Governance and Corruption

GOVERNANCE & CORRUPTION

CEOs Behaving Badly – Sexual Misconduct and Corporate Governance

The final – Friday – morning got off to a flying start when Australian Prof Peter Waring from the University of Newcastle, Singapore, related the stories of two highly publicised and comparable cases of alleged sexual misconduct by the then Chief Executive Officers of large publicly listed corporations in the United States (Mark Hurd of Hewlett Packard) and Australia (Mark McInnes of large retailer David Jones).

Both were regarded as otherwise competent CEOs; both had allegedly engaged in sexual misconduct with female employees; both were alleged to have misused their power in pursuing these sexual relationships; both were forced to resign from their positions and both resignations resulted in many millions of dollars being reduced from the market capitalisations of their companies – AUD$81 million from David Jones and US$10 billion from HP.

Peter suggested these situations were nothing new, quoting from Solon around 600BC: Public evil enters the house of each man…’ He said the ‘private evil of powerful men’ involved narcissism, risk-taking, opportunity, perception of reduced punishment, a sense of entitlement and the problem of power-distance.

Peter said sexual misconduct committed by CEOs is not usually a risk bargained for by shareholders and other stakeholders but it is clearly a risk that can result in tarnished corporate reputations and demand serious crisis management from corporate boards who are generally unprepared for the situation.

Content analysis of CEO contracts confirmed it is a risk rarely considered.  Boards tend to be reactive while ethics policies, values and training can be inadequate.

Reporting lines to Boards and CEO Power constrict information flow. Monitoring CEO behaviour is subject to power and communication constraints – for instance the typical line of reporting is from the CEO direct to the board.

Crises tend to erupt without forewarning. Performance management systems are typically ‘feedback’ forms of control and are unlikely to detect risks until they erupt into fully fledged crises.

Other risk management tools such as contractual penalties and organisational anti-harassment policies and ethics training clearly have their utility, but both were present in abundance in these cases – indeed in the case of David Jones, the CEO had personally approved of the misconduct policy.

The specific questions that are therefore raised by these cases centre on the role of the board in prevention and in managing these crises when they occur.

Peter’s suggestions for improved governance included the need for new ‘Input and Concurrent Controls’, ethics background checking, clearer grounds for termination and new channels of information and monitoring. This could incorporate enhanced roles for Ethics Officers/Advisors to monitor CEO activity and report to Board. Indeed Peter suggested Chief Ethics Officer could be a new kind of CEO!

He also suggested ethical issues needed to be elevated within Board meetings and CEO’s should receive regular ethics coaching.

Peter well illustrated the necessity for balance by also discussing the alternative utilitarian argument that the boards in both these cases erred in requiring the resignations of their CEOs.

The highly entertaining and engaging presentation used video clips and led to a healthy half hour corporate governance debate with many emotive contributions from the audience.

The acceptance of bribery and corruption in Australian organisations

Dr Doug Thomson is a Senior Lecturer at the Graduate School of Business and Law at RMIT University, Melbourne. With a background in industry, he was a late convert to academia, so was particularly well placed to comment on the impact of bribery and corruption in Australian organisations

Doug followed Peter Waring’s talk on CEOs and opened by referring to Peter’s address by asking ‘where do we look for ethical leadership?’ and suggesting that looking at the ‘top end of town is not going to work terribly well and I think we need to start looking at leadership within ourselves; don’t look for leaders in ethics, look for ourselves for leadership’.

He noted some Australian States had started an experiment with the inclusion of ethics for schoolchildren which he suggested was a good place to start.

Like many of his compatriots, Doug did not mince his words, notably his direct assertion that ever since the ‘Rum Rebellion’ of 1808 which deposed Governor William Bligh, the only successful armed takeover of government in the country’s history, ‘Australia has had a continuing history of corrupt leaders and organisations’.

He suggested the worst kind have been those of a political/economic nature, because they undermined democratic principles and people’s faith and trust in the political system and the law enforcement agencies.

He had particular sympathy for the ultimate victims of corruption and fraud who were often ordinary people of modest means whose situation was usually unreported.

