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Ethics and Governance in Action

Posted on March 3, 2024 by | Leave a comment


The best governed organizations will have ethical failures, even criminal activities, occurring from time to time. When an organization employs 1000s of people there will always be some who make mistakes or choose to do the wrong thing.  The difference between a well governed organization with a strong ethical framework and the others is how they deal with the issues.

The Bad

Over the last few months there has been a lot of commentary on major ethical failures by some of the ‘big 4’ accountancy firms (see: The major news story everyone missed: KPMG hit with record fine for their role in the Carillion Collapse). With a common theme being attempts by the partners running these organizations to minimize their responsibility and deflect blame. As a consequence, there have been record fines imposed on KPMG and massive long-term reputational damage caused to PWC by the Australian Tax Office scandal.

The Good

The contrast with the way the Jacobs Group (Australia) Pty Ltd (Jacobs Group) has managed an equally damaging occurrence could not be starker! Jacobs Group had pleaded guilty to three counts of conspiring to cause bribes to be offered to foreign public officials, contrary to provisions of the Criminal Code Act 1995 (Cth). But, the exemplary way this issue has been managed is an example for all.

Offering bribes to foreign public officials has been a criminal offence in Australia since 1995, and the Crimes Legislation Amendment (Combatting Foreign Bribery) Bill 2023 has just passed into law significantly increasing penalties.

Despite this, between 2000 and 2012, SKM was involved in two conspiracies in the Philippines and Vietnam. Both conspiracies involved employees of SKM’s overseas development assistance businesses (the SODA business unit) paying bribes to foreign public officials in order to facilitate the awarding of public infrastructure project contracts to SKM. SKM employees embarked on a complex scheme to conceal the bribes by making payments to third party companies, and receiving fake invoices for services which were not in fact rendered. The conduct was known to and approved by senior persons at SKM, although concealed from the company more widely.

Jacobs Group acquired SKM in 2013, after the conduct had ceased. During the vendor due diligence processes, the conduct came to the attention of persons outside those involved in the offending, and the company’s external lawyers.

Despite the lawyers findings being subject to legal privilege, and the very remote possibility of the Australian Authorities discovering the crime, the non-conflicted directors unanimously voted to self-report the findings to the Australian Federal Police (AFP), to waive legal privilege in the draft report, and to make it available to the AFP. The company also reported the findings of its investigation to a number of other authorities, including the World Bank, Asian Development Bank, AusAid, and ASIC.

The company and a number of individuals were charged in 2018, and Jacobs pleaded guilty to three counts of conspiring to cause bribes to be offered to foreign public officials. The matter only came to our attention because of a recent High Court ruling dealing with technical issues around the calculation of the fine to be paid by Jacobs.

When Justice Adamson in the New South Wales Supreme Court sentenced the company on 9 June 2021. She found that while each of the offences committed fell within the mid-range of objective seriousness for an offence, this was mitigated by the fact that the company had self-reported the offending to authorities, and that the self-reporting was motivated by remorse and contrition rather than fear of discovery. The sentencing judge also found that the conduct was not widespread, and effectively limited to the SODA business unit. She accepted evidence from the AFP that it was unlikely to have become aware of the conduct absent the company’s self-reporting, and that the company’s post offence conduct was “best practice” and “of the highest quality”.

Based on these findings the amount of the fine to be paid by Jacobs is likely to be in the region of $3 million – a massive discount from the potential maximum that, based on the High Court decision, is likely to exceed $32 million.

Lessons on Governance and Ethics

The approach taken by Jacobs Group, following the identification of potential criminal conduct, is a useful guide as to how an ethical organization works:

  1. The prompt retention of independent external lawyers to investigate suspected instances of criminal misconduct.
  2. The decisions of the board of directors to self-report the conduct to authorities and provide ongoing assistance and cooperation to law enforcement and prosecutorial authorities, notwithstanding the risk of criminal sanction.
  3. Committing to remediation steps to address the conduct (and seeking to prevent any repeat of it), including by overhauling relevant policies and procedures and making appropriate operational changes including:
  • suspending and then terminating relevant individual employees who had participated in the conduct;
  • operational changes to management and oversight of the SODA business unit that had been involved in the conduct, and changing approval processes for all payments by that unit;
  • introducing a new Code of Conduct which explicitly prohibited the offering of inducements to public officials;
  • introducing a requirement for the completion of a bribery and corruption risk assessment before committing to new projects;
  • upgrading various internal policies, including the company’s whistleblower, donations and gifts and entertainment policies. It also introduced new policies which discouraged the use of agents, and required the screening of all new suppliers and sub-consultants for bribery and corruption risk. The company also engaged an independent monitor to review the changes made to its policies;
  • updating and expanding existing bribery and corruption training programs for staff; and
  • modifying internal audit practices to more closely scrutinize non-financial risks, such as bribery and corruption.

One definition of ethical behaviour is doing the right thing when no one is looking. The contrast between Jacobs and KPMG’s outcomes is a lesson worth remembering.

For more on governance and organizational ethics see: https://mosaicprojects.com.au/PMKI-ORG-010.php#Overview

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The 19th century Spanish Prisoner Swindle!

Posted on July 7, 2023 by | Leave a comment

Every improvement in technology leads to a new way of parting people from their money, and it appears gullible victims can still be found after at least 150 years of swindling.

One of the first technological advances that allowed direct communication to individuals occurred in the 19th century.  In the 1840s Britain introduced a pre-paid national postal service and the ‘Penny Black’ postage stamp, you could post a letter to anyone and expect it to be delivered. Shortly thereafter, this new service was being used to scam unsuspecting victims, and as similar postal services were established in other countries, the scam spread.

