Understanding Ethical Leadership Failures (part 2)

Following yesterday's blog, and taken from the same source, the potential organisational ethical failures are:

• Lack of clarity ("what does ethical mean around here?")
• No ethical leadership and behaviour standards ("there are no rules about this")
• Oversimplified rules ("just do the right thing")
• Lack of positive role models ("who is doing it the right way")
• No training or coaching (" how will I learn it")
• No accountability, no enforcement ("nothing bad happens if I do it, even though it's not allowed")
• No performance integration "we say we want ethics but we reward and promote based on sales and output")
• When problems happen, scapegoats are quickly fired (instead of learning from mistakes and fixing culture").

So, it is likely that ethical failures are due to more than one of these factors and a combination of individual failures (see yesterday's blog) and organisational failures.

This just reinforces the point that strong ethical leaders and role models are essential in engendering ethical conduct so that there are visible and active examples of how to behave everyday and what "doing the right thing" means.

Understanding (and preventing) ethical leadership failures

The content of today's blog is attributed to the American Linda Fisher Thornton who has written about understanding some of the problems that cause ethical leadership failures. These relate to individual problems and other problems embedded in the organisational culture.

You may recognise some of these in your organisation, or probably a combination of them. So, starting with the individual, these are some of Linda's identified issues.

• Ignoring boundaries (ignoring ethics codes and organisational values that forbid and action).
• Failing to use self-control ("I will do this even though it's not allowed")
• Entitlement view ("I definitely deserve this even though it's not allowed")
• Prominent personal values (" I think this is really fine to do even though it's not allowed")
• Crowd following ("Everyone else is doing it, so it must be fine")
• Lack of moral compass ("Nobody specifically said I can't do it so it must be fine if I do it").

The latter two points here show how easy it is for companies in a particular sector to just follow their competitors, regardless of whether the actions fit with organisational values. It also shows how important, and how difficult it often is,to find leaders who are prepared to challenge, rigorously and often,internal practice and conduct.

Fitness First making a strength out of transparent "housekeeping".

Over the last few years a number of gym chains have been heavily criticised about their inflexible terms and conditions. This has resulted in some customers being locked into unsustainable payments as their personal circumstances changed and the media attention has damaged the reputation of major firms in this sector.

In "Marketing" magazine last week, Fitness First's marketing director explained why his gym chain is undergoing a £70m re-brand. Its ambition is to become a member-led business. It is interesting within this that he stated "We wanted to be completely transparent. We proactively contacted the Office of Fair Trading to approve our terms and conditions, and we had them certified by the Plain English Society. These types of things are housekeeping, which everyone should have in order, but not everyone does".

A very valid response to this could be "big deal" but it does at least help to demonstrate that one of the many benefits and arguments for everyday business ethics is that transparency and fair treatment do help to keep the Regulator or Government off your back.  While you wouldn't expect "housekeeping"  to be much of a competitive advantage, Fitness First is at least realising the benefits of being proactive in improving customers outcomes. Even if this is because it is cheaper than dealing with an OFT investigation, the move is at least in the right direction.

£ 0.5 billion to finally get the message on fair treatment

Today PWC revealed that banks had been fined £ 0.5 billion during 2013.

These fines were for a mix of "misdemeanours" including unethical selling as well as illegal acts such as Libor rate fixing. The figures don't even include "customer redress" so the actual amount is going to be even more massive and painful to the Boards of the banks.

It is no wonder then that the banks are finally getting the message from the Regulator that unethical behaviour and poor customer conduct will not be tolerated. Apparently there is now significant investment in customer focus to develop behaviours which genuinely treat customers fairly. The customer is apparently now topping the agenda.

 It's surely time now for shareholders to take stock, gear up and assert their authority by backing the Regulator so that their investment and reputations are not damaged further.

A real role for shareholders and NEDs?

It's the bankers' bonus season. Data published by the European Banking Authority shows that an average banker based in London receives bonuses of 370% times their salaries. It is no wonder then that the new EU cap of 100% of salary for bonuses has been sending the sector into a flurry in the attempt to ensure that bankers do not suffer a reduction in pay.