Doug discussed a number of definitions:

  • Fraud: ‘any dishonest activity causing actual or potential loss to any person or entity’ (AS8001, 2008)
  • Bribery: ‘money etc offered to procure (often illegal or dishonest) action in favour of the giver’ (Concise Oxford Dictionary, 2010) or ‘gaining improper advantage for business including activities such as gaining orders, applications for regulatory permits, customs, taxation concessions and judicial and legislative rulings’ (Apke 2001).
  • Corrupt: ‘rotten, tainted with vice or sin, depraved; influenced by bribery, verbal (Concise Oxford Dictionary, 2010)
  • Corruption: ‘the transgression of formal rules governing the allocation of public resources by officials in response to offers of financial gain or political support’ (Ampratwum 2008, p.76)
  • Deviant: ‘deviating from the normal (social etc) standards of behaviour (Concise Oxford Dictionary, 2010) although he suggested once deviant behaviour became more of a norm it may no longer be described as deviant!

He explained that bribery and corruption can in fact be defined differently depending on the perspective and the issue that is being discussed, such as economic, political or legal. Kinsea (2008) suggests that an individual or a group is said to be guilty of corruption if they accept money for doing something that they are under a duty to do anyway, or under a duty not to do.

Bribery is regarded as occurring when an informal reward is offered to pay or provide favours to a person of trust to influence their conduct or judgment (Beauchamp and Bowie, 2001). Ampratwum (2008) highlights the difficulty that bribery could include exercising legitimate discretion but for an improper reason, or transgressing rules governing public resources by officials in response to financial inducements or political influence.

Rose-Ackerman (1974) describes bribery simply as an illegal or unauthorised transfer of money or an in-kind substitute.

Doug and his colleague’s work examined the nature of corruption within organisations and the conditions that lead to corrupt practices being accepted as normal practice. He then cited examples since the 1950s of ‘high level deviance’ including the New South Wales (NSW) State Premier Sir Robert Askin and criminal Abe Saffron; the Queensland State Premier Sir Joh Bjelke-Petersen; the Western Australia State Premier Brian Burke and entrepreneur Alan Bond.

He described Abe Saffron, the son of Polish immigrants who thrived as kingpin of the Australian underworld for three decades from the 1950s, amassing a multimillion dollar fortune, as leaving an ‘enduring model for future organised criminals’. To protect his empire Saffron ‘corrupted or blackmailed anyone he needed’ including the NSW State Premier Sir Robert Askin, judges, and the NSW Police Force, starting with its Commissioner at a time when illegal gambling, prostitution and alcohol could not exist without protection. In over 40 years Saffron had no major convictions other than eventually 17 months for tax evasion. The Australian Taxation Office audited Premier Askin’s estate and found large undisclosed income but no finding of criminality. Eventually a 1977 murder provoked public outrage and led to a number of ‘Royal Commissions’ of enquiry.

Doug then discussed Sir Joh Bjelke-Petersen who was Queensland premier from 1911 to 2005 and accused by Farnsworth in 2005 of ‘trampling on democracy, civil liberties and the fundamental elements of representative democracy…His dominance of public life in Queensland for close to two decades demonstrates how quickly democracy can be perverted by a cunning politician with a will to power and an eye for the main chance’. Doug described how he insisted that all decisions had to go through the Premier.

Bjelke-Petersen ‘enriched himself by abusing his public office with corrupt gains from many sources including oil exploration permits and stories of bags of cash arriving at the Premier’s office’. He demanded $1 million from Alan Bond in settlement of a defamation action. By 1987 discontent with Sir Joh’s leadership grew, particularly as the ‘Fitzgerald inquiry’ began to expose widespread corruption in the police force and the government. In 1991 he appeared in the Brisbane District Court on a charge of perjury arising from the Fitzgerald inquiry but the jury was unable to reach a verdict.

The ‘WA Inc’ Royal Commission investigatedwhether there had been corruption, illegal conduct, improper conduct, or bribery by any person or corporation in the affairs, investment decisions and business dealings of the Government of Western Australia or its agencies’ under the leadership of Brian Burke for five years during the 1980s. Brian Burke was touted as a future Australian (federal) prime minister before he became a domestic liability and the ‘Hawke Federal Government sent him to Dublin in 1988 as Australian Ambassador’. The State Government decisions and dabbling in business during the 1980s boom ‘cost Western Australia at least $600 million in deals with Alan Bond, Laurie Connell and other corporate figures, all of them big contributors to Labor Party funds’.

Doug said the ‘WA Inc Royal Commission’ found conduct and practices on the part of individuals involved in government in the period 1983 to 1989 such as to place the government system at risk. Some ministers elevated personal or party advantage over their constitutional obligation to act in the public interest. The decision to lend Government support to the rescue of merchant bank Rothwells in October 1987 was principally that of Premier Burke. His motives in supporting the rescue were not related solely to proper governmental concerns. They derived in part from his well established relationship with Mr Connell, and from his desire to preserve Labor’s standing with the business community from which it had secured much financial support. Personal associations and the manner in which electoral contributions were obtained could only create the public perception that favour could be bought, that favour would be done. The Royal Commission observed that the size of the political donations was quite extraordinary with Burke ‘nominating the amounts he expected’.

