Posts Tagged ‘business ethics’

Corporate opacity at Olympus

Posted: April 15, 2013 in Books
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Olympus E-PM2 with Tokina 80-400mm

Olympus E-PM2 with Tokina 80-400mm (Photo credit: hto2008)

I was really looking forward to reading ‘Exposure: Inside the Olympus Scandal‘. Perhaps unfortunately it has parallels to the fictional ‘Rising Sun‘ so I was hoping for a similarly dramatic story of moral uprightness in the face of wrongdoing. Maybe some readers found that to be the case, but as I worked through the book I thought the ethics of the situation became murkier.

In brief: Briton Michael Woodford was made President of Olympus in 2011. Just a few months into the job he became aware of an accounting fraud when it was leaked to independent magazine Facta by an anonymous employee. He tells his executives to investigate it but gets stonewalled and, when he pushes the issue, the board dismisses him.

The fraud in question was a loss incurred all the way back in the late 1980s during Japan’s property slump, when an investment turned sour. Company insiders had kept it out of the accounts all that time before deciding to realise the loss in 2008 by purchasing a phoney company and counting the $700 million debt as an ‘advisory fee’. Woodford wryly comments that, had it been real, it would have been the largest advisory fee in history.

But that’s as far as the scandal goes. There’s no hidden agenda, no underworld involvement, not even any personal enrichment arising from these shenanigans. The perpetrators were motivated purely by the desire to protect their own company. A victimless crime then? Not exactly; the shareholders were clearly being misled, however massaging of ugly facts is so commonplace in Japan that it’s difficult to call it wrongdoing (see earlier post about laws vs norms). The Economist described the Olympus affair as “not so much a scandal as a state of mind”.

Is it just a simple clash of Anglo American vs Japanese values? Woodford didn’t think so. He argues forcefully while at Olympus (and again in his book) that such practices are rotten and need to change. Japan’s closed-rank corporate culture, he says, did wonders for the country in the postwar era but now that those companies have grown up they need to be able to adapt to changing circumstances. Unquestioning deference does not allow people to take the necessary risks to fight off competitors, notably including those in next-door Korea. Woodford passionately wants Olympus to succeed but sees its own corporate culture as its biggest challenge. How much impact his actions will have in the long term remains to be seen.

Here he is talking about his experience on Australian television:

Shareholder value versus value to other stakeholders

On the narrower question of the fraud itself, I can empathise with the unknown people who were trying to correct the damage. They remind me of the hapless crew of the Battleship Yamato who continued to man the guns even when the ship’s fate was sealed. Woodford comes from an Anglo-American perspective of shareholder capitalism. In his view the profitability of the company is the number one value. The Japanese, on the other hand, see the company in a more embedded fashion: it exists in a web of relationships including the other members of its keiretsu conglomerate, suppliers, customers, employees and factory towns. It sounds noble to make the company face the music, but what effect does it have on the ongoing wellbeing of all those stakeholders? (If that sounds touchy-feely, don’t laugh; the U.S. Government used exactly these justifications to rescue both the financial industry and General Motors)

Faced with such ludicrously high responsibility, it’s not hard to see why the poor devils working in Olympus’s back offices opted to delay the day of reckoning. I’m not saying it was the right call, just that it’s understandable with the pressure they would have felt.

Harvard Business Review ran an article last month titled ‘Long CEO Tenure Can Hurt Performance’. It compared the stock return of several companies against the length of tenure of their CEO and, sure enough, the short-term CEOs saw the greatest rise in stock price. What was omitted was whether the companies stock prices performed better after the CEO in question departed; not as well, I suspect. However that is a tactical argument. The real point is that bundled into the article is the Anglo-American assumption that the share price is the measure of a company’s worth, and what it accomplishes in the real world is only an adjunct to this. I’m not convinced.

See also:

Related posts:

Laws and social norms are different things

Posted: March 18, 2013 in Responsible business
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Law School

Law School (Photo credit: Tulane Public Relations)

A little over a week ago, the Australian Council of Trade Unions released recommendations for unions to improve their internal governance, primarily in the area of finances. The panel was announced at last year’s tri-ennial Congress as a response to allegations of misuse of union funds at one particular union.

