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The responsibility for the “ethical environment" in state owned enterprises


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Lecture by Jim Wesberry on the Panel "Good Governance of Public Sector Enterprises: Issues of Ethics and Accountability" in the
Practitioners Summit of the 2015 CReCER Conference
“Preserving Economic Gains and Investing in the Future: Promoting Growth through Improved Financial Accountability"
May 7, 2015, Quito, Ecuador
(Short Version)

Published in: Government & Nonprofit
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The responsibility for the “ethical environment" in state owned enterprises

  1. 1. 1 The Responsibility for the “Ethical Environment in State Owned Enterprises Lecture by Jim Wesberry on the Panel "Good Governance of Public Sector Enterprises: Issues of Ethics and Accountability" in the Practitioners Summit of the 2015 CReCER Conference “Preserving Economic Gains and Investing in the Future: Promoting Growth through Improved Financial Accountability" May 7, 2015, Quito, Ecuador "It is necessary that men know evil to be ableto prevent it and dedicate themselves to doing good" Confucius, 500 B.C. Objective Many centuries ago in China a wise old man was asked, "Whatcan we do about the corruption a lack of obedience and ethics among our children?" He replied, "Well, you must start with their grandparents." My desire in this talk, as a grandfather of 13 grandchildren, is to leave you with what I think is most important in the searchfor ethics by state enterprises: The president or chief executive of the enterprise and all all itssenior executivesare the key persons in establishing andmaintaining the "tone at the top" that affects the integrity, ethics and other factors essential to a positive“ethical environment.” Exemplary conduct by all seniorexecutives is essentialto demonstrate a sound "tone at the top" and guarantee an "ethicalenvironment."
  2. 2. 2 The "ethicalenvironment" is even more important than legislation, enterprise policy, codes of ethics or any other instrument or practice employed in pursuit of ethical conduct. Confucian Ethics Confucius was the first and perhaps the greatestphilosopheron the importance of ethics in the public sectorand the importance of projecting an image of integrity and honestyby the highest officials. PeterDrucker, one of the 20th Century’s greatestauthorities on management and an admirer of Confucius observed: “…if there ever is a viable"ethics of organization," itwillalmostcertainlyhave to adoptthe key concepts which have madeConfucianethics both durable and effective.” "Ethics" is related to the study of the practices and standards of right and wrong, i.e. goodand evil. The term "ethics" is defined as the discipline dealing with what is goodand what is bad and with moral duties and obligations. Ethics has been called "the science ofthe ideal human nature". It is the combination of ideals, beliefs and standards that characterize or are inherent in a group, community, people or nation. "Ethical" conductis that which merits moral approval or, in its most common usage, it is considered that which is accordwith acceptedstandards of professionalconduct. In our hemisphere ethics is based upon Judeo-Christian traditions of morality and righteousness but there are also other ancient traditions such as those of Confucius that in many respects coincide with our more modern ones. Unlike many of the other philosophers one, Confucius, had a very special interest in ethics in the public sector. He often spoke of the "governor" or "ruler" posts that today we callthe "chiefexecutive or CEO." His teachings survived over more than two millennia. Greatinterest in his teachings is currently resurging in China, after having been nearly abandoned under the Mao regime. “Togovern is to correct. If you set an examplebe being correct, who would dareto remain incorrect?” - Confucius
  3. 3. 3 The most interesting thing about the teachings ofthe greatphilosopher is that his main criterion regarding public officials 25 centuries ago is still important and widely acceptedup to now. He believed in the powerof benevolence, arguing that rule by example rather than by fear would inspire people to follow an equally virtuous life. The same principle, in his opinion, should govern personal relationships. “If guided byvirtue and regulated bythe rules, the common peoplewill have a sense of shame and abidebywhatis required of them.” Confucius emphasized trust - trusting your boss, your employee, your neighbor, your friend in the hope that this confidence will be returned. He believed that refraining from offending and building a decentreputation would encourage goodteamwork, business success,and community spirit. Confucius was an eternaloptimist. He believed in people. He believed that if the ruler was a noble man, the people will not only follow him, but will imitate him. Confucius pointed to the "north" in the compass ofgovernance and many of his teachings are still very applicable to state and private enterprises, their officers and their employees. “ConfucianState Capitalism” The values of work, education, merit and frugality are common to Confucius and also to the capitalist system. Moreover, Confucius’conceptthat the conduct and example of honesty and integrity of the executive (governorin times of Confucius) and seniorofficials is the key to goodadministration coincides with what today we call "the tone at the top." The outstanding economic successesofChina and the four Asian tigers, Singapore, South Korea, Hong Kong and Taiwan, and similar efforts by countries that along with China are called the "BRICS"--Brazil, Russia, India and South Africa -- have given birth to the conceptcalled"State Capitalism” an economic systemin which the state conducts commercial economic activity with administration and organizationof the means of production in a capitalistmanner, including the system of a salaried
  4. 4. 4 workforce andcentralized management. It is characterizedby the dominance of state enterprises in the economy. Some attribute the economic successofChina and the four "Asian tigers" to Confucian virtues and the important socialrelationships and interpersonal trust operating in the world of business, aspects sometimescalled"Confucian Capitalism." Certainly Confucian values such as hard work, family values and community cohesionas wellas business practices basedon trust can explain their wealthand Asian commercialsuccess with possibilities of more efficient, more profitable and less competitive than the methods of classical capitalism. Confucius’ philosophy was basedupon free will, not state control. He believed that societiesand nations would be more stable if there was a bidirectional flow of duties: the duty of the people to work for the development of the state balancedwith the government's duty to care for people and to provide for their welfare. We canconceptualize these two approaches as "ConfucianState Capitalism" combining the efficiency aspects ofcapitalismwith the ethicalcharacteristics of Confucianism thus providing a step forward in the searchfor ethics in state enterprises. Experimentation and development of this form of "capitalism" could be the answerto the urgent need to ensure ethics, honesty and integrity in state enterprises. The Ethical Environment The "ethical environment" is even more important than legislation, codes of ethics or any other instrument or practice employed in the pursuit of ethical conduct. It is a very special problem in the public sectorand among its enterprises, often characterizedby many speeches, debates and legal provisions calling for ethicalbehavior, but simultaneously demonstrating a poor ethical environment as a result of arrogant, selfishand often blatant public and private acts by political leaders who having receivedfrom the populace the privilege of high public office, somehow feellike the legendary "king" of the popular Latin American song with the claimed right: "I do what