The ‘Spanish Prisoner’, as the name suggest, was operated by criminals based in Spain. Using trade directories to obtain names and addresses of people, they sent out hundreds of letters across Britain spinning a tale of a person held in a Spanish prison. In other parts of the world, similarly close, but difficult to access places became the location of the ‘prison’. 

Generally, the story was that a former military officer was being held prisoner in a Spanish prison. He wrote that his father or grandfather was English, but he had entered the military of service of Spain and had been wrongly accused of stealing money. He was now seriously ill and was in fear of death.

He would announce that he had a daughter who needed looking after and in his Will had appointed the recipient of the letter to be his daughter’s guardian. Furthermore, he had a large sum of money hidden away which needed to be recovered from a secret location. Once the victim responded sympathetically to what they thought was a sincere and truthful story, money would be requested to pay for the daughter’s travel expenses, etc. All totally fictitious of course.

As with modern scams, there is no doubt that victims were found. There are numerous newspaper articles starting around 1876 which refer to the fraud and how victims had been taken in, and the occasional article detailing a successful police response.  

It appears some things never change:

–  Developers of new technologies rarely think about potential abuses

–  Criminals are always early adopters

–  People get caught out.

This post is outside of our normal range focused on the history of projects and allied disciplines but this subject does raise questions around the ethical responsibility of people developing new processes and technologies. For more on the evolution of ethics see: https://mosaicprojects.com.au/PMKI-ZSY-015.php 

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Phronesis – A key attribute for project managers

Posted on May 21, 2017 by | 3 comments

Phronesis (Ancient Greek: φρόνησις, phronēsis) is a type of wisdom described by Aristotle in his classic book Nicomachean Ethics. Phronesis or practical wisdom[1] is focused on working out the right way to do the right thing in a particular circumstance. Aristotle understood ethics as being less about establishing moral rules and following them and more about performing a social practice well; being a good friend, a good manager or a good statesman. This requires the ability to discern how or why to act virtuously and the encouragement of practical virtue and excellence of character in others.  But in a post-truth world, the ability to use ‘practical wisdom’ to discern what is real and what is ‘spin’ in rapidly becoming a key social and business skill. So prevalent is this trend, the Oxford English Dictionary named ‘post-truth’ its 2016 word of the year.

This problem pre-dates Donald Trump and ‘Brexit’, but seems to be getting worse. How can a project manager work out the right way to do the right thing in the particular circumstance of her project when much of the information being received is likely to be ‘spun’ for a particular effect.  There may be a solution in the writings of Bent Flyvbjerg.

Professor Bent Flyvbjerg, Chair of Major Programme Management at the Saïd Business School, Oxford University, has a strong interest in both megaproject management and phronesis. A consistent theme in his work has been the lack of truthfulness associated with the promotion of mega projects of all types, worldwide and the consequences of this deception. To help with the challenge of cutting through ‘spin’, and based on his research, he has published the following eight propositions:

1. Truth is context dependent.
2. The context of truth is power.
3. Power blurs the dividing line between truth and lies.
4. Lies and spin presented as truth is a principal strategy of those in power.
5. The greater the power, the less the truth.
6. Power has deeper historical roots than truth, which weakens truth.
7. Today, no power can avoid the issue of ‘speaking the truth’, unless it imposes silence and servitude. Herein lies the power of truth.
8. Truth will not be silenced.

There is, of course, a book, Rationality and Power: Democracy in Practice[2] that goes into more detail but just thinking through the propositions can help you apply the practical ethics that underpin phronesis.  Being virtuous is never easy, but regardless of the power brought to bear, sooner or later the truth will be heard.

The problem is which ‘truth’, understanding and perception will influence what people see, hear and believe to be the truth. Nietzsche, a German counter-Enlightenment thinker of the late 19th century, suggests that objective truth does not really exist; that objective absolute truth is an impossibility. The challenge we all face is the practical one of understanding enough about ourselves and others (we are all biased[3]) to achieve a reasonable level of understanding and then do our best to make the right decisions (see more on decision making), and to do the right thing in the right way.

___________________

[1] From Practical Wisdom, the right way to do the right things by Barry Schwartz and Kenneth Sharp.  Riverhead Books, New York 2010.

[2] See: https://www.amazon.com/Rationality-Power-Democracy-Practice-Morality/dp/0226254518/

[3] See,  The innate effect of Bias:  http://www.mosaicprojects.com.au/WhitePapers/WP1069_Bias.pdf

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Selling Change – lessons from Brexit

Posted on June 30, 2016 by | 6 comments

Is the reason so many change initiatives fail an excessive focus on the ‘technical benefits’ and future value?  Some of the lessons from the Brexit campaign would suggest ‘YES’!

Before people will buy into a new opportunity (the ‘change’) it helps if they are unhappy with the status quo.  If this unhappiness can be magnified the willingness to embrace an uncertain future can be increased.  The Brexit ‘Leave campaign’ is an extreme example of creating this desire. Most of the focus of ‘Leave campaign’ seems to have been tailored towards raising the level of unhappiness with the status quo. A few key examples:

EU bureaucracy – it exists and it is a significant burden; by simply focusing on the ‘perceived pain’ (most electors have very little contact with the regulations) a desire to leave was generated. The counter points carefully ignored include:

  1. If the UK leaves it will need its own regulations for public health and safety
  2. Firms that want to export to Europe will have more bureaucracy to deal with, complying with both the UK rules and the EU rules (the alternative is to cut off 50% of your export market).

