February 2000

Ethics in this country have become an ambiguous area where self-interest appears to justify conduct. A measurement of this is the extent of the increase of dishonesty cases sent to us. Hence a manager who has taken monies by abusing a company credit card states unashamedly in court:

"I did not need to seek authority for that unauthorised loan because I always intended to repay the company. "

When cross-examined on what he would have done had the company not found out, he rationalises:

"I would have repaid the company anyway."

At the time of the court case he has not repaid the company but "sincerely" exhibits remorse in court.

A director raids a pension fund because his short pensionable service entitles him to. In another case an employee dismissed for theft demands reinstatement because the company is insured against theft. He rationalises that it has suffered no loss. At the lowest level, blaming a third party for an error of one's own, is an unethical act.

We could quote many examples of employees displaying self-serving and ambiguous notions of ethical conduct. The "take and grab" non-ethic is consuming the moral fabric of the nation.

If ethics have become ambiguous and therefore uncertain, we believe that it is necessary for employers to implement ethics policies. An employer cannot assume that all employees share the institution's ethics. Such policies must be established and developed from within the institution and vigorously applied. We stress this aspect because these policies will not operate successfully where employers reward employees who have stolen property of the company, fellow employees, suppliers or customers. This is a principal area where disputes with employees dismissed for dishonesty should never be settled by a financial payment. Such settlements create the perception that dishonest employees are rewarded for thieving and encourage further dishonesty.

We are presently developing ethics policies for clients who have recognised the need to build standards from within and essentially as a bulwark in a climate of ambiguous standards.

We make no apology for the academic and theoretical discourse that follows. It is vital that the employer community should reflect on the origins of our ethics, the impact which they have on our institutions and economy and the extent to which an ethics programme at company level may be useful in protecting the employer's interests.

Francis Fukuyama in his seminal textbook on Trust, explores ethics in relation to economic development. His view is controversial and perhaps does not give sufficient weight to other central components of a successful economy. However, he has some useful insights and we summarise his book below:


1. The Idea of Trust

Fukuyama states that economic activity, a vital part of social life, is knit together by a wide variety of norms, rules, moral obligations and other habits that together shape society. Fukuyama believes that a nation's well-being, as well as its ability to compete, is determined by a single, pervasive cultural characteristic, namely the level of trust.

The Toyota Motor Company's Takaoka assembly plant is cited as an example of the positive impact a high level of trust has on a company's well-being. Any of the thousands of assembly line workers can bring the entire plant to a halt by pulling on a cord provided at every workstation. These workers were given the power to stop the entire assembly line because management trusted them not to abuse that authority. The workers repay this trust by using that power responsibly in order to increase the line's productivity.

Fukuyama comments: "The community in this case is a cultural one, formed not on the basis of explicit rules and regulations but out of a set of ethical habits and reciprocal moral obligations internalised by the community's members". These habits and obligations afforded the members of the Toyota community grounds for trusting one another. These members are motivated by something broader than individual self- interest. In all successful economic societies, communities are united by trust.

Economists have argued that formation of social groups arise as the result of voluntary contact between individuals who reach a rational conclusion that co-operation is in their long-term self-interest. According to this approach trust is not necessary for co-operation: enlightened self-interest, combined with legal mechanisms like contracts, can compensate for an absence of trust and permit strangers to form an organisation which works for a common purpose. Although contract and self-interest form important bases for association, the most effective organisations are developed from communities of shared ethical values. Fukuyama argues that such communities do not need extensive contract and legal regulation of their activities due to the fact that prior moral consensus gives people a basis for mutual trust.

Fukuyama defines social capital as the ability of people to work together for common purposes in groups and organisations. This ability to associate is reliant on the degree to which communities share norms and values and are willing to sacrifice individual interests to those of larger groups. Trust emerges out of shared values and trust has a considerable and measurable economic value.

If people in an organisation are able to trust one another because they share a common set of ethical norms, doing business effectively costs less. Fukuyama reasons that such a society is better equipped to innovate organisationally, since the high level of trust allows a wide variety of social relationships to emerge. Conversely, people who distrust each other are forced to work under a system of formal rules and regulations, which have to be negotiated, litigated, and enforced, sometimes by coercive means.

A high-trust society can encourage a more flexible and group-oriented workplace and lower levels of the organisation can be given more responsibility. Low- trust societies, however, must regulate and control their workers with a sense of bureaucratic rules. Fukuyama argues that employees are more satisfied if they are trusted to contribute to the organisation's common purpose.

Industrial structure reveals much about a country's culture. Societies that boast strong families hut have weak bonds of trust between people not related to one another usually have small, family- owned and managed businesses. Societies that have strong private non-profit organisations such as churches, schools and charities are able to form powerful private economic institutions that extend beyond the family.

For this reason, the United States, Japan and Germany were among the first countries to form large, modern, professionally managed corporations. This was due to the fact that in each of these societies there was a high degree of trust between individuals who were not related to one another. Accordingly there existed a solid basis for social capital.