Brian Burke was jailed for two years in June 1994 relating to $17,179 of travel expenses and served seven months before his release on parole. In March 1997 Burke was jailed for three years on multiple counts of stealing a total $122,585 in campaign donations and served six months before the convictions were quashed, on appeal, by a two to one majority, on the grounds that the money was Burke’s to use, as State leader, as he saw fit.

Doug then described high profile London-born Australian businessman Alan Bond who became a national hero in 1983 after his yacht won the pedigree international racing trophy, the America’s Cup, the first non-American to do so. This previous ‘Australian of the Year’ was also noted for his high-profile business dealings but ultimately also for his criminal convictions and the demise of the Bond Corporation, which at the time was the biggest corporate collapse in Australian history. The WA Inc Royal Commission investigated dealings between the Burke government and businesspeople including Bond. In 1992, Bond was declared bankrupt with personal debts totalling A$1.8 billion. He was subsequently convicted of fraud and served four years in prison.

Doug then remarked that examples such as these could suggest that corruption and deviance in Australia is endemic and normalised, and that deviance is accepted on the basis that ‘it’s ok as long as you don’t get caught’. Yet research produced by Transparency International depicted a favourable picture of Australia in terms of global corruption measures – ‘a decade ago Australia was the top-ranked ”clean” country in the world by Transparency International, but today it has fallen to eighth place’ (Kirby, 2010).

Doug then described a number of surveys conducted by his own college RMIT and KPMG’s 9th Fraud and Misconduct Survey 2010 Australia and New Zealand which found the suspected total cost of fraud was increasing – from A$300m in 2008 to A$345m in 2010 with respondents suggesting only a third of total losses are actually detected, with the number of frauds increasing from 530 to 813 and average value from A$1.5m to A$3m over the same period. 65 percent of major frauds were committed by people already working in the organisation who usually acted alone. The main motivators were greed and lifestyle.

The RMIT survey was developed to analyse the anonymous attitudes of mid level managers to concepts in business ethics and issues related to corruption and bribery. The survey, approved by the RMIT University ethics function, was designed with closed questions, open ended qualitative questions and a series of five point Likert scale questions to surface attitudes to the following issues:

  • awareness of unethical practices in your organisations;
  • attitudes to concepts such as honesty, integrity, fairness and the ability to make ethical decisions;
  • views on bribery and corruption;
  • reaction to being offered a bribe;
  • reaction to being asked for a bribe; and
  • description of what you would do if aware of unethical practices in your organisation.

87 practicing managers from a diverse range of private and public organisations located in Australia and operating trans-nationally were surveyed with 60% responding.

To the question “have you ever been aware of unethical practices in your organisation?” 74% of respondents confirmed that they had experienced unethical practices, whilst 22% responded that they had no experience of unethical practice in their organisation.

Over 50% disagreed that concepts such as honesty, integrity, fairness and the ability to make ethical decisions are not necessary and a possible impediment to effective business decision making. About 62% agreed that the concepts were an important capability that most managers have already developed, although Doug suggested given over 70% had experienced unethical practices, this called into question the level of understanding of ethical business practice and level of sophistication of practice in the organisational setting beyond minimum codes (Donaldson & Werhane, 1999; Shaw & Barry, 1998).

85% agreed or strongly agreed that the concepts of honesty, integrity, fairness and the ability to make ethical decisions are important managerial capabilities and need to be learned and understood and Doug suggested there appeared to be a considerable need to develop understanding of business ethics concepts and practice.

Nearly 75% agreed that bribery and corruption were wrong and added costs to the organisation, although almost 90% agreed that bribery and corruption is an undesirable business practice which may be necessary in many situations. Doug suggested this implied that respondents considered bribery and corruption as, ‘necessary evils’ in given situations, as opposed to rejecting the concepts outright. The level of response would confirm the rationale for corporations taking part in corrupt practices posited by Carmichael (1995).

While many managers viewed bribery and corruption as neither part of normal business practice at home or abroad, an equal number (42%) saw it as a necessary part of business practice abroad.

Managers also appeared to value their own personal ethics above company policies on matters of bribery with very few (10%) believing they would offer or accept bribes of minimal value and 78% saying they would decline because they thought the practice to be wrong.

