Contracts: An Ethical Conundrum
As the name of this blog implies, I believe that commitment matters. The nature of the commitments we make, and how we then go about performing them, are fundamental to trust and reputation. I think it is time for the contracts community – Legal, Procurement, Contract Management – to engage in debate over the ethics of contracting and our role in safeguarding trust and reputation.
Contracts represent an interesting dichotemy in the commitment process. Clearly they contain commitments, but at the same time they limit the extent of obligations or potential recourse. This dual purpose results in some confusion about the role of contracts professionals. Should they be advocates for ethics and fairness, or should they be seeking to minimize the effect of promises offered?
In many organizations, there is a divide between sales and marketing (who make promises) and the contracts staff (who write conditions that limit any resulting obligations). Indeed, this habit of protection can be so ingrained that even the intentions of executive management may be undermined by the terms and conditions that appear in the contract.
While it is right for those in Legal, Procurement and Contract Management to protect their business against unreasonable loss, I believe they must think in bigger terms than individual deals. Surely we should be considering the reputational impacts of our contracting practices and the extent to which these cause others to be reluctant or wary when doing business with us? Regardless of any ethical implications, have we at least understood the potential financial consequences of our trading terms?
Over the last year, the recession gave rise to many examples of declining standards. Companies used power to impose unilateral changes in contract terms. There was a decline in readiness to justify policies or negotiating positions and a growth in the ‘because we can’ attitude. This erodes relationships – and as relationships weaken, there is a knock-on effect in the quality of performance.
It sometimes seems that we are caught in a trap where the criteria for winning business have reduced to unit price and risk allocation. In such an environment, both buyers and sellers are constantly watching out for opportunities to gain advantage or limit losses, rather than worrying about the quality of their performacne or the value they are delivering. And this leads to dissatisfied end users who rightly question the effectiveness of those who prepared and negotiated the contract.
End users are not the only ones who are paying attention. In our networked world, there are growing opportunities for both government and non-governmental organizatiosn to observe what is happening – and to take action. If companies cannot find a better way to self-regulate, then we must expect more pressure from outside – including a tougher regulatory regime.
IACCM has become stadily more involved in these debates. For example, we are active in debates over ‘fairness’ in payment terms (the European Union has already stated it will legislate in this area). We also joined the Business Travel Coalition in its efforts to shift airline policy in the United States regarding hours that passengers could be held ‘on the tarmac’ (the US administration announced new rules will come into effect in April 2010). And this year, we will be participants in a global initiative for consumer contracting principles, seeking to develop more consistent approaches to the way that businesses deal with consumers (the US State Department, the Organization of American States and UNCITRAL are all pushing for changes in this area).
Change will occur. Once more, our community has a choice. We can be by-standers, waiting for others to define the policies and procedures that represent acceptable ethical approaches to the negotiation and management of commitments; or we can be active participants in the debate, within our organizations and beyond.
The global economy demands new standards. I hope that we will contribute to these by working together to propose codes of conduct, both for ourselves as a body of practitioners and as a recommendation for the way that business should operate.
What do you think?
Commitment Matters 
Some thought provoking issues here, Tim!
It seems to me that corporate integrity is the underlying issue here; specifically, lack of integrity. These repugnant ‘take-it-or-leave-it’ and ‘because-we-can’ attitudes are anathema to contracting professionals. In my experience such attitudes are a reflection of conscious corporate policy intent upon continuously improving bottom line and stockholder value. We have now reached the state where principled negotiation cannot drive margins down or transfer risk accountability any further. As a consequence, intimidation is about the only technique remaining available to the negotiator under instructions to implement policy. Sadly, I don’t foresee that landscape changing even when the global economy turns around.
In the UK there’s a saying that “Ethics (sic Essex) is a county east of London”. That quip is no longer amusing; because, it reflects attitudes to declining personal and corporate integrities in our money-centric world. So, we can join in debate, but there’s a depressing lack of realistic solutions.
Colin, thanks for these observations. I think you are right that society generally is struggling to find a new balance on these issues. Perhaps this reflects the breakdown of many established instititions; we are all tyring to understand quite where and how we ‘belong’ in an increasingly borderless world.
