Business Ethics - Articles - Cheats Can Prosper and Do

Tony Harris

Most people involved in business promote themselves as ethical, but scratch the surface and their conduct is often less than squeaky clean. Tony Harris reports.

There is a view held by business people that Australia's business ethics are in good shape. Instances of ethical failure in Australia's large businesses are, they say, rare and exceptional.
Ethical breaches are certainly not representative of the prevailing culture in business, they contend. But other evidence, including evidence from those who view business from the outside, suggests this view is optimistic.

Allan Moss, chief executive of Macquaire Bank, cannot and does not debate that there is unethical behaviour in business. He has seen it at first hand, including when a senior Macquarie Bank employee, Simon Hannes, was convicted of insider trading. At this year's Edmund Rice Business Initiative Forum, sponsored by the Christian Brothers, the audience of 140 ethicists and business people heard Moss say that ``most people involved in managing a reasonable number of people for a reasonable time have suffered a disappointment about the ethical conduct of a colleague''. But there was no view that these ethical lapses were frequent. ``It's a surprise, and sometimes an astounding surprise.''

In this, Moss agrees with the views of John Ralph, formerly of CRA and recently of the Commonwealth's business tax review. Ralph acknowledged in last year's Forum that there were instances where business people behaved unethically. He, too, saw these instances as atypical examples of Australia's business ethics.

Reporting on the ``controversial, notorious, infamous and titillating'' is, according to Ralph, merely the media competing for ratings and revenues. (Ralph seems to forget that the media are themselves part of Australia's businesses.) It is important, Ralph says, ``to maintain perspective and be aware that usually the minority is being portrayed not the majority''.
Both Moss and Ralph also agree that there is adherence to ethical standards because natural incentives operate to keep business ethics in check.

Ralph argues that people, even wealthy people, would not regard themselves as being successful if they had a poor reputation because of their unethical behaviour. He also argues that financial incentives advantage businesses whose staff act ethically.
``It might seem to some that setting out to act ethically in business is really being naive. Some might even see it as giving a competitor who chooses not to behave similarly an advantage in what is perceived as a `dog eat dog world'.''

But, Ralph continued, ``if you do not act with integrity ... you are not likely to enjoy the kind of reputation that will keep good people in your employ, or keep customers coming back for your products or services.''

Moss made the same point by observing that the market valuation of companies places a value on companies' intangibles (customers, staff, proprietary information and brands) that were vulnerable to loss from unethical behaviour. ``Over the last eight years, the market value [of companies] has gone from being just above book value to way above book value; twice book value.'' In this light, ``investment in ethics is a better investment by far than [ever before] in the history of investment.''

For Moss, there is no conflict between making profits and behaving ethically. ``Word gets out. In the long run, organisations have to play by the rules.''
The importance of reputation is supported by Ralph Doubell, executive chairman of Australia Derivatives Exchange and director of Stadium Australia Ltd. He believes most executives are aware they should act so that public reporting of their actions ``on The Financial Review's back page [Rear Window] or on the Telegraph's front page'' would cause no embarrassment.
But unless the value of personal reputation is a recent phenomenon, none of this explains the ``excesses'' of the late 1980s and early 1990s that resulted from a failure by an important part of Australia's community to adhere to Australia's laws and ethics.

History shows that many entrepreneurs, often aided by aggressive lawyers and accountants and complicit auditors, cheated their shareholders and creditors. In the shadow of their bad loans and poor investments, the then chairmen of Westpac and AMP, Sir Eric Neil and Sir James Baulderstone, spoke out on the urgent need for Australian businesses to develop and adhere to a sound ethical framework.

This interest was pursued by the Business Council of Australia for a few years. It worked with others to publish a couple of editions of Corporate Practices and Conduct,a book that provided views on corporate governance issues. But as the economy strengthened, co-ordinated business interest in business ethics waned.

The accounting profession also acted to tighten up the discretion previously allowed accountants and auditors when deciding what was fair and reasonable in companies' accounts. In an approach now attacked by some of the major accounting firms, many prescriptive accounting and auditing standards were enshrined in law to ensure that entrepreneurial flair did not extend to the financial reporting of incorporated bodies.

