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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4

439

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JOURNAL OF GOVERNANCE AND REGULATION VOLUME 4, ISSUE 4, 2015, CONTINUED - 4

CONTENTS

THE REGULATORY PRACTICE OF THE FRENCH FINANCIAL REGULATOR, 2006-2011. FROM SUBSTANTIVE TO PROCEDURAL FINANCIAL REGULATION? 441

Thierry Kirat, Frédéric Marty

POINT-OF-PURCHASE DISPLAYS IN THE FMCG SECTOR: A RETAILER PERSPECTIVE 451

Jeevarathnam P Govender

CORPORATE GOVERNANCE, OWNERSHIP, COMPANY STRUCTURE AND ENVIRONMENTAL DISCLOSURE: EVIDENCE FROM SAUDI ARABIA 460

Murya Habbash

CREATING A STORE ENVIRONMENT THAT ENCOURAGES BUYING: A STUDY ON SIGHT ATMOSPHERICS 471

Y Hefer, E C Nell

BUSINESS ETHICS EDUCATION 476

Isaias Rivera

THE TALMUDIC PHILOSOPHICAL CONCEPTION OF BUSINESS ETHICS 486

Alexander Maune

THE USE OF INTERNATIONAL STANDARDS IN ETHICS EDUCATION IN THE TUNISIAN AUDIT CONTEXT 499

Arfaoui Feten, Damak-Ayadi Salma

EMPLOYEES PERCEPTION ON IMPROVING SERVICE DELIVERY IN THE DEPARTMENT OF PUBLIC WORKS 507

Gugu Precious Mathaba, Ian Nzimakwe, Mashau Pfano, Elias Munapo

WHY HAVEN’T PULP FUTURES CONTRACTS SUCCEEDED? A CASE STUDY 515

Hilary Till

THE GENUINE INDIVIDUAL WITHIN THE ICT ENVIRONMENT 524

Amos Avny

AN ANALYSIS OF SYSTEMIC THINKING IN DECISION-MAKING PROCESSES IN THE MUNICIPALITIES WITHIN THE PROVINCE OF KWAZULU-NATAL 531

Mbuyiseni Goodlife Ntuli, Lawrence Mpela Lekhanya LONE RANGER DECISION MAKING VERSUS CONSENSUS DECISION MAKING: DESCRIPTIVE ANALYSIS 548

Maite Sara Mashego A STUDY ON THE EFFECTIVENESS OF THE ORIENTATION PROCESS AND CROSS-CULTURAL TRAINING FOR THE EXPATRIATE 553

Maxwell Agabu Phiri, Nevoshnee Pillay


441

THE REGULATORY PRACTICE OF THE FRENCH FINANCIAL REGULATOR, 2006-2011. FROM SUBSTANTIVE

TO PROCEDURAL FINANCIAL REGULATION?

Thierry Kirat*, Frédéric Marty**

Abstract

Fraud and misconduct in financial markets have recently become a key regulatory issue against the backdrop of the financial crisis. This paper investigates the sanctions policy and practices of the French financial regulator, Autorité des Marchés Financiers (AMF). It argues that, over time, the AMF has shifted from substantive to procedural regulation of finance. This shift consists in departing from sanctions based on observed outcomes in the market and, instead, assessing how the internal organizational schemes of financial firms actually perform. The AMF's new policy and practice involves a process of legalization of organizations; it also evidences a tendency to delegate regulation to financial firms themselves. JEL code: G18, G28, K22 Keywords: Financial Market, Substantive Regulation, Procedural Deterrence, Legalization of Organization * CNRS-UMR 7170, IRISSO-Université Paris-Dauphine-PSL, France ** CNRS-UMR 7321, GREDEG-Université Nice Sophia, France

Fraud and misconduct in financial markets have

recently become a key regulatory issue against the

backdrop of the financial crisis, as evidenced by

recent issues of major journals (e.g. Accounting,

Organizations and Society, 38, 2013). The purpose

and scope of financial market regulation are often

discussed in terms of the gap between, on the one

hand, national legislation and regulation and, on the

other hand, interconnected and globalized markets.

The development of high-frequency trading raises

another major regulatory issue: several authors

consider the internal “discreete regulation” of the

financial industry as the real regulatory process for

finance, which narrows the scope of public regulation

(Huault & Richard, 2012). All countries with highly

developed financial industries implement a policy of

punishing market participants that do not comply

with prevailing laws and regulation (Demerens & al.,

2014). The penalty policies enforced by financial

supervisors form the core of this paper.

Sanctions usually have several objectives: to

deter fraud, compensate for harm, and punish white-

collar crime. A large part of the economic and

financial literature on sanctions focuses more on their

purpose than on what they consist of and who is

sanctioned. This is one of the issues we raise in this

paper.

Our argument is that financial regulation can be

split into two types, which we call “substantive” and

“procedural”. What we mean by substantive

regulation is that the scope is limited to outcomes,

which are punished in and of themselves. With

procedural regulation, however, the outcome is

considered as the result of an internal decision-

making process, which must be addressed as such.

We therefore give a specific meaning to the concepts

of procedure and proceduralization, as regards the

legal-political post-modernist analysis of law (see

Frydman, 1998, for a survey). We depart from

Teubner's or Ladeur’s analyses of procedural

regulation and proceduralization in terms of relations

between legal and non-legal systems and reflexive-

responsive regulation (Teubner, 1993; Ladeur, 2001),

including participation of civil society in public

decision-making (Black, 2000).

We take ‘procedure’ to mean organizational

features beyond the outcome of market behaviors.

This concept is inspired by Montagne’s analysis. In

this respect, we expand on her analysis of legal

control of fund managers in the U.S. (Montagne,

2006, 2013). According to the author, managers' legal

duties towards employees benefiting from a pension

plan, as well as towards the firms contributing to it,

are assessed according to the standard of investors’

prudence. The managers have a best-endeavors

obligation, i.e. to set up a technological and

organizational scheme that meets the standards of a

modern financial industry. In other words, the

responsibility of fund managers if their funds collapse

is assessed on their organizational and technological


442

skills rather than on the observed outcome of their

behavior. This is what Montagne analyzes as the

procedural assessment of a prudent investor, for

instance in terms of duty of care1 (Montagne, 2013).

Following Montagne’s perspective, we stress the

procedural issue: aside from the observed outcomes

on the market, we argue that internal and/or

organizational features tend to become a key issue in

financial supervisors' enforcement policies.

The article is based on empirical research into

pecuniary and non-pecuniary sanctions imposed by

the Autorité des Marchés Financiers (AMF), the

regulator that has enforced financial regulation in

France since 2003. The analysis covers the period

2006-2011, which includes the 2007-2008 financial

crisis. Examining the database containing all the

AMF's sanction decisions yields one major finding:

over time, the AMF Enforcement Committee has

focused increasingly on the internal organizational

structures of financial firms rather than on their

compliance with substantive financial regulation.

This evolutionary process can be summed up by

saying that the AMF had moved from substantial to

procedural control of the finance industry. As a newly

created authority, the AMF started out with a mainly

legalistic framework for compliance, focusing on

observed outcomes of financial behaviors and on

market practices. The outcomes were then assessed as

compliant or non-compliant with substantive

regulation, i.e. concerning the substance of legal

categories of fraud (insider trading, disclosure or use

of false information, etc.). As the AMF became a

more stable organization with established routines, it

reined back its commitment to substantive control

and focused increasingly on issues of intra-

organizational control of financial firms (brokers,

portfolio managers, investment funds, etc.). This

backshift, from outcomes to firms' internal

organization, reveals a gradual but major

transformation of the AMF's precedents for regulating

financial markets. It should be noted that such a

tendency is not specific to the AMF. Several case

studies, for instance in the U.K., put the emphasis on

the unsuitability of a legal response based on criminal

law for dealing with financial fraud or misconduct in

the current context. Since financial markets regulators

seem uncertain of being able to prosecute such

behaviors successfully, they tend to focus on

persuasive and self-regulatory approaches alternatives

to sanction and deterrence (Lokanan, 2015). The

deterrence model is increasingly giving way to one

based on procedural regulation.

1 OECD states that the prudent investor has a “duty of care”: “The duty to act prudently imposes a standard of behaviour on trustees and other fiduciaries under which they must exercise such care and skill as persons of ordinary prudence would exercise in dealing with their own property. “ (OECD, 2002).

Section 1 gives a brief overview of the AMF.

Section 2 presents key empirical results. Section 3

expands on the analytical and theoretical issues raised

by our argument in terms of procedural regulation.

1. Institutions and Regulatory Framework

1.1. Formation of the AMF

From a legal viewpoint, the AMF is an independent

administrative agency vested with the power to

sanction non-compliance with financial regulation, as

laid down in France's Financial and Monetary Code.

It is also vested with the power to sanction non-

compliance with the law. The AMF's policy is laid

down in various documents posted on its website,

including the General Regulation and other policy

documents.

The AMF was established by the Financial

Security Act passed in August 20032. The formation

of the AMF rationalized and unified an institutional

blueprint that had previously been dispersed among

three among three institutions – Conseil des marchés

financiers, Commission des opérations de bourse, and

Conseil de discipline de la gestion financière –

responsible for punishing financial misconduct and

fraud.

The AMF can decide two types of sanction,

disciplinary and pecuniary, which can be decided by

a body called the Enforcement Committee. Pecuniary

sanctions are intended to be dissuasive, while

disciplinary sanctions punish non-compliant or

fraudulent behavior by finance professionals, and ban

individuals from the market on a temporary or

permanent basis.

The maximum amount of pecuniary sanctions

has been revised several times since the AMF was

formed in 2003. Initially, the law set a ceiling of 1.5

million euros. The Economic Modernization Act

passed in August 2008 increased the maximum

possible pecuniary sanction to 10 million euros (or

ten times the profit earned from the unlawful

practice)3. In 2010, a new law, the Banking and

Financial Regulation Act (loi n° 2010-1249 du 22

octobre 2010 de régulation bancaire et financière),

passed in the context of the subprime crisis, raised the

ceiling to 100 million euros (or ten times profits

earned from non-legal practice4).

It should be noted that these figures concern a

segment of the profession only, namely investment

2 Loi n° 2003-706 de sécurité financière. 3 Loi n°2008-776 de modernisation de l’économie. 4 Note that the legal provisions make sense in a deterrence framework. According to Gary Becker (1968), the optimal fine should be defined as the additional gain earned from rule-breaking, divided by the probability of being sanctioned. In other words, if the probability of being fined by the courts is 10%, the optimal sanction in terms of deterrence will be ten times the improper financial gain.


443

services providers, regulated professionals, and

natural or legal persons convicted of market abuse.

French law separates market abuse from failure to

comply with professional duties, which is considered

less serious. For natural persons acting on behalf an

investment services provider or for regulated

corporate entities, the maximum penalty is 15 million

euros (compared with 1.5 million euros before 2010).

1.2 Legal Policy on Financial Markets

“The AMF regulates participants and products on

French financial markets, including: financial markets

and market infrastructures, listed companies,

financial intermediaries authorized to provide

investment services and financial investment advice

(credit institutions authorized to provide investment

services, investment firms, investment management

companies, financial investment advisers, direct

marketers), [and] collective investment products

invested in financial instruments.” (AMF website, as

at June 23, 2014).

Alongside the Financial and Monetary Code, the

AMF has issued several influential communications

and guides, the most important being the General

Regulation, which is binding. Together with a series

of instructions, positions, and recommendations

posted on its website, the AMF rulings are part of a

more comprehensive gap-filing process, insofar as the

way it interprets the general and abstract rules of the

Code is made known to the financial industry: “When

read in conjunction with past decisions handed down

by the Enforcement Committee and the grounds for

certain individual decisions, the AMF’s published

policy allows market participants to understand how

the AMF applies – under the supervision of the courts

– the laws and regulations governing matters within

its jurisdiction.” (AMF website, as at July 28, 2014).

Since the AMF is an administrative agency, its

remit is to police the market. From a legal and

administrative viewpoint, its main tool is sanctions.

Owing to its institutional status, the AMF is a

disciplinary administrative agency. However, senior

AMF executives claim that the agency's remit is to

deter infringements of laws and regulations. Several

key official reports (e.g. Nocquet, 2013) and

newspaper interviews confirm the prevalence of this

policy of deterrence5.

5 Note that the prevalence of the deterrence approach in the fining policy often emerges gradually through decisional practice and is ultimately confirmed through soft law. This has been the case with European competition law. The deterrence objective was enshrined by the Court of Justice in its ruling “Musique Diffusion Française” (June 7th, 1983), which upheld a Commission decision imposing a significant fine for a breach of competition law. Subsequently, the Commission's 1996 guidelines defining its methods for setting pecuniary fines confirmed the overriding importance of this objective.

It is worth emphasizing how much the AMF's

soft law influences its decisional practices and leeway

in terms of regulating the financial industry. The

effective legal framework is the product of soft law

stemming from guidelines, communications, and

statements of the regulator's own decisional practice.

If these elements are grounded in statute law, they

offer significant margins of discretion for an

independent administrative authority, offering

additional legal resources that can enhance

deterrence. The legal resources stemming from soft

law can enhance deterrence (by determining how the

fines are set) or can provide stakeholders with

additional information and legal certainty for

alternative ways to close cases. As a consequence the

regulatory powers of the AMF exceed the sole

capacity to deter non-compliant behaviors through

fines. Soft law is part of a less vertical model of

regulations, which puts greater emphasis on the

procedural dimension and less on sanctioning

outcomes (see for instance Brunner, 2015). Thus the

AMF can depart from its deterrence policy and opt

for a more remedy-based approach. Negotiated

procedures, such as composition administrative

(settlement), make sense from this perspective

because the stress is on compliance policy. It may

also be noticed that the capacity to incentivize

financial market participants to adopt this regulation

mindset depends heavily on whether the threat of

fines is effective. In other words, a deterrence policy

is a necessary first step towards implementing such a

procedure-based regulation model.

However the role of soft law and the increasing

proportion of cases closed through settlement raise

the issues of the discretionary power of the AMF as

an independent administrative body and of its judicial

control (Conseil d’Etat, 2014).

Last but not least, the AMF's regulatory practice

is more complex than its institutionally-defined

missions, involving a mix of punishment, dissuasion,

compensation, and cooperation with the financial

industry to repair some of the latter's major

organizational failures. This aspect will be addressed

later on. Notice that the deterrence policy is not at all

empirically testable. Compensation of victims (savers

and investors) is rarely explicit in the decisions issued

by the Enforcement Committee. The disgorgement of

illegal profits is explicitly analyzed in some rare

cases.

2. Empirical Analysis

We now turn to an empirical analysis of AMF

sanction decisions. We collected all the decisions

issued in 2006, 2008 and 2011 from the AMF's

website on the grounds that since the AMF was set up

in mid-2003, we considered that 2006 corresponds to

more than two full years of sanction practices

constituting an organizational learning process. In

terms of numbers of decisions, 2008 marked a peak,


444

while 2011's decisions concerned the infractions that

occurred during the financial crisis starting in 2007 in

the wake of the subprime collapse. Since a sanction

procedure lasts between two and three years, the

decisions issued in 2011 relate to events that occurred

in 2008-2009.

Table 1. Pecuniary sanctions (in current euros)

2006 2008 2011

Mean 518,746 610,334 376,351

Median 50,000 150,000 175,000

Min (individuals) 5,000 5,000 10,000

Max (individuals) 1,770,480 5,000,000 300,000

Min (firms) 5,000 10,000 10,000

Max (firms) 7,117,668 1,000,000 4,470,000

2.1 Data

The decisions we collected have been coded. The

extracted data concern: the identity and type of

incriminated individual(s) and organization(s), the

date an investigation was opened, the number and

type of claims made against the correspondents and

finally enforced the type of sanction, and the size of

the fine. Since the claims are defined by law, we were

able to obtain a precise view of the infractions

committed by each natural and legal person involved

in a proceeding.

2.2 Results

2.2.1 Overview

The first issue we raise here is whom does the AMF

sanction? Sanctions can be taken against both

individuals and legal entities. Both kinds of person

can be sanctioned in a same decision. Figure 1 shows

the distribution of sanctions, with a peak for

individuals in 2008, regardless of whether these

penalties were issued in a specific decision, or in

conjunction with those issued to corporate entities.

By contrast, the number of individuals falls sharply in

2011, seemingly evidencing a tendency by the AMF

to de-personalize its penalties. The same trend can be

also observed in the U.S.A. This is especially

important because these cases are commonly closed

through settlement procedures in which firms first

negotiate immunities for their staff (McDonald,

2012). This kind of procedure effectively corrects

market practices but may be questioned in terms of

incentives, since the fine negotiated by a firm can be

seen as its cost of doing business (“Not only does the

corporation get to avoid reputational harm and any

collateral risks that such harm may impose, but the

individuals involved— charged or uncharged—are

able to walk away virtually untarnished”, McDonald,

p.433.)!

Figure 1. Types of persons sanctioned

Going into more a more detailed analysis, it is

worth distinguishing between legal persons and

individuals. Figure 2 exhibits the types of legal

persons sanctioned. We see a clear trend towards

sanctioning the financial industry (investment service

providers and investment funds), while the number of

0

5

10

15

20

25

30

35

2006 2008 2011

Individuals Corporate Individuals + corporate


445

sanctions on listed companies breaching regulations

of mergers and acquisitions and insider trading

decreases.

Figure 2. Categories of legal persons sanctioned

Concerning private individuals, we note a

diversification of the status and functions of those

sanctioned (Figure 3). Before 2008, no executives,

lawyers, or private investors were involved in a

sanctioning proceeding. CEOs and high-level

managers are, in relative terms, sanctioned to a lesser

extent in 2011 than in previous years.

Figure 3. Types of individual sanctioned

The most common sanction is a pecuniary

penalty (Figure 4). A combination of fines and

disciplinary sanctions was scarce for all three years

under review. From 2011 onward the proportion of

Enforcement Committee decisions including at least

one clearance of liability and, subsequently, no

sanction is smaller than previously. This may be

interpreted as an indicator of the stricter policy on

misconduct that the Committee adopted in the wake

of the 2007-2008 subprime crisis.

0

2

4

6

8

10

12

14

16

18

20

Share

issuers

Invest.

Funds

Inv.

Services

providers

Assets

managers

Financial

analysts

Tied agents External

valuers

Other

2006 2008 2011

0

5

10

15

20

25

2006 2008 2011


446

Figure 4. Types of sanctions

We now turn to the kinds of misconduct that the

AMF sanctions.

2.2.2 A Process of Judiciarization of Internal

Organization

Below we describe practices characterized as market

offenses or offenses related to deficiencies in firms'

internal organization:

- Market offenses relating to fraud and

misconduct which directly affect the

information disclosed to the market. These

consist of insider trading, disclosure or use of

privileged information, manipulation of

information, stock-price manipulation, and

breach of the duty to inform customers.

- Internal organizational deficiencies arising

within financial firms, and consisting of a series

of internal shortcomings, such as: mis-

management of conflicts of interest (absence of

“Chinese walls”), lack of internal and

compliance control (lack of appropriate human

or technological capabilities, non-referral to an

ethics or compliance officer, etc.), insufficient

risk management and lack of compliance with

prudential rules, non-respect of investment

rules, deficiencies in compliance management

standards (investment, diversification, hedging,

etc.), breach of rules governing the trading

(delivery, entry in functional accounts, data

recording and retention…).

Figure 5. Deficiencies in internal organization and control (% of total sanctions per year)

While sanctions for professional misconduct in

terms of internal organization and control account for

15.4% of decisions in 2006, this rises to 21% in 2008

and almost doubles to 40% in 2011.

We thus observe a shift from sanctions

punishing dissemination of misleading financial

information (on the financial position of companies

issuing securities, primarily on the secondary market)

to penalties for shortcomings in practical risk control

and compliance monitoring by the financial industry

and firms' internal organization. In the U.S., the

enforcement actions taken by the Securities and

Exchange Commission (SEC) against broker-dealers

in 2005, 2006 and the first four months of 2007 focus

to a significant extent on violations related to

organizational failures. More precisely, as shown by

Gadinis (2012), violations such as failure to maintain

appropriate books and records, and to supervise

0

5

10

15

20

Financial Disciplinary Financial and

disciplinary

Number décisionswith

at least one person

cleared2006 2008 2011

0

5

10

15

20

25

30

35

40

45

2006 2008 2011

Decision with at least

one person cleared


447

employees, along with internal control failures, and

late trading, are mainly dealt with in administrative

proceedings rather than court action. According to

Gadinis’s data, these types of violations account for

34.9% of the cases handled through administrative

proceedings, and only 0.4% of those that go through

the courts (Gadinis, 2012:94-96). Gadinis argues that

“…the SEC assigned fraud-based violations

predominantly to courts, while violations relating to

supervisory failures were more likely to result in

administrative proceedings” (Gadinis 2012:94).

As a matter of fact, a series of decisions taken in

the recent years sanction internal control failures (De

Vauplane, 2012):

- A fund manager was sanctioned for outsourcing

internal control but failing to ensure its

effectiveness. However, the external accounting

firm to which control had been outsourced "did

not provide a sufficiently comprehensive and

regular management activity control" while for

the Enforcement committee "any fund manager

must always have the resources, organization

and procedures of control and monitoring in line

with its activities." (AMF – Enforcement

Committee, decision October 23, 2008)

- A fund manager was sanctioned for having

insufficient resources to value portfolios, since

any fund manager is required to have adequate

and sufficient means to fulfill the obligation to

conduct its own asset valuation both at the time

of acquisition and throughout the life of the

financial asset, especially in the case of complex

products such as Euro Medium-Term Notes

(AMF – Enforcement Committee, decision

April 7, 2011).

- Two fund managers were punished for control

and monitoring failures related to the fraud

orchestrated by Bernard Madoff until 2008.

“The Committee found that both companies had

failed in their duties of care and professionalism

in controlling risky investments for third

parties.” (AMF – Enforcement Committee, two

decisions, October 21, 2011).

- Société Générale Asset Management (SGAM)

was sanctioned for the way it managed its

enhanced cash funds at the beginning of the

financial crisis in 2007-2008. These funds

invested in subprime-related assets without

informing customers. Société Générale had

bought back shares and units from customers

wishing to exit the funds, but this was done

under organizational conditions sanctioned by

the AMF: SGAM involved its risk control and

compliance team in the cash management

process. Staff from the risk control and

compliance office were closely involved at

several key moments in the process of

determining the sale price of the assets. Thus, no

one was able to control the process, and assets

were mis-valued. (AMF Enforcement

Committee, two decisions, October 7, 2011).

It is worth underlining that the AMF mitigates

its sanctions if the incriminated entity changes its

internal organization while an Enforcement

Committee proceeding is underway. Thus in 2011

several of the Committee's decisions clarified a new

AMF policy, which consists in reducing a penalty

when the entity in question, whether an investment

services provider or a fund manager, has made

tangible changes to its internal organization or its

stock-pricing and valuation technology. (B*Capital, 5

May 2011; Société X, 7 April 2011; EMI France, 21

October 2011; OFI Asset Management, 30 June,

2011). These examples illustrate the trade-off within

the sanction policy between fines and behavioral

penalties. Even if the latter can replace the former in

a procedural regulation framework, they remain

essential in terms of compliance incentives.

3. Law and Financial Markets

Enforcement of financial regulation deserves to be

considered as part of the broader issue of

interconnection between law and finance. Broadly

speaking, the changing pattern of sanctions analyzed

so far provides evidence of a dynamic relationship

between the public institution responsible for

enforcement and the market. The AMF's sanctioning

practice is grounded only marginally in laws and

regulation; it relies mostly its own rules and

precedents6. Having a certain degree of discretion, the

AMF Enforcement Committee has been able to

implement a learning process about what is

considered the best way to regulate securities markets

and their participants through sanctions proceedings.

In other words, the changes in the AMF's

enforcement precedents and practice over time are the

sign of a reflexive relationship between the regulator

and the market participants it oversees (Black, 2013).

In addition, the process of legalization of

financial entities' internal organization stresses the

fuzziness of the boundaries between law and markets.

Like antitrust and competition law, legal regulation is

built on the principle of punishing non-compliant

behaviors on the market. Our argument of a beyond-

market-behavior regulation converges with the idea

that a new policy of risk prevention seems to be

expanding. The proceduralization of regulation may

be considered as a process for building a risk

prevention system. In this regard, Michael Power

6 The soft law issued by independent administrative authorities, such as guidelines for fining policy, are not binding on the courts responsible for judicial control of those authorities' decisions. However, as illustrated by EU competition law, even judicial control tends to adopt a procedural approach, confining it to an assessment of whether the agency's decisions comply with its own guidelines.


448

(2013) deserves attention. Developing upon a

Foucauldian approach to the apparatus (dispositif) of

fraud risk, he argues that the idea of preventing risk

rather than punishing a risk that has occurred is a

major shift in regulatory policies: regulation

encourages the creation of internal organizations

capable of preventing the risk of fraud. Power’s

analysis echoes our own in the field of financial

regulation. Paradoxically, however, this focus on

internal organization could damage the interest of

savers and investors due to the separation of financial

activities and compliance management.

Furthermore, the normativity of law extends

beyond the scope of the market and enters into the

internal organization of firms. This result is in line

with the main arguments of law and organization

analysts such as Edelman & al. (1999) or Sitkin and

Bies (1993). The process of legalization of internal

organization schemes in the private sector finance

also underscores the hybrid character of finance (i.e.

between State and market) (Pistor, 2013). Edelman

and Stryker (2005) recognize that “organizations are

highly responsive to their legal environments on the

law-related aspects of organizational fields” (2005:

532). In their perspective, "legal environments" have

a variety of components: formal law and the sanctions

associated with it, informal practices and norms

regarding the use or non-use of law, and ideas about

the meaning of law (Edelman and Stryker 2005: 532).

However, the construction of internal control

mechanisms within financial firms is largely

structured by formal law and, in France, by AMF

sanctions. In specific cases, these sanctions are in

addition to international, European and nationally

binding provisions – from Basel Committee

principles to the French Financial and Monetary Code

regarding the control of risks in banking and finance.

The empirical study reported here gives more

evidence on the role of formal law and sanctions than

on informal practices and ideas about what law is.

The AMF policy actually consists in putting legal

pressures on financial firms so that they take

corrective actions when designing their

organizational and decisional arrangements.

Enforcement of regulation is a key issue for

socio-legal research. Coglianese and Kagan (2007)

stress the prevalence of two dominant perspectives:

legalistic and social. Enforcement as a legal process

means that the regulatory agency punishes violations

of law. This implies an adversarial, non-cooperative

regulatory practice. The second view is social:

enforcement becomes a social process implying a

dialogue between the regulator and regulated entities,

with close cooperation and a focus on problem-

solving rather than punishment. Coglianese and

Kagan consider that “many regulatory agencies claim

that they strive for a flexible enforcement style:

legalistic and punitive when needed, but

accommodative and helpful in others […].”

(Coglianese & Kagan, 2007, xviiii). Legalism and

punishment on one side, cooperation on the other, are

complementary in regulatory practice. As a matter of

fact, the practice of the AMF Enforcement

Committee consists less in punishing fraud and

misconduct as such than in inducing financial firms to

achieve intra-organizational changes. One the main

tools used by the AMF is mitigating its pecuniary

sanctions if a firm makes necessary changes in the

course of a proceeding before the Enforcement

Committee. The AMF's precedents are closely looked

at by auditing firms and consultants, who issue advice

about the regulator's expectations on internal control,

compliance officers, risk management, and other key

intra-organizational issues. The growing number of

recommendations on internal control made by

auditors and consultants, although not investigated as

such in this paper, give a significant idea of their

contribution to the process of managerialization of

the law (Power, 2013). This process echoes the

increasing tendency of regulatory agencies to

implement negotiated procedures that are more or

less based on horizontal-type bargaining with

stakeholders. This can lead to contractualization, as

demonstrated by the U.S. model of settlement.

The proceduralization of financial regulation

can also be interpreted in terms of delegation of

enforcement. As stated earlier, beyond in addition to

sanctioning organizational failures within financial

firms, the financial regulator also mitigates the

amount of fines if the firm improves its internal

organization in the course of a sanction proceeding.

These facts evidence a process of delegating

regulation from the financial supervisor to financial

firms themselves. Through proceduralization, the

supervisor gives incentives and responsibilities to

firms, encouraging them to behave in a more socially

responsible way, and to be more legally compliant

when operating in the market.

As a matter of fact, when a firm improves its

contested organizational arrangements during a

sanction proceeding, the AMF Enforcement

Committee regards this cooperative behavior as a

legitimate motive for lowering the fine. The AMF's

recent settlement policy underscores its shift towards

procedural control7. Indeed, since 2011 the AMF has

been vested with the power to reach a settlement with

an entity whose misconduct is not harmful enough to

justify a costly and lengthy sanction proceeding. If

accepted by the wrongdoer, the settlement does not

imply recognition of guilt; both parties negotiate the

introduction of a compliance plan and the payment of

an amount of money to the State.

This trend can be analyzed within very different

theoretical frameworks. In microeconomic terms, it

could be seen as an optimal expedient for the

regulator to delegate monitoring to a second body –

the financial firm itself. As external regulation of firm

7 Decree n° 2011-968 of 16 August 2011 on the sanctioning powers of the AMF and the settlement procedure.


449

behavior is both costly and difficult – if not

impossible – to implement, the regulator may provide

efficient incentives to firms’ executives and managers

by adopting this kind of procedural regulation. Within

a principal-agent framework, the firm's management

becomes a delegated principal that monitors the

agent. The interests of both the regulatory body and

financial firms are more efficiently aligned since the

burden of proof is considerably lightened for the

administrative authority. At the same time, this model

of delegation may prevent incoherent incentive

schemes. The possibility that firms will be fined

because of shortcomings in their internal control

system tends to make them less inclined to set up

evaluation or remuneration systems that might

encourage staff to take excessive risks or play

dangerously with the rules. In consequence,

operational staff is less likely to be exposed to

conflicting incentives vis-à-vis market rules. In

addition, such a delegation scheme may address the

issue of the “fraud triangle” consisting of internal

pressures to maximize financial returns, rule-breaking

opportunities due to weak internal controls, and a

professional culture that refuses to see financial

regulations and the associated sanctions as legitimate.

However, an alternative story can be told. The

choice of a procedural regulation model may be

driven by efficiency. In this case, however, efficiency

is not to be understood from the standard perspective

of economic optimization. Rather, it is a pragmatic

adjustment to the fact that regulators are finding it

harder and harder to punish increasingly complex

financial misconduct because they lack the budgetary,

technical, and human resources to do so. Putting the

accent on internal control failures makes it possible to

alleviate the burden of proof and to close cases more

quickly and efficiently. Likewise, relying on soft law

sources and promoting negotiated procedures – such

as composition administrative – reduces the risk of

appeals and also enhances the legal certainty

associated with the regulatory body that is making the

ruling. This solution may allow the regulator to

concentrate its resources on cases that are more

important.

Conclusion

Legalization of the internal organization of private

financial firms is an ongoing process in connection

with sanction-based financial regulation in France. As

noticed by Edelman & al. (1999) within the socio-

legal field of law and organization, the internal

structure of private entities does not stand outside the

law. This specifically confirms the insightful

statement made by Katharina Pistor, who promotes a

legal theory of finance, that “finance is legally

constructed; it does not stand outside the law" (Pistor,

2013: 315).

Critical accounting theorists put the emphasis of

the fact that fraud is a social construct, with the legal

dimension as an important component of the social

construction (Cooper, Dacin, Palmer 2013: 441). In

this regard, what is fraud varies according to context

and over time. It therefore is of major importance to

contextualize fraud within a specific political,

economic, social and legal pattern, and to recognize

the social construction of fraud and associated

categories of wrongdoing. The focus of this paper is

on the variation of the AMF's construction of fraud

over time; its variation across space may be the

subject of further comparative research.

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451

POINT-OF-PURCHASE DISPLAYS IN THE FMCG SECTOR: A RETAILER PERSPECTIVE

Jeevarathnam P Govender*

Abstract

Intense competition in the (fast-moving consumer goods) FMCG sector has prompted manufacturers and marketers to rely more heavily on point-of-purchase displays, an antecedent manipulation of the retail setting, to stimulate sales. Retailers, on the other hand, have become more discerning about the number and types of displays they will allow in their stores. There has been limited research on point-of-purchase displays in South Africa. This paper therefore examines retailers’ perceptions of point-of-purchase displays. Being an exploratory study, a survey was conducted among 100 supermarket owners and managers using a quantitative approach. It emerged that respondents believed that point-of-purchase displays drive in-store sales and contribute to retailers’ profits, as well as drive impulse purchases. It was found that point of purchase displays create an interactive retail experience, create brand loyalty and alone can drive sales without a price reduction. The results also indicate that point-of-purchase displays lead to clutter in stores and that marketers’ bargaining power influences point of purchase decisions in stores. Of concern was the perception that point-of-purchase displays did not cater for low literacy consumers. Keywords: Fast-Moving Consumer Goods Sector, Retail Business, Point-Of-Purchase Displays * Department of Marketing and Retail Management, Durban University of Technology, South Africa

Introduction

The FMCG retail sector has witnessed intense

competition where manufacturers and marketers of

low-involvement products are relying heavily on

point-of-purchase displays with a view to gaining a

competitive advantage. Behaviourally, in-store

displays are antecedent manipulations of the retail

setting and fall under the classification of marketing

communication channels, more commonly referred to

as point-of-purchase communications (De

Pelsmacker, Geuens & Van den Bergh 2004). Recent

trends in marketing have seen an increased emphasis

on in-store advertising with the intention of grabbing

the attention of shoppers at the point of purchase.

Retailers have become more discerning about the

number of displays they will allow, to the point of

restricting the number of displays or even disallowing

certain types of displays. Point-of-purchase displays

are materials used in the retail sector to promote an

item or a brand and are useful in showcasing the

product (Newlands & Hooper, 2009). Point-of-

purchase displays allow for the prominent display of

products, often in high traffic areas or aisles, and at

strategic areas such as pay points, thereby giving the

product greater prominence and consequently, greater

chance of purchase.

According to McDaniel, Lamb & Hair (2013),

point-of purchase promotion has a key advantage in

that 70% to 80% of all retail purchase decisions are

made while the consumer is in the store. In light of

this, Brown (2007) believes that marketers are now

diverting large budget allocations to shopper

marketing compared to the past.

Internationally, retail outlets are currently

inundated with point-of-purchase displays throughout

the year. Securing prime positions in stores is key,

and this poses a challenge to manufacturers and

marketers. Adhering to retailers’ requirements is a

further challenge. Retailers, especially those with

strong bargaining power are prescriptive when it

comes to point-of-purchase displays in their stores.

Retailers prefer less clutter, hence less confusion in

their stores. There has been significant growth in

retail sales in South Africa. In keeping with this, the

use of point-of-purchase displays has also risen

significantly. However, there has been limited

research in the South African retail environment in so

far as point-of-purchase displays are concerned. The

aim of this paper is to evaluate retailers’ perceptions

of point-of-purchase displays. Specifically, the views

of store managers are solicited. Effective point-of-

display displays can make the difference between

products lying in inventory and products making their

way into customers’ shopping baskets, including the

encouragement of impulsive purchasing. It is

envisaged that managers of retail outlets will view the

importance of point-of purchase displays as an

effective means of stimulating sales. It is envisaged

that this paper will find applicability to marketers in

similar developing economies.


452

Literature review

Point-of-purchase refers to the moment a consumer is

about to buy the product; a crucial point where the

exchange takes place, offering the marketer the last

chance to attract the customer (Abrishami &

Peivandi, 2014). According to De Pelsmacker et. al.

(2004), point-of-purchase communications have five

key objectives: (a) to capture the attention of

consumers in order to differentiate the product, (b) to

remind consumers of prior and on-going marketing

communications stimuli, (c) to inform consumers

about product attributes, (d) to create image of

positive associations and (e) to persuade the

consumer to make an impulse purchase. Moore

(2010) believes that marketers are placing more

emphasis on connecting with the consumer at point of

purchase. Effective interaction will entice new

consumers, encourage brand switching from

competing products and maintain brand loyalty

among existing customers (Shaffer & Zettelmeyer,

2009). Mitchell (2002) suggests that point-of-

purchase, as an advertising medium, should be

viewed for its long term benefits in building brand

awareness and not just as a distribution channel.

Point-of-purchase displays serve an important role in

product search, product choice, making the shopping

experience more favourable and reminding

consumers (Solomon, 2007). Liljenwall (2004)

believes that the majority of consumers go into a

store undecided about exactly what they intend to

purchase. They look at products available and their

attention focuses on in-store displays. It is for this

reason that point of purchase display becomes

important, hence the need for point of displays to

attract the attention of consumers. Horward, Flora,

Scheicker & Gonzalez (2004) believe that it is for this

reason that marketers are now spending more on non-

traditional media such as point of purchase

advertising and promotions.

Raghubir & Valenzuela (2006) observed that

large food retailers exercise strict control over what

point-of-purchase displays appear in their stores.

Before a display does eventually appear on the aisle,

it needs to go through rigorous scrutiny. This decision

is guided by clean-store policies and the necessity to

reduce clutter of the aisles. It becomes necessary for

marketers to adhere to retailers’ rules, especially to

prevent conflict with retailers. Hunt (2002) concurs

by stating that a strong retailer relationship not only

gets point-of-displays in store, but also ensures that

point-of-purchase displays are effectively set up to

optimise their benefits.

According to Chandon, Hutchinson, Bradlow &

Young (2007), given the situation that the consumer

faces an array of choices at a store, attracting

consumer visual attention at the point-of-display

strongly influence consumer choice. Items placed at

point-of display with a price-tag attached, create a

notion in the consumer’s mind, that the price has been

discounted, even if this is not the case (Inman,

McAlister & Hoyer, 1990; Woodside & Waddle,

1975). (Solomon (2007) believes that consumer

behaviour, at point-of-purchase, is influenced by out-

of-store memory-based factors and in-store attention-

based factors. Therefore, considering the clutter in the

retail environment, creating memory-based consumer

pull is insufficient; marketers must create “visual lift”

for their brands. To this end, Kerfoot, Davies & Ward

(2003) point to the importance of visual point-of-

purchase product presentation in influencing in-store

browsing and purchase behaviour. Leech (2009)

observed that, in difficult economic circumstances,

consumers change the way they shop, focusing on

necessities and changing their in-store movement

patterns to avoid the enticement of purchasing non-

essential items. However, brands with share of voice

will continue to have share of market. To this end, the

effective use of point-of-purchase displays can reduce

the risk of brand decline, given that display alone can

drive sales without a decrease in price.

Sudhir and Rao (2006) believe that

manufacturers are willing to pay a premium price in

exchange for strategic placement of their point-of-

purchase displays. It is common practice for retailers

to put up a portion of their shelf space for bidding by

manufacturers who compete for shelf space. Those

who offer the highest bid secure preferential shelf

space, e.g. products being displayed in the centre of

an aisle which are most likely to be chosen. It is not

uncommon for manufacturers to offer hefty upfront

payments that are not related to current retail

volumes, which Shaffer (2005) refers to as “ slotting

allowances”. Another challenge faced by marketers is

compliance, whereby retailers demand that point-of-

purchase displays be tailored to meet their needs,

apart from the needs of the marketer. Retailers are

imposing stricter conditions pertaining to the number

of displays as well as the types of displays they are

willing to accommodate and prefer that point-of-

purchase displays blend with the store’s ambiance,

posing a challenge for marketers who wish to

participate at a particular retail outlet (Hill, 2003).

Milman (2009) believes that point-of-purchase

displays not only bring brands to consumers, but are

also enabling a more interactive retail experience.

Kerfoot (2003) identifies three important factors for

the success of a retailer, viz, creating the perfect retail

setting for the target customer, effectively presenting

the product to the customer and creating beneficial in-

store displays that will attract customers. Soars

(2009) believes that, given the complexity of today’s

consumers, retailers will have to go a step further in

creating an enhanced shopping experience. This can

be achieved by moving beyond simple points-of-

display and signage to a sensory approach whereby

shoppers’ sense of sound, smell, light and touch will

influence choice of store, in-store decision making

and spend. This can stimulate sales as the consumer


453

moves through each aisle, aided by point-of-purchase

displays which encourage purchase.

When it comes to product decision-making, low

literacy consumers face challenges in the context of

processing information from point-of purchase

displays. Jae & Delvecchio (2004) found that in the

USA, as much as 50% of the population operate at a

maximum of level two literacy i.e. possessing only

marginal literacy skills. Furthermore, high literacy

consumers made product choices based on central

cues, whereas low literacy consumers relied on

peripheral cues to make product decisions. The

authors also found information in advertising and on

packaging to be generally written at a level that was

beyond the comprehension of low literacy consumers.

To this end, visual cues such as graphic information

at point-of-display can improve choice for consumers

with low literacy levels (Wallendorf, 2001;

Viswanathan, Rosa & Harris, 2005).

Methodology

The study was exploratory, descriptive, quantitative

and cross-sectional in nature. A structured

questionnaire consisting of closed questions was

used. The target population comprised large

supermarkets in the city of Durban, South Africa.

Two non-probability sampling techniques were

employed. Firstly, purposive sampling was used,

whereby supermarkets with a sizeable number of

point-of-purchase displays were chosen.

Supermarkets with more that 20 point-of-purchase

displays were included in the study. Secondly,

convenience sampling was chosen to select

supermarkets. Being an exploratory study, a net

response rate of 100 usable questionnaires was the

target. The intended respondents were owners or

managers of supermarkets. Questionnaire content

covered the perceptions of retail store owners or

managers on point-of-purchase displays at their

stores. All questions were interval in nature,

employing the five-point Likert scale (Strongly

disagree to strongly agree). Questionnaires were

personally delivered and collected at a later date by

agreement with the respondent.

Results

The following section discusses the findings of the

empirical study.

Point-of-purchase displays drive in-store sales

The results, as presented in Figure 1 indicate that the

vast majority (75%) agreed, with 24% of respondents

agreeing and 51% strongly agreeing that that point-

of-purchase displays drive in-store sales. 14% of

respondents disagreed in this regard. The mean value

was 4.06, indicating the degree of agreement that

point-of-purchase displays drive in-store sale.

Figure 1. Point-of-purchase displays drive in-store sales

Point-of-purchase displays contribute to a retailer’s

profits

21% of respondents agreed and 42% strongly agreed,

meaning that 63% of respondents were in agreement

that point-of-purchase displays contribute to a

retailer’s profits. The results are presented in Figure

2. The mean value was 3.69 suggesting the overall

extent of agreement in this regard.

6% 8% 11%

24%

51%

0%

10%

20%

30%

40%

50%

60%

S Disagree Disagree Neutral Agree S Agree


454

Figure 2. Point-of-purchase displays contribute to a retailer’s profits

Point-of-purchase displays drive impulse purchases

It emerged that the vast majority (79%) agreed, with

39% of respondents agreeing and 40% strongly

agreeing that that point-of-purchase displays drive

impulse purchases. These are reflected in Figure 3.

The mean value was 4.08, an indication of the strong

agreement that that point-of-purchase displays drive

impulse purchases.

Figure 3. Point-of-purchase displays drive impulse purchases

The greater the number of point-of-purchase

displays, the greater the sales

As reflected in Figure 4, 31% of respondents

disagreed (16% strongly disagreeing and 15%

disagreeing) that the greater the number of point-of-

purchase displays, the greater the sales. The majority,

at 25% were neutral and 44% agreed (24% agreeing

and 20% strongly agreeing) in this regard. The mean

value was 3.17, suggesting that generally,

respondents did not strongly believe that more point-

of-purchase displays meant more sales.

Figure 4. The greater the number of point-of-purchase displays, the greater the sales

11%

14%

12%

21%

42%

0 0,05 0,1 0,15 0,2 0,25 0,3 0,35 0,4 0,45

S Disagree

Disagree

Neutral

Agree

S Agree

3% 5%

13%

39% 40%

0%

10%

20%

30%

40%

50%


16% 15%

25% 24%

20%

0%

5%

10%

15%

20%

25%

30%



455

Point-of-purchase displays create an interactive

retail experience


vast majority (72%) agreed, with 47% of respondents

agreeing and 25% strongly agreeing that point-of-

purchase displays create an interactive retail

experience. 13% of respondents disagreed in this

regard. The mean value was 3.89, indicating the

degree of agreement that point-of-purchase displays

create an interactive retail experience.

Figure 5. Point-of-purchase displays create an interactive retail experience

Point-of-purchase displays create loyalty to the

brand and the retailer

42% of respondents agreed and 23% strongly agreed,

meaning that 65% of respondents were in agreement

that point-of-purchase displays create loyalty to the

brand and the retailer. The results are presented in

Figure 6. The mean value was 3.71 suggesting the

overall extent of agreement in this regard.

Figure 6. Point-of-purchase displays create loyalty to the brand and the retailer

Point-of-purchase displays alone can drive sales

without a price reduction

As reflected in Figure 7, 84% of respondents were in

agreement (21% agreeing and 63% strongly agreeing)

that point-of-purchase display alone can drive sales

without a price reduction. 10% were neutral and 6%

disagreed in this regard. The mean value was 4.41,

suggesting that generally; respondents were of a

strong belief that point-of-purchase displays alone

can drive sales without a price reduction.

5%

8%

15%

47%

25%

S Disagree

Disagree

Neutral

Agree

S Agree

3%

11%

21%

42%

23%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



456

Figure 7. Point-of-purchase displays alone can drive sales without a price reduction

The rate of sales determine space allocation in a

prime aisle position


vast majority (68%) were in agreement, with 47% of

respondents agreeing and 21% strongly agreeing that

that the rate of sales determine space allocation in a

prime aisle position. 21% of respondents were in

disagreement in this regard. The mean value of 4.58

is indicative of the strong degree of agreement that

the rate of sales determine space allocation in a prime

aisle position.

Figure 8. The rate of sales determine space allocation in a prime aisle position

Payment for space determines space allocation in a

prime aisle position

It emerged that the vast majority (89%) were in

agreement, with 22% of respondents agreeing and

67% strongly agreeing that payment for space

determines space allocation in a prime aisle position.

These are reflected in Figure 9. The mean value was

4.48, an indication of the strong agreement that that

payment for space determine space allocation in a

prime aisle position. The findings are consistent with

those in the aforementioned section where it became

evident that the rates of sales determine space

allocation in a prime aisle position.

Figure 9. Payment for space determines space allocation in a prime aisle position

0% 6%

10%

21%

63%

0%

10%

20%

30%

40%

50%

60%

70%


10%

11%

11%

47%

21%

0% 10% 20% 30% 40% 50%

S Disagree

Disagree

Neutral

Agree

S Agree

2% 4% 5%

22%

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%



457

Point-of-purchase displays create too much clutter

in my store

As reflected in Figure 10, there appears to be a

similar distributing of opinion among the scale

categories on point-of-purchase displays creating too

much clutter in stores. The minimum frequency was

23% of respondents strongly disagreeing and the

maximum, 27% of respondents agreeing that point-

of-purchase displays create too much clutter in their

stores. The range of 4% supports the close spread of

responses, implying that there were varying opinions

on the issue of clutter in similar proportion. The mean

value was 3.85.

Figure 10. Point-of-purchase displays create too much clutter in my store

The bargaining power of marketers influences

point-of-purchase decisions in my store

As reflected in Figure 11, 85% of respondents were in

agreement with 38% agreeing and 47% strongly

agreeing that the bargaining power of marketers

influences point-of-purchase decisions in their store.

8 % were neutral and 7% were in disagreement in this

regard. The mean value was 4.22, suggesting that

overall, respondents strongly believed that the

bargaining power of marketers influenced point-of-

purchase decisions in their store.

Figure 11. The bargaining power of marketers influences point-of-purchase decisions in my store

Point-of-purchase information caters for low

literacy consumers

It emerged that the majority (54%) were in

disagreement, with 22% of respondents strongly

agreeing and 32% strongly disagreeing that point-of-

purchase information caters for low literacy

consumers. 32% of respondents were in disagreement

and 22% in strong agreement in this regard. These are

reflected in Figure 12. The mean value was 1.92, an

indication of the sentiment that, overall, respondents

felt that point-of-purchase information did not cater

for low literacy consumers. This is an important

consideration in light of a large proportion of the

South African consumer market having low literacy

levels.

23%

26%

24%

27%

26%

S Disagree

Disagree

Neutral

Agree

S Agree

3% 4% 8%

38%

47%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%



458

Figure 12. Point-of-purchase information caters for low literacy consumers

Conclusion

The results show that respondents believed that point-

of-purchase displays did indeed drive in-store sales.

This needs to be seen in the context of respondents

also acknowledging the importance of point-of-

purchase displays also contributing to their stores’

profits. The aforementioned suggests the importance

place on point-of purchase displays insofar as

turnover and profitability were concerned. It emerged

that point-of-purchase displays influenced impulse

purchase, an important consideration, given the

prevalence of impulse purchases among consumers.

Interestingly, the findings indicate that more point-of-

purchase displays do not translate into more sales,

suggesting that respondents were mindful of the

clutter factor. It will reach a point when an excessive

number of point-of-purchase displays leads to

diminishing returns. The findings highlight the role of

point-of-purchase displays in making shopping a

more interactive experience. It also became evident

that point-of-purchase displays create loyalty both to

the brand and the retailer, suggesting its role in

establishing a relationship with the customer. What

also became clear was that point-of-purchase display

alone can drive sales without a price reduction. It

emerged that there was strong agreement that the rate

of sales as well as payment for space determined

space allocation in a prime aisle position. It could be

reasonably argued that sales levels are linked to

payment for space, i.e. the higher the sales, the more

a marketer would be willing to pay for a prime aisle

location. The results suggest a cause for concern with

regard to point-of-purchase displays creating clutter

in stores. This can be explained in terms of the large

number of marketers clambering for their “slice of the

customer”, often resulting in supermarkets using

whatever space available to accommodate marketers,

even at the expense of customer movement space.

Retailers need to be selective in the management of

point-of-purchase displays. One possibility is to

consolidate the point-of-purchase display, with

greater impact, for a particular marketer, rather than

having several smaller displays, with smaller impact.

The findings allude to the power exerted by suppliers

with strong bargaining power on point-of-purchase

displaying in supermarkets. This has raised concern

in recent years where powerful marketers have been

accused of using strong-arm tactics in the retail

environment in which they operate, much to the

disadvantage of smaller and also emerging marketers.

It has become evident that low literacy consumers are

placed at a disadvantage at point-of purchase because

of the difficulty in comprehending messages. To this

end simplifying the language on packaging or using

signs and symbols may facilitate better understanding

of the marketer’s message by the consumer, leading

to customer confidence and the possibility of repeat

purchase.

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460

CORPORATE GOVERNANCE, OWNERSHIP, COMPANY STRUCTURE AND ENVIRONMENTAL DISCLOSURE:

EVIDENCE FROM SAUDI ARABIA

Murya Habbash*

Abstract

This study examines the Environmental Disclosure (ED) practices in Saudi Arabia and the potential relationship with Corporate Governance (CG) , ownership and company structure, following the application of the Saudi 2006 CG code in 2007. The study deepens the understanding of ED and its main determinants in one of the largest economies in the Middle East. A self-constructed ED checklist, based on ISO 26000, is used. We employ regression and content analyses to examine a sample of 267 annual reports covering the period 2007-2011. The analysis finds that the average ED has improved following the application of the Saudi 2006 CG code to 30%, more than double the 14.61% found by Al-Janadi et al. (2013) during 2006-2007. The analysis also finds that audit committee effectiveness, role duality, state and institutional ownerships, firm profitability, and industry sensitivity positively affect ED. However, board independence, family ownership, and firm size are found not to be significant determinants, while a negative significant correlation was found with firm leverage. The results imply that CG regulators and stakeholders should acknowledge the importance of active audit committees comprising relevant experts and independent directors, in addition to the role of state and institutional ownership in enhancing ED. The study covers a five-year period, contrary to the majority of ED studies which focus on only one year. The study helps to fill the gap in ED literature in developing countries. Finally, the study provides a recent evaluation for the Saudi CG code recently applied in 2007. Key Words: Corporate Governance, Ownership Structure, Environmental Disclosure, Saudi Arabia * King Khalid University, Saudi Arabia

1. Introduction

Concern for the environment has increased

significantly across the globe in recent decades. This

concern has been driven in part by a number of

environmental disasters caused by humans, such as

the Bhopal gas tragedy. The release of toxic gas, on

the 3rd of December 1984 in India, left about 16,000

dead in a few days. Another international tragedy was

occurred on 26th of April 1986, when an explosion

occurred at the Chernobyl Nuclear Power Plant in

Ukraine resulting in severe human and environmental

consequences. Thus, the black side of the industrial

development is the potential for terrible

environmental consequences.

Consequently, environmental organizations

were established and environmental laws and

standards were issued. For example, the Greenpeace

Organization was established in 1971, the main

objective of which is to highlight issues and force

governments to adopt solutions for the global

environmental problems. Furthermore, ISO14001 was

issued by the International Organization for

Standardization (ISO), with the aim of promoting

more effective and efficient environmental

management in firms and better communication of

environmentally relevant information to stakeholders.

Moreover, several governments have acknowledged

importance of environmental disclosure (ED); the UK

government has announced that ED is deemed to be

crucial in corporate reporting and firms must report

essential environmental issues in their annual reports

(Sun et al., 2010).

Accordingly, firms have come under increasing

pressure to account for and disclose transparently

how their activities affect the environment. This can

be achieved through environmental accounting and

disclosure. Moreover, Giannarakis et al. (2014) find

that polluting firms tend to increase their Corporate

Social Responsibility (CSR) disclosure including ED

to legitimize their activities, eliminate stakeholder

pressure and avoid any regulatory cost. However,

most national and international accounting standards

and laws do not compel firms to provide ED

(AbuRaya, 2012), implying that ED remains

voluntary on an international scale.

ED may be one of the most relevant, sensitive,

and important voluntary disclosure categories for two

reasons. First, it is related to the health of humans,

society and environment; health is the most valuable

asset for humans. Second, the disclosure of material

environmental information can be relevant for


461

stakeholders’ decisions and financial markets.

According to the publication, Environmental

Disclosure in Financial Reporting, by the

Commission for Environmental Cooperation, the

share price of US Liquids Inc., a Houston waste-

management firm, fell 58% in one week when

employees reported to government agencies that the

firm had illegally dumped hazardous wastes and

falsified records. This example indicates that the ED

may be one of most important voluntary disclosures

categories.

ED extends the accountability of firms to

include their environmental responsibilities (Gray, et

al., 1987; Rizk, 2006; AbuRaya, 2012). However as

the code is voluntary it raises questions such as: how

accurately do firms disseminate information that

informs the public of the dangerous implications of

their activities on the environment? And, Will firms

accuse themselves of malpractice? In this context,

Rizk (2006) argues that ED may have economic

consequences for the firms making the disclosure; it

may increase or curtail sale revenues, or it may invite

prosecution. As a result, this can create a

transparency problem, which can impact negatively

on the financial markets and the investment

community as the lack of transparency has been a key

factor in financial scandals around the world (Abdel-

Fattah, 2008).

Transparency is one of the main Corporate

Governance (CG) principles and objectives. Thus,

many authors argue that an effective CG system is

associated with increased transparency (e.g., Gul and

Leung, 2004; Abdel-Fattah, 2008; AbuRaya, 2012;

Albassam, 2014; Peters and Romi, 2014; Giannarakis

et al., 2014). This implies that an effective CG system

may encourage or force managers to disseminate

more information about the impact of their

company’s activities on the environment.

However, different elements can affect the

degree of CG compliance. For instance, ownership

structure is one of the main CG mechanisms that

could influence managerial decisions including those

related to ED. Empirically, Barako et al. (2006) find

that audit committee existence, foreign and

institutional ownership are positively correlated with

the voluntary disclosure including the ED. Moreover,

Rao et al. (2012), Htay et al. (2012) and Janadi et al.

(2013) find that board independence is positively

correlated with ED. Furthermore, AbuRaya (2012)

finds that higher ED quantity is associated with

separation of the dual role of Chief Executive Officer

(CEO) and chairman, as well as a higher frequency of

board meetings. This implies that CG and ownership

and company structure could enhance the

transparency on environmental activities.

This study investigates the extent of ED in Saudi

Arabia and the potential influence of CG and

ownership type and company structure on ED. The

findings indicate that the average ED was 30% during

the years 2007-2011. Furthermore, the results find a

positive significant correlation between audit

committee effectiveness, role duality, state and

institutional ownerships, firm profitability, and

industry type and the extent of ED in Saudi Arabia. A

negative significant correlation was found for firm

leverage, while no statistically significant correlations

were found for board independence, family

ownership, and firm size on the extent of ED.

This study contributes to the literature in the

following ways. First, according the Saudi Arabian

General Investment Authority website (SAGIA,

2014), Saudi Arabia holds 25% of the world’s oil

reserves, and contributes 25% of the Arab world’s

gross domestic product (GDP). Moreover, the

upstream and downstream hydrocarbon sectors are

the main components of GDP in Saudi Arabia.

However, very few ED studies that are relevant to the

type of economy in Saudi Arabia have been

published. Second, this study incorporates five years;

the majority of ED studies focus on only one year’s

worth of data (Saleh et al., 2010; Giannarakis et al.,

2014). Third, this study provides a recent evaluation

of the CG reforms in Saudi Arabia, through studying

the years following the application of the Saudi 2006

CG code. Finally, the study incorporates variables,

such as audit committee effectiveness, state

ownership and family ownership that are rarely

examined in relation to ED.

This study is organized on the following lines.

The second section reviews the literature and

illustrates the gaps in the literature, while the third

section formulates the hypotheses. The fourth section

highlights the methodology, while the fifth section

presents and discusses the results. The final section

summarizes the conclusions, implications, limitations,

and future research.

2. Literature Review

This section contains a selective literature review on

the determinants of ED determinants, and also on the

wider aspect of CG. Haniffa and Cooke (2002)

investigate a sample of 167 Malaysian firms for the

year 1995. The findings indicate a negative

significant relationship between independent non-

executive directors, chairperson and the proportion of

the family members on the boards and ED. Moreover,

Gul and Leung (2004) investigate a sample of 385

Hong Kong firms for the year 1996. The results find

that CEO duality and proportion of expert

independent directors on the board are negatively

correlated with voluntary disclosure including ED.

Furthermore, firm size, profitability, the presence of

audit committee, and firm growth were found to be

positively correlated. In addition, Barako et al. (2006)

examine a sample of 54 Kenyan firms over the period

1992-2001. The results indicate that audit committee

existence, institutional ownership, foreign ownership,

firm size, and leverage are positively correlated with

the voluntary disclosure including ED; the board


462

composition is negatively correlated, while the board

leadership structure is not correlated.

Moreover, Sun et al. (2010) examine a sample

of 245 UK firms for the year ended in March 2007.

They find no significant statistical relationship

between various measures of earnings management

and the ED. They find also that audit committee

diligence, but not board size, affects the relationship

between the ED and earnings management. AbuRaya

(2012) examine a sample of 229 UK firms with 916

firm-year observations, during the years 2004-2007.

The study finds that the average ED is 38.44%, and

that higher ED quantity is related with a lower

percentage of independent non-executive directors on

the board, Chairperson/CEO separation, higher

frequency of board meetings, greater cross-

directorships of board members, presence of board-

level environmental responsibility committee, and

lower ownership concentration. Rao et al. (2012)

examine a sample of 100 Australian firms for the year

2008. The results demonstrate a significant positive

correlation between the proportion of independent

and female directors on the board and ED. Said et al.

(2013) investigate Malaysian public listed firms

during the year 2009. The analysis finds positive

significant correlations between independent

chairpersons, the chairperson’s age, the existence of a

CEO with a law background and the industry type

with ED.

A number of relevant studies have been

published in 2014. Peters and Romi (2014),

investigates a sample of 1,238 firm-year observations

of US firms, during 2002 to 2006. The findings

indicate a positive significant relationship between

presence of environmental committees, a

sustainability officer and the ED and that expertise of

both of them are positively correlated with greater ED

transparency, but committee size is negatively

correlated. Cormier et al. (2014) investigates 172

Canadian firms subject to mandated ED for the year

2008. The study finds that mandated ED does not

relate to analysts’ information set in the presence of

good CG but it does for firms with weak CG;

therefore, the study concludes that mandatory

disclosure may act as an environmental governance

mechanism. Giannarakis et al. (2014) examine a

sample of 100 of large-sized US firms listed on the

Standard & Poor's 500 Index, during 2009 to 2012.

The results reveal that the more polluting firms tend

to disclose greater levels of CSR information

including the ED, and that CEO duality and the

presence of women on the board do not affect the

extent of CSR disclosure.

Finally, very few studies were found on Saudi

Arabia. One early study, Al-Khuwiter (2005),

distributed a questionnaire to 100 financial managers,

102 auditors, and 91 accounting academics. The

findings indicate a significant weakness in the

adoption of environmental accounting and disclosure

practices in Saudi Arabia and that the two main

drivers of the environmental accounting and

disclosure are the image of the firm and adherence to

local environmental laws. Another study on Saudi

Arabia is Al-Janadi et al. (2013), which examines 87

annual reports of Saudi firms listed in 2006 and 2007.

The study finds that the lowest disclosure category is

ED with an average of 14.61%. However, the study

finds that non-executive directors, board size, CEO

duality, audit quality and government ownership are

positively associated with disclosure levels.

To conclude, most ED studies are conducted on

developed countries, such as the USA, the UK,

Australia, and Canada. In addition, the majority of

studies focus on only one year’s worth of data,

confirming the findings of Saleh et al. (2010) and

Giannarakis et al. (2014). Moreover, only a few

studies address the relationship between CG and ED,

especially in developing countries, compared to other

categories of voluntary disclosure. Finally, to the best

of our knowledge, only two studies have been

conducted in relation to Saudi Arabia, but both have a

number of deficiencies. Al-Khuwiter (2005) does not

address CG or any of its variables and furthermore is

dated. Al-Janadi et al. (2013) examine only old two

years, 2006 and 2007, and use a small sample size of

only 87 annual reports.

3. Hypotheses Development Audit Committee Effectiveness

The audit committee is one of the main CG

mechanisms and a key pillar of CG systems. The aim

of the committee is to improve control and

monitoring of managers' decisions, as well as the

integrity of financial reporting (Fama, 1980; Fama

and Jensen, 1983; Abdel-Fattah, 2008). CG codes

around the world require certain characteristics for

the composition and structure of audit committees,

such as independence, expertise, and diligence. Thus,

Section 14 of the 2006 Saudi CG code stipulates that

each firm should construct an audit committee

comprising at least three non-executive directors,

with at least one director specialized in financial and

accounting affairs.

The characteristics demanded by CG codes are

supported by research. According to Bryan et al.,

(2004) and Soliman and Ragab (2014), the activity of

audit committees, measured by the frequency of their

meetings, improves disclosure quality and quantity.

Furthermore, independence is a crucial characteristic

for auditors, boards, and audit committees. Agency

theory suggests that independence reduces agency

costs and information asymmetry. Finally, Madawaki

and Amran (2013) and Soliman and Ragab (2014)

find that audit committee expertise enhances the

reporting quality. Accordingly, we believe that

effective audit committees comprising the necessary

expertise, holding frequent meetings, and containing

independent external directors are more likely to


463

encourage or force the managers comply with

stakeholders’ needs for ED. Therefore, the study’s

first hypothesis is:

H1: There is a positive correlation between

audit committee effectiveness and environmental

disclosure.

Board Independence

Board independence is measured by the proportion of

non-executive directors on the board. A high

proportion of non-executives is a signal of strong CG

that will motivate transparency and disclosure levels

(Gul and Leung, 2004; AbuRaya, 2012). Agency

theory supports the role of non-executive directors on

the board. Moreover, Forker (1992), Abdel-Fattah

(2008), and Htay et al. (2012) argue that appointing

non-executive directors to the board will result in

higher disclosure levels of the material matters of

firms. Accordingly, non-executive directors are more

likely to encourage managers to comply with

stakeholders’ needs for the ED. Therefore, the study’s

second hypothesis is:


board independence and environmental disclosure.

Role Duality

In certain firms, the board chairperson also serves as

the CEO; this is termed role duality. However,

separation of the roles is thought to enhance the board

independency and improve reporting quality (Forker,

1992; Jensen, 1993; Abdel-Fattah, 2008; AbuRaya,

2012). Several studies, such as Forker (1992), Haniffa

and Cooke (2002), Gul and Leung (2004), and

AbuRaya (2012), find that chairperson/CEO

separation is positively correlated with voluntary

disclosure levels including the ED. Moreover, the

agency theory believes that an independent

chairperson provides the board with strong powers to

monitor and demand sufficient disclosure (Al-Janadi

et al., 2013). Accordingly, we argue that an

independent chairman is less likely to conceal

material information on environmentally sensitive

activities, since he/she is not directly engaged in

executing these activities. Furthermore, it may induce

him/her to disclose more environmental information.

Therefore, the study’s third hypothesis is:

H3: There is a negative correlation between

role duality and environmental disclosure.

Family Ownership

A large number of firms in the developing world,

including Arab countries, are family-owned and

controlled (Abdel-Fattah, 2008; Baydoun et al.,

2013). Typically, company ownership in Saudi

Arabia is family-concentrated (Al-Lehaidan, 2006;

Ghazwy, 2010; Al-Janadi et al., 2013; Albassam,

2014). Moreover, Ho and Wong (2001) and Haniffa

and Cooke (2002) find that family-controlled firms

are less likely to disclose more information. However,

Block and Wagner (2010) and Ghazwy (2010) argue

that family firms usually recognize the importance of

social responsibility and therefore, in addition to

achieving financial objectives, work to maintain a

satisfactory social and environmental performance.

We argue that family firms tend to play a positive

social role, to improve the image, prestige, and

reputation of their families. Therefore, the study’s

fourth hypothesis is:


family ownership and environmental disclosure.

State Ownership

State ownership could play a key role in encouraging

firms to respect the environment and be transparent

about their sensitive environmental activities. In

general, governments are expected to work for the

good of the public, and protect their populations from

threats to their lives. As they defend the state

boundaries from external enemies, they must also

protect the health of the populace from environmental

and industrial threats. In this context, governments

issue environment-protection regulations for firms to

apply. Thus, governments should provide an effective

example in applying these regulations, in firms in

which they hold a large shares ratio. Therefore, high

state ownership could be an effective CG mechanism

(Claessen et al., 1999; Zeitun and Tian, 2007).

Moreover, Al-Janadi et al. (2013) find a positive

correlation between state ownership and voluntary

disclosure including ED in a sample of Saudi firms.

Accordingly, the study’s fifth hypothesis is:


state ownership and environmental disclosure.

Institutional Ownership

Agency theory suggests that institutional investors

could be an effective monitoring mechanism for ED

(Jensen and Meckling, 1976; Abdel-Fattah, 2008;

AbuRaya, 2012). This suggestion is consistent with

the efficient-monitoring hypothesis, which suggests

that institutional investors are sophisticated and have

greater expertise, resources and power than other

investors, which enable them to effectively monitor

managers’ decisions (Guan et al., 2007; Abdel-Fattah,

2008; AbuRaya, 2012). However, the passive hands-

off hypothesis suggests that institutions are passive

and short-term investors that prioritize their financial

interests (Porter, 1992; Claessens and Fan, 2002). In

relation to ED, Barako et al. (2006), Saleh et al.

(2010) and Htay et al. (2012) find a positive

relationship with institutional ownership. In line with

these findings, this study believes in the positive role

of institutional investors as suggested by agency

theory and the efficient-monitoring hypothesis.


464

Therefore, we examine both aspects, through the

following hypothesis:


institutional ownership and environmental disclosure.

4. Methodology

Sample and Data

The study population covers all listed firms on the

Saudi Stock Exchange between 2007 and 2011. Table

1 shows the distribution of firm-year observations by

year. The initial sample included 694 firm-year

observations, which is reduced by 172 observations

of financial and insurance firms. Next, the initial

sample is reduced by 255 observations because of

missing data on the study variables, which results in a

final sample of 267 observations. The observations

with missing data reduced gradually over time which

may be due to the application of the Saudi CG code in

2007. The companies’ annual reports are the main

data sources, and were obtained from

www.tadawual.com.sa.

Table 1. The study sample firm-year observations

2007 2008 2009 2010 2011 Total

Initial Sample 111 129 146 152 156 694

Less: Financial and Insurance firm-year observations (28) (32) (36) (38) (38) (172)

Less: Firm-year observations with missing data (64) (58) (52) (44) (37) (255)

Final Sample 19 39 58 70 81 267

The Study Model

We use the following multiple regression model for

the panel data fixed effects analysis, in order to test

the study’s hypotheses.

EnDIndexit = β0 + β1 ACscoreit + β2 Brdindpit + β3

RolDualit + β4 Famownit + β5 Stateownit + β6

Instownit + β7 ROAit + β8 Levrgit+ β9 IndSenit + β10

Sizeit + ε

Dependent Variable

The ED index is the model dependent variable. To

measure its extent, we adopt three steps, as followed

previously in the literature (e.g., Botosan, 1997; Rizk,

2006; AbuRaya, 2012). First, we constructed an ED

checklist covering five categories-environmental

expenditure, pollution abatement, environmental

preservation, recycling programs, and environmental

award-based on the available information and the

social responsibility standard, ISO 26000. Second, we

examined the annual reports of the sample firms

using manual content analysis in order to determine

the checklist-items that are actually disclosed for each

firm-year observation; we assigned one if the item is

disclosed and zero otherwise. Third, we calculated the

total number of items actually disclosed for each

firm-year observation and divided this number by the

total number of the checklist items, which results in a

disclosure index value for each firm-year observation.

We use the following equation:

EnDIndexit = Σ Actual Items Disclosed

Total Checklist Items

Independent and Control Variables

The independent variables can be classified into three

groups. The first group consists of three CG

variables; audit committee effectiveness, board

independence, and role duality. We use an aggregate

score to represent the overall audit committee

effectiveness, instead of examining each

characteristic individually. The aggregate score is

used by Brown and Caylor (2006) and Jiang et al.

(2008), among others. The second group includes

three ownership variables; family ownership, state

ownership, and institutional ownership. The third

group includes four corporate characteristics, as

control variables; profitability, leverage, industry, and

firm size.

In relation to the control variables we make four

assumptions. First, we believe that profitable firms

can afford the costs of additional disclosure, as well

as the costs of applying environment-protection

procedures, which may influence positively ED.

Second, highly leveraged firms may disclose less

environmental information, since they may prefer to

retain extra voluntary disclosure costs to pay debts.

Third, the ED may vary between sensitive and non-

sensitive industries; therefore, we included a dummy

variable that differentiates between both industries

types, with the expectation of a positive correlation.

Fourth, larger firms can have a larger number of

stakeholders; therefore, they may be under more

pressure to disclose environmental information than

small firms. Accordingly, we examine these beliefs

by including the four control variables, return on

assets (as a proxy for profitability), firm leverage,

industry sensitivity and firm size. Table 2 presents the

study variables and their measurements.


465

Table 2. The Study Variables' Definitions and Measurement

Symbol Definition Measurement

Dependent Variable:

EnDIndexit Environmental

Disclosure Index

The ratio of sum of ED items disclosed by a firm i for the year t to the total

number of ED items in the checklist.

Independent Variables:

ACscoreit Audit Committee

Score

It is a dummy variable that takes the value one if the AC of the firm i and

the year t, consists of fully independent members, with at least three

members, one of whom is a financial expert, and holds at least three

meetings a year, and zero otherwise. Brdindpit Board

Independence

This variable equals the proportion of outside directors to total number of

directors on the board for the firm i during the year t.

RolDualit Role Duality This variable is a dummy variable that equals one if the board chairman is

also the CEO of the firm i and the year t, and zero otherwise.

Famownit Family Ownership This variable equals the ratio of number of shares held by family members

to the total number of outstanding shares of the firm i and the year t.

Stateownit State Ownership This variable equals the ratio of number of shares held by the Saudi

government or any of its agencies to the total number of outstanding shares

of the firm i and the year t.

Instownit Institutional

Ownership

Institutional ownership is measured as the ratio of number of shares held by

institutional investors to the total number of outstanding shares of the firm i

and the year t.

Control Variables: ROAit Return on Assets It is a proxy for firm performance, that is the ratio of total net income to the

total assets of the firm i and the year t.

Levrgit Firm Leverage This variable equals the total debts divided by the total assets of the firm i

and the year t.

IndSenit Industry

Sensitivity

It is a dummy variable that equals one if the firm i during the year t belongs

to one of the following sensitive industries: chemicals, petrochemicals and

engineering, and cement industries, and zero otherwise.

Sizeit Firm Size This variable is measured as the natural logarithm of total assets of the firm

i and the year t.

5. Results and Discussion

Descriptive Statistics

Table 3 displays the descriptive statistics of all the

model variables. First, the mean value of EnDindex is

0.30, indicating that the average ED of the sample

firms is 30% during the years 2007-2011, which is

more than double the 14.61%, found by Al-Janadi et

al., (2013) for a sample of Saudi firms during 2006-

2007. This improvement in ED extent may be due to

the application of the Saudi CG code in 2007.

Second, the mean value of ACscore is 0.26, implying

that 26% of the sample audit committees can be

deemed effective, since they consist of fully

independent directors, with at least three directors,

one of whom is a financial expert, and hold at least

three meetings a year. Third, the Brdindp mean value

is 0.52, indicating that on average more than half of

the boards’ directors of the sample firms are

independent. However, the mean value of RolDual is

0.85, which implies that on average 85% of the

sample boards’ chairpersons play a dual role as board

chairmen and CEOs. This mean is very high if

compared with 0.04% found by AbuRaya (2012) for a

sample of UK firms.


466

Table 3. Descriptive statistics (N= 267)

SD. Min Max Median Mean Variable

0.79 0.00 4.00 0.00 0.30 EnDIndexit

0.81 1.00 1.00 0.33 0.26 ACscoreit

0.22 0.00 1.00 0.50 0.52 Brdindpit

0.36 0.00 1.00 1.00 0.85 RolDualit

0.24 0.00 0.95 0.00 0.15 Famownit

0.17 0.00 0.83 0.00 0.08 Stateownit

0.19 0.00 0.66 0.00 0.13 Instownit

0.40 -0.59 7.18 0.07 0.10 ROAit

0.15 0.00 0.62 0.04 0.10 Levrgit

0.43 0.00 1.00 0.00 0.25 IndSenit

0.69 7.18 11.05 9.22 9.24 Sizeit

Fourth, the descriptive statistics of ownership

variables shows that 15%, on average, of the sample

firms’ outstanding shares are owned by families,

followed by 13% by institutional investors, and 8%

by government agencies. Furthermore, the maximum

values are 95% for family ownership, 83% for state

ownership, and 66% for institutional ownership.

These results support the arguments of Al-Lehaidan

(2006), Al-Janadi et al. (2013), and Albassam (2014)

that firm ownership in Saudi Arabia is family-

concentrated. The mean value of Levrg is 0.10, which

implies that the sample firms, on average, do not

suffer a severe debt problem. Furthermore, the mean

value of IndSen variable is 0.25, indicating that 25%,

on average, of the sample firms belong to one of the

sensitive industries.

Correlation Matrix

Table 4 shows that the highest correlation between

independent variables is 0.41 which is between state

ownership and firm size, followed by -0.34 between

board independence and institutional ownership.

These correlations do not represent a harmful

multicollinearity problem, since they are all less than

50%. Guajarati (1995) and Bryman and Cramer

(2001) argue that correlation between independent

variables of more than 80% can be considered to be a

serious multicollinearity problem. Moreover, a

positive correlation of 0.30 between EndIndex and

IndSen implies that firms in the sensitive industries’

category may report greater levels of ED than do

other firms, and a positive correlation of 0.24

between EndIndex and ROA indicates that profitable

firms may report greater levels of ED than do less

profitable firms. However, Brdindp and Famown

variables seem to be less correlated to EnDIndex,

while size was not correlated at all.

Table 4. Correlation Matrix

Variabl

e

EnDInd

ex

ACsco

re

Brdin

dp

RolDu

al

Famo

wn

Stateo

wn

Insto

wn

RO

A

Levr

g

IndSe

n

Siz

e EnDInd

ex

1.00

ACscor

e

-0.12 1.00

Brdindp -0.01 0.15 1.00

RolDual 0.15 0.14 0.02 1.00

Famow

n

0.05 0.07 -0.18 0.17 1.00

Stateow

n

0.10 0.02 -0.04 0.07 -0.20 1.00

Instown 0.19 -0.01 -0.34 0.05 0.23 -0.26 1.00

ROA 0.24 0.00 -0.12 0.21 -0.10 0.32 0.14 1.00

Levrg -0.09 -0.16 -0.11 0.00 -0.07 -0.05 0.26 0.18 1.00

IndSen 0.30 -0.05 0.24 -0.04 -0.29 0.26 -0.09 0.26 0.07 1.00

Size 0.00 -0.01 -0.14 0.09 0.18 0.41 0.15 0.02 0.29 0.18 1.0

0

Regression Results

Table 5 displays the regression analysis results.

Regarding the CG variables, the coefficient of the

variable ACscore was found to be positive and

statistically significant at 1% (β1= 0.265, t-statistic=

2.650), which implies that firms with effective audit

committees report ED more than do other firms. This

result is consistent with arguments of Bryan et al.

(2004), Madawaki and Amran (2013), and Soliman

and Ragab (2014) that audit committee effectiveness

improves disclosure quantity and quality. The result

confirms our hypothesis that effective audit

committees are more likely to induce or force

managers to comply with the increased needs of ED.

Therefore, we accept the study’s first hypothesis.


467

The coefficient of the variable Brdindp was

found to be positive, but statistically insignificant

(β2=0.145, t-statistic=0.470), which indicates that

board independence may not be a determinant of the

ED, in Saudi Arabia. This result is inconsistent with

Rao et al. (2012), Htay et al. (2012), and Janadi et al.

(2013), who find a positive correlation, and with

Haniffa and Cooke (2002), Barako et al. (2006), and

AbuRaya (2012), who find a negative correlation.

Therefore, we reject the study second hypothesis.

The coefficient of the variable RolDual was

found to be positive and statistically significant at

10% (β3= 0.358, t-statistic= 1.790), indicating that

firms with boards' chairpersons who serve jointly as

CEOs, report more ED than other firms. The result

contradicts agency theory and findings of previous

studies, such as Forker (1992) and Haniffa and Cooke

(2002), and AbuRaya (2012) However, Al-Janadi et

al. (2013) find a similar result from a sample of Saudi

firms. This result can be explained by Stewart (1991)

and Heracleous (2001) who argue that role duality

could enhance decision making and enable boards to

provide adequate monitoring.

Table 5. The Regression Analysis Results

Symbol Definition Coef. t- statistic P> t

Cons. Model Constant β0 0.702 0.730 0.465

ACscoreit Aggregated AC score β1 0.265 2.650 0.009***

Brdindpit Board Independence β2 0.145 0.470 0.639

RolDualit Role Duality β3 0.358 1.790 0.075*

Famownit Family Ownership β4 0.364 1.260 0.210

Stateownit State Ownership β5 0.318 1.690 0.094*

Instownit Institutional Ownership β6 1.093 3.100 0.002***

ROAit Firm profitability β7 1.327 1.970 0.050**

Levrgit Firm leverage β8 -0.456 -2.290 0.023**

IndSenit Industry sensitivity β9 0.616 3.990 0.000***

Sizeit Firm size β10 -0.079 -0.780 0.438

Additional Statistics

N= 267 F-value = 5.720 Prob>F = 0.000 Overall R-sq = 0.2430

*Significant at 1%, **Significant at 5%, ***Significant at 10%

Regarding the ownership variables, the

coefficient of the variable Famown was found to be

positive, but statistically insignificant (β4=0.364, t-

statistic=1.260), implying that family ownership may

not be a determinant of ED in Saudi Arabia. This

result is consistent with that of Ghazwy (2010) who

finds no significant correlation in Saudi Arabia. In

contrast, the analysis demonstrates that the coefficient

of the variable Stateown was found to be positive and

statistically significant at 10% (β5=0.318, t-statistic=

1.690), indicating that firms with higher state

ownership disclose more environmental information

than do other firms. Our explanation for the positive

correlation is that governments work for the interests

of the public and regularly issue environment-

protection regulations, and therefore, they are

expected to provide a positive example for

compliance with these regulations. Our result

confirms the previous arguments of Claessen et al.

(1999) and Zeitun and Tian (2007) that high state

ownership could be an effective CG mechanism by

which to improve transparency. Furthermore, our

result confirms the positive correlation found by Al-

Janadi et al. (2013) in Saudi Arabia. Accordingly, we

accept the study’s fifth hypothesis.

The results also show that the coefficient of

Instown variable was found to be positive and

statistically significant at 1% (β6= 1.093, t-

statistic=3.100), which confirms the correlation

(0.19) found by the correlation matrix. This result

indicates that firms with high institutional ownership

are more likely to disclose more environmental

information. This result confirms the agency theory

suggestion of a positive influence of institutional

ownership on transparency, as well as the arguments

of the efficient-monitoring hypothesis. Moreover, the

result confirms the findings of Barako et al. (2006),

Saleh et al. (2010) and Htay et al. (2012), who

establish a positive correlation. Accordingly, we

accept the study’s sixth hypothesis.

In relation to the control variables, the analysis

found that the coefficient of the ROA was positive

and statistically significant at 5% (β7= 1.327, t-

statistic= 0.050), which confirms the correlation

(0.24) as reported in the correlation matrix. This

implies that highly profitable firms report higher

levels of environmental information than do less

profitable firms, which confirms our argument that

profitable firms can afford the extra costs of ED. Our

result is consistent with that of Gul and Leung (2004).

The coefficient of the Levrg variable was found to be

negative and statistically significant at 5% (β8= -

0.456, t-statistic=-2.290), indicating that highly

leveraged firms are less likely to disclose higher

levels of environmental information, which is

consistent with the negative correlation (-0.09) found


468

by the correlation matrix. This result confirms our

argument that highly leveraged firms may prefer to

save the extra voluntary disclosure costs in order to

pay debts, which reduces the level of ED. This result

is consistent with that found by Cormier and Magnan

(2003), but inconsistent with that of Barako et al.

(2006). The analysis found also that the coefficient of

the variable IndSen was positive and statistically

significant at 1% (β9= 0.616, t-statistic= 3.990),

which confirms the positive correlation (0.30)

reported by the correlation matrix. This result

indicates that firms that belonging to the sensitive

industries’ category report higher levels of

environmental information than do other firms. This

result confirms our expectations and the arguments of

Said et al. (2013). Finally, the coefficient of the Size

variable was found to be negative, but statistically

insignificant (β10= -0.079, t-statistic= -0.780), which

confirms the correlation matrix result that firm size is

not correlated (0.00) with ED. Therefore, firm size

cannot be deemed a determinant of ED.

To conclude, audit committee effectiveness, role

duality, state ownership, institutional ownership, firm

profitability, and industry sensitivity were found to be

positively and statistically correlated with the ED

index. Furthermore, firm leverage was found to be

negatively and statistically correlated with the ED

index. However, board independence, family

ownership, and firm size were found not to be

statistically correlated with the ED index.

6. Conclusion This study evaluates ED practices and its

determinants in Saudi Arabia following the

application of the Saudi 2006 CG code. Saudi Arabia

is one of the largest economies in the Middle East

holding 25% of the world oil reserves and

contributing 25% of the Arab world’s GDP; however,

despite the importance of the economy there has been

a lack research in the area of ED in the Kingdom. We

use manual content analysis and a self-constructed

ED checklist to examine annual reports of a sample of

267 firm-year observations from 2007 to 2011. The

results find that the average ED extent is 30%, more

than double the 14.61% found by Al-Janadi et al.

(2013) for a sample of Saudi firms in the period

2006-2007. Furthermore, the analysis concludes that

firms with effective audit committees, role duality,

high state and institutional ownership, and high

profitability rates, as well as those that belong to the

sensitive industries’ category report greater levels of

environmental information than do other firms.

Moreover, firms with high leverage levels were found

to report less environmental information. However,

no statistical significant correlations were found for

board independence, family ownership, and firm size.

Our results confirm agency theory suggestions that

CG mechanisms, such as audit committees and state

and institutional ownerships could enhance

transparency, and thus, disclosure levels. However,

our results on role duality contradict agency theory

suggestions that chairperson/CEO separation

increases transparency levels. The study results provide important

implications. For GC regulators, the results

emphasize the importance of effective audit

committees, and state and institutional ownership in

enhancing the transparency on the material

environmental matters. In this context, governance

codes should emphasize specific minimum

characteristics of CG mechanisms, such as

independence, expertise, and activity of audit

committees. Furthermore, stakeholders should exert

greater pressure on managers to disclose greater

disclosure on environmental matters, since disclosure

levels are still moderate. In addition, they should

recognize that financially healthy firms, those with

high profit levels and lower leverage, are more likely

to present greater levels of ED, while other firms may

prefer to save extra disclosure costs, in order to

enhance performance or pay debts. This may help to

determine the ED expectations before investing in a

specific firm.

The study has a number of limitations, which

invites future research. First, the sample size is

relatively small, and the study period is restricted to

2007-2011. Further research should expand the

sample size and period to better generalize and

validate the results. The study examines only the

period following the application of the Saudi 2006

CG code; however, a broader conclusion can be

reached when comparing the years prior to the

introduction of the code in 2007. Further research

could include a comparison study between ED

practices before and after the application of the code,

to better evaluate the effectiveness of the code. Future

research in the ED context can also include more

variables, such as number and extent of

environmental fines, and the presence of

environmental prosecutions against the firms. A

research question to be investigated is: could

environmental prosecutions and fines be the main

drivers of firms to give greater attention to

environmental matters, and thus, the ED?

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471

CREATING A STORE ENVIRONMENT THAT ENCOURAGES BUYING: A STUDY ON SIGHT

ATMOSPHERICS

Y Hefer*, E C Nell*

Abstract

More than ever, consumers respond to more than just the physical product when making a decision to purchase a product. One of the most noteworthy features of a product is the atmosphere of the place in which the product is bought. From time to time, the store atmosphere is more powerful than the product itself. This study focused specifically on the most important atmospheric element – sight. The main research question explored the effect of sight atmospherics on consumer perceptions. Explorative research was conducted together with qualitative research by means of focus groups. Purposive sampling was deemed the most appropriate sampling method for this study. The findings indicated that sight atmospherics can influence consumers’ perceptions either subconsciously or consciously, and have a direct influence on the amount of time consumers spend in a specific store. Consumers perceived sight atmospherics as a tool to establish a ‘purchasing’ atmosphere and as a means of communication to represent the brand of the store. It was established that sight atmospherics create visual attraction and stimulation with consumers, and that they contribute to the image and the character of the store. Key Words: Sight, Atmospherics, Colour, Lighting, Visual Displays, Consumer Perceptions, Apparel Retail * Department of Marketing and Retail Management, University of South Africa (UNISA), South Africa

1. Introduction

Retailers make use of various communication

methods to market their products and brands to

consumers and ultimately influence consumer’s

perceptions about the store. Communicating with

consumers by means of atmospheric cues has long

been considered an important aspect of retailing

(McGoldrick, 2002).

A retailer’s store atmosphere is designed

specifically with the purpose of communicating the

retailer’s image and personality (Berman & Evans,

2013). Determining consumers’ perceptions of

atmospheric cues used in apparel retail stores can

assist in developing a retailer’s image, improve

customer value, and heighten performance and

patronage intention by way of reducing time, cost and

energy in keeping or enticing new consumers

(Kumar, Garg & Rahman, 2010).

With the intention of adding depth to the

perceptions condensed in the atmospherics and to

communicate the retailer’s brand value, each element

of the retailer’s atmosphere is planned in such a way

as to be different from its competitors. Kotler (1973),

who is also known as the ‘father of atmospherics’,

specified that environmental elements in and around a

retail store can arouse perceptions about a store and

its image. Gardner and Siomkos (1990) reflected this

phenomenon in yet another way and found that sight

atmospherics can affect consumer perceptions about a

product.

Even though the literature about store

atmospherics is extensive, the literature falls short

when discussing consumer perceptions based

specifically on sight atmospherics used in apparel

retail stores. In most cases, sight atmospherics only

includes the elements of colour and lighting. For the

purpose of completeness, visual displays were added

to sight atmospherics as a third element. Displays in

apparel retail stores are also noticed in a visual

manner by consumers. For that reason, the main

objective of this research study was to explore the

effect of sight atmospherics on consumers’

perceptions in apparel retail stores by scrutinising not

only colour and lighting, but also visual displays.

Through the interrelated use of colour, lighting

and visual displays these elements become noticeable

and perceptible. Therefore, visibility in apparel retail

stores depends greatly on the use of the correct

lighting (Pegler, 2010). According to Hultén et al.

(2009), appropriate lighting has the ability to create

an applicable mood, which in itself entices a

consumer’s attention.


472

2. Literature Review

Atmospherics is a term used to describe the design of

a specific space with the intention of influencing

consumers on an emotional level to increase purchase

intention (Lunardo & Roux, 2015). Owing to the fact

that several in-store cues in the retail setting are

visually communicated, Kerfoot, Davies and Ward

(2003) arrived at the conclusion that 90% of all in-

store environment cues are absorbed visually.

According to Kotler (1973) several elements can have

an impact on sight.

Sight refers to the act of seeing and forming a

perception of specific things or objects by using the

eyes (AR Dictionary, 2010). Hultén (2011) is of the

opinion that sight is considered to be the most

influential of all the human senses. It is for this reason

that sight was chosen as the focus area for this study.

Perception refers to a consumer’s attentiveness

and understanding of reality and their surroundings

(Harris & Babin, 2016). Essentially, perception is the

way consumers understand things. Through the use of

sight atmospherics, apparel retailers can communicate

certain messages to their consumers. Because

consumer perceptions vary from one consumer to the

other, the intended message could get lost in

translation and reach a particular consumer as

something entirely different to the retailer’s intent. It

is therefore critical for apparel retailers to understand

how consumers perceive the communications created

by the sight atmospherics used in store.

2.1 Colour

The effect of colour on consumers’ perception isn’t

limited to the merchandise on display only. The

colours surrounding consumers while they are

shopping – for example, the colour of the walls or the

colour of the displays – can also influence

consumers’ perceptions.

Gupta and Tandhawa (2008) explain that colour

is the best atmospheric element to use to entice a

consumer into a store and to create an appealing store

atmosphere. Bell and Ternus (2012) suggests that

colour can be used as a tool to draw consumers into a

store and ensure that they walk through the whole

store before exiting.

Colour can be integrated throughout a store in

various ways – on the interior and exterior store

walls, in the signage, with the merchandise and in

many other ways (Poloian, 2013). Colours can

communicate various emotions and have diverse

connotations when experienced through different

cultural and/or social lenses (Ebster & Garaus, 2011).

Colours such as yellow, gold and red generally evoke

energetic, hot and dynamic responses, whereas cool

colours such as green, blue and white have a calming

effect on consumers (Pegler, 2010).

Because colour is one of the first things

consumers notice when walking into a store, it is one

of the most important design elements that retailers

can use to communicate with their consumers (Bell &

Ternus, 2012). Colour plays an important role in a

retail store as it can stimulate feelings and emotions

that can trigger memories and experiences (Gobé,

2009:79). Colour can also be used in the design of a

brand and a logo, in signage and merchandise and

even window displays.

For this reason it is vital for apparel retailers to

know and understand the mental meaning and

emotional meaning behind colours and to understand

consumers’ perceptions with regard to the colours

used in store. Understanding consumers’ perceptions

about colour can assist apparel retailers to create a

pleasurable in-store atmosphere that can stimulate

positive emotions in consumers (Pegler, 2010; Gobé,

2009).

2.2 Lighting

The use of lighting in retail stores is even more

essential than apparel retailers comprehend. Different

styles of lighting can produce different store

atmospheres for consumers (Wiid, 2012). In order to

create a definitive mood or ambiance to attract

consumers into a store, lighting can be used to

introduce merchandise to consumers that they would

not necessarily have considered previously.

Lighting can be defined as a means to create

artificial illumination (Gilmour, 2010). Bell and

Ternus (2012) explains that lighting plays a central

role in describing and setting a retailer’s brand

identity and image. These authors also say that

lighting is used in retail stores to highlight

merchandise with the aim of creating a feeling or a

mood. The benefits and significance of lighting in

retail stores have not only been acknowledged by

lighting manufacturers, but similarly by academic

researchers (Boyce, 2004; Marques, Cardoso &

Palma, 2013; Schielke, 2010; Summers & Hebert,

2001).

Pegler (2010) came to the conclusion that

consumers will always move towards areas in the

store that have the most light. Summers and Hebert

(2001) support this view, noting that when a store is

well-lit, it will invite customers to go into the store,

browse and linger and ultimately motivate them to

make a purchase.

Lighting is a key factor in the retail

environment’s effect on consumers, as intensely lit

stores have a more noticeable effect on consumer

behaviour than softly lit stores (Mehrabian, 1976).

The use of realistic lighting in-store could have an

impact on the way consumers perceive the store

atmosphere. Additionally, lighting can be used to

communicate retail image (Quartier, Vanrie &

Cleempoel, 2014).

Consequently, lighting plays a crucial role in the

formation of an effective in-store atmosphere. For

this reason it is crucial for apparel retailers to be


473

familiar with and understand the consumer’s

perceptions of lighting (Binggeli, 2010).

2.3 Visual Displays

Visual displays are generally used to decorate a store

by adding extra props, colours, fixtures, posters, frills

and materials to a store in order to promote the sales

of specific merchandise (Colborne, 1996). A visual

display is a strategic tool that apparel retailers can

utilise to assist in the sales process by enticing

consumers and piquing their interest. Visual displays

can assist apparel retailers to create a competitive

advantage that is not easily duplicated, as they can

create a look and feel that is unique to their

merchandise and image (Bell & Ternus, 2012).

If effective, visual displays can invite consumers

into a store and influence them to make a purchase.

Visual displays can include, among other elements,

merchandise arrangements, props and signage

(Pegler, 2010). Owing to the fact sight is the most

influential of all the human senses, good visual

displays can appeal both to consumers’ cognitive as

well as emotional senses. As soon as the visual

displays have attracted consumers, retailers can

further utilise the visual displays to keep the

consumers in the store by directing them towards

certain products. Therefore apparel retailers can

increase their probability of making sales by

understanding consumer perceptions regarding visual

displays and by determining what works and what

does not.

Visual displays can assist retailers to achieve

their sales targets if the visual displays make decent

first impressions. If the visual appearance of the store

is satisfactory and the merchandise is attractively

presented through the visual displays in-store as well

as the window displays, it is possible that consumers

will browse longer and eventually make a purchase.

Visual displays can perform various functions,

including attracting the consumer, welcoming a new

season, promoting slow-moving merchandise, or

announcing a sale. If the retailer is privileged enough

to have storefront windows, then the retailer has one

of the most recognised (and least costly) forms of

promotion at their fingertips. Retail store windows is

the one way through which retailers can visually

communicate the merchandise on offer to consumer

and stop them in their tracks as they walk past the

store. Once the window displays has the consumers

attention, the in-store displays can further entice the

consumer. Even though some stores may not have

storefront widows, there are several places throughout

the store where visual displays can be fashioned,

including in-store displays on shelves or fixtures,

stock displays and point of purchase displays (Wiid,

2012).

3 Methodology

The extent to which sight atmospherics have an effect

on consumer perceptions was studied by means of

exploratory research. Because a comprehensive

explanation in terms of consumer perceptions was

required, qualitative research was deemed the best

research design to use. The empirical data was

gathered through self-reporting as a data source by

means of focus groups.

Focus groups are free flowing interviews

between small groups of people, typically between

six and ten participants (Zikmund & Babin, 2010).

Focus groups align well with an exploratory paradigm

as they are designed to shed light on vague situations.

In the focus groups, the participants were asked about

their views, opinions and perceptions towards sight

atmospherics, focusing on colour, light and visual

displays.

Each focus group consisted of eight participants

that were selected by means of non-probability,

purposive sampling. The participants were selected

based on their availability and by the purposive

judgement of the researcher, based on the following

inclusion criteria: people who are located in Gauteng

and that purchase apparel and apparel related items at

retail outlets in Gauteng; people who have access to

e-mail; people who speak, read and comprehend

English; people who have the time and are willing to

participate in the study. Given the qualitative

paradigm of the study, the goal was not to be

representative, but to be able to transfer the findings

and information towards further research studies.

In each focus group session, various

photographs of an apparel retail store in Gauteng

were used to illustrate visual examples of sight

atmospherics. In order to structure the focus group

sessions, the following questions were asked:

1. What do you understand about the term “sight

atmospherics”?

2. When you walk into an apparel retail store, what

influence does the use of colours have on your

perception of the store?


influence does the use of lighting have on your

perception of the store?


influence does the use of visual displays have on

your perception of the store?

As the gathered data were contextual in nature,

thematic analysis was used to evaluate the data.

Thematic analysis is a data analysis process in which

data patterns are searched for and arranged according

to themes and categories based on the found patterns.

4 Results

The results revealed that the lighting used in a store

was a significant factor when making a decision to

enter a store or not. The participants favoured stores


474

that are saturated with light rather than stores stifled

by darkness. The focus groups concurred that if they

observed a store from a distance and it looked like the

store was not well lit, it could prevent them from

entering the store. If a store is too dark it is perceived

as being dirty or that the retailer is purposefully trying

to hide something.

The participants agreed that lighting is a symbol

of quality and cleanliness. The focus groups

established that lighting could have a positive or a

negative outcome on consumers’ perceptions in

apparel retail stores. A positive outcome meant that

consumers will linger and browse in a store for longer

and will generally spend more money in the store. In

contrast, consumers will decide to not enter a store or

they will minimize the time they spend in store, thus

decreasing the probability of a sale.

The participants identified that a prominent

visual stimulant was colour, which creates visual

attraction and stimulation. The participants explained

that a colourful store attracted their attention and

enticed them to enter the store. The focus groups

explained that they were sensitive to the use of colour

in displays, that they appreciated the realistic use of

colour, as opposed to the use of colour in an attempt

to make a display seem trendy.

The participants explained that visual displays

used in apparel retail stores are mostly perceived in

subliminal ways and that consumer perceptions are

influenced by personal preferences and contextual

aspects such as themes, store type, gender, sensory

and cognitive aspects. A fantastic, extravagantly

fictional display, while attractive for some

consumers, would not appeal to others if it was out of

context with the merchandise on offer.

The focus groups went on to comment that they

often notice a specific theme that is communicated

through visual displays and that they appreciate a

retailer’s consideration to social and environmental

occurrences and adapt displays accordingly.

Participants are of the opinion that visual displays

should stay true to the retail image and should be

updated regularly to keep up with current seasons and

trends. The focus groups continued to say that they

notice themes that do not fit with a certain time or

space, or themes that send the wrong message

through the display.

It was found that displays should be logical,

realistic and bright. They also mentioned that the

displays should be at eye-level, balance the amount of

space and foot traffic of the store, and would be more

productive if use was made of mannequins. It was

highlighted that the displays should provide

information (for example using signage) about the

merchandise on display.

Despite the fact that the focus groups concurred

that visual displays are useful, the participants were

determined to point out the aspects that hindered the

successful perception of a display. Focus groups felt

that it was imperative that visual displays should be

secondary to the actual merchandise sold in a store.

Moreover, the participants were acutely aware of

having sufficient space to move around a store

without restriction. Consequently, extensive and busy

displays were not well received.

5 Conclusion

Participants’ perceptions of sight atmospherics were

found to be powerful enough to influence cognitive

processes and change consumer behaviour by

creating curiosity and a desire to look at the

merchandise. These changes in thinking and

behaviour have a direct effect on the amount of time

consumers spend in a specific store. Consumers

perceived sight atmospherics as an instrument to

create a ‘purchasing’ atmosphere and as a means to

communicate the image of the store to consumers

It was established that sight atmospherics create

visual attraction and stimulation with the consumers,

and that it contributes to the image and the character

of the store. Participants mentioned that sight

atmospherics enhanced their perceptions by creating a

relaxed environment to shop in. They also stated that

sight atmospherics contributed to the perception of

quality of the product sold in store. Participants

mentioned that physical and sensual characteristics

are important to them. Characteristics like brightness

of colours and lighting, the size and height of

displays, the suitability of the displays and the fact

that the displays should be realistic and logical were

emphasized. The participants pointed out that visual

displays should never be messy, but should always

stay spotless and be well designed.

6 Areas For Future Research

An interesting study would be to determine whether

sight atmospherics have the ability to act as an

identifying factor which enables consumers to

recognize a brand or store only by considering the

sight atmospherics.

Testing consumers’ perceptions of sight

atmospherics from two different retailers from the

same retail group located in different regional areas

could make for an interesting study.

Another stimulating study would be the

investigation of whether the different atmospheric

elements (sight, sound, touch and smell) in a retail

environment can be used as a segmentation tool, as

consumers of different ages, backgrounds and

cultures might respond in different manners to

various sounds, smells and visual stimuli.

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475

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476

BUSINESS ETHICS EDUCATION

Isaias Rivera*

Abstract

This paper makes the review of the literature dedicated to relevant social issues that have been addressed by business practices and the business ethics literature, especially during the past century. The review of practical literature is undertaken from the perspective of the practitioner and demonstrates that the business ethics literature has been lax in the sense that it mostly addresses specific managerial problems and personal ethics within the business environment. Key Words: Business Ethics, Business Practices, Management * Tecnologico de Monterrey Campus Chihuahua, Mexico

Introduction

What do we really mean by the expression “business

ethics”?

Is the term “business” limited to those activities

that are designed or intended to make money, or a

profit?8

These are two of the questions presented by

George Devine in his book Responses to 101

Questions on Business Ethics. These two questions

are of significant importance in the literature of

business ethics; in fact, almost the entire genre

engages directly or indirectly in these debates.

Business ethics began to be systematized at the

start of the 20th

century. McHugh notes that between

1900 and 1920, the “moralist admonished the shady

trader to mend his ways; voters called for legislation

to improve the working conditions of women and

children,” worker compensation issues became

relevant, as did “truth in advertising,” the Better

Business Bureau was established, and the first

courses in business ethics were offered in

universities.9 I opened this paper with two questions

in order to frame a comparison within the business

ethics literature. I classify this literature as either

“practical” or “philosophical.”

Taking these literary classifications as a frame

of reference, I intend to compare and contrast two

basic claims. First, I will analyze portions of a

selected group of books in the field that engage

Devine’s questions about business ethics, its

definition, and some of the basic ideas about the

8 George Devine, Responses to 101 Questions on Business Ethics (New Jersey: Paulist Press 1996). 9 Francis P. McHugh, Keyguide to Information Sources in Business Ethics (London: Mansell Publishing 1988). Here McHugh uses the term “systematizing business ethics” and exemplifies the start of business ethics as a field of study for social relevance.

relationship between profit and ethics. Second, I will

address the historical evolution of the discipline of

business ethics and how it has neglected to address

social issues such as poverty from a preventive

stance. This review will reveal that the business ethics

literature lacks a social justice perspective and thus

neglects to provide a coherent response to economic

justice.

The review of the philosophical literature will

be dedicated to relevant social issues that have been

addressed by business practices and the business

ethics literature, especially during the past century.

The review of practical literature will be undertaken

from the perspective of the practitioner (an employee

or businessman) and will demonstrate that the

business ethics literature has been lax in the sense that

it mostly addresses specific managerial problems and

personal ethics within the business environment.

Business Ethics Literature

In the Blackwell Encyclopedic Dictionary of Business

Ethics, the entry for the term “business ethics” opens

by stating that, “The study of ethics is the study of

human action and its moral adequacy.” It is a branch

of applied philosophy that considers the idea of what

are, and what ought to be, good business practices.

The text proceeds to specify that business ethics is,

then, “the study of business action-individual and

corporate-with special attention to its moral

adequacy.”10

It is an applied ethical field that

addresses activities in commerce.

A basic search of “business ethics” on

www.amazon.com provides over 27,000 texts that

include the term as a title or subtitle. Most business

10 The Blackwell Encyclopedic Dictionary of Business Ethics, 1997; “Business Ethics.” The definition is provided by Kenneth E. Goodpaster in this edition, edited by Patricia H. Werhane and R. Edward Freeman.


477

ethics books strive from the very beginning to define

the topic as an applied social practice. This is

important because the practice of business deals

specifically with the activity of monetary profits,

which in itself triggers ethical concerns from several

different cultural perspectives. It also creates the two

different literary currents most easily described in the

literature: the practical and the philosophical. The

practical perspective in the literature engages more

with the individual, such as issues of personal

responsibility, liability, or direct impact. In contrast,

the philosophical aspects and issues analyzed in the

literature tend to engage in the discussion of the

collective moral impacts of business practices. This

dichotomy became clear as I reviewed the business

ethics literature commonly used in business schools

and humanities departments, and more specifically in

the introduction of these texts.

Philosophical Business Ethics Literature

Given that the business ethics literature is quite

ample, I intend to use Richard DeGeorges 2005

paper, delivered at The Accountable Corporation

Conference in Santa Clara University, and McHugh’s

Keyguide to Information Sources in Business Ethics

as references for the most common philosophical

approaches and issues studied in the literature. I will

take some of the points mentioned by both authors,

and then proceed to illustrate them with examples

taken from some of the better-known authors in the

field of business ethics.

DeGeorge and McHugh are both prolific authors

in the field and their works present a careful

description of the development of business ethics as

an academic discipline. Furthermore, the two authors

exemplify key philosophical ideals that have

influenced and shaped the field as we know it today.

Among these, social responsibility and justice are

perhaps the most frequently addressed issues.

Social Responsibility

Ethical Issues in Business: A Philosophical

Approach, by Thomas Donaldson and Patricia

Werhane, first appeared in 1979.11

It was one of the

first titles in the field to present a strong philosophical

content. The authors tried to interpret the concept of

business ethics via an historical-philosophical

evaluation, using a compilation of writings from

different social perspectives. This title and a great

majority of others approach social responsibility from

the ethical and philosophical analysis presented by

Milton Friedman in his 1970 New York Times article

“The Social Responsibility of Business is to Increase

its Profits.”

11 Thomas Donaldson and Patricia Werhane, Ethical Issues in Business: A Philosophical Approach (New Jersey: Prentice Hall Press, 2008). This is now the 8th edition of the book.

In the business ethics literature, Friedman has

come to represent the 20th

century interpretation of

the liberal philosophical school of thought–a

perspective that defends the profit seeking

mechanisms of the business community. Friedman

utilizes Adam Smith’s work to advocate the laissez-

faire practices that he believes are necessary for

ethical outcomes to flourish in the corporate world.

Friedman makes a remarkable distinction with his

question, “What does it mean to say that business has

responsibilities?” and his answer is, “Only people can

have responsibilities.”12

This dichotomy has

continued to serve as a key concept in the

philosophical business ethics literature.

Most business ethics literature addresses social

responsibility under a rubric such as “Ethics in

Corporations.” Given the great influence of

Friedman, this section generally includes writings that

deal with the individual and his or her liability for

decision-making. I interpret DeGeorges analysis as

quite assertive, as he refers to Adam Smith’s

intellectual development of John Locke’s idea of

labor and his insistence of presenting it as a theory of

value. I defend this point, because this basic theory of

labor has allowed for the autonomy that is imperative

in the development of business practices during in the

global age.

“In modern times,” DeGeorge claims,

“commentators have interpreted him [Smith] as a

defender of laissez-faire economics, and put great

emphasis on his idea of the invisible hand.”13

Certainly the philosophical foundation of social

responsibility in the business ethics literature is one in

which liberty and autonomy are the instruments with

which to achieve success. However, the philosophical

literature also flirts with an alternative but realistic

outcome, failure. Failure is a potential outcome

because the main force struggling against liberty and

autonomy in a profit-based practice is that very

human element, greed.

Ethical Theory and Business, by Tom

Beauchamp and Norman Bowie, was published in

1977. McHugh claims that when this book first came

out “business ethics had received little attention by

philosophers,” and business schools considered the

field to be of little importance.14

Clearly, this text and

that by Donaldson and Werhane pioneered the

implementation of theoretical thought in the business

12 Milton Friedman; “The Social Responsibility of Business is to Increase its Profits,” New York Times Magazine, September 13, 1970. Retrieved from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html June 2, 2008. 13 Richard DeGeorge, 2005, “A History of Business Ethics”, paper delivered at “The Accountable Corporation”, the third biennial global business conference sponsored by the Markkula Center for Applied Ethics at Santa Clara University. 14 Ibid. 3. McHugh p. 12.


478

ethics field. DeGeorge mentions that during the 1970s

“philosophy added a theoretical framework to the

area that had been previously lacking,” thus

designating Beauchamp and Bowie’s book a

significant source in the literature.

Although Beauchamp and Bowie also approach

social responsibility from a Friedmenian perspective,

a section on the differences between stockholder

management and stakeholder management is included

in their book. Articles by Goodpaster and Boatright

engage in the analysis of social responsibility from

each perspective. Goodpaster mentions that the

concept of the stakeholder, first proposed by

professor R. Edward Freeman, “appears to have been

invented in the early 60s as a deliberate play on the

word stockholder to signify that there are other

parties having a stake in the decision making of the

modern publicly held corporation,”15

therefore

amplifying the social responsibility circuit into a

more heterogeneous approach.

The philosophical insight of the stakeholder

theory was to root responsibility in the hands of the

local, a characteristic that is shared by cosmopolitans.

Boatright, on the other hand, includes the term

“fiduciary” to specify the common practice of

entrusting great responsibility to an individual or

group of individuals for the specific purpose of

profiting. According to Boatright, the legal owners’

“main fiduciary duty is to operate the corporation in

the interests of the shareholders.”16

A division of

interest is well-established among the shareholders

and the stakeholders, giving the first group a

prioritizing place in the determination and

achievement of social outcomes.

The social responsibility debate in the

philosophical business ethics literature does for the

most part remain rooted in this liberal tradition. It has

strived towards the ideal of shared responsibility and

it encourages the finding of common ground between

shareholders and stakeholders. However, this

balancing act can produce severe difficulties due not

only to greed, but also because it sidesteps the

question of whether business should be solely

restricted to the creation of profits. Furthermore, the

philosophical approach in the business ethics

literature has endorsed a docile economic justice

approach throughout its history.

However, I believe that the social responsibility

debate-among the laissez-faire approaches, and

between the stockholder versus stakeholder theories

15 Keneth E. Goodpaster, “Business Ethics and Stakeholder Analysis” in Tom L. Beauchamp and Norman E. Bowie’s, Ethical Theory in Business, (New Jersey: Prentice Hall Press, 2001). This is now the 6th edition. 16 John R. Boatright, “Fiduciary Duties and the Shareholder-Management Relation: Or, What’s So Special About Shareholders?” in Tom L. Beauchamp and Norman E. Bowie’s, Ethical Theory in Business, (New Jersey: Prentice Hall Press, 2001). This is now the 6th edition.

in the social responsibility realm—addresses a

process that has been irreparably fractured by its

profit-seeking nature. In other words, so long as we

refer to the established social responsibility literature

of business ethics, we will continue to lead business

students to a system, which is primarily based in and

oriented towards economic solutions. In all such

cases, a given solution economically favors or hurts

the stakeholder more than the stockholder.

Even so, scholars in the field have been aware of

the legislative and political aspects of social

responsibility and of the fact that most corporations

have chosen to present themselves as socially

responsible. As DeGeorge states, “the language of

social responsibility rather than explicitly ethical

language is still probably the most commonly used”17

in order for corporations to get away with a self-

imposed measuring system of ethical behavior. It is

likewise true that there has been significant influence

or pressure from society regarding business ethics,

and many corporations have adopted external

monitoring. What role has the business ethics

literature played in the decision making process of

corporations? Is the literature used in business

schools and in academia in general generating an

awareness of the ethical? Or is it fair to say that the

literature itself has addressed only the interpretative

side of unethical corporate behavior, simply taking

sides on what would be or not be socially

responsible? I believe that the philosophical business

ethics literature has tended toward the latter, and that

his problem derives from the nature of the field: the

dichotomy between profit and ethics and the

unending struggle to combine both.

Ethics and Corporate Social Responsibility

In Ethics and Corporate Social Responsibility,

Ronald R. Sims presents a pragmatic philosophical

approach to the social responsibility discussion.

Chapter Three of the book is entitled “Understanding

Corporate Citizenship: Social Responsibility,

Responsiveness, and Performance.” It begins with

this claim:

The History of U.S. business is riddled with

sordid tales of magnates who went to any length in

their quest for success, in the process destroying not

only the country’s natural resources and the public’s

trust but also the hopes and dreams of millions of

people.18

The resources and the trust that the author

claims to have been destroyed are the price that some

in American society have, for the purpose of

generating profits, cost others. The author encourages

the stakeholder to take social action in order to

remedy this situation. He presents a list of the people

17 Ibid. 7. DeGeroge 18 Ronald R. Sims, Ethics and Corporate Social Responsibility: Why Giants Fall (Westport: Praeger Publishers, 2003).


479

who should be involved in ethics decisions, drawing

from the different roles in which you and I can or

already do participate in society: shareholders,

employees, customers, creditors, suppliers, unions,

competitors, governments, local communities, and the

general public.19

We can ask, Who does this list omit?

The answer is nobody. The approach Sims outlines

ought to allow every individual in society who

participates in a specific role to expect to enjoy a

socially responsible environment.

Corporate Social Responsibility and the Bottom

Line

Business ethics literature has approached competing

philosophical arguments by recognizing that the

corporation does “play a significant role in society”

and in the “lives of people” now more than ever

before.20

However, several business ethics scholars

have widened the scope of the analysis. Nicholas

Capaldi identifies “four main sources” in the business

ethics of social responsibility: the philosophical,

legal, political, and geo-political. However important

all four aspects are for the understanding of the

concept of social responsibility, our interest now

concentrates on the philosophical. Capaldi asserts

about the philosophical tradition about social

responsibility:

Many modern philosophers, beginning with

Machiavelli and specially Hobbes, Locke, and the

subsequent Anglo-American tradition, reject the

classical and medieval notions of a collective social

good.21

This is why I state that the nature of business

and profit possesses the root of the problem, and why

business ethics literature therefore struggles to

achieve a realistic ethical outcome.

In the philosophical literature, as mentioned

before, several tools have been utilized by business

ethicists. Capaldi, although not the first, does include

the term “compassion” in the social responsibility

discussion. He divides the “compassionate approach”

amongst libertarians and communitarians. The

libertarian achieves liberty thru free will, autonomy,

and the strong protection of personal rights. The

communitarian seeks the same outcomes by relying

on social good as defined by society, distributive

justice that seeks fairness, and strong legislation that

promotes equality.

The realization of corporate activity in society

varies: the libertarian is seeking profits based on

consumption with little regard for anything else,

19 Ibid. p. 40-41. 20 Ibid. 3. McHugh p. 13. Citing Kenneth E. Goodpasters “course outline at Harvard Business School, Ethical aspects of corporate policy.´” 21 Nicholas Capaldi. “Corporate Social Responsibility and the Bottom Line.” International Journal of Social Economics Vol. 32 No.5 (2005).

while the communitarian concentrates more on the

relations of production and the distribution factor of

profit.22

It is not my intent to engage in the debate

amongst these two common approaches to the

achievement of social justice. It is, however, my

intention to point out that neither of currents of

thought in the business ethics literature can appeal

completely to an achievement of economic justice

and therefore most business practitioners.

Justice: Philosophical Approaches In Business Ethics Literature

Initial discussions of business ethics introduced

students to two of the basic techniques of moral

argumentation, that used by utilitarians (who hold

that an action is right if it produces the greatest

amount of good for the greatest number of people),

and that used by deontologists (who claim that duty,

justice and rights are not reducible to considerations

of utility). Other approaches were soon introduced

including natural law, virtue ethics (based on

Aristotle), and the ethics of caring (often associated

with a feminist approach to ethics).23

DeGeorge utilizes the terms right, good, duty,

justice, law and virtue, in describing the basic

arguments within the business ethics literature, and

more specifically as descriptors for methods to define

and achieve a just outcome for individuals who

engage in business. Why is it that all these concepts

have to be utilized in discussions of justice qua

business ethics? McHugh declares the following

about the dilemma:

But when it comes to applying general theories

of morality and principles of justice to the

particularities of business, contemporary authors soon

run up against the problem of making ethical

judgments about individual acts….24

These statements illustrate that the philosophical

business ethics literature has had to decipher the

pursuit of justice by placing the action of the

individual first and foremost; only after this can the

business outcome may be determined to be ethical or

just. Even in ancient Greek society, the concept of

justice framed whether or not actions taken amongst

autonomous individuals would be values as

exemplary. In Book I of the Republic, Polemarchus

suggests that Justice is “giving to each what is owed,”

meaning that a rational process should take place in

order to decide what is for whom. More profound is

Thrasymachus’s claim that justice is nothing more

than the will of the strong and powerful. These two

perspectives—the giving to each what is owed versus

the determination of justice based on power—entail

some of the greatest ethical dilemmas in the field of

business ethics. In either case, the literature engages

22 Ibid. 23 Ibid. 7. DeGeorge 24 Ibid.


480

the individual as an autonomous being capable of

reason, and thus capable of understanding right from

wrong.

In reviewing business ethics literature, I have

detected a degree of uniformity within the teaching of

individual ethical reasoning. For instance, it is quite

common to witness the use of Aristotle, Immanuel

Kant, and John Stuart Mill to represent the classical

approaches to the good. It is also common to read

ethical theories of justice that engage mostly with

contemporary philosophers, and which work to

exemplify a modernized version of Mill’s utilitarian

theory. Several examples serve to illustrate these

trends.

In Ethics and Excellence: Cooperation and

Integrity in Business, author Robert Solomon uses

(for the most part) an Aristotelian virtue approach to

interpret justice as a viable outcome. He includes an

entire section, composed of seven subsections,

dedicated to Aristotelian thought. For Aristotle,

justice is a virtue, a trait of character that must be

reached; it is not a state of being. According to

Salomon, the Aristotelian virtue approach to

achieving social justice is the best challenge to the

demands of a corporate world where the “cost-

cutting, the down-sizing, the strategic bankruptcies

and restructurings, the mergers and the take-overs”

are some of the conflicts (or business solutions) that

the present corporate entities have created.25

Salomon

assigns the integrity of the individual as quest for

virtues throughout the chapters.

The business ethics literature approaches justice

in a way that promotes duality, and even divergence,

between theory and practice. We can come to

understand a metaphysical concept of justice, of what

“ought to be”; however, actual business practices are

what eventually come to define society, whether just

or unjust. To circumvent this problem, business needs

to follow what Capaldi called (T/P), to exemplify the

idea that “practice ought to follow theory.”26

Yet as

noted above, business ethics literature has been

almost constantly forced to engage in an

interpretative sequence of events rather than engaging

in preventive analyses in which the actual ethical

theory could imply or even suggest significant

philosophical changes in business practices.

Many other titles in the business ethics literature

have considered virtue ethics to be a relevant ethical

approach. They follow Aristotle’s suggestion that a

process of maturation in the individual leads to an

eventual recognition and practice of virtue, from

which justice can then be achieved. This model of

25 Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business (New York: Oxford University Press, 1992) 26 Nicolas Capaldi. “What Philosophy Can and Cannot Contribute to Business Ethics.” The Journal of Private Enterprise. Vol. 21 No. 2 (2006)

ethics in business allows for the practice to precede

the theory, a reversal of Capaldis (T/P) suggestion.

The Kantian model for philosophical business

ethics literature serves as a central established

framework that defines parameters for the basic rule

of duty, or as Kant called it, the categorical

imperative. In the Groundwork of the Metaphysics of

Morals, Kant states: “Act only according to that

maxim whereby you can at the same time will that it

should become a universal law.”27

It is important to

know that according to Kant morality is commanded

by reason in the individual, which then allows the

thinking being to determine his duties and obligations

in order to create justice.

The Kantian Perspective in Business Ethics

Literature

Business Ethics: A Kantian Perspective, by Norman

Bowie, analyzes Kant’s “three formulations of the

categorical imperative” to address the question, “how

would business firm in a capitalist economy be

structured and managed?”28

in accordance with

Kant’s ethical theory. When Bowie refers to the three

Kantian formulations, he is basically narrowing the

idea of the categorical imperative to include only

permissibility in market interactions, moral obligation

in market interactions, and moral community

formulation (for moral business organization),29

so

that he can provide a foundation for a moral business

organization.

Immanuel Kant provides common sense ideas

about morality to the literature of ethics, both

business-oriented and otherwise. However, despite

the vast business ethics literature, only Bowie’s book

engages extensively in Kantian considerations of

business practice. Nonetheless, Bowie clearly states

throughout the book that even though Kant’s

philosophy is rigorous, the bottom line for business is

still profitability. Business ethics will constantly have

to engage in the profit versus morality debate; and

even tough business ethics literature strives to

scaffold coherent arguments about the good, the

profit factor will undoubtedly continue to taint the

achievement cosmopolitan ideals.

The argument presented in this document is

organized around the idea of an inclusive

cosmopolitan business ethic. I have argued that the

philosophical business ethics literature has neglected

to address ethical theories in business from a

preventive critical stance, a factor contributing to the

lack of cosmopolitan understanding in the part of the

business ethics learners in business schools in

general. Even tough, Immanuel Kant’s idea of the

27 Immanuel Kant, Groundwork of the Metaphysics of Moral (United Kingdom: Cambridge University Press, 1998) 28 Norman E. Bowie, Business Ethics: A Kantian Perspective (Massachusetts: Blackwell Publishers, 1999) 29 Ibid.


481

cosmopolitanism is what initially inspired the idea of

business ethics and economic justice. I do believe that

Kantian cosmopolitanism is clearly a precursor to

contemporary ideas of globalization. However, I

conclude that Kant lacked the ability to achieve a

truly globalized cosmopolitanism. Kant neglected to

directly engage with the kinds of practical economic

issues and events that are relevant in modern global

business practices today.

Bowie entitled the last section of his book “The

cosmopolitan perspective.” There he adheres to

Kant’s ideal of perpetual peace, where we as global

citizens will realize that we are all one human

family.’30

Several other important titles in the

philosophical business ethics literature include

discussions of Kant. In Manuel Velasquez’s Business

Ethics: Concepts and Cases, the author points to the

Kantian moral theory as having limitations and

inadequacies for business practice.31

He feels that

Kant’s inflexibility regarding duty is a major fault

within the culture of business practice. This argument

is another commonalty in the business ethics

literature that I have reviewed.

In Kevin Gibson’s Business Ethics: People,

Profits, and the Planet, Kant’s Ethics of Duty is cited

in discussions of a “movement in business ethics

called Kantian capitalism,”32

a form of capitalism

based on the idea of a respect for human worth (as

presented by Kant in his categorical imperative).

Gibson points out that this means, “that a business

has to treat its workers not just as human capital but

by reference to the golden rule,”33

comparing God’s

principle to that of Kant’s imperative.

The utilitarian Perspective in Business Ethics

Literature

In Boatrights Ethics and the Conduct of Business,

Chapter Two “Welfare, Rights and Justice,” utilizes

the utilitarian philosophical theory for “its ability to

account for the concepts of duty (or obligation),

rights, and justice.”34

Utilitarianism is probably the

most popular philosophical theory published in the

business ethics literature, as I have mentioned before.

It is used explicitly in the philosophical business

ethics literature and more indirectly in what I refer to

as the practical business ethics literature. It is of

common use because it allows authors a way to map

30 Ibid. P. 166 Here Bowie is quoting Kant. 31 Manuel G. Velasquez, Business Ethics: Concepts and Cases (New Jersey: Prentice Hall Press, 2005) This is now the 6th edition of the book. 32 Kevin Gibson, Business Ethics: People, Profits and the Planet (New York: McGraw-Hill, 2006) 33 Ibid. 34 John R. Boatright, Ethics and the Conduct of Business (New Jersey: Prentice Hall Press, 2007) This is now the 5th edition of the book.

justice into business practices. Let us consider the

question, Are more profits a better form propagating

happiness amongst society? A utilitarian equation has

the possibility of placing profit over the individual, if

one can determine that that profit will in some form

benefit more individuals, either immediately or in the

future. Boatright, like most other business ethics

academicians, places an emphasis on utilitarianism

being a consequentially-based moral theory. In

chapter two of Utilitarianism, John Stuart Mill states:

The creed which accepts as the foundation of

morals, Utility, or the Greatest Happiness Principle,

holds that actions are right in proportion as they tend

to promote happiness, wrong as they tend to produce

the reverse of happiness.

By happiness is intended pleasure, and the

absence of pain; by unhappiness, pain, and the

privation of pleasure.35

It is clear of how the principal of utilitarianism

has allowed business ethics literature to interpret

business actions as ethical strictly by considering

them as they affect a majority of people through this

“pleasure principle,” which is later defined as profit.

However, it cannot be fair to assume that

utilitarianism has been responsible for pushing the

business ethics literature to suggest that ill-business

actions are ethical.

Boatright describes four forms of utilitarianism,

which together are considered by some to exemplify

classical utilitarianism. As a premise he states the

following: “An action is right if and only if it

produces the greatest balance of pleasure over pain

for everyone.”36

Additionally, four sub-premises

complement this principle: consequentialism,

hedonism, maximalism and universalism. Business

ethics as an established practice uses these principles

because they allow for the basic interpretation of

cost-benefit equations, including those with a social

component.

This limitation does not mean that utilitarianism

is wrong; however, it does specify directly that there

will be winners and that there will be losers in the

game. Only then will it be able to provide room for

realistic discussions that can provide substantial

intellectual and practical solutions that address the

problem of poverty.

In reference to the future of business ethics as an

academic field, Richard DeGeorge states that “both

globalization and the march into the Information Age

are changing the way business is done and the ethical

issues businesses face.”37

The philosophical approach

to business ethics, as a discipline, needs renovation

because business practices, conditions, views, and

circumstances are also being reworked.

35 John Stuart Mill, Utilitarianism (Indianapolis: Hackett Publishing Company, 2001) 2nd ed. 36 Ibid. 28. Boatright is quoting John Stuart Mill’s Utilitarianism. 37 Ibid. 7. DeGeorge


482

Cosmopolitanism needs to harness the business ethics

literature in order to address more of the globally

shared problems and to widen the field of business

ethics.

The literature discussed in this paper highlights

the point of contrast between philosophical business

ethics literature as it currently exists, and what I

intend to determine should be the new issues that

critical business ethics literature should engage with

in order to achieve the a cosmopolitan ideal.

Practical Business Literature

Business ethics are by their very nature applied, and

as such can promote good actions among every

participant. Many of the titles I review in this section

agree on practical business approaches, such as the

creation of codes of ethics or corporate ethic

statements. Richard DeGeorge refers to these as

“ethics in business sense of business ethics”—the

every day ground rules that should be followed

closely (he compares them to the Ten

Commandments).38

Codes of conduct are a somewhat

more loosely followed set of tenets that tend to

generalize behavior or attitudes that participants

should share.

Business ethics as a field of study and theory

has had to evolve with the business practice.

Historical events, and especially those of the past

century, have created important social movements in

which business attitudes and practices had to

accommodate to new laws and regulatory regimes.

Issues addressed by such movements include race and

gender discrimination, equal salary adjustments,

privacy acts, health and safety, sexual harassment,

affirmative action, unjust dismissal, and whistle

blowing, among others.

Prevention and Correction in Business Ethics

Applied business ethics concern the individual

employee. Thus much of the literature in this genre

concerns itself with discussions of practical ethical

recommendations and rules. Examples include titles

like, Eighty Exemplary Ethics Statements, The

Business Ethics Activity Book, and Practical Business

Ethics for the Busy Manager,39

which focus primarily

on psychological traits and purport to develop a

specific applied ethical behavior that is desired from

the individual. However, as I noted above, business

ethics has neglected to deal with social issues and

social change from a preventive stance. The emphasis

on corrective measures is illustrated in A Pragmatic

Approach to Business Ethics, which states the

38 Ibid. 7. DeGeorge 39 The titles mentioned here are used to exemplify some of the vocabulary that is use in specific titles and serve the purpose for the classification of practical business ethics in the section.

following in the introductory chapter: “The trouble

with pragmatists is that they will get in bed with

anyone.”40

Here the author, Alex Michalos, shows the

genre’s tendency to approach ethical matters in a

simplistic manner. Although even tough, serious,

pragmatic philosophers would have a hard time

agreeing with his conclusion, I would argue that they

would find it rather difficult to disagree with the

practical literature’s tendency to over-simplify

examples and conclusions.

Furthermore, business ethics literature has been

almost constantly forced to engage in interpretative

and corrective approaches to a sequence of events

rather than occupying its attention in preventive

analyses. These preventive analyses, which I refer to,

would encourage the ethical theory to suggest

significant philosophical changes in business

practices. For the most part the corrective literature

approach reflects a strong Western perspective in

which the rights of the individual are much more

important than those of a community.

This simplicity of corrective approaches can be

attributed to the need for rapid and effective methods

within the business world. Historically, business

practices have been reactive, addressing malpractices

such as fraud, abuse, and corruption, only after media

attention or legal threats. Both situations pose a

menace for corporate profits. Although a variety of

proactive alternatives exist, one of the few that is

discussed in the practical literature is whistle

blowing. In either case, one might ask, are these

actions ethical because they imply a duty for the

individual? Does this remain the case regardless of

the economical consequences for the same individual

or others involved? How would whistle blowing as an

ethical practice function without the appropriate laws

that protects the whistle blower? Without these laws,

would whistle blowing be still considered ethical?

Contemporary Ethical Issues in Business Ethics

These interrogations link to the very first question

presented in this paper: What do we really mean by

the expression “business ethics”? In their book,

Contemporary Ethical Issues, John Dienhart and

Jordan Curnutt talk about the common accusation of

the late 1970s that the phrase “business ethics” was

an oxymoron. They separate the phrase into its

constituent components and note that “business is

concerned with promoting self-interest” while “ethics

is concerned with promoting the interest of others.”41

Ken Smith and Phil Johnson reflect a somewhat

similar perspective in their book, Business Ethics and

40 Alex C. Michalos, A Pragmatic Approach to Business Ethics (London: SAGE Publications, 1995) 41 John W. Dienhart and Jordan Curnutt, Contemporary Ethical Issues: Business Ethics A Reference Handbook. (Santa Barbara, CA: ABC-CLIO, INC. 1998).


483

Business Behavior, noting the “hilarity at the naivety

of the misnomer”42

of the term business ethics.

One of the problems with defining business as

ethical (from a philosophical perspective) is that the

business practitioner displays behavior patterns that

cannot be determined to be ethical per se. This

shortcoming limits the practical business ethics

literature and in turn allows for business practitioners

to engage in a dialectic of ethical relativism—

practitioners encounter very little theoretical analysis

in the literature, and that which they do read is for the

most part considered impractical to apply to real-

world situations.

Alex Michalos constructs a plausible counter-

argument to this perspective:

1. In order for business or a market economy to

exist, there must be some sort of community of

potential buyers and sellers.

2. In order for a community of potential buyers

and sellers to exist, there must be morality.

Thus, in order for business or a market economy

to exist, there must be morality.

3. Anyone with an interest in preserving

business or a market economy should help maintain

those conditions, like morality, that are necessary for

its preservation.

4. Businesspeople have such an interest.

Therefore, businesspeople should help maintain

those conditions that are necessary for the

preservation of business, including morality.43

In this argument, every individual is seen as a

“potential buyer and seller.” If we assume that the

condition of being human is inherent to the argument,

then perhaps the economic agenda for a business

ethics would be to identify opportunities that can

provide resources for the human beings who have yet

to become “potential buyers and sellers.”

The practical business ethics literature is clearly

concerned with daily practices in the business world

world. It has for the most part traced the ethical

dilemmas of the business world through a path of

social and economical “ifs” that ultimately establish

the conditions for determining what is ethical. As a

lawfully protected practice, whistleblowing has

become one of the most important “ifs” through

which people denounce ethical malpractice. The next

section traces the historical development of

whistleblowing in order to illustrate how business

literature could find a new approach to ethics.

Whistleblowing

In the United States, government employees who

report malfeasance are protected by the

Whistleblower Protection Act of 1989. The Act is

42 Ken Smith and Phil Johnson, Business Ethics and Business Behavior. (Boston MA: International Thomson Business Press, 1996). 43 Ibid. 34, Michalos.

enforced by the U.S. Office of Special Counsel

(OSC) and defines a whistleblower as a person who

contacts the OSC when he or she reasonably believes

to have evidence of the

…violation of any law, rule or regulation; gross

mismanagement; gross waste of funds; abuse of

authority; substantial and specific danger to the public

health and substantial and specific danger to public

safety.44

Although the Special Counsel’s office only has

a specific jurisdiction over former, current, and future

federal employees, the protection of government

whistleblowers represents an achievement for

business ethics literature and marks its influence over

legislation. My intention behind this example is to

illustrate how business ethics literature can define the

scope of ethical actions and to calculus on which they

are to be based upon. This is not a victory for

business ethics per se. However, given that some

lawful protection is provided for government

employees after denouncing, it serves as an example

for how the public good ought to be promoted.

Between 1980 and 1983 the Harvard Business

School developed the case study approach to

teaching. The business ethics literature soon adopted

this approach so that it could analyze the past

behavior of individuals, their decisions, and related

outcomes. The Ethics Resource Center in

Washington, D.C., created a case study resource list

of 123 entries, the topics of which include

whistleblowing.45

The case study method has been a

significant teaching tool for whistleblowing because

it illuminates the commonalities among individual

reporters and promotes whistleblowers’ successes,

thereby encouraging other individuals to denounce

unethical behavior.

Whistleblowing is one of the most difficult

issues in business ethics practices because it generally

involves the denunciation of an individual or a group

of individuals who are well known to the denouncer.

This situation can create an ethical dilemma for the

denouncer because the process of accusation is

viewed as a trespassing of loyalty and trust that will

almost certainly cause a rupture in the relationship.

According to Terance Miethe, author of

Whistleblowing at Work, terms such as snitches,

squealers, rats, moles, finks, stools, blabbermouths,

tattletales, and others reflect the typically negative

feelings shared by many towards those who report

malfeasance.46

Certainly such terms imply a

44 U.S. Office of Special Council, “Whistleblowing” Whistleblower Disclosures. Retrieved From: http://www.osc.gov/wbdisc.htm#overview and http://www.osc.gov/documents/pubs/post_wb.htm July 8, 2008. 45 Ibid. 3. McHugh. 46 Terance D. Miethe, Whistleblowing at Work: Tough Choices in Exposing Fraud, Waste, and Abuse on the Job (Boulder CO: Westview Press, 1999).


484

coarseness of feeling among the general public that

has an inevitable impact an individual reporter’s

personal and professional life.

The analysis of such phenomena, however, is

best left to those in other professions. Instead, the

focus here is to develop an understanding of the ways

that practical business ethics literature has engaged

with whistleblowing. What are the most common

philosophical approaches to the topic? Technical

definitions such as the one presented by Near and

Micelle state that whistleblowing is the “disclosure by

organization members (former or current) of illegal,

immoral, or illegitimate practices under the control of

their employers, to persons or organizations that may

be able to effect action.” Their definition goes on to

specify that the whistleblower “lacks the power and

authority to make the change being sought” and so

“must appeal to someone of greater power or

authority.”47

A single example illustrates one of the problems

with the literature. In Marlene Caroselli’s Business

Ethics Activity Book there is an activity entitled

“Whistleblown in the Wind.” It is a 20 minute

exercise that is “based on real-world situations” and

in which the participants will eventually discuss their

course of action with a partner.48

This basic activity

purports to involve the revelation of ethics violations

and both a legal and a “moral, and/or ethical”49

discussion of said violations. However, while the text

includes brief descriptions of “laws to protect” the

whistleblowers, there is in fact no framework for the

ethical discussion. In this type of exercise, the ethical

component of the learning process is essentially nil.

In other words, rather than educating business

students on the ethics of whistleblowing, the literature

revolves almost exclusively around the consequences

suffered by those involved. It generally posits that

denouncers will face social, if not financial,

recrimination, and that the stock and stakeholders of a

corporation will suffer disastrous damage to their

economic bottom lines and reputations.

Why is there so little regard for an ethical theory

of whistleblowing? Perhaps because whistleblowing

is generally interpreted as an action intended to

benefit the greater public. In attempting to understand

the whistleblower’s rationale, C. Fred Alford

introduces the concept of an individual exhibiting

“narcissism moralized.” He posits that the

whistleblower is willing to endure social judgment

and repercussions for him- or herself and the ones

around him or her due to a desire to strive for

47 Marcia P. Miceli and Janet P. Near, Blowing the Whistle: The Organizational and Legal Implications for Companies and Employees (New York, NY: Lexington Books Macmillan, 1992). 48 Marlene Caroselli, The Business Ethics Activity Book: 50 Exercises for Promoting Integrity at Work (New York, NY: HRD Press, 2003). 49 Ibid.

wholesomeness, good, purity and perfection.50

Would

this “narcissism moralized” be an opening to an

ontological approach to ethics? If we agree that it is

the moral duty of the whistleblower to denunciate,

then the moral question for business practices would

be to identify what constitutes the greatest good. Is it

the good of the stockholders, the stakeholders, the

professional future of the denouncer, or of some other

entity or outcome? Given the conflicts of interest

inherent in these categories, can the business

practices structure handle a whistleblowing case

strictly on the bases of ethical theory?

DeGeorge reminds us that we can identify a

pattern in the approach taken by business ethicists

that not only adds arguments, but strives to

demonstrate “common sense judgment” that is

“indeed correct.” However, “what about the tools by

which the morality of new issues could be

intelligently debated”?51

Within economic justice

perhaps the approach for whistleblowing would entail

a broader global vision where the individual not only

contemplates the possible consequences for the

immediate stakeholders, but the implications for the

global business practices structure and humanity as a

whole.

The practical business ethics literature reflects a

Western perspective in which the rights of the

individual are valued more than those of society as a

whole. The business ethics literature on

whistleblowing emphasizes the presence of a legal

platform or safety-net that, by protecting the

individual, encourages the denouncer to engage in

ethical practices: the denouncer is “safe” in reporting

another individual or a group of individuals. Should

cosmopolitanism propagate this Western emphasis on

the individual? If we are to understand

cosmopolitanism as a global ethic, the Westernization

of such practical issues as whistleblowing will have

to be modified to reflect a global justice that is

inclusive of periphery countries and populations.

Conclusion

In order to try and make sense of the philosophical

and practical business ethics literature, it was

imperative to make a distinction between the social

practice of business and the specific implications

faced by individual in business practices. The

analysis presented at the beginning of this document

indicates that the philosophical aspect of the business

ethics literature is not grounded upon the individual.

Instead, the philosophical business literature tends to

deal with collective aspects, circumstances,

consequences, and impacts. The practical business

ethics literature tends to deal with issues by

50 C. Fred Alford, Whistleblowers: Broken Lives and Organizational Power (Ithaca, NY: Cornell University Press, 2001). 51 Ibid. 7 DeGeorge.


485

oversimplification and the application of “common

sense” approaches to the ethics of the corporate

environment.

Most of the books and articles considered in this

analysis are key titles in the world of business ethics.

Classifying the literature into philosophical and

practical genres highlighted specific differences

between the two categories and their theoretical

frameworks. I argued that for the most part both

genres fail to take issues of global social, economic

and environmental justice into account that some

business practitioners have endorsed for almost half a

century. In fairness, however, the most recent editions

of some of the titles reviewed herein have annexed a

chapter or a section on the topic of international

business ethics. However, “International” taken to

foment and explain cultural differences, at some

points, even environmentally aware. At no point is

there a mention of economic justice in any of these

sections or chapters.

One might question whether the business ethics

literature, either philosophical or practical, is entitled

to separate theories of ethics into “local” and

“international” spheres. Interestingly, we can

conclude that regardless of whether we answer that

question in the affirmative or the negative, the current

business ethics literature has neglected to recognize

the ethics of economic fairness. However, one can

also argue as to whether economic justice should be a

concern of business ethics at all. The answer would

have to be yes. Furthermore, do economic inequalities

propagate the lack of ethics in business practices, or

vice-versa? This is a new question that neither the

practical nor the philosophical business ethics books

address; they simply do not connect economic

inequalities to the ethical practices of businesses at

the local or global scales. It is time we do so.


486

THE TALMUDIC PHILOSOPHICAL CONCEPTION OF BUSINESS ETHICS

Alexander Maune *

Abstract

The Talmud is considered to be one of the cornerstones of Judaism, Jewish business ethics and Jewish wisdom for business success. The Talmud has been the guide and main nerve center of the Jewish people. This article examines the philosophical conception of business ethics from a Talmudic perspective. The article used a conceptual approach as well as a review of related literature. It was found out that the road of the Talmud led not to philosophy and theology but to ethics, law and justice; it pursued not the abstract but the concrete. This article has therefore business and academic value. Key Words: Talmud, Torah, Tanach, Business, Ethics * CEMS, Department of Business Management, UNISA, South Africa

1. Introduction

The Babylonian Talmud (Hebrew, Talmud Bavli) is

without doubt the most prominent text of rabbinic

Judaism’s traditional literature. Indeed, the simple

phrase “the Talmud says” often stands as a kind of

shorthand for any teaching found anywhere in the

vast rabbinic corpus surviving from Late Antiquity.

Among Jews, of course, the Talmud has been revered,

studied, and commented upon over and over again for

more than a millennium (Jaffee and Fonrobert, 2007).

The Talmud (Jewish Oral Torah) literally means

“study.” The Talmud is a lengthy commentary on the

Mishnah composed in Hebrew and Aramaic. The

earlier edition, most likely redacted in Tiberias in the

late fourth and/or early fifth centuries in the current

era, is known as the Jerusalem or Palestinian Talmud

(Talmud Yerushalmi). The later and larger edition,

redacted in Persia in as-yet poorly understood stages

between the late fifth and late eighth centuries in the

current era, is known as the Babylonian Talmud. Like

the Mishnah, the Talmud is organized into orders

(sedarim) and within the orders into tractates

(masekhot) (Jaffee and Fonrobert, 2007).

According to Miller (2011) in Maune (2015a),

the Talmud is a comprehensive term for the Mishnah

and Gemara as joined in the two compilations known

as the Babylonian Talmud (6th

Century) and the

Jerusalem Talmud (5th

Century). The Mishnah is a

fundamental collection of the legal pronouncements

and discussions of the Tanna`im (Rabbinic sages),

compiled by Rabbi Yehudah HaNasi early in the 3rd

Century. The Mishnah is the basic text of the Oral

Torah (Maune, 2015a). The Talmud is principally

concerned with halacha (Jewish law), but it also

provides a detailed record of the beliefs of the Jewish

people, their philosophy, traditions, culture, and

folklore, that is, the aggadah (homiletics). It is also

replete with legal, ethical, and moral questions.

Friedman (1985) states that the Talmud consists of 63

tractates (volumes) which include discussions of the

law (and moral obligations) with regard to religious

rites, marital relations, business, torts, social relations,

holidays, et cetera. There are 6 orders, 63 tractates,

and 517 chapters (Kahaner, 2003). The Midrash52

, a

separate scripture, recorded the views of the

Talmudic sages and is mainly devoted to the

exposition of biblical verses (Friedman, 2000). The

canon of the Gemara, constructed from commentaries

and discussions on the Mishnah, was first recorded in

written form about 1500 years ago (Friedman, 2012).

Unterman (1971) in Maune (2015a) argues that,

States sprang up and States vanished but the Jew has

always preserved his Talmud and from it drew the

strength to overcome all the tragedies. The Talmud

has been argued to be the Jewish secret for success

(Brackman and Jaffe, 2008). Unterman (1971) argues

that the inner world of the Jew has always remained

52 Midrash – Is the specific name for the activity of biblical interpretation as practiced by the Rabbis of the Land of Israel in the first five centuries of the Common Era. The Hebrew word derives from the root, d-r-sh, which literally means “to inquire” or “to search after.” In the earlier books of the Bible, the root is used to refer to the act of seeking out God`s will (for example, Genesis 25:22; Exodus 18:15), particularly through consulting a figure like Moses or a prophet or another type of oracular authority. Midrash itself is part of the Oral Torah. The Hebrew word for “study” used in the verse (Ezra 7:10), lidrosh, has the same root as midrash. By late antiquity midrash had come to designate Bible study in general. The Rabbis called their academy a bet midrash, literally “a home of study,” and from such usage, midrash came to be the term the Rabbis themselves employed to designate the way they studied Scripture and interpreted its meaning.


487

whole and untouched; no outside influence, no danger

and no whirlwind had sufficient power to destroy this

world. The Talmud has always been a book solely for

scholars, savants, and researchers and it is considered

a significant part of their [Jewish] daily life

(Unterman, 1971). To Unterman (1971) and

Brackman and Jaffe (2008) the Talmud is the

cornerstone of the Jewish culture, their creative

strength as well as the backbone of their history. To

the Jewish people the Talmudic literature, as well as

the Tanach (Bible), is imbued with the highest of

universal ideals, full of love for mankind and human

brotherhood.

The Talmud has created a broad ethical world,

and it is from this that the Jews have drawn their

universal conception of morality and responsibility

(Unterman, 1971). It is the Talmud which gave

Jewish ethics their breadth and depth of conception.

The Jews derived their views upon morality and

individual responsibility, ideas concerning their

relations to man and society, Jew and non-Jew, from

the Talmud. The main foundations have always been

universal. Love and justice for all of humanity. This

is best expressed in the maxim: love thy neighbor as

thyself.

This article focuses on the Talmudic conception

of business ethics through a review of related

literature in journal articles and books. It is the

author`s hope that, in some way, this will help resolve

societal and business ethics related challenges.

Friedman (1985) argues that although the Talmud is

an ancient document, many of the problems

addressed in it have their modern counterparts. This is

especially true of those related to ethical behavior in

business. The reason being that from region to region,

and from century to century, while things may have

changed, the people are still the same. The business

world has been faced with immoral activities and

behavior that requires ethics, not of the 21st century,

but ethics as perceived by the Talmud. After the big

corporate scandals such as Enron, Worldcom,

Parmalat, [Andersen, Adelphia, Barings Bank, Exxon

Valdez, Chernobyl] and various other failures in

[both local and] global corporations, corporate

governance has become the focal point and has

increased to the role of business ethics (Rossouw,

2005; Crowther and Seifi, 2011 cited in Maune,

2015b). CEOs have robbed their companies of

millions while leaving their workers penniless and

unemployed. As Kidder (2001) states that the world

will not survive the 21st century with the ethics of the

20th

century. Something significant has to be done.

This is true if one considers the scale at which

technology is developing and if imagining the scale

of future technologies. The main worry is whether our

ethics have grown so strong and sophisticated to

match the growth in technology. This article seeks to

find solutions and answers to all these challenges

from the Talmud.

2. The concept of business ethics 2.1 Definition of business ethics

Although defining business ethics has been somewhat

problematic, several definitions have been proposed.

De George (2006) defines the field broadly as the

interaction of ethics and business, and although its

aim is theoretical, the product has practical

application. Velasquez (2006) defines the business

ethics field as a specialized study of moral right and

wrong.

In his Terminology of Logic, Maimonides

divides philosophy into two divisions: theoretical and

practical philosophy. The latter he also terms "human

philosophy," or "political science." Under theoretical

philosophy he groups mathematics, physics, and

metaphysics. Under practical philosophy are found

ethics, household economy, the science of

government, and politics in its broadest sense

(Gorfienkle, 1912).

According to Gorfienkle (1912), ethics, or the

science of self-guidance, consists, on the one hand, in

acquiring for one's self noble soul-qualities or

characteristics, and, on the other hand, of avoiding

evil qualities. These qualities, whether good or bad,

are called states or conditions, and when acquired

each is known as a property. Noble qualities are

called virtues, while evil qualities are termed vices.

The virtues cause good deeds, the vices, bad ones.

Ethics to Gorfienkle (1912) is the science of virtues

or of good deeds.

Unterman (1971) further defines ethics as the

science of moral and right behavior, the art of so

regulating human conduct as to ensure happiness to

all mankind, the system of thought which attempts to

change the factors determining manners and to

introduce harmony and clarity in them. To him, ethics

is essentially the teaching of human justice, the

teaching of precepts that bind the individual to

obligations that are not enforceable by law. Ethical

obligations are not under the jurisdiction of the court,

and no one can be punished for violating them. The

individual himself is responsible for adhering to

them, and they are entrusted to him alone. This points

to Kidder`s (2001) definition of ethics.

According to Kidder (2001), Lord Moulton, a

British jurist in the 19th

century, described ethics

simply as “obedience to the unenforceable.”

Obedience to the enforceable is merely law–an

important part, but only a small part, of the reason we

behave as we do. He further states that, obedience to

the enforceable is what prevents us from driving 65

miles an hour in a school zone: You get caught.

Obedience to the unenforceable, however, is what

keeps you from going into a supermarket and, just as

an elderly woman is about to put her hand on the last

shopping cart, elbowing her away, seizing the cart,

and running off down the aisle with it. There is no

law that says, “Thou shall not steal shopping carts


488

from elderly women.” People do not do those things–

because of the very real but ultimately unenforceable

canons of society. This concept of ethics as obedience

to the unenforceable helps to explain some of the

things people see going on around in the regulatory

and legislative climate today. We are clearly

regulated one way or another–that is the nature of the

human experience. Our choice is only whether to be

self-regulated or to be regulated by externalities

(Kidder, 2001). As the ethics of self-regulation

dropped away, in other words, the law rushed in to

fill the void. And that will ever be the case. If one

asks him/herself why we are such a litigious society,

regulated by vast bodies of law at every turn, is it not

largely because our ethics has dropped away and the

law has swept in to replace it? What used to be

obedience to the unenforceable has become

obedience to the enforceable. What used to be

regulation by our own good habits has become

regulation by the will of the legislators (Kidder,

2001).

Kidder (2001) further provides another

definition that grows out of concern over dictionary

definitions of the word ethics. This talks about ethics

in relation to the difference between right and wrong.

Frankly, for most people, most of the time, ethics is

the battle of right versus right. Few people, facing an

ethical dilemma, say to themselves, “Here, on one

hand, is the great, the good, the wonderful, and the

pure and, on the other hand, the awful, the evil, the

miserable, and the terrible–and here I stand equally

torn between them.” People do not do that. Once one

defines one side as evil, it is pretty much dismissed.

The whole subject of business ethics revolves

around Hillel the Elder`s most famous Talmudic

saying: “What is hateful to you, do not do to your

fellow human, 'that is the whole Torah, and the rest is

just commentary.’”53

3. The Talmud`s conception of business ethics

The soul of the Jewish religion is its ethics. Its God is

the Fountainhead and Ideal of morality. Jewish

business ethics, then derives its sanction from God,

the Author and Master of life, and sees its purpose in

the hallowing of all life, individual and social. At the

beginning of the summary of the ethics laws in the

Mosaic Code stands the verse: “Speak to the entire

assembly of the Children of Israel and say to them:

You shall be holy, for holy am I, Hashem, your

God”54

(Leviticus 19:2). According Friedman (2012),

numerous books and papers examine Talmudic

53 Shabbos, 31a 54 This Sidrah begins by instructing the nation to become holy by emulating God as much as possible; this will elevate their lives in this world. “You shall be holy” is a general admonition that one`s approach to all aspects of life be governed by moderation.

business ethics (for example, Friedman, 1980;

Friedman, 1984; Friedman, 1985; Levine, 1987;

Tamari, 1987; Tamari, 1991; Tamari, 1995;

Friedman, 2000; Gellis, Giladi, and Friedman, 2002;

Kahaner, 2003; Levine, 2005; Friedman and Klein,

2010; Friedman and Adler, 2011). Friedman (2012)

further states that, the Talmud has extensively

discussed issues of business ethics. To him, this is not

surprising given that more than a 100 of the 613

precepts in the Torah itself deal with the subject.

The Talmud (Yoma, 85b) states that,

transgressions committed against one’s fellowman

are, in a sense, more severe than those committed

against God. If a person sins against God and

subsequently repents, God forgives him. But if the sin

is against one’s fellowman, then even if the sinner

repents, he cannot be forgiven until he has appeased

the offended party. We see, then, that transgressions

against one’s fellowman are more severe than those

committed against God, and this is underlined by the

manner in which each type of sin is atoned for. If a

sinner repents, then Yom Kippur atones for all his

sins against God, but until his fellowman forgives

him, Yom Kippur cannot atone for interpersonal

injuries, no matter how fervently one confesses and

regrets them. This then supports Hillel the Elder`s

above mentioned famous saying in Shabbos (31a)

that: “What is hateful to you, do not do to your fellow

human, ‘that is the whole Torah, and the rest is just

commentary.’” The Jewish faith and ethics is

centered on this.

There are various schools of philosophy that

believe, however, that ethical concepts are not

completely arbitrary and although they may often

change they remain essentially the same. These

include the naturalist, the intuitive and the hedonistic

schools of thought that hold that beliefs are inborn in

human nature and that it is by intuition that man

knows what is right and what is wrong. However, the

ethical beliefs of Judaism are totally different. They

are immutable and are independent of human will or

intuition. The laws of right and wrong are universal,

because they are determined by the will of God.

Jewish ethics are spiritual ethics – based on the idea

that there is a constant awareness of God that infuses

all thought and actions. Unterman (1971) argues that

even from the purely human viewpoint, in the light of

everyday experience, the Tanach and the Talmud are

the greatest and most glorious works of ethics; this to

him is true as regards their prismatic clarity, as well

as their historical significance, their many

humanitarian laws, and their great influence. To

prove his point, he states that when the foundations

were being laid for the future world, the city of Rome

on the hills of the Tiber, the prophets of Israel had

already been prophesying about the fate and future of

nations. At the present time, when people are in

possession of the ancient literatures of the Egyptians,

the Assyrians, and the Babylonians, people are able to

judge that the truth of the Tanach and the Talmud has


489

no equal; and that the most magnificent and splendid

works of other peoples were created under the

influence of Jewish ethics.

The Talmud apprehended three fundamental

truths: the belief in one God, the belief in a moral and

ethical life, and the hope for the salvation and

liberation of all mankind. Faith in God demands of

the Jew a disciplined moral life, regulated by the

precepts concerning the relations between man and

God and man and man. Only the transgressions

against God can be forgiven, but not the

transgressions against man. The duty subsisting

between man and man is absolute and must be

observed absolutely, because this duty flows from the

very faith in Divinity (Unterman, 1971). Faith and

morality, belief and good deeds are all closely bound

together. According to the Talmud, morality without

faith is impossibility. This is clearly expressed in

Psalms (10:4) (Scherman, N. (2013). The Stone

Edition Tanach, 3rd Ed., Mesorah Publications,

Brooklyn, N.Y.): “The wicked man, in the pride of

his countenance, [says]: “He will not avenge!” All his

schemes are: “There is no Divine Judge.” Wicked

people assume that God will not punish misdeeds.

The concepts of democracy, freedom, equality,

and fraternity are found first in the Torah. If there is

such a thing as ethics, they are rooted in Jewish life,

in its very innermost being and essence. Jewish

ethics, in their immense scope and vast conception,

were the first to burgeon upon our earth; they were

the very first foundation of civilized life (Unterman,

1971). The Jews were the first and only people to

develop clearly and comprehensively the idealistic

view of man and mankind. The Jews were the first to

regard labor as sacred, to put aside a day of rest, to

proclaim complete freedom and equality, and to pray

for peace among nations.

According to the Talmud, the belief in God and

in His so-called attributes is the foundation and

edifice containing the entire Jewish spiritual lore. The

apprehension of the Divinity does not grow out of

human ethical concepts, but because human

sentiments are an integral part of the Divinity and are

fundamentally rooted, in and linked with human

consciousness. The Jewish concept is that ethics are

the divine spirituality, the mark of God with which

man was created. In distinction to the Jewish concept,

is the Greek concept that sees ethics as a result of

purely human rationalism (Unterman, 1971). Both the

term ethics (from the Greek ethos) and morality (from

the Latin mores) are derived from custom or habit.

The word “ethics” comes from the Greek word ethos,

meaning “character” or “custom”, and the derivative

phrase ta ethika, which the philosophers Plato and

Aristotle used to describe their own studies of Greek

values and ideals (Zimmerli, Holzinger, and Richter,

2007). An ethos is that core of attitudes, beliefs, and

feelings that gives coherence and vitality to a people

(in ancient Greek, an ethnos, a word significantly

similar to “ethos”) (Zimmerli et al., 2007).

In distinction to this, the Tanach points to

God`s will as perceived in the human conscience as

the source of all morality. Below is a table that

provides the distinction between the Jewish and

Greek concepts of ethics.

Table 1. Jewish and Greek concepts of ethics

Judaism Hellenism

Demands spirituality Demands pure reason

Believes in a world of deeds Believes in a word of thought

Is soul and sentiment Is mind and reason

Emphasizes cleanliness Emphasizes beauty

Teaches morality Teaches art

Is holiness Is lust

Is ethics Is esthetics/aesthetics

Not man but God is the central point of existence. It is

not man`s will which prevails, but the will of God. Not

man`s justified or unjustified passions and caprices must

be fulfilled, but the external ethical laws of God, the

laws of morality and justice, of truth and equity, peace

and brotherhood.

Its belief is that morality and ethics are completely

divorced from faith and are not a consequence of a

belief in God placed the main emphasis upon man

and prepared the soil for an uncontrolled

individualism. In the idealistic system of philosophy

man became the creator of the world, the foundation

and the source of being. The Universe exists only

through man and with man. The Universe is an

image of man and only as an idea of man does it

have a place in Universal creation.

The Talmud apparently believes that without

religious influence morality and ethics are divested of

their fundamental basis. The Talmud also believes

that no logical theory is capable of inducing an

individual or group to do that which may be against

their own immediate interests. The Talmud and the

prophets consider it far too dangerous for man to

observe ethical precepts merely because they are for

the good of the community. It is far easier for man to

enjoy that which is immediately available than to


490

think of the welfare and security of the group. Jewish

religion is far more practical and realistic. Jews have

always based their ethics not upon reason and logic,

but upon Divine authority and Divine perfection.

According to the Talmud, the desire to acquire

ethical standards of conduct comes not from man, but

from the portion of the Divinity that if found within

man. The desire comes from its primeval source,

which are the Power of Creation and the Power of

Domination. Without God, ethics are without essence

and foundation, without influence and reality, without

system and permanence. Rabban Shimon ben

Gamaliel55

says: On three things the world is

sustained: on law, on truth, and on peace, as it is said:

“These are the things that you should do: Speak the

truth with one another; and in your gates judge with

truth, justice and peace” (Zechariah 8:16)56

. Mishnah

1857

seems to contradict the dictum of Shimon the

Righteous in mishnah 258

, who says that the world

exists because of Torah, service, and kindness. There

is no contradiction. According to Lieber (2008),

mishnah 2 speaks of virtues because of which God

created the universe. He wanted a world where there

would be people who are dedicated to Torah study,

Divine service, and unselfish kindness to others.

Indeed, even in the worst of times there have been

such people even though they may have been few and

unappreciated. As the Rambam59

comments in Lieber

(2008), all Creation is worthwhile even if there is

only one righteous person in the world. This is the

teaching of Shimon HaTzaddik in mishnah 2, and it

sets up a standard for people whose goal it is to live

up to the Divine goal of Creation. Mishnah 18, on the

other hand, speaks to the very practical question of

how society can be maintained on an even keel,

without descending into an animalistic jungle. To this

Rabban Shimon ben Gamliel responds that the “social

contract” cannot exist without justice, truth, and

peace (Lieber, 2008).

The Jewish civilization for the past 3,000 years

has turned for ethical guidance to the Torah itself and

all other sacred literature that flowed from studying it

and wrestling with everyday ethical challenges from

the beginning of time right up until today. The

fundamental religious principle that underlies all of

Jewish ethics is the idea that transformed the world

itself the minute the Torah entered human

consciousness. Then the Torah came into the world

and introduced the idea that there is a God who has

55 Avos 1:18 56 Scherman, N. (2013). The stone edition Tanach, 3rd Ed., Mesorah Publications, Brooklyn, NY. 57 Avos 1:18 58 Avos 1:2 59 Rabbi Moses Ben Maimon (Maimonides/Rambam) (1135-1204) born in Spain before moving to Egypt. He was a physician and wrote medical works as well. His greatest works are the Mishneh Torah and The Guide of the Perplexed.

ethical expectations of every human being. It was an

idea whose time had come and continues to resonate

to this very day – that what you do matters, and what

you say matters because who you are really matters.

4. Business ethics philosophy from a Talmudic perspective

Numerous books and articles have been written

examining the Talmudic business ethics philosophy

and how applicable it is to the contemporary business

environment that is rampant with corruption, bribery,

fraud, misappropriation, misrepresentation and all

other forms of unethical behavioral activities. The

following are some of the authors who have devoted

their time and energy to bring this unique kind of

information to the world (Friedman, 1980; 1984;

1985; Levine, 1987; Tamari, 1987; 1991; 1995;

Friedman, 2000; Gellis, Giladi, and Friedman, 2002;

Golinkin, 2003; Kahaner, 2003; Levine, 2005;

Friedman and Klein, 2010; Friedman and Adler,

2011; Friedman, 2012; Schwartz, 2012).The

following are some of the basic Talmudic

philosophies of business ethics as discussed by the

Sages. These will go a long way as referral points for

both business and the society at large.

4.1 Care for the environment

The idea that everything-including the environment-

belongs to God and that one of mankind`s job is to act

as its caretaker plays a large role in how the Talmudic

rabbis viewed the world`s resources. Ecclesiastes

Rabbah (7:13) says, “God said to Adam: ‘everything

you see I created for your sake. See to it that you do

not spoil and destroy the world for if you do, there

will be no one to repair it after you.’” The Talmud

(Taanit, 23a) tells a story that one day as Rabbi Honi

ha-Ma`agel was travelling on the road, he

encountered a man planting a carob tree. He asked the

man, “How long does it take for the tree to bear

fruit?” The man replied, “It takes seventy years for

the tree to bear fruit.” He asked him, “Are you certain

you will live another seventy years?” The man

replied, “When I came upon this land, I found a

grown carob tree that my ancestors had planted for

me. I am doing the same by planting this tree for my

descendants” (Judovits, 2009). One of the hallmarks

of Talmudic environmental beliefs is that what

someone does in one place can affect someone else

no matter how much distance is between them

(Kahaner, 2003). Traces of radioactivity from the

Chernobyl nuclear plant accident were found in the

milk of cows grazing in Scandinavia (Kahaner, 2003).

The Torah (Deuteronomy 20:19) states that: “When

you besiege a city you shall not destroy its fruit trees.

Man`s life depends on the trees of the field. The

Talmud (Shabbos, 67b) states that, “It is forbidden to

cause the oil in a lamp to burn too quickly, thus


491

wasting fuel.” The Midrash (Genesis Rabbah60

, 13:3)

summarily states that, three things are of equal

importance: earth, humans and rain.

4.2 Honesty in Business

The Talmud (Shabbos, 31a) states that: "The first

question an individual is asked in the afterlife at the

final judgment is: 'Were you honest in your business

dealings?'" This statement on its own demonstrates

the importance of honesty in business dealings. In

fact, all that the Holy One blessed be He desires, is

honesty, as it states (Psalms 31:24): “The Eternal

safeguards the honest.” And it says (Isaiah 26:2):

“Open the gates and let the righteous nation enter –

they have waited trustingly” and (Psalms 101:6): “My

eyes are upon the faithful of the land, that they may

dwell with me; he who walks the way of perfect

innocence, he shall serve me,” and (Jeremiah 5:3):

“Surely your eyes are toward those who are faithful.”

"Whoever conducts his business dealings honestly is

liked by humankind and it is considered as though he

observed the entire Torah" (Mechilta, Exodus 15:26).

Rabbi Shimon Ben Gamliel, in Avos (1:18) states

that: "The world endures on three principles: truth,

justice, and peace." "One who wishes to become

pious must be scrupulous in observing the laws

dealing with damages and torts" (Bava Kamma, 30a).

The Talmud states that rather eat vegetables and

fear no creditors than eat duck and hide (Pesachim,

114a). The rabbis made this statement several times

in different ways. It calls on companies and

individuals not to spend beyond their means. Once in

debt, you are always fearful of creditors and the

humiliation that being in debt can bring (Kahaner,

2003).

Obeying the strict letter of the law is not

enough. The Talmud says that Jerusalem was

destroyed, for not doing more than the law required

(Bava Metzia, 30b). This idea is brought out in the

story of Kamtza and Bar Kamtza, which is told in the

Talmud (Gittin, 55b). The Talmud uses the term “the

way of the pious” to describe the highest form of

ethical behavior. A businessperson who leads his or

her life according to this standard would rather

sacrifice time and money before exploiting another’s

misfortune (Friedman, 1985).

4.3 Employer-Employee Relations

The Talmudic sages encouraged people to be hard-

working. They taught four things that have to be

industriously completed: Torah study, performance of

60 Genesis Rabbah – Also called Bereshit Rabbah is the most ancient systematic aggadic midrashim in our possession. It was composed in Eretz Israel in the 4th or 5th centuries C.E., and its language is Galilean Aramaic. The meaning of the words “Bereshit Rabbah” is “the Great Genesis” (Hananel Mack, 1989, MOD Books, Tel-Aviv).

good deeds, prayer, and performance of one’s

occupation (Berachos, 32b). Whenever he went to the

academy, Rabbi Yehudah would carry a pitcher on

his shoulders and say, “Great is labor for it honors the

worker” (Nedarim, 49b). The Psalmist declares,

“When you eat the labor of your hands, you are

praiseworthy61

, and it is well with you” (Psalms

128:2).

The Talmud exempted laborers from the

Biblical obligation of standing up for elderly

individuals and scholars while working (Kiddushin,

33a). The following law, discussed in the Talmud

(Berachos, 16a), further demonstrates the importance

of not wasting time that belongs to one’s employer.

Laborers were permitted to recite various prayers

while on top of a tree or on the top of a scaffold. The

worker was not permitted to climb down the tree

since it would waste time that belonged to the

employer. The employer, on the other hand, was

obligated to climb down the tree in order to recite the

prayers with more feeling. One is obligated to

perform religious obligations at one’s own expense,

not at the expense of the other.

The Torah (Leviticus, 25:41) requires employers

to treat slaves, that is, the lowliest employees,

humanely as it says: “You shall not rule over him

through rigorous labor.” Furthermore, the master is

not permitted to make the slave perform debasing

tasks (Leviticus 25:39), and he have to provide for the

slave’s family (Leviticus 25:41). Degrading work,

labor without purpose, or jobs with no definite time

limit could demoralize a human being. Therefore

these were prohibited for servants and certainly for

employees (Leviticus 25:39).

The Talmud (Kiddushin, 22a) interprets the

verse, “because he fares well with you,”

(Deuteronomy 15:16) to mean the servant must have

the same living standard as the master, “[the servant]

must be equal to you in food and drink; you should

not eat refined bread and he eat coarse bread, you

[should not] drink old wine and he drink new wine,

you [should not] sleep on a mattress and he on straw.”

The Talmud concludes that one who procures a

servant acquires a new master for himself! Many

scholars have noted that the rules applying to slaves

would certainly apply to employees. Thus, treating

employees poorly is prohibited.

The Talmud (Berachos, 5b) tells a story that

once Rabbi Huna suffered great financial loss when

four hundred jars of his wine turned sour. Rav

Yehuda, the brother of Rabbi Sala Hasida, and the

other rabbis visited him. They said to him; “Master,

you ought to examine your deeds.” He asked them,

“Do you find me suspect?” They answered him: “Is

God to be suspected of punishing unjustly?” He

declared, “If somebody has heard that I am accused

61 Scherman (2013). Man must toil to produce results with his own two hands. Only then does God send His blessing (Tanchuma, Vyeitzei).


492

of any misdeed, let him speak.” They replied, “We

heard that the master does not give his tenant his

lawful share of vine twigs.” He replied, “Does he

leave me any? He steals them all.” They said to him,

“That is exactly what the proverb says. If you steal

from a thief, a taste of his theft remains with you.” He

said to the rabbis: “I take upon myself to give him his

share in the future.” It was reported that after this

visit, the vinegar became wine again. Others say that

the price of vinegar increased so much that Rabbi

Huna sold the vinegar for the same price as wine. The

employee-employer relationship is very critical for

business success as evidenced by the above classical

Talmudic discussions and examples. It must be a win-

win relationship.

4.4 Fraud and theft

The Talmud’s views towards fraud and theft go

beyond those of contemporary business ethics

thought. Besides acknowledging the rational and

logical requirement of honest dealings within the

marketplace, the Talmud looks at monetary

dishonesty as a transgression against God’s will.

Regarding stealing, many prohibitions have been

stated in reference to it in the Torah: “You shall not

steal” (Exodus 20:13), “Nor may you rob” (Leviticus

19:13), “You shall not oppress” (ibid.), “Nor may any

man [among you] make a false denial” (Leviticus

19:11), “Or lie against his fellowman” (ibid), “You

must not cheat one another” (Leviticus 25:14), “You

must not move back the border of your fellowman [`s

field]” (Deuteronomy 19:14). Such activities lead to

Divine retribution (Tamari, 1991).

The Talmud (Bava Basra, 88b) states, “Stealing

from a human being is worse than stealing something

that is consecrated [for use in the Beis HaMikdash62

],

for when referring to the former, [the Torah] speaks

first of ‘sinning’ and only afterwards does it mention

‘misappropriation’ [while when referring to the latter

it speaks first of ‘misappropriation’ and only then

does it mention ‘sinning’].” Theft requires not only

restitution, but repentance before God (teshuvah), and

may result in an individual becoming ineligible as a

witness (Tamari, 1991).

The Talmud (Bava Kamma, 119a) states,

“Whoever steals from another, even [something]

worth only a prutah, it is as if he has taken his life.”

[From here] one sees the severity of this sin even with

regard to small amounts. The Talmud further says on

this subject (Taanit 7b): “The rains are withheld only

because of the sin of stealing.” The Midrash

(Leviticus Rabbah63

, 33:3): “[In] a basket full of

62 Temple 63 Vayikra/ (Leviticus) Rabbah – is an ancient volume of aggadot which was created in Eretz Israel and was edited in the 5th or the beginning of the 6th century C.E. It was clearly influenced by the ancient Tannaic Midrashim (Hananel Mack, 1989, MOD Books, Tel-Aviv).

transgressions, which sin is the most incriminating?

The sin of stealing!” And it was the sin of stealing

that finally condemned the generation of the Flood to

such harsh punishment (Sanhedrin, 108a).

4.5 Misleading others with bad advice

The principle of lifnei iver (literally, “before the

blind”) prohibits one from giving bad advice to

another person. It is based on the verse in the Torah

(Leviticus 19:14): "You shall not curse the deaf, and

you shall not place a stumbling block before the

blind64

; you shall fear your God - I am Hashem." The

original Hebrew reads, lifnei iver lo sitten michshol

(“before the blind do not place a stumbling block”)

and is often referred to, succinctly, as lifnei iver. The

term “blind” is interpreted metaphorically as meaning

someone who is unsuspecting, naïve, ignorant, or

even morally blind65

. Thus, one who purposely gives

bad advice to another has violated this law. In fact,

one who conceals his true motives for giving the

advice (for example, there is a conflict of interest and

the advisor stands to make a hidden profit or get a

kickback from his advice) has violated the principle

of lifnei iver (Leviticus 19:14). As the Midrash

explains, the reason the verse ends with the warning

about fearing God is that human beings do not know

whether advice proffered to them by friends is good

or bad; after all, advice is often given with an ulterior

motive. Only God knows the true motive of the

advice giver.

In addition, lifnei iver is considered to be a

prohibition against helping or causing another to

sin66

. Thus, placing any kind of prohibited temptation

in front of someone would not be allowed. For

example, providing an individual with a prohibited

food would be a violation of lifnei iver, thus

according to the Talmud, Pesachim (22b). How many

times do people fail in these transgressions daily as

their lust for profit lures them onward? In the Torah

the severity of their punishment has already been

spelled out (Deuteronomy 27:18): “Cursed is he who

misleads an undiscerning person.”

The responsibility of an honest person is such

that when someone comes to him for advice he must

give him the same advice that he would himself

follow, having no other end in mind, immediate or

distant, than the benefit of the one who has come for

the advice. And if it should happen that he sees

himself as standing to lose by such advice, he should

reveal this to the other party if he is able to, and if he

cannot, he should excuse himself and not give any

advice (Luzzatto, 2009).

64 Scherman (2013). “Before the blind.” [In addition to the lateral meaning,] one may not give bad advice to an unsuspecting person (Rashi; Sifra), or cause someone to sin (Rambam). 65 ibid 66 ibid


493

4.6 Bribery, outright and subtle

The Torah is very strict about taking bribes: It states

(Exodus 23: 8; Deuteronomy 16:19): “Do not accept

a bribe” and (Deuteronomy 16:19): “Do not pervert

judgment.” The Talmud (Kethuboth, 105a) adds that

the Torah prohibits a judge from taking money even

in order to acquit the innocent or to declare the guilty

liable. To further elaborate on this point, the Talmud

(Kethuboth, 105b) tells the story of Rabbi Yishmael

son of Rabbi Yosi whose sharecropper brought him a

basket of a fruit (from Rabbi Yishmael’s own

orchard) every Friday afternoon. One day he brought

the basket on Thursday. When Rabbi Yishmael asked

him why he brought the fruit early, he was informed

that the sharecropper wanted to use him as a judge on

a case. Rabbi Yishmael recused himself and found

others to try the case. Later, when Rabbi Yishmael

overheard the proceedings, he kept thinking to

himself of arguments the sharecropper might use to

win the case. When he realized what he was doing, he

cursed those who take bribes. He said that in this

situation, where he did not take the gift and even if he

had, it was fruit from his own orchard, yet, he was

still biased and could not think clearly. All the more

so, one who takes a bribe (or who even has a conflict

of interest) can never be impartial.

4.7 Conflict of interest

The Talmud (Bava Metzia, 38a) discusses a

disagreement regarding the law in the case of a bailee

who is watching someone’s fruit, wine, oil, or honey

and notices that it is starting to spoil. Should he sell it

or is he not permitted to do anything? The Talmud

maintains that he should sell it to others under the

supervision of the court, but he is not permitted to

buy it for himself. The reason being to avoid people

to suspect that the bailee purchased it for an unfairly

low price. Klainman (2000) uses this law to prove

that the Jewish laws dealing with conflict of interest

are not only for judges, witnesses, or public officials.

These laws are also for trustees or “anyone having a

fiduciary relationship with another.” Also, they cause

others to be suspicious of one’s motives, implying a

lack of transparency or oversight. One is obligated to

act in a way that does not cause others to be

suspicious of one’s actions.

There is no question that Jewish law does not

allow people or organizations to place themselves in a

situation where a conflict of interest is present. The

Talmud (Sanhedrin, 18b) states that neither the king

nor the High Priest may be members of the court that

is involved in the intercalation of the year. The

Talmud felt that the conflict of interest was too great

and therefore did not allow the king to participate as a

member of the panel. The High Priest also had a

conflict of interest. If he agreed to add another month,

the following Yom Kippur would be later in the year

when it is colder in Israel. This would result in a great

deal of discomfort for him, either because of the five

ritual baths he took on Yom Kippur and/or because

the floor would be very cold and he performed the

service barefoot. When it comes to conflicts of

interest, no one is to be trusted (Friedman and

Friedman, 2009).

4.8 Honest weights and measures

The Torah is very concerned with honest weights and

measures. The Torah states (Leviticus 19: 35-36):

“You shall not commit a perversion in justice67

, in

measures of length, weight, or volume. You shall

have correct scales, correct weights, correct dry

measures, and correct liquid measures – I am

Hashem, your God, Who brought you forth from the

land of Egypt.” One is not permitted to own an

inaccurate weight or measure (Deuteronomy 25: 13-

16): “You shall not have in your pouch a weight and a

weight – a large one and a small one. You shall not

have in your house a measure and a measure – a large

one and a small one. A perfect and honest weight

shall you have, a perfect and honest measure shall

you have, so that your days shall be lengthened on the

Land that Hashem, your God, gives you. For an

abomination of Hashem, your God, are all who do

this, all who act corruptly” (Bava Metzia, 61b). This

is why shopkeepers were instructed to wipe their

weights once a week and clean their scales after every

weighing (Bava Basra, 88a).

The Talmud further states that, “The punishment

for measurements is [even] more severe than the

punishment for promiscuity….” The Talmud is so

concerned with honest measures that the sages even

prohibit vendors of liquids from pouring a liquid

rapidly from a great height. Since foam is generated,

the consumer ends up with less liquid. In addition,

market commissioners were appointed to oversee

businesses using weights and measures (Bava Basra,

89a). For example, the strict Jewish attitude towards

maintaining accurate weights and measures counters

society’s lenient view with respect to “shortchanging”

clients and “cutting corners.” One major form of theft

or monetary exploitation regarded by Jewish law is

“overcharging.”

There are three degrees of overcharging. If the

discrepancy between the sale price and the market

value is less than one sixth of the market value, no

legal action is possible. It is assumed that the buyer

and seller waive their legal rights as the social costs

of cancelled sales would outweigh any benefits

(Tamari, 1991). If the discrepancy between the sale

price and the market value is exactly one sixth, the

buyer may make a claim for the price differential. If

the sales price differs from the market value by more

than one sixth, the sale may be invalidated. If the

67 Scherman (2013). Ch.19:35-36. A businessman who falsifies weights and measures is likened to a judge who perverts judgment.


494

seller makes it clear that there is an overcharge, and

no form of oppression exists, then no claim for

“overcharging” can be made. This form of legal

protection is designed to prevent the exploitation of a

party who may be weaker, ignorant, misled, or

otherwise disadvantaged (Tamari, 1991). The issue

still arises whether one is entitled to charge more than

the market value up to the one-sixth level. The

Talmud suggests that the moral activity would be

charging no more than the market price, despite being

technically allowed by the law.

4.9 Transparency

The Torah (Numbers 32:22) states that, “And you

shall be innocent before God and Israel.” This verse

is used by the Talmud (Yoma, 38a) to derive the

principle that it is not enough for one to know that

that one`s actions are proper in God`s eyes. One must

also act in such a way as not to engender suspicion on

the part of human beings. Conflicts of interest, of

course, cause people to be suspicious of one’s actions

and this is not permitted. Demonstrating the

importance of keeping honest records, the Torah

(Exodus, 38:21-31) enumerates the amount of gold,

silver, and copper used in the construction of the

Tabernacle. Moreover, the Torah (Exodus, 38:21)

informs us who was ultimately responsible for

guaranteeing that accurate records were kept: “These

are the accounts of the Tabernacle, the Tabernacle of

the Testimony, as they were calculated according to

the commandment of Moses…” Moses wanted to

show everyone that he was acting in such a way so

that no one would be suspicious of him and to make

evident to the Israelites that no precious metals were

diverted for anyone’s personal use. Thus, he

commanded others to audit the books.

The Sidrah begins with a detailed listing of the

amounts of gold, silver and copper that was

contributed for the construction of the Tabernacle.

Despite the fact that metals were deposited with

Moses and were under the supervision of Bezalel –

people whose greatness and integrity were

indisputable, known to the people, and attested to by

God – Moses would not rely on assumptions. Leaders

must be beyond reproach and must keep accounts of

the funds that pass through their hands. Today we

would refer to this as transparent accounting records.

Moses gave a complete reckoning to the Jewish

people of what their donations had been used for.

Financial transparency is essential for all

organizations and especially those that are supported

by the community.

The Talmud (Pesachim, 13a) states that the

overseers in charge of the soup in the kitchen were

not allowed to purchase surplus food when there were

no poor people for whom to distribute it. Surpluses

were only allowed to be sold to others so as not to

arouse suspicion that the charity overseers were

profiting from public funds. The Talmud (Yoma, 38)

relates how the family of Garmu, that made the

showbread for the Temple, was especially careful to

be above suspicion. Their children were never seen

with fine bread. Brides from the family of Abtimas

never wore perfume since this family made the

incense for the Temple.

4.10 Not discriminating against the stranger

One type of poor person that is mentioned numerous

times in the Torah is the stranger. According to one

opinion in the Talmud (Bava Metzia, 59b), the

precept of treating the stranger properly is mentioned

thirty-six different times in the Torah. For instance,

Leviticus (25:35) states: “You shall strengthen him,

whether he is a stranger or a native, so that he can live

with you.” In addition, the Torah prohibits one from

wronging or oppressing the stranger (Exodus 22:20;

23:9). Moreover, the Torah obligates one to love the

stranger (Leviticus 19:34; Deuteronomy 10:19). This

concept of caring for the stranger is mentioned

seemingly endless times in Scriptures (also in the

Prophets-Jeremiah 22:3; Zechariah 7:10) because

there is a natural tendency to take advantage of those

who are different, whether of a different nationality,

different background, or different race. Employers

have a special obligation to “strengthen” those who

are of different backgrounds by providing them with

meaningful work.

4.11 Paying Wages and Rents on Time

The Torah (Leviticus 19:13) states: “You shall not

cheat your fellow and you shall not rob; a worker`s

wage shall not remain with you overnight until

morning68

.” Employers must pay employees on time.

Withholding payment due to workers is a violation of

the Torah law. The Talmud (Bava Metzia, 112a) says

that, “Whoever withholds an employee`s wages, it is

as if he has taken the person`s life from him.” The

Talmud (Bava Metzia, 111b) extends this law to all

kinds of payments owed, including various types of

rental fees. Firms that are late in paying their

landlords or suppliers violate this law. The

importance of paying workers on time can be seen

from the following episode related in the Talmud

(Bava Metzia, 83a). Some porters hired by Rabba

Ben Huna were negligent and broke his cask of wine.

Not only did Rabba not get restitution, but Rab, the

judge, required that Rabba pay the workers. Rab felt

that since the porters were quite poor, one must

sometimes go beyond the strict letter of the law. Rab,

somewhat cryptically, quoted a passage from

Proverbs to demonstrate that an ethical person

68 Scherman (2013). Ch.19:13 If a worker was hired by the day, his employer has until morning to pay him; if he was hired for the night, he must be paid by the next evening (Rashi; Sifra).


495

sometimes must do that which may not be necessary

on purely legal grounds. The verse in Proverbs (2:20)

says: “That you may go in the way of the good and

keep the ways of the righteous.”

In our own time, Aaron Feuerstein, President

(owner) of Malden Mills, displayed an unusually high

level of ethics after his textile company burned down

on December 11, 1995. This was so unusual that

President Clinton was moved to invite him to sit with

his wife Hillary and daughter Chelsea during the

State of the Union address the following month

(Kahaner, 2003). Feuerstein could have taken the

insurance money and not rebuilt his company. Not

only did he choose to rebuild (primarily in order to

save the jobs of 3000 employees), but he paid his

idled workers for three months and took care of their

health-care benefits for six months. The total cost of

his generosity was about USD10 million. Apparently,

Mr. Feuerstein chose to “keep the ways of the

righteous.”

4.12 Fringe benefits for employees

The Torah requires the master to give his or her slave

a severance gift. The Torah (Deuteronomy 15:13-14)

states: “Do not send him away empty-handed. You

shall give him a severance gift from your flocks, from

your threshing floor, and from your wine cellar; as

Hashem, your God, has blessed you, so shall you give

him.” An ethical employer should realize that if the

Torah demands that a slave be given a severance

bonus after six years of labor, it is certainly

appropriate for employers to reward loyal workers

who have been with a firm for many years. The Torah

gives a field worker the right to eat the produce he

cultivates.

The Torah (Deuteronomy 23:25-26) states:

“When you come [as a worker] into your neighbor’s

vineyard, you may eat as many grapes as is your

desire, to your fill, but you may not put any into a

receptacle. When you come into your neighbor’s

standing corn, you may pluck ears with your hand,

but you should not lift a sickle on your neighbor’s

standing corn.” Grape-pickers, for example, can eat

some of the grapes they are harvesting, but they are

not allowed to place them into a vessel (to take home

with them). These laws ensure that a field worker has

a right to eat the crop he or she is working on while

harvesting. However, they also protect the field

owner from a rapacious worker who will take too

much. Surely, an ethical employer, especially one in

the food business, should allow workers to take a

reasonable amount of food for them. Interestingly,

many hotels allow employees to get all their meals

free while working, but do not allow them to pack up

food to bring home.

The Talmud recounts the story of the son of

Rabbi Yochanan Ben Mattia, who once hired workers

and agreed to supply them with food, without

specifying the quantity or type of food. When his

father heard about this, he said: “My son, even if you

would prepare for them a banquet as majestic as

Solomon when in his grandeur, you would not fulfill

your undertaking” (Bava Metzia, 83a). Rabbi

Yochanan believed that a simple meal would not be

sufficient to satisfy one’s obligation, since laborers

had to be treated with great honor and respect.

Providing the workers with bread and water for their

meal would be as unacceptable as feeding one’s own

family such a meal.

4.13 Honesty in negotiations

The negotiation between Ephron and Abraham over

the Cave of Machpelah provides interesting insights

into proper and improper ways to negotiate (Genesis

23). Abraham’s wife Sarah died, and Abraham

needed a place to bury her. Abraham was desperate

for a burial plot. Ephron, knowing this, realized that

he could overcharge Abraham and probably still get

his asking price. Ephron, however, was also

interested in posturing before his countrymen and

looking generous. He said to Abraham, “No, my lord,

listen to me! I have already given the field to you, and

as for the cave that is in it, I have given it to you; in

the sight of my countrymen, I have given it to you.

Bury your dead” (Genesis 23:11). Abraham certainly

had the opportunity of saying to Ephron, “Thank you

very much for this nice gift.” Abraham probably

suspected that Ephron was offering the land only

because his countrymen were watching and was not

sincere in his offer. Abraham replied, “If only you

would listen to me! I am giving you the money for the

field.…” Ephron said, “My lord, hear me! Land worth

four hundred silver shekels, between me and you,

what is it? Bury your dead” (Genesis 23:15). Ephron,

still pretending that he wanted to give away the land,

slyly mentioned its value. Abraham understood what

Ephron really wanted and ended up paying him the

grossly outrageous sum of four hundred silver shekels

(Jeremiah paid seventeen shekels (Jeremiah 32:9) for

property that was better, and probably larger, than the

Cave of Machpelah).

The Torah could simply have stated that

Abraham paid Ephron four hundred silver shekels for

the Cave of Machpelah and left it at that. One reason

this chapter is in the Torah is possibly to instruct us in

the proper way to negotiate. Abraham did not want to

take advantage of Ephron, knowing very well that

Ephron was simply posturing. Abraham desired to

pay a fair price. Ephron’s behavior, on the other hand,

was reprehensible. Knowing that he had the upper

hand, Ephron proceeded to ask for an outrageous

sum. From Ephron’s conduct, the Talmud (Bava

Metzia, 87a) derives the principle that “wicked

people promise much and do not even do a little.”

They would offer to anoint with oil from an empty

flask.

Negotiations are quite common in business. In

particular, there are employer-employee and buyer-


496

seller negotiations. The story of Abraham and Ephron

demonstrates the importance of being honest. Ephron

comes across as a sleazy character because he

promised much and then ended up overcharging for

his property. Ephron was more concerned with

grandstanding than with being honest and

straightforward.

The Talmud discusses various standards of

conduct that affect negotiation techniques. For

instance, the Talmud prohibits asking a dealer the

price of an item if an individual has absolutely no

intention of buying the item (Bava Metzia, 58b).

Asking a merchant a price when one has no intention

of buying, causes the merchant to have a false

expectation of a sale. The Talmud considers this to be

deceptive. Furthermore, the merchant is upset when

the inquiry does not result in a sale. Only an

individual who has some interest in purchasing a

product has the right to inquire about a price.

The Talmud states that an individual who

“jumps in” while another person is involved in

negotiations and snatches the property away from the

latter party is wicked. The Talmud tells the story of a

sage who abandoned a field he had just purchased

after discovering that someone else had been

negotiating for it prior to the purchase (Kiddushin,

59a). A decent person (or organization) does not

intrude when others are in the midst of negotiations.

Legally, of course, one cannot prevent another from

interloping. The Talmud, however, frowns on such

behavior. This rule also applies to an individual who

“steals” a job from another person who is in the

middle of negotiations with a prospective employer.

It may be legally binding, but it is certainly immoral

by Talmudic standards.

4.14 Honesty in selling

Talmudic law requires that the seller inform the buyer

of any hidden defects in the merchandise. Sales made

under false pretenses, for example, by hiding a

product defect, would be null and void. Two classic

cases are discussed in the Talmud. One case involves

an individual who sells fruit without specifying

whether the fruit is to be used for eating or seed. The

buyer, who purchases the fruit for its seeds, plants the

seeds and then finds out that the seeds are sterile. The

seller’s argument was that he sold the fruit for eating

and not for the seeds. The other classic case involves

an individual who buys an ox and then finds out that

the ox is a gorer and thus unsuitable for plowing. The

seller claims that he sold it for meat. The above cases

are situations in which the seller distributes both

types of products, for example, oxen for plowing and

oxen for meat. If, however, a seller only sells one

type of product and clearly is trying to deceive a

blameless customer, there is no question that this is a

violation of the biblical law.

One is not permitted to deceive others under any

circumstances. The Talmud prohibits various kinds of

deceptions in selling, including the following:

painting animals or utensils to fool prospective buyers

into thinking they are younger or newer; or deceiving

potential customers by placing the better quality

merchandise on top of the bin (and the lower quality

merchandise on the bottom) to make it appear that the

merchandise is of uniformly high quality throughout.

The law against deception is relevant even in

marriage, that is, one party can claim mekach taos

(transaction under mistaken assumption) if the other

party has a hidden defect. The discovery of a bodily

defect in a spouse can annul a marriage; this kind of

marriage is voidable. Evidently, the Talmud considers

any type of deception or dishonesty to fall under the

biblical prohibition against stealing, denying falsely,

or lying.

The Talmud states that there is a clear

distinction between fraudulent and legitimate

business practices: Whatever one does to show the

buyer the true value and beauty of an item is a fair

and honest effort. However, whatever [is done] to

conceal its defects is fraudulent and prohibited. This

according to the Talmud is a fundamental rule in the

workings of business ethics (Luzzatto, 2009).

4.15 Providing an honest day’s work

The rule of thumb is that whatever the work may be,

one who has been hired to do a day`s work is

regarded as having sold all his hours to his employer

for that day, as the Talmud (Bava Metzia, 56b) says:

“One who hires himself out for a day`s work sells

himself for that day.” Therefore, whatever one takes

[from those hours] to benefit himself, in whatever

manner, is pure thievery, and if [his employer is not

prepared] to overlook this he is not absolved of guilt,

as the Talmud (Yoma, 85b) adds that: “A man`s sins

against his neighbor are not atoned for on Yom

Kippur until he placates his neighbor. Employees are

required to work to the best of their abilities and not

waste time. Incidentally, companies that are hired on

a cost-plus basis as contractors have the same

obligation of working to the best of their abilities and

not wasting time and money belonging to others.

Homiletically, one sees this principle in the following

biblical passages. Yaàkov Avinu (Jacob) ran away

from his parents’ home in Israel to another country

because his brother Esav wanted to kill him. When he

arrived in Haran, he noticed some shepherds idling

around the well. He said to the shepherds, “Look, the

day is still long; it is not yet time to bring in the

cattle. Water the sheep and go on grazing” (Genesis

29:7). A stranger in a foreign land does not usually

question the work habits of others. This can be quite

risky, especially with the wrong kind of people.

Apparently, Yaàkov Avinu was surprised that

these shepherds appeared not to be doing an honest

day’s work. Many years later, Yaàkov Avinu

described the kind of work he himself had performed

for Laban. Yaàkov Avinu told his wives, “You know


497

that I have served your father with all my strength”

(Genesis 31:6). Yaàkov Avinu also described to

Laban the kind of work he did for him: “These twenty

years that I have been with you, your ewes and your

she-goats have not miscarried their young, and I have

not eaten the rams of your flocks. That which was

torn of beasts I did not bring to you; I bore the loss of

it.... “In the daytime I was consumed by drought and

in the evening by frost, and my eyes were deprived of

sleep” (Genesis 31:38-41). So what will they say –

those who are busy with their own pleasures while

they are supposed to be at work attending to their

jobs, or who are occupied with enriching their

pockets [at their employers` expense]?! Evidently,

Yaàkov Avinu worked to the best of his abilities for

Laban this, despite the fact that Laban had deceived

him by substituting Leah for Rachel at the wedding,

thus requiring that Yaàkov Avinu work an additional

seven years. Yaàkov Avinu believed that an

employee should work as hard as possible and do an

honest day’s work.

The Talmud relates that Abba Chilkiyah was so

meticulous about not wasting his employer’s time that

he ignored and did not even greet two scholars sent

by the rabbis to ask him to pray for rain. The two

scholars then later asked Abba Chilkiyah about the

mysterious behavior to which Abba Chilkiyah

answered, “Because I was a paid laborer; I could not

steal my employer`s time to greet you” (Taanit, 23a-

b).

4.16 Kiddush Hashem and chillul Hashem

These two principles apply not only to business ethics

but to all of our relations with our neighbors. The two

are called kiddush Hashem, or the sanctification of

God's name, and chillul Hashem or the desecration of

God's name. They stem from a verse in Leviticus

(22:32): "You shall not desecrate My holy name, that

I may be sanctified in the midst of the people of Israel

- I am the Lord who sanctifies you." This verse means

that any good or holy act that a person does, sanctifies

God's name in the eyes of people while any bad or

profane act that a person does, desecrates God's name

in the eyes of the public. A Jew`s primary privilege

and responsibility is to sanctify God`s Name through

his behavior, so that people say of him, “Fortunate are

the parents and teachers who raised a person.”

Conversely, there is no greater degradation for a Jew

than to act in a way that will make people say the

opposite (Yoma, 86a).

As we learn in the classic Talmudic story about

Shimon ben Shetah (Yerushalmi Bava Basra, 2:5):

Shimon Ben Shetah was in the flax trade. His

students said to him: 'retire from the flax trade and we

will buy you a donkey and you will not have to work

so hard.’ They bought a donkey for him from a non-

Jewish trader. As it turned out, a precious gem was

hanging from its neck. They came to him and said:

'from now on you will not have to work anymore!' He

replied: 'why not?' They explained: 'we bought you a

donkey from a non-Jewish trader and we found a

precious gem hanging from its neck'. Shimon said:

'And did its master know?' They replied: 'no'. He said:

'go and return it. Do you think I am a barbarian?! I

want to hear the non-Jew say "blessed be the God of

the Jews" more than I want all the material rewards of

this world!' This taught us that we should always

have the Lord in our thoughts. If we are able to think

of business when we are praying, we should be able

to think of praying when we are doing business.

4.17 Responsibility for damages

According to Kahaner (2003), the biblical phrase “an

eye for an eye” does not have anything to do with

punishment for knocking out someone`s eye, and it is

not an endorsement of the death penalty. It means that

we are responsible for everything that we do. If we

break something, we are expected to fix it, replace it,

pay for it, or otherwise make restitution. The

corollary he said is that we are also obligated to

prevent damage to or the destruction of anything

unnecessarily. This includes anything that happens as

a result of our action or our inaction. This prohibition

refers not only to material things but to intangibles

such as another person`s self-esteem or reputation.

5. Conclusion

In conclusion, the Talmud is without doubt the most

prominent text of rabbinic Judaism’s traditional

literature. The Talmud has created a broad ethical

world from which the Jew has drawn his universal

conception of morality and responsibility. The

Talmud is therefore a guide for every person who

honestly seeks to unite with God and man, with the

love of God as well as with the love of man. In his

book, The Complete Idiot`s Guide to the Talmud,

Rabbi Aaron Parry says that when, shortly before his

death, Albert Einstein was asked what he would do

differently if he could live his life again, he replied

without hesitation: “I would study the Talmud.”

Many people, Jews and Non-Jews have resorted to

study the Talmud which is a significant part of our

very life and an efflorescence which has substantially

helped to mold and form our very essence.

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THE USE OF INTERNATIONAL STANDARDS IN ETHICS EDUCATION IN THE TUNISIAN AUDIT CONTEXT

Arfaoui Feten*, Damak-Ayadi Salma**

Abstract

This study examined the educational tools used in teaching ethics in the Tunisian audit context. Data collection was based observation of ethics education sessions. The findings identified a large difference between the observed teaching practices of ethics education and the requirements of international education standards. The data collected and the discussion of the findings revealed the main challenges in teaching ethics to auditors in addition to certain innovative educational tools that can be used by future professionals when confronted with difficult situations in the workplace. Key Words: Audit, Ethics Education, International Education Standards, Observational Protocol, Tunisian Context * ISG TUNIS, Tunisia ** IHEC Carthage, Tunisia

Introduction

Within a difficult business context primarily

characterised by failure, ethics and trust in the

accounting field have become increasingly important.

To enhance confidence and credibility in the

accounting profession, federal and state governments

have responded to corporate scandals. Such is the

case in the US and other countries around the world

with financial regulatory reforms, such as the

Sarbanes–Oxley Act in the United States, the French

Financial Security Act and a law strengthening the

security of financial relations in Tunisia.

Nevertheless, recent scandals have highlighted the

importance of ethical behaviour in accounting

practices. These events have also demonstrated the

need to instil the importance of ethical behaviour in

accounting in students (Gaa and Thorne 2004).

There was a strong consensus relating the

importance of ethics education to pre-qualifying

programs. The international federation of accountants

(IFAC) members and education providers worldwide

must take up the challenge of implementing ethics

education as part of the educational process for the

qualification of accountants (IFAC 2006).

The purpose of this study was to analyze the

different practices, methods and content of

accounting ethics education in the Tunisian context to

cope with the international education standards (IES),

in particular IES 4, and the IFAC code of ethics for

professional accountants. We used a nonparticipant

observational protocol as a data collection tool. The

observation tool helped researchers to obtain a better

understanding of the educational tools used in

teaching ethics and the participants therein. Our

report is organised as follows: the first section

reviews relevant studies reported in the literature, the

second section discusses the adopted methodology,

and the third section reports the empirical results.

1 The educational practices available in accounting ethics education literature

Ethics education could restore the credibility of the

accountancy profession (Ponemon 1990). Besides,

one of the goals of ethics education is to encourage

students’ moral improvement. Developing

professional values should begin early in pre-

qualifying programs and be applied in all other areas

of learning (paragraph 9, IES 4). The most

challenging tasks facing the IFAC initiative are the

implementation and compliance with IFAC standards

in developing nations (IFAC 2006).

1.1. The fundamental principles of professional ethics

The audit is a governance mechanism designed to

ensure the reliability of financial information (Prat dit

Hauret 2003). As a relationship that is of general

interest, the dependence of an auditor on the

controlling entity may affect the quality of the audit

performed. Different financial statement users should

be reassured of auditor independence; which

constitutes a fundamental guarantee of controls and

the credibility of certified reports (DeAngelo 1981).

Nevertheless, conflicts of interest between the auditor

and managers may lead to a lack of independence in

formulating judgments (Goldman and Barlev 1974).

If the audit market is highly competitive, the auditor

may face pressure from managers to prevent the


500

revelation of irregularities discovered in the market

(Shockley 1981).

Under § 14 of the ISA 20069

« The auditor is

subject to relevant ethical requirements, including

those pertaining to independence, relating to

financial statement audit engagements.”Parts A and B

of the International Ethics Standards Board for

Accountants (IESBA) code of ethics for professional

accountants related to an audit of financial statements

together with national requirements that are more

restrictive. Paragraph 15 of the ISA 200 states that

the« part A of the IESBA Code establishes the

fundamental principles of professional ethics relevant

to the auditor when conducting an audit of financial

statements and provides a conceptual framework for

applying those principles». In this context, it has been

added within the paragraph 15 of the ISA 200

stipulates that the « part B of the IESBA Code

illustrates how the conceptual framework is to be

applied in specific situations». Under § 100 of the

code of ethics for professional accountants, a

professional accountant should comply with the

following fundamental principles.

Under § 110 of the above code «the principle of

integrity imposes an obligation on all professional

accountants to be straightforward and honest in all

professional and business relationships. Integrity also

implies fair dealing and truthfulness».

Under § 120 of this code « the principle of

objectivity imposes an obligation on all professional

accountants not to compromise their professional or

business judgment because of bias, conflict of interest

or the undue influence of others.»

Under § 130 of this code « the principle of

professional competence and due care imposes the

following obligations on all professional accountants:

- To maintain professional knowledge and skill at

the level required to ensure that clients or

employers receive competent professional

service; and

- To act diligently in accordance with applicable

technical and professional standards when

providing professional services. »

Under § 140 of this code « The principle of

confidentiality imposes an obligation on all

professional accountants to refrain from:

- Disclosing outside the firm or employing

organization confidential information acquired

as a result of professional and business

relationships without proper and specific

authority or unless there is a legal or

professional right or duty to disclose; and

- Using confidential information acquired as a

result of professional and business relationships

69 International Standard on Auditing 200: Overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing.

to their personal advantage or the advantage of

third parties. »

Under § 150 of this code « The principle of

professional behavior imposes an obligation on all

professional accountants to comply with relevant

laws and regulations and avoid any action that the

professional accountant knows or should know may

discredit the profession. This includes actions that a

reasonable and informed third party, weighing all the

specific facts and circumstances available to the

professional accountant at that time, would be likely

to conclude adversely affects the good reputation of

the profession. »

1.2. Approaches to the development and maintenance of professional ethics according to international standards

Based on the literature review, surveys of member

bodies, and data collected by means of interviews, the

IFAC recommended the ethics education framework

(EEF) in pre-qualifying education programs (table 1).

Although the content of ethics education in pre-

qualifying programs can vary depending on

individual preferences and resources, IES 4 prescribes

some topics which are the minimum requirements in

ethics education programs. These topics were

matched with those identified in the ethics education

framework (table 2).

In accounting education, few studies have

assessed the effect of ethics education in making

ethical decisions. In a pioneering work, Armstrong

(1993) a sample ethics and professionalism course for

accounting students. Armstrong demonstrated that

this intervention had a positive effect on students’

moral development. Table 3 presents this example

and provides helpful references.

There was a strong consensus relating the

importance of ethics education to pre-qualifying

programs. IFAC members and education providers

worldwide must take up the challenge of

implementing ethics education as part of the

educational process for the qualification of

accountants (IFAC 2006). The purpose of this study

is to assess the effectiveness of ethics interventions in

the Tunisian context to align with the requirements of

IFAC’s standards.

2. Research method

Data collection was based on observation of ethics

education sessions to assess the ineffectiveness of

ethics training in affecting the moral reasoning

abilities of students. This section presents the design

of the study followed by a description of the

participants, the instruments used and finally the

procedure used for data collection.


501

2.1. Post-observation interview

The post-observation interview enabled the

identification of educational tools for teaching ethics

and the expectations of the actors involved in the

Tunisian audit context. Data collection was based on

semi-directed interviews (Arfaoui and Damak Ayadi

201470

) with 15 teachers, 31 graduate students

(Masters CCA), and 15 auditors. The data analysis

allowed us to reveal seven extant programs to the

learning of professional values, ethics and attitudes.

Because of the representativeness of the participants,

we can use a unique classroom observation protocol

for each program.

Consequently, seven programs of ethics

education were randomly sampled to participate in

this study from a Tunisian institution of higher

education during 2011-2012 and 2012-2013 academic

years:

- The 3rd year Audit program in license applied in

management accountant during the first

semester in the academic year 2011-2012;

- Master's 1 Audit program during the first


- Master's 2 Audit program during the first


- Master's 1 Legal Audit program during the

second semester in the academic year 2011-

2012;

- Higher National Diploma in Accounting's 2

Audit program during the first semester in the

academic year 2012-2013;


Audit program during the second semester in the

academic year 2012-2013;


Legal Audit program during the second semester

in the academic year 2012-2013.

Validity is stronger if researcher maintains a

sense of objectivity through distance (Gavard-Perret

& al. 2008). To avoid behavioral bias, we did not

record the lesson observed. The recording reveals

technical difficulties and actors can refuse it.

Furthermore, the participants are often sensitive to the

use which could be made with the images and sound

recordings. Therefore, we have fully noted during

class observation. Moreover, we have used a

structured observation process to maximize the

efficiency of the data collection.

2.2. Observational instrument

Educational Organisation and Management

instrument was used as a method for recording notes.

This instrument was developed by the centre for

research in education, training, and professional

70 co-authors

insertion (CREFI)71

(Altet and al. 1994). As Clanet

(2001/2005), we make accurate observation and field

notes using this observational instrument. This

instrument was adapted for the purpose of the study.

Indeed, we are interested in the fundamental

professional values in IES 4 and the required topics

within ethics education programs. The adapted

instrument articulates the following criteria:

- Descriptive: modality, public, the number and

duration of lesson observations.

- Educational: planning and learning goals,

contents, activities and assessment.

- Organizational: classroom organization and

teacher-student interaction.

- Metacognitive: metacognitive approach.

2.3. Material and observational Procedure

The initial data collection process included obtaining

permission from the university director and teachers.

On the field, it is important to define which approach

to collect data from classroom observations. In this

research, observer was present on class for all ethics

education sessions of the seven programs selected in

order to collect information about the context of the

session observed. Field notes were taken during each

observation, and the Educational Organisation and

Management instrument was completed at the end of

each session.

3. Normative analysis of the educational tools based on the observational instrument

Observations of the seven programs of ethics

education in audit field are usually made during

2011-2012 and 2012-2013 academic years. During

each observation, the observer takes notes of the

extant educational tool for teaching ethics.

The coding observation notes was used to select

and emphasize information that is important enough

to record, enabling the observer to weed out

extraneous information and focus his observations on

the educational tool. The observational instrument

consists of 52 items divided into four criteria:

descriptive (3); educational (34); organizational (12);

and metacognitive (3). The second and third subsets

are each divided into smaller groups of items. The

observer was rated the lessons observed according to

each item on the observational instrument by finding

the cell that best describes what he saws during the

observation. If an item was not observed during the

observation, it should be rated 0.

71 CREFI is a Centre for Research in Education, Training, and Professional Insertion. It is a research institution specializing in Education Sciences.


502

3.1. Descriptive criteria

It is extremely important to describe what is

observed. The first subset, consisting of three items,

was designed to describe lessons observed. The

characteristics of the studied programs of ethics

education in the Tunisian audit context are provided

in table 4.

3.2. Educational Criteria

The second subset was directed at the educational

criteria and was divided into 34 items.

3.2.1. Learning goals of ethics education

Loeb (1988) identified seven goals for the accounting

ethics education. These are:

- relate accounting education to moral issues ;

- recognize issues in accounting that have ethical

implication;

- develop a sense of moral obligation

responsibility;

- develop the abilities to deal with ethical

conflicts;

- learn to deal with uncertainties of the accounting

profession;

- set the stage for a change in ethical behavior;

and

- Appreciate and understand the history and

composition of all aspects of accounting ethics

and their relationship to the general field of

ethics.

During class observation, we have to notice that

learning goals are stated at the beginning of the

course. These objectives are almost absent. And, even

if they are present; they are not provided clearly at the

beginning. This helped to explain the information

collected through interview with students. Indeed, the

little speech on ethics is not necessarily attributable

only to them, but also to the effectiveness of ethics

educational interventions. The lack of clarity about

the definition of learning goals reflects the

disinterestedness of the students. ‘’Because of the

importance of professional values, ethics and attitudes

to future professional accountants, the presentation of

the topic may at first be treated as a separate subject.

This will encourage students to look for and consider

the possible ethical implications of problems being

discussed in their study of other subjects (paragraph

17, IES 4). ”

3.2.2. Content of ethics education

The paragraph 16 of the IES 4 stipulates that, each

program to the learning of professional values, ethics

and attitudes should include the topics reproduced in

table 3. During each observation, we shall take note

the presence or absence of those topics. The results of

the observations are provided in the following table.

We just mention the frequency of occurrence of IES 4

statements (table 5). Indeed, the horizontal frequency

is established by dividing, for each modality of ethics

education, the number of sessions that an element

appears at least once, by the total number of the

sessions observed.

3.2.3. Activities of individual students

During the observation sessions of ethics education,

we noticed that students had already taken notes.

Besides, we had noticed that students did not master

well the French language. Therefore, students have

difficulty to appropriate knowledge in audit

education. Moreover, we noticed students’

disaffection with studies which they considered to be

too difficult and have little benefits. Indeed, the

students are aware of the fact that young people with

good qualification are confronted with the growth of

unemployment. Therefore, the level of students fell

sharply and education at university can only adapt to

this new situation. This disinterestedness is followed

by a lack of diligence which generates a very short

and necessarily insufficient apprenticeship.

3.2.4. Modalities used by teachers to maintain the

interest of students

We observed the modalities used by teachers to

arouse the interest of students for ethics education in

audit field. Indeed, to maintain their interest, the

teachers used essentially, written documents (table 6).

3.2.5 Teaching practices of ethics education

Paragraph 20 of the IES 4 stipulates that the

presentation of professional ethics to accounting

students can be greatly enhanced through the use of

participative approaches. These may include:

- The use of teaching materials such as multi-

dimensional case studies;

- Role playing;

- Discussion of selected readings and videos;

- Analysis of real life business situations involving

ethical dilemmas;

- Discussion of disciplinary pronouncements and

findings; and

- Seminars using speakers with experience of

corporate or professional decision making.

During the observation sessions, we noticed

almost a total absence of those tools in audit

education. During few lesson observations of the

Master's 2 audit program, the teacher used the case

studies.

3.2.6 Organizational criteria

In what follows, we capture the organizational

modalities with 12 items. This subset reports the

student-teacher interactions. Students only take notes;


503

they had the impression that moral issues are treated

in a secondary place in audit education. This result is

in conformity with the results of the interviews with

involved actors in the Tunisian audit context. This

can be explained by the disinterestedness of students

and the quality of teaching (almost total absence of

participative approaches). Indeed, the students lack

motivation is a world phenomenon. To overcome this

problem, the educational tools should be revised. The

teachers need to use participative approaches, such as,

debates, case studies, seminars, role playing and

active discussions.

3.2.7. Metacognitive criteria

We noticed that the teachers keep a detailed logbook

during each session. Actually, the holding of the

logbook might become an aid to recognize the skills

and knowledge. Besides, it allows carrying out

effective maintenance and identifying future learning

needs. Finally, this document could arouse the

students' motivation and facilitate interactions in the

classroom. Thus, we can also suggest the holding of

the logbook for each student.

Conclusion

Ethics education is perceived as a crucial factor in

restoring the credibility of the profession (Ponemon

1990). One of the goals of this training should be the

advancement of students‘moral development

(Lockwood 1978; Leming 1981; Langenderfer &

Rockness 1989; Shaub 1994; Thorne 2001, O'Leary

2012).

This study has as objectives the exploration and

identification of the educational tools for teaching

ethics in the Tunisian audit context. Data collection

was based on interviews and observation of ethics

education sessions. The findings identified a large

difference between the observed teaching practices of

ethics education and the requirements of international

education standards. The data collected and the

discussion of the findings revealed the main

challenges in teaching ethics to auditors in addition to

certain innovative educational tools that can be used

by future professionals when confronted with difficult

situations in the workplace.

Traditional accounting education constrains

moral development.

To arouse and maintain students’ interest, we

must demonstrate the importance of ethical behaviour

in accounting practice. Teaching ethics must involve

the use of innovative tools such as mind maps,

quizzes, case studies, role-playing, and research.

Moreover, this teaching should expose students to

real-world dilemmas that reflect the complexities they

will confront in the future. In addition, ‘‘it is

important for professional accountants to learn from

their ethical experiences. With this in mind, education

programs need to include reflection in which students

are required to consider an experience, what went

well, what did not work, and what approach may be

taken in the future in similar circumstances’’

(paragraph 22, IES 4). Moreover, we recommend that

multiple ethics courses be required, with the initial

course being a general education course rooted in

philosophy and ethical reasoning. Ethics should also

be taught as part of pre-qualifying programs (Noël &

Geyer 2007).

Like all research, our study presents some

limitations involved with using observations as a tool

for data collection. The research limitations relate

primarily to the small size of the sample of the

selected programs. Nevertheless, using of unique

classroom observation protocol for each program is

recommended because of the representativeness of

those programs. Moreover, we evoke the process of

conducting observations. Indeed, this data collection

method is characterized by a low-level of

formalization of the observational protocol (Gavard-

Perret and al. 2008). However, we make accurate

observation field notes based to formative theoretical

frameworks and scrupulous attention to detail.

Besides, there is an ethical concern about the

identities of the participants. The researchers need to

preserve the anonymity of the participants in the final

write-up in ways that community members will not

be able to identify them.

Our work suggests new research directions

designed to extend the developments of our study.

Other research can be led to analyze in depth the

different educational tools for teaching ethics in other

universities and other contexts.

In a future research, we suggest to demonstrate

the existence of obvious links between the

educational strategies, the expectations of the actors

involved in this system, and the expected objectives

and student characteristics, while attesting them

within the Tunisian context.


504

Table 1. Developing a framework approach to deliver ethics education (IFAC 2006)

Stage Objective of stage How to teach Focus of content

Stage

1

To develop ethical intelligence by

attaining the necessary knowledge

in ethical concepts and theories

relating to the accountant’s work.

A separate required module in

ethics taught early in the

program.

Traditional theories of ethics,

virtues, and moral development.

Stage

2

Sensitize learners to ethical issues

and threats in the relevant

functional disciplines of

accounting.

Integration of ethical issues

across existing subject matter

such as financial accounting,

managerial accounting,

auditing and taxation.

Common issues and dilemmas

facing accountants in practice e.g.

tax evasion.

Stage

3

To integrate knowledge of ethics

with sensitivity in order to

develop competence in ethical

judgment and decisions.

A separate required or

optional capstone module/

course in ethics.

Application of ethical theories,

social responsibilities, code of

professional conduct and other

ethical decision models to ethical

dilemmas.

Stage

4

To understand organizational and

situational contexts and to sharpen

one’s ethical competence in

translating knowledge and

sensitivity into behavior.

Continuous professional

ethical training.

Factors affecting ethical decision-

making and ethical behavior

Table 2. Prescribed topics of ethics education (IFAC 2006)

IES 4 Topics EEF Topics

The nature of ethics

Differences of detailed rules-based and framework approaches to

ethics, their advantages and drawbacks;

Framework approaches

Concepts and values

Professional behavior and compliance with ethical standards

Concepts of independence, skepticism, accountability and public

expectations

Ethics and law, including the relationship between laws, regulations

and the public interest

Compliance with the fundamental ethical principles of integrity,

objectivity, commitment to professional competence and due care, and

confidentiality

The environment - corporate,

professional and regulatory

Professional ethics

Ethics and the individual professional accountant: whistle blowing,

conflicts of interest, ethical dilemmas and their resolution

Decision-making

Consequences of unethical behavior to the individual, to the profession

and to society at large

Ethical threats and

safeguards

Ethics in relation to business and good governance

Ethics and the profession: social responsibility

Enterprise governance

Social and environmental

issues

Table 3. Sample ethics and professionalism course (Armstrong, 1993)

Reference

I. Theoretical foundations

A. Ethical theory

B. Moral development theory

C. Sociology of professions

Beauchamp & Childress, 1989; Donagan, 1977;

Gilligan, 1982; Kohlberg, 1976, 1984; Rest, 1979a, 1986;

Buckley, 1972; Curd & May, 1984; Greenwood, 1957;

II. Professional guidance

A. AICPA Code of Professional

Conduct

B. Monitoring and enforcement

C. Guidance in tax practice

1. IRS-Circular 230

2. AICPA-Statements of

American Institute of Certified Public Accountants, 1988a;

Bremser, 1986; DeFatta & Smith, 1986;

Zick, 1985;

Ayers &Jackson, 1988; Cheifetz, 1987;

Podolin, 1988; Shapiro, 1986;

American Institute of Certified Public Accountants, 1988b; Armstrong

& Mikkelsen, 1990;


505

responsibility in tax

practice

D. Guidance in management

advisory service

Burton, 1980; Elliott & Kuttner, 1982;

Previtz, 1985;

III. Congressional investigations and

professional responses

A. 1970s: Moss, Metcalf, Cohen

Commission

B. 1980s: Ding&l, Wyden,

Brooks, Treadway

Commission

Commission on Auditors’ Responsibilities, 1978; U.S. Congress,

Senate Committee on Government Operations, Su~ommi~ee on

Reports, Accounting, and Management, 1976; U.S. Congress, House

Committee on Interstate and Foreign Commerce, Subcommittee on

Oversight and Investigations, 1976;

National Commission on Fraudulent Financial Reporting, 1987; U.S.

Congress, House Committee on Energy and Commerce,

Subcommittee on Oversight and Investigations, 1985-1986; U.S.

Congress, House Committee on Government Operations, 1986; U.S.

Congress, House, 1986;

IV. Federal Trade Commission

A. 1970s: Advertising and

solicitation

B. 1980s: Commissions and

contingent

Fees

Bernstein, 1978;

American Institute of Certified Public Accountants, 1990; Berton,

1987, 1988;

V. Public opinion surveys

A. Public Oversight Board

B. Harris Poll

Audits & Surveys, Inc., 1986 ;

Briloff, 1987; Louis Harris and Associates, Inc., 1986;

VI. Case Studies-Integrated

throughout Course

Mintz, 1990.

Table 4. Characteristics of the studied programs

Modality M1 M2 M3 M4 M5 M6 M7

Device

type

Formal Formal Formal Formal Formal Formal Formal

Scope National National National National National National National

Public 3rd year

students in

license applied

in management

accountant

CCA's

Master 2

students

CCA's

Master 1

students

CCA's

Master 1

students

Higher

National

Diploma in

accounting

students

Higher

National

Diploma in

accounting

students

Higher

National

Diploma in

accounting

students

Duration 11 weeks 10 weeks 11 weeks 11 weeks 15 weeks 15 weeks 14 weeks

Table 5. The frequency of occurrence of IES 4 statements

M1 M2 M3 M4 M5 M6 M7

Differences of detailed rules-based and framework

approaches to ethics, their advantages and drawbacks; _ _ _ _ 13,33% _ _

Compliance with the fundamental ethical principles of

integrity, objectivity, commitment to professional

competence and due care, and confidentiality

10,53% _ 25% 9,09% 26,67% 13,33% 14,28%

Professional behavior and compliance with technical

standards; _ _ _ _ 6,67% 26,67% 14,28%

Concepts of independence, skepticism, accountability

and public expectations; 10,53% 8,33% _ 9,09% 33,33% 26,67% 14,28%

Consequences of unethical behavior to the individual, to

the profession and to society at large; _ _ _ 9,09% _ _ _

Ethics and the profession: social responsibility;; 5,26% _ _ _ 6,67% _ 7,14%

Ethics and law, including the relationship between laws,

regulations and the public interest; 5,26% _ _ _ 13,33% _ _

Ethics and the individual professional accountant:

whistle-blowing, conflicts of interest, ethical dilemmas

and their resolution.

_ _ _ 9,09% 6,67% _ _


506

Table 6. Variety of modalities used by teachers to maintain the interest of students

M1 M 2 M3 M4 M5 M6 M7

He asks questions that enhance the development of students’

understanding. - - - 9,09% - 13,33% 14,28%

He evokes current events and other disciplines. 5,26% - 16,67% 9,09% - - -

He tells real stories and anecdotes. 5,26% - - - - - 7,14%

He uses humor. 5,26% - - 9,09% - - _

He maintains order and discipline. - - - - 13,33% 6,67% 7,14%

He uses a written document (Text, drawings, etc.). - - 50% - 33,33% 26,66% 28,57%

References 1. Altet, M., Bressou, P., Bru, M. and Leconte-Lambert,

C. 1994. Les pratiques d’enseignement en

CE2.(Research paper; Ministry of Education, Research

and the Technology, Paris).

2. Arfaoui, F., Damak Ayadi, S. (2014). Réflexion sur la

sensibilisation à l’éthique des futurs professionnels de

l’audit : Une étude exploratoire dans le contexte

tunisien. Revue de l’Organisation Responsable, 7(1),

39–56.

3. Armstrong, M. B. 1993. Ethics and professionalism in

accounting education: A sample course, Journal of

Accounting Education, 2, 11-92.

4. Clanet, J. 2001. Étude des organisateurs des pratiques

enseignantes à l’université, Revue des sciences de

l'éducation, 27 : 2, 327-352.

5. Clanet, J. 2005. Contribution à l’étude des pratiques

d’enseignement ; Caractérisation des interactions

maître-élève(s) et performances scolaires, Revue des

sciences de l'éducation, 14, 11-28.

6. De Angelo, L. 1981. Auditor independance, low

balling, and disclosure regulation, Journal of

Accounting and Economics, 3: 2, 113-127.

7. Gaa, J. & Thorne, L. 2004. An introduction to the

special issue on professionalism and ethics in

accounting education, Issues in Accounting Education,

19, 1-6.

8. Gavard-Perret, M.L., Gotteland, D., Haon, C., Jolibert,

A. 2008. Méthodologie de la recherche Réussir son

mémoire ou sa thèse en sciences de gestion (Paris:

Pearson).

9. Goldman, A., Barlev, B. 1974. The Auditor-Firm

Conflict of Interests, it’s Implications for

Independence, The Accounting Review, 49:4, 707-

718.

10. IFAC. 2003. International Education Standard (IES).

No. 4: Professional Values, Ethics and Attitudes. New

York: International Federation of Accountants.

11. IFAC. 2005. Approaches to the Development and

Maintenance of Professional Values, Ethics and

Attitudes in Accounting Education Programs (New

York: International Federation of Accountants).

12. Langenderfer, H., Rockness, J. 1989. Integrating ethics

into the accounting curriculum: Issues, problems and

solutions, Issues in Accounting Education, 4, 58–69.

13. Leming, J. 1981. Curricular effectiveness in

moral/value education: A review of Research, Journal

of Moral Education, 10, 147-164.

14. Lockwood, A. 1978.The effects of values clarification

and moral development curricula on school-age

subjects: A critical review of recent research, Review

of Educational Research, 48, 325-364.

15. Loeb, S, E. 1988. Teaching Students Accounting

Ethics: Some Crucial Issues, Issues in Accounting

Education, 3, 316–329.

16. Noël, C., & Geyer, D. 2007. Ethique et comptabilité :

Un défi pour la formation des futurs professionnels du

chiffre, Revue Française De Comptabilité, 397, 30-34.

17. O’Leary, C. 2012. Semester-specific ethical instruction

for auditing students, Managerial Auditing Journal, 27:

6, 598-619.

18. Ponemon, L. A. 1990. Ethical Judgments in

Accounting: A Cognitive Developmental Perspective,

Critical Perspectives on Accounting, 1, 191-215.

19. Prat Dit Hauret, C. 2003. Audit et développement

moral cognitif, Finance Contrôle Stratégie, 6 : 3,117-

136.

20. Shaub, M. K. 1994. An analysis of the association of

traditional demographic variables with the moral

reasoning of auditing students and auditors, Journal of

Accounting Education Winter, l-26.

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independence: An empirical analysis, The Accounting

Review, 56: 4, 785-801.


507

EMPLOYEES PERCEPTION ON IMPROVING SERVICE DELIVERY IN THE DEPARTMENT OF PUBLIC WORKS

Gugu Precious Mathaba*, Ian Nzimakwe**, Mashau Pfano*, Elias Munapo*

Abstract

The study aimed at establishing the critical factors underlying the improvement of service delivery within the Department of Public Works in South Africa by ensuring that key elements of service delivery (cost effectiveness of services, high quality services and timeous delivery of services) are adhered to. Durban Regional Area was selected as the location of study. A total of 100 participants were randomly sampled from a population of 400 employees in the targeted area of study. A questionnaire was used as a research instrument and was administered to all the selected 100 respondents. What emerged from the study is that the Department of Public Works is marred by a number of problems, the biggest problem being the non-existence of an integrated management system, making it difficult to track the stages of services to be delivered and this resulted in huge delays in delivering the services to the clients. The quantitative results showed that the Department has staff members who are suitably skilled for the work rendered, but these skills alone are not sufficient if the Department is lacking in the critical resources required to deliver services. Since Department of Public Works is a technical department, it is recommended that skilled employees such as quantity surveyors, engineers as well as information technology experts be at the forefront of priorities. It is also very important that guidelines, policies and business processes for all sections in the department are well communicated to all staff. Key Words: Public Service Delivery; Employee Perception; Procurement Challenges * Graduate School of Business & Leadership, University of KwaZulu-Natal, South Africa ** School of Governance, University of KwaZulu-Natal, South Africa

1. Introduction

Public sector managers around the globe now face a

common set of challenges when it comes to meeting

the increased expectations of their customers (Dalton,

2013). While these challenges may be consistent in

the way they come, the ways in which they are being

confronted and the results that are being achieved

vary considerably. One of these common challenge

faced by every organisation is how to service its

customers better. Luthuli (2009) argued that most

people are accustomed to the very good or enhanced

service delivery provided by the private sector and is

worthy the monies paid for. The same people view

the public sector as another provider of services, for

which they also pay for but in this case in the form of

taxes. In order to address this, the public sector must

find ways to improve the efficiency and effectiveness

of its service delivery.

Luthuli (2009) further proposed that the Public

Service should provide value for money by improving

the quality of service (accessibility for all and

satisfactory customer experiences and outcomes) and

reducing the costs involved in providing those

services. The need for a customer-oriented focus

coincides with the tightening of government budgets,

providing value for money is a core concern today.

This is prompting the public sector to explore new

sustainable models for service delivery. These are

models that can improve customer experience and

outcomes through enhanced service levels at the same

or reduced cost (Fourie, 2011).

It must be kept in mind that the public sector

does not choose its customers. What is required is to

service them and their diverse requirements are

another factor driving the need for improving service

delivery. To deliver on the customer’s promise,

public sector organisations must build a connected

government. A connected government is one with

seamlessly aligning multiple government departments

that have customer journey needs. The customer

promise is part of the inherent agenda of governance

for the public sector and sets out the standard of

service that government is required to provide to its

customers (Bayat and Meyer, 2004).

Citizens today are more aware of their rights and

they have better access to information on public

services and consequently have higher expectations

of service levels. Since customers have become

accustomed to capable private sector organisations

providing high levels of customisation and other

benefits, they are not prepared to accept that public

sector organisations are incapable of improving their

own service delivery. They expect a positive


508

customer experience and better returns on the taxes

they pay.

The Department of Public Works which

provides comprehensive building infrastructure

services to most of government departments in the

KwaZulu-Natal provincial administration relies on

the quality of its service in order to satisfy and retain

its clients. The Department is having challenges with

delivering a service to client departments timeously,

at a reasonable cost and of an acceptable quality

standard. The challenges originate from the lack of

capacity and inadequate resources within the

Department, which are the key contributing factors in

the poor service delivery within the Department.

Challenges also stem from the non-existence of an

integrated management system, making it difficult to

track the stages of services to be delivered, resulting

in huge delays in delivering the services to the clients.

All these challenges have put the Department under

the spotlight as they have resulted in lots of queries

and complaints. The Department of Public Works

must ensure that it is capable of providing

infrastructure needs to government departments by

ensuring that processes are followed, systems are in

place and that it has adequate resources and capacity

to deliver services.

Problem statement: The Department of Public

Works in South Africa is having challenges with

delivering a service to client departments timeously,

at a reasonable cost and at an acceptable quality level.

The challenges stem from the lack of capacity and

inadequate resources which are the key contributing

factors in the poor service delivery within the

Department. Challenges also stem from the non-

existence of an integrated management system,

making it difficult to track the stages of services to be

delivered, resulting in huge delays in delivering the

services to the clients.

2. Literature review

Frontline workers: Sometimes public sector workers

have challenges in delivering the services to the

public clients. For example the frontline workers,

such as teachers, police officers, nurses or social

workers experience stress challenges caused by high

workloads when delivering public services to the

customers (Tummers et al., 2015). Even though there

are ways to alleviate these challenges such as coping,

these ways are far below the customer service quality

expectations.

E-Governance: According to the ARC (2008),

governance is “the exercise of political, economic and

administrative authority in the management of a

country’s affairs, including citizens’ articulation of

their interests and exercise of their legal rights and

obligations”. According to Deity (2013), e-

Governance is defined as the “transformation of

governance with the help of Information and

Communication Technologies”. A study on

Information and Communication Technology use in

the public health was done in Indian (Prakash, 2015).

What emerged from the study is that there was need

to shift the design focus in e-Governance projects,

especially those that aim to bring about improvements

in the public service delivery. In other words e-

Governance is the use of information and

communication technologies to improve the activities

of public sector organisations (Harrison et al., 2012,

Osman et al., 2014). E-Governance is about

delivering improved services to citizens and

businesses through drastically changing the way

governments manage information. Governments have

been viewed as complex, bureaucratic establishments

with a set of information silos that erect barriers to

the access of information and make the provision of

services frustrating. E-Governance improves the

quality of services provided to citizens and businesses

while attaining greater efficiency for all participants

(Osman et al. 2014).

Good governance may be the right concept

which is very important for achieving socio-economic

development of any country but on its own it is not

sufficient. Effective public service delivery is

required as an important instrument to beef up the

available good governance (Hassan, 2015). A study

done in Bangladesh by Hassan showed that the public

sector does not often function according to what the

citizens expect. The citizens in that country were not

satisfied with the public service delivery system.

Performance Management: Management service

delivery on its own in the public sector is not enough

without proper or effective employee performance

management. Even though most of the public sectors

throughout the world have successfully implemented

performance management there are significant

adverse effects associated with its use (Arnaboldi et

al., 2015). These negative effects include low staff

morale, the lack of ready-made answers to

performance management and demand for public

service managers.

Procurement challenges: The public

procurement processes are usually to blame for delays

in government projects and these have very negative

effects on the public service delivery. A study was

done by Dzuke and Naude (2015) to investigate

procurement challenges that impacted on the public

service delivery in Zimbabwe. The research findings

showed that there were various challenges in the

public procurement process that negatively affected

the service delivery. These challenges include:

lack of managerial, leadership and

professional skills,

lack of appropriated funds from Treasury,

no accountability in the procurement process

and

procurement policy and procurement function

have no strategic recognition in the public

sector.


509

Competitive intelligence: Sewdass (2012),

studied competitive intelligence-related strategies,

tools and techniques that can be used to gather and

analyze information from South African public

service departments so as to improve service delivery.

The development of a new competitive intelligence-

related framework for gathering and analyzing

information emerged as the result of the study. This

result represents a formal and systematic process of

informing managers in the South African public

service departments about the very important issues

that these public service departments may face in the

future.

Public service delivery in South Africa: The

South African Government is committed to

continually improve the lives of the people through a

transformed public service which is representative,

coherent, transparent, efficient, effective, accountable

and responsive to the needs of all (Dalton, 2013). To

bring the vision into realisation, the following

mission was adopted (White Paper, 1997). This is

creation of a people-centred and people-driven public

service which is characterised by equity, quality,

timeously and a strong code of ethics (White Paper,

1997).

When the New Government of National Unity

took over in 1994, it had a new and different

mandate, a new set of beliefs and practices and

different expectations from the public. The need for a

public service that will meet the demands of the new

government and the expectation of the public was

evident. This situation warranted that the government

reshape the existing public service for its appointed

role in the new dispensation (Mashamaite, 2014).

3. Research methodology

The study aimed at establishing the critical factors

underlying the improvement of service delivery

within the SA Department of Public Works by

ensuring that key elements of service delivery (cost

effectiveness of services, high quality services and

timeous delivery of services) are adhered to. The

study further sought to ensure that operational

realities (outdated business processes, lack of

integrated management system and inadequate

resources and capacity) are addressed. The following

objectives were formulated for the study.

3.1 The objectives of the study

Review the overall service delivered by the SA

Department of Public Works in terms of

capacity and resources.

Identify the deficiencies in service delivery that

could be preventing the Department from

delivering efficient and effective services to its

clients.

Eliminate project management constrains which

will contribute to improved service delivery.

Identify the gaps in business process that could

be resulting in customer queries or complains.

3.2 Participants and location of the study

This research was conducted in the Durban Regional

Area (DRA). The total study population was made up

of 400 employees. Of the 400 employees, 100

participants were selected by simple random

sampling. Simple random sampling was used because

it gave equal of being selected to all the elements in

the population.

Table 1. Sample size

Category N Male Female

Managers 25 16 9

Departmental Officials 75 30 45

Total 100 46 54

3.3 Construction of the research instrument

The study used a questionnaire as the research

instrument. The questionnaire was made up of 20

questions and had two main sections A and B.

Section A was mainly on the demographics while

Section B was made up of Likert 5 point scale type of

questions on service delivery.

3.4 Pretesting and validation of research instrument

The questionnaire was tested on 10 participants in

DRA but not from the 100 selected for the main

study. The necessary changes were made.

3.5 Reliability of research instrument

The Chronbach’s alpha coefficient was found to be

0.718 which indicated that the research instrument

was reliable.


510

3.6 Administering the questionnaire

A total of 100 Questionnaires were hand delivered to

all the 100 participants in the Durban Regional Area.

Respondents were given two weeks to complete the

questionnaire and those who were not able to

complete were given some extra time to do so.

Queries or clarification on some of the questions were

handled at the point of collection. As a result all the

questionnaires were completed giving a response rate

of 100%.

3.7 Limitations

If resources could have allowed us to have a complete

enumeration of the entire population in the Durban

Regional Area the results could have given a true

reflection of the study. Unfortunately this was not

possible because of the resource constraints and as a

result only 100 respondents were used in the study.

3.8 Ethical Considerations and Limitations

In carrying out the study it was crucial to ensure that

ethical issues were taken care of. Before the study

could be done permission had to be sort in the form of

an ethical clearance from the University. Measures

were taken to protect the autonomy of respondents

and to prevent social stigmatisation and secondary

victimisation of respondents.

3.9 Data Analysis

The data obtained from the respondents was analysed

using SPSS package, version 21.0. The results were

presented as tables.

4. Presentation of results and discussions

4.1 Capacity and resources

Table 2. There is adequacy of staff complement for the workload in the Department

Frequency

Strongly Disagree 24

Disagree 46

Neutral 2

Agree 23

Strongly Agree 5

Total 100 Agree: 28 Disagree: 70

Table 3. There is adequacy of resources to deliver services on time and cost effectively

Frequency


Disagree 54

Neutral 14

Agree 3

Strongly Agree 12


Table 4. There is staff skill suitability for the work rendered

Frequency

Strongly Disagree 9

Disagree 17

Neutral 9

Agree 38

Strongly Agree 27



511

Table 5. Staff is provided with sufficient training to carry out their duties

Frequency


Disagree 46

Neutral 26

Agree 8

Strongly Agree 3


Table 7. The Department has sufficient quantity surveyors for projects

Frequency


Disagree 63

Neutral 11

Agree 6

Strongly Agree 5


Table 8. Department has sufficient engineers for engineering jobs

Frequency


Disagree 57

Neutral 20

Agree 6

Strongly Agree 3


Table 8. Department has sufficient IT professional

Frequency


Disagree 58

Neutral 20

Agree 6

Strongly Agree 2

Total 100

Agree: 8 Disagree: 72

4.2 Departmental strengths and deficiencies in service delivery

.

Table 9. Policies, procedures and processes are well communicated and in place to ensure on time procurement

Frequency


Disagree 52

Neutral 11

Agree 6

Strongly Agree 1



512

Table 10. Clients receive the service on time

Frequency

Strongly Disagree 3

Disagree 71

Neutral 11

Agree 13

Strongly Agree 2


Table 11. Projects are completed within budgets

Frequency

Strongly Disagree 6

Disagree 22

Neutral 11

Agree 42

Strongly Agree 19


Table 12. There is awareness on all property defects reported by clients

Frequency

Strongly Disagree 9

Disagree 37

Neutral 9

Agree 31

Strongly Agree 19


Table 13. There are very few queries or complaints from clients

Frequency


Disagree 29

Neutral 6

Agree 16

Strongly Agree 12


Table 14. There is very low or no corruption in the Department

Frequency


Disagree 38

Neutral 1

Agree 14

Strongly Agree 11



513

4.3 Integrated Management System for Projects

Table 15. Use of an integrated management system will improve service delivery

Frequency

Strongly Disagree 3

Disagree 6

Neutral 10

Agree 47

Strongly Agree 34


4.4 External service providers

Table 16. External service providers are paid on time

Frequency


Disagree 52

Neutral 11

Agree 4

Strongly Agree 5


5. Conclusions

The analysis of the results from the primary data

collected from the members of staff and management

at the national Department of Public Works confirms

that there are a lot of deficiencies within the

Department. The Department needs to focus on

putting resources in place in order to create an

enabling environment for the staff to deliver services

in an effective and efficient manner.

The majority of the staff agreed that the capacity

in the Department is not sufficient for the workload

being undertaken by the Department. This results in

the staff at the Department being stretched and

constantly fatigued, and thus not being able to deliver

to the best of their ability. The Department is not to

blame for this as it cannot compete with the private

sector in attracting top engineers and other high

quality professionals.

The majority of staff also confirmed that an

integrated tracking system is critical for the

Department, and that its absence is the reason for the

major delays in procurement of services in the

implementation of projects on time and in paying

service providers on time. It is therefore crucial for

the Department to have an integrated system in place

for the proper management of projects. The absence

of an integrated system creates silos within the

Department. Each section creates their own Excel

spread sheet in order to try and manage the work that

comes through to their section.

The absence of an integrated management

system in the Department has further escalated the

challenges due to the fact that the staff cannot track

anything being executed in the Department. The

service providers who are providing departmental

services are not being paid timeously because of the

long and unnecessary processes that are being

followed in order to pay the service providers.

South Africa as a country is embarking on

encouraging emerging entrepreneurs because they are

the source of job creation in the country. It is

therefore a huge embarrassment that a critical

department such as the Public Works Department

contributes towards destroying the service providers

by not paying them on time. The integrated

management system is very important as a means of

ensuring that the Department delivers an efficient and

effective service.

The Department of Public Works is a technical

department and it is imperative that skilled employees

such as quantity surveyors and engineers, as well as

information technology (IT) are at the forefront of

their priorities. It is a risk for the Department not to

have these skills because projects must be correctly

estimated and critical projects must be supervised and

signed off before they are handed over back to the

Department. IT skills assist with developing the latest

technological advancements needed by every

organisation to remain competitive.

It is also very imperative that guidelines,

policies and business processes for every section are

well communicated to all staff, and that all concerned


514

are comfortable that these are implemented correctly

so that there is no audit queries or complains which

will plague the Department unnecessarily.

Even though there are no specific cases of

corruption in Department, the employee perception

on corruption is a bit high. Corruption is a disease

that is not confined to South Africa only and is very

difficult to treat. The Government of South Africa is

trying its best by putting measures or systems to make

the corrupt activities very difficult in all departments.

There is need to explore some of the traditional

or cultural ways of serving clients in queues. When

people arrive at a sangoma’s or traditional chief’s

homestead they explain their problem before joining

the queue. Sangoma is a South African name for

traditionally healer. The traditional chief or sangoma

way is an excellent way of serving clients since the

service provider will be ready for the query or

complain at the time of serving. These cultural ways

must be studied as possible ways of handling queries

and complains.

References:

1. ARC. (2008). Promoting e-Governance: The smart

way forward. 11th report of the 2nd administrative

reforms commission: Government of India. Retrieved

from http://arc.gov.in/11threp/ARC_11th_report.htm

2. Arnaboldi, M., Lapsley, I. and Steccolini, I. (2015).

Performance Management in the Public Sector: The

Ultimate Challenge Financial Accountability &

Management, 31(1), 1-22.

3. Bayat, M.S. and Meyer, I.H. (1994).Public

Administration: Concepts, Theory and Practice. South

Africa. International Thomson Publishing Southern

Africa.

4. Dalton, R. J. (2013). Citizen politics: Public opinion

and political parties in advanced industrial

democracies, CQ Press.

5. DEITY. (2013). Report of the expert group on HR

policy for e-governance.

6. Department of Electronics and Information

Technology, Government of India.

7. Dzuke, A. & Naude, M.J.A. (2015). Procurement

challenges in the Zimbabwean public sector: A

preliminary study, Journal of Transport and Supply

Chain Management 9(1). Art. #166, 9 pages.

8. Fourie, D. (2011). Adjusting good governance

architecture to achieve public service excellence.

Journal of Public Administration, Volume 19(3), pp

154-166.

9. Harrison, T. M., Guerrero, S., Burke, G. B., Cook, M.,

Cresswell, A., Helbig, N., Hrdinová, J. & Pardo, T.

(2012). Open government and e-government:

Democratic challenges from a public value

perspective. Information Polity, 17, 83-97.

10. Hassan, M.S. (2015). Ensuring Effective Public

Service Delivery in the Field Administration of

Bangladesh to Boast up Good Governance: The

Perspective of Deputy Commissioner Office

International Journal of Business and Management;

Vol. 10, No. 4.

11. Luthuli, T.B. (2009). From compliance to

performance: a leadership challenge in the South

African public service. Journal of Public

Administration, Volume 44(3), pp 460-469.

12. Mashamaite, K. 2014. Public Service Delivery Protests

in a Democratic South Africa: A Dilemma for Local

Municipalities. Mediterranean Journal of Social

Sciences, 5, 231.

13. Osman, S.A., Ali, F.F., Musa, M.E. & Sliman, L.

(2014). Towards an effective e-government

framework: Tasks and instruments for design and

evaluation of public sector websites. Intelligent

Systems Design and Applications (ISDA), 2014 14th

International Conference on, IEEE, 193-198.

14. Prakash, A. (2015): E-Governance and Public Service

Delivery at the Grassroots: A Study of ICT Use in

Health and Nutrition Programs in India, Information

Technology for Development.

15. Sewdass, N. (2012). ‘Proposing a competitive

intelligence (CI) framework for Public

16. Service departments to enhance service delivery’, SA

Journal of Information Management 14(1), Art. #491,

13 pages.

17. Tummers, L.G., Bekkers, V.J.J.M., Vink, E.,

Musheno, M. (2015). Coping during public service

delivery: A conceptualization and systematic review of

the literature. Journal of Public Administration,

Research and Theory.

18. White Paper (1997). The transformation of the Public

Service http://www.dpsa.gov.za/dpsa2g/documents/

acts&regulations/frameworks/white-

papers/transform.pdf [Accessed on 1 May 2015].


515

WHY HAVEN’T PULP FUTURES CONTRACTS SUCCEEDED? A CASE STUDY

Hilary Till *

Abstract

Why have some seemingly promising futures contracts not succeeded in the recent past? In this paper, we will examine one such example, the pulp market. The structure of this paper is as follows. First we summarize the individual attempts at launching pulp futures contracts, and then we note how the pulp markets match up (or not) against the various criteria for the successful launch of a futures contract. Key Words: Pulp Futures, Pulp Market, Futures Contract * EDHEC-Risk Institute; J.P. Morgan Center for Commodities, University of Colorado Denver Business School, USA

Individual Attempts at Launching Pulp Futures Contracts

Thus far, there have been at least six attempts to

launch futures contracts on pulp, each with varying

degrees of success. The following section largely

draws from WRAP (2007) in summarizing what the

key problems were in each failed attempt.

Table 1. Montreal Exchange

Date Exchange Key Problems

Late

1980s Montreal Exchange

In the late 1980s a significant

amount of planning went into

creating a futures exchange

market for pulp at the

Montreal Exchange; however,

it never truly got off-the-

ground.

Delivery settlement (industry unhappy with the concept,

especially at that time)

Idea of separating U.S. and Western European markets, which

would reduce the liquidity

Reduced volatility: lengthy period when prices first only moved

up and then stabilized

Insufficient physical structure (warehousing plans, warrants).

Source: WRAP (2007).

In addition, Toomey (1985) reported that “…

Canadian pulp manufacturers … expressed

skepticism about the … [launch of a wood pulp

futures contract]. Roger Allard, a spokesman for CIP

Inc., said his company does not feel the futures

contract is an appropriate mechanism for buying and

selling pulp. ‘Pulp is a differential product, that is to

say, it has varying properties and is often made to

customer specifications,’ he said. ‘We can’t see how

our customers will be served by it.’”

Table 2. Merrill Lynch


Early

1990s Merrill Lynch

In the early 1990s Merrill

Lynch planned a futures

exchange market for pulp;

however, the project was

abandoned fairly quickly

due to lack of sufficient

interest.

Delivery settlement concept

Splitting of liquidity (plan was for 4 products: NBSKP and BHKP and both

grades in two currencies. USD and ECU)

Bad timing; a) industry slumped badly in 1991-1993; and b) currency

fluctuations were very important (Nordic currencies were devalued)

Insufficient knowledge of the industry; lack of “common language" between

banking experts and production-oriented industry leaders.

Source: WRAP (2007).

Key to Terms: NBSKP: Northern Bleached Softwood Kraft Pulp; BHKP: Bleached Hardwood Kraft Pulp; USD: United States Dollar;

ECU: European Currency Unit, which was replaced by the euro in 1999


516

Table 3. FOEX


1996-

1998 FOEX

FOEX...chose, with a clear recommendation from the

pulp and paper industry, the cash-settled approach. The

product was NBSKP market pulp in Europe. FOEX

used the PIX-index, developed for the purpose and

accepted by the different parties of trading. FOEX

traded, however, only about 100,000 tons before

closing the Exchange and converting into an index

provider. The key reason for very limited trading was

the insistence of one of the regulators of trading

between only Exchange and industry participants,

without the normal intermediaries, i.e. the banks and

brokers. After ceasing trading in summer 1998 and

closing the Exchange officially in May 1999, FOEX

converted its activity into a specialized index (or price

benchmark) provider. The company name was altered

to FOEX Indexes Ltd.

Disagreement between the two

regulating bodies (Ministry of Finance

and the Bank of Finland “Inspection and

Control Office”) over how the laws

should be interpreted; requirement by

Bank of Finland that only direct

company contracts allowed (no banks,

no brokers)

Exchange was viewed to be “too small”

Obligatory collateral requirement

which, in times of already poor

profitability (1997-1999), was a

problem for some participants

Competition from Pulpex project from

mid 1997 (see below), especially as

Pulpex viewed FOEX as a competitor

Lack of market makers (as brokers

excluded) Source: WRAP (2007).

Key to Terms

FOEX was originally the Finnish Options Exchange, according to http://www.foex.fi/index.php?page=alias, which in turn

was accessed on November 21, 2014.

Table 4. PULPEX


1997-

2003 PULPEX

Late in 1997, “Pulpex” - located at the London Securities and

Derivatives Exchange (OMLX) - started to offer standardized,

physically delivery- based futures contracts through the OM Group with

exchanges in Stockholm and London. It was originally owned jointly by

CellMark and the OM- Group and then by Pulp and Paper Research

AG, a subsidiary of CellMark. Pulpex offered futures and options on

NBSKP and also BHKP, but liquidity remained low after more than 5

years of trading with trading ending in 2003 after costs running well

above the earnings in each of year of trading.

Not enough brokers &

market makers

Run by OM-Exchange in

London, which had

interest to develop the

services only in the

beginning (no ownership

at the end)

Too few warehouses

In the beginning no

warrants to operate the

inventory business with;

high share of trades

ending in delivery

High cost Source: WRAP (2007).

In addition, Lehtinen (2014) described his

experiences as a PULPEX market-maker and

provided the following possible reasons for why the

contract failed:

Many different pulp grades;

Counterparties did not accept benchmark grades,

which could then have been used for adding

premiums or subtracting discounts to the

benchmark in individual deals;

The forestry industry did not support transparent

pricing;

The banks for forestry companies did not require

hedging price risk as a condition for lending to

the companies;

A lack of market makers: at best there were three

active market-makers; and

Pulp as a product has thus far not been well

understood by financial participants and

speculators.


517

Table 5. NYBOT


2005-

2008 NYBOT

In 2005 the New York Board of Trade (NYBOT)

started trading pulp. The exchange used the

delivery settlement concept, which the industry

continued to be suspicious of, with the contract

deliverable against NBSK. In 2007, trading

continued to be very limited, compared to the

potential volumes and to the resources at the

Exchange’s disposal. Volumes were less than

10% of the swap-deals concluded for the same

product. The contract was delisted in 2008.

Delivery settlement concept, which the

industry was skeptical about

Failure of OM/Pulpex with a very similar

concept was still fresh on the minds of

potential participants

Too few warehouses

A high share of trades ended in delivery,

compared to many other commodities

Lack of willingness from producers to see

their pulp (with their stamp clearly seen on

each bale) to be auctioned by the Exchange at

prices well below their announced list price* Source: WRAP (2007).

* Kokontis (2014) noted that in general, “concentrated industries” do not welcome the “visible prices” that come with the

launch of a new futures contract.

Unfortunately, the contract listed on the

NYBOT had little open interest. Noted Pointer

(2007): “According to data on the exchange’s Web

site, open interest in the most-active December pulp

future was [only] 176 contracts …”

The exchange did try to broaden the contract’s

use by adding delivery points. According to Board

Market Digest (2007), the NYBOT “added China as a

delivery point on its pulp futures contract, beginning

with the June 2008 delivery. The exchange …

certified Changshu Westerlund Terminals in the Port

of Changshu Xingao, China, as a licensed pulp

warehouse.”

But effective on September 12, 2008, ICE

Futures U.S. [which the NYBOT had been renamed

as of September 2007] delisted all Pulp futures

contracts.

Table 6. CME Group

Date Exchange

2007-

2012 CME Group

The CME Group launched a softwood pulp index futures contract in September 2007. The exchange

later launched a hardwood pulp index futures contract as well. Both contracts were cash-settled to

indexes provided by “FOEX Indexes Ltd. FOEX is a private Finland-based independent company that

specializes in providing audited, trademarked registered pulp and paper price indexes ... [and is] the

industry standard for the global forest products industry.” The contract specifications for both

contracts are on the next page.

Like past efforts, the trading volume for the contract was always low. Both contracts were

permanently delisted in 2012. Source: CME Group (2008a).

Figure 1 summarizes the contract specifications

for the CME Group’s softwood pulp index and

hardwood pulp index futures contracts.


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Figure 1. CME Group’s softwood pulp index and hardwood pulp index futures contracts

SOFTWOOD PULP FUTURES OPTIONS

Trade Unit 20 metric tonnes (MT) 1 futures contract

Settlement Method Cash index PI X-NBSKP Europe Cash index PIX-

NBSKP Europe

Point Description $ per MT $ per MT

Point (Tick) Size $.50 per MT = $10.00 $.50 per MT = $10.00

Contract Listing 24 calendar months 24 calendar months

Trading Venue CME Globex CME Globex

Product Codes WP WP

Hours Sunday 5 p.m. CT to Friday 4 pm. CT with

daily halts from 4 p.m. to 5 p.m. CT

Sunday 5 p.m. CT to

Frida)* 4 p.m. CT with

daily halts from 4 p.m.

to 5 p.m. CT

Strike N/A $5 per MT (in $100

range)

Limits $50 per MT above or below the previous day's settlement

price. None in the spot month contract.

None

Minimum Fluctuation $.50 per MT = $10.00 $.50 per MT = $10.00

Cab .25= $5.00

HARDWOOD PULP FUTURES OPTIONS

Trade Unit 20 metric tonnes (MT) 1 futures contract

Settlement Method Cash index PIX-BHKP Europe Cash index PIX-BHKP

Europe

Point Description $ per MT $ per MT

Point (Tick) Size $.50 per MT = $10.00 $.50 per MT = $10.00

Contract Listing 24 calendar months 24 calendar months

Trading Venue CME Globex CME Globex

Product Codes HWP HWP

Hours Sunday 5 p.m. CT to Friday 4 pm. CT with

daily halts from 4 p.m. to 5 p.m. CT

Sunday 5 p.m. CT to

Frida)* 4 p.m. CT with

daily halts from 4 p.m.

to 5 p.m. CT

Strike N/A $5 per MT

(in $100 range)

Limits $50 per MT above or below the previous day's settlement

price. None in the spot month contract.

None

Minimum Fluctuation $.50 per MT = $10.00 $.50 per MT = $10.00

Source: CME Group (2008b), p. 3.

According to Kokontis (2014), the “lack of

initial liquidity” can kill a contract’s prospects.

Table 7 shows the total yearly trading volume

(in contracts) for the CME Group’s softwood pulp

futures contract.

Table 7. Total Yearly Trading Volume (in contracts) for the CME Group’s Softwood Pulp Futures Contract

Year Volume

2007 62

2008 893

2009 129

2010 65

2011 15

Source: The Bloomberg.

Table 8 shows the total yearly trading volume

(in contracts) for the CME Group’s hardwood pulp

futures contract. In 2010 the yearly volume was 325

contracts.


519

Table 8. Total Yearly Trading Volume (in contracts) for the CME Group’s Hard Hardwood Pulp Futures

Contract

Year Volume

2010: 325

Source: The Bloomberg.

Silber (1981) provided a volume and timing

criteria for deciding upon whether a new futures

contract can be termed successful. In his 1981 paper,

Silber “use[d] 10,000 contracts traded per year as an

arbitrary cutoff point and consider[s] a contract

successful if it reaches that level during the third year

after it has been innovated.” Silber’s “justification for

the 10,000 volume criterion is that a contract trading

at that level is unlikely to be delisted by an exchange

(unless regulations are imposed).” By Silber’s metric,

both CME Group contracts were, unfortunately, far

from success stories.

How the Pulp Markets Match Up Against the Various Criteria for the Successful Launch of a Futures Contract

We can also approach the analysis of why pulp

futures trading has not been successful in a more

conceptual fashion. Specifically, we can review the

criteria provided by one economist and two

academics to determine whether the pulp markets are

just not suitable for futures trading. Namely, we will

successively examine how the pulp markets fare

against criteria established by Dr. Richard Sandor,

Professor Charles Cuny, and Professor Craig Pirrong.

Dr. Richard Sandor’s Criteria

Table 9 summarizes the criteria provided by the

economist, Richard Sandor, on whether a new futures

contract might succeed or not.

Table 9. Dr. Richard Sandor’s Criteria

Sandor’s Criteria

Price variability of the commodity is sufficient;

The price of the commodity is competitively determined;

Either the commodity is homogeneous, or there is close movement of prices of different grades of the

commodity;

A prior pattern of forward contracting has broken down;

There must be a viable cash market (i.e., a market for immediate delivery) in order to facilitate the delivery

procedure; and

The futures contract must be properly specified so that hedgers will be attracted to the futures market. Source: Sandor (1973).

A Sandor Criterion Met: Sufficient Volatility

At least under of one Sandor’s criteria, it would seem

that the pulp market would be a good candidate for a

successful futures contract. Pulp prices have been

sufficiently volatile for this market to have merit as a

potential futures contract, as shown in Figure 2.


520

Figure 2. Pulp (and Fiber) Prices as Compared to the Prices of Other Markets That Have Successful Futures

Contracts

Source: WRAP (2007), Figure 4.

Key to Terms

PAMS: McKinney (1995): “The majority of grades used in the manufacture of newsprint consists of old newspapers,

commonly referred to as ONP, and old magazines and coated flyers, commonly referred to as OMG or PAMS.”

NBSK: “Northern Bleached Softwood Kraft [is] the paper industry's benchmark grade of pulp,” according to

http://www.paperage.com/pulp_paper_terms.html, which in turn was accessed on November 20, 2014.

A Sandor Criterion Not Met: A Prior Pattern of

Forward Contracting Has Broken Down

Sandor (1973) was prophetic in understanding a key

driver for the later success of crude oil futures

contracts; that is, a prior pattern of forward

contracting broke down for this commodity market,

leading to the need for futures markets for managing

price risk. We will briefly describe that history here,

followed by discussing the relevance of this point to

pulp markets.

In review, the structure of the oil industry

changed in the 1970s after numerous nationalizations

in oil-producing countries. This forced some oil

companies to shift from long-term contracts to the

spot oil market, as described in Yergin (1992). An

economic need for hedging volatile oil price risk

thereby emerged, which the New York Mercantile

Exchange responded to with a suite of energy futures

contracts, starting with the heating oil contract in

1978.

Arguably, Sandor’s observation has continued

validity, this time for understanding why pulp futures

contracts have not succeeded.

Finchem (1998) reported that “pulp producers

and their customers have … manage[d] …

[commodity price] risk through portfolio management

(i.e., making several products, or making ‘value-

added’ products), inventory management, and

[through] long fixed-price or fixed-quantity

contracts.” (Italics added.)

Forward contracting does appear to continue to

satisfy sophisticated commercial participants, as seen

in a recent Canfor Corporation financial report, which

is summarized in Table 10. In other words, a need for

futures hedging has not emerged, given the viability

of direct forward contracting amongst commercial

participants.


521

Table 10. Canfor Corporation financial report

Company Nature of Company Sophisticated Derivatives User Description of Forward

Contracting in Pulp

Canfor

Corporation

“Canfor is an integrated forest

products company with

facilities in Canada and the

United States. The Company

produces softwood lumber,

pulp and paper products,

oriented strand board,

remanufactured lumber

products and specialized wood

products.”

[1] “Canfor utilizes credit insurance to

mitigate the risk associated with some of

its trade receivables.”

[2] The Company “utilizes interest rate

swaps to reduce its exposure to interest

rate risk associated with financial

obligations bearing variable interest

rates.” [3] “A portion of the [Company’s]

currency risk … is covered by foreign

exchange collar contracts …” [4] Canfor

is exposed to energy price risk relating to

purchases of natural gas and diesel … The

exposure is hedged up to 100% through

the use of floating to fixed swap contracts

or option contracts … In the case of

diesel, Canfor uses heating oil, Brent oil

and Western Texas Intermediate (‘WTI’)

contracts to hedge its exposure.”

“Canfor is exposed to

commodity price risk related

to [the] sale of lumber, pulp,

paper, and oriented strand

board. From time to time,

Canfor enters into futures

contracts on the Chicago

Mercantile Exchange for

lumber and forward contracts

direct with customers for

pulp.”

Source: Canfor Corporation (2012).

2. Professor Charles Cuny’s Key Criterion

In Cuny’s (1993), the author’s key point is that it is

not hedging demand per se that matters for a

contract’s success, but net hedging demand. Net

hedging demand, in turn, refers to hedging demand

that is not directly met by other hedgers, resulting in

the economic need for intermediaries (speculators) to

assume the price risk of the commodity. This point is

closely related to Sandor’s observation that futures

contracts seem to be able to gain traction if a previous

pattern of direct forward contracting amongst

commercials breaks down.

The contribution of Cuny is that he arrives at

this point by reasoning from first principles how it is

that a futures exchange can exist in the first place.

The following summarizes Cuny’s reasoning:

a. “Exchanges are taken to be entrepreneurial

entities that design markets …”

b. The goal of exchanges is to “maximize their

own revenues.”

c. They do so by designing futures contracts that

“maximize transaction volume.”

d. Commercial “hedgers are not normally in the

business of providing liquidity” to a futures market;

that is not their core business. Therefore, commercial

hedgers are not the participants who provide the

necessary amount of transaction volume for an

exchange to be able to exist.

e. An exchange’s trading volume is largely

provided by those who stand ready to take on and

manage the risk from commercial hedgers: the

speculators.

f. But the services of speculators are not needed

if hedging demand is largely balanced out amongst

commercial participants.

g. Therefore, substantial net hedging demand is

needed for a contract to be viable on a futures

exchange.

h. Note that this nuanced view does not

contradict Holbrook Working’s approach, which

emphasizes that a “futures market owes its existence

to the demand generated by hedgers.” Cuny helpfully

refines the Working approach by noting further that it

is net hedging demand that is what is most important.

i. Therefore, when “selecting a contract, an

exchange [will naturally] align itself with the greatest

unsatisfied hedging demand …”

Using Cuny’s logic, if direct forward

contracting satisfies the hedging needs of pulp market

participants, then there is no need for price-risk-

bearing specialists, as exist in futures markets, to be

compensated for sharing in this risk.

Correspondingly, there would be no economic

need for a futures contract on pulp.

3. Professor Craig Pirrong’s Criteria

a. Pirrong Criteria That Are Satisfied:

Standardization, Large Inventories, and Sufficient

Volatility

In Pirrong (2014), the author notes that both

standardization and large inventories that need to be

hedged are essential for a commodity to have a

successful futures contract.

“Pulp is as or more standardized than a good

deal of other commodities that support viable

contracts.” And in fact, “the pulp market [is] … big

enough (compared to … [for example] cotton … and

the softs [which, in turn, do support futures trading],”

writes Pirrong.


522

WRAP (2007) reinforces Pirrong’s point

regarding the pulp market sharing characteristics with

commodities that do have successful futures

contracts. Aluminum is “hedge-traded with huge

success. Physical production of aluminum is about

2/3 of the tonnage in the global pulp market

(currently about 40 million tonnes) but hedge trading

volumes in aluminum now exceed the annual physical

volumes actually marketed by a factor of 10.”

Further, “[i]n tonnage terms, market pulp, recovered

fibre and paper [would seem to] have the potential to

become the third largest commodity product group

hedged globally, after oil and wheat,” according to

the WRAP report.

Pirrong also notes that commodity markets need

sufficient price volatility in order to warrant interest

in hedging. According to the author, price volatility

for pulp has been “comparable to some other

commodities,” which have thriving futures contracts.

WRAP (2007), once again, confirms a Pirrong

criterion. “The costs attached to price risk

management are not high [,] but they still need to be

covered by the price gains or cost savings obtainable

from hedging. Market intelligence indicates that if

price volatility is less than 5%, hedging does not offer

sufficient incentive. When volatility is between 5-

15%, one should consider it. If volatility exceeds

15%, it is strongly recommended. Average price

volatility for market pulp is in the vicinity of 20-

25%,” according to the WRAP study.

So far the pulp market has met all of Pirrong’s

criteria for the successful launch of a futures contract.

But one prerequisite has been crucially missing, and it

relates to both Sandor’s observation and Cuny’s

theory.

b. A Pirrong Criterion That Is Not Satisfied:

Fragmented Marketing Chains

According to Pirrong (2014), “futures contracts are

most viable when …” not only are there “large

holdings of inventories to be hedged”, but also when

“there are relatively fragmented marketing chains …”

Noted the researcher: there has been “a lot of

vertical integration in pulp, and even freely traded

pulp … [has] not been traded in long chains like grain

or oil is. [As a result, there are] few trader

intermediaries … [with] most [pulp] traded directly

from pulp producers to paper producers.”

Pirrong summarized this consideration as an

“industrial organization issue.”

Framing the issue as one of “industrial

organization” is another way of thinking about what

markets could be suitable for the launch of a

successful futures market. In contrast to the pulp

market, the industrial organization of the natural gas

market became conducive to the launch of a

successful futures market by the early 1990s, as will

now be discussed.

According to IEA (2012), “Liberalization

changed the structure of the US gas industry. Before,

strong regulation applied to the different stages, from

production to transmission to distribution, to long-

term contracts between producers, interstate pipeline

companies and distribution companies. Liberalization

and open access to pipelines starting in 1985 led to

the creation of the competitive wholesale gas market

and a new type of company appeared – gas

marketers, which are the link between producers on

one side, and distribution companies as well as large

consumers on the other side.” [Italics added.]

Exhibit 3 provides a graphic Augustine et al.

(2006) that “shows schematically some of the types

of natural gas transactions that take place as gas

makes its way from the fields where it is produced to

end users’ burner tips.”

Figure 3. Natural Gas Industrial Organization

Source: Augustine et al. (2006), Figure 15.


523

According to Augustine et al. (2006), some

natural gas producers “sell their gas to marketers who

have the ability to aggregate natural gas into

quantities that fit the needs of different types of

buyers and to transport gas to their buyers. Marketers

may be large or small and sell to local distribution

companies or to commercial or industrial customers

connected directly to pipelines or served by local

distribution companies.”

“Marketers are able to meet customers’ differing

needs by bringing together a large number of buyers

and sellers. In addition, marketers and other buyers

and sellers of natural gas are able to use financial

instruments traded on exchanges to hedge the risks

associated with price volatility,” write Augustine et

al. (2006). (Italics added.)

In contrast to the pulp industry where there are

fewer trader intermediaries, from this brief

description of the structure of the natural gas industry,

one can see how the natural gas market meets

Pirrong’s criterion on the type of industrial

organization that is promising for futures contract

development.

Conclusion

In reviewing the criteria for a successful futures

contract, one could argue that pulp futures contracts

have not been successful because:

A prior pattern of forward contracting has

not broken down;

There has been insufficient net hedging

demand; and

The industrial organization of the pulp

industry is not conducive to the success of a

futures market.

The common theme with each of these points is

that it appears that the pulp industry has not been in

need of price-risk-bearing intermediaries, whom, in

turn, can provide this service on futures exchanges.

Endnotes

This article is excerpted from a three-day seminar on

why some futures contracts have succeeded while

others have failed.

The information in this article has been

assembled from sources believed to be reliable, but is

not guaranteed by the author.

Research assistance from Katherine Farren of

Premia Risk Consultancy, Inc. is gratefully

acknowledged.

References 1. Augustine, C., Broxson, B. and S. Peterson, 2006,

“Understanding Natural Gas Markets,” A Policy

Analysis Study By Lexecon, an FTI Company,

undertaken for the American Petroleum Institute.

2. Board Market Digest: Independent Analysis and Key

Information on the Packaging Paper & Board Market,

2007, “Electronic Trading for NYBOT Pulp Futures

Only,” Vol. 21, No. 12, September.

3. Canfor Corporation, 2012, “Financial Statements.”

Accessed via website: http://www.canfor.com/

docs/investor-relations/2012_canfor_corp_year_end

_fs_sedar.pdf?sfvrsn=2 on November 20, 2014.

4. CME Group, 2008a, “CME Group to List Hardwood

Pulp Index Futures and Options,” Press Release,

December 2.

5. CME Group, 2008b, “Softwood and Hardwood Pulp

Futures and Options: Based on Key Industry Indexes

By FOEX Indexes Ltd.”, Commodity Products

Brochure.

6. Cuny, C.J., 1993, “The Role of Liquidity in Futures

Market Innovations,” The Review of Financial

Studies, Vol. 6, No. 1, pp. 57-78.

7. Finchem, K., 1998, “Futures Trading Offers

Potential,” Pulp & Paper Magazine: The Leading

Information Provider for the Global Forest Products

Industry, March.

8. [IEA] International Energy Agency, 2012, “Gas

Pricing and Regulation: China’s Challenges and IEA

Experience,” IEA Publication.

9. Kokontis, W., 2014, private correspondence, October

8. [William Kokontis is a veteran of both the CME

Group and the Commodity Futures Trading

Commission, https://www.linkedin.com/pub/bill-

kokontis/86/420/158.]

10. Lehtinen, K., 2014, private correspondence, October

14. [Kerri Lehtinen had been a Pulpex market-maker

and is now the managing director of MG Commodity

Corporation in Helsinki, Finland, www.mgcorp.fi.]

11. McKinney, R., 1995, Technology of Paper Recycling,

London: Chapman & Hall.

12. Pirrong, C., 2014, private correspondence, October 8.

[Craig Pirrong is a Professor of Finance at the

University of Houston, http://www.bauer.uh.edu/

directory/profile.asp?firstname=Craig&lastname=Pirro

ng.]

13. Pointer, A., 2007, “CME to Launch Electronic Wood

Pulp Contract Later This Year,” MarketWatch, April

17.

14. Sandor, R. L., 1973, “Innovation by an Exchange: A

Case Study of the Development of the Plywood

Futures Contract,” The Journal of Law and

Economics, Vol. 16, No. 1., April, pp. 119–136.

15. Silber, W., 1981, “Innovation, Competition, and New

Contract Design in Futures Markets,” Journal of

Futures Markets, Vol. 1, No. 2, pp. 123-155.

16. Toomey, C., 1985, “Exchange’s Trading in Wood Pulp

Would Be First of Its Kind: Manufacturers Express

Skepticism,” The Gazette (Montreal), Business

Section, p. 27.

17. [WRAP] Waste and Resources Action Programme,

2007, “Managing Risks in The Recovered Fibre

Market,” Final Report, July. Accessed via website:

http://www.wrap.org.uk/content/managing-risks-

recovered-fibre-market-0 on November 20, 2014.

18. Yergin, D., 1992, The Prize: The Epic Quest for Oil,

Money, & Power, New York: Simon & Schuster.


524

THE GENUINE INDIVIDUAL WITHIN THE ICT ENVIRONMENT

Amos Avny*

Abstract

The Post-modern era of the 21st Century differs significantly from the previous time because many traditional conventions that seemed steady become unclear and uncertain. The Author examines four issues: 1) whether future communities have Vision and Goals and how they affect their life? 2) How does a consumer community match social and cultural desires? 3) What are the traits and expertise required from the national or local leadership? And 4) whether nations have Updated strategy for the future and who promote it? The Author argues that at the Post -modern era a prosperous society should be a creative and a knowledge one. It should combine trust with faith, individual strive with social accountability, self-esteem with curiosity, deep commitment with inspiring vision. At these tumultuous conditions and in order to minimize youth unemployment, so wide spreading at present, higher education systems should prepare better youngsters for nowadays challenges. But, for qualifying for that mission they must to change. They have to change their teaching methods and reshape the traditional student-professor relationships and make them more student-oriented. Professors are required to act as coaches, performers and facilitators. In sum, nations that want to prosper should strive for innovation and invest resources for identifying the appropriate people for these missions. They are usually those individuals who are dissatisfied with the current state of affairs, have a deep sense of curiosity, an opened-mindedness, a creative thinking and mostly are non-conformists. Key Words: Creativity, Innovation, Higher Education, Post-Modernism * Senior Management & Strategy Consultant, Omnidev International, Israel

1. Introduction

Living at the 21st Century's second decade confronts

thinking people with some key issues that have

accompanied mankind for many, many years. This

20-30 years period, named as the “Post-modern Era”,

is distinguished from the two or three hundred years

of “Modernism” that came before it. The use of such

a different term is justified because of the significant

changes and substantial developments that occurred

during this period. The transformation from

Modernism to Post-modernism in Social Sciences

was partly explored (Avny 2012) and described by

three major phenomena: Technological breakthrough,

Democratization and Globalization.

The technological advancement during the last

decades was so fast and intensive that it surpassed the

hundreds of years of progress before it. It bridged

over countries and continents' discrepancies and

converted today's world into a veritable small village.

Almost everything could be seen and heard in real

time, at just about every point over the globe.

However, the impact of the sophisticated technology

exceeds by far the technological world. The severe

competition between the world largest ICT firms and

the intensive fight over markets shares continuously

expands the number of new devices and gadgets

introduced into the markets. People are compelled to

make fast decisions and purchase new instruments

just because they are influenced by public opinion.

Since the impact of technology at the 21st

century is so significant it raises an old but familiar

issue of man-machine relationships. The question is:

who affects whom? Does a human being create and

direct the machine, or rather, does the machine direct

and steer human life? The continual race for

improving the smartphones and their applications just

demonstrates the excessive effort multinationals

invest in introducing less needed and redundant

gadgets. Ironically one can argue that as much as the

smartphone would be smarter, so can its user be more

naïve and less competent.

Democracy became during the said period the

most popular form of Government. Although it has

adopted several forms of ruling, in general it

promoted the idea of general elections and some kind

of people's representation. It is obvious that the

advanced communication measures and the

sophisticated social networks have substantially

contributed to the growing impact of public opinion

and demands for influencing governance. In the Post-

modern Era there are very few autocratic rulers who

can allow themselves to ignore democracy or to reject

it openly.


525

Globalization, as the third affecting power, had

tremendous effect on the division of wealth between

the industrial and the Less-Developed Countries

(LDCs). The globalization that had commenced with

a modest move of manufacturing facilities and

production lines from the industrialized nations to

LDCs has reached its peak with China becoming the

second largest world economy. This enormous

industrial change has affected also the economies of

all the Asian neighboring nations and ignited India's

sleeping economy. But in addition to the economic

impact, the globalization, assisted by the growth of

communications technology, has had momentous

influence on people and communities all over the

world. People and organizations, in different parts of

the world, eat, drink, wear and use the same products

and similar services. Multinational organizations gain

more and more power and influence on millions of

the world's citizens.

Following the above developments, it is easy to

comprehend that the 21st Century's Post-modern Era

is a period that significantly differs from the previous

ones. This difference that evolved from tangible

changes results in many intangible expressions.

Additionally, many of the innovations and the

improvements that originally were aimed to bring

concrete assistance and better wellbeing have yielded

questionable outcomes. In the following pages, the

Author analyses and explores these issues.

2. The Nature of a Thinking Community

A traditional Jewish proverb teaches that "wisdom of

elder thinkers should be delivered in tranquility." The

apparent rationale for such a recommendation was

that in the past, elders were the main source for

collecting and preserving accumulated wisdom. At

that time, it was also understood that the old people

show the way, set the tone and decide on proper

behavior. Thus, communities were led by elder

individuals according to their guidance and pace. The

nature of historical communities rested therefore, on

tradition, conventional behavior, self-esteem and

respect. Wisdom and knowledge were thus delivered

accordingly. Similarly, learning, teaching, and

studying were carried out within a relaxed and stress-

free atmosphere.

Since the social conditions and the living

atmosphere of today completely differ from that of

the past, it is legitimate to examine what are the

desired conditions for maintaining an advanced

knowledge-seeking society at present. This is also the

background for examining the role and the position of

gifted individuals.

Modernism came to its peak, as a course of

action and as a social structure, toward the end of the

20th Century. Symbolically, Post-modernism

commenced with the collapse of the Soviet Union and

the Communist Bloc as a philosophy and as a

political-economic entity. At its first steps, Post-

modernism tried to follow the Neo-liberal Capitalist

perspective and had behaved accordingly. But within

20 years, at the time of the 2008 Financial Crisis,

many of its supporters have realized how

disappointing the old greedy Capitalism was and how

it failed to provide a satisfactory perspective to most

countries. The impact of the triad powers of change

was therefore, more than welcomed by the former

communist or semi-communist countries and they

joined others in search of a better course of action.

Obviously, the Post-modern revolution has

promoted good ideas and endorsed a more just social

structure. It has empowered common people by

opening before them more and new information

sources and increasing their political power by

enhancing the influence of social networks and public

media. However, one may argue that in part this Post-

modern revolution also had considerably contributed

to convert the general public into a consumer

community. It had built avenues and constructed

political-economic structures for meeting instantly

people's demands and desires. This development

raises the following principle issues:

1) Vision and goals of future societies – what

are they and how they affect?

2) The consumer community – does it match the

desired vision?

3) The required leadership – its required traits,

character and competence

4) Updated strategy for Developing nations –

how to foster it and by whom?

Exploring those questions will assist in

understanding these issues and clarifying future

prospects.

2.1 Vision and Goals of Future Societies and Nations

The vision and goals of free, developed and advanced

nations are best summarized by The Preamble of the

US Constitution as quoted below:

"We the people of the United States, in Order to

form a more perfect Union, established Justice, insure

domestic Tranquility, provide for the common

defence, promote the general Welfare, and secure the

Blessing of Liberty."

It is possible that some of America's opponents

will reject this statement, because it does not reflect

US behavior today. Nevertheless, it is still an

appropriate banner and a spiritual lighthouse for

many freedom fighters of today. Symbolically, it still

represents a national vision and regime aspirations

despite the fact that it was drafted over two hundred

years ago.

2.2 The Nature and Character of the Consumer Community

This is, in principle, the core of the discussion.

Current technology enables citizens to express freely


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their opinions, to claim their desires and to demand

their immediate fulfilment. Apparently such an

arrangement seems to be the ultimate form of

democratic life since equal opportunities are opened

for everyone. However, such a consumer society

reflects only one side of the social-economic

equation. This is because it expresses citizens' wishes

by a non-committed verbal manifestation. It does not

examine citizens' willingness and ability to create and

contribute something positive to the communal assets.

It does not deal with the supply side of life. In a way

it has also shed some light on the Post-modern

evolving reality, which favors and advances verbal

expressions and communication skills over

implementation hardships. Unfortunately, one should

admit that up to now, the Post-modernism's new

paradigm has shaken up the former social-economic

equilibrium by empowering the general public and

increasing its democratic power. The greater

involvement of people in politics, the growing impact

of social networks and the popular use of verbal

expression cannot conceal the fact that they

circumvent basic changes. Very few of the critics and

protestors really refer to the phenomena that too

many industries left the industrialized nations causing

a growing loss of good-paying jobs. The flocks of

unemployed young university graduates, which

characterize many of Southern European nations,

must change their attitude and be prepared to be more

creative, ready to work harder and be more flexible in

the search for jobs.

Modernism, in principle, was based on some

kind of the old perspective of "division of labor".

Almost everyone and every social group has known

and agreed to fulfill their role in the given social

structure. Social mobility was enacted and accepted,

but for its execution in practice one was required to

have a strong character, a willingness to invest time

and money and to be consistent with this move. In the

previous period, living seemed to be materialistic

harder, but the rules were clear and easy for

understanding and following. In the Post-modern era,

however, the democratic, easygoing and continually

demanding social environment makes everything and

more complex. The rules of the game are not clear,

there are almost no preliminary requirements and in

essence, everyone is a legitimate member of such a

boundaries-less community. When all wish

differently, when desires must be fulfilled

immediately and when public regulators (an old-new

term for bureaucrats) are in charge of the execution, a

rational solution is almost impossible. Usually, even

in the richest nations, means are short of desires.

Governments, therefore, must have some kind of

rational provision order and a clear preference policy.

An elementary guiding rule teaches that resources

must meet execution costs, and a sound financial

program should support every social initiative.

Wishful thinking and even much love cannot replace

a shortage of supporting means. History teaches that a

gradual and consisting advancement, even if it is not

so spectacular, usually is favored and preferred on a

very illusionary but unrealistic dream.

By departing from the "division of labor"

principle and allowing everyone to express his/her

opinion on everything, social activists claim that they

promote equality and justice. Even if they are right in

doing so, they encourage and endorse mediocrity.

Thus, Post-modern social advocates, knowingly or

unknowingly, downgrade the image of the competent

individuals and lessen their position in society.

Furthermore, by promoting the value and the power

of verbal and electronic expressions, which are so

popular at present, few give thought to the creative

effort and the hard toil needed for creating and

building something concrete. As an example, one

should note that research and development is carried

out by a small group of competent scientists.

Similarly, sophisticated high-tech industry depends

on gifted creative engineers; advanced public

medicine rests on talented physicians; inspiring music

and arts are created by talented individuals; while

culture and literature are produced by smart

producers. The "division of labor" rule and the

"specialization" outcome that is derived from it

represent a conventional wisdom that was

accumulated during many years of human history.

The contemporary trend of deviating from it and

giving all people the same will not last too long.

Every individual should be supplied in accordance

with his/her needs, which above a certain level are

different.

Throughout history human, advancement and

progress originated and were endorsed as joint

ventures of genuine, hard labor and continual efforts

of individuals and communities. It is logical to

foresee that future leaders will be forced to

reestablish similar socio-economic balance. The

recent complicated relations between the EU and

Greece provide a good example for demonstrating

this case. For the past two decades, Greece was a

living example of a consumer's society where most of

its attention was directed toward pleasing its members

and giving them an easy life. Over the past fifteen

years, Greek governments and public institutions

were busy getting loans from foreign banks and other

sources to finance their public and private desires. It

was a democracy that pleased the majority of its

members. Relatively little attention was given during

that period to the need for building local industries

and developing economic enterprises. Consequently,

when the payment date came, Greece was short of

resources to repay its debts. The debt repayment

agreements Greece was forced to sign with the EU

and other international institutions have imposed a

very painful austerity regime, which the Greek people

will suffer from for years to come. On the other side

are the German political individuals, who led the

country successfully during the same period.

Naturally, they led the EU negotiations with Greece


527

and were stiff and firm enough to force on the Greek

government to embrace a more responsible policyi.

2.3 The Role and Responsibilities of National Leadership

The former discussion well demonstrates the

complicated task of the national leadership. When

great parts of society are fascinated by the new

opportunities opened to them by the promising Post-

modern perspective, someone should bring them back

to the ground. When irresponsible social activists

mislead them to believe that by words alone the world

could be changed, a responsible leadership should

face people with reality. The three legged foundation

of the Post-modern movement has opened new

avenues and promising paths to prosperity, but these

challenges can be met only through a consistent effort

of creative thinking, research and development and

professional and hard work supported by inspiring

leaders. The well-known statement "there is no free

lunch" that was relevant in the past, will also remain

relevant in the future.

The case above demonstrates quite clearly the

role of individuals in social life. Although the case

refers to the political-economic system it is relevant

to all walks of life. Trends, styles and fashions exist

and inspire many nations and millions of people. As a

rule of thumb, it is right to claim that dreams are

greater than capabilities and desires surpass aptitudes.

Consequently, individuals tend to misevaluate their

potentials. Similarly, societies and nations frequently

fail to assess their strengths. This is the main reason

for demanding able, gifted and talented people to take

the commanding post. Within the open and

spontaneous societies that many of the developed

countries are, it is not so easy to justify the need for

competent or talented individuals. Within a

democratic society where everyone sees him/herself

as the know-it-all person, as the ultimate Salvatore

and the most gratefulness individual, it is quite

difficult to convince of the need to support gifted and

talented people.

2.4 An Updated Strategy for Developing Nations

Many nations in Europe72

today face a stand-still

situation. Two major issues that seriously threaten

their future development—namely, the emigration

from Africa and Asia and their own demographic

worries—are subject to the central EU authorities and

are beyond the scope of this discussion. Thus, we

intend to explore and focus on examining some

aspects of the development issue and identify factors

that may boost it.

72 I mention Europe since I am familiar with major problems of many of them. However most of the recommendations are also relevant for other nations.

Many national leaderships understand today the

critical role of science and research in advancing the

development of their nations. Most leaders

understand that elevating their citizens' standard of

living, alleviate poverty and accelerating their

nation's advancement is quite a complex undertaking.

This comprehension notwithstanding, the actual

policies and actions taken frequently miss these stated

goals. The Post-modern development process differs

from similar efforts carried out during the second half

of the 20th

Century because more known and

unknown variables take part in the process. In the

past, during the de- or post-colonial period,

development was relatively simple. The agencies

involved aimed to improve the already existing

colonial education system, concentrating on

constructing critical infrastructure ventures and

focusing on building a variety of key development

projects. Most projects and programs were relatively

simple since they came to meet concrete needs and

known requirements, usually defined by international

agencies.

The situation today, in the 21st Century, is

different. First of all, the goals and the objectives of

the development efforts are not clear. Beyond general

statements and ambiguous declarations, most policies

fail because they either promise everything to few, or

promise nothing to all. Even reaching a consensus on

the requirements or defining them quantitatively is

often complicated and unattended. As previously

explained, the Post-modern revolution opened the

ears and the eyes, the mind and the imagination of

many that wish and expect unlimited satisfaction.

Post-modern economic development

encompasses an internal dialectical conflict. It

requires saving present means and using them as

resources for attaining long term objectives. In short,

it seems that the consumer society, a community that

looks for easy and immediate satisfaction and people

who seek easy solutions are not the adequate

promoters of development policy. Only few of them

will be ready to be modest at present in order to

promise future prosperity. Implementing an active

development strategy, in a Post-modern democracy,

requires the establishment of a significant nurturing

atmosphere of trust and support. Facing the

suspicious and doubtful atmosphere prevailing in

many western countries at present, attaining such

objectives is almost impossible. In addition one may

ask: if people are so busy with their instantaneous

phone communication, when do they have the time

for thinking? Unfortunately, the answer is quite

simple: in most cases they do not have the lust to

think thoroughly.

Another aspect of the complicated Post-modern

society is the contradicting relations between the

majority, the general public, and the cultural

minority, or the pace-giving elites. Here also relations

were simpler in the past when status and rules were

historically determined by external forces. The


528

democratic structure of today's society promotes

equality and allows people to disregard qualitative

differences. Here again arises the discourse on

society's description. Some, traditional writers

continue to claim that "all people are the same." The

Author, however, argues that "people's mind and

behavior differ as their faces and physical appearance

vary." Consequently human society should use the

Normal Distributing Equation (or the Bell shaped

Curve) for describing its structure. So the question in

this regard is how to convince most of the people,

resting within the left side of the Bell Curve, on the

critical worth of the qualitative elite, resting in the

Curve's right far end.

A nation that wishes to promote and advance its

development, and seeks an adequate strategy for

doing so, faces a guiding policy constructed of two

channels. This two-pronged effort recommends

carrying out the execution in parallel. One move

entails the reshaping of the public mood and creating

a positive atmosphere that supports the required

change and promotes advancing innovation. The

second parallel move should concentrate on

reorganizing the education system. This topic will be

discussed later in the following section.

A strategy that intends to change the social

surroundings should start with reconstructing positive

behavior and rebuilding public trust and hopes. A

credible relationship between the people and the

government, a reliable process of public service and

an effective mechanism of administrative

functionalism are among the central building blocks

required for reforming the national spirit. An

unreliable government cannot portray a promising

future and of course cannot induce people to follow

it. As in similar cases, rebuilding the national image

is a dialectical process. On one hand it should

strengthen the national self-esteem, but on the other

hand it should encourage skepticism, critical

evaluation and free thinking. On one hand it should

provide a safe and reliable basis for take-off, and on

the other one it should encourage creative innovative

thinking and unconventional solutions. All in all, the

new spirit that is required for reshaping a creative

society, should combine trust with faith, individual

strive with social accountability, self-esteem with

curiosity, deep commitment with inspiring vision.

However, these contradictory feelings and emotions

cannot remain general. They must be transferred to

and instilled in the hearts and minds of the concerning

individuals. It is required because in general, social

advancement depends on the talent, skills and

capabilities of its members.

Reestablishing trust, setting up faith and

inducing hopes are first of all the main undertaking of

the national elite and its leaders. National leadership,

in all the relevant fields of politics and economics,

science and technology, arts and culture, should

always be able to set an example. The best and most

effective way for prominent and gifted leading

individuals to get influence and attain goals has

always been, and still is, becoming role models and

living examples for their followers. This short

analysis simply reemphasizes the crucial role and the

heavy responsibility that rests on the shoulders of the

national elites.

3. The New Process of Learning

Over the past centuries, maintaining an ordinary and

productive process of academic education was based

traditionally on three essential assumptions:

1) The students - the learners who sought higher

education, have willingly admitted that they do not

know the learning material.ii

2) The teachers, lecturers and professors - the

knowledge providers, were publicly and academically

prepared, trained and qualified for providing the

required education.

3) The universities, colleges and the academic

surroundings have been recognized by both parties,

students and teachers, as the adequate bodies

responsible for teaching and providing higher

education and knowledge.

This principal set of assumptions has worked for

years, and has successfully contributed to increasing

research, developing science and setting in motion a

permanent process of knowledge accumulation. The

academic traditional course of action enabled the

higher education establishments to flourish while

becoming a legitimate goal of many individuals and

societies.

Thus, toward the end of the 20th

century,

provision of higher education to their citizens became

an official strategy of both developed and less-

developed nations. Democracy that had become so

popular in many countries was applied also to higher

education. More and more people, from all walks of

life, saw themselves eligible for acquiring higher

education. The democratization process of the

academic world gained power and started to threaten

many of the old traditional institutions

However, the tri-faceted move to Post-

modernism, discussed previously, has changed also

some of the basic cornerstones of higher education.

First of all some of the education's leading targets had

changed. No longer were vague desires of being an

intellectual or a respectful member of the academic

community sufficient. On the eve of the 21st Century,

being an intellectual or a gifted thinker did not suffice

in providing a prestigious or a respectful living. As

higher education became popular, it was forced to add

two major objectives to its curriculum. First, it was

demanded to increase the teaching of concrete and

practical fields, such as law, medicine and business.

Secondly, it was forced to open more universities and

colleges to enable an easier and greater recruitment of

new students.

In this way, higher education that was

historically established as an instrument for preparing


529

and training academic elites became at the turn of the

21st Century a much more popular establishment

aimed at educating common citizens. The EU for

example, seeking ways to accelerate its members'

economic growth, decided in 1999 to support and

promote a policy of hastening the provision of higher

education to its youths. Many hopes and bright

prospects were unfolded before higher education

assuming that it will continue to proceed along the

same track and lad by the same wider term of

reference.

But unfortunately, a new technological-driven

threat appeared and seemed to endanger many of its

intellectual achievements. This new danger evolved

from the smartphone evolution that emerged from the

communication revolution, and ended up with the

domination of the mobile-phone systems as the

leading global means of communication. Smartphone

are at present available in every country, and in some

cases their number surpasses the population's size.

Although there are many advantages to such an

impressive quantitative growth, with regard to

learning and education it is followed also by some

risks and perils.

The first and perhaps the most crucial manner in

which the smartphone revolution challenged the

higher education system was its rejection and denial

of the three basic learning assumptions. Most young

people refuse to admit that they know little, since the

smartphone provides them with abundance of

information in no time. Similarly they refuse to

accept the academic authority of their teachers and

recognize them as an information source, since they

can gather much data freely and rapidly from the

global networks. And lastly, many doubt the

importance of universities and academic libraries,

since knowhow and information could easily be

collected from alternative sources. As such, when the

ideological basis of the higher education system is

challenged, its foundations become unstable, its

usefulness doubtful, and the prospects for the future

are dim and unclear.

4. The Genuine Individual in the ICT environment

The genuine individual is the main player and the key

holder of all the above undertakings. All the former

regimes that, by force or other coercive measures,

have tried to subdue their citizens and use them as

less-respectful individuals had failed. In general,

progress mostly is endorsed by free people, such as

thinkers, artists, educators, scientist and similar

creators, who are the prominent members of today's

turbulent society.

Over the hundreds of years of Western73

cultural

history, along many breakthroughs and significant

73 In this paper the Author refers mainly to Christianity and Judaism, the Western Civilizations that he is familiar with.

innovations, advancement was carried out by brave

thinkers and gifted individuals. From Galileo and

Copernicus, through Newton and Einstein, from

Michael Deangelo and Leonardo de Vinci to Picasso

and his contemporaries, from Beethoven and Mozart

to Tchaikovsky and his colleagues, all of them were

talented individuals who were driven by their faith

and belief that they can achieve extraordinary

accomplishments. Despite the indifferent and

sometimes hostile surroundings, these pioneers were

fueled by their internal belief and personality toward

attaining unbelievable achievements. Fortunately

enough, it also seems that history tends to support

such human efforts and is inclined to promote

progress by securing and preserving these relevant

individuals.

Therefore, a nation that is in search of

innovation and progress should invest time and

resources in finding and identifying the appropriate

people for such a mission. Although some will argue

that this strategy contradicts the egalitarian spirit of

the social networks, there is no other way available.

The most appropriate qualifying process, which can

be used in other areas is the process of preparing,

training and qualifying the space astronauts in US.

Advancing a nation is such a critical mission that all

steps necessary should be taken for finding the right

personnel for achieving it.

To conclude this section, it is necessary to

illustrate some of the major traits and the leading

features of the able individuals who are located in the

far end of the nation's bell shaped Normal

Distribution Curve: Usually, they are always

dissatisfied with the current state of affairs. They

have a deep sense of curiosity, an enduring open-

mindedness, and a lasting creative thinking. Mostly,

they were raised as non-conformists, questioning and

critical individuals. They are risk-takers, ready to dare

and unafraid of making mistakes, while

simultaneously willing to admit their failures. They

are visionaries, with a constructive self-esteem that

maintain optimism even in bad times. These

outstanding individuals are humble, consistent,

dedicated to their mission and result-oriented.

Although they rest on their mind they also listen to

their intuition and follow their internal leanings. In

most cases they dislike formalities, detest

bureaucracy and look for means to circumvent red

tape. Due to their unconventional personality, many

do not understand them and some even distance

themselves from them. For a thorough and an

instructive study on this topic see Dan Senor and Saul

Singer's (2009) book: Start-Up Nation.

He finds it necessary to mention this fact since 2 large nations, China and India, are not included in the analysis.


530

5. Conclusion

In the wake of the 2008 Financial Crisis, many

European nations are experiencing stagnation and a

sluggish economic growth. In these pages, a

development strategy was proposed emphasizing the

conditions required for a Post-modern approach.

Whereas growth in the previous centuries was mainly

carried out by governments and designated agencies,

at present it depends more upon people, and talented

ones in particular. Governments and public

institutions must organize and maintain the social

environment and the public climate so that free non-

conformists and creative individuals will be able to

take risks and innovate. At the same time, people and

factions of the general public must realize that their

future prospects are firmly linked to the spirit of

entrepreneurship, their government's ability to

maintain it and their leaders' willingness to nurture

and preserve it. Unfortunately, not all governments

understand, agree and choose such courses of action.

References

1. Avny Amos, (2012) How to secure the Blessing of

Liberty, A Social-Capitalism Manifest, Germany: LAP

Lambert Academic Publishing.

2. Collins C. James & Porras I. Jerry, (Heb. Ed.)(1994),

Built to Last, Tel Aviv: Peker Books.

3. Collins C. James, (Heb. Ed.)(2001), Good to Great,

Tel Aviv: Peker Books.

4. Drucker F. Peter, (1989), The New realities, New

York: Mandarin.

5. Drucker F. Peter, (1994), Post Capitalism Society,

New York: HarperBusiness.

6. Krugman Paul, (2008), (Heb. Ed.) The Return to

Depression Economics, Tel Aviv: Yedioth Books.

7. Senor Dan and Singer Saul (2009) Start-Up Nation,

The story of Israel's Economic Miracle, New York:

Twelve.


531

AN ANALYSIS OF SYSTEMIC THINKING IN DECISION-MAKING PROCESSES IN THE MUNICIPALITIES WITHIN

THE PROVINCE OF KWAZULU-NATAL

Mbuyiseni Goodlife Ntuli*, Lawrence Mpela Lekhanya**

Abstract

This paper advocates the adoption of systemic thinking in decision-making processes in municipalities. Most importantly, in this epoch of managing in complex and thought-provoking business environment, decision making is one of the most important skills required by any manager to remain effective. The success of a municipality or any business hinges on how well decisions are taken and implemented. In this paper, I intend to scrutinize decision making processes at strategic management levels in the municipalities within the province of KwaZulu-Natal. In doing that, a mixed method approach of qualitative and quantitative techniques was adopted in gathering data from sixty-one municipalities within the province of KwaZulu-Natal. This was done in order to substantiate theoretical perspectives from different erudite scholars on the discourse of systemic thinking in decision making processes. This notion of systemic thinking is coined upon the universally used rational decision making process model. Thus, the conceptualization of rational decision-making model was also considered in this paper, the possibility of decision failure, the complexity of the municipality, and systemic thinking as the recommended option of dealing with complexity was explored. The results indicates that the theory that underpins the adoption of systemic thinking in dealing with complexity today’s business environment is relevant. Key Words: Complexity of Municipality, Decision-Making Process, Municipality, Systemic Thinking * University of KwaZulu-Natal, South Africa ** Durban University of Technology, South Africa

Introduction

This paper presents an analysis of systemic thinking

in decision-making processes in the municipalities

within the province of KwaZulu-Natal. The concept

of systemic thinking was best explained in the

international conference paper presented by Bartlet

(2001). Subsequently, the literature has further

revealed that municipalities should consider

tempestuous environment as an opportunity rather

than a threat (Almahamid, 2013: 10; Atwater et al.,

2008: 42). The literature further stated that one thing

certain is that tomorrow will not be like yesterday and

the future is highly risky, therefore it is more risk to

keep the status quo and ignore innovation (Garrison,

2011: 14). It had become evident that managers need

to adopt new paradigms and address new challenges

arising from the changing social, economic, political

and demographic realities of the changing

marketplace (Drucker, 2012: 107).The complexity in

business environment is unpredictable (Vasconcelos

and Ramirez, 2011: 237). Complexity is relative in

nature because it depends on the number and the

nature of interactions among the variables involved

(Gharajedaghi, 2011: 110). Management must be

creative and innovative, because the future is no

longer anticipated, it is now created. The key

concepts now are chaos, conflict, instability, complex

learning and dialogue to favour spontaneous self-

organization (Olmedo, 2012: 82). McBride, Hall and

Okwaro (2013:17) argued that the success of any

organisation hinges on how well decisions are

undertaken in all levels of the organisation.

According to Jackson (2010: 327), systemic thinking

would be a better thinking approach to managers to

manage effectively in an environment of complexity,

change and diversity.

Problem Statement

The findings of the Auditor-General in terms of the

Audit Report 2012/13 revealed that the environment

of managing municipalities are complex and requires

leaders and managers who can apply systemic

thinking in decision making processes. Since,

systemic thinking is defined as an ability to combine

analytical and synthetical thinking in decision-making

processes (Bartlet, 2001: 2). The literature reviewed

has also revealed that much work has been done on

the concept of systemic thinking and its application to

other sectors but there is very little empirical

evidence to show that a study on systemic thinking


532

has been conducted in any municipality in South

Africa. Worse, to determine the understanding,

application and effectiveness of systemic thinking in

decision-making processes in municipalities in any

province within South Africa. Hence, this paper

intended to investigate systemic thinking in the

municipalities within the province of KwaZulu-Natal.

Aim and Objectives

Aim This paper aims to analyse the understanding,

application and effectiveness of systemic thinking in

decision making processes within the municipalities

within the province of KwaZulu-Natal.

Objectives

To determine the understanding of systemic

thinking by senior managers within the

municipalities in KwaZulu-Natal.

To investigate the application of systemic

thinking in decision making processes within the

municipalities in KwaZulu-Natal.

To assess the effectiveness of systemic thinking

in decision-making processes within the

municipalities in KwaZulu-Natal

To recommend the model of how systemic

thinking can be incorporated and applied in the

decision-making process.

Literature Review The Outmoded Practices of Decision Making

Daft (2012: 26) stated that decision making processes

are still charecterised by routine, specialised tasks,

and standardized control procedures, and

organizations, and are coordinated and controlled

through a vertical hierarchy with decision authority

residing with upper-level managers, whereas in the

new workplace, work is free-flowing and flexible,

and structures are flatter, and lower level employees

are empowered to make decisions based on

widespread information and guided by the

organisation’s mission and values. Pidd (2004: 27)

argued that those who are entrusted with the

responsibility of strategic management must accept

that, in an unpredictable and changing environment, a

fixed plan for decision making is no longer possible,

the ideal decision making process must be adaptive,

decentralized and self-organising, and allow

organisational policies and goals to remain emergent

and indeterminate. As a result, in dealing with

complexity, Pidd (2004: 28) further suggested that

there is need of decision makers to incorporate the

culture of systemic thinking in decision-making

processes.

Mitchell (2009: 19) agreed with the contention

that decision making processes must adapt to

complex business challenges , since these challenges

that are emerging from complex business

environment cannot be fully understood, and their

behavior cannot be exactly predicted. This view is

confirming the school of thought by Neumann (2013:

81) that only complicated challenges can be

understood and predicted but not the complex

challenges , and that can only happen if managers

have enough time, knowledge and the right tools for

dealing with such complicated challenges. Since,

today’s organizations are characterized by

disequilibrium, nonlinearity and emergence, therefore

management must adopt a culture of becoming

learning , creative and innovative organisation,

because the future is no longer anticipated, it is now

created (Olmedo, 2012: 82), and that the current key

features of today’s organisations are chaos, conflict,

instability, complex learning and requires a dialogue

to favour spontaneous self-organization. The same

view is shared by Drucker (2007: 132) that the heart

of business success would depend mostly on the

willingness of businesses to incorporate creativity and

innovation in decision making process. Castillo

(2014: 615), contended that managers should not

regard rational decision making process model as the

only honest, mature and intelligent decision-making

process, when in reality it lacks ingenuity, innovation

and originality.

Rational Decision Making Process Model

A rational decision making model is a multi-step

process of choosing among alternatives in a way that

accords with the preferences and beliefs of an

individual decision maker or those of a group making

a joint decision. The word “rational” in this context

does not mean sane or clear-headed as it does in the

colloquial sense. In this paper rational decision

making model must be contextualized in a sense that

it is an approach that follows a sequential and formal

path of activities(Doyle, 1998: 1). This path is best

illustrated in the diagram on Figure 1.


533

Figure 1. Rational Decision Making Process Model (Doyle 1998:1)

This model has caught criticism from scholars

like Pettigrew (2014: 13) that this rational decision-

making model has some limitations. Among the

limitations are its assumptions that it requires a great

deal of time, a great deal of information, assumes

rational, measurable criteria are always available and

agreed upon, it further assumes that there is accurate,

stable and complete knowledge of all the alternatives,

preferences, goals and consequences, and also assume

a rational, reasonable, non-political world. Pidd

(2004: 36) argued that this model is premised on an

assumption that managers have only one problem to

look at, and the process of making a decision is one

of seeking options with a hope of choosing the best

solution. Ferrell, Hirt and Ferrell (2009: 224)

affirmed that the reality on the ground is that

decisions are often made on the basis of incomplete,

insufficient and probably partially accurate

information. Also, Pettigrew (2014: 14) went on to

argue that while the rational planning decision-

making model was innovative at its inception, the

model is now controversial and questionable.

Benveniste (2011: 134) asserted that the rational

decision making process model ignores political

influence. Despite these scholarly criticism ,

positivism, linearity and reductionism still dominate

the processes of decision making in management

practices even during this era of complex business

environment (Olmedo, 2012: 82). Despite these

criticism by various academics, it remains pivotal to

acknowledge the fact that the success of any

organisation hinges on how well decisions are

undertaken in all levels of the organisation

(Benveniste, 2011; Pettigrew, 2014; McBride et al.,

2013). It is important that people learn how to

embrace systemic thinking through bringing in the

element of creativity and disagreement, since

organizations need this creative energy generated by

these differences in order to progress (Olmedo, 2012:

85). According to Polasky, Carpenter, Folke and

Keeler (2011:398) managing in a period where

organisations are operating in complex environment,

it requires an ability to gather new information and

perspectives to better anticipate future conditions of

the organisation . The traditional management

principles are no longer relevant in this era, because

managers have to manage complexity, in a thin line

between order and disorder or, in other words, at the

edge of the chaos, which implies a need of revisiting

the traditional thinking approach (Paarlberg and

Bielefeld, 2009: 247).

The Possibility of Decision Failure

Every decision situation in any business is organized

on a scale according to the availability of information

and the possibility of failure (Daft, 2012: 240). The

problem with the current management practices, in

dealing with complex organisational challenges, is

that decision making processes are still handled in a

linear thinking order (Castillo, 2014: 215). Daft

(2012: 239) suggested that management decisions

typically fall into two categories. Those two

categories of decisions are programmed and non-

programmed decisions. Programmed decisions

involve situations that have occurred often enough to

enable decision rules to be developed and applied in

the future, Programmed decisions are made in

response to recurring organizational problems ,

whereas non-programmed decisions are made in

response to situations that are unique, are poorly

defined and largely unstructured, and have important

consequences for the organisations. Thus, Towler

(2010: 111) argued that the main challenge of

Identification of the Problem

Information Processing

Developing Alternative Solutions

Selecting the Best Solution

Implementation

Improvement v Feedback


534

managing business in this era is that managers are

still operating under the impression that decisions are

made under certainty, as a result the assumption is

that the decision-making process of finding

alternatives is still too predictable. Yet, the literature

has just revealed that, that can only happen in a

perfect world whereby managers would have all the

information necessary to make decisions.

Gharajedaghi (2011: 335) contended that neither

a problem nor a solution can be entertained free of

context, and further indicated that a tendency to

define problem in terms of their solutions, and a

strong preference for context-free solutions will

merely continue regenerating the past, reproducing

the non-solution all over again. He went on to say do

not use constraints such as time and information or

resources to define problems, because in doing so the

implication is that a problem is defined in terms of a

known solution. The same assertion was also

affirmed by Daft (2012: 240) that in reality, some

things are unpredictable, thus some decisions fail to

solve the current business problems or attain the

desired outcomes. To explore further the same views,

a litany of literatures(Cole and Kelly, 2011; Daft,

2012; Ferrell et al., 2009) were considered and

confirmed that decision-making processes are

designed in a rational approach which becomes the

greatest challenge in managing business complex

situations. As a result, the traditional managed

organisations are suffering the most in times of

turbulent business periods.

The Changing Landscape of Business Environment

Managers spend a great deal of time confronting

complex and difficult challenges of the business

world today. Some of these challenges relate to

rapidly changing technology, increased scrutiny of

individual and corporate ethics and social

responsibility, the changing nature of the workforce,

new laws and regulations, increased global

competition and more challenging foreign markets ,

declining educational standards and time itself, but

such diverse issues cannot simply be plugged into a

computer program that supplies correct , easy-to-

apply solutions. It is only through creativity and

imagination that managers can make effective

decisions to benefit organisations(Ferrell et al., 2009:

225). In view of rapidly increasing complex and

interconnected business world, Smith, Binns and

Tushman (2010: 11) suggested that systemic thinking

must be incorporated in decision making processes

since it is regarded as the best approach in dealing

with complex challenges and it is also perceived as an

approach that will become a source of a competitive

advantage and a tool to become a pre-condition for

success in most organisations.

The same view is affirmed by Olmedo (2012:

88) wherein he clearly articulated that leaders should

be encouraged to promote novelty and disequilibrium

and the emotional connections with common

language and symbols inside simple rules to favour

new emergent business environmental behaviors, and

be able to recognize the emerging emergent behaviors

and be able to interpret the meaning thereof.

According to (Bartlett, 2001: 4)systemic thinking can

be a solution in dealing with complex business

challenges. To test the veracity of that assertion, on

the basis of the findings from the literature regarding

the view that that profit making business solutions

that the private sector has adopted in response to the

growing complexity of the business environment

could work equally well in the public sector

(Hamalainen, Kosonen and Doz, 2012:9), this study

seeks to investigate the application of systemic

thinking in decision making process in the


The Relevance of Sytemic Thinking in Today’s Decision Making Processes

Systemic thinking enables managers to deliberately

and systematically gain significantly deeper insights

into challenging situations and complex domains by

surfacing the interaction-patterns that underlie, drive

and govern complex situations (Johanessen, Olaisen

and Olsen, 1999). Reynolds, Forss, Hummelbrunner,

Marra, and Perrin (2012: 3) indicated that systemic

thinking has got its originality in three traditions,

namely-the theoretical perspective of gaining a

holistic view of a problem, the practical pursuit of

engaging with multiple perspectives each restricted

with bounded judgments (pluralistic thinking and

participatory practice), and the purposeful pursuit of

improving situations (operational research and action

research). Doppelt (2012: 76) stated that the strength

of dealing with complexity in today’s business

challenging environment is the ability of a manager to

rise above the occasion in decision making processes.

Johannessen and Skålsvik (2013: 42) indicated that

the challenges of business today cannot be dealt with

only in accordance with fixed documented rules,

procedures and regulations. Reynolds et al. (2012)

argued that systemic thinking challenges the narrow-

minded reductionist practices, the rational models of

policy-making, linearly assumed causal relationships

and experimental evaluation designs which can often

inhibit more appropriate or meaningful evaluation. In

his justification, Reynolds et al. (2012: 3) indicated

that systemic thinking encourages a dynamic, more

holistic perspective which influences the ability of

evaluators to manage deliberative processes about

complex problems in a democratic fashion.

Peter Drucker once warned that one thing

certain is that tomorrow will not be like yesterday and

the future is highly risky, therefore it is more risk to

keep the status quo and ignore innovation (Garrison,

2011: 14). The complexity in business environment is

unpredictable (Vasconcelos and Ramirez, 2011: 237).


535

Since complexity is relative in nature because it

depends on the number and the nature of interactions

among the variables involved, it needs proper

management (Gharajedaghi, 2011: 110). Management

must be creative and innovative: the future is no

longer anticipated, it is now created. The key

concepts now are chaos, conflict, instability, complex

learning and dialogue to favour spontaneous self-

organization (Olmedo, 2012: 82). Therefore, systemic

thinking provide managers with the ability to manage

effectively in an environment of complexity, change

and diversity (Jackson, 2010: 327).There are different

theories and methods in systemic thinking that are

each designed to address complex problems in

business organisations (Peters, 2014: 2).

The business environments are said to be

complex because they involve multiple interacting

agents, the context in which they operate keeps

changing and the manner in which things change do

not conform to linear or simple patterns(Mitchell,

2009: 231). Sometimes elements within the system

are able to learn new things, or sometimes create new

patterns as they interact over time (Gharajedaghi,

2011: 213). Many of the problems in municipalities

are now recognized as complex problems where

simple blue print approaches have limited access

(Peters, 2014: 2). Municipalities functions in an

apparently illogical and paradoxical manner (Olmedo,

2012: 84). Managers must learn to apply systemic

thinking approach, which is mooted as the most

appropriate approach, in dealing with complexity in

business management, because the problems

managers face are too complicated and diverse to be

handled by anything other than systemic thinking

approach (Jackson, 2010: 15).

This approach has challenged the effectiveness

of a rational decision making process, that the

decision making process should not be merely a

linear thinking model but it must be a non-linear

approach to accommodate complexity in turbulent

environments (Castillo, 2014: 54). Thus, the creation

of the ability to continuously match the portfolio of

internal competencies with the portfolio of emerging

markets opportunities in any business organisation

has become the foundation of the emerging concept

of new business architecture (Gharajedaghi, 2011:

181). It is therefore imperative that those in

management learn to think in a creative way and

further allow disagreements, since organizations need

creativity which is generated by these differences in

order to succeed (Olmedo, 2012: 85).

Notwithstanding the fact that decision making,

in most if not all organisations, is often linked with

the organisation structure. An organisation structure,

in a hierarchical traditional way, determines how

rational decision are made, communicated and

responded to (Ferrell et al., 2009: 234). Whereas, in a

global market economy with ever-increasing levels of

disturbance, a viable business cannot be locked into a

single structure anymore, success comes from a self-

renewing capability to spontaneously create structures

and functions that fit the moment. (Gharajedaghi,

2011: 181).

In a nutshell, Jackson (2010: 131) summed the

value of systemic thinking to managers succinctly

when he contrasted traditional management theory

and complexity theory. Traditional management

theory advises managers what to do in order to

achieve goals in an optimum way. It teaches

managers how to organise the parts of an organisation

into a coherent structure. It seeks conformity from

employees and put in place detailed control

procedures to ensure that this is realized , whereas

complexity theory teaches managers to change their

way of thinking , abandoning mechanism and

determinism, and learning to appreciate and cope

with relationships, dynamism and unpredictability;

that organisations coevolve with their environments,

and therefore managing the environment is crucial;

that the best mangers are able to intuitively grasp the

patterns that are driving the behavior of their

organisations and the environments they are

confronting. They look for patterns in the whole and

seek small changes that can have the maximum

impact on unfavourable patterns; that the most

successful organisations do not try to control

everything. To an extent that managers can trust in

chaos and allow the processes operating at the edge of

chaos to bring new order through self-organisation,

and thus promote learning, diversity and a variety of

opinion. (Jackson, 2010: 131).

The Complexity of the Municipality

The Municipalities are faced with a number of new

complex challenges that represent a significant

reshaping of the sector from its image and decision-

making processes (Hutchinson, Walker and

McKenzie, 2014: 3) .Increasingly, municipalities are

responsible for the delivery of a broad range of

services to a diverse set of constituents including

other tiers of government, residents and business

(Dollery, Wallis and Allan, 2006:111). This

expansion in activity and accountability has quite

naturally led to research interest in efficacy of

leadership, governance and decision-making

processes to ensure that they are responsive and

relevant to the increasingly diversified nature of the

sector (Hutchinson et al., 2014: 3). Whilst being the

third tier of government, municipalities are unique in

that they straddled both the public and private spheres

(Dollery et al., 2006: 112). On the one hand,

municipalities are about participation, both in terms

of voting and contributing to the community we wish

to live in, and on the other municipalities are

expected to deliver services efficiently with a shift in

operational emphasis to policy and strategic activities

that are similar to those of the private sector

(Hutchinson et al., 2014: 3). This duality provides a

complex leadership challenge for those in


536

management of municipalities and sets their roles

apart from other public sector leaders in that they

have multiple stakeholders to answer to and be

responsible for South African municipalities and

cannot afford to invariably perform poorly because

this could ultimately affect public confidence and

trust on the part of local inhabitants, thus services to

local communities should be provided in a sustainable

manner (Johanessen et al., 1999: 17). In order to

fulfill this constitutional obligation, municipalities

should ensure that institutional capacity is

continuously strengthened, systemic and structures

are firmly put in place and periodically reviewed with

a view to adapt to changing conditions and

circumstances and more fundamentally resources are

allocated to effectively and efficiently deliver public

service .

Research Methodology

A mixed method of quantitative and qualitative

approach was used in this paper to collect data from

61 municipalities within the province of KwaZulu-

Natal, in South Africa. The targeted population was

183 senior managers in the municipalities within the

province of KwaZulu-Natal. However, a response

rate of 83% was obtained. A stratified random

sampling method was chosen to select the required

sample. A stratified random sampling involves a

process of dividing population into mutually

exclusive groups that are relevant, appropriate and

meaningful in the context of the study (Sekaran and

Bougie, 2013: 249). Thus, stratified random sampling

was adopted in order to create strata on the basis of

specialization. Therefore, senior managers who are

specialists in finance, corporate services and

municipal managers were selected in accordance with

their functional areas of operations. The final sample

is shown in Table 1 in terms of stratum per districts

and metropolitan. In gathering data, a self-

administered structured questionnaire and structured

interviews were used as data collection instruments.

Table 1. The Distribution of Stratum per Local, Districts and Metropolitan Municipalities in KwaZulu-Natal

Geographical Area per District/ Metropolitan Frequency Percentage Targeted

Population

Amajuba District 4 7 12

EThekwini Metro 1 2 3

Harry Gwala District 6 10 18

ILembe District 5 8 15

UGu District 7 11 21

UMgungundlovu District 8 13 24

UMkhanyakude District 6 10 18

UMzinyathi District 5 8 15

UThukela District 6 10 18

UThungulu District 7 11 21

Zululand District 6 10 18

TOTAL 61 100% 183

Questionnaire and interviews were used as

measuring instrument for this survey. The main

questions are summarised in Table 2.

Table 2. Summary of Key Questions

Research Area Question

General Information

Current position

Alternative Responses: Senior Manager: Corporate Services, Technical Services,

Community Services, Chief Financial Officer, Municipal Manager

Number of Years Occupying the Position

Response Alternatives: Less than one year; One to two years; Three to five years;

Six to ten years; Over ten years

Number of Times participating in Strategic Decision Making Processes

Response Alternatives: One to two times; One to two years; Three to five times; Six

to ten times; Over ten times


537

Understanding of

systemic thinking

Resolving problems according to a fixed set of rules and procedures is always

relevant in municipalities.

Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly

Disagree

Systemic thinking would be a better approach in gaining insights into complex

challenges of the municipalities.


Disagree

Every manager is aware of the processes and outcomes of systemic thinking.


Disagree

Application of systemic

thinking

Managerial Challenges in running a municipality are unpredictable


Disagree

Systemic thinking in the decision making process is a time-consuming process.


Disagree

External factors always play a great role in the decision making process


Disagree

Effectiveness of systemic

thinking

Problems that are associated with complexity, change and diversity can always be

resolved through a rational decision-making process


Disagree

Creativity , ingenuity and originality are a necessity in dealing with complexity,

change and diversity


Disagree

Systemic thinking in the decision making process will improve the performance of

municipalities.


Disagree

Results and Discussion

Relevant scholarly works, textbooks and journal

articles on systemic thinking and decision making

processes were considered for additional insight.

Statistical tests were conducted to test the probability

of independence of each variables and the

significance of variables. During the analyses of data

through SPSS package, the Chi-square test generated

3 Chi-Square alternatives. i.e. Pearson Chi-Square,

Likelihood Ratio and Linear-by-linear association.

However, for the purpose of this study Pearson Chi-

Square results were used for interpretation. The actual

interpretation was that if the p<0.05 then we have a

Chi-Square value which is significant at the

conventional cut off point of 5%. That meant the

association found in the sample data is significant and

would be regarded as evidence that there is an

association between the variables in question in the

population from which the sample has been drawn.

The main findings were that the response rate was

83% from 183 (n=183) respondents from senior

managers in the municipalities within the province of

KwaZulu-Natal and the key findings of this research

were as follows.

Table 3. Positions Occupied by the Respondents

Frequency Percent Valid Percent Cumulative Percent

Valid Senior Manager: Corporate Services 53 34.9 34.9 34.9

Chief Financial Officer 49 32.2 32.2 67.1

Municipal Manager 50 32.9 32.9 100.0

Total 152 100.0 100.0

Table 3 indicates that 34.9% of the respondents

were senior managers responsible for corporate

services, 32.2% of the respondents were chief

financial officers responsible for financial

management, and 32.9 % were municipal managers,

who are also accounting officers of municipalities,

because they are responsible for the overall

management of municipalities.


538

Table 4. Number of Years Occupying the Same Position


Valid Less than one year 3 2.0 2.0 2.0

One to two years 24 15.8 15.9 17.9

Three to five years 70 46.1 46.4 64.2

Six to ten years 35 23.0 23.2 87.4

Over ten years 19 12.5 12.6 100.0

Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

Table 4 reveals that 46.1 % of the respondents

have been operating in senior management from three

to five years, 23.2% have been in senior management

position from six to ten years, 15.9% in senior

management from one to two years, and 12.6% have

been in management over ten years, and only 2%

were the new comers in senior management level.

The overall results indicate that there is profoundness

of experience in senior management positions in the


Table 5. Number of Times participated in Strategic Decision Making Processes


Valid One to two times 17 11.2 11.3 11.3

Three to five times 55 36.2 36.4 47.7

Six to ten times 41 27.0 27.2 74.8

Over ten times 38 25.0 25.2 100.0

Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

Table 5 shows that 36.2 % of the respondents

have participated in strategic decision making

processes from three to five times, 27% have

participated in strategic decision making processes

from six to ten times, 25% have participated in

strategic decision making processes over ten years

11.2% have participated in decision making process

within a period one to two times. Overall, this result

indicates that the majority of senior management have

enormous understanding of decision making practice

within the municipality.

Table 6. Response on resolving problems according to a fixed set of rules and procedures is always relevant in

municipalities


Valid Strongly Agree 5 3.3 3.3 3.3

Agree 16 10.5 10.6 13.9

Neutral 7 4.6 4.6 18.5

Disagree 85 55.9 56.3 74.8

Strongly Disagree 38 25.0 25.2 100.0

Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0


539

Figure 2. Resolving problems according to a fixed set of rules and procedures is always relevant in

municipalities

In the 5-item Likert scale question, the

respondents were asked whether resolving problems

according to a fixed set of rules and procedures is

always relevant in municipalities or not? Wherein

respondents were expected to indicate whether they

strongly agree (1), agree (2), are neutral (3), disagree

(4) and strongly disagree (5) with the statement. The

results from the respondents as shown in Table 6 and

Figure 1 reveals that 85 (55.9%) of the respondents

disagree with the statement, 38 (25%) of the

respondents strongly disagree with the same

statement. Whilst, 16 (10.5%) respondents agreed

with the statement, and 5 (3.3%) strongly agreed with

the statement, and 7 (4.6%) of the respondents

preferred to be neutral on this statement. These results

indicated that the majority of the respondents do not

believe that resolving problems in municipalities

according to rules and procedures is always relevant.

Subsequently , a Chi-Square Test was conducted

to test a null hypotheses created that there was no

significant relationship between the position occupied

and resolving problems according to a fixed set of

rules and procedures in municipalities. The results

obtained were a Pearson Chi-square value of 53.668

with 8 degrees of freedom and a significance

probability of less than 0.0001. Since the significance

probability value was less than the accepted norm of

0.05. Therefore, the null hypothesis was rejected.

These findings is in corroboration with the research

findings by Letiche, Lissack and Schultz (2011:11)

that municipality are organisations that are strictly

working in accordance with rules, codes and, firm

and inflexible boundaries and such arrangements are

challenged by the new, the unexpected, and the

unknown.

Table 7. Response on whether systemic thinking would be a better approach in gaining insights into complex

challenges of the municipalities



Agree 73 48.0 48.3 90.1

Neutral 11 7.2 7.3 97.4

Disagree 4 2.6 2.6 100.0

Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

3.3%

10.5% 4.6%

55.9%

25.0%

0,0

10,0

20,0

30,0

40,0

50,0

60,0

Strongly Agree Agree Neutral Disagree Strongly Disagree


540

Figure 3. Systemic thinking would be a better approach in gaining insights into complex challenges of the

municipalities

The results from the respondents presented in

Table 7 and Figure 2 show that 73 (48%) of the

respondents agree with the statement, 63 (41.4%) of

the respondents strongly agree with the same

statement. Whilst, 11 (7.2%) preferred to be neutral

on this statement, and 4 (2.6%) disagreed with the

statement. These results indicated that the majority of

the respondents were of the view that systemic

thinking would be a better approach in gaining

insights into complex challenges of the

municipalities. The Chi-Square value for the position

occupied and systemic thinking as a better approach

in gaining insights into complex challenges of the

municipalities had a value of 10.595 with 6 degrees

of freedom and a significance probability of 0.102,

which was a very weak significant result.

Based on the evidence of this data, there is no

association between the position occupied and

systemic thinking as a better approach in gaining

insights into complex challenges of the

municipalities. Since the p>0.5, there is no

statistically significant on these variable, the null

hypothesis was rejected. These research findings

corroborated with a view by Bartlet (2001), who

indicated that systemic thinking would be a better

approach in gaining insights into complex challenges.

It further affirmed the assertion by Benedetto De

Martino (2009: 684) that theories of decision-making

have tended to emphasize the operation of analytical

processes in guiding choice behavior without

considering that more intuitive or emotional

responses can play a key role in human decision-

making, and that when taking decisions under

conditions when available information is incomplete

or overly complex, subjects rely on a number of

simplifying heuristics, or efficient rules of thumb,

rather than extensive algorithmic processing.

Table 8. Response on whether every manager is aware of the processes and outcomes of systemic thinking



Agree 30 19.7 19.9 23.2

Neutral 14 9.2 9.3 32.5

Disagree 78 51.3 51.7 84.1


Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

41.4%

48.0%

7.3% 2.6%

0.0% 0,0

10,0

20,0

30,0

40,0

50,0

60,0



541

Figure 4. Every manager is aware of the processes and outcomes of systemic thinking

The results from the respondents indicated that

78 (51.3%) of the respondents disagree with the

statement, 24 (15.8%) of the respondents strongly

disagree with the same statement. Whilst, 30(19.7%)

of respondents agreed with the statement, and 5

(3.3%) strongly agreed with the statement, and 14(9.2

%) of the respondents preferred to be neutral on this

statement. These results indicate that the majority of

the respondents are of the view that it is incorrect to

think that every manager is aware of the processes

and outcomes of systemic thinking. According to the

Cross tabulation findings, the Chi-Square value for

the position occupied and every manager being aware

of the processes and outcomes of systemic thinking

was 10.479 with 8 degrees of freedom and a

significance probability of 0.233, which was a very

weak significant results. Based on the evidence of this

data, the association between the position occupied

and every manager being aware of the processes and

outcomes of systemic thinking was not statistically

significant, because the significance probability value

was more than the p-value of 0.05. Therefore, the null

hypothesis was rejected.

Table 9. Response on whether managerial challenges in running a municipality are unpredictable



Agree 35 23.0 23.2 90.1

Neutral 1 .7 .7 90.7

Disagree 9 5.9 6.0 96.7


Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

Figure 5. Managerial challenges in running a municipality are unpredictable


101 (66.4%) of the respondents strongly agree with

the statement, 35 (23%) of the respondents agree with

the same statement. Whilst, 9(5.9%) of respondents

disagree with the statement same statement, and 5

(3.3%) of the respondents strongly disagree with the

3.3%

19.7%

9.2%

51.3%

15.8%

0,0

10,0

20,0

30,0

40,0

50,0

60,0


66.4%

23.0%

0.7% 5.9% 3.3%

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0



542

statement, and 1(0.7%) of the respondents preferred

to be neutral on this statement. These results indicate

that the majority of the respondents believe that

managerial challenges in running a municipality are

unpredictable. These results were found to

corroborate an assertion made by (Mitchell, 2009)

that managerial challenge cannot be fully understood,

and hence their behavior cannot be exactly predicted.

Table 10. Response on whether systemic thinking in the decision making process is a time consuming process



Agree 56 36.8 37.1 54.3

Neutral 11 7.2 7.3 61.6

Disagree 46 30.3 30.5 92.1


Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

Figure 6. Systemic thinking in the decision making process is a time consuming process


56(36.8%) of the respondents agree with the

statement, 46(30.3%) of the respondents disagree

with the same statement. Whilst, 26(17.1%) of

respondents strongly agree with the statement, and 12

(7.9%) strongly disagree with the statement, and

11(7.2%) of the respondents preferred to be neutral

on this statement. These results indicate that the

majority of the respondents are of the view that

systemic thinking in the decision making process is a

time consuming process. These results were found to

be in corroboration with Jackson(2010:131)’s view

that systemic thinking looks for patterns in the whole

and seek small changes that can have the maximum

impact on unfavourable patterns and it is time

consuming in nature.

Table 11. Response on whether external factors always play a great role in the decision making process



Agree 35 23.0 23.2 97.4

Neutral 2 1.3 1.3 98.7

Disagree 2 1.3 1.3 100.0

Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

17.1%

36.8%

7.2%

30.3%

7.9%

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0



543

Figure 7. External factors always play a great role in the decision making process


112 (73.7%) of the respondents strongly agree with

the statement, 35(23%) of the respondents agree with


disagree with the statement, and 2(1.3 %) of the

respondents preferred to be neutral on this statement.

These results indicate that the majority of the

respondents strongly believe that external factors

always play a great role in the decision making

process. These results were found to be in line with

the assertion made by Benveniste (2011: 134) that the

rational decision making process model ignores

political influence.

Table 12. Response on whether problems associated with complexity, change and diversity can always be

resolved through a rational decision making process



Agree 21 13.8 13.9 19.2

Neutral 8 5.3 5.3 24.5

Disagree 102 67.1 67.5 92.1


Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

Figure 8. Problems associated with complexity, change and diversity can always be resolved through a rational

decision making process


102 (67.1%) of the respondents disagree with the

statement, 21(13.8%) of the respondents agree with


strongly disagree with the statement, and 12(7.9%)

strongly disagree with the statement, and 8(5.3 %) of

the respondents preferred to be neutral on this


the respondents disagree with the statement that

complexity, change and diversity can always be

resolved through a rational decision making process.

These results affirmed by Ferrell et al. (2009: 225)

that managers spend a great deal of time confronting

complex and difficult challenges of the business

world today through rational decision making

processes in vain , yet some of these challenges relate

to rapidly changing technology, increased scrutiny of

individual and corporate ethics and social

responsibility, the changing nature of the workforce,

new laws and regulations, increased global

73.7%

23.0%

1.3% 1.3% 0.0% 0,0

20,0

40,0

60,0

80,0


5.3% 13.8%

5.3%

67.1%

7.9%


0,0

20,0

40,0

60,0

80,0


544

competition and more challenging foreign markets ,

declining educational standards and time itself, but

such diverse issues cannot simply be plugged into a

computer program that supplies correct , easy-to-

apply solutions. It is only through creativity and

imagination that managers can make effective

decisions to benefit organisations.

Table 13. Response on whether creativity, ingenuity and originality are a necessity in dealing with complexity,

change and diversity



Agree 86 56.6 57.0 76.8

Neutral 4 2.6 2.6 79.5

Disagree 24 15.8 15.9 95.4


Total 151 99.3 100.0

Missing System 1 .7

Total 152 100.0

Figure 9. Creativity, ingenuity and originality are a necessity in dealing with complexity, change and diversity


86 (56.6%) of the respondents agree with the

statement, 30(19.7%) of the respondents strongly

agree with the same statement. Whilst, 24(15.8%) of

respondents disagree with the statement, and 7(4.6%)

strongly disagree with the statement, and 4(2.6 %) of

the respondents preferred to be neutral on this


the respondents agree with the statement that

creativity, ingenuity and originality are a necessity in

dealing with complexity, change and diversity. These

results were also found to be in line with a view by

Jackson (2011:131) that the most successful

organisations do not try to control everything, but

they allow chaos and the processes operating at the

edge of chaos to bring new order through self-

organisation, and thus promote learning, diversity and

a variety of opinion.

Table 14. Responses on whether systemic thinking in the decision making process will improve the performance

of municipalities



Agree 39 25.7 26.0 87.3

Neutral 18 11.8 12.0 99.3

Disagree 1 .7 .7 100.0

Total 150 98.7 100.0

Missing System 2 1.3

Total 152 100.0

44.7%

53.3%

0.7% 0.7% 0.0%

0,0

10,0

20,0

30,0

40,0

50,0

60,0



545

Figure 10. Systemic thinking in the decision making process will improve the performance of municipalities


92 (60.5%) of the respondents strongly agree with the

statement, 39(25.7%) of the respondents also agree

with the same statement. Whilst, 18(11.8%) of the

respondents preferred to be neutral on this statement

and 1(0.7%) of the respondents disagree with the


the respondents agree that systemic thinking in the

decision making process will improve the

performance of municipalities. The Chi-Square value

for the position occupied and systemic thinking in the

decision making process will improve the

performance of municipalities was 30.343 with 12

degrees of freedom and a significance probability of

0.002, which was a very strong significant results.

Based on the evidence of this data, the association

between the position occupied and every manager

being aware of the processes and outcomes of

systemic thinking was statistically significant,

because the significance probability value was less

than the p-value of 0.05. Therefore, the null

hypothesis was rejected.

Limitations of the Study

This study focused in the province of KwaZulu-Natal,

as a result it excluded other provinces in South Africa

and was limited to 61 municipalities within the

province of KwaZulu-Natal due to the hugeness and

geographical distribution of municipalities in South

Africa. Hence, the researcher cannot make a profound

inference about the results of this study to all

municipalities in South Africa.

Recommendations

It is evident from the findings that the current model

of rational decision making process makes it very

difficult to deal with issues of complexity and

unpredictability in managing municipalities in the

province of KwaZulu-Natal. The majority of the

respondents in this study believe that systemic

thinking would be of great assistance in dealing with

complex challenges in decision making processes of

the municipalities, due to the fact that it allows

creativity, ingenuity and originality in dealing with

complexity, change and diversity. Therefore, this

study recommends that training on systemic thinking

of decision makers in municipalities need to be

conducted in order to equip management

practitioners with relevant decision- making skills. It

further recommended the expansion of the current

rational decision making process model to be as

follows

60.5%

25.7% 11.8%

0.7% 0.0%

0,0

20,0

40,0

60,0

80,0

Strongly Agree Agree Neutral Disagree Strongly

Disagree

1. Problem Identification

2. Information

Verification

3. Information Processing

4. Developing Alternatives

Solutions

5. Selecting the Best Solution

6. Consulting on the Chosen/Best

Solution

7. Improvement

8. Implementation

9. Monitoring and Evaluation


546

Conclusion

The understanding, application and effectiveness of

systemic thinking can only add value if the decision

makers are equipped with skills to deal with complex

issues as opposed to complicated issues in decision

making processes. A lack of understanding and

knowledge of the systemic thinking and its

importance in running a municipality may have a

negative impact in the operation and functionality of

the municipality.

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LONE RANGER DECISION MAKING VERSUS CONSENSUS DECISION MAKING: DESCRIPTIVE ANALYSIS

Maite Sara Mashego*

Abstract

Consensus decision making, concerns group members make decisions together with the requirement of reaching a consensus that is all members abiding by the decision outcome. Lone ranging worked for sometime in a autocratic environment. Researchers are now pointing to consensus decision-making in organizations bringing dividend to many organizations. This article used a descriptive analysis to compare the goodness of consensus decision making and making lone ranging decision management. This article explored the models, roles, tools and methods of consensus decision making. The results were that consensus decision making brings people together and cements the relationship among employees. The lone ranger’s decision is only consented to by staff but inwardly disagreeable resulting in short term benefits but long term collapse of organizations. Key Words: Decision Making, Lone Ranger’s Decisions, Consensus Decisions * University of South Africa, South Africa

1. Introduction

Some leaders turn themselves into martyrs. They

think if they want something done they might as well

do it themselves (Taylor, 1998). They take pride in

making all the decisions, coming up with all the

ideas, and doing all the 'big jobs' personally rather

than delegate them. These lone ranger leaders believe

that because they carry such a load they are

indispensable and have great value. Just the opposite

is true. Lone ranger leaders are typically

micromanagers and oftentimes they will grow their

company - to a point - because micromanagement

does produce success, but it is limited and only in the

short term. However, because they fail to grow

others, they ultimately limit their team, their

organization and themselves. They fail to grow and

plateau and so do the people and organization they

lead. It takes a strong leader to push power down the

ladder instead of hoarding it at the top. It takes an

unselfish leader to invest time, money and resources

in the development of others. Leaders who make all

the decisions, come up with all the ideas and carry the

load themselves are the weakest of leaders and here's

why:

One reason a leader would assume a lone

ranger mentality is if he or she had not taken

the time to teach others to think for

themselves, empower them to act and decide,

train and mentor them to grow personally. But

these tasks are the highest callings of

leadership and leaders that shirk them are

selfish, limited and weak.

The second reason a leader becomes a 'one

man show' is because the people around him

or her aren't competent and unworthy of

empowering to act, make decisions and share

the load. This too is a sign or severe leadership

weakness and solely the leader's fault since he

or she is responsible for building the team,

training them, creating an environment where

they can succeed, setting expectations and

motivating them to become more and do more.

It's time for weak leaders to stop believing that

the measure of their success is how much they do

how far they go and how much they get. A much

truer measure of a leader is how many people he or

she takes with them on the journey. This article is

going to explore the models, roles, tools and methods

of consensus decision making.

2. Research Methodology: Descriptive research methodology

For the purpose of this study a descriptive research

methodology has been adopted, because it is

restricted to factual registration and that there is no

quest for an explanation why reality is showing itself

this way (Tsang, 1997). In principle, descriptive

research is not aiming at forming hypotheses or

development of a theory (Creswell, 2002). Through

document analysis descriptive research isabout

describing how reality is in the natural ecosystem.

With descriptive research in its purest form

explaining and evaluating is left to the reader or to

other disciplines (Krathwohl, 1993).


549

Hanson et al., (2005) argued that documents are

unobtrusive and can be used without imposing on

participants; they can be checked and re-checked for

reliability. This methodology emphasizes an

integrated view of speech/texts and their specific

contexts. Texts in documentary analysis can be

defined broadly as books, book chapters, essays,

interviews, discussions, newspaper headlines and

articles, historical documents, speeches,

conversations, advertising, theater, informal

conversation, or really any occurrence of

communicative language (Robson, 2002).

3. Consensus decision-making as collective intelligence

Consensus decision-making is a group decision-

making process that seeks the consent of all

participants (Bressen, 2007). Consensus may be

defined professionally as an acceptable resolution,

one that can be supported, even if not the "favorite"

of each individual. Consensus is defined by Merriam-

Webster as, first, general agreement, and second,

group solidarity of belief or sentiment. It has its

origin in the Latin word cōnsēnsus (agreement),

which is from cōnsentiō meaning literally feel

together(Merriam-Webster 2004)

It is used to describe both the decision and the

process of reaching a decision. Consensus decision-

making is thus concerned with the process of

deliberating and finalizing a decision, and the social

and political effects of using this process.

Aims of consensus decision-making in

organizations against lone ranger decision

(Michaelsen, & Black, 1989)

Agreement Seeking: A consensus decision

making process attempts to help everyone get

what they need

Collaborative: Participants contribute to a

shared proposal and shape it into a decision

that meets the concerns of all group members

as much as possible

Cooperative: Participants in an effective

consensus process should strive to reach the

best possible decision for the group and all of

its members, rather than competing for

personal preferences.

Egalitarian: All members of a consensus

decision-making body should be afforded, as

much as possible, equal input into the process.

All members have the opportunity to present,

and amend proposals

Inclusive: As many stakeholders as possible

should be involved in the consensus decision-

making process.

Participatory: The consensus process should

actively solicit the input and participation of

all decision-makers.

3.1 Consensus Process

There are multiple stepwise models of how to make

decisions by consensus. They vary in the amount of

detail the steps describe. They also vary depending on

how decisions are finalized. The basic model

involves:

collaboratively generating a proposal,

identifying unsatisfied concerns, and then

Modifying the proposal to generate as much

agreement as possible.

After a concerted attempt at generating full

agreement, the group can then apply its final decision

rule to determine if the existing level of agreement is

sufficient to finalize a decision.

3.2 Models of consensus decision making

Muo & Oghojafor, (2012) identified the following

models of decision-making.

Quaker-Based model

Quaker-based consensus is effective because it puts in

place a simple, time-tested structure that moves a

group towards unity. The Quaker model has been

employed in a variety of secular settings. The process

allows hearing individual voices while providing a

mechanism for dealing with disagreements. The

following aspects of the Quaker model can be

effectively applied in any consensus decision-making

process.

Multiple concerns and information are shared

until the sense of the group is clear.

Discussion involves active listening and

sharing information.

Norms limit number of times one asks to

speak to ensure that each speaker is fully

heard.

Ideas and solutions belong to the group; no

names are recorded. Differences are resolved

by discussion. The facilitator ("clerk" or

"convenor" in the Quaker model)

Identifies areas of agreement and names

disagreements to push discussion deeper.

The facilitator articulates the sense of the

discussion, asks if there are other concerns,

and proposes a "minute" of the decision.

The group as a whole is responsible for the

decision and the decision belongs to the group.

The facilitator can discern if one who is not

uniting with the decision is acting without

concern for the group or in selfish interest.

Dissenters' perspectives are embraced.

Key components of Quaker-based consensus

include a belief in a common humanity and the ability

to decide together. The goal is "unity, not unanimity."

Ensuring that group members speak only once until

others are heard encourages a diversity of thought

(Muo & Oghojafor, 2012)


550

CODM Model

Hartnett, (2011) propounded the Consensus-oriented

decision-making (CODM Model). The model offers a

detailed step-wise description of consensus process. It

can be used with any type of decision rule. It outlines

the process of how proposals can be collaboratively

built with full participation of all stakeholders. This

model lets groups be flexible enough to make

decisions when they need to, while still following a

format based on the primary values of consensus

decision-making. The CODM steps include:

Framing the topic

Open Discussion

Identifying Underlying Concerns

Collaborative Proposal Building

Choosing a Direction

Synthesizing a Final Proposal

Closure

4. Roles in consensus decision making

The consensus decision-making process often has

several roles designed to make the process run more

effectively. Although the name and nature of these

roles varies from group to group, the most common

are the facilitator, a timekeeper, an empathy and a

secretary or notes taker. Not all decision-making

bodies use all of these roles, although the facilitator

position is almost always filled, and some groups use

supplementary roles, such as a Devil's advocate or

greeter. Some decision-making bodies opt to rotate

these roles through the group members in order to

build the experience and skills of the participants, and

prevent any perceived concentration of power

(Mohammed, & Ringseis, 2001)

The common roles in a consensus meeting are:

Facilitator: As the name implies, the role of the

facilitator is to help make the process of

reaching a consensus decision easier.

Facilitators accept responsibility for moving

through the agenda on time; ensuring the group

adheres to the mutually agreed-upon mechanics

of the consensus process; and, if necessary,

suggesting alternate or additional discussion or

decision-making techniques, such as go-

arounds, break-out groups or role-playing. Some

consensus groups use two co-facilitators. Shared

facilitation is often adopted to diffuse the

perceived power of the facilitator and create a

system whereby a co-facilitator can pass off

facilitation duties if he or she becomes more

personally engaged in a debate.

Timekeeper: The purpose of the timekeeper is to

ensure the decision-making body keeps to the

schedule set in the agenda. Effective

timekeepers use a variety of techniques to

ensure the meeting runs on time including:

giving frequent time updates, ample warning of

short time, and keeping individual speakers

from taking an excessive amount of time.

Empathy or 'Vibe Watch': The empathy, or 'vibe

watch' as the position is sometimes called, is

charged with monitoring the 'emotional climate'

of the meeting, taking note of the body language

and other non-verbal cues of the participants

(Verma, 2009).. Defusing potential emotional

conflicts, maintaining a climate free of

intimidation and being aware of potentially

destructive power dynamics, such as sexism or

racism within the decision-making body, are the

primary responsibilities of the empathy.

Note taker: The role of the notes taker or

secretary is to document the decisions,

discussion and action points of the decision-

making body

4.1 Tools and methods used in consensus decision making

Non-verbal means of expression can also reduce

contention or keep issues from spreading out in time

across an entire meeting. Various methods of agenda

control exist, mostly relying on an explicit

chairperson with the power to interrupt off-topic or

rambling discourse. This gets more difficult if there is

no such chair and accordingly the attitude of the

entire group must be assessed by each speaker.

Verbal interruptions inevitably become common,

possibly in the form of grumbling, muttering, and

eventually sharp words, if there is no effective means

of cutting off persons making false factual statements

or rambling off a topic. The Levi Hand Signal

Technique (LHST) employed by Otesha

http://otesha.ca/content/meetingfacilitation) "allows

meeting participants to register their intent to make

two distinct kinds of comments: those that are

directly in response to someone else's comment

('reactive comments') and those that are separate

thoughts ('unique comments'). Intent to register a

reactive comment is signaled by a different hand

signal than is intent to register a unique comment. An

index finger is used for the former and a full hand for

the latter. This clears direct responses to a contentious

comment faster—and makes it harder to insert it in a

long speakers' list and count on a long delay between

the utterance and the challenge to create the

appearance of agreement. "Twinkling fingers",

similarly, is a nonverbal way of expressing strong

agreement, similar to applause but without the

interruption and possibly less intimidation of

disagreement than applause or cheers can create.

4.2 Colored cards

Some consensus decision-making bodies use a system

of colored cards to speed up and ease the consensus

process. Most often, each member is given a set of

three colored cards: red, yellow and green. The cards


551

can be raised during the process to indicate the

member's input. Cards can be used during the

discussion phase as well as during a call for

consensus. The cards have different meanings

depending on the phase in which they are used. The

meanings of the colors are:

Red: During discussion, a red card is used to

indicate a point of process or a breach of the

agreed upon procedures. Identifying off topic

discussions, speakers going over allowed time

limits or other breaks in the process are uses

for the red card. During a call for consensus,

the red card indicates the member's opposition

(usually a "principled objection") to the

proposal at hand. When a member, or

members, use a red card, it becomes their

responsibility to work with the proposing

committee to come up with a solution that

works for everyone.

Yellow: In the discussion phase, the yellow

card is used to indicate a member's ability to

clarify a point being discussed or answer a

question being posed. Yellow is used during a

call for consensus to register a stand aside to

the proposal or to formally state any

reservations.

Green: A group member can use a green card

during discussion to be added to the speakers

list. During a call for consensus, the green card

indicates consent.

4.3 Hand signals

Hand signals are often used by consensus decision-

making bodies as a way for group members to

nonverbally indicate their opinions or positions. They

have been found useful in facilitating groups of 6 to

250 people. They are particularly useful when the

group is multi-lingual (Saint, & Lawson, 1994). The

nature and meaning of individual gestures varies from

group to group. Nonetheless, there is a widely

adopted core set of hand signals. These include:

wiggling of the fingers on both hands, a gesture

sometimes referred to as "twinkling", to indicate

agreement; raising a fist or crossing both forearms

with hands in fists to indicate a block or strong

disagreement; and making a "T" shape with both

hands, the "time out" gesture, to call attention to a

point of process or order. One common set of hand

signals is called the "Fist to-Five" or "Fist-of-Five".

In this method each member of the group can hold up

a fist to indicate blocking consensus, one finger to

suggest changes, two fingers to discuss minor issues,

three fingers to indicate willingness to let issue pass

without further discussion, four fingers to affirm the

decision as a good idea, and five fingers to volunteer

to take a lead in implementing the decision. A similar

set of hand signals are used by the Occupy Wall

Street protesters in their group negotiations (Saint, &

Lawson, 1994). Another common set of hand signals

used is the "Thumbs" method, where Thumbs Up =

agreement; Thumbs Sideways = have concerns but

won't block consensus; and Thumbs Down = I don't

agree and I won't accept this proposal. This method is

also useful for "straw polls" to take a quick reading of

the group's overall sentiment for the active proposal.

A slightly more detailed variation on the thumbs

proposal can be used to indicate a 5-point range: (1)

Thumb-up = strongly agree, (2) Palm-up = mostly

agree, (3) Thumb Sideways = "on the fence" or

divided feelings, (4) Palm down = mostly disagree,

and (5) Thumb down = strongly disagree.

4.4 Consensus is not Groupthink

Consensus seeks to improve solidarity in the long run.

Accordingly it should not be confused with unanimity

in the immediate situation, which is often a symptom

of groupthink. Studies of effective consensus process

usually indicate a shunning of unanimity or "illusion

of unanimity" that does not hold up as a group comes

under real world pressure (when dissent reappears).

Cory Doctorow, Ralph Nader and other proponents of

deliberative democracy or judicial-like methods view

the explicit dissent as a symbol of strength (Merton,

2012). Lawrence Lessig considers it a major strength

of working projects like public wikis (Lessig, 2006

5. Conclusion and recommendation

Business performance in the knowledge economy is

no longer just about producing and interpreting facts,

but also about mobilizing the tacit knowledge through

the consensus decision-making. Gone are the times

when lone rangers like Jack Welch used to do it

alone. Like collective intelligence of bees, people in

an organization need to work together, to think

together. A shared vision is likely to be followed by

everybody in the organization unlike the one imposed

on people. In this case the role of a manager and of a

leader is to consult, facilitate and serve each

individual in the workgroup. This means to never be a

lone ranger or a traditional boss, never be one to

hoard information, and never be one to make all the

decisions. Even God consulted the angels when He

Said, "Let us make human beings in our image, to be

like us”.

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A STUDY ON THE EFFECTIVENESS OF THE ORIENTATION PROCESS AND CROSS-CULTURAL

TRAINING FOR THE EXPATRIATE

Maxwell Agabu Phiri*, Nevoshnee Pillay*

Abstract

This paper focuses on the effectiveness of the orientation process and cross-cultural training (CCT) and its impact on cross-cultural adjustment for the expatriate. The objective of the study on which this paper is based is to evaluate the effectiveness of the orientation process for expatriates and to determine the need for a separate orientation and culture training. By improving the orientation process and identifying a need for culture specific training, the company can thus eliminate relocation and replacement costs. The main objective of this research is to design a guideline for the implementation of a culture specific orientation process for the expatriate. This will be done based on the recommendations made by the respondents of the survey. The paper reviews different writings in the areas of cross-cultural training, cross-cultural adjustment, the orientation process and the expatriate. The study highlights specific issues regarding cultural training, assignment failure and success, and the expatriate experiences. The research is motivated by the need to reduce assignment failure and the subsequent costs associated with engaging expatriation, and ensure smooth transition into a new culture. The research methodology utilized was qualitative, based on structured questionnaires and personal interviews. The study attempts to recommend, based on the findings, a culture centered orientation process for the expatriate. Key Words: Expatriation, Cross-Cultural Training, Orientation Process, Cross-Culture Adjustment, Culture Shock, Globalization * School of Management of the University of KwaZulu-Natal, South Africa

Introduction

As enterprises develop globally, there is a growing

challenge to utilize expatriates in international

assignments to complete strategically significant tasks

(Brewster 1998; Downes and Thomas 1999;

Gregersen and Black 1996). Multinational

corporations (MNCs) utilize expatriates, not only for

reasons of corporate organization and expertise in

critical global markets, but also to smooth the process

of entry into new markets or to extend international

management abilities (Bird and Dunbar 1991;

Boyacigiller 1991; Forster 2000; Rosensweig 1994;

Shaffer, Harrison and Gilley 1999). For that reason,

in order to maintain competitive in today’s

international marketplace, enterprises not only

acknowledge that transferring competent employees

adds crucial skill and knowledge to their overseas

performances, enabling them to compete more

efficiently in all international positions, but also

expatriate employees, particularly managerial and

professional employees, are vital to the success of

overseas assignments such as implementing

international corporate tactics and managing and

coordinating subsidiaries (Black, Gregersen and

Mendenhall 1992). Expatriates are able to play

tremendously significant roles during worldwide

assignments. Expatriating employees out of the parent

company to work in an overseas subsidiary serve

three major functions: filling staff vacancies,

management development and organizational

development (Edstrom and Galbraith 1997; Ondrack

1985; Tung 1982).

Expatriates undertake executive practices in an

unfamiliar work context; deal with a different mode

of life and experience profound personal

transformation. ‘Culture shock”, the stress and

alienation experienced when confronted with

normally incomprehensible surroundings (Odberg

1960), sets the expatriate job apart from other jobs

and is repeatedly revealed as the primary cause of an

ineffective or unsuccessful expatriate assignment. As

a result a great deal of expatriate management

literature has paid attention to the management of

cross cultural adjustment (Berry, Kim and Boski

1998; Black and Gregerson 1991; Harris and Moran

1989). This focus appears reasonable when the high

cost of expatriate failure, attributed to incapability to

adjust (Adler 1986), is well considered. Expatriates

are regarded as to have “failed” in their overseas

assignment if they return to the parent company

prematurely.


554

In fact virtually 40 percent of American

expatriates return earlier than they planned (Kealey

1996). A number of factors may contribute to this

phenomenon, including difficulty in adjusting to

different physical or cultural environments, family-

related problems, personality or emotional maturity

issues, job-related technical competence, and lack of

motivation to work overseas. For both employees and

their families, adjusting to life overseas can be

regarded as a significant barrier (Black and Gregerson

1991; Tung 1988). Adjustment literature (Black 1998;

Nicholson and Imaizumi 1993; Shaffer and Harrison

1998) suggests that expatriates who do not adjust

satisfactorily to their international assignments will

not function well, will withdraw psychologically, and

will almost certainly return prematurely. The better

adjusted expatriates are, the more likely they will be

to complete their overseas assignment (Kramer,

Wayne and Jaworski 2001; Stroh, Dennis and Cramer

1994). Accordingly, well adjusted expatriates will be

more competent in and committed to their new job

because they experience less stress and better cultural

integration (Aycan 1997b). An expatriate’s successful

adjustment to the host culture environment is shown

over and over again to be the leading determinant of

expatriate’s job performance. For this reason, the

importance of cross-cultural training cannot be over-

emphasised.

Background of the Research

As the world continues to become globalised, firms

are being required to manage an increasingly diverse

workforce with expatriation being just a subset of this

challenge. As more and more companies go global,

the expatriates who help to run overseas operations

are becoming an increasingly critical asset, often

making the difference between a company’s success

and failure in the marketplace. Any workplace in any

society in the world is always a very dynamic and

complex environment with a host of variables and

forces at work that influence social interaction

patterns and resultant levels of productivity and

performance. The cross cultural workplace has an

even higher level of dynamic complexity because you

have culture shaped institutional structures and norms

interacting with people of different cultures.

It is a fairly common organisational practice to

ship expatriate families abroad with hardly any or no

preparation for the substantial transitions they are to

experience. Yet troubles with culture adaptation are

one of the major reasons why expatriate assignments

fail. International assignees would be better equipped

to handle cultural adjustments if organisations were

more consistent in providing pre-departure culture

and language training programs. An effective pre-

departure culture and language orientation program

can be developed that would adequately prepare

expatriates and their families.

Employees to be assigned overseas should be

given cross-cultural training so that they will be able

to deal with difficulties associated with living and

working in another country. Potential problems

include family lifestyle adjustment, social relations,

on-the-job-communications, and negotiation styles.

Organisational support for international employees

can improve the success rate of these expatriates.

With personnel who are equipped to deal with global

issues, companies can better cope with the increasing

globalisation of the business world.

Most business leaders focus on the functional

skills needed for international work and overlook the

importance of cultural knowledge. But most

expatriate failures aren’t caused by problems with job

skills. They are caused by an inability to adapt to an

unfamiliar culture. This paper focuses on the

usefulness of the orientation process for the expatriate

and its contribution to the successfulness of an

overseas assignment.

Companies today are challenged to expand

globally. Employees often work outside their country

of origin or work with employees from other

countries. Expatriate is a term generally used for

employees sent by a company in one country to

manage operations in a different country. Once an

expatriate manager has been selected, it is necessary

to prepare that manager for the upcoming assignment.

Because these individuals already possess job-related

skills, some firms have focused development efforts

on cross cultural training. However, cultural training

is hardly universal. According to one 1995 survey,

nearly 40 percent of the respondents offered no cross

cultural preparation to expatriates. Cross cultural

preparation involves educating expatriates and their

families who are to be sent to a foreign country. To

successfully conduct business in the global

marketplace, the employees must understand the

business practices and the cultural norms of different

countries (Noe, 2000).

Motivation for the Research

The main objective of the research for this article is to

design a guideline for the implementation of a culture

specific orientation process for the expatriate. A

survey by the Simon Fraser University in British

Columbia was conducted to evaluate the expectations

of expatriates assigned in overseas operations and

how they felt about their jobs in such settings. Results

from some 409 employees from 49 multinational

companies revealed that while most reviewed

overseas assignment as positive, more that 2 out of 3

believed that they could have been better prepared

through cross cultural training and information. The

lack of information and training not only adds to the

stress of relocation but also extends the time it takes

for expatriates to feel comfortable in their new

environment. Furthermore, the survey found out that

while expatriates generally enjoy working overseas,


555

more than two thirds believe that their companies are

not doing a satisfactory job of providing a clear

preview of what to expect from assignments. In

addition two-thirds said that companies do not pay

enough attention to cross cultural training. This lack

of information and training not only adds to the stress

of relocation but also extends the time it takes for

expatriates to feel comfortable in their new

surroundings. Managers need to consider the effect of

such neglect on productivity (Fishman, 1996).

To be successful in overseas assignments,

expatriates need to be:

Competent in their area of expertise.

Able to communicate verbally and non-

verbally in the host country.

Flexible, tolerant of ambiguity, and sensitive

to cultural differences.

Motivated to succeed, able to enjoy the

challenge of working in other countries, and willing

to learn about the host country’s culture, language

and customs.

Supported by their families (Arthur &

Bennet, 1995).

One reasons for U.S expatriates’ high failure is

that companies place more emphasis on developing

employees’ technical skills than on preparing them to

work in other cultures (Noe, 2000).

Noe et al (2000) states that foreign assignments

consists of three phases: 1.pre-departure. 2. On-site.

3. Repatriation. Pre-departure is of particular

relevance to this study as, at this stage, the employees

need to receive language training and an orientation

in the new country’s culture and customs. It is critical

that the family be included in the orientation

programmes. Cross cultural training methods range

from the presentational techniques, such as lectures

that expatriates and their families attend on the

customs and culture of the host country; to actual

experiences in the home country in culturally diverse

communities.

The Research Problem Statement

With globalisation, expatriation is becoming

increasingly important and with the costs involved in

this process, it is imperative to be properly oriented

and with not just the company, but with the culture of

the country as well. This article then aims to look at

the orientation process and to provide a set of

guidelines for proper cross cultural training. This

article will discuss the effect that cultural orientation

has on the success of the assignment given to the

expatriate.