It should be noted that the people involved in this incident have since been charged with fraud so there is no deficiency of regulation. The recommendations propose tightening-up of internal procedures so that it is more difficult for this kind of conduct to take place unseen.

This got me thinking again about the difference between regulatory compliance and ethics.

All laws have the effect of categorising human behaviour as acceptable or unacceptable. The problem is, the real world does not lend itself to tidy distinctions, so laws become more complicated as they define exceptions and then define exceptions to exceptions. Moreover, this process doesn’t take place in a vacuum; as soon as you proscribe one form of misconduct, another will spring up in its place. You could call this the ‘Hydra Effect’.

It’s worth asking what effect, if any, does legislative redress have on people’s sense of right and wrong?

I don’t think there is a hard and fast answer to this but can see three interpretations:

  1. It sends the message that society disapproves of the conduct and thus the law has a normative effect. This may be true in some areas -notably criminal law- but it seems a little naive to believe that law and morality could be so closely correlated in an era when the laws of the state run to thousands of pages. I once attended a defensive driving course where there was a free-for-all discussion about what were the correct road rules in certain situations – everyone was just guessing! (We know what drivers really do when faced with such ambiguous situations: they don’t consult the rule book, they simply fall back on politeness and decide who will give way using hand signals)
  2. Legislation could in some situations have the perverse effect of lowering standards. Take financial regulation for example: most people involved with finances are behaving honestly at the outset. Then, in response to the actions of a few individuals, the law steps in to set a certain benchmark. That benchmark will most likely be lower than people’s personal standards, as it sets only a minimum standard of behaviour. The normative effect of the law makes them ask themselves, ‘Why should I bother? Here is a clear signal that I don’t need to take as much care as I have been’. How many times have you heard someone say, defensively “But we were acting within the law”? Mandatory CSR targets fall into this category, e.g. carbon emissions treaties and ‘Fair Trade’ standards (see earlier post).
  3. You could attempt to sidestep this dilemma by taking a position that law-makers oughtn’t be interested at all in whether or not the law has a normative effect on people, they should simply see it in an instrumental fashion designed to bring about a particular result – or, even more cynically, see it as a way of reacting to public opinion. You might call this the ‘checks and balances’ view. Immigration laws are an example. Stock exchange rules are another: their purpose is simply to avoid certain outcomes and the moral status of human actors involved becomes irrelevant. This view has its place (see post) but if you apply it universally, you will end up ascribing unrealistic levels of responsibility to Governments, as if their mere fiat alone is sufficient to determine what people do in the real world. Or, if you admit that they can’t, then you’d have to advocate allowing individuals completely to follow their own moral lights. That is basically an optimist’s vision of the law of the jungle.

This leaves us between a rock and a hard place. Yes, laws do carry a normative effect but you can’t rely on that alone.

There was a book by Jim Collins a few years back that advocated the use of “Stop Doing” lists. The idea is that more work will always find its way to you, creating the need for an ever-lengthening “To Do” list; so, to be able to stay on top of things you need to discipline yourself to make a list of what you need to stop doing to free up the necessary time.

Legislators and pressure groups, take heed: more law isn’t always the solution. It might help, but of itself it won’t be enough to bring about the intended change.

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Reciprocity – the basic problem with First World living

Posted: February 10, 2013 in Ethical decision-making
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Red Packets

Red Packets (Photo credit: xcode)

Reciprocity is so fundamental to social organisation yet we don’t often bother to name or think about it.

An underlying norm of reciprocity is by itself a powerful engine for motivating, creating, sustaining, and regulating the cooperative behavior required for self-sustaining social organizations, as well as for controlling the damage done by the unscrupulous. (Wikipedia)

An example of reciprocity in action are the hundreds of millions of packets of money being exchanged around the world today wherever Chinese culture has had an influence.

Reciprocity as a norm pre-dates its more recent manifestations such as the Golden Rule of Christianity or the similar formulation promulgated by Confucius (Do not do to others what you would not have them do to you).