EU bureaucrats – the unelected and unaccountable masses in Brussels!  This ignores the fact UK bureaucrats are unelected and both sets are accountable to their respective parliaments.  However, the perception of lack of control and accountability was significant despite the fact 99% of the UK electors have no control over UK bureaucrats.

Immigration and Islam. ‘Taking control of UK borders’ seemed to be the biggest factor in the debate.  It’s a nice idea that ignores history:

  1. The vast majority of Islamic migrants in the UK arrived before the UK joined the EU (or these days their parents arrived…). Until the 1960s Commonwealth citizens had UK passports and a right of residence in the UK.
  2. The EU is less than 5% Islamic.
  3. Freedom to work in the EU is a two-way process – the right to work and access to workers is important (and has virtually nothing to do with ‘immigration’).

Trade deals. Negotiating ‘trade deals’ to the benefit of the UK…..   Ignoring the fact that any trade deal requires concessions and most take 5 to 10 years to negotiate. The ‘other party’ has to see a significant benefit.

 

Lessons from Brexit!

The positive lesson for change proponents is to spend more time on creating the desire for change. Most people in an organisation can ‘live with’ the status quo (but are aware of the problems and pain points), and are likely to be frightened with the perceived threats and challenges of the proposed change.  Digging into the ‘pain points’ and offering constructive solutions may provide a powerful basis for building the desire for change.  This is a very different approach to starting with an emphasis on the future benefits and opportunities the proposed change will bring.

The processes needed to sell the change to the organisation’s executive decision makers have to focus on benefits and value, but Brexit suggests a different approach may be beneficial when approaching the people within the organisation affected by the change.

Ethics matter!  “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time[1]”. What has yet to wash out in the Brexit aftermath is the lack of ethics and in some cases blatant dishonesty of the ‘Leave campaign’. I suspect there will be a major backlash against the people responsible for the ‘Leave campaign’ as people become aware of the exaggerations and deceptions.  The current crash in the Pound and the almost inevitable recession it will cause were predicted.  What was missed from the UK debate, and is essential in an organisational change initiative, is recognition of the challenges of the change – offset by the vision of future benefits. Ethics are not negotiable!

Simple language is important.  Creating and emotional commitment to change requires the use of language that is easy to understand. The ‘Leave vision’ was simplistic rather than simple but it worked – ‘make Britain great again’ and ‘regain sovereignty’ sound appealing[2] but lack substance.  The difference between the Brexit ‘con job’ and ‘informed consent’ is understanding what you are committing to, both the vision and the journey. But the language of projects, engineers and technicians used to define and develop a change proposal is frequently inappropriate for effective communication to the rest of the people affected.  This is discussed in my paper: Understanding Design – The challenge of informed consent.

Summary

The Brexit campaign is an extreme example of creating a desire for change based on developing a level of dissatisfaction with the status quo.  This tactic can be a very useful early phase in the communication processes around a proposed organisational change – dissatisfaction with the current state is a powerful driver to accept change.  The flip side, also observable in the Brexit campaign, is that ethics and honesty matter. Democracy requires informed consent!  We have no idea what the consequences in the UK would have been if the ‘Leave campaign’ had been more ethical and spelt out a future; but judging from the reaction of many, large numbers of people now seem to feel conned by the ‘leave’ campaign.

In an organisational context, this loss of trust will be disastrous.  However, the fact the ‘Leave campaign’ could persuade a majority in the UK to vote in favour of an uncertain future that will reduce living standards and increase costs in the short-term (at least) without even bothering to paint a clear vision of their proposed future (or how to get there) shows how powerful the techniques discussed above can be.

The challenge for ethical organisational change is to harness the power without resorting to the deceptions.

 

[1] Adapted from: “Traité de la Vérité de la Religion Chrétienne” by Jacques Abbadie (1684, Chapter 2)

[2] Britain was ‘Great’ in the period leading up to WW1 based on its Empire (not the Commonwealth); it is and has been a sovereign nation since 1066…… Neither of these concepts was fleshed out possibly allowing 1000s of different self-made visions to fill the space. Potentially a good tactic but fraught with problems going forward.

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Stakeholders and Reputational Risk

Posted on April 25, 2016 by | 1 comment

Your reputation and your organisation’s reputation are valuable assets. The willingness of others to trust you, their desire to work with you and virtually every other aspect of the relationship between you and your stakeholders is influenced by their perception of your reputation (see more on The value of trust).  But reputations are fragile: they can take a lifetime to build and seconds to lose. Some of the factors influencing them are:

  1. Reputation cannot be controlled: it exists in the minds of others so it can only be influenced, not managed directly.
  2. Reputation is earned: trust is based on consistent behaviour and performance.
  3. Reputation is not consistent: it depends on each stakeholder’s view. One organisation can have many different reputations, varying with each stakeholder.
  4. Reputation will vary: each stakeholder brings a different expectation of behaviour or performance and so will have a distinct perception of reputation.
  5. Reputation is relational: you have a reputation with someone for something. The key question is therefore: ‘with whom, for what?’
  6. Reputation is comparative: it is valued in comparison to what a particular stakeholder experiences or believes in relation to peers, performance and prejudice.
  7. Reputation is valuable: but the true value of reputation can only be appreciated once it is lost or damaged.

Estimating the ‘true value’ of your reputation is difficult and as a consequence decisions on how much to invest in enhancing and protecting your reputation becomes a value judgment rather than a calculation. Your reputation is created and threatened by both your actions and their consequences (intended or not).  Some actions and their effects on your reputation are predictable, others are less so and their consequences, good or bad are even less certain. This is true regardless of your intention; unexpected outcomes can easily cause unintended benefit or damage to your reputation.