Other responses included adding offences, such as secret commissions, to ``black letter'' law; establishing the National Crime Authority and strengthening the powers of what is today the Australian Securities and Investments Commission.

Whether these responses have been sufficient to address the weaknesses seen a decade ago might not be known until the next recession occurs and the next round of corporate collapses is seen. When the economy is growing, asset prices are increasing and profits are being earned, those who breach business ethics, even to acquire great fortunes, are not as susceptible to observation. And they are never as observable as their counterparts who indulge in personal and property crimes.

By definition, secret commissions are not easily seen. The small number of convictions in Australia for insider trading gives no hint of their pervasiveness in our society. Fortunes can change hands ``through communication that is less frank than it should be'', to use Moss's description.

Perceived conflicts of interest were the most common ethical issues that confronted Doubell in the development of Stadium Australia. But conflicts of interest are difficult to prove, because they require a knowledge of internal motives, and perceived conflicts are often played down and ignored.

Adam Smith saw a conspiracy against consumers whenever business people met. An American economist, Thorstein Veblen, observed at the turn of the 19th century something equally valid at the turn of the 20th: ``The thief or swindler who has gained great wealth by his delinquency has a better chance than the small thief of escaping the rigorous penalty of the law.''
They also have a great chance of escaping comment in Australia's media. Australia's defamation laws ensure that.

Moss, Ralph and Doubell are correct to say that people value their reputation. They also value their freedom. But this alone is insufficient to ensure law is maintained.
According to the Australian Bureau of Statistics, there were 2.6 million crimes committed in Australia in 1998 against household property or the person. The number of crimes compared to the much smaller number of convictions suggests that numerous people break the law in the hope and expectation that they will not be charged or convicted.

If ethical behaviour is analogous to legal behaviour, we could expect that there are numerous people who act unethically to enrich themselves in the hope that the general society is not advised of their deserved poor reputations.

If the taxation arena offers an example of general behaviour, there should be no confidence that ethical behaviour is in good shape in Australia.

The Commissioner of Taxation, Michael Carmody, also spoke at last year's Forum. His address about business ethics was less optimistic than those of his business counterparts. It was informed by his experience of business people involved, in their personal or official capacities, in aggressive tax avoidance activity.

Carmody knows that people defend their tax avoidance by saying that it falls within the ``rule of law''. But that, he says, is a ``clinical debating point that fails to recognise that attitudes and values invariably affect the choices that people make, their preparedness to push the boundaries and the ways laws are applied.''

Carmody believes that the aggressive tax minimisation culture that dominates parts of the community are inimical to a functioning society. He pointed to the considerable costs borne by the society through ``entrepreneurial and mass marketing of [tax minimisation] schemes'', through ``serial bankruptcy ... to avoid a tax liability'', through the abuse of industry incentives ``when the `money men' arrived to enhance the benefits and the cost of these incentives'', through resources diverted to rent-seeking and through the need for costly legislative responses ``to increasingly complex and contrived schemes''.

Even then, in October 1999, Carmody asked whether there was a need for ``penalties that attract directly to promoters and marketers of schemes to which tax-avoidance penalties apply'', a thought to which he has recently returned.

Although these comments related to tax, Carmody argued they implicated the value set which business people applied to other pursuits. On this logic, Carmody was indeed pessimistic about Australia's business ethics. He was particularly dismayed that an Australian Legal Services Tribunal concluded that a barrister convicted of more than 30 tax offences had not committed professional misconduct.

It is true that in Australia's developed economy, most financial transactions are professionally undertaken most of the time.

This is why Transparency International, a body established to promote business ethics, judges Australia's performance as better than 73 other countries. But many of these countries are not ones to which we compare ourselves. It also judged our performance to be worse than 10 other countries to whom we do compare ourselves.

Just as we should not judge ourselves against less developed economies, we should not assess our ethical standards by what happens when there are few opportunities to profit from unethical behaviour or when there are few pressures to profit from unethical behaviour.

Simon Longstaff of the St James Ethical Centre argues that behaviour can be assessed only when people are acting consciously. Behaviour performed from habit gives little clue to the values of a person. Similarly, if persons rarely have the opportunity to act unethically and succumb equally rarely, they cannot be said to be ethical.
28 July, 2000, published in the AFR.