In contemporary nation-states it finds its way into positive law and, when it doesn’t, it is what drives activism to make laws fairer.

The problem is that it is something we devised in a small group world, where co-operation is necessary for survival, whereas today we live in a planetary society. However the underlying necessity is no less valid, in fact if anything it is even more valid than it was in millennia past.

Pre-modern humans knew survival skills. They knew how to find their own food and could survive if isolated from their community. Larger scale social organisation meant specialisation and abandoning the ability to fend for oneself in every respect. Now that has gone a step further and arguably entire nations are now integrated in the same manner.

Yet … where’s the reciprocity gone in this equation? Those people who work in other nations making our clothes, growing our food, assembling our consumer knick-knacks, what do they get for their trouble? Poverty wages that would never allow them to aspire to the same kind of lifestyle. How fair is that?

We all tolerate this, we are all aware that we are tolerating it, and we feel uneasy about it because of reciprocity. If they were merely poor it would be another matter, but they are poor because people pay them peanuts, in the name of the consumer: i.e. you and me.

All of this because “they” are so far away we never get to meet them or learn their names.

Related:

SAI destroys own credibility

Posted: October 3, 2012 in Responsible business
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Deutsch: Kreuzwinkelständer der Modekette KiK

Deutsch: Kreuzwinkelständer der Modekette KiK (Photo credit: Wikipedia)

A couple of weeks ago we saw the tragic death of at least 250 Pakistani apparel workers in an unregulated factory, the worst such disaster in history.

It later emerged that this factory was supplying garments to the European market including Germany’s KiK.

It also emerged that this very factory was audited by RINA (Registro Italiano Navale Group) at the behest of New York-based Social Accountability International (SAI) just a short while before the fire occurred, and certified as meeting the SA8000 standard as a fair and safe supplier.

SA8000 is a voluntary standard promoted by SAI as a means of ensuring that suppliers are ethical. No one would suggest that it is anything but sincere but this incident makes a mockery of it.

When interviewed by Al Jazeera, SAI’s Executive Director didn’t seem particularly upset or contrite about the incident either:

True, if the deaths were anyone’s fault it was the negligent factory owners (who are now on murder charges). Plus, if you look narrowly at the auditing aspect, it’s more RINA’s fault than SAI’s as they were the people on the ground.

However it really doesn’t rescue SAI. To blame it on RINA is to use the precise defense that suppliers try to use but know they can’t get away with. Imagine if Mattel said that in 2007 when it had the toxic paint problem: “Well, hey, it’s not our supplier, it’s our supplier’s supplier doing the wrong thing, so how are we to know?” If SAI, the supposed leader, can’t monitor their own contractors, how are companies supposed to?

This tragic episode underscores the shortcomings of SA8000. You can’t manage workers’ rights in the same way that you might manage food additive levels or child restraint shock resistance, as something that can be measured and implemented but always imparted. All companies need to do is stand back and listen to what people want (like … ventilation and fire exits, let’s say). It’s not really that difficult.

Asia Monitor Resource Centre recently published a book about this very issue, titled The Reality of Corporate Social Responsibility: Case Studies on the Impact of CSR on Workers in China, South Korea, India and Indonesia. You can download the PDF on their site here: http://www.amrc.org.hk/system/files/Book%20-%20The%20Reality%20of%20CSR%20-%20AMRC.pdf It is well worth checking out.

This book is written by people at the front line thoughout developing Asia and documents how Corporate Social Responsibility (CSR) that reflects the corporate agenda is not only unhelpful to workers in the developing world but is frequently used as a strategy to prevent workers and other community groups from having their place at the table.

In the Asian context, CSR mostly involves activities like adopting villages for what they call a ‘holistic development’, in which they provide medical and sanitation facilities, build school and houses, and helping villagers become self-reliant by teaching them vocational and business skills. Such corporate strategies have been effectively hegemonic, providing a strong legitimacy and license for corporations to sustain the exploitation of human and natural resources. More importantly, it leads people to wrongly assume that the business houses, and not the states, are responsible for citizens’ basic rights to better education, clean water, healthcare, etc. It disciplines the un-informed poor motivating them to behave in ways that make state regulation obsolete, while leaving them at the mercy of market forces. (pp. 2-3)

Rights aren’t something that you can “give” or impart, they are something that you acknowledge. That’s the problem with CSR: it is by definition an after-thought that merely papers over an existing way of doing things without seriously challenging them.