Building a reputation requires hard work and consistency; the challenge is protecting your hard earned reputation against risks that can cause damage; and you never know for sure what will cause reputational damage until it is too late – many reputational risks are emergent.

Managing Reputational Risk in Organisations

Because an organisation’s reputation is not easy to value or protect, managing reputational risk is difficult! This is particularly true for larger organisations where thousands of different interactions between staff and stakeholders are occurring daily.

The first step in managing an organisation’s reputational risk is to understand the scope of possible damage, as well as potential sources and the degree of possible disruption. The consequence of a loss of reputation is always the withdrawing of stakeholder support:

  • In the private sector this is usually investor flight and share value decline; these can spiral out of control if confidence cannot be restored.
  • In the public sector this is typically withdrawal of government support to reflect declining confidence.
  • In the professional sector client confidence is vital for business sustainability; a loss of reputation means a loss of clients.

Each sector can point to scenarios where the impact of reputation damage can vary from mild to catastrophic; and whilst the consequences can be measured after the effect they are not always predictable in advance.  To overcome this problem, managing reputation risk for an organisation requires three steps:

  • Predict: All risk is future uncertainty, and an appropriate risk forecasting system to identify reputation risk is required – creative thinking is needed here! The outcomes from a reputational risk workshop will be specific to the organisation and the information must feed directly into the governance process if reputation risk is to be taken seriously (see more on The Functions of Governance).
  • Prepare: Reputation risk is a collective responsibility, not just the governing body’s. All management and operational staff must recognise the organisation’s reputation is important and take responsibility for protecting it in their interaction with stakeholders. The protection of reputation should also be a key element in the organisation’s disaster recovery plans.
  • Protect: A regular vulnerability review will reveal where reputation risk is greatest, and guide actions to prevent possible damage. Each vulnerability must be assessed objectively and actions taken to minimise exposure. Significant risks will need a ‘protection plan’ developed and then implemented and monitored.

Dealing with a Reputational Risk Event

When a risk event occurs, some standard elements needs to be part of the response for individuals and organisations alike. For reputation enhancing risk events, make sure you acknowledge the ‘good luck’ in an appropriately and take advantage of the opportunity in a suitably authentic way. Over-hyping an event will be seen as unauthentic and have a negative effect on reputation; but good news and good outcomes should be celebrated. Reputation threatening risk events need a more proactive approach

  • Step 1: Deal with the event itself. You will not protect your reputation by trying to hide the bad news or ignoring the issue.  Proactively work to solve the problem in a way that genuinely minimise harm for as many stakeholders as possible minimises the damage that has to be managed.
  • Step 2: Communicate. And keep communicating – organisations need to have a sufficiently senior person available quickly as the contact point and keep the ‘news’ coming. Rumours and creative reporting will always be worse then the fact and will grow to fill the void. All communication needs to be open, honest and as complete as possible at the time.  Where you ‘don’t know’ tell people what you are doing to find out. (see Integrity is the key to delivering bad news successfully).
  • Keep your promises and commitments. If this becomes impossible because of changing circumstances tell people as soon as you know, don’t wait for them to find out.
  • Follow up afterwards. Actions that show you really care after the event can go a long way towards repairing the damage to your reputation.

Summary

Reputation is ephemeral and a good reputation is difficult to create and maintain. Warren Buffet in his 2015 memo to his top management team in Berkshire Hathaway emphasised that their top priority must be to ‘zealously guard Berkshire’s reputation’. He also reminded his leadership team that ‘we can afford to lose money–even a lot of money. But we can’t afford to lose reputation–even a shred of reputation’ (discussed in Ethics, Culture, Rules and Governance). In the long run I would suggest this is true for every organisation and individual – your reputation is always in the minds of other people!

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Ethics and competition

Posted on March 26, 2016 by | 1 comment

The report of The Senate Education and Employment References Committee report: A National Disgrace: The Exploitation of Temporary Work Visa Holders; released on the 17th March highlights a major National problem.

The report consolidates and affirms issues raised in some of our earlier posts including:

In a nutshell, the report confirms that large numbers of unethical employers are routinely exploiting 1000s of temporary visa holders to inflate their profits.  The report is worrying reading and hopefully will result in proactive government action to stamp out the worst of the excesses.   It’s in the government’s interest, many of the exploited visa holders in work are preventing an unemployed Australian from obtaining work; this is equally true in the unskilled categories and in skilled categories where skilled, older workers are frequently discriminated against.

What is more worrying, and the focus of this post is the ‘Coalition Senators’ total failure to understand business and competition.  One of the major areas of malfeasance with some of the worst exploitation of temporary workers is the Labour Hire business.  The committee recommendation #32 is that:

9.309 The committee recommends that a licensing regime for labour hire contractors be established with a requirement that a business can only use a licensed labour hire contractor to procure labour. There should be a public register of all labour hire contractors. Labour hire contractors must meet and be able to demonstrate compliance with all workplace, employment, tax, and superannuation laws in order to gain a license. In addition, labour hire contractors that use other labour hire contractors, including those located overseas, should be obliged to ensure that those subcontractors also hold a license.

In an annex to the main report, Coalition Senators state that they do not agree with this recommendation on the basis ‘it would punish those labour hire firms which are already complying with relevant laws’; and that the actions of a ‘minority of labour hire firms which are doing the wrong thing, in most cases, is already illegal’.

