Auction Alliance: Can it be saved?

People have been dismissed, reputations damaged, and clients lost.

The Auction Alliance saga has revealed some very questionable business behaviour. The costs and consequences that continue to unfold warrant considering what they should have done.

The recent Saturday Star report that kickbacks were paid to liquidators, attorneys and bank staff to direct business to AA has been accompanied by accusations of collusion between AA and the seller. And, Wendy Appelbaum is disputing the legality of the Quoin Rock auction in December 2011 when it was established that she was the only genuine bidder.

In response, Investec, FNB, Nedbank and Absa stopped trading with AA, and the National Consumer Commission, the Estate Agency Affairs Board and the SA Institute of Auctioneers initiated investigations.

AA’s denials and Rael Levitt’s defamation charge against Appelbaum were dropped as the matter escalated. Levitt stepped down as CEO, and acting CEO, Bruce Sneddon, is now battling to retain clients and salvage a declining reputation.

Central to this scandal is the fact that the behaviour and practices this has exposed amount to a major ethical failure. But, what can be learnt from this?

Understanding what drives unethical behaviour is arguably easy enough. At an individual level it is often simply the opportunity to acquire additional financial or other benefits. At an organisational level it could be viewed as perverse approach to maintaining competitive advantage. In the case of AA, the company that Levitt described as leading the auction industry “by a long shot”, this lead appears to have been secured via kickbacks, which gave them a virtual monopoly in the industry.

Yet this position of prominence was built on an unsustainable foundation. It may have lasted for many of the 20 years AA has been in business, but it could not have been maintained for ever. The leadership which kept AA on this path can be described, at best, as extremely reckless – and as unethical.

The cost of this breach of ethics is well illustrated - people have been dismissed, reputations have been damaged, and clients have been lost. Additional costs may include jail sentences and even the closure of the business, two such examples being Jackie Selebi, the jailed former National Police Commissioner, and Wendy Mechanik, whose national estate agency was closed down. All too often, the cost of ethical failure also extends beyond the perpetrators to innocent victims who effectively “share” the cost - such as employees who lose their jobs and investors who lose their investments.

But, do these costs act as a deterrent to others? It is unfortunately questionable whether many leaders or organisations learn from the mistakes of others. The challenge of the AA situation is that when you are “in the cash” (as Levitt described their kickbacks), it is difficult to abandon that advantage. It takes strong, ethical leadership to choose another path.

AA should have, but didn’t, recognised the importance of business ethics.

To manage ethics effectively necessitates ethical leadership, articulated ethical goals and a supporting ethics strategy. Creating an ethical culture is a worthy goal, which requires a strategy based on a proactive approach. This contrasts with the more frequent occurrence where ethics is only addressed reactively, after a problem has arisen, or on an ad hoc basis.

A sound strategy includes the regular measurement and monitoring of the company’s ethical status using an ethics survey (such as the Ethics Monitor). For AA, this would have provided an opportunity for those employees who knew what was happening to expose it at the outset.

Establishing an effective ethics committee can provide valuable guidance and support to build an ethical organisation. This can also serve to meet the requirements of the Companies Act to form a social and ethics committee.

Reporting on ethics constitutes a crucial element of a good ethics strategy – provided the report is based on the experiences and perceptions of the company’s stakeholders, not simply on the directors’ assumptions or desired reality. This also serves a dual purpose by meeting the reporting requirements of the Companies Act and the King III recommendations.

However, this approach was not followed at AA, and is also not followed by other companies in other industries. For these organisations ethics is either an illusion – spoken about, but not real or acted upon - or viewed as a luxury which cannot easily be afforded in the competitive business world. Fortunately, there are organisations and leaders who view ethics as essential for a sustainable business – not just to avoid the costs of ethical failure, but, more importantly, to reap the benefits of an ethical culture.

Trust is one of the primary benefits of sound ethics – yet this is what AA now lacks. Without trust, Sneddon’s efforts to save the company may well be in vain.

By Cynthia Schoeman
Posted on Moneyweb