Management Futures: The best people make the best managers

02 September 2013

Have you ever been asked to do something at work that you felt was unethical?

For the past few decades, the matters of ethics and social responsibility in business have been put firmly in their place: a short section near the end of the annual report; a few minutes before the close of the Board meeting. Social responsibility has meant some charitable donations and volunteer days, perhaps creating useful photo opportunities for the PR department. It has been – and often still is – seen as very much junior to the big beasts of finance, strategy and marketing.

This is changing, however. In the past few years, some highly unethical practices, often enthusiastically pursued as part of the quest for high returns, have destroyed much shareholder value.

Numerous institutions in financial services have seen damage to their reputations and balance sheets in the past six years of the credit crisis and its aftermath. Examples include mis-selling of consumer products, and of interest rate hedging products to businesses; short-term speculation on asset price movement, and alleged fixing of the London Inter-Bank Offered Rate (LIBOR), now the subject of a fraud inquiry.

In other sectors, we have recently seen the horsemeat scandal in the supermarket industry, and deaths owing to neglect in the NHS. Controversy also continues over disparity in pay between the boardroom and junior staff, and allegations of tax avoidance.

These developments transform the terms of engagement. Social responsibility is not only on a par with the finance function, but inextricably linked to it, because a lost reputation is a commercial disaster.

So what does this mean for the individual manager? There has been some talk recently of introducing an oath for managers, like the doctor’s Hippocratic oath. Of course, CMI itself has a code of conduct through which individuals promise to conduct themselves with integrity and responsibility. (Indeed, we’ll be launching a review of the Code shortly – watch out for invitations to contribute to this work in the weeks ahead.)

A useful indicator is: if you would be unhappy with your family members being treated the way in which your company is treating customers or its own staff, then it fails the test. For example, would you be happy if it was your 16-year-old daughter working long hours in an unsafe factory? Or your grandfather sold an expensive insurance product he didn’t really need? Faced with a tough decision, would you reach the same conclusion if it affected your friends and family?

The dilemma for practising managers can be very real: can I afford to put my career on the line for principle? Might I be jeopardizing the company and putting other people’s jobs at risk? These are valid concerns, but what recent revelations demonstrate is that it isn’t always a compromise between conscience and the commercial imperative.

Take the issue of low pay. There is little doubt that it is socially harmful: putting pressure on families, communities and the welfare system. It is widely assumed, based on accountancy measures, that lower wages increase profit margins. Many outsourcing strategies are based on such a calculation. But this assumes a crude equation that the wage cost and the operating cost are the same. In the real world, they are very different, as this report highlights. Employers that take the trouble to measure employee engagement find that the savings of low absence, high morale and strong teamwork typically outweigh cash savings from a low-wage strategy. Engagement adds economic value.

So if a finance manager claims that: ‘We’ll save £x million by switching to casual labour,’ this is an easy argument to rebut. You simply say: ‘That’s accounting cost, not operating cost. You’re omitting some of the biggest factors to take into account.’

When Marks & Spencer, for example, began paying a living wage in its supplier factories in Bangladesh, combined with management improvements, lower staff turnover and higher engagement helped profit margins to improve, according to Mike Barry, head of sustainability.

On mis-selling, it is easy to point to commercial disasters that flow from aggressive sales strategies. It was recently reported that mis-selling of payment protection insurance in the UK cost the companies involved more than  £18 billion – around twice the cost of the London Olympic Games. So you can make the case in the language of risk management, and protecting the brand.

It isn’t always the case that the ethical and the business interests coincide. Employers at a senior level should establish principles to uphold irrespective of the context – like this example of WL Gore. They should also ensure that there are whistle-blowing procedures that staff can trust. In the absence of these, it may still be advisable for a troubled individual manager to record his or her concerns – with HR, or with the local MP, to explore what options are available. In the long run, it often helps clear your reputation to have your concerns placed on the record. Some unethical practices may be illegal, for example if they involve orchestrated attempts to mislead customers, regulators or tax authorities.

And in many contexts, ethical concerns do not lie on the other side of the table to the commercial interest. The practices of tricking customers, exploiting workers and harming the environment are often bad for business, as well as society. It’s time for honest managers to speak up.

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Submitted by Philip Wood

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