No one likes additional ‘red tape’ so superficially the Coalition Senators position is understandable.  What the Coalition Senators ignore is the effect the illegal activity is already having on the honest firms they purport to support!  The owners and operators of the dishonest firms using illegal and exploitative practices do not expect to get caught, and if they are caught expect the profits they make from their activities to significantly outweigh the penalties. Unethical is not synonymous with ‘stupid’ – the people making the decision to act illegally expect to make large profits. However, as a consequence of their illegal actions:

  • Honest labour hire firms cannot compete on price with the dishonest firms exploiting temporary workers and suffer as a consequence. The honest operators either make far less profit or go out of business.
  • The users of ‘hired labour’ from labour hire firms are also in competition and need to minimise input costs. They are incentivised to accept the low-cost offerings from the dishonest firms exploiting temporary workers and not to look too closely at their practices to compete within their market.  The alternative is to pay more for the workers and be at a competitive disadvantage to organisations that ‘turn a blind eye’ to the problem.

A licensing scheme will increase the cost of compliance for all of the businesses in the labour hire market, but if implemented properly, it will have the effect of largely eliminating the unfair competition created by the unethical exploitation of temporary workers.  Which will be hugely beneficial to those ‘honest’ businesses that are acting ethically and already fulfil their legal and moral obligations; both within the labour hire industry and the wider community.

The Coalition Senators do ‘support the prosecution of these illegal operations’ (as does everyone) the problems with implementing a clean up strategy focused on prosecutions alone are:

  1. The damage is done before the prosecution can take place.
  2. No prosecution stops illegal behaviour in the future. In an unlicensed regime the same unethical people can set up other businesses and carry on indefinitely through a series of ‘phoenix companies’.
  3. As suggested above, no criminal expects to get caught – deterrence is highly overrated.

Licences may not be ideal, but they do offer a practical way to support ethical behaviour that ‘prosecutions’ cannot. Good governance at every level is getting the balance between rules and flexibility right – the balance needs to support ethical behaviour without constricting innovation and growth. No one except the criminals benefits from the situation exposed in the Senate report that allows virtually unfettered unethical behaviour.

The art of ‘practical ethics’ is to develop systems that disadvantage unethical behaviour and encourage people to do the right thing. The combination of a beefed up ability to prosecute offenders and a licensing system that will make it difficult for unethical operators to remain in the labour hire business is the best way to drive the culture change needed in this industry, and in the businesses that rely on labour hire firms for their staffing needs.

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Practical Ethics 2

Posted on March 10, 2016 by | 6 comments

A couple of weeks ago I posted Practical Ethics discussing the undue reliance governments and others  place on other people’s ethics, Through naivety, undue optimism, or laziness, they set up situations based on blind trust in the ethical standards of others which have resulted in deaths, injury and the loss of $billions.

In this post I want to look inside an organisation and discuss reason why Determining the ethics of the organisation is at #2 in my Six Functions of Governance and Creating the culture of the organisation is at #3.  #1 in the list is Determining the objectives of the organisation.

The underlying approach I’ve taken, founded in stakeholder theory, is the presumption that the best way to achieve an organisation’s objectives is to work with the organisation’s full spectrum of stakeholders so they contribute to the success of the organisation and everyone benefits. This requires a strong ethical foundation and an outwardly focused culture. The role of the governing body is to set the objectives and create the organisation’s culture and ethics, the role of management is to work within this framework to achieve the objectives. Whilst many aspects of governance can be delegated to a degree, setting the ethical standards of the organisation in particular is non-transferable. It starts and stops at the top – with the governing body.

The ethical standards of an organisation are created in two ways:

  • The way the organisation’s leaders act;
  • The ethical standards the leaders are prepared to tolerate in their subordinates.

This post will look at both of these aspects, using the example of the current scandal surrounding Comminsure (the insurance arm of the CBA bank) to highlight their importance – see more on the scandal.

 

Leaders set the standard.

Generally speaking, the top managers in an organisation create a ceiling on ethical behaviours. Leaders at the next level down tend to be rated lower than their managers on every leadership dimension including their honesty and integrity, many may rate equally but it is very rare to find a subordinate acting more ethically than the organisation’s leaders (for more on this see Ethical Leadership).

The key here is the word ‘act’ – leaders set the ethical standards of the organisation by their actions, not their statements. It more than ‘walking-the-talk’, talking is almost irrelevant.

One glaring examples from the Comminsure scandal will serve to demonstrate the issue.  The CBA’s CEO said that he placed a high value on transparency and open communication; this included both encouraging and protecting ‘whistleblowers’ within the bank. A commendable and highly ethical position; and from a practical perspective essential for the minimisation of wrong doing in a workforce of 55,000.

However, actions speak louder than words! In November 2014 the chief medical officer of Comminsure, Dr Benjamin Koh, disclosed his concerns over “an improper state of affairs” concerning aspects of Comminsure’s business to key independent directors at Comminsure including the chairman Geoff Austin. Two months later Comminsure began to investigate Dr Koh and he was sacked by the managing director of Comminsure, Helen Troup, for ‘misconduct’, in August 2015. He is now suing Comminsure and the CBA for unfair dismissal.