The majority of managers were aware that bribery and corruption were undesirable practices which could place managers at risk, but sometimes became necessary when managers had little choice but to engage in these practices. Doug suggested to some extent this is confirmed by research into the normalisation of corruption in organisations (Spicer, 2009; Palmer, 2008; Ashford and Anand, 2003) which indicates that corrupt practices can become behavioural norms within the culture and systems of an organisation over time.

Managers appeared to prefer to report unethical practices internally to managers and supervisors (71% agreement) than reporting to external corruption authorities (42% agreement). 60% disagreed that ‘if you were aware of unethical practices in your organisation you would do nothing’. However 25% agreed that ‘doing nothing’ was the preferred course of action. Doug suggested this could imply that for some managers the issue of alerting senior management to unethical practices in an organisation remains a sensitive issue, noting that Lewis (2008) found that in the UK over a ten year period protection for whistle blowers was inadequate.

In situations whereby managers were asked to undertake unethical practices which subsequently became public, there was little trust that their organisation would support the individual managers, with 55% believing the manager’s organisation or manager would ‘deny any knowledge of my actions’. Although 31% disagreed that an organisationally orchestrated unethical situation should lead to an individual manager’s resignation or dismissal, many managers (59%) expected to be dismissed or be asked to resign when the unethical action was dictated by senior management.

Doug concluded from the surveys that deviant behaviour is at the individual level, that corruption is increasing and that most individuals have a very limited understanding of ethics and its application in their workplace, despite the UN Convention against Corruption, OECD Policy Framework for Investment, OECD anti-bribery Convention, national laws and conventions on corruption, organisational codes of ethics, conformity with superior directions, laws of the land and so on and so forth.

So he asked how this problem could be overcome? Is it that a ‘top down’ approach has not and is not working and that some other approach should be considered such as a ‘bottom up’ approach?

Doug’s suggestion was to use Den Nieuwenboer’s (2008) structured three types of first order deviance to develop a systematic orderly process which may be used by organisations to understand, develop, implement and maintain ethics codes, policies and structures:

  1. deviance centred around external rules and norms such as those applied to organisations by governments and professional institutions;
  2. deviance centred around the organisation’s own rules and norms; and
  3. deviance centred around the client.

He cited a wide variety of research into reasons for individuals in organisations engaging in deviant behaviour. Corruption within organisations has typically been examined from a risk management or forensic accounting and audit perspective (Dellaportas et al 2005), by seeking to establish whether it is occurring or not. However, while it is critical that organisations establish mechanisms to detect corruption, it is also crucial they understand why and how it occurs, hence the relevance of the RMIT and other research.

How organisations influence their members and how members change the organisation cannot be understood without seeing the interplay between the organisation and the individual (Schein, 2006). This interplay is important for the study of wolf pack and vulture type of deviance (Mars, 1982).

Doug cited Kohlberg’s (1969) distinguishing six stages of cognitive moral development and argued that people in a higher stage are less inclined to engage in deviance. This and the individual difference variable, locus of control, have been empirically linked to deviance by Trevino and Youngblood (1990). People who are internally locussed have the tendency to attribute their own personal success and failures to themselves, that is, to effort and persistence. Externally locussed people tend to attribute success and failure to things that are beyond their control that is, to luck and other people’s actions.

Organisations often assume that people make a rational choice when being deviant, but this may not always be so. Some management practices can coerce employees into deviant behaviour by setting performance targets to be reached which may undermine and change people’s values so they feel they have no choice but to be deviant to reach their targets. Goals that are far out of reach don’t work to motivate people (Locke & Latham, 2002), yet goals that are ambitious but only just out of reach are most likely to provoke deviant behaviours in order to reach them.

Criminologists have long related status to deviance – people’s desire for social status and goals of a non monetary nature influence people to engage in deviance. Not everyone responds equally to status dynamics, and Doug suggested more research was needed to explain why individuals engage in deviance caused by status dynamics alone. It is necessary to explore whether certain person related traits play a role and make some people more inclined to deviance than others.

People who score high on Machiavellianism value goals more that the means to obtain the goals and are more inclined to engage in deviance than people who score low on Machiavellianism (Bass, Barnett & Brown, 1999).

People who score high on negative affectivity, a so called higher order personality variable frequently measured with so called mood scales, tend to have higher levels of distressing emotions and are more inclined to deviance than people with low scores (Aquino, Lewis & Bradfield, 1999).

