Trust but verify
Corporate execs talk about honesty, but few are very trusting thems
elves

Ask senior corporate executives about honesty and you'll likely get similar cliché responses. Character and integrity are routinely rated as essential qualities in the people they deal with and promote into management.

U.S. president George Bush's comments early this summer on the subject of corporate corruption are typical: "Ninety-five per cent (or a) huge percentage of the business community are honest," said Bush, a former oil executive himself. "But there are some bad apples."

But look a little closer and it quickly becomes apparent most business executives don't trust the bulk of their contemporaries and employees any further than they could throw them. And with good reason, because by the looks of it there are a lot more than a few bad apples.

According to study conducted by Ipsos-Reid, 20% of Canadians say they are personally aware of people stealing from their employers. And that's just those who are getting spotted or caught. Transgressions included inflated expense accounts, cooking the books, and pocketing the money from cash sales.

"If you've got more than five employees, you're a victim of fraud," said Nick Hodson, a partner with Ernst & Yong's litigation advisory services practice in a written statement accompanying the study results. "In effect all companies are suffering loss through fraud."

In fact, serious thinkers on the subject of organizational structure take it for granted that most people, not just corporate executives, are inherently corrupt, and that strong systems of internal controls are what keeps greed in check.

To see how little most managers trust each other and their employees, just look at a check issued by any large company. At the bottom you'll see two signatures. That's because the folks designing the internal controls at these organizations know that if they give individual executives complete signing authority, the till would be empty in no time.

For another sure sign take a walk near any company's office supplies cabinet. Even organizations staffed with highly educated well-paid professionals will lock the doors to corporate assets to prevent theft.

Many executives attribute their personal success to their ability to assess the trustworthiness of the people they deal with, and will brag about times that they did large deals on a handshake.

But look a little closer and you'll find that these "handshake agreements," are almost always followed by new rounds of negotiations, --often starting again from scratch -- when the lawyers are brought in the ink the ultimate contract.

There is an old saying about trustworthiness, which states that a verbal agreement is not worth the paper that it's written. Indeed Quebec law looks unfavorably at oral contracts and severely restricts the use of testimony to prove the existence of verbal agreements exceeding $1,500.

The degree to which people are inherently corrupt is not just some academic question. It is the primary principle directing effective corporate and organizational structure design.

In that respect the organizational structures of modern Western democracies and corporations have a lot in common.

According to historian Richard Hofstadter, the U.S. fathers of confederation believed that a human being was an atom of self-interest. "They did not believe in man," wrote Hofstatdter. "But they did believe in the power of a good political constitution to control him.

To prevent any American politician from establishing a dictatorship, the U.S. founding fathers separated governmental powers into three distinct branches, the executive, legislature and judiciary. Each institution acts as a check on the other two.

Large public companies are structured in a remarkably similar fashion.

Indeed the CEO position in most big public companies is a political office, with the CEO needing to build large constituencies of followers among employees, shareholders and directors as he moves up the ranks.

Like politicians, to get all these people on board, the rising executive has to employ startling amounts of mendacity, prevarication and outright lying. But to control these shifty CEOs companies are set up with boards of directors and auditors.

Internal control experts say that corporate structures must be set up so that three key functions: the custody, recording and authorization of an asset, are split up between three different people or departments. That way, for fraud or dishonesty to occur, two people must be involved.

One of the most telling anecdotes about individual honesty occurred during the landmark nuclear arms reduction talks at the Rekyavik summit between former U.S. president Ronald Reagan, and then Soviet leader Mikhail Gorbachev.

Gorbachev was annoyed by the U.S. demand that any agreement be accompanied by a weapons inspection protocol to ensure that neither side was cheating.

"You don't trust us?" Gorbachev reportedly asked Reagan. To which Reagan allegedly smiled and replied. "Trust yes, but verify."

Diekmeyer can be reached at peter@peterdiekmeyer.com

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