Does honesty pay?

2010

LG Electronics, one of the world's largest electrical manufacturing conglomerates, has just been caught again (this is the third time), trying to beat the system by hoodwinking customers. CHOICE, the magazine of a not-for-profit Australian consumer advocacy group, has just discovered LG has been doctoring refrigerators to make them appear more energy efficient.

LG Electronics has agreed to compensate potentially thousands of consumers after two of its fridges – models L197NFS and P197WFS – were found to contain a device that activates an energy-saving mode when it detects room conditions similar to those in a test laboratory. This gives the impression that the appliances use less electricity than they actually do under 'normal' conditions.

The revelation follows closely on the heels of the now-infamous Toyota faulty accelerator problems where the company initially failed to admit that its cars were faulty.

Will the current S.E.C. case against Goldman Sachs prove to be another case of dishonesty in business? (The SEC contends that Goldman misled investors who bought a mortgage-related instrument known as Abacus 2007-AC1 by not disclosing that the security was devised to fail.)

Do the executives of these companies think that people will not find out? And from a leadership perspective, what type of culture does such behaviour engender within the organization?

Why does this type of thinking from many business leaders permeate our business culture?

Is it the case that we (all) have become more short-term, transaction-oriented rather than long-term, relationship-based?

As Nigerian writer Samson Itoje puts it: "The goal of every business is to maximize profit. The more transactions the business engages in, the more the profit potentials. And the greater the profit margin per transaction, the greater the overall profit of the business. Hence, business managers seek to maximize the return per transaction in order to maximize the profitability of the business. Honesty in business on the other hand, means you may lose opportunities to make more from each transaction because you tell the truth."

Itoje gives the example of an electrician who finds a customer's problem to be a faulty fuse and fixes the problem, not by replacing the fuse, but by putting in a new transformer, thus making a large transaction profit.

As we have seen recently however, whilst this particular customer might not know they have been robbed, inevitably customers and the public find out in the end.

This type of short-term, transaction-based thinking is also evident at the corporate level. For example, the obsession with quarterly results pushes CEOs to be transactional-focused rather than taking a longer term view of their business.

So how do we start to overcome this type of thinking among our business leaders?

There are at least two strategies that need to be in place to help overcome leaders' preparedness to be dishonest rather than honest.

The first is systemic. If there are structures, systems and sanctions that ensure that people are held to account for their actions, then there will be less likelihood of dishonesty or cheating.

In terms of structures for example, it is essential to separate the Board from Senior Management. The Board should only have two functions – to appoint the CEO and to decide on long-term strategy. Their key responsibility is to represent shareholder interests and to hold the CEO accountable for implementing policy.

Senior management, led by the CEO (who should never sit on the Board), in addition to being responsible for implementing Board policy, must be accountable for managing the expectations of the key stakeholders – owners, staff, community, customers, suppliers and the industry of which the business is a part.

However, many CEOs today have remuneration packages that include large parcels of shares. As owners, they therefore have a vested interest in maximizing profits often at the expense of other stakeholder interests such as customers and staff. Separating the Board and Management roles, very clearly delineates strategy and operations and ensures that all stakeholders best interests are served.

Systems and sanctions refer to financial reporting and penalties for financial mismanagement that are now being discussed by governments around the world. With these in place, people are more likely to be honest when there is a high probability that transgressions will be discovered and punished.

It would also be nice to think that businesses would revert to 12-monthly reporting cycles to help facilitate longer term planning. However, this is unlikely to occur.

The second strategy that will help engender honesty in management has to do with training managers to disclose - and particularly to self-disclose. Disclosure is the reporting of "stuff-ups" as they occur, rather than waiting to be found out. Business schools should include subjects on the benefits of disclosure and how to disclose with dignity.

Does disclosure work? Within relationships, it has been shown that couples who disclose more, stay together longer and have closer relationships with others. It's also been shown that some of the benefits of disclosure include a greater understanding of self, a better understanding of how others might view the situation and the likelihood that others will disclose to you. Wouldn't all senior management like to see these benefits in their roles?

Does honesty in business pay? It's difficult to get any hard evidence, as "honesty" unlike "dishonesty", goes unreported.

A great example of effective disclosure is the open letter by Home Depot CEO Frank Blake in response to a MSN Money article in 2007. In the article "Is Home Depot Shafting Customers?", author Scott Burns described Home Depot as the store that he and his wife once called "our store".

Blake immediately responded, not by justifying their recent strategies, but by disclosing – "Sorry we let you down", then immediately establishing a task force (headed by himself) to address the situation.

At the time Home Depot had experienced the worst results in their 28-year history. Recently, they announced a 22.9% increase in earnings for the last quarter of 2009 and have opened six new stores in a tight and competitive market.

Can this turnaround be put down solely to honesty? Probably not. However, undoubtedly one of the outcomes is a changed behaviour by senior management that has led to improved motivation and staff commitment.

The message for leaders is quite clear. Make honesty your guiding principle and when stuff-ups occur (as they will), disclose with dignity.

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About The Author

Bob Selden
Bob Selden

Bob Selden is MD of the Australian National Learning Institute and author of What To Do When You Become The Boss. He has been a boss many times over. He's also worked for many. Some of these relationships have been fantastic and some did not work as well as they might have.