The appearance is that the bank’s management won’t fire you for whistle blowing but they will find some other excuse. The bank virtually admits as much, in this statement which states: “Commonwealth Bank encourages all employees to speak up if they see activities or behaviours that are fraudulent, illegal or inconsistent with our values. We provide a number of different safeguards to ensure that there are no negative consequences for raising concerns. We have thanked Dr Koh for raising concerns that led to the CMLA Board conducting a review. Dr Koh’s employment was not terminated for raising concerns. It was terminated primarily for serious and repeated breaches of customers’ privacy and trust involving highly sensitive personal, medical and financial information over a lengthy period of time.”  What they fail to mention was one of major issues raised by Dr. Koh was the manipulation, alteration and loss of information from the records he is accused of mishandling.

The perception may be incorrect, but to anyone looking on from outside of the organisation it would seem the person running Comminsure preferred to sack a whistleblower rather than deal with the problems he raised.

The CEO and the Directors of CBA can talk until they are blue in the face about the ‘ethical standards’ they purport to uphold, their actions speak louder. The person running Comminsure and responsible for the issues raised by Dr. Koh is still in her role, the ‘whistleblower’ is out of a job. If the board really meant what is says, the whistleblower would have been protected and the manager attacking him disciplined. Everyone else in CBA will clearly understand the message.

It really does not matter what the final outcome of all of this is; the actions of CBA and Comminsure management have made it clear to every one of their 55,000 staff that if you raise concerns within the banks ‘whistleblower’ processes you will be fired!

Given this perception, is it any wonder that the leaders of the CBA seem to be continually in the dark about what’s really going on in their organisation……..  Unfortunately for those in governance role not knowing is not an excuse.

 

Tolerating unethical behaviour.

The second plank underpinning an ethical organisation is the degree of unethical behaviour it is prepared to tolerate. If an organisation is prepared to tolerate a person increasing his or her bonus by not paying out an insurance claim to a dying person for 3 or 4 years, everyone else in the organisation will understand the acceptable level of behaviour.

Comminsure has been shown to have withheld legitimate payments to claimants for years to boost profits and bonuses (only rectified after the national broadcast was imminent).  As far as I can tell everyone responsible from the managing director down are still in their jobs.

Previously the CBA was shown, courtesy of a Senate enquiry, to have misrepresented information to clients and falsified documents.  Again, most of the people responsible still work for the CBA and the ethical benchmark has been determined by this fact.

If the behaviours were ethically unacceptable people would be fired or moved into roles where they cannot adversely affect customer’s lives. The fact most people are still in their roles and still have their bonus payments from previous years indicates to everyone the CBA believes these behaviours are ethically acceptable and will continue to reward people for placing profits ahead of customers (see The normalisation of deviant behaviours). Management’s actions speak far louder then PR announcements and so called ‘public apologies’ that only eventuate after adverse national publicity.

 

Culture

Culture is ‘the way we do thing around here’ – one of the key elements of culture is the ethical standards people see as ‘normal’; another is the learned experience of how to behave within the organisation. As outlined above these settings are very different from the rhetoric.

But, ethics and culture are always shades of grey; the CBA’s culture is clearly flawed if the bank claims to be concerned about its customers. However, if the CBA is really only concerned with short-term profits, the culture, ethics and PR spin may be appropriate. In the last 6 months, the CBA achieved a remarkable return on equity of above 17 per cent, and a $4.8 billion half-year profit. And, despite the scandal, its shares have increased in price today. The cost is the damaged lives of some of its customers; the unresolved question is what are the acceptable limits? Maybe a Royal Commission will let everyone know.

Legal implications aside, the challenge facing the CBA is that changing culture and ethical standards is a massively difficult task and the people who created and thrive in the current culture are unlikely to be willing participants in changing it.  There’s no easy answer to this dilemma.

 

Conclusion

The real measure of an organisation’s ethical standards are set by the way people behave when no one is looking on – there will always be mistakes and unethical actions by a few, others within the organisation will correct these deviations and being behaviours back inside the culturally acceptable norms of behaviour of the organisation. This has undoubtedly been occurring within CBA and Comminsure on a daily basis, unacceptable behaviours will have been corrected or sanctioned; desired behaviours rewarded. What’s acceptable and unacceptable is determined by the culture of the organisation and its ethical standards.

The ethical standards of an organisation are set by the actions of its leaders. What they do themselves sets the ceiling and what they tolerate in others the floor. The rest of the people in an organisation will generally find a position between these two limits and the culture of the organisation will adapt to see this level of ethical behaviour as acceptable. The problem the governors and leaders of the CBA face is the simple fact that changing the ethics and culture of an established organisation is extremely difficult.

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Comminsure Scandal – just more of the same……

Posted on March 8, 2016 by | 2 comments

The Directors of the CBA Bank and Comminsure would appear to have a lot to learn about basic ethics.  You do not set the ethical standards for an organisation by:

  • Saying ‘we are focused on ethics’,
  • Confusing ethical intent with outcomes,
  • Meeting with people screwed as a consequence of unethical behaviour within the organisation,
  • Saying sorry and/or making belated payments years too late.

This approach is at best second rate PR and the belated payments may be necessary restitution (but rarely compensates for the pain an suffering caused by the CBA’s unethical behaviours extending over years). But none of these actions has anything to do with setting ethical standards – ethics are about doing the right thing when no one is watching and proactively correcting errors as soon as you are aware of them. Ethical standards have nothing to do with implementing a pathetic PR exercise after your extensive wrong doing has been exposed to the full glare of publicity and then only paying parsimonious compensation to a few of the victims.

The ethical standards of an organisation are set by the minimum standards of behaviour its managers condone.  CBA Directors and managers have condoned highly unethical behaviours and the CBA continues to employ many of the same people who have been responsible for the creation and sustainment of this unethical culture over many years. This is a fundamental failure of organisational governance.

