Ethical business means rewarding creators of value

Business Report
7 April 2010
Jonathan Yudelowitz

Business morality is supposed to ensure that merit triumphs over mediocrity; that good ideas triumph over bad; and that value and wealth is created.

Effective capitalism encourages people to invest because of conviction, without certainty of outcome; to risk their resources and to apply intelligence, creativity and labour to create value.

It implies a relationship between what people say and uphold and what they do; what they contribute and what they reap; and that the "rules of the game" are clear.

Luck - being in the right place at the right time, being born with brains or beauty - always plays a part in success. Thus people will always envy, be awed by and admire people apparently better off than themselves.

Nevertheless, the Companies Act, tax legislation and competition law ensure that businesses operate in a relatively fair environment: that fate, passivity and gambling, while always present - feature less prominently than productive value creation.

Corruption torpedoes ethical value creation; and so destroys enterprises and societies. It occurs when society allows its members to amass riches without having to declare their special contribution; letting them masquerade as genuine economic players.

The banks' role of allocating credit with intelligence and foresight is crucial; bankers' responsibilities are huge and should be rewarded when properly exercised to create economic value.

The crumbling infrastructure and unfinished houses in the so-called Third World - where credit mechanisms are either substandard or lacking - illustrate the true function of credit: to enable businesses and individuals to accumulate value-creating and quality-of-life enhancing capital, such as decent homes or education, when they are needed.

US and British bankers distorted credit, becoming obscenely rich, convincing themselves and others that in the "new superior" form of global, technology-enabled capitalism, people could acquire assets without working for them or investing anything. They cynically exploited the man in the street's trust in banks' brands, the expensive and prestigious degrees of their deal makers and the endorsements of the rating agencies and authorities.

In its present form, South Africa's black economic empowerment (BEE) programme is still experienced as artificial; even after 16 years as government policy, the business establishment has not committed to it.

This is largely because, like investment banks' remuneration systems, BEE fails to distinguish between beneficiaries who make a contribution and add value, and opportunists or "tenderpreneurs", who benefit because of their connections - who risk or invest nothing. Universally, insider trading is a criminal offence for executives and owners of publicly listed companies; yet in South Africa, Julius Malema and endless others exploit the "inside track" to get rich, without sanction.

The moral problem with Malema and his ilk, is that they did not earn their wealth by taking risks or investing with imagination and talent.

This would hardly matter if it were an isolated incident but it is a trend set by the Elephant Consortium, led by the former director-general of communications, Andile Ngcaba, who unfairly exploited his inside track to get a sizeable chunk of Telkom. This was followed recently by Imperial Crown Trading, a shelf company of Gugu Mtshali - a former personal assistant to the ANC treasurer-general - getting prospecting rights over a share of the rich Sishen iron ore mine, ahead of Kumba Iron Ore, complicating the corporate dispute between it and ArcelorMittal South Africa.

People who make their money through opportunism not only extract more value than they create but they damage the reputation of the whole economic system. Beneficiaries of an unfair system cannot be role models to aspiring young South Africans, who need to witness their elders triumphing over disadvantage through ingenuity, tenacity and hard work, proving racists and patronising imperialists wrong.

Instead, the BEE tenderpreneurs and other undeserving beneficiaries, like greedy Anglo-Saxon bankers, rely on the increasingly shaky and morally pretentious rationalisation of transformation and free markets, respectively.

In doing so, they subvert capitalism and South Africa's vital economic and social transformation project.

Jonathan Yudelowitz is the joint managing director of YSA and the author of Smart Leadership.