Sunday, January 17, 2010

Making Ethics pay back in difficult times

The other day I was watching a debate on US television on whether the investments by industry in controlling carbon emissions were worthwhile and the payback adequate. A similar question can be raised about Business Ethics. Putting an Ethical framework and culture in place costs a lot of money. BE practitioners have for long given broad-brush hypotheses on how ethics pays - like customer loyalty, ability to retain employees, etc. These generic benefits apply to businesses that are running well and financially in sound health. To test the hypothesis we need to put BE to the acid test. Which is - can a business that is in trouble benefit from Ethical behaviour? Let us look at a few real-life situations.
When a business is in a financial crunch the first set of stakeholders to get affected are its vendors. Supplier payments are delayed, initially by a few days and progressively by longer durations. Vendors get to hear a variety of excuses. Those who are large start to insist on cash before delivery. Uncertainty prevails and supplies get affected. We see a vicious spiral setting in, with business consequences. A Business Ethics-based approach would be different, and be based on a prudent level of transparency with the vendors. The Purchase team could explain to the vendors that the firm is going through a period of financial stringency, and re-negotiate payment terms. In some cases, prices may have to be increased to compensate for the additional financing costs. This approach would, apart from building enormous trust, help the vendors plan their internal finances and operations. For the firm, this would mean business continuity and improved support from its business partners to tide over a difficult period.
The next group of stakeholders who normally get affected by a downturn are the employees. The contemporary solution to this problem is that of the "pink slip". This ensures immediate cash savings, but just imagine the impact on the morale of the employees who the firm needs to stay back. They would feel miserable, and the sensible ones start looking out for alternate jobs. The firm invariably ends up losing the employees it actually needs, and the business gets hit further. What I am saying is not new, we see this happening time and again. The ethical response to this situation would be pro-active and positive. Let me quote a personal example. I had a consultant working on a long-term assignment with a client. The client cancelled the contract overnight for internal reasons. Suddenly, I had a consultant on my rolls with no work. I spoke to the young man and told him that in the absence of the contract I could not employ him productively. We decided mutually that I would employ him till he found a suitable job, and also support him in his job search. He got a good job within 3 months.
To talk of an extreme situation, let us look at a firm that is closing down parts of its business in the process of a restructuring. We read of massive lay-offs every day. In a situation like this, the HR department has a significant opportunity to demonstrate ethical leadership - by helping employees re-skill themselves to be employable outside, hiring counsellors to provide psychological support, using placement agencies to outplace employees discretely, and so on. I have seen all these options being used by responsible firms. The Supply Chain function also needs to demonstrate ethical vision in this situation - by being candid with business partners and giving them adequate advance information so that they can find alternate customers. Innovative ways to help them sustain their businesses need to be worked upon. The positive rub-off of these actions on the rest of the business, and its reputation, is significant. There is also significant financial feedback, as the business continues to have the whole-hearted support of its employees and business partners during the phase of closure. This means that financial losses are minimised and financial recoveries maximised.
Business Ethics always pays back. It needs innovative thinking, a large dose of transparency, and above all the belief that responsible behaviour is required towards people we separate from the business.

Saturday, January 9, 2010

Building the Ethical DNA

One of the most prominent topics of discussion amongst Compliance Officers is how to build an Ethical DNA within the organisation. How do companies like JnJ manage to build and sustain this DNA over the long-term? Is it through selecting the right people? Is it through extensive training and dissemination? Is it through stringent punishment for defaulters? Is it through appropriate leadership?

The answer includes all the above possibilities. But I believe there are three primary requirements for building an Ethical DNA without which all other efforts would be mere compliance exercises.

The first is a strong belief that is shared by the apex management team of the company that "being good is actually good for business". It may sound simple but let me tell you a lot of senior managers do not look at Ethics from this perspective, but from a pure compliance perspective. Let me give you an example to illustrate this. I was reviewing the third party manufacturing- related risks of a client and found that the employee safety standards at the 3P were below those prescribed by the company for in-house facilities. The senior business managers told me that enforcing the same standards on the 3P would nullify the cost advantage of the operation and make it unviable. I then took this up with the CEO of the company. What he told me was this (quote) "The 3P manufacturing strategy is key to our business success. At the same time our safety standards are not negotiable. We hire the best engineers in the country. It is their job to find cost-effective solutions that enable us to meet our safety standards and at the same time retain the 3P cost arbitrage" (unquote). What he was doing was using the Ethical dimension to drive new technology. It is similar to companies that are trying to carve a niche for themselves through "green' products. Or companies that provide flexible-working hours for its female employees so as not to lose good talent. Once senior management start looking at goodness as a business resources, the DNA gets a healthy organisational body to grow in.

The second is continuous culling of employees whose DNA do not match that of the firm. Nature has a wonderful way of ensuring that the strongest of the species survive. A tigress instinctively knows which of its cubs have a stronger chance of survival and focuses its resources on these. This may sound cruel to people uninitiated into the ways of nature, but for the species it ensures survival. I would apply the same principle to the survival of the species called the Ethical Employee. Employee evaluation and other HR practices need to be re-engineered to deliver this objective, and gradually over a period of time you start having an employee mass that shares a common vision on Ethics. This is a tough task, and may need talented and senior people to be asked to leave. However, firms that have built a strong Ethical DNA do this all the time.

The third is ethical training. I do not mean the standard training methods of workshops and other dissemination exercises. I believe 75% of ethical learning happens by observing what the superior does in a given situation. Employees watch these situations far more closely than the superiors realise. Let's look at a caselet. A Production Foreman goes to the Production Manager and tells him that a particular batch of product is marginally outside the quality parameters and could this be allowed to pass as it would help them meet their month targets. In this situation, the entire shop floor is watching what decision the Production Manager takes. If he says 'yes', it sends a message that the Code is flexible. If he says 'no' it sends a strong message that it is not malleable. There is no amount of class room training that can impart the learning of a single instance like this. Hence I strongly advocate that the Code training for line managers and supervisors be focussed sharply on what I call the "demonstrative effect" of their actions. One can easily realise how this third attribute is closely related to the second attribute of DNA articulated in the previous paragraph.

Building an ethical DNA is tough work. It means a DNA that covers a wide spectrum of behaviours - from lofty goals like not taking short-cuts in meeting business targets, to seemingly not so lofty goals like making payment to your canteen service provider on time. Most companies fall somewhere in the middle, because business targets are too critical to miss and the canteen contractor too small to bother about.