With a background as an electrical engineer, it’s not surprising that W. Edwards Deming repurposed the ideas of connections and electric circuits as he became a business consultant.

One of his well-known theories is the “System of Profound Knowledge”, a concept that defines an organization as nothing more than a holistic system, connecting not only internal resources, but also interlinking with external stakeholders. For managing the system, four pillars are relevant: Appreciation of a system, knowledge of variation, theory of knowledge, and psychology.[1]

Deming published this concept back in 1993. But despite being almost three decades old, the philosophy sounds more modern than ever. Thanks to digital twins – virtual replicas of physical devices – his philosophy can now be practically implemented, not only in production facilities but also the office environment.

The new workforce is ready to take on AI systems

Believe it or not, Generation Z (born 1997 and later)[2] is now in the process of entering the  workforce. These employees not only grew up with the internet, but also have extensive experience with voice assistants and other forms of artificial intelligence. Accordingly, they appreciate the technology and are comfortable interacting with AI to achieve the required results. With Generation Z, the future workforce is skilled in system-thinking.

The concept of smart contracts was first defined one year after the “System of Profound Knowledge”, not by a lawyer, but the computer scientist Nick Szabo:

“A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs.”[3]

As a mathematician, his definition of a legally biding document is nothing more than a rules-based algorithm.

Smart contracts can keep your company sustainable and secure

With extraterritorial laws such as the U.S. Foreign Corrupt Practices Act or the UK Modern Slavery Act 2015, companies can be held responsible for their vendors, sales agents and other partners. As a consequence, they must elaborate a code of conduct for vendors, and in parallel conduct background checks and request evidence.

The electronic signature on a contract is based on conditions. If a vendor stops complying with one or more of them, much like the effect of an electric circuit getting interrupted, the validity of the contract is disrupted.

For example, a company may require its vendors to upload an annual statement that their products are free of conflict minerals. Based on this condition, the agreement was signed. If the vendor does not comply with the deadline of the rule, the smart contract gets automatically abrogated until the issue gets resolved or the company decides to terminate the agreement.

Smart contracts can be combined with continuous monitoring, where an algorithm connects  automatically with various databases to check if a used vendor gets listed or delisted from a governmental sanction-list, is involved in a lawsuit, or negatively mentioned in the news which could lead to reputational risk.

Human interaction is still needed to execute smart contracts properly

The ideal collaboration of AI with humans is that the machine is responsible for the level 1-tasks, freeing up the human expert to focus on the level 2-priorities. Regarding smart contracts, this means that the algorithm can continuously monitor that all defined rules are still valid. The moment the AI perceives that this is no longer the case, it interrupts the smart contract and alerts the employee to analyze the situation.

The human stays in charge, and accordingly must make final decisions to confirm or dismiss the computer alert.

This requires not only that the human understands the system, but also that they are capable of critical thinking to avoid falling prey to automation bias or a general over-trust of the AI. This has become increasingly important in the current environment, where a host of disruptions have been deemed “force majeure” due to the COVID-19 pandemic.

Deming’s focus on human psychology inside the system is imperative. He says a contract is “a voluntary, deliberate, and legally binding agreement between two or more competent parties. Contracts are usually written but may be spoken or implied, and generally have to do with employment, sale or lease, or tenancy.”[4]

This broad definition should also apply to smart contracts. The province of Alberta published the “Electronic Transactions Act” in 2001. The law defines the validity of electronic contracts, including the option of “the interaction of an electronic agent and a person or by the interaction of electronic agents.” Today the wording “electronic agent” has become outdated, replaced by as the terms “automated” or “autonomous software”.

As the demands of all included parties must be ensured, it’s crucial that smart contracts need to be auditable at any time.

Blockchain technology adds an extra layer of security and transparency

Modern definitions align smart contracts with blockchain:

“A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible.”[5]

The blockchain technology promises enhanced cyber-protection for smart contracts, as the information does not get stored on just one server, but is encrypted and decentralized on numerous servers. The different machines validate each other, and any deviating information (such as a manipulated contract),  would be automatically overwritten with the correct authorized information stored on the other servers.

As expressed by “chain”, no information gets deleted, but all changes are registered with the date and time. If the smart contract is enabled to connect automatically with other databases where certifications are stored in blockchain, the contract would add those. If not, it could connect to an internal server, where vendors manually upload such documents.

In times of global anti-corruption enforcement and rising stakeholder activism, companies want to ensure that their partners continuously comply with the law and defined human rights-initiatives. As a result, more documentation and statements are required. Smart contracts are a possible solution to achieve transparency, and automatically control the needed certifications. In the spirit of W. Edwards Deming, they can act as a bridge to connect two crucial organizational systems.