  5. 5. 5 I want ... my word is the law ... and I keepon being the king. " It's a happy song but it is sad that politicians observe its words… a very common sad practice throughout the world, evenwhere the song is neither known, nor sung. There are two main maladies involving ethics that characterize state enterprises: • The executive or leaderwho does not realize, or care, about the fact that eachof his actions contributes to the strengthening or weakening of the ethicalenvironment of the enterprise itself. • The politicization of the enterprise subjugating its efficiency and ethics to the wishes of a party or political group. The ethicalenvironment in a public enterprise consists ofthose efforts and activities aimed at promoting and maintaining ethical, honest and responsible behavior, notably including both official and private actions of senior executives and ethical image that they reflectwith respectto both their support of ethical conduct and their ownexample. The ethicalenvironment is part of the broader "controlenvironment". It is one of the components of internal control describedin the "COSO" report, a document sponsoredby five prominent professionalorganizations that now have globalacceptance. The Politicizationof the State Enterprise A state enterprise must be an apolitical enterprise, a very difficult goalto achieve in governments surrounded and sometimes consumedby an ambition and desire to advance the powerof the for the moment dominant or ruling party. The main two typical problems that result are: • Overloading the company with partisan employees loyal to the party, but unnecessary, unqualified and useless. • Contracting and/or purchasing services and products at higher than market prices conditioned upon "donations" to finance the party. Obviously these very common practices destroyany possibility of maintaining an ethical environment in the enterprise. If management is not sufficiently
  6. 6. 6 strong to be able to deny the influence of the party in power, it has no chance of maintaining an ethicalenvironment. The "Tone at the Top" It is very clearthat is not the only obligation of senior executives to carry out their managerialduties effectively and efficiently, but they must also assure ethical conduct and their own behavior should exemplify before the rest members of the organization a personal model of honesty and ethical principle. Nowadays this conceptis known as "The Tone at the Top," the support provided by seniorexecutives as regards ethicalvalues, both through official channels and acts, as wellas their own official and private conduct. The board of directors also has responsibility for the ethicalenvironment and the controlof the company. Exemplary behavior While maintaining a supportive attitude regarding internal controls and is one of the most important functions of the executive, perhaps most important is a goodexample. The sayings of "do what you preach" and "actions speak louder than words" are particularly relevant in the case ofthe credibility of executives. Tragically, very often the same executives who support ethical practices and preaching the values of ethicalconduct not follow their own advice in their personalacts, and thus undermine their own credibility and that of the companies they represent, and question all officialstatements directed his subordinates. An exemplary by seniorexecutives conduct is essentialto maintaining ethical environment. The tragedy of the world's governments is evident every day in published in newspapers orbroadcaston televisionnews, and that officials have been appointed to fill the highest public office are not setting a good example by their actions;they are actually giving a very bad example and therefore are destroying the credibility of the company. More than 3,000 years ago King David of Israeland Judah left us in Psalm 15 a recipe for ethics:
  7. 7. 7 Walk with integrity Do what is right Speak the truth from your heart Keep your tongue from slander Do not cause harm to others Do not speak ill of your fellow Keep your word ... even if it costs Do good without expecting reward Do not accept bribes Despise vile men Honor those who serve God In closing remember the most important thing: The chief executivehead of the organization and itssenior executives are the key persons in establishing andmaintaining the "tone at the top" that affects integrity, ethics and other factors indispensableto assure a positive "ethical environment". The greatpoet Alexander Pope describedour human dilemma about the vice and corruption, so common in our world, when he said: "Seen so often, familiar with her face. We first endure, then pity, then embrace. " But the same Alexander Pope also said:
  8. 8. 8 "An honest man is the noblest work of God A longer version of this paper is at: James P. (Jim) Wesberry, Jr. CPA, CFE, CIA, CFSA, CGFM, is an auditor, consultant, researcherof corruption, lecturer and author. He is editorof seven electronicjournals "Corruption" and"ForensicAudit." It also maintains several web portals on the Internet. Was CertifiedPublicAccountant for 57 years. He was honored with the designation Contador Father of the Americas, the highest of the profession of public accounting of our hemisphere, honorreceivedthe highest honor of the Institute of Internal Auditors calledthe "Bradford Cadmus Award" and received the award for "Outstanding Achievement overhis career"awarded by USAID. He has been honored three times fortheirservices. He was an advisor to three General Comptrollers of Peru, Ecuador and three from the US Comptrollers and Bolivia. Wesberry has played execs positions at the World Bank, USAID, the ComptrollerGeneral of the US, PricewaterhouseCoopers andthe Institute of PublicAdministration of New York and was Director of Audit of the Organization of American States. Start exercising theirprofession in Atlanta, Georgia where he had his own firm and was electedthree times to the Senateof the State. Overthe past 15 years been project managerAnti-Corruption USAID for the Region of the Americas, and the countries of Mexico, Ecuador and the Philippines. Presently living in Cumbaya, Ecuador with his wife Lea, peruvian Quivilla, Province of Huanuco. He has seven children, thirteen grandchildren and one great-granddaughter. More information and