According to Merriam-Webster, a system is a regularly interacting or interdependent group of items forming a unified whole. But sometimes, we get results we didn’t expect. Is the system broken?
Systems are built over time, layer by layer. Sometimes carefully, sometimes ad hoc. As a system becomes more complex it becomes more vulnerable. And the biggest weakness in any system is the people.
That is simply because people are unpredictable. This is brilliantly explored by Dan Ariely in his book “Predictably Irrational”.
Turn On the Darn Light
Think of a simple system – one designed so that there will be light in an otherwise dark room. You would likely install a switch connected to a light source. The light will be on or off depending on the position of the switch. If the system fails it could be the wiring, the switch or the light. But the switch will not suddenly start singing Bohemian Rhapsody. It works, or it doesn’t. It’s predictable. It can be fixed.
But there is one other element in that simple system. A person observed that the room was dark but, for some reason, did not flip the switch. The signal was not interpreted as expected.
Unethical Business Practices
When we look at ethical issues within a business, we often focus on the signals designed to prevent or limit certain behaviours. Companies have well written policies and procedures. They develop checklists, ensure supervisors and managers receive training and adequate professional development. They carefully create and monitor a code of conduct and try to develop a culture that supports inclusiveness, fairness and honesty. Companies have clearly stated consequences for failure to comply. So, what goes wrong?
When unethical business practices are brought to light the public responds. Share prices may be impacted. Individuals may boycott or show their disapproval in other ways. The CEO may resign or be fired. The company reviews and rewrites their policies. Various regulatory bodies may impose more restrictions, rules or reporting requirements.
These are appropriate responses but do little to prevent future occurrences. We can push back against a system, but systems are resilient and will persist.
When I talk about ethics, my interest is not in better codes, larger fines and penalties or public humiliation. I want to explore the role of individuals within the system.
I start with the assumption that the employees and executives are good people. They likely think of themselves as honest, trustworthy and ethical.
It is too simple to say that the people involved in what we perceive as unethical behavior are in themselves “bad” in some way. It’s too easy to assume they are greedy or lazy to think they are different, not like us.
We know that people world-wide are frustrated and angry. People see weaknesses, flaws, inadequacy and hypocrisy within their own organizations and institutions. When they act out, observers often refer to them as disgruntled employees or agitators but fail to analyze the anger.
We do know there are several reasons why employees do not speak up, complain or report flaws in their system.
- Not my job: When an employee, at any level in the organization, senses that there is a problem, they assume someone else will notice and fix it.
- Just how it is: They tell themselves just “go along to get along.” They keep their head down to avoid aggravation.
- Peer response: Rumours circulate about people who were fired or otherwise punished for speaking up.
- Shame: The employee may lack the communication skills to adequately explain the issue. They may believe or be told they don’t understand the complexity of the system.
- Fear: There is a real danger that they will be perceived as a troublemaker; a noisy component in the system that needs to be fixed or replaced.
The System is Operating Exactly as it Was Designed
As a case in point, International Rights Advocates, Inc. filed a class action lawsuit against Dell, Apple, Microsoft, and Tesla, seeking damages for the families of Congolese children who suffered harm or death while working in cobalt mines.
In March 2024, the US Court of Appeals dismissed the case.
Let’s consider the systems.
The primary objective of a for profit business is to benefit the shareholders and that is still usually perceived as wealth maximization. The above-mentioned companies buy cobalt at as low a price as possible to produce the products that their consumers want. They do not feel they should be held responsible for the behavior of their suppliers since they do not have direct control.
The legal system is the framework of rules, procedures, and institutions that are used to interpret and enforce the law. In this case, the courts looked at the letter of the law, precedents and interpretations and used reasoned judgment to determine there was no actionable case.
If you are an employee or an investor in one of these companies, you likely feel relief. If the courts dismissed the case, the allegations must be groundless, and so there is no guilt to be shared.
If you care about human rights, and I expect you do, you feel frustrated and angry. You might conclude that large companies have leverage that enables them to avoid the consequences. You feel powerless.
But the system isn’t broken. It just produces results we don’t like.
How The System Evolved
Systems are long-lasting and resilient. An extremely abbreviated history of the capital market system shows the original intent was to ensure an orderly allocation of resources to the companies that would make the best use of those resources. Since the resources were usually controlled by a relatively small group of wealthy folks, it likely operated in the way it was intended. Boards of directors were in place, usually with majority shareholders as key players. Their role was to ensure the company fulfilled its mandate – wealth maximization. However, since the investors were adequately represented, they had control and the opportunity to impose ethical or other considerations as they saw fit.
Two major components were introduced into this system. Open-ended mutual funds allowed people with small amounts of capital to participate in the stock market. Professionally managed, diversified investment products allowed unsophisticated investors to enter the market with lower risk. In 1978, the USA introduced 401(K) to encourage individuals to save for retirement. Since the 1980s and 1990s, markets have been very strong, and owning mutual funds seemed to be a magical elixir for preserving and improving personal wealth.
With the influx of resources, businesses grew at an unprecedented rate. Technology rapidly advanced during this time. In 2024, 9 of the top 10 largest companies in the world are tech based.
Investors monitor corporate entities through a system of heavily regulated financial reporting. All the Fortune 500 companies are audited by one of the Big Four accounting firms. While the ability to adequately audit the financial statements of these mega-corporations has been called into question, no one has an alternative.
Who then, should be responsible for ensuring that corporations balance wealth with other important considerations? Because when responsibility is diffused individual responsibility decreases. We all feel the way Microsoft and the other big tech firms feel. We should not be held responsible for something we do not directly control.
Change the System
Management develops signals to align employee’s personal goals with those of the organization. Traditional thinking is that individuals will not work for the good of the company without incentives and punishments. Metrics and reward systems provide the levers of control. This is part of the system.
My focus is on that one unpredictable component in the system – people. We know that when we use levers of control, we get results we didn’t expect. I suggest we start with the assumption that individuals want to behave ethically and are willing to accept responsibility for the roles they play within the system.
Increasingly, young workers seek employers whose goals align with theirs. If the signals they receive are weak, conflicting or unclear they will be frustrated. We all need to be able to examine and evaluate our own performance using personal standards. This involves critical thinking, an understanding of ethics and a framework. It starts with us, as employees, as citizens, as investors.
- We cannot expect a top-down solution.
- We cannot wait for a savior.
- We cannot expect a politician to guide us.
Behaving ethically is not easy because it is not simply good versus bad or right versus wrong.
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A system begins to fail when important components malfunction. People, uniquely in a system, can evaluate their own functionality. If we hope for a better world, we can bring change to the system. We can gain control, feel less frustrated and be more hopeful. We are the system, and we can self correct.
Ethics is not a four-letter word. It is about integrity, mindfulness, and courage. In the end, it is all about knowing we do the best we can.
By Michelle Causton, FCPA, FCGA, MBA
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