Of course, you may be right that we are on a slippery slope that is taking us to a world of each for themselves and to hell with morality. But I like to believe that we are instead in a period of transition and such periods always offer – indeed demand – the emergence of new leaders. Among those is most likely the creation of new professional groups and forums that will exert real influence in moving us from past to future principles of governance. I see no reason why our community cannot be one of those leaders.
Here here, gentlemen…
I would like to add my comments, which I trust will not stray too far from the subject matter.
As one who has seen some of these ‘society changes’ over the recent years at a close and personal level, I fully endorse the possibility that closing the gaps for those issues mentioned above is fundamentally necessary to improving and regulating the manner in which contracts are tendered, let and controlled. Although, I agree with you both that such task is depressing and collateral damage to industry will be widespread further than it is today.
Forgive my cynicism, for me, the title of the first post say’s it all, especially with the use of the word “…ethics..”, which for many expats is now a ‘dying sun’ sinking into the horizon, empasizing Colin’s “…quip…” about Essex.
To grasp the mantle, it is my view that one of the dominant causes at this time is the high diversity of components and by that I mean with the world progress expanding at a high rate and (as mentioned above) with every grubby little ‘dealer’ hoping to make his own chunk of cash at whatever cost problematic issues of how to contract, when to contract and the manner to contract, become wider. This thought also embodies more advanced and broader spectrum of problems, such as finance and investment, which are in today’s marketplace tailormade with disputable items and fraught with political and corporate interference.
In past times there seemed to be limited states involved and there were prescribed standards which we all recognised and were capable of working to with relative ease. New projects worldwide all have the ‘local’ influence embedded into the circumstances, hence (I believe) dealing with so many different laws, cultures and religions causes certain differences to the moral approach and (in my view) has led to the erosion of the contractual intent we once knew and recognised to maintain and bind parties with reasonable standards.
Clients in many countries hold the ‘whip-hand’ and fully exercise that right, in many cases without proper control. This creates negative issues to place unnecessary burden for modern contractors to even comply with the ‘basic’ rules and regulations under a contract from each commencement.
Some countries, in the Middle East (for example) are already working to bridge the gap and attain some measures to control issues that, by tradition lead to such waywardness. However, those changes are sprinkled with local laws, which by their own nature are different from the ones which standardised the construction industry in the first place. Some expats are involved in the process, but this is still in it’s infancy and even Middle east states trying to set in place a fair system still suffers from dubious influences to official procecess. Equally, a few countries are set by recommendations from (dare I say it) consultants who know how to escape the duty and committment in such matters and who can disguise ‘progress’ and compliance as the means to justify their own ends. In many cases this is purported under cover of the expression’s of ‘no play, no pay’ or being placed ‘over-the-barrel’ by customers. Employment contracts are widely flouted and the ‘old’ expat way of life is now, for many, a struggle for survival – all of these details point to a marked and very large change in attitude between contracting parties, which is driven (as you both indicate) by corporate change.
Apologies for the volume, but I also fully agree that something should be done to tackle this matter, but at what level and by whom, is probably greater than all of us singularly. A uniform or collective approach would seem to be the better way.
Thanks Graham, especially for your diverse cultural perspectives. As you say in conclusion, these issues are certainly beyond individuals and hence our efforts to drive collective action through IACCM. There is a lack of groups or associations with wide cross-cultural and cross-industry membership that could perhaps offer the reach and objectivity to have influence on these issues of fairness and wider human interest. IACCM is such a vehicle; but of course the challenge then becomes whether enough individuals actually care sufficiently to make campaigning a real possibility.
Thank you Tim,
Agreed … The main players (Institutions) have already attempted such activity, I was involved in setting one up myself in Indonesia with the CIArb. about 10 years ago and I can vouch for the numerical existence of the ‘talkers’ and the ‘doers’. As you say quite rightly, there does need to be more collective power to such campaigning with people who know and can recognise the ‘loopholes’ in those defensive arguments from those who actually need the help.
Alas, the present state of the world economy is going to be one stumbling block, with a large number of qualified people maintaining a ‘state of grace’ to protect personal interests.
However, I am always willing to help in any way and this medium is a good starting point to collect the quorum. What’s next …?