Thus in situations where high status dynamics are combined with individuals who are more likely to engage in deviance, the risks of deviance are high. However Doug suggested that this should not mean that organisations should be discriminatory and select out those individuals who score highly on the individual variables and so be more likely to engage in deviance, as many of these individual traits have positive sides.

One’s moral conscious may be triggered by intuition (Haidt, 2001). Basing decisions on feelings, for example, when people reflect on when they feel something is wrong and not necessarily just when there is evidence of an actual wrong doing.

Governments, organisations and professional associations impose rules, procedures and institutions in order to guide and protect their integrity, the aim being to not only guard organisational interests but also to ensure organisations live up to their societal tasks. He suggested it could be worthwhile to research how people obey the rules or intervene in deviance taking place or prevent it from happening altogether, to examine how deep knowledge must infiltrate people to become an occupational intuition or moral conscious, and how to obtain such knowledge. Independent minds, relationships and occupational intuition could now be a focus.

Doug suggested that further research is also necessary into whether organisations can deter deviance by looking for a balance between organisational requirements and individuals responses, meaning organisations should be careful and less pre occupied not to have too much ‘status dynamics’ going on. He suggested a number of techniques such as social simulation games whereby individuals work together over a long period of time on certain tasks in a controlled experimental environment, allowing the study of whether and how norms may change over time.

Identification with the audience has obvious benefits, but it can be a dangerous tool. It can evaporate independence and criticality of thought up to a point that perceived deviance is easily accepted and adopted by all members of the organisation.

Increasing competitive pressures may make it more likely that deviance takes place.  Doug suggested that organisations should think carefully about fostering competition, commerciality, identification, and be moderate about motivating employees to care too much about the organisation’s goals and ambitions.

Ashford and Anand (2003) believe that all organisations have the potential for corrupt or unethical practices as opportunities exist both internally and externally which if accepted can result in the normalisation of the practice. They also describe a second aspect to the normalisation process – the rationalisation of the practice whereby managers and employees not only accept the corrupt practice but also put forward reasons why it is acceptable.

Doug suggested that organisations need to think thoroughly about the implications of their practices. The demands, rules and structures they impose on their employees may have unintended effects and potentially drive even the most well meaning and upright of employees into deviance.

While organisational growth can be the source of many positive behaviours and results, a strong focus on growth and development in some cases may take on such dimensions that it suffocates normal morality, which changes into deviance.

The more people are dependent on the organisation for their definition of self and for their evaluation of how they are doing, the more likely they will engage in deviance if that is what the institution seemingly wants of them, even when the organisation doesn’t explicitly ask for it.

‘Moral Integrity Systems’

Willeke Slingerland LLM is a lecturer in international law at Saxion University of Applied Sciences in Enschede and a PhD researcher at Erasmus University Rotterdam, both based in the Netherlands.

She opened by explaining the National Integrity System concept developed by Transparency International (TI) as part of TI’s holistic approach to combat corruption. The presumption is that integrity, transparency and accountability, and hence corruption prevention, is best guaranteed through institutional guarantees. Within a healthy society there is a variety of institutions, rules and procedures aimed at preventing corruption.

The ‘NIS-temple’ is based on political-institutional, socio-political and socio-economic fundamentals of a society, substantiated within 13 sectors of society and aimed at protecting the constitutional state, realisation of sustainability and quality of life for its citizens by safeguarding of integrity and corruption prevention.

Wileke explained that different researchers in Europe are carrying out a pan-European research into the National Integrity System in their respective countries and shared some of her practical experiences working with the NIS concept in the Netherlands.

Many western states do have formal provisions in place to safeguard integrity in the public and private sector, aiming to assist the acting with integrity of businessmen, civil servants and politicians.

She suggested people classify particular actions as good or bad but in the meantime we see ourselves more and more confronted with new situations in which integrity is violated, such as conflict of interest, favouritism and trading in influence. Willeke believed the main principles in western societies are reciprocity and pragmatism

She prepared a number of examples including former Dutch ministers accepting high positions within the business sector immediately after resigning their offices with companies which directly related to their previous portfolio.

Willeke asserted that integrity can only be safeguarded if the moral system within sectors of society and within society as a whole is taken into account as it regulates the behaviour of the people.  The principles which lie at the foundation of this moral system cross all sectors of society and are the main driving force behind the conduct of society, including decision making when conflicts of interest arise.

Understanding the moral layer in society helps to understand the systemic character of integrity violations and can improve instruments that promote integrity.

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