The importance of the state sector varies considerably by culture. In low-trust familistic societies such as China or Italy, the only way such nations can build large-scale industries is by considerable state intervention. This becomes important if the country wishes to participate in global economic- sectors demanding large scale operations. Countries such as Japan or Germany with a high degree of trust and social capital are able to create large organisations without state support.

2. Low-Trust Societies and the Paradox of Family Values

Notwithstanding the current American debates over family values, Fukuyama submits that the family paradoxically does not always contribute positively to promoting economic growth. In some cultures, as is evident in China, the family is the most popular form of association. Accordingly, this has an immense impact on industrial life. Although familism in itself is not a barrier to industrialisation or rapid growth, it does affect the character of that growth and the types of economic organisations that can be formed. Fukuyama finds that familistic societies have greater difficulty in creating large economic institutions and that such constraints on size accordingly limit the sectors of the global economy in which such businesses can participate.

Cultures in which the main avenue toward sociability is family and kinship do not easily create large, durable economic organisations and therefore rely more on the State to initiate and support them. However, cultures that are open to voluntary associations are able to create large economic organisations more spontaneously.

3. High-trust Societies and the Challenge of Sustaining Sociability

Fukuyama attempts to answer the much asked question of: "Wasn't the modern system of contract and commercial law invented precisely to get around the need for business associates to trust one another as family members do?". Proponents of this theory argue that the very essence of modern economic life is the replacement of informal moral obligations with formal, transparent legal ones. These theorists argue that businesses based on strong family ties and unstated moral obligations degenerate into nepotism and poor decision-making. Fukuyama answers these questions by stating that although property rights and other modern economic institutions are vital for the formation of modern businesses, people generally do not realise that such businesses rest on a bedrock of social and cultural habits that are often taken for granted.

Legal frameworks such as contract and commercial law are necessary preconditions for the formation of a modern industrial economy. It would be foolish to believe that trust or moral obligation alone could take their place. However, the existence of a high level of trust in economic relations can improve economic efficiency by minimising what economists call transaction costs. These costs are incurred by activities such as finding the appropriate buyer or seller, negotiating a contract, obeying government regulations and litigating in the event of a dispute or fraud regarding the contract.

Fukuyama believes that these activities are simplified if people can believe in each other's basic honesty. It would not be necessary to spell issues out in extensive contracts to hedge against unexpected contingencies. There would be fewer disputes and litigation would therefore be less prevalent.

Japan is a good example of a high-trust society. Japan's modern industrial structure has been dominated by very large organisations. Family management was replaced by professional management relatively early in Japan's economic development.

By adopting the corporate form of organisation, Japanese companies grew to be very large. If one compares Japan with China, it is clear that non-family employees in China do not remain with family businesses for extended periods if they have other options. They realise that they will probably not be admitted into the ranks of top management as fully trusted and equal partners. For this reason, employees in Chinese firms switch employers readily and ultimately aim to gain the capital to start their own businesses.

By contrast, Japanese companies in the main have adopted the practice of lifetime employment since the early post-war period. When an employee begins his career with a Japanese company, there is an understanding that management will continue to provide employment, and that the employee will not leave to seek a better job elsewhere. Enforcement of this agreement rests not on law but on moral pressure alone. An employee who leaves lifetime employment firm for another paying a higher wage may subsequently be ostracised, as will a firm who poaches employees of another firm. In return for stable employment and steady advancement, the employee gives the company his best effort. The employee desires to give his best because the company protects his long-term welfare. Fukuyama says: "The sense of obligation is not formal or legal, it is entirely internalised, the result of a subtle process of socialisation".

The bonds of reciprocal obligation existing between workers and managers is evident in Japanese union organisation. There is a much higher degree of trust between labour and management than in the United States or Britain. Unions and management share a common interest in the overall growth and well-being of the company. Fukuyama comments that Western managers who see the apparent docility of Japanese unions, desire such relations with their workers. However, Japanese-style reciprocal obligations can only work if the obligation and trust flow in both directions.

Another unique feature of the Japanese economy is the Keiretsu or business network. Such networks depend on the pervasive ability to enter into high-trust relationships. The most common type of network is the horizontal Keiretsu which unites widely differing types of businesses. In a network organisation there is no overall source of authority and no central office to resolve disputes between members. If the network is required to take an action, a member has a potential veto due to the need for consensus. Consensus is relatively easy to achieve in Japan. Fukuyama believes that such networks would result in paralysis and inaction if introduced into low-trust societies. Each member of the network would attempt to exploit the network for its own advantage and would believe that other members are doing the same. The Japanese culture easily allows one person to incur a reciprocal obligation to another and to maintain this sense of obligation over a long period.

The radius of trust in Japan extends well beyond the family or lineage to a wide variety of intermediate social groups. Trust exists in Japan among many different groups of unrelated people on a voluntary basis. Fukuyama says: "The degree to which non-kin entering into voluntary organisations are willing to trust each other without the benefit of contract or other legal instruments spelling out reciprocal rights and duties is extraordinarily high in Japan". This reciprocal moral obligation allows the emergence of economic practices like lifetime employment or business networks that are unique.

The country boasting the highest degree of spontaneous sociability, after Japan, in Fukuyama's opinion, is Germany. There is a much higher degree of mutual trust between management and labour than in less communally-oriented societies.