Aftermath

SAI’s mistake was not promoting SA8000, it was disowning this catastrophic system failure. They haven’t made a peep of a suggestion that they need to re-examine their way of doing things.

SAI is funded by the companies that obtain its certification (rather like FairTrade), which leads me to think it will soldier on through the crisis, notwithstanding the harm that’s been done to its reputation.

There is more than one group operating in this space and it’s really important that they aren’t all tarred with the same brush. All up, six groups belong to the Joint Initiative on Corporate Accountability and Workers Rights.

SAI is one. Another, the Fair Labor Association (FLA), was set up during the Clinton administration. It has also been criticised for being too soft on business (they are the company auditing Foxconn).

Of the others, Fair Wear Foundation, Clean Clothes Campaign and the Workers Rights Consortium all put the promotion of union membership and worker consultation and participation front and centre and really need to be lauded for the great work they do in partnership with developing-world worker organisations.

The last, the UK-based Ethical Trading Initiative, seems to adopt a tripartite ILO-type approach which presumes unions’ involvement without pushing it too hard.

The best thing that could come out of this disaster is that FWF, CCC and WRC start getting some phone calls from companies whose motivation isn’t white-washing but who want to know that their suppliers are decent places to work in reality.

Related posts on FairForAll.org:

Related articles elsewhere in the blogosphere:

Electronic trading’s ethical vacuum

Posted: August 30, 2012 in Ethical decision-making, Natural Resources
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English: in Chicago, Illinois, USA.

English: in Chicago, Illinois, USA. (Photo credit: Wikipedia)

I’m sorry, Dave. I’m afraid I can’t do that.

-The shipboard computer HAL in 2001: A Space Odyssey

For a while, I worked in the Chicago Loop.

I’d always turn to glance at the impressive Board of Trade building with its Art Deco statue of Ceres, the god of agriculture, dominating LaSalle Street as far as Lincoln Park, at which point the street bends slightly westward.

A short walk away, on the other side of the River, lies the Chicago Mercantile Exchange. In 2007 the two merged and became one company. It’s the largest futures and commodities exchange on the planet.

The prices of oil, wheat, corn, cocoa, copper, tin, oil, tantalum … you name it … are largely set on this exchange, along with the fates of millions of primary producers around the world.

I recently learned something fascinating: the blocks around these two exchanges are starting to bristle with microwave dishes. Trading companies want to know what’s happening in the CME servers those few thousandths of a second faster than their competitors relying on copper-cable based internet connections.

Why? Because today the majority of trading is done by computers, without the input of a human being.

The computer decides to buy or sell based on algorithms, and it does it many many times faster than the guys in the mustard yellow jackets can.

Admittedly, these traders don’t exactly go around touting their moral credentials (see earlier post) but a computer can’t even pretend. Non-monetary values are invisible to it. All that triple bottom line stuff? Not in the program. E-trading programs don’t care, don’t even know that a huge spike in the price of corn is going to take food off tables around the globe.

Bad enough that people have to contend with natural disasters, but this has come about because people have willfully taken their hands off the wheel.

It’s the same story on Wall Street – a similar proportion of company stocks are traded electronically. It’s no surprise that institutional investors fail to exercise their voting rights at AGMs: the real-life people in those companies don’t even know what stocks they are holding and what they are selling. That emphasis on quarterly results at all costs, and the harmful short-term thinking that it engenders, is increasingly being done to appease these ‘robot overlords’. Worse, I don’t hear anyone out there with the stomach to seriously challenge the wisdom of this system.

Fact starts to emulate science fiction.

