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FMI Quarterly/September 2013/September 1, 2013

99 and 44/100% Pure

compass_imageThe claim of “99 and 44/100% Pure” becomes significant when a bar of Ivory® soap is being held between your teeth. For more than 60 years, parents have used this disciplinary practice to “wash our mouths out” and discourage us from lying, cussing or saying something inappropriate. For some, this technique was effective. For others, holding the soap became a lesson in saliva control that ended without leaving a bad taste in our mouths at all.

The whole exercise did give us pause, however, to think about what we said. You may have thought about what was in the other .056% of the bar. Even though it was only a tiny amount of “impurity,” would it be enough to hurt us? The longer we held that potentially poisonous soap in our mouths and the more times we had to hold it there, the more likely we were to be harmed. If you believe that our industry is more than .056% impure, are you willing to risk the initial “bad taste” that corporate discipline requires to make it more “pure”? Let us consider the state of ethics in the construction industry today.

Most of us do not remember what construction was like 60 years ago, since the vast majority of our current industry leaders were born in the 1960s and early 1970s. The world was different back in 1953, especially in the areas of construction safety and, analogously, ethics. First, consider job-site safety, then and now. Back in the day, construction workers were just as concerned about personal safety as they are now, but the focus was different. They did not fully understand that there was more to staying unharmed than telling your workers to “be safe.” Today, companies must prove that they are and will continue to be safe. The industry focus shifted from reactive to proactive and, as a result, fewer people are injured and killed today than 60 years ago.

Ethics is evolving in a similar fashion. Arguably, industry leaders are more concerned about ethics today than they were 60 years ago. There is more at stake. They are beginning to realize the severity of the issues that can arise when there is a lack of focus on ethics in their companies. For one thing, business is much less “private” than it used to be. Enron and Sarbanes-Oxley were game changers. Transparency is now an integral part of how we do business today. When you consider that anyone with a phone or a Wi-Fi connection could expose you to the public, it is difficult to hide anything. More and more companies are getting caught and being told to “hold the soap between their teeth,” as seen in Exhibit 1.

2013q3_99_pure_ex1

It is important to understand that “getting caught” is a reactive response to the lack of focus on ethics, just like getting hurt is a lack of focus on safety. The real penalties for an ethical breach are expensive and leave more than a bad taste in your mouth. Ethical misconduct can cloud the reputation of the company for decades and cause collateral damage within the company, as seen in Exhibit 2.

2013q3_99_pure_ex2

We are also beginning to understand that there is more to being ethical than telling our employees to “do the right thing.” Agencies and owners are no longer tolerant of the “old games” that contractors used to play to grow their margin. Our “new” buyers are beginning to demand that companies provide some evidence that they are and will continue to be ethical.

The Federal Acquisition Regulations (FARS) is the first indicator of this new trend. It is disappointing that the federal government is the trendsetter for ethics and not a company in our industry, and some would say it is a little bit ironic with all of the scandals that have made the news over the years. Many in our industry have started to take notice, though, with the help of the Construction Industry Ethics & Compliance Initiative (CIECI). The CIECI brings together, in a non-profit, private association, companies within the U.S. construction industry that are committed to the highest level of ethics and conduct and compliance with the law (see http://www.ciecinitiative.org/ for more information.) As a result, some firms are implementing ethics programs to highlight the need for higher ethical standards in their companies. They are creating these programs, partly out of a desire to do the right thing, but also as a way to prove that they are ethical (more ethical than their competitors anyway). Ethics programs are turning into reasonably priced insurance policies against any ethical claims. These programs are also proving to be good for business. After all, an effective ethics program is a proactive approach and gives the company some control over the outcomes.

This new focus on ethics is long overdue. The construction industry has not done a good job of public relations, and its reputation has suffered. That being said, the industry has come a long way in a short time. What can be done to support the rising demand industry? Let us consider the three primary components of any good ethics program: a solid ethics and compliance structure including a clearly written code of ethics; well-trained people with high ethical standards; and a culture that rewards and recognizes good ethical decisions, while identifying and punishing bad ethical behaviors.

An important piece of a solid ethics and compliance program is a well-written code of ethical conduct. Typically, this document defines and clarifies the policies of the company and highlights the ethical issues that a company predictably will face. A sample table of contents might include the following topics and provide some guidance about how to address them:

  • Equal Employment and Nondiscrimination
  • Environmental Compliance
  • Safety and Health
  • Drugs and Alcohol
  • Conflicts of Interest
  • Outside Employment
  • Personal Financial Interests
  • Gifts and Entertainment
  • Bribery and Kickbacks
  • Antitrust
  • Price Fixing
  • Bid Rigging
  • Claims
  • Disadvantaged Business Enterprises

If you look at the list, many of these topics were not even on the radar 60 years ago.

An ethics and compliance program should also describe the components and systems that define it. The key is to make the program both simple and clear. Typically, this would include the telephone number to an anonymous hotline, structured ethics training and a communication program for everyone on the payroll. In addition, the president and/or senior leaders should reaffirm their “tone from the top” and remind all employees of the importance of ethics to the company, at least annually.

There certainly is more that can be done, but these three easy steps form the basis for most ethics and compliance programs and fulfill the minimum requirements set forth by FARS. Most importantly, these steps represent tangible and measurable actions that you can take to begin to prove to the marketplace that your company intends to deal ethically. A well-defined ethics program is solid evidence for any owner that your company will try to be ethical. “Try” is the right word choice here. The most difficult aspect of this process is that it involves people, who are unpredictable, and perception, which is subjective. Once the program is set, you need to get your employees on board.

How many people are on your payroll? A dozen, 50, a couple of hundred, a few thousand? Now, how many of them have to make a knuckleheaded decision before negative attention is drawn to your company? That is right, one. One person can for ethical practices in the construction create a lot of trouble for you and your company. The reality is that you never have 100% control over every employee. It may be just a matter of time before one of them gets caught doing something questionable. To complicate the issue a bit, who decides whether someone’s action is unethical? That is right, everyone else does.

More to the point, “illegal” is relatively easy to spot, but “unethical” is a bit more subjective. We need to install some guardrails for our people and we need to provide clarity around key issues to influence perception positively. The first guardrail involves some required reading. Each person who works for the company must read and then acknowledge that she or he has read the code of conduct. The next guardrail requires each person to attend an ethics training orientation, sometime during the year, to make sure that he or she understands the company policies and the intent of the ethics program. People can be taught about ethics. Most people have an innate sense of right and wrong and just need some guidance. When people hear real-life stories and examples of the right and wrong responses to actual ethical dilemmas, the code of conduct becomes more than just a document. These stories, as told by the senior leaders, give the written code some context, which makes the ethics policy more personal. It also gives the company the ability to hold its people accountable. Employees learn about the ethical boundaries of their company from the leaders of the organization. People can then make the right choices and business decisions on their own as well as hold each other accountable.

When your employees know that ethics is important to the company, they will be less likely to engage in unethical conduct themselves and more likely to report it when they see it in others. This will reduce the risk profile of the company. Interestingly, most of your people (75%) have seen some ethical breach and said nothing about it. When you proactively address ethics with your employees, you are able to hold an individual accountable for breaking a policy and protect the rest of the company from taking the fall for it. When viewed this way, an ethics program becomes a good business decision. When more and more of your people understand what is “right and wrong” at your company, they begin to act accordingly. Eventually, this corporate understanding evolves into a culture, which in turn changes the way your company is perceived, internally and externally.

Vala Afshar, chief marketing officer of Enterasys Networks, said, “The simplest definition of culture is what happens when the manager leaves the room.” An interesting case study would be to look at your office expenses in August and September. Are they higher? After all, your staff has children going back to school, and they need notepads, notebooks and pens. When you have a culture that rewards ethical behavior, you begin to attract ethical people to your company. When you hire ethical people, those who are preloaded with the same ethical standard as the company desires, they will make better decisions. They will be less likely to “steal” from the company, and you might find that office supplies costs remain more consistent throughout the year. Office supplies are just the tip of the iceberg.

The big dollars are found when owners, agencies, subcontractors and customers begin to trust your company. Evidence suggests that there is a direct connection between being ethical and being more profitable. At FMI, we call that the integrity chain, and it occurs when ethical behavior is a cultural expectation. The result of creating and having an ethical culture is greater profitability. Moreover, there are intangible benefits that accrue when your company is considered ethical: Your employees will be more loyal, turnover will drop, generation Y will be more attracted to your company as a place to work, subcontractors will give you their best price the first time making you more competitive, issues are addressed more openly and quickly reducing corporate risk, etc. When you consider these and other intangible costs, ethics begins to add real value to your company.

The industry is still a long way from being 99.044% pure. Trust is hardearned and easy to lose in the construction industry. Sixty years ago, a person’s word was his or her bond and a handshake would seal a deal. If people did not keep their word, their reputation suffered along with their business. Back in the day, owners would just refuse to work with unethical people and their companies. It seemed to be more personal. Not as much today. Everything needs to be in writing: contracts, change orders, safety logs, production tracking, etc., to manage project risk including the risk of unethical behavior.

A handshake is not enough anymore. Today, owners and contractors require documentation as a way to prove legitimacy and protect them. Experience modification ratings and safety programs serve to prove how safe you are. Production tracking and daily huddles demonstrate that you can be productive. Quality assurance programs, pre-job planning and the elimination of rework show that you can deliver quality. The construction industry has been forced to develop systems and processes to help compare itself against a moving benchmark — each other. To that end, if you were asked to prove to owners or contractors that you are (and will be) ethical, how would you do it? Would you show that you have a solid ethics and compliance structure, including a clearly written code of ethics? Would you introduce them to your well-trained people with high ethical standards and a clear understanding of the policies defining what is acceptable and unacceptable business behavior? Would you immerse them into your culture so that they could see how you recognize people for good ethical decisions and build trust? Ethics is the next differentiator. We have tested the model with safety during the past 60 years, and it works. Our jobs and our industry are safer as a result. Even though it has not been possible to eliminate every accident, zero accidents is still the goal. Ethics is next. The time has come for us to repair the reputation of this industry that we love. It may not be possible to be 100% ethical, 100% of the time, but zero ethical regrets is the right goal. To that end, if 100% purity is too hard to imagine, let us start with 99.044% and work our way up.


Andrew (Andy) Patron is a principal with FMI Corporation. He can be reached at 919.785.9239 or via email at apatron@fminet.com.

 

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