By contrast, Frederick W. Taylor's book, "The Principles of Scientific Management", attempted to codify the "laws" of mass production. The concept of mass production was introduced by the Ford Motor company in 1913 in Michigan. In an attempt to maximise labour efficiency in the factory, Taylor recommended a very high degree of specialisation that did not allow individual assembly line workers to demonstrate initiative, judgement or even skill. The aim of scientific management was to organise the work- place in such a way that the only ability required of an employee was obedience. Taylorism, as it became known, epitomised the carrying of the low-trust, rule- based factory system to its logical conclusion.

A workplace structured according to Taylorite principles communicates to its workers the message that they are not going to be trusted with significant responsibilities and that their functions will be laid out for them in a highly detailed and legalistic form. However, the de-skilling of labour, its overspecialisation and the frustrating nature of blue-collar work in a Taylorite factory contradicted the long-standing German philosophy of the importance of "joy in work". The German workplace was thus not structured along pure Taylorite lines but instead has institutionalised many trust relationships that allowed for a greater degree of flexibility.

Fukuyama suggests a more communally-oriented workplace as an alternative to Taylorism. Instead of sub-dividing labour into simple tasks performed repeatedly by specialised workers, a communally- oriented factory would aim for much flexibility in the way that it used its employees. Employees are trained to do many different tasks and could thus be moved around depending on the day's production needs. In this way, even the lower levels of the production hierarchy would be trusted with a higher degree of responsibility and skills would be improved.

The Taylorite factory in the United States has been replaced by a more team-oriented form of factory floor organisation imported from Japan, namely, "lean manufacturing". Lean manufacturing was invented in the 1950s by Toyota's Chief Production Engineer, Taichi Ono. Lean manufacturing creates an extremely taut and fragile manufacturing system that can easily be disturbed by faults anywhere along the line. Each worker has a cord at his workstation by which he can halt the entire production line if he notices a problem. The worker then fixes the problem at its source rather than permitting defects to be incorporated in the final product.

In lean production, the degree of trust shown in the lowliest assembly line worker is very high by Taylorite standards. Assembly line workers are given much decision making authority. Rather than being given highly detailed instructions on how to perform a narrow and simple task, an entire team of workers is given the responsibility to decide together how to solve a complicated production problem. The investment in training has to be much higher than in a classic Taylorite factory.

4. American Society and the Crisis of Trust

Fukuyama addresses the complicated problem of where to locate the United States in the spectrum of low and high-trust societies. Americans typically think of themselves as individualistic, but if this were so, it would be hard to account for the rapid rise of giant corporations in the United States in the nineteenth century. If it were an individualistic society, Americans would be too headstrong and uncooperative to take orders in large organisations and too independent to create enduring private institutions. Indeed, it has proved to be a society with a high propensity for spontaneous sociability which boasts a high level of social trust resulting in large economic organisations in which non-kin co-operate easily for common economic ends.

5. Corporations of the 21st Century

It is uncertain what the corporation of the early twenty- first century will look like. Whatever this form of organisation will be, Fukuyama contends that it will be discovered first by societies boasting a strong tradition of social co-operation. People who trust each other can adapt easily to new conditions and can create appropriate new organisational forms. However, societies with thick barriers of distrust, such as class, ethnicity or kinship will be hindered by extra roadblocks in their adoption of new organisational forms.

6. Enriching Trust

Most economic activity in the modern world is not carried out by individuals but by organisations requiring much social co-operation. Although property rights, contracts and commercial law are vital frameworks for creating a modern market-oriented economic system, it is possible to minimise transaction costs if such legal frameworks are supplemented by social capital and trust.

The most obvious consequence of a society with a high propensity for spontaneous sociability is the ease with which large modern corporations are formed.

The 3 high-trust societies of Japan, Germany and the United States pioneered the emergence of large-scale, professionally-managed enterprises.


In the light of Fukuyama's views and given that trust is relatively low in South Africa, we should focus on the building of trust to assist in promoting economic growth and productivity. The building of co-operative relations through employee participation can assist this process. Instead of employers perceiving employees as problems, constructive engagement through participation could build trust. Conversely it would discourage the tendency for certain employees to treat employment as a combative sport, rather than an arena where the parties, while recognising that on occasions their interests differ, enter the "corporate boat" together in order to fulfil their common objectives of productivity, profitability, fair conditions and employee well-being.

At a recent conference held in Johannesburg a Swedish speaker described the 6 cornerstones deter- mining whether Swedish investors would invest in a country and stated that one of them was a sound legal system with the ability to enforce obligations. A senior industrial relations manager, bemused, asked the speaker to explain why that cornerstone was important. The speaker answered that investors required know- ledge of the applicable legal rules so they could properly assess risk and hence a degree of legal certainty and proper mechanisms for enforceability (whether civil or criminal) are required.

What are institutional ethics? We invite you to assess the costs of continuing to endure low and ambiguous ethical standards.

For further information, please contact us.


The material contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage, which may arise from reliance on information contained in this article.

© Copyright Webber Wentzel Bowens 1999. All Rights reserved.