently, money is donated to schools in poor neighbourhoods or to improving the environment, while a true measure of corporate social responsibility like ethical behaviour in business transactions is given little more than a cursory glance in too many boardrooms.
Obviously, companies need to change their view of what constitutes success and how success is legitimately achieved. And business schools need to educate future corporate leaders in what is right business behaviour. But real change will require instilling in the next generation of leaders a profound sense of right and wrong from an early age. It is about educating for character.
Leadership, from an early age
The real problem starts much earlier than when people enter the world of business or attend business schools. The problem lies with our primary and secondary schools, and within our homes. At an early age our future corporate leaders need to be educated in some fundamental values that seem to have been forgotten by the current crop of corporate bosses, or that were perhaps overlooked by their parents and early educators.
From a values point of view, children need to learn early on that the end does not justify the means. A recent survey of business school students by the publication Academy of Management Learning & Education found that 56 per cent of students at North American business schools admitted to cheating. And cheating students said they did it because they believed everyone else must also be cheating to succeed. Once we start to accept the idea that the end does justify the means, we have climbed onto a very slippery slope to all kinds of horrors. Students who think everyone else is cheating and that cheating at school is an acceptable means to success will later also justify cheating when they sit in the CEO's office or in the boardroom.
Chances are that the business school cheats started cheating long before they got to business school.
From an early age children need to learn that integrity is far more important than winning at any cost. They learn this in the classroom and on the sports field -- by parents, teachers and coaches helping them to be the best that they can be; by praising them for their successes; and by accepting their limitations when they have done their very best but still fall short of the top mark or top score. Children need to learn that there is no dishonour in losing; dishonour is in winning at all costs, in sacrificing principles for short-term gain.
If we teach only that to our children, we will have taught them a great deal.
Alistair J. Nicholas is the Managing Director of China-based consultancy firm AC Capital Strategic Public Relations, which advises foreign companies on corporate reputation management in China. The company's blog, Off The Record, discusses issues that affect the image and reputation of companies, organizations and individuals. The author has also provided training to foreign companies on ethical business practice in the Asia-Pacific region.

[i] "Business schools: Bad for business?" The Economist, 17 February 2005


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