[1] Deming, W. Edwards (1993): “The New Economics for Industry, Government, Education”

[2] Dimock, Michael (2019): “Defining generations: Where Millennials end and Generation Z begins”

[3] Szabo, Nick (1994): “Smart Contracts”

[4] BusinessDictionary (fetched 04.04.2020): “contract”

[5] Frankenfield, Jake (2019): “What is a Smart Contract?”

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After nearly 20 years of allowing facilitation payments, the Canadian government has repealed a section of its anti-corruption laws to eliminate the exception for facilitation payments. The revised law protects employees by making it clear that all forms of bribery are prohibited and will be sanctioned.

According to the finance and investing portal Investopedia, facilitation payments are made, generally to low-level government officials, “to smooth the progress of a service to which the payer is legally entitled, without making this payment.”

Under the 1998 Canadian Corruption of Foreign Public Officials Act, these payments were legal.

This regulation was similar to one included in the US Foreign Corrupt Practices Act of 1977, which excludes facilitation payments. But companies operate in a gray area here.

Most routine public processes do not automatically lead to the desired result, but include some kind of control. If the request for required documentation is not complete or does not comply with the process, for example, the approval is denied. This is a stumbling block, as countries with a higher perceived level of corruption often  have an inefficient bureaucracy.

A comparison of the 2014 World Bank’s Ease of Doing Business Index with the Transparency International Corruption Perception Index from the same year presented a correlation coefficient of 0.79, a strong statistical relationship. As a corrupt government official has no interest in making the process transparent, it is nearly impossible for the individual to understand whether a potentially missing document is based on process or has been invented by the official to provoke a payment.

Arm employees to handle bribe requests in high-risk areas

Employees traveling from countries with a lower corruption risk, such as Canada, to those with a higher risk are particularly vulnerable because they do not have experience handling such requests. This includes understanding how to avoid risky situations and how best, based on local culture, to decline the request.

If corruption has not played a role in the individual’s life, it may be difficult to connect their existing inner values such as integrity or honesty with the attitude “do not bribe.”

Business travel only offers limited opportunities to meet local employees or other citizens, especially when there is a language barrier. Clichés like “corruption is part of the culture” or “locals are happy with it” can be easily assumed. Corruption becomes perceived as a faceless crime, and the employee’s positive self-image is not challenged by this cognitive dissonance.

In most countries, facilitation payments are defined as classic bribery and a deviation to local laws. If an organization wants to be a good global corporate citizen, these payments must be forbidden.

Corrupt government officials often take advantage of gaps in knowledge and time pressure. Uninvolved employees who are unaware of the human cost of corruption, such as lack of infrastructure, inefficient public schools, restricted access to healthcare and legal impunity, are easily persuaded to pay the bribe. Companies are responsible for their employees. If they send them to places with public safety or health risks or corruption, they must be prepared for the potential risk scenarios.

Eliminating the gray areas

To ensure adequate behavior, companies not only have to inform employees about law, culture and business behavior, but their Ethics & Compliance Officers have to go a step further and motivate employees by explaining which regulations apply, and why.  This means detailing the relationship between bribery, slowed growth and poverty to develop empathy for the victims of corruption. Facilitation payments can speed up a process, which means the process for someone who does not make an additional payment becomes slower. An advantage for one always means a disadvantage for someone else.

Laws, like corporate guidelines, fulfill an important task. Based on government’s opinion and its role representing the population, laws define adequate behavior and how to sanction violations. It is imperative that laws be as strong as necessary to protect individual rights, and as non-bureaucratic as possible. Efficient laws draw thin red lines that separate the adequate from the non-adequate and eliminate gray areas. Individuals can act and live safely inside this space. Less efficient laws enlarge gray areas and limit the individual’s safe space. Based on these premises, efficient laws (and corporate guidelines) are ethically justified.

On October 30, 2017, the Canadian government eliminated the gray area in its anti-corruption law and drew this type of red line when it repealed the exception for facilitation payments.

The change is more of a protection than a limitation for employees. No longer do they have to interpret potential mixed signals from management to understand what is expected of them because all forms of bribery are forbidden and sanctionable. If they are faced with a situation in which a government official requests such a payment, they can refer to the law and decline the payment while keeping the discussion short.

Overnight changes will challenge organizations

After nearly 20 years, the law’s repeal is a sudden, but relevant change. For a company that did not sanction facilitation payments in the past and allowed them as an option for their employees, this creates a risk, because human behavior is difficult to change overnight. Experience has shown that not all individuals are willing to adapