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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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,
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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%
S Disagree Disagree Neutral Agree S Agree
16% 15%
25% 24%
20%
0%
5%
10%
15%
20%
25%
30%
S Disagree Disagree Neutral Agree S Agree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
455
Point-of-purchase displays create an interactive
retail experience
The results, as presented in Figure 5 indicate that the
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%
S Disagree Disagree Neutral Agree S Agree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
The results, as presented in Figure 8 indicate that the
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%
S Disagree Disagree Neutral Agree S Agree
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%
S Disagree Disagree Neutral Agree S Agree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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%
S Disagree Disagree Neutral Agree S Agree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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:
H2: There is a positive correlation between
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:
H4: There is a positive correlation between
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:
H5: There is a positive correlation between
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
464
Therefore, we examine both aspects, through the
following hypothesis:
H6: There is a positive correlation between
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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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.
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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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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?
3. When you walk into an apparel retail store, what
influence does the use of lighting have on your
perception of the store?
4. When you walk into an apparel retail store, what
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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).
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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).
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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).
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
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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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
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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).
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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
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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.
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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).
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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-
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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. Ya`akov 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, Ya`akov Avinu was surprised that
these shepherds appeared not to be doing an honest
day’s work. Many years later, Ya`akov Avinu
described the kind of work he himself had performed
for Laban. Ya`akov Avinu told his wives, “You know
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
497
that I have served your father with all my strength”
(Genesis 31:6). Ya`akov 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,
Ya`akov 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 Ya`akov Avinu work an additional
seven years. Ya`akov 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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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
semester in the academic year 2011-2012;
- Master's 2 Audit program during the first
semester in the academic year 2011-2012;
- 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;
- Higher National Diploma in Accounting's 2
Audit program during the second semester in the
academic year 2012-2013;
- Higher National Diploma in Accounting's 2
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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;
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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;
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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% _ _
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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%
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C. 1994. Les pratiques d’enseignement en
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sensibilisation à l’éthique des futurs professionnels de
l’audit : Une étude exploratoire dans le contexte
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39–56.
3. Armstrong, M. B. 1993. Ethics and professionalism in
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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
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7. Gaa, J. & Thorne, L. 2004. An introduction to the
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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
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14. Lockwood, A. 1978.The effects of values clarification
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Ethics: Some Crucial Issues, Issues in Accounting
Education, 3, 316–329.
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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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
Strongly Disagree 17
Disagree 54
Neutral 14
Agree 3
Strongly Agree 12
Total 100 Agree: 15 Disagree: 71
Table 4. There is staff skill suitability for the work rendered
Frequency
Strongly Disagree 9
Disagree 17
Neutral 9
Agree 38
Strongly Agree 27
Total 100 Agree: 66 Disagree: 26
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
511
Table 5. Staff is provided with sufficient training to carry out their duties
Frequency
Strongly Disagree 17
Disagree 46
Neutral 26
Agree 8
Strongly Agree 3
Total 100 Agree: 11 Disagree: 63
Table 7. The Department has sufficient quantity surveyors for projects
Frequency
Strongly Disagree 15
Disagree 63
Neutral 11
Agree 6
Strongly Agree 5
Total 100 Agree: 11 Disagree: 78
Table 8. Department has sufficient engineers for engineering jobs
Frequency
Strongly Disagree 14
Disagree 57
Neutral 20
Agree 6
Strongly Agree 3
Total 100 Agree: 9 Disagree: 61
Table 8. Department has sufficient IT professional
Frequency
Strongly Disagree 14
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
Strongly Disagree 29
Disagree 52
Neutral 11
Agree 6
Strongly Agree 1
Total 100 Agree: 28 Disagree: 70
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
512
Table 10. Clients receive the service on time
Frequency
Strongly Disagree 3
Disagree 71
Neutral 11
Agree 13
Strongly Agree 2
Total 100 Agree: 15 Disagree: 74
Table 11. Projects are completed within budgets
Frequency
Strongly Disagree 6
Disagree 22
Neutral 11
Agree 42
Strongly Agree 19
Total 100 Agree: 61 Disagree: 28
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
Total 100 Agree: 50 Disagree: 46
Table 13. There are very few queries or complaints from clients
Frequency
Strongly Disagree 37
Disagree 29
Neutral 6
Agree 16
Strongly Agree 12
Total 100 Agree: 28 Disagree: 66
Table 14. There is very low or no corruption in the Department
Frequency
Strongly Disagree 36
Disagree 38
Neutral 1
Agree 14
Strongly Agree 11
Total 100 Agree: 24 Disagree: 74
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Total 100 Agree: 81 Disagree: 9
4.4 External service providers
Table 16. External service providers are paid on time
Frequency
Strongly Disagree 28
Disagree 52
Neutral 11
Agree 4
Strongly Agree 5
Total 100 Agree: 9 Disagree: 80
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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:
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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 &
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3. Bayat, M.S. and Meyer, I.H. (1994).Public
Administration: Concepts, Theory and Practice. South
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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.
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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
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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.
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Service http://www.dpsa.gov.za/dpsa2g/documents/
acts®ulations/frameworks/white-
papers/transform.pdf [Accessed on 1 May 2015].
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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
Date Exchange Key Problems
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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Table 3. FOEX
Date Exchange Key Problems
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
Date Exchange Key Problems
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
517
Table 5. NYBOT
Date Exchange Key Problems
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
518
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
526
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
municipalities within the province of KwaZulu-Natal.
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).
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
Disagree
Every manager is aware of the processes and outcomes of systemic thinking.
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
Disagree
Application of systemic
thinking
Managerial Challenges in running a municipality are unpredictable
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
Disagree
Systemic thinking in the decision making process is a time-consuming process.
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
Disagree
External factors always play a great role in the decision making process
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
Disagree
Effectiveness of systemic
thinking
Problems that are associated with complexity, change and diversity can always be
resolved through a rational decision-making process
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
Disagree
Creativity , ingenuity and originality are a necessity in dealing with complexity,
change and diversity
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
Disagree
Systemic thinking in the decision making process will improve the performance of
municipalities.
Response Alternatives: Strongly Agree; Agree; Neutral; Disagree; Strongly
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
538
Table 4. Number of Years Occupying the Same Position
Frequency Percent Valid Percent Cumulative Percent
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
municipalities within the province of KwaZulu-Natal.
Table 5. Number of Times participated in Strategic Decision Making Processes
Frequency Percent Valid Percent Cumulative Percent
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
Frequency Percent Valid Percent Cumulative Percent
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 63 41.4 41.7 41.7
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 5 3.3 3.3 3.3
Agree 30 19.7 19.9 23.2
Neutral 14 9.2 9.3 32.5
Disagree 78 51.3 51.7 84.1
Strongly Disagree 24 15.8 15.9 100.0
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
Strongly Agree Agree Neutral Disagree Strongly Disagree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 101 66.4 66.9 66.9
Agree 35 23.0 23.2 90.1
Neutral 1 .7 .7 90.7
Disagree 9 5.9 6.0 96.7
Strongly Disagree 5 3.3 3.3 100.0
Total 151 99.3 100.0
Missing System 1 .7
Total 152 100.0
Figure 5. Managerial challenges in running a municipality are unpredictable
The results from the respondents indicated that
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
Strongly Agree Agree Neutral Disagree Strongly Disagree
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
Strongly Agree Agree Neutral Disagree Strongly Disagree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 26 17.1 17.2 17.2
Agree 56 36.8 37.1 54.3
Neutral 11 7.2 7.3 61.6
Disagree 46 30.3 30.5 92.1
Strongly Disagree 12 7.9 7.9 100.0
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
The results from the respondents indicated that
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 112 73.7 74.2 74.2
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
Strongly Agree Agree Neutral Disagree Strongly Disagree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
543
Figure 7. External factors always play a great role in the decision making process
The results from the respondents indicated that
112 (73.7%) of the respondents strongly agree with
the statement, 35(23%) of the respondents agree with
the same statement. Whilst, 2(1.3%) of respondents
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 8 5.3 5.3 5.3
Agree 21 13.8 13.9 19.2
Neutral 8 5.3 5.3 24.5
Disagree 102 67.1 67.5 92.1
Strongly Disagree 12 7.9 7.9 100.0
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
The results from the respondents indicated that
102 (67.1%) of the respondents disagree with the
statement, 21(13.8%) of the respondents agree with
the same statement. Whilst, 12(7.9%) of respondents
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
statement. These results indicate that the majority of
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
Strongly Agree Agree Neutral Disagree Strongly Disagree
5.3% 13.8%
5.3%
67.1%
7.9%
Strongly Agree Agree Neutral Disagree Strongly Disagree
0,0
20,0
40,0
60,0
80,0
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 30 19.7 19.9 19.9
Agree 86 56.6 57.0 76.8
Neutral 4 2.6 2.6 79.5
Disagree 24 15.8 15.9 95.4
Strongly Disagree 7 4.6 4.6 100.0
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
The results from the respondents indicated that
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
statement. These results indicate that the majority of
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
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 92 60.5 61.3 61.3
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
Strongly Agree Agree Neutral Disagree Strongly Disagree
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
545
Figure 10. Systemic thinking in the decision making process will improve the performance of municipalities
The results from the respondents indicated that
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
statement. These results indicate that the majority of
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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).
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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)
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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,
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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).
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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).
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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-
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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:
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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.
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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;
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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
Journal of Governance and Regulation / Volume 4, Issue 4, 2015, Continued - 4
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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