John Menadue. Bad apples, corporate culture and leadership.

Apr 9, 2016

The recent scandals at CBA,ANZ  and now Wespac have focused us on business culture. But the CEOs  keep telling us that there is no business culture problem but only a few bad apples. If only that were true. The issues are more systemic than they would suggest and the problem covers a wide range of companies and not just the banks – massive tax avoidance by large multinational and private companies, the Seven/Eleven franchise, labor hire companies, child care and vocational education and training.

The ANZ  and Wespac are accused of manipulating the bank swap rate (BBSW) in its favour to disadvantage customers and generate illegal profits. The CBA doesn’t seem able to put its house in order with abuse first by financial planners and more recently by Comminsure, threatening customers, by removing medical details and delays in payments.

Now the Chairman of the Australian Securities and Investment Commission, Greg Metcalf, has been joined by the Australian Prudential Regulation Authority, Wayne Byers, in demanding the finance industry fix its corporate culture. Metcalf said ‘Time and time again we have seen firms blaming behaviour on a few bad apples driving bad outcomes for consumers, rather than taking responsibility by looking more closely at their organisation and implementing the necessary changes to address the cause of the problem. … At the end of the day, you need to have a culture that your customers can believe in.’ I would have added also the importance of staff belief in the culture of the organisation.

Malcolm Turnbull has said ‘banks do not just operate under a banking licence,they operate under a social licence and that is underwritten by public confidence and trust’

We have a serious problem but I am not persuaded that the loss of moral compass is any worse today than in years past. But the scale of our economy and the consequences are much greater than ever before. We are unprepared for the challenges we face. We have seen wealth generation in the last 50 years that probably exceeds the wealth generation of the last 2,000 years. Growing wealth and the permissive attitude to it is raising more and more problems.

The Protestant Reformation from the 16th Century broke the grip of the church on economic and business life, and released those individualistic energies that have driven so much of capitalist enterprise over the last 400 years. The new religious climate following the Reformation with its more individualistic and less communal values set the scene for capitalist development. This transformation broke the power of the church over business activity and set the scene for unprecedented expansion and wealth alongside unemployment, business shortcuts and inequality in a pluralist society. We have been in catch-up ever since.

We have not really addressed the social question that John Curtin spoke of, that the economy is to serve social norms and not the other way around. We could add to that, confusion of ends and means by noting the rise of economic fundamentalism which has promoted deregulation and privatisation with its claimed benefits to the community. ‘Rational people’ in the market are expected to put their private interests ahead of the public interest.

Without morality in public life, we have only rules and laws to fall back on. But we all know that laws are not sufficient. We cannot legislate for good behaviour. A society that is based on laws alone can go down many slippery paths.

Neither are the so-called codes of conduct that we hear about from business all that helpful. Codes are usually applied from the top down and seldom are they grounded in the attitudes of customers and staff. Codes and rules are usually external and have the effect of detracting from personal responsibility. Codes also have a problem in that they can never cover all situations which we face in a complex and diverse world. So often, these codes become ‘fig leaves’ for leaders and a business opportunity for lawyers who have colonised this field. Lawyers may be good at law, but I am not sure that they have any more to offer than other people on corporate culture and business morality.

Two factors today seriously inhibit a socially-based corporate culture. The first is the lack of trust which is so essential in all parts of our lives. How can a CEO expect to have the trust of staff and customers if his or her salary is 100 times that of the average staff member? The conclusion that almost all staff members will draw from excessive executive salaries is that self-interest is paramount. Public relations and spin will never change that. And when trust is broken there is an inevitable high price to pay. It is no coincidence that the banks with their very high executive salaries are facing problems with their corporate culture.

The second problem that inhibits a healthy business culture is when so-called private values are not reflected in public behaviour. Tax avoidance on a massive scale by major corporations can only persuade staff and customers that the corporation is not serious about public behaviour and responsibility. Staff and customers of large corporations are expected to pay, and do pay in most situations, their fair share of tax. They rightly believe that executives of many public companies talk about public morality but their behaviour is quite different. Not surprisingly again, staff and consumers get the message that if it’s OK for the boss to look his own interest to avoid tax why shouldn’t I cut some corners if necessary.

Cultural and social values in a business must be derived from customers and staff. The ‘leader’ can assist in this process. As Lao Tsu put it ‘As for the best leaders, people do not notice their existence. … When the best leaders’ work is done, the people say “we did it ourselves”.’

The attitude and values of staff and customers is critical in reflecting the way corporations should behave. They understand the ‘pub test’ better than many leaders.

A good leader knows that power is always abused even by himself or herself. Many CEOs have great authority and status. But authentic leadership and understanding what a moral compass is, is quite another thing. Do leaders have principles that guide their public life-like personal coscience, transparency, loyalty to my principles as against my organisation and reciprocity-the golden rule?

Leadership by example is more important than direction from the top and public relations.

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