MARCO NAVONE 

You’d have thought corporate executives in a post-GFC world would have learnt, the hard way, the relevance of ethical behaviour.

So it may come as a surprise that in a recent survey by Ernst & Young on business integrity, 15% of executives indicated they’d be willing to pay bribes to secure opportunities, up from 9% in the previous poll.

That increase was attributed, by the survey authors, to a tougher competitive environment for business and the need to seek growth in countries where corruption is more widespread. While paying a bribe may not always be unethical (imagine being endlessly harassed by a corrupt traffic officer), it certainly becomes questionable when the practice is used to gain a competitive advantage.

“Conforming to local business practice” is one justification attempted by executives – the idea they are acting in the best interest of the company. What they are implying is that the damaging effect of the bribe falls outside the normal circle of company stakeholders, that shareholders, employees and the home community of the firm will all benefit from the additional business secured through the bribe.

Consider the example of a company deciding to dump toxic waste in a “far away” country with relaxed environmental regulations. The company is within the boundaries of the local law and, if the country is “far away” enough, none of the company’s traditional stakeholders will be adversely affected.

While executives focus mainly on their stakeholders, only a very peculiar ethical system would consider this behaviour acceptable. Similar to dumping toxic waste, paying a bribe damages the “social environment” of the host country by promoting widespread corruption.

The Ernst & Young report understandably focuses on the reputational and financial risks associated with lack of compliance with the growing body of national and international regulations.

But there is another hidden risk associated with these unethical business practice that is often overlooked by the same company executives in their eagerness to praise bottom-line achievements without asking too many questions.

A young, but promising, body of academic research shows unethical behaviour in the private life of executives adversely affects company life. Authors have shown, for example, that companies managed by executives who have experienced a variety of “ethical” issues in their private life are more likely to be involved in shareholder class-action lawsuits, or commit fraud. Another paper found executive’s personal habits, such as a lack of frugality, affect company culture and increase the probability of fraudulent corporate reporting.

If unethical behaviour “off the job” affects company life, practices promoted in one area of a company — dealings in foreign countries, for instance — would certainly be expected to spread to other areas of the company via a culture that promotes achievement with little respect for regulations, social responsibility and general decency.

Perhaps it’s more important to speak about developing an ethical corporate culture rather than strict compliance, and even stricter codes of conduct. Good executives are trained to think creatively to overcome obstacles; if the ethical rule is seen as an obstacle, sooner or later it will be creatively circumvented.

We also have to acknowledge that often the desire to have a set of strict rules of conduct is reminiscent of the temptation laid down by the Grand Inquisitor in Dostoevsky’s novel The Brothers Karamazov: blindly following “the rule” alleviates the burden of having to personally judge what is ethical and what is unethical, what is right and what is wrong.

But it’s in this very personal effort of freedom that ethical behaviour is born. Without this personal attitude, rules of conduct will only protect us from the last ethical scandal, never from the next one.

Originally published on The Conversation, 11 October 2013