It looks like most of the banks will be asking their shareholders for approval to pay out bonuses of twice their salaries and other ways of paying additional payments.

Their is a real role here for shareholders and NEDs to enthusiastically challenge the Executive reflecting some of the concerns from other stakeholders. NEDs could ask:

• How much money has been paid to consultants to provide advice on executive pay and terminology ("allowance" etc) to overcome the restrictions?
• How much time and intellectual resource have been expended by the executive to protect themselves?
• What's the opportunity cost of these resources being diverted away from customer focus, cultural change and engendering ethical behaviours?
• How do they believe this helps build trust in their bank and the sector as a whole? (Bearing in mind that executive pay is the most commonly identified issue to address in business:see IBE Business Ethics survey February 2013).

If the shareholders and NEDs are really committed to change then they have the opportunity to make a stand. Bearing in mind most of them fall into the same camp, it is unfortunately unlikely.

When is transparency not enough: with vulnerable customers

The consumer group Which? has been drawing attention recently to payday lenders and what it sees as exploitation of borrowers due to their excessive fees for non-payment which can push them further into debt. One of the big payday lenders, Wonga, stated in the media yesterday that they are "completely transparent about fees" as though this is sufficient in getting them off the hook for any responsibility to their customers.

Some may say that if an individual gets into debt it is their own fault, and many in business seem to think this way. However, in the House of Lords yesterday a question was raised about why the Government is not doing more to hold banks to account for the PPI scandal. While billions have already been paid out to customers in recompense there was a view that many more customers may have suffered losses and not claimed. One Lord stated that it was in fact vulnerable customers that were less likely to claim.

In April this year the FCA will be taking over the regulation of payday lenders. It seems very likely therefore that we are going to hear about mis-selling, poor customer treatment and unethical behaviour similar to PPI and the banks in the payday lending arena (bearing in mind the OFT are already investigating a 7th payday lender following its market study in 2013).

The whole question of marketing to "vulnerable customers" is a tricky subject. Some easier classifications of "vulnerable"are children, the elderly, the mentally impaired.The FCA has emphasised the importance of Treating Customers Fairly and their 6th customer "outcome"states that " products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and targeted accordingly".  Hopefully the payday lenders are now creating genuine "vulnerable customer" strategies explaining their approach to transparency in anticipation of  FCA challenge.

Is there such a thing as socially responsible gambling?

It's good to start the year with a different sector to focus on: gambling.

On BBC 4's "Today" programme this morning there was a discussion about the profits from the fixed-odds gambling terminals (FOGT) which were reported as contributing a significant proportion of profits to gambling organisation Betfred. FOGT is a high-speed, high-stakes betting terminal and can be particularly addictive for some. The Betfred representative stated that they were "committed to socially responsibile gambling" but making the statement doesn't really say much.

Betfred aggressively markets FOGT as evidenced by a media story which broke just before Christmas about staff wages being linked to fixed-odds terminal profits. If you look at their website they have a section on "Responsible Gambling" which states that for a few, gambling may no longer be fun and that their Customer Services team are trained to deal with aspects of responsible gambling such as setting maximum limits on accounts.

However, this whole picture looks a lot like the PPI mis-selling scandal where profits came before treating customers fairly and responsibly, where staff were targeted to sell aggressively  and where accountability from the top was non-existent. What kind of redress do vulnerable gambling customers have? Where is the real, demonstrable commitment to social responsibility?

The failing in ethical behaviours always starts at the top. Here's another example to start the year.

New year resolution: the quintuple bottom line?

As 2014 kicks off, the "quintuple bottom line" might be a good starting point for new year's resolutions with "sustainable development" at its heart. Sustainable development is defined as "development that meets the need of the current generation without compromising the ability of future generations to meet their own needs" (per 1972 Bruntland Commission).

The quintuple bottom line is about:
 1) operating within an ethical or moral framework (as defined by the beliefs of the wider community)
2) financial return
3) economic responsibility
4) environmental responsibility
5) social responsibility

Companies then need to manage and balance these important five aspects for sustainable development. The key to keeping this resolution has to be excellent leadership and long-term focus. Happy new year!