Savour International

Society today is concerned with an all-pervading loss of common values, not least in the field of business management. In future, companies must select and pay their managers in accordance with ethical criteria.

Anyone who thought that the end of the VW scandal and Siemens affair means that the public has now finished discussing the subject of ethics among business managers is greatly mistaken. Never before has so much attention been devoted to the concept of the moral manager than today. What is certain is that there are now many cases that point to a situation which is simply untenable. Corporate governance commissions and hackneyed invocations are clearly not sufficient for promoting ethical behaviour and reinstating it as the general standard.

Society today is concerned with an all-pervading loss of common values, not least in the field of business management.  This is due to the system of greed and excess exemplified primarily by investment bankers, and which is now pushing the world finance system off the rails. It is also due to the fact that our recruitment and incentives systems themselves promote unethical behaviour. Exorbitant bonuses do not lead to responsible actions with respect to customers but only serve to feed the greed of the management executives.

In the past few years, the manager remuneration system in particular has developed incentive systems that will produce the polar opposite of ethical behaviour if applied. Yet an effective payment system should reward sustained success rather than promoting short-term optimisations. It was with this goal in mind, for example, that share options were employed as a supposed long-term variable remuneration instrument. But they have failed.

Because given that there is a danger of an exercise price not being attained by the maturity date, with the result that the option lapses, high-risk projects suddenly appear more attractive. It is often the case that all the tricks in the book are played to see to it that the share price rises.

Fundamentally, an effective incentive system must have a structure that allows it to be variable and bound to actual business success. This means that the target bonus should be based on participation in the actual generation of value, such as profit. Moreover, it must be ensured that attained performance levels are sustainable before the respective bonus is paid out. This can be taken care of by a so-called bonus bank. Every year, a certain sum is credited to the bonus bank when goals are reached, but only a certain percentage is actually paid out and the rest carried over into the next year or the one after that. This results in the creation of a long-term incentive system, which, by assigning negative bonuses, also incorporates participation in any business risks.

Character should be something we can take for granted

Company proprietors and boards of directors also have other mechanisms at their disposal with which they can facilitate ethical behaviour. For instance, it is surprising that so many management contracts contain no provisions for ethical dealing among their myriad target achievement categories. Ethical behaviour is something that can be quantified and rewarded commensurately, provided the will is there.

Conversely, it should be possible to put effective sanctions in place, in the event of unethical behaviour. These sanctions can have a direct effect on the manager's income and career progress and can even include his dismissal.

However, the largest control mechanism that a company has lies in the selection of its management personnel. In addition to his qualification and business suitability, the description of the ideal candidate should place major emphasis on stable ethical values. The person should possess decency and character, factors which we should really be able to take for granted. Whether they indeed possess these features can be ascertained on the basis of a few indices. The following indices, for example, would go against the selection of a particular candidate:

• Multiple periods in which he or she is only present in the company for a short time
• Acceptance of extremely large payments
• Unfounded references
• Loss of driving licence, for instance, by attaining the maximum number of points in the transport register
• Entry ban into certain countries
• Tendency towards making public announcements and an excessive need for personal publicity
• Contradictory statements both internally and externally

These are just a few items from a long list of indicators which can be used to test the ethical stability of a potential candidate. Any business or human resources manager who fails to examine a candidate in this way risks damaging both the company's image with the general public and the business's own balance sheets. Clean management is a necessity of good business, pure and simple. Ethical behaviour is like environmental protection – it has become unavoidable. Anyone doing business in a way that does not take human values into consideration should be punished and ostracised; the person's capacity to be active in business should also be reduced.