Common organisational myths that lead to corporate scandals. Can ethics and business be mutually beneficial? Some would argue that “the business of business is business” and there is no place for ethics (Rossouw & van Vuuren, 2013, p. 3). This is also entrenched in the common belief that ethics are for those who can afford them.  However, history is replete with incidences where organisations have financially faltered purely due to unethical conduct. For example, ENRON, an energy supplier in the USA, and Arthur Andersen, a well-known auditing firm, both collapsed financially due to scandalous business practices (Moncarz et al., 2006). Ironically, these organisations were considered, a few years prior to their collapse, as the most profitable and ethical organisations listed on the New York Stock Exchange (Healy & Palepu, 2008). Similarly, Exxon an oil company based in New Jersey incurred major financial losses due to the infamous Exxon Valdez oil spill at Prince William Sound Alaska. This incident was believed to be the direct result of a lack of investment in safety and environmental protection protocols which resulted in a public boycott of Exxon products. In South Africa we have also had our share of scandals in the corporate sector. Clover South Africa, South African Airways (SAA), Allied Bank of South Africa (ABSA), Fidentia Asset Management, Saambou Bank, Leisurenet, Tiger Brands, Premier Foods, Foodcorp, and Pioneer foods have all been guilty of unethical behaviour (Steenkamp, 2007; Rossouw & van Vuuren, 2013). Some of this behaviour included allegations of milk and bread price fixing, insider trading, bribery and fraud. Although ABSA, SAA, Foodcorp, Pioneer Foods, Tiger Brands and Clover SA survived and rebuilt their reputations, the other organisations were not so lucky. It is no coincidence then that the King Report on Corporate Governance has become so popular in South Africa. This is in part due to the slow but gaining awareness that good business is ethical business. The King Report on Corporate Governance was first published in 1994 (King I) followed by the second amended report published in 2002 (King II) and which is now in its third iteration published in 2009 (King III). The King Report on Corporate Governance was established by the Institute of Directors in South Africa who asked retired Supreme Court judge Mervyn King to establish and chair a committee on corporate governance in South Africa in 1993. The published King report is considered a hallmark of good practice in business and its recommendations, corporate guidelines, and codes of good practice are a requirement today for any company that applies for listing on the Johannesburg Stock Exchange (JSE). In general, the King report outlines that ethics and business should not be separated, but rather entrenched. Good business is ethical business according to the King III report where it is outlined that ethics is essential for business profitability, stakeholder trust and corporate reputation. Of these factors stakeholder trust and consequently corporate reputation can be considered the most important aspects affecting business profitability. According to Rossouw and van Vuuren (2013) unethical behaviour can severely damage the trust stakeholders place in organisations. This trust is difficult to attain often requiring a good track record and a lot of time to establish. Unfortunately, trust can be easily lost, hurting the corporate reputation of organisations and negatively affecting their license to operate. An organisation’s licence to operate refers to the reputation of an organisation where stakeholders (suppliers, customers, employees etc.) interact with the organisation if they view the organisation favourably. Conversely, the license to operate can be taken away if stakeholders view the organisation’s reputation as unfavourable. The Exxon Valdez is one such example, where customers boycotted the use of Exxon products, and employees and suppliers refused to interact with Exxon after the Exxon Valdez disaster. In South Africa, the South African National Roads Agency Limited (SANRAL) lost their license to operate the Gauteng e-tolls with the majority of road users refusing to pay for them. Non-payment was not the only sanction for SANRAL, with multiple protests, anthrax scares, hate mail, and legal actions taken against them. These sanctions were a direct result of poor stakeholder engagement by SANRAL and a loss of their license to operate. Despite the growing awareness of the financial impact ethics has on business, organisations are still unsettled by the concept of ethics vs. business. Often organisations succumb to the idea that a) Capitalism is unethical by nature and that we simply cannot do anything about it; and b) financial success is unfeasible where ethics are concerned. The source of this divergence should be challenged. Rossouw and van Vuuren (2013) identified six common myths that feed into this perceived disparity between business and ethics. We list these myths below.

  • Dog eat dog – the business place is hostile and success depends on sole self-interest. It is a myth because unfettered self-interest has never aided business networking and stakeholder engagement.
  • Survival of the fittest – success is sustained by pure competition even if it disregards rules. It is a myth because valuable interactions that promote growth rely on cooperation.
  • Nice guys/ girls come second – consideration cannot accompany the road to success. It is a myth because nurturing business relationships is a prerequisite for sustained success, bearing in mind the value of a respectful reputation.
  • Unethical conduct is not serious – it might not be right, but it’s not causing harm, So let’s keep doing it. It is a myth because eventually the knock-on effects of unethical behaviour will catch up, harming the organisation and its stakeholders.
  • When in Rome, do as the Romans do – everyone else is working unethically, so we should too. It is a myth because peer pressure is a pitfall. Just because everyone else is doing it doesn’t make it right or good for our stakeholders and our reputation.
  • All that matters is the bottoms line – money should be made at all costs no matter the ethical consequences. It is a myth because while money making remains at the core of any business, profitability is dependent on stakeholder interaction which will be lost if unethical behaviour results in a scandal.

These myths, put succinctly, are dangerous. Generally organisations believe them and embrace them. This puts the organisation at great risk for unethical conduct, and possibly a costly scandal (Rossouw & van Vuuren, 2013). Scandals in turn ruin corporate reputation and negatively impact an organisation’s licence to operate. Without a licence to operate the business cannot be profitable. It may therefore be better to think that the business of business is not business, but rather, ethical and responsible conduct.

References:

Healy, P., & Palepu, K. (2008). The fall of Enron. Harvard Business School Case, 109-039. IDSA (2009). King code of governance for South Africa. Institute of Directors of Southern Africa. Moncarz, E. S., Moncarz, R. Cabello, A., & Moncarz, B. (2006). The rise and collapse of Enron: Financial innovation, errors and lessons. Contaduría y Administración, 218, 17-37. Rossouw, D., & van Vuuren, L. (2013). Business ethics (5th ed.). Cape Town, South Africa: Oxford University Press South Africa. Steenkamp, P. (2007). Fidentia: A strategic and corporate governance analysis. Unpublished master’s dissertation. Graduate School of Business, University of Stellenbosch.

 By: Paul Vorster (JvR Psychometrics) & Sharlene Olivier (JvR Psychometrics)