The only real measure of CBA and Comminsure starting to cut out the unethical rot in its management systems will be the number of people in senior management ranks fired or otherwise sanctioned for either:

  • Condoning the behaviours outlined in the previous Senate enquiry and the latest ABC 4 Corners / Fairfax report, or
  • For incompetence in not knowing (or not wanting to know) the unethical practices were on-going.

A number of Comminsure Directors should be resigning for exactly the same reasons!

The root cause of the Comminsure scandal highlighted over the last 24 hours is identical to the earlier CBA banking scandal (discussed in several previous posts) – CBA management designed incentive systems that paid its staff bonuses to screw their clients and inflate profits. The consequences may not have been intended but nothing was done to correct obvious problems once they became apparent, probably because the managers responsible for oversighting the behaviours were on exactly the same incentive structure. And, the bank continued to pay for behaviours that focused on short term profits over the needs of distressed clients for years. Simply leaving the same group of people who created the mess to clean it up is stupidity of the highest order.

As defined in our White Paper: The Functions of Governance, two of the most important aspects of governance are establishing (and enforcing) the ethical standards and culture of the organisation. These functions cannot be delegated for reasons outlined in Dr. Bourne’s post from last week Practical Ethics.

The question is what are the CBA Board going to do about the core problem?

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Ethics and sustainability

Posted on November 3, 2015 by | Leave a comment

Building ethics and sustainability into a project does not limit its success; in fact the reverse is often true. London’s Crossrail project is turning into an outstandingly successful project despite numerous challenges including finding hundreds of skeletal remains from the Black Death in the excavation for one of its major stations.  One can only hope Melbourne’s Metrorail project to construct a similar heavy rail tunnel under the CBD is as successful.

One factor in the Crossrail success has been the focus of the UK government on developing the skills needed to manage major infrastructure projects focused on the Major Projects Authority. This multi-year investment links proactive oversight and reporting, with research, support and training designed to create an organic capability to make major projects work (more on this later). Another is being prepared to ‘think outside of the square’ to solve major challenges – the focus of this post.

The challenge faced by Crossrail (and to a lesser extent Metrorail) is what to do with millions of tonnes of excavated materials when your project is situated under a major city??  The Crossrail solution has been innovative and coincidentally focused on restoring the environment of my youth.

Wallasea Island unloading wharf

Tidal marshlands may not be the scenery of choice for many but the marshes do have a fascination for those of us who grew up playing in and around them. My home and Charles Dickens 150 years earlier were the North Kent marshes.

Pip at the start of Great Expectations: “Ours was the marsh country, down by the river, within, as the river wound, twenty miles of the sea…”  and elsewhere “The dark flat wilderness, intersected with dykes and mounds and gates, with scattered cattle feeding on it… the low leaden line of the river… and the distant savage lair from which the wind was rushing, the sea…”

The landscape is not quite as bleak as it was (but still comes close in winter). The marshes have been drained and there are hops and orchards where there would once have been a windswept wilderness. But the Kent that Dickens knew can still be glimpsed if you know where to look, including the graves where Pip was first confronted by Magwitch in St. James’ churchyard at Cooling.

Seals at Wallasea

However, what may be seen as less than desirable real-estate to people not born on or near the marshes is essential habitat for a vast range of migratory birds and native wildlife.  Unfortunately, in the 150 years since Dickens, the draining, farming and urbanisation of the lands around the Thames and Medway estuaries has destroyed much of this valuable habitat. But the tide is turning.

The Royal Society for the Protection of Birds (RSPB) has been on the campaign trail for the last 30 years to re-establish the marshlands in North Kent and Essex.  One of their earlier successes was to convert the industrial landscape of the Cliffe marshes (my home village) into Cliffe Pools.

Cliffe Pools before the RSPB project

The chalk hills and clay marshes were home to whiting works from the early 1700s and Portland cement works from 1866. Several years after the last of the factories finally closed, the flooded quarries used to dredge clay and some of the former industrial sites were brought by the RSPB and are now a steadily improving wildlife reserve.

Cliffe Pools after the RSPB project

On the other side of the Thames, the RSPB and Crossrail have combined in to create a new marshland on a massively larger scale.  Wallasea Island in Essex is an on-going project that has used 3 million tonnes of clay from the Crossrail excavations to start the transformation of drained farmland into coastal wetlands and marshes.  Another 10 million tonnes will be required to complete future stages of the project.  The drained farmland was several meters below the high tide level, protected by sea walls (and under increasing threat from rising sea levels); coastal marshes need to be a bit above sea level. Massive amounts of fill were required for the ‘wild coast project’.

Crossrail solved their problem of ‘what to do with millions of tonnes of excavated spoil’ by shipping the materials to Wallasea Island and working with the RSPB to transform the area. A win-win outcome Crossrail were able to use costal shipping to remove the clay from London minimising road haulage and carbon emissions, and they avoided tipping costs from commercial landfill sites. 80% of the materials were transported by water or rail on a tonne per kilometer basis. The RSPB got a head start on a major project to reinstate a major area of coastal marshland and 1000s of birds are getting a new home.

When completed in 2025, the project will have created 148 hectares of mudflats, 192 hectares of saltmarsh, and 76 acres of shallow saline lagoons.

Wallasea Island is a work in progress, but with at least two major tunnelling projects in London still to come, the Thames Tideway sewage scheme and Crossrail2, and the infrastructure in place to take the excavated spoil completion of this project seems likely.

What is of importance form the perspective of this post is the Crossrail project is 65% complete and on time and on budget – being environmentally friendly and effective are not incompatible!  It will be interesting to see what the Metrorail project does with its excavated spoil.