*Update (3 October): New York Times reports that several other jurisdictions are seeking to rein in high-speed trading. No sign on Wall Street or Chicago’s South Loop however. The article also says that 65% of U.S. stock trades that are performed by computers. Here’s the link: Beyond Wall Street, Curbs on High-Speed Trades Proceed (New York Times, 26 September 2012)

Further reading:

A right of conscience for financial professionals

Posted: June 30, 2012 in Ethical decision-making, Responsible business
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To Buy or Not to Buy

To Buy or Not to Buy (Photo credit: Wikipedia)

In the last month or so we’ve seen a lot of attention given to ‘Say On Pay‘ – the right of shareholders to have a say on executive pay. The fact that this is even contentious is very revealing: it is allegedly the shareholders on whose behalf the managers are acting at all times. It just brings home the reality that a small number of people maximise their own benefit whilst keeping other investors at arms length.

The whole Say On Pay issue is a red herring compared to the more important questions that shareholders ought to be able to ask, but don’t. Even though I agree it’s an abuse of privelige for executives to be skimming that much money out of companies and people only do it because they can, nonetheless I feel activists have let themselves get distracted by this issue instead of worrying about questions that affect many more people, such as: What is this company paying the rest of its workforce?

Other than regulators, shareholders are the only group to whom boards have to account for their decisions, but they don’t ask them to do anything of the sort (boards do their best to ensure it stays this way I might add). Basically we accept that executives will run companies and shareholders will give them money and hope for the best. That’s about as far as their involvement goes.

Way forward?

Ok so what about the shareholders’ proxies, the accountants and bankers? I’ve previously looked at strategies of regulation, corporations bound by charter and consumer pressure to bring corporate behaviour under control in situations where union advocacy is difficult because headquarters and production are located in different countries. From the investing angle, a concept in legal philosophy might help here: the modus vivendi.

The concept has been devised by jurist Iain Benson as a way to resolve problems with pluralism(1). It’s easier to illustrate it in the context of a political disagreement:

Take same-sex marriage. In Canada it is now legal so the legalisation issue does not come into it. Many Canadians continue to believe that marriage should only be marriage between a man and a woman. Benson argues that the state, if it is to be truly neutral on the issue, has to accommodate them and make arrangements that do not forcibly compromise people who hold such beliefs. He says problems of pluralism only arise when one viewpoint tries to dominate everyone’s understanding of a contested matter.

So, for example, civil marriage registrars should be entitled to recuse themselves from registering same-sex marriages if it is contrary to their beliefs. We have a more pointed example here in Australia where a statute in the state of Victoria requires doctors or other health professionals to assist a person who seeks an abortion regardless of their own views about the matter. To date no one has ever been prosecuted for noncompliance so there remains an uneasy stand-off.

Benson uses the term modus vivendi to mean a state of affairs where two points of view are able to coexist without one needing to quash the other.

Now let’s apply this concept to investment. Institutional investors will generally move money wherever it will generate a return. In fact, in Australia, they are obligated to do this and would probably run afoul of regulations if they were to take CSR considerations into account(2) .. not that anyone does. As far as I know, no one has considered allowing financial professionals to recuse themselves from recommending investment in companies whose operations they have ethical issues with. At present, profits trump everything and anyone who thinks otherwise should go work in another industry and that is the legally-sanctioned view(!) Protecting the rights of people in the industry to follow their conscience would be a more easily attainable goal for fans of shareholder democracy.

Notes:

  1. Benson, I. T. (2010) Living Together with Disagreement: Pluralism, the Secular and the Fair Treatment of Beliefs in Canada Today, Camrose, The Chester Ronning Centre
  2. Superannuation Industry (Supervision) Act 1993 (Cth), s. 62(1)

Related post:

Illusion of Control

Posted: April 25, 2012 in Ethical decision-making
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CCTV camera

CCTV camera (Photo credit: Mike_fleming)

Illusion of Control is a cognitive bias that has two implications in business today.

The first is fairly obvious: Managers often over-estimate the extent of their control over the operations of their companies. I love the story from an old Harvard Business Review about the divisional manager who was troubled by a purchase order for a smoke stack … *just* a smoke stack. It turned out that one of his regional managers had been able to build almost an entire factory without asking for approval; the smokestack was the only component that cost enough to require authorisation from the divisional manager’s office.