The study investigated the perceived uses or

purposes of assessing employee-customer service

interactions, including the perceived fairness of the

assessment process, and how perceptions of fairness

relate to employee satisfaction with assessment

outcomes. Before employees can develop an opinion

on the fairness or unfairness of the assessment tool

utilized by the organization, they must first

understand the objectives of the system. These

objectives could be: the improvement of the

organizational/customer relationship, rating

employees’ effectiveness or generating an input into

remuneration or promotion decisions.

The study attempted to gain insight into the

perceptions of the people who interact with customers

and who are the recipients of the outcomes of the

appraisal or assessment process, in terms of their

views on the uses or functions associated with this

tool. In addition, it is necessary to understand whether

employees perceive that the outcomes from the tool

used to assess their performance are fair as well as

their satisfaction with the assessment outcomes.

Testing the relationship between employees’

perception of fairness and their satisfaction with the

assessment outcomes, encompassing the impact of

fairness on satisfaction with assessment outcomes,

can then be carried out.

Objectives of the Study

The objective of the research for the article was to

evaluate the effectiveness of the orientation process

for expatriates and to determine a need for a separate

orientation and culture training. By improving the

orientation process and identifying a need for culture

specific training, the company can thus eliminate

relocation and replacement costs.

Literature review

With globalization, international assignments have

always played an important role in the operations and

activities of multinational companies. A lot of

enterprises have invested their ventures in foreign

countries to avoid the high cost of land and labour,

also the shortage of manpower. The research

literature on international expatriates is reasonably

consistent in reporting rather high failure rates among

these expatriates (Black, 1998; Dunbar and Ehrlich,

1986). The costs related to these expatriate failures

are relatively high as well (Black, 1998; Oddou,

1991; Stone, 1991; Wederspahn, 1992). It has been

estimated that the first year cost of posting expatriates

on international assignments is no less than three

times the base salaries of their domestic counterparts

(Wederspahn, 1992). However, sixteen percent to

forty percent of overseas assignments are still not

successful in the end (Black, 1988), and costs of

expatriates have increased from as much as

US$250,000 a decade ago (Copeland and Griggs

1985) to US$1 million per failure for U.S. enterprises

(Shannonhouse, 1996). Even though the cost of

expatriates is fairly high, MNCs are increasingly

using plenty of expatriates as an international

strategy, not only for traditional control and expertise

reasons, but also to overcome barriers and smooth the

progress of entry into new markets (Torbiorn, 1994).


556

Due to the internationalization process,

enterprises should devote to provide an adequate

expatriation programme for expatriates due to that

working in a new environment that is dissimilar to

that of the parent company, expatriates are often

faced with an entirely new work role, with increased

challenges, opportunities and prestige, as well as

more responsibilities and pressures to perform

(Harvey, 1985).

The main intention of this section is to present a

general background on the available academic

literature that relates to the study and explores: (1) the

orientations process, (2) expatriate assignment

failure; and (3) cross cultural training and its impact

on cross cultural adaptation.

Orientation Process

Orientation is the planned introduction of new

employees to their work environment and co-workers.

However, since all employees are different, a

sensitive awareness to anxieties, uncertainties and

needs is important. Orientation should not be a

mechanical process. The overall goal of orientation is

to help new employees learn about their new work

environment and get their performance up to

acceptable levels as soon as possible. This impression

begins even before the new employee reports to work.

Providing sufficient information about when and

where to report the first day, handling all relevant

paperwork efficiently, and having personable and

efficient individuals assist the new employee, all

contribute to creating a favorable impression of the

Company

The general ideas that follow highlight the

major components of an effective orientation system:

preparing for new employees, providing them with

needed information, presenting orientation

information effectively and conducting evaluation

and follow-up on the initial orientation.

Often new employees receive a large amount of

information, some of which they may not

immediately need, and at times might fail to get the

information they really need the first day. HR uses an

orientation checklist which indicates items to be

covered by the HR unit and the new employee’s

supervisor or manager. Using an orientation checklist

will ensure that all necessary items have been

covered. The employee signs the checklist to verify

that they have been informed of all pertinent

information.

Orientation is used for the following purposes:

To Reduce Startup-Costs: Proper orientation

can help the employee get "up to speed" much more

quickly, thereby reducing the costs associated with

learning the job.

To Reduce Anxiety: Any employee, when

put into a new, strange situation, will

experience anxiety that can impede his or her ability

to learn to do the job. Proper orientation helps to

reduce anxiety that results from entering into

an unknown situation, and helps provide guidelines

for behaviour and conduct, so the employee doesn't

have to experience the stress of guessing.

To Reduce Employee Turnover: Employee

turnover increases as employees feel they are not

valued, or are put in positions where they can't

possibly do their jobs. Orientation shows that the

organizations values the employee, and help provide

tools necessary for succeeding in the job.

To Save Time for Supervisor & Co-

Workers: Simply put, the better the initial orientation,

the less likely supervisors and co-workers will have

to spend time teaching the employee.

To Develop Realistic Job Expectations,

Positive Attitudes and Job Satisfaction: It is important

that employees learn early on what is expected of

them, and what to expect from others, in addition to

learning about the values and attitudes of the

organization. While people can learn from

experience, they will make many mistakes that are

unnecessary and potentially damaging.

Basic Elements of the Orientation Process

1. Orientation should begin with the most

important information (basic job survival).

2. Orientation should emphasize people as well

as procedures and things. Employees should have a

chance to get to know people and their approaches

and styles in both social and work settings.

3. Buddy an employee to a more experienced

person, but make sure the more experienced person

wants to buddy up, and has the inter-personal skills.

This provides ongoing support.

4. Introduce employees to both information and

people in a controlled way. A new employee can't

absorb everything at once, so don't waste your time.

The need for cross-cultural training

Researchers (Black and Mendenhall, 1989;

Mendenhall, Dunbar and Oddou, 1987) estimated that

20 to 40 percent of expatriates posted to perform

international assignments return prematurely due to

the incapability of the expatriate and their spouse to

adapt to a new culture and environment. For this

reason, cross cultural training can smooth the

progress of efficient adjustment and performance, and

is essential for financial and strategic issues. Chen

and Starosta (1996) believe that people have to

develop their intercultural communication

competence in order to live meaningfully and

productively in the global village. According to

Landis and Brislin (1983), as the workforce in various

countries becomes more culturally diverse, it is

necessary to train people to become more competent

and thus to deal effectively with the complexities of

new and different environments. Thus, the issue of

cross-cultural training in developing intercultural

communication competence can no longer be


557

neglected. People who are sent abroad must develop

such competence in order to be successful. Cross-

cultural training has long been advocated as a means

of facilitating effective cross-cultural interaction

(Bochner, 1982; Harris and Moran, 1979; Landis and

Brislin, 1983; Mendenhall and Oddou, 1986; Tung,

1981). The importance of such training in preparing

an individual for an intercultural work assignment has

become increasingly apparent (Baker, 1984; Lee,

1983; Tung, 1981). As Bhagat and Prien (1996, p.

216) put it, ``as international companies begin to

compete with each other in the global market, the role

of cross-cultural training becomes increasingly

important.'' A comprehensive literature review by

Black and Mendenhall (1990) found strong evidence

for a positive relationship between cross-cultural

training and adjustment. In addition, another survey

revealed that 86 percent of Japanese multinationals

report a failure rate of less than 10 percent for their

expatriates who have received training (Hogan and

Goodson, 1990).

Numerous benefits can be achieved by giving

these expatriates cross cultural training. It is seen as:

a distinct advantage for organizations;

a means for conscious switching from an

automatic, home-culture international management

mode to a culturally appropriate, adaptable and

acceptable one;

an aid to improve coping with unexpected

events or culture shock in a new culture;

a means of reducing the uncertainty of

interactions with foreign nationals; and

a means of enhancing expatriates' coping

ability by reducing stress and disorientation.

It can reduce or prevent failure in expatriate

assignments (Giacolane and Beard, 1994).

Furthermore, in a survey of 200 corporate clients,

Berlitz International found that companies needed

cultural orientation training programs more than

foreign language training (Lubin, 1992).

Further benefits of receiving cross cultural

training prior to relocation are that it:

Prepares the individual/family mentally for

the move,

Removes some of the ‘unknown’,

Increases self-awareness and cross cultural

understanding,

Provides the opportunity for questions /

anxieties to be addressed in a supportive

environment,

Motivates and excites,

Reduces stress and provides coping

strategies,

Eases the settling-in process,

Reduces the chances of relocation failure.

As the world continues to become globalised,

firms are being required to manage an increasingly

diverse workforce and expatriation being just a subset

of this challenge (Deresky, 2000). As a result,

expatriation has been popularly used as means by

which information sharing and knowledge transfers

can be undertaken (Harzing and Van Ruysseveldt

2003).

The importance of training in preparing an

individual for an intercultural work assignment has

become increasingly apparent (Baker, 1984; Lee,

1983; Tung, 1981).

A major objective of intercultural training is to

help people cope with unexpected events in a new

culture. An individual overwhelmed by a new culture

will be unable to perform required work duties

effectively. Further, an ill-prepared individual may

inadvertently offend or alienate a foreign host and

perhaps jeopardize existing long term relations with a

host country. Thus, an objective of training is to

reduce conflict due to unexpected situations and

actions. The generalized trauma people experience in

new and different cultures because they must learn

and cope with a vast array of new cultural cues and

expectations is referred to as culture shock (Harris &

Moran, 1987:88-89).

Cross-Cultural Training Models

Three models of cross- cultural training will be

discussed in this section: the acculturation model, the

training effectiveness model and the integrated cross-

cultural training model. Before expanding on the

various models of cross-cultural training it is

imperative that we first have an understanding of the

cross-cultural cycle.

The above model is based on the concept of

“cultural change,” which represents a transition

between one’s own culture and a new culture.

Cultural change is part of a problem-solving process

undergone by users (Havelock, 1963; Conner, 1993).

Here, the users are identified as sojourners and

expatriates who experience a new culture which is

unfamiliar and strange. In the initial stage of

confrontation with the new culture, the user

experiences a culture shock. Then, full or partial

acculturation takes place, depending on factors such

as former experience, length of stay, cultural distance

between home and new culture, training, language

competency among other factors. The greater the

user’s ability to acculturate, the less the impact of

culture shock on them. The ability to acculturate and

reduce the impact of the culture shock can be

developed through an appropriate and effective cross-

cultural training. Apart from that, training can also

help the users develop intercultural communication

competence, which is needed to adapt better and

perform well in the new environment. As a result,

once sojourners and expatriates have succeeded in

completing the cycle, they will be more familiar with

it the next time they confront a new culture. The

change process will be improved and become less

complicated. However, the success or failure of the

users to adjust and perform depends on how they

respond to the cycle (Zakaria, 2000).


558

Figure 1. Model of Cross-cultural cycle

Source: Adaptation from Havelock (1963) and Conner (1993)

Figure 2. Acculturation process model

Source: Lazaurus & Folkman (1984), Ward (1988), & Berry (1994)

The acculturation model

Acculturation is defined as, “Changes that occur as a

result of first-hand contact between individuals of

differing cultural origins” (Redfield et al, 1936). It is

a process whereby an individual is socialized into an

unfamiliar or new culture. In short, it refers to the

level of adoption of the predominant culture by an

outsider or minority group. According to Gordon,

1967; Garza and Gallegos, 1985; Domino and Acosta,

1987; Marin and Marin, 1990; Negy and Woods,

1992, the greater the acculturation, the more the

language, customs, identity, attitudes and behaviours

of the predominant culture are adopted. However,

many sojourners and expatriates experience difficulty

in acculturating; only adopting the values and

behaviours they find appropriate and acceptable to

their existing cultures. It is a question of willingness

and readiness (Zakaria, 2000).

The acculturation process begins at the societal

(macro) level, where cultural contact and cross-

cultural communication take place between the

society of origin and settlement. The difference

between the two societies is called the cultural

distance. The societal variables for both societies

consist of four main dimensions, which affect the

acculturation process: social, political, economic, and

cultural. The acculturation process is further

influenced by the variables at the individual level,

which may be divided according to two moderating

factors; characteristics associated with:

the acculturating individual (e.g. personality,

previous training and experience, language

competency, and acculturation strategies); and

Initial Entry In this initial stage, international personnel

travel to diverse cultures

New culture

Cultural contact with a different culture leads

to culture shock. At this point the process of acculturation also takes place

Cultural shock

The impact of culture shock can be reduced by

providing relevant cross-cultural training

programmes

Cross-cultural

Sojournes and

Expatriates

Sojournes and

Expatriates

As a result, international personnel are better adjusted and more prepared to

handle verseas assignment

Cross-cultural training helps to

develop the necessary intercultural

communication competence skills


559

the acculturation situation (e.g. amount and

length of cultural contact, perception of cultural

distance, and amount of life changes).

This model considers culture contact as a major

life event. It is characterized by elements such as

stress, disorientation, and learning deficits; it

demands cognitive appraisal of the situation,

behavioral and affective responses for stress-

management, and the acquisition of culture-specific

skills. All the cultural contact factors, together with

the psychological and socio-cultural outcomes, are

influenced by both the societal and individual-level

variables (Ward, 1988). Ward (1988) further points

out that researchers may also conceptualize

acculturation as relating to the acculturated individual

state in which acculturation is defined and measured

in relation to the three markers: cognitive, behavioral,

and affective. However, she did not define these

states further because her model is framed as an

ongoing process.

The theory of acculturation represented in the

first model (Figure 2) also addresses some essential

issues that have been brought up by intercultural

trainers. For example, Martin (1986) regrets the lack

of conceptual clarity about what constitutes cross-

cultural orientation and which outcomes should be

considered. In response to this, the model offers a

basic distinction between psychological and socio-

cultural adjustments and suggests that adjustment

outcomes can be integrated with training objectives.

Further, this model also supports Martin's claim that

both culture-general and culture-specific training are

relevant to cross-cultural orientation programs.

However, the model has some drawbacks. For

example, although Ward includes macro-factors, such

as politics, social, economics, and culture in both the

society of settlement and society of origin, which

undoubtedly affect individual acculturation, the

macro-factors are given less attention than the

individual-level factors. The individual-level

variables, but not the macro-factors, are shown to be

moderating factors in the acculturation process.

Furthermore, Ward concluded that situational factors

were more relevant than the individual factors. This

implies that, although both factors can moderate the

process of acculturation, the degree of impact each

factors has on the process is different. This may be

true, but the implication can be confusing because, in

the model, both variables were shown to be equal

moderating factors. The model also suggests that

adjustment outcomes can be integrated with training

objectives. The model, however, does not explicitly

show how a training program can play a critical role

in ensuring successful acculturation outcomes.

The training effectiveness model

Figure 3. The training effectiveness model

Source: Bhagat & Prien, 1992

This model developed by Bhagat and Prien

(1996), called intercultural training effectiveness

(Figure 3), was produced on the assumption that a

precise assessment of the various needs associated

with intercultural training needs could be conducted.

Basically there are three main attributes which have

an impact on both training effectiveness and

individual success in overseas assignments, job-

specific, and organizational strategy and culture. The

individual attributes associated with overseas success

include: cognitive flexibility, adaptability, tolerance

for ambiguity, non-ethnocentrism, positive self-

image, outgoingness, cultural sensitivity, intercultural

competence, and extroversion. The job-level

attributes include: level of technical skill, need for

information about the host country and of the

operations headquarters, and complexity of

interpersonal and administrative activities. The

authors felt that these attributes were likely to have

profound complicating effects. At the organizational-


560

level, strategic and cultural factors have the highest

relevance in designing effective training. They ensure

that the training objectives are consistent with the

design of the training program. In addition, cultural

differences or ``cultural distance'' between the

country of origin and the host country also impact on

success in overseas assignments. Following training,

the success of overseas assignees is conceptualized at

three levels: intercultural competency, especially

effectiveness in the work role; organizational success,

reflected in the impact of the training programs; and

training effectiveness from the point of view of the

host country (Triandis, 1994).

In the training model (Figure 3), successful

adjustment in overseas assignments is greatly affected

by cultural differences between the country of origin

and the host country. Again, this is similar to the

acculturation model, which suggests that the culture

of origin and the culture of settlement modify cultural

contact and psychological and socio-cultural

adjustment in a number of ways based on overall

cultural similarities and differences. The unique

significance of the training model lies in its focus on

organizational attributes. These help to highlight such

key questions: whether training is seen as a strategy

to gain competitive advantage, and is incorporated

into the ``work-cultures'' and whether the

organization invests heavily in training and

development (T&D). In essence, the training model

succeeds because it explicitly explains what

constitutes training effectiveness in the cross-cultural

context and defines various variables affecting it.

However, the model also has some limitations. It

assumes that learning is based on the acquisition of

knowledge, rather than on changes of attitudes. In a

cross-cultural setting, training requires not only

recognition, but also acceptance of differences. This

helps the expatriates to make the necessary changes

in attitudes, which may be the most difficult part of

training in a cross-cultural setting. In their review of

cross-cultural training, Hesketh and Bochner (1994)

addressed some of these shortcomings. They

suggested that the training model of Bhagat and Prien

(1996) should be modified and expanded, specifically

in the context of cross-cultural settings. People should

be taught how to learn by developing specific skills,

which, in turn, can be used to adapt and transfer to the

demands of changing jobs in a dynamic environment.

Lastly, they suggested that the focus of training

should be on the trainee, and not on the trainer or the

training method. On the contrary, Bhagat and Prien

(1996) believed that overall effectiveness can be

enhanced only with an explicit, articulated strategy,

which is then incorporated into the design of training.

Thus, some parameters for training design must be

provided. This is because effective and appropriate

training design can have beneficial consequences for

the individuals, organization, and members of the

host country coming into contact with expatriates.

Nevertheless, they also feel that more research is

needed on the links between training and

organizational outcomes, especially in the

commitment of firms towards training resources, in

order to develop training in more meaningful

programs for expatriates.

While the acculturation and training models are

based on two different concepts: the acculturation

process and the effectiveness of training, the factors

affecting the success of the two models are similar.

For example, the individual factors predicting success

in the training model in overseas assignments involve

similar competencies as the individual characteristics

moderating successful adjustments in the

acculturation model.

An integrated cross-cultural training model

The two previous sections presented two models of

acculturation and training effectiveness. However,

both models have certain limitations. Consequently,

both models are combined to create a third model, the

``Integrated Cross-Cultural Training Model,'' which

links the effectiveness of training programs to the

process of acculturation (Figure 4). Cross-cultural

training can help expatriates adjust more successfully

and decrease distressing experiences during the

confrontation of uncertainty in foreign cultures. This

model defines acculturation as both a process and a

state.

This suggested model maintains the same

societal-level variables that were examined in the

acculturation model (Figure 2), with slight but

important modifications in the individual-level

variables. In the original model training and

experience was one of the individual-level

characteristics. However, in this model, training is

explicitly shown as a sub-process to stress the

importance of providing training prior to cultural

contact and before the acculturation process. Some

individual and situational characteristics have also

been added to the individual level of variables by

integrating relevant attributes from the training

effectiveness model (Figure 3). For individuals, these

added characteristics are family support and

willingness to acculturate. The new situational

characteristics are type and length of assignment and

training. The major enhancement in the integrated

model is the addition of another critical process

before cultural contact takes place, both of which are

antecedents to the acculturation process. This new

process is called the moderating process and it

requires effective training programs. The objectives

of the moderating process are: to modify the

individual and situational characteristics; to reduce

such factors of culture shock as stress, disorientation,

and learning and skills deficiency; and to achieve

better acculturation outcomes than by the

unmoderated process alone. Training is the critical

component.


561

Global experts recommended that when the need

to send people abroad arises, overseas personnel and

their families must be given adequate preparation

ahead of time for their new cultural experiences

(Laabs, 1993). The training will help to bring about a

continuous learning process to help them to adapt

better. In fact, it is critical for them to get adequate

preparation, both socio-culturally and

psychologically, if they are to acculturate

successfully.

There are many training programs available

today, but two best enhance situational and individual

characteristics: experiential and cognitive training.

Both types of training add new characteristics to the

situational variables since the types and durations of

training programs have different effects. Length of

assignment is used to classify a person as an

expatriate or visitor, since they need different types of

training programs. Looking next at individual

characteristics, it is important to provide training for

both the individual and family. It is not effective to

prepare only the affected individual for an overseas

assignment since family support has a paramount

impact on the success of adaptation.

The acculturation model (Figure 2) presented

failed to include this element in the acculturation

process, whereas according to Tung (1988), one of

the most frequent reasons for failure relates to the

inability of the family to adapt to life in the host

country. Over 80 percent of the firms surveyed found

that training is only given to the employees and not to

the spouse and family (Arvey et al., 1990). As a

result, many employees return prematurely because of

the spouse's failure to adjust to a dissimilar culture

(Briody and Chrisman, 1991; Solomon, 1994; Tung,

1987). Both individuals and their families have to

adapt. Hence, for successful acculturation, they need

to go through a training process first.

In addition, another new individual

characteristic is willingness to acculturate. Sometimes

expatriates refuse to fully acculturate because of the

many difficulties they face. Instead, they become

bicultural, adopting only those cultural traits or values

they think are relevant to their work performance. By

providing appropriate and effective training programs

before cultural contact, sojourners and expatriates can

develop greater intercultural communication

competence and thus enhance the ability to

acculturate. Once both the situational and individual

characteristics are modified and enhanced by

appropriate training programs, individuals develop

intercultural competence and are prepared to confront

the new culture. Borrowing from Chen and Starosta

(1996), intercultural competency is a three-part

process that leads to cultural awareness, cultural

sensitivity, and cultural adroitness.

Cultural awareness

This cognitive process consists of two main

attributes, self-awareness and cultural awareness.

These attributes provide the framework for

communication competence in a diverse society.

Once people become more self-aware, they tend to be

better at predicting the effects of their behavior on

others. After they learn something about other culture

and begin to understand the cultural ``map'' they

know how to modify their behavior to meet the

expectations of the new society.

Cultural sensitivity

A sojourner must be able to incorporate values, such

as open-mindedness, high self-concept, non-

judgmental attitudes, and social relaxation, in order to

understand the value of different cultures and become

sensitive to the verbal and non-verbal cues of people

from the foreign culture.

Cultural adroitness

With respect to intercultural communication

competence, people learn how to act effectively when

in contact with the new cultural environment. When

they know what to do and what not to do, they will be

able to communicate effectively without offending

any parties.

In this model, three types of intercultural

competence have been explicitly incorporated as

important processes for acculturation, as emphasized

by Chen and Starosta (1996). These competencies are

seen in another form as responses to culture shock.

Training programs, which create better states after

individuals are in contact with the culture, can

moderate the responses of sojourners and expatriates.

After the moderating process, the individual

responses may be different because of intervening

factors such as the situational and individual

characteristics. Different training programs promote

various aspects of competence. For example, while

cognitive training should enhance a person's cognitive

level (i.e. cultural awareness and interpersonal skills),

experiential training should enhance a person's

affective and behavioral levels (i.e. their intercultural

effectiveness skills).

However it is also important to understand that

although training is directly related to competence,

the moderating factors, which consist of both the

situational and individual characteristics, also impact

and give rise to variations in the responses. Training

moderates the initial state prior to cultural contact

thereby optimising the state of cross-cultural

competence. Looking at acculturation from a state

viewpoint can explain a wider range of outcomes in

the Integrated Cross-Cultural Training Model. On the

other hand, training can also make the acculturation

process easier and less stressful by developing both


562

culture-general and specific factors as both training

state and process have a positive relationship to the

outcome. Thus, effective process of acculturation

may achieve an effective state of response.

The importance of the suggested integrated

model has been clearly addressed through the

description of the effects training can have on

acculturation. The next step is to discuss how the

model affects the contrasting skills developed by

experiential and cognitive training affect responses

and outcomes. Experiential training is expected to

enhance personal and family adjustments, as well as

work performance overseas because it tends to

concentrate on individual characteristics rather than

situational ones. Therefore, an experiential training

program should aim to develop intercultural

effectiveness skills, especially the three basic skills of

adaptation, cross-cultural communication, and

partnership. Furthermore, it should include other

skills, such as work transition, stress-management,

relationship building, and negotiation techniques. By

going through an experiential program, individuals

and family members become more sensitive and able

to respect the differences between their culture of

origin and the contact culture. In addition, they learn

skills that will enable them to choose the ``right''

combination of verbal and non-verbal behaviors to

achieve a smooth and harmonious relationship with

their hosts in the foreign culture. These skills enhance

both their affective and behavioral responses, which

in turn, trigger more successful psychological

adjustments. Ward and Kennedy (1993) support this

interpretation in their finding that locus of control,

life changes, social difficulty, and social support

variables are predictors of psychological adjustment.

By contrast, cultural awareness training is a

cognitive method that aims to enhance interpersonal

skills. Such training focuses on understanding the

host culture in a more personally relevant way to

develop performance-enhancing interactive skills.

The best known technique for creating such cultural

awareness is through the self-learning tool called the

``cultural assimilator'' which stimulates and enhances

sojourners' and expatriates' cognitive responses. As a

result of cognitive training, people understand host

social systems and values better (Deshpande and

Viswesvaran, 1992). These cognitive responses then

lead to better socio-cultural adjustments because they

increase the level of satisfaction with the host

national contact; reduce cultural distance; and help

expatriates develop a more positive attitude towards

the host culture. Ward and Kennedy (1993) also

support this as they found that factors associated with

intercultural awareness account for 52 percent of the

variance in socio-cultural adjustments.

The Integrated Cross-Cultural Training Model is

an improved model of acculturation; the explicit

effects of training have been shown prior to cultural

contact and the acculturation process. By looking at

the effects of training theoretically, the model

successfully explains how different types of training

can promote different competencies (both culture and

culture-specific skills) and trigger different responses,

which consequently result in different adjustment

outcomes. The three models (acculturation, training,

and integrated cross-cultural training) share many

common traits or factors. Each model attempts to

describe: a process, which reflects the personal

development of expatriates who interact with foreign

nationals within a specific environment (the foreign

culture) by developing culture-specific and general

skills through training. The first two models differ in

terms of their emphasis, goals, and content; the third

model attempts to reconcile these differences.

While numerous studies have responded to the

issues raised in this paper in the affirmative, there are

also some contradictory responses. According to

Black and Mendenhall (1990), many people are not

convinced that training can do much to resolve

expatriates' working problems, even when they are

fully aware of them. For instance, companies such as

IBM, require as many as forty two hours of

management training on topics such as managing

multinational groups of people and

internationalization. However, surprisingly, many

studies concluded that expatriate employees in this

kind of company still face cross cultural obstacles and

high failure rates in spite of the training efforts.

Overall, the number of expatriate failures has been

variously estimated at between 16 percent to 40

percent by Dowling and Schuler, (1990), 20 percent

to 50 percent by Bird and Dunbar (1991), and

approximately 30 percent by Tung (1987). Although

many scholars agree that training is the best approach

or tool for developing intercultural competence, not

everyone sees it as the principal solution to cultural

problems (Kealey and Protheroe, 1996). Other people

question the effectiveness of cross-cultural training

more explicitly. Since prolonged international

business travel is increasingly important in today's

global market, the need to develop successful training

programs is also critical. Many first-time expatriates

face cross-cultural adaptation problems stemming

from the ignorance both of ``self-culture'' and ``cross-

culture'' and from their tendency to depend on their

previous set of ethnocentric beliefs (Smith, 1998).

Implications

Some of the important implications of inadequate

adjustment to international assignments are:

Costly for both the organizations and

individuals in terms of absenteeism;

Early return to the home country; and

Lower performance according to Tung,

1982; Copeland and Griggs, 1985; Black, 1988.

In order to reduce the numbers of sojourners and

expatriates returning early, Japan Overseas

Educational Services (JOES) provides training over a

period of several months to the wives and families of


563

Japanese businessmen being sent overseas to

psychologically prepare the Japanese women for life

in the new culture (Tung, 1988). In Great Britain, the

Women's Corona Society offers a similar program for

families preparing to live abroad. Both these efforts

emphasize the importance of giving adequate training

prior to cultural contact to better prepare both

expatriates and their families. O'Brien (1998) believes

that the development of specific cross-cultural skills

and competencies are also important. He adds that the

two most important cross-cultural competencies are:

``A mindset that observes successful people and the

ability to modify one's own behavior to work with

that successful person in their culture.'' Learning new

habits of behavior is the outcome of successful

observation and changes in mindset, which both are a

great foundation for cultural awareness and skill

building.

Mindset shift is like the concept of paradigm

shift in change management. One must be able to be

flexible and open to any changes in order to facilitate

the adaptation process, even when it does not involve

national boundaries. Letting go of the existing work

culture, values, and norms, which can be a very

difficult task in one's own culture, is even harder if

different national cultures are involved.

Consequently, many organizations find the best way

to manage change in order to achieve success, reduce

resistance, and increase receptiveness is through

continuous training. Courses should be given to

employees on a regular basis to increase their skills

and knowledge and maintain their mental flexibility.

Employees on overseas assignments need even more

support. Without such training, business exchanges

involving different national cultures have often been

difficult.

According to O'Brien (1998), the effectiveness

of training depends largely on how ``trainable'' people

are. He points out that many top management people

refuse to receive training because they feel, that being

at the top, they should already know about cross-

cultural communication. However, O'Brien (1998)

argues that, regardless of position or past experiences,

training can always help people increase their

knowledge and develop new competencies. One

should not regard training as limited to a period of

time; instead it should be a continuous education.

Training should achieve the desired result if

organizations and individuals put the same level of

effort, commitment, and motivation into identifying

and achieving common goals throughout the business

person's sojourn. The organization has a role to play

in ensuring that people are given an adequate amount

of knowledge and skills, strong support, and clearly

communicated goals. Individuals also need to be

willing to face the new culture, look forward to

meeting a diverse group of people, and, most of all,

be willing to make the necessary mental and social

adjustments. Such individuals play an interface role

in the confrontational organization and foreign

cultures.

Training expatriates

The study identifies several new areas for training the

better prepared expatriate. Current thinking advocates

two types of training:

language training for improved

communication in the host environment (Andreason,

2003); and

cultural training for intelligent

responsiveness in different psychosocial and cultural

milieus (Tung, 1982; Yavas and Bodur, 1999).

Descriptions of best practices in expatriate training

are also reported in the literature (Tung, 1987).

There are, however, two issues relevant to real-

world expatriate experiences that remain

unaddressed. First, expatriate training in any

meaningful form seems largely absent in practice,

resonating with the writings of Forster (2000) and

Leiba-O'Sullivan (1999). It is found that pre-

departure training, when it occurs, is often limited to

provision of materials to familiarize managers with

facts about the host-country and the key aspects of

their overseas assignment. Second, while we can see

how pre-departure training in language and culture

can be useful to expatriate managers, such training

seems inadequate for managing some of the key

challenges of their day-to-day reality; i.e. unexpected

situations that require extensive renegotiation, ethical

dilemmas that defy solutions, and the loss of

composure and temper that can severely impede

effectiveness. Provision of facts and figures, and

language training, however, does not make a training

program. Our study implicates pre-departure training

in skills such as active listening, ethical reasoning,

and conflict management. Additional research and

new thinking about training is clearly needed for

developing well-prepared expatriates.

In this regard, the use of sensitivity training to

help expatriates suspend judgment, listen, reason, and

win hearts and minds in foreign locations is clearly

implicated. Our sample suggests that they need to

learn:

new and effective ways of building

relationships and trust with people in foreign

locations; and

Informed perspectives into how host

nationals define and interpret situations, and why they

behave the way they do in light of their culture-bound

interpretations.

While scholars have referred to the importance

of such sensitivity training (Cavusgil et al., 1992;

Dowling et al., 1999), and computer-assisted learning

modules seem available (Cushner and Landis, 1996),

practice has trailed the thinking in the literature by a

wide margin. Future research on the following is

forthcoming:


564

types and methods of pre-departure training

that firms actually provide their expatriate managers;

and

contrasting those expatriates who receive

interpersonal skills training versus those who do not

in terms of their cross-cultural adjustment.

Research methodology

Predominantly there are two types of research

methods, a qualitative and a quantitative approach.

The former approach uses methods to collect

descriptive and contextually situated data to seek an

understanding of human experiences (Mann and

Stewart 2000). The latter approach presents data as

numerical relationships and typically has a formalized

form and style (Glesne and Peshkin 1992). This study

was undertaken using qualitative research methods,

which Maxwell (1996) identifies its strength to be

their inductive approach. The qualitative approach

was ideal for this research project for two main

reasons: (1) theories and results are derived that are

understandable and experientially credible to the

sample group and others and (2) conducting

formative evaluations will help to improve existing

literature rather than simply assessing the value of it.

Therefore a quantitative approach was believed to be

insufficient, as presenting data in numerical terms

would not have captured the human element of the

responses or provide in-depth explanations that were

sought after (Van Maanen, Dabbs and Faulkner

1982).

Data Collection

Data was collected in two ways: personal interviews

and emailed responses. Firstly, personal interviews

were conducted in the form of semi-structured

interviews. This format allowed the researcher to

encourage conversations from participants, and gave

participants the flexibility to contribute additional

information that they thought were relevant to the

research topic (Mann and Stewart 2000). Interviews

took place at a mutually agreed place and time, and

all personal interviews were recorded on audiotape

and subsequently transcribed. The tape recording

helped maximize accuracy and enabled the researcher

to concentrate on the quality of the responses rather

than on writing down the responses.

The use of the semi-structured, open-ended

questionnaire is described by Jankowicz (1995:195)

as being characterized by the fact that:

Content and sequence are not fully specified in

advance, but the researcher has a clear idea of his/her

purpose.

Questionnaires are open-ended, so respondents

are encouraged to use their own words. While a script

of guideline questions may be developed, the

researcher’s actual questions will be led by the

prevailing atmosphere and rapport between the

participants. There are four techniques that can be

used, namely, conversation, the individual interview,

key informant interview and focus group. Content

analysis is the main technique of analyzing the mass

of data that will come out of the open-ended

responses.

The second means of data collection was via

emailed responses to identical interview questions.

All documentation was emailed to potential

participants in advance so that they were aware of

what types of questions would be asked. Eleven

people were contacted by email and all responded.

Those who agreed, emailed responses back within a

week. The researcher chose this second mode of data

collection, as it presented many advantages (Mann

and Stewart 2000). Firstly, it has the ability to obtain

a larger sample group. This helped to increase the

relevance of generalizing the findings because it

applied to more people. Secondly there was

significant time and cost savings, especially when all

personal interviews needed to be transcribed. Lastly,

emailed responses allowed the respondents to answer

the questions in their own time and at their own pace,

which helped facilitate in-depth and well thought-out

responses.

Population Size and Sampling Procedure

Initially, all participants were my work colleagues.

Thereafter, all participants were asked whether they

knew of any other expatriates, repatriates or spouses

who may be interested in being involved with the

research project. Participants helped by contacting

other friends or colleagues who might be interested.

However it was relatively difficult to find participants

who were willing to take part in personal interviews.

Overall, it was relatively easier to gain commitment

from participants if there was an opportunity to

communicate with them initially over the telephone to

answer any questions. From this point, arrangements

were made for a personal interview at a mutually

agreed upon place. In all four cases where the

researcher was able to talk to the potential participant

over the telephone, he/she agreed to be interviewed

personally.

Recruiting participants for emailed responses

was much easier than finding participants for personal

interviews. This was because emailed responses

overcame the issue of the physical location of the

respondent. Interested members were able to email

the researcher directly.

All respondents found the interview questions

clear and relevant. Participants responded well to the

questions and were more than happy to share their

experiences. Overall, the responses were of a good

quality and depth, confirming the appropriateness of a

qualitative approach to this research as opposed to a

quantitative approach.

The breakdown of respondents is presented in

table 1.


565

Table 2. Summary of participants

REPATRIATES EXPATRIATES

Personal Interviews 2 6

Emailed Responses 1 11

Total by Category 3 17

TOTAL 20

Research Design

In order to increase its validity and reliability, the

questionnaire for this study was partly developed by

integrating the research objective and literature

review. The questionnaire consisted of two parts. The

first part consisted of multiple choices, demographic

data and the second part consisted of open ended

questions pertaining to expatriate adjustment.

Demographic Factors

The questionnaire began with individual background

variables: age, educational level, expatriation

duration, gender, marital status, length of assignment,

level of foreign language proficiency, level of formal

cross-cultural experience before this assignment,

relevance of cross cultural training to work

performance.

Cross-Cultural Adjustment

Interview questions were formulated after a review of

the existing literature on expatriate management to

ensure sharper and more insightful interview

questions about the topic (Yin 1994). As the current

literature on expatriate management lacks

standardized questions, questions needed to be

developed. The questions were deliberately designed

to be open-ended and to avoid leading questions. The

interview questions for the expatriates and repatriates

(termed (re) expatriates) centred primarily on

exploring their experiences, or lack thereof, of cross-

cultural training. A pilot test was first conducted with

one participant, a repatriate, to determine whether the

interview questions were understandable and

applicable in addressing the issues of the study.

In the analysis of the data collected, responses

from expatriates and repatriates were presented

together. Respondents were able to record multiple

answers to any particular question. Patterns and

trends were then identified and presented. Some

direct quotes were used from the participants, who

remained anonymous, and reported in the results

chapter. The quotes chosen were insightful and

provided evidence for the support or lack of support

for propositions.

Research Results

This chapter will present the results of the research.

The objective of this study is to evaluate the

effectiveness of the orientation process for expatriates

and to determine a need for a separate orientation and

culture training. By improving the orientation process

and identifying a need for culture specific training,

the company can thus eliminate relocation and

replacement costs. In light of the above statement, the

results of the research proved quite interesting, in that

none of the expatriates who responded, either by

personal interviews or email, ever had any type of

cross cultural training whatsoever.

The questionnaire consisted of two parts. The

first part consisted of multiple choice questions which

focused on marital status; length of expatriate tenure;

level of foreign language fluency; level of formal

cross-cultural experience before this assignment;

when was the most recent cross-cultural training

conducted; whether the knowledge gained from the

cross-cultural training helped the expatriate perform

his/her daily job; how much of the training was

actually applicable to perform their job; the most

important characteristic that an expatriate manager

must possess; and what, in their opinion, based on

Tung’s findings, is the main reason for expatriate

failure.

The second part of the questionnaire consisted

of semi-structured questions. The limitation of this

was seen in the response to emailed questionnaires.

Respondents did not elaborate on their answers. For

example, in response to the question “what were the

cultural differences that you found most

challenging?”, one respondent replied “the African

setting is a more different setting in terms of culture

and they are just different”.

The aim was at least to receive a response rate

of not below 25 percent.

Data Collection Strategies

The methodology used to collect data entailed a self-

administered questionnaire; the advantage of this

approach was that the participants’ responses were

free from any undue influence from peers and their

superiors. The disadvantage was that, given that it

was a self-administered questionnaire, the response

rate was lower than the researcher anticipated. This

could have been due to employees not trusting the

confidentiality guarantees and not being brave

enough to express their independent views if they


566

were contrary to management’s thinking. In order to

overcome these disadvantages, an email was resent to

the participants via their human resource department

appealing to them to respond, highlighting the

importance of doing so and again reiterating the

guarantee of the individual’s confidentiality as well as

non-disclosure of their identity in the final report.

As stated earlier a total of 410 questionnaires

were distributed to the call centres situated in

Gauteng, Bloemfontein and Cape Town. The reason

why all employees were targeted for the survey was

to try to achieve a response rate of 25 percent and

above which will be sufficient to write a report.

Data Analysis

In order to address research question number one i.e.

the perceived uses or purposes of assessing or

evaluating employee-customer service interactions,

the appropriate statistics were used in the analysis,

which are known as frequencies. This provides an

indication of how many respondents selected each of

the items listed. Given that this type of question

comprises multiple-response type questions, the

percentages obtained did not add up to 100% because

the respondents may have selected more than one of

the listed uses or functions served by the assessment

of employee-customer service interactions.

Discussion and presentation of the findings

As is well-known, an increasing number of firms are

conducting business globally, seeking to multiply

benefits by exploring opportunities worldwide. It is

widely recognized that utilizing expatriate employees

effectively on international assignments is a critical

factor in enterprises succeeding in their global

projects. On average, international organizations

spend over two and a half times more to place an

employee on an expatriate assignment than they

would if they employed locally.

Adjustment generally refers to the changes

which individuals actively engender or passively

accept in order to achieve or maintain satisfactory

states within themselves. In the same way, cross-

cultural adjustment also can be regarded as the degree

of comfort, familiarity, and ease that the individual

feels toward new surroundings. The majority of

expatriates who return prematurely, that is, return

expatriates before the completion of their overseas

assignment, do so for several reasons such as poor

performance, job dissatisfaction, cultural shock and

family dissatisfaction.

The non-completion of an international

assignment by an expatriate necessitates replacement

with a new expatriate. Consequently, expatriate

failure is costly and results in a crisis for the

multinational corporation. And while the direct costs

of expatriate failure are calculated in monetary terms,

the indirect costs of these failures, such as their

implications for future career prospects, are often

concealed. Furthermore, they tend to be more

damaging, and the consequences underestimated by

both expatriates and international enterprises.

Because of the relatively high frequency of

expatriate turnover and the related direct and indirect

costs, international business literature has highligted

efforts to isolate the factors causing difficulty in

cross-cultural adjustment. Because of the relatively

high frequency of expatriate turnover and the related

direct and indirect costs, international business

literature has highligted efforts to isolate the factors

causing difficulty in cross-cultural adjustment.

Individual factors may result in expatriates

having dissimilar cross-cultural adjustment

experiences owing to the different emotional states

and reactions, and the different things they may learn

from the experience. This section discusses how

individual factors: age, educational levels,

expatriation duration, gender, overseas study

experience, previous overseas experience, previous

cross-cultural training, and marital status of

expatriates as well as partner-employment situation

impact on cross-cultural adjustment. The correlation

between cross-cultural training and cross-cultural

adjustment was significant in this study.

Cross-cultural training appears to be an

important factor in the adjustment of expatriates.

Nevertheless, the statistical results revealed that

MNCs often neglect to provide any kind of cross-

cultural training for their international expatriates. In

review, the high costs related to difficulties in

expatriation such as adjustment difficulties,

premature returns, repatriation difficulties and career

management problems, are also widely noticed. From

these standpoints it is stressed that the training of

employees for their international careers is a very

important HRM challenge.

Normally, different countries have different

climates, cultures, customs and dissimilar barriers.

Consequently, international organizations should

offer expatriates cross-cultural training relevant to

expatriate needs and the overseas location. In fact,

most cross-cultural training for expatriates is

generally superficial in degree, incomplete or non-

existent. Many researchers advocate the use of cross-

cultural training (Berry et al. 1993; Black and

Mendenhall 1990; Deshpande and Viswesvaran 1992;

Gregersen and Black 1992; Hammer and Martin

1990; Naumann 1993; Oddou 1992). Extensive

studies indicate that training is advantageous in

reducing the perceived need of expatriates to adjust.

In other words, a positive relationship existed

between cross-cultural training and cross-cultural

adjustment (Befus 1988; Deshpande and Viswesvaran

1991; Earley 1987; Gudykunst et al. 1977; Latta

1999; Mitchell et al. 1972; Newbold et al. 1982;

O’Brien, Fiedler and Hewett 1970; Salisbury 1971;


567

Steinkalk and Taft 1979; Worchel and Mitchell

1972).

For international expatriates who are completely

unfamiliar with the customs, cultures and work habits

of the host nation, cross-cultural training may be a

critical element in their effectiveness and success in

their overseas assignments. Because cross-cultural

training familiarizes expatriates with the new culture,

it is predictable that expatriates would feel adaptable

and familiar with the host culture more directly and

effortlessly. Equally, owing to the subsequent cultural

familiarity and advanced cross-cultural understanding

on the part of the expatriates, cross-cultural training

would lead to reduced anxiety and culture shock, and

would thereby facilitate cross-cultural adjustment. In

terms of adjustment, which is defined as effective

interaction with host nationals, expatriates gain

knowledge through cross-cultural training that

enhances their self-efficacy, which enables

expatriates to emulate behaviors that would result in

effective interactions more efficiently than non-

trained expatriates. Training should include pre-

departure training, overseas on-the-job training, host

cultural awareness training, and language programs.

It is a norm, at least theoretically, for organizations to

offer some sort of orientation to employees posted to

international assignments. This, it is assumed, will

assist the expatriates to deal with some important

issues while working in the new surroundings.

The importance of such training in preparing the

individuals for intercultural work assignments has

become increasingly apparent. A comprehensive

review of the literature demonstrated that there was

strong evidence for a positive relationship between

cross-cultural training and adjustment.

Numerous advantages can be gained through

providing expatriates with cross-cultural training

prior to departure for international assignments, and

this sort of training are concluded as several meaning

as following. Firstly, cross-cultural training can be

explained as a method for conscious change from an

automatic, home-culture mode to a culturally

appropriate, adaptable, and acceptable mode. It also

can be defined as an aid to dealing with unexpected

events or culture shock in a new culture. Thirdly,

cross-cultural training can be described as a way of

lessening the uncertainties of interactions with

foreign co-workers and nationals. Lastly, cross-

cultural training should be clarified as a system of

increasing the ability of expatriates to manage the

reduction of pressure and uncertainty in overseas

environments, work performance and general living

problems.

Underlining the complex nature of culture,

nevertheless, even as international organizations try

to equip employees mentally, it is not easy to develop

the appropriate mental frame of reference for dealing

with different cultures worldwide. A frame of

reference in this sense includes a basic awareness of

cultural differences, which exist between the ‘home’

culture and those with which people are doing, or

would like to do business. In conclusion, the degree

to which cross-cultural training is needed and is

effective is a function of the degree to which the

international assignee interacts with members of the

host culture. In addition, empirical experiences of

international enterprises and academic researches

exposed that the cross-cultural training is an

imperative factor in facilitating cross-cultural

adjustment process.

Recommendations

The interplay of job novelty, degree of interaction and

culture novelty determines the degree of training

rigor. The recommended training model takes into

consideration the required training intensity and the

profile of the expatriate manager.

The recommended training methods are

intended to provide the type of CCT that best fit the

expatriate manager. The concept of benchmarking for

identifying good CCT practices is also mooted.

In view of the business world’s state of constant

flux, corporations like Intel have resorted to Just-in-

time CCT (Odenwald, 1993). We may want to go one

step further by introducing preemptive CCT. This

means that the training department organises topical

courses on selected countries that are deemed to be

potential growth areas.

For companies that are new to CCT, fresh

emphasis on this aspect of global competition may

entail significant re-engineering of organisation

culture and individual value system. How traumatic

the changes are, and how much resistance is

displayed, depend on the organisation’s and the

individual’s determination and mental readiness to

succeed globally..

The importance and complexity of CCT imply

that companies cannot afford to be haphazard in their

attitude towards expatriation. A 4-step method to

determining the trainees’ level of CCT need has been

proposed. On the basis of the intensity of their CCT

need, the trainees participate in one of the three

recommended training programs, each representing

different degree of training rigor to match the training

needs.

To prepare the typical manager effectively, the

CCT begins with the intellectual training approach,

before blending in the experiential approach for

learning synergy. The assumptions are that as a

citizen of a meritocratic and culturally diverse

country he is more adept to cognitive learning and is

more in need of culture-specific rather than culture-

general CCT. The focus is on developing his

attitudinal flexibility and readiness to assume the role

of a visionary qualities he apparently lacks to succeed

independently overseas. Centralisation of the training

function, preemptive CCT and benchmarking for

training excellence are also discussed, with a view to

reinventing the value of CCT and inviting further


568

discussion on how attention to CCT in MNCs can be

promoted.

The CCT model specifically targeted the

expatriate or to-be-expatriated managers. Although it

is assumed that their family members would also be

relocated, to model the combinedd CCT needs of the

expatriates and their family members would

complicate the recommended CCT model. Another

limitation of this study is issues that may draw the

readers’ attention in the course of examining this

study have been left unanswered. These issues, such

as trainer competency, conflict of interest and

trainees’ adjustment problems, together with, the

resultant costs to the individuals, their families and

their companies, merit indepth study. In the interest

of conducting a more focused study, these issues are

not discussed in this study, but it is hoped that they

will stimulate future research.

Finally, the recommended general CCT model is

meant to be adapted to specific companies’ unique

business realities, not adopted wholesale.

Conclusion

For international expatriates who are completely

unfamiliar with the customs, cultures and work habits

of the host nation, cross-cultural training may be a

critical element in their effectiveness and success in

their overseas assignments. Because cross-cultural

training familiarizes expatriates with the new culture,

it is predictable that expatriates would feel adaptable

and familiar with the host culture more directly and

effortlessly. Equally, owing to the subsequent cultural

familiarity and advanced cross-cultural understanding

on the part of the expatriates, cross-cultural training

would lead to reduced anxiety and culture shock, and

would thereby facilitate cross-cultural adjustment. In

terms of adjustment, which is defined as effective

interaction with host nationals, expatriates gain

knowledge through cross-cultural training that

enhances their self-efficacy, which enables

expatriates to emulate behaviors that would result in

effective interactions more efficiently than non-

trained expatriates. Training should include pre-

departure training, overseas on-the-job training, host

cultural awareness training, and language programs.

It is a norm, at least theoretically, for organizations to

offer some sort of orientation to employees posted to

international assignments. This, it is assumed, will

assist the expatriates to deal with some important

issues while working in the new surroundings.

The importance of such training in preparing the

individuals for intercultural work assignments has

become increasingly apparent. A comprehensive

review of the literature demonstrated that there was

strong evidence for a positive relationship between

cross-cultural training and adjustment.

Numerous advantages can be gained through

providing expatriates with cross-cultural training

prior to departure for international assignments, and

this sort of training are concluded as several meaning

as following. Firstly, cross-cultural training can be

explained as a method for conscious change from an

automatic, home-culture mode to a culturally

appropriate, adaptable, and acceptable mode. It also

can be defined as an aid to dealing with unexpected

events or culture shock in a new culture. Thirdly,

cross-cultural training can be described as a way of

lessening the uncertainties of interactions with

foreign co-workers and nationals. Lastly, cross-

cultural training should be clarified as a system of

increasing the ability of expatriates to manage the

reduction of pressure and uncertainty in overseas

environments, work performance and general living

problems.

Underlining the complex nature of culture,

nevertheless, even as international organizations try

to equip employees mentally, it is not easy to develop

the appropriate mental frame of reference for dealing

with different cultures worldwide. A frame of

reference in this sense includes a basic awareness of

cultural differences, which exist between the ‘home’

culture and those with which people are doing, or

would like to do business. In conclusion, the degree

to which cross-cultural training is needed and is

effective is a function of the degree to which the

international assignee interacts with members of the

host culture. In addition, empirical experiences of

international enterprises and academic researches

exposed that the cross-cultural training is an

imperative factor in facilitating cross-cultural

adjustment process.

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