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Governance and ethics

Posted on October 10, 2015 by | Leave a comment

Back in June I posted on Governance and Stakeholders focusing on the damage institutions were doing to their stakeholders through on-going governance failures.  Two of the organisations discussed (not for the first time) were the CBA Bank’s ongoing financial advice crisis and FIFA’s corruption, both on-going scandals.

Press articles over the last few days show neither of these problems is being well managed from either the institutions’ perspective or their customers’/stakeholders’ perspectives. The on-going sagas suggest the root cause of the problems is very much a governance failure, but in areas not previously discussed.

The Six Functions of Governance are:

  1. Determining the objectives of the organisation;
  2. Determining the ethics of the organisation;
  3. Creating the culture of the organisation;
  4. Designing and implementing the governance framework for the organisation;
  5. Ensuring accountability by management;
  6. Ensuring compliance by the organisation.

This post will demonstrate the importance of functions 2 and 3.

Starting with FIFA: the stated objective of FIFA is to further the development of soccer (football) world-wide. A noble objective!  However, to a large extent the culture and ethics within FIFA have become focused on individuals obtaining and retaining personal power for the benefit of the ‘powerful person’ – they may believe they are the best possible person for the job, but the evidence suggests otherwise! The use of FIFA’s resources by people in power to achieve this end has already been well documented and whilst of themselves these actions are not necessarily wrong, they have certainly led to a number of high profile prosecutions for corruption. I would suggest the ethical breakdown was driven by the toxic culture focused on achieving and retaining power.

This type of problem is well understood in many similar organisations that I’m familiar with, where there has been a focused effort by the governing body to create a culture of service to the membership / stakeholders.  This has been achieved by placing strict limits on the amount of time any one person can occupy a position of power. Generally there’s a ‘leadership chain’ of one or two ‘vice presidents’ and then the president.  People on this chain have one year terms in each position and move up the ladder progressively (elections are for the lowest ‘rung’ on the ladder).  Similarly, members of the governing body can serve a maximum of two terms of two years and a minimum of 25% of the ‘board’ positions are up for election each year.

This type of governance framework provides both continuity and renewal, and discourages people seeking power for themselves.  Anyone interested in seizing ‘power’ for 10 to 20 years will go elsewhere and find another organisation to participate in. This continual renewal process ensures there are always new ideas and new sets of eyes to ‘see’ any problems that are emerging, balanced by experience to maintain the longer term objective of the organisation. Ethical standards, competency and other matters remain important within a governance framework focused on facilitating the organisation’s objectives.

It will be interesting to see if the inevitable changes in FIFA will move in this direction and then if they use their funding power to drive similar changes through the regional and national organisations. If there’s no structural change, there will be no lasting change in the governance culture and consequently in the culture of the whole organisation.

The second focus is the CBA bank. Culture is also an issue in the way the CBA bank is treating the people damaged by the toxic culture it encourages in its wealth management division.  The basic rule for dealing with a failure (particularly of this magnitude) is ‘own-up then fix-up’. You need to acknowledge the error and take appropriate actions to rectify the mistake.

The causes of the problems were structural, and are discussed in The normalisation of deviant behaviours, but it took a Senate enquiry to drag a reluctant acknowledgement of the error.  To avoid sanctions, the CBA also agreed to set up a ‘high profile’ unit to compensate the victims of its wealth management advice.  After many months virtually no-one has been compensated and the bank’s approach would appear to be parsimonious at best.

The ‘fix-up’ part of dealing with a problem requires quick and generous restitution as far as is possible. This is relatively easy where then primary loss is financial but runs counter to the bank’s demonstrated culture of not really admitting error accompanied by short-term monetarism.

A quick and generous solution would be to frame a simple calculation and make an offer. The CBA knows how much money was ‘brought to the table’ by their victims, they can easily calculate what that would be worth now if the bank had advised the people to invest in bank term deposits and  they know the value of the money actually returned to the people. A couple of weeks with a decent spreadsheet and everyone could have received a reasonable offer.  There may be a need to add in some costs incurred in fighting for the victims rights and for other losses and damage but the whole problem could be largely resolved by now.

The cost of this type of option will be insignificant compared to the less obvious but real costs associated with the wages and costs associated with the bureaucratic monster the bank has created, the massive on-going damage to the bank’s reputation and ‘brand capital’ and the contingent liabilities for further legal actions and/or government action driven by the bank’s approach to this problem.

I’m not sure how the logic of the bank’s assessment processes are structured but a report in the press this week that some people had only been offered a fee refund highlights an approach focused on minimising payouts rather then solving the problem.  If advice was so bad a refund of the fees paid for the advice is warranted, the advice was bad and liability for the damage it caused would appear to sit with the bank??

How you change the culture in an institution as big as the CBA from a parsimonious focus on paying out money to maximise short-term profits is a challenge of the CBA Board, but if they fail, sooner or later the CBA will fail because its stakeholder community will decide to do business elsewhere.  Just because you are big does not mean you are invulnerable.

Conclusion.

The first three elements in the six functions of governance are there for a reason.  Obviously the objectives of the organisation are its reason for existing and have to come first. Then the governing body has to do the hard work of developing the right set of ethics and the right culture within the organisation’s (making sure its governance framework supports the desired culture) before anything else can really occur. As FIFA in particular demonstrates, failure in these critical aspects of an organisation tarnish everything else is touches.

It is impossible to achieve a ‘customer centric’, stakeholder aware organisation if the culture is focused on power or short-term profits!

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