Another example I like is the frank admission of former Chevrolet head Pete Estes, quoted in On a Clear Day You Can See General Motors, that the company

is so gigantic that there isn’t any way to really run it. You just sort of try to keep track of it.

If this sounds shocking (and I’m guessing that, for most readers, it doesn’t), then think of government as an example. Responsible government and the sport of blaming ministers would not be possible if people had realistic notions of how much detail any individual can really oversee.

Activists know this, even if they may not necessarily be familiar with the phrase illusion of control. However there is also a flip side: NGOs and others can also over-estimate their ability to bring about change.

It was last week’s post that started me thinking about this, looking at the hazards faced by the Miskito lobster divers of Nicaragua. Systemic improvements in their conditions seem unlikely in the near future however a concerned person could at least assist individual families through microcredit. This led me reflect that microcredit sounds like a poor man’s alternative, a half-solution. Yet if it’s the only feasible way of assisting, wouldn’t it be better to get some improvement than to throw up your hands and get no improvement?

The point for activists is not to assume that your brilliant solutions will be completely effective once put in place. If you are lobbying for supply chain monitoring, for example, you should presume that any monitoring system is going to be full of loopholes, best intentions notwithstanding.

People have limitations. They build imperfect systems, yes, and proposed solutions are likely to be imperfect also. Don’t beat yourself up about it.

Responsibility is the soft underbelly of fantasies about power

-Ivan Illich

What if there really is no villain?

Posted: December 29, 2011 in Ethical decision-making
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English: A stereotypical caricature of a villa...

Image via Wikipedia

Back in the 60s psychologists identified something called fundamental attribution error. In short, it is the tendency to ascribe too much importance to individual characteristics and too little to situational factors.

In short:

we want to hold onto the idea that if something’s happened, someone wanted it to happen and made it happen (Nick Chater*)

To illustrate attribution error at work, consider the difference between Michael Moore’s two most high-profile films. One of the strengths of ‘Bowling for Columbine’, I felt, was how he resisted the temptation to designate a villain in his search to understand the United States’ obsession with violence. It was an exploration of multiple causes, none of them easily remediable. Then, bizarrely, in his next film ‘Fahrenheit 911′ he did the complete opposite and blamed the Bush family and Saudi royals for a large share of the world’s ills.

Traits that contribute to attribution error include:

(1) Pattern recognition; wanting to connect the dots.

(2) The preference to personalise things that are abstract

This goes on all the time, and it’s partly a result of the personality cult model of corporate leadership. I can remember during the antitrust action against Microsoft in the late 1990s, Microsoft Inc and Bill Gates were almost synonymous.

More prevalent in the West

People in more individualistic societies (e.g. the USA, UK, Canada and Australia) are more susceptible to fundamental attribution error, which shouldn’t be surprising. They are more likely to buy in to the myth of the heroic leader.

Yes of course senior leaders have a greater-than-average ability to bring about change, but they aren’t the only people with influence in a workplace or organisation.

Now it has occurred to me that there is a consequence of this: all of our clever systems of transparency and accountability such as America’s Sarbanes-Oxley and Dodd-Frank laws are built on the premise of the individual wrongdoer. We don’t simply take things on trust; we check. The problem is, it’s all built on the assumption that we need to find the ‘bad eggs’, making us blind to systemic issues. Attribution error is surely part of this. These regulations come about as a result of bad press and a belief that there must have been some kind of malfeasance. Don’t get me wrong: Often this is the case … just not always.

I hope we can move more to a ‘no fault liability’ model in corporate regulation; more solution-oriented and less punishment-oriented. Pillorying doesn’t serve the public interest as much as having companies that do little harm.

*Reference:

Related posts:

Nestlé finally does something about child labour

Posted: December 1, 2011 in Consumer campaigns, Natural Resources
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Change has come to the world’s biggest food company!

In the last few days Nestlé has finally agreed to allow independent auditing of its cocoa supply chain and propose ‘remedial strategies’ if child labour is proven.

In stark contrast to the reassurances given by Nestlé’s suppliers in the film The Dark Side of Chocolate, the company this week admitted “We are sure that there are children working”.

Best of all, the process will be led by the multi-stakeholder Fair Labor Association which means we can expect the reporting to be free and fearless.

This is a great moment for all who’ve been involved in the chocolate campaign, notably the International Labor Rights Forum (ILRF) who have pushed the issue for the last several years.

Opportunity to gain further ground – Act now!

An additional opportunity exists right now to raise standards. The United States Government has a procurement policy that prevents it from sourcing either Cote d’Ivoirian cocoa or Uzbek cotton without a ‘good faith’ certification that child labour was not involved. Bizarrely the Executive Order that makes this stipulation only applies to the raw materials and not to chocolate made out of the cocoa or T-shirts made out of the cotton. I’m not sure how often the U.S. Government has cause to order raw cocoa.

The Executive Order has come up for public comment though only until 3 December, so now is the time to remind Washington decision-makers to fully implement the intention of the policy all the way along the supply chain.

Add your voice here: http://action.laborrights.org/p/dia/action/public/?action_KEY=3205

Source:

http://www.confectionerynews.com/Regulation-Safety/Nestle-sure-child-labour-occurs-in-supply-chain-as-company-allows-probe

Earlier posts on this story:

The cultural gap between Equity and Equality

Posted: October 28, 2011 in Ethical decision-making
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The second paragraph of the Declaration of Independence of the United States of America begins:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights,

More than two centuries later, Americans and other Westerners still stride the planet convinced of the obvious universality of their values. They can hardly be blamed, as there is a lot of apparent evidence to support this view: Western brands have been on the march. Visit any city around the world and, upon disembarking, you’ll be greeted by the familiar sights of KFC, Coco Chanel, even Marlboro. Similarly parliamentary, electoral democracy has spread in past decades. It seems to be a one-way story of the adoption of enlightened Western ways and rising prosperity to follow.

Tiananmen Square Protest (tian_med)

This guy is a hero in the West but 1989 fizzled in China. Why?

Research shows that countries retain sharp divisions in the emphasis they place on individual versus collective values. Generally countries in the Western tradition have a higher emphasis on the individual and those in the Confucian tradition have a high emphasis on the collective. These traditional values have persisted into modern times despite the removal of Confucianism as the official Chinese religion.

These findings are known and accepted but do not seem to be translating into managerial education.

The result is that American or British businesspeople turn up in ‘non-Anglo’ countries poorly equipped to motivate and build rapport with local workers. Notably they carry with them the baggage of America’s highly antagonistic labour relations but for now I want to highlight something else: compensation.

The central motivational factor under a manager’s control is the allocation of extrinsic rewards. (Ralston et al., p. 70)

How is compensation to be divided?

The dominant view in the West is that reward should be, to some extent, related to the person’s output. This is equity-based reward.  The dominant Confucian assumption, however, is that an equal distribution -regardless of output- is ‘fairer’ because it is more conducive to the group cohesion. This is equality-based reward.

(Incidentially there is a third approach: Rewards are distributed according to need. Under this approach a breadwinner for a large family would be paid more than a single person without dependents doing the same job)

What flows from this? For one, it explains how executive pay has been able to run so far ahead of average workers’ pay in the United States especially.

More relevantly, it explains why many national and plant managers make their own lives difficult by implementing reward-for-output. Not only is it not appreciated, it probably causes friction.

This is not to say that rewards can never be shaped towards encouraging performance in Eastern cultures, just that they need to be directed towards the group.

My point in all this is that well-meaning labour activists in the West who want to assist their brethren in the developing world ought to consider that it might not be appropriate to promote a wage-setting apparatus similar to the one in their home country, complete with tiered salary grades and assumptions about the relative worth of different kinds of work. It might be like forcing a square peg into a round hole.

Source:

  • Ralston D, et al, The relevance of equity values in Eastern cultures, in ‘Whose Business Values? Some Asian and Cross Cultural Perspectives’ (1995) edited by Sally Stewart and Gabriel Donleavy

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