What is the true cost of unethical conduct?

‘Procurement irregularities’ has taken 3rd place on Corruption Watch SA’s Corruption Report 2017 (CRW2017). Coming in at 12% of the reported types of corruption, procurement irregularities trails bribery as the most common form of reported corruption (27% of cases).

However, CRW2017 does not define ‘procurement irregularities’, which caused Xavier Greyling (MCIPS) to question if procurement irregularities do in fact account for only 12% of the reported cases, and, faced with the possibility of a far higher figure – what role does procurement play in what is lost to corruption every day?

Released on 4 April 2018, CR2017 breaks down the 5 334 incidents lodged with Corruption Watch during 2017.

If one considers ‘procurement irregularities’ to be any action relating to enticing non-adherence to procurement due process, Greyling suggests that the true number of total unethical acts of conduct (bribery, theft, extortion, etc.) condoned by procurement is actually as much as 70%. As the business activity that sits at the heart of it all, that ‘owns the purse…’, it is procurement that delivers the justification to finance to make the payment,” says Greyling.

So, let’s ask a different question:

What cost is procurement paying for corruption?

Is the true cost that the reputation of procurement practitioners is tainted? Is the procurement business function downgraded as a whole? Is it labelled the ‘collective of the corrupt’?

Has the procurement profession lost (or is it about to lose) credibility? This is the true cost of corruption in procurement.

What is everyone else paying for corruption?

Imposing fines, penalties and other instruments of sanction leads to quantifiable losses. In 2013 and 2014 JB Morgan paid almost $16-billion in fines and legal fees. Without provision for escalation and monetary inflation, this amount could have eradicated the current South African treasury deficit – a deficit now borne by over-taxed, law-abiding citizens.

Imposing curtailment measures generates costs associated with enforcement – manpower and time required to establish, audit and verify compliance with measures that grow and grow. This is a running expense that reduces an entity’s profitability, reduces the nett taxable income and reduces much-needed tax collection.

There are also non-quantifiable consequences of unethical conduct.

Steinhoff is a good example. Once a gem of South African success on the global stage, Steinhoff’s share price has plummeted almost 90%. The reputational damage is staggering. Numerous studies have shown and confirmed that a poor ethical perception of a company (or public service) has a direct impact on peoples’ willingness to procure/make use of the services and to invest in those entities.

Unethical behaviour also creates problems related to employees and employee productivity. Honest employees will battle to work in an unethical business environment, with increased absenteeism and lack of productivity the inevitable result. A recent Harvard Business School study showed, for example, that corruption in an organisation has a marked negative impact on employee morale. And employee morale is directly linked to employee commitment (as measured through levels of absenteeism) and ultimately to company performance.

An unethical work environment can prompt honest employees to leave, which results in high staff turnover and a loss of critical skills that impacts productivity. Productivity is further affected by unethical employees tending to exercise bias towards their other income-generating activities during working hours, abusing company resources.

Where unethical conduct is rife, institutions may opt to impose intrusive surveillance within the workplace and an increasingly elaborate framework of rules. This not only adds a significant direct extra cost to the business, but also contributes to a paranoid, adversarial and dysfunctional work environment: one that promotes poor productivity and attempts by employees to assert their freedom by acting in ways that are hostile towards the company’s best interests. It also sets people up to find ways around the rules, which increases misconduct, in turn leading to the proliferation of more rules, more surveillance–and more costs.

Leadership sets the tone

In researching this piece, the only successful counter to unethical conduct (as manifested in acts of bribery, fraud, theft, deceit, financial crimes, extortion and the like) that I could find is good leadership.

It comes as no surprise then that Transparency International’s Corruption Perceptions Index 2017 clearly remarks that “the key ingredient that the top performing African countries have in common is political leadership that is consistently committed to anti-corruption. While most countries already have anti-corruption laws and institutions in place, these leading countries go an extra step to ensure implementation. From President Paul Kagame’s strict enforcement of compliance with the leadership code in Rwanda, to President Jorge Fonseca’s open promotion of institutional transparency in Cabo Verde or President Ian Khama’s innovative approach of ‘mainstreaming anti-corruption’ across ministries in Botswana.”

If leaders build a workplace that is based on integrity and honesty, they will get higher performance from their employees, greater loyalty and retention, and lower levels of employee fraud and misbehaviour. On a national level, the citizen’s eyes turn to its elected political officials.

If citizens see corruption, they will be corrupt. If citizens see ethical behaviour, they will act ethically. The real costs of poor behaviour do not depend on bad leaders getting caught.

Have we moved beyond a point of no return?

I believe not. South Africa’s neighbours (Zimbabwe, Zambia and Malawi) have professionalised the discipline of procurement. This entails promulgated legislation for the profession of procurement in their respective countries, with Certified Procurement Practitioners subject to properly earned and issued certificates of practice, codes of ethics/conduct and consequences in instances of breach/non-compliance. It is a big step in the right direction.

Coupled with this though must the absolute protection of whistle-blowers. There are a number of South African institutions that offer this service, but a dedicated service for procurement professionals, akin to the Attorney’s/Legal, CA’s and Medical Practitioner’s Boards, to further the specific interests of the particular discipline of procurement, will ensure that the beacon of ethical conduct in Procurement shines bright and is resolute no matter the onslaught.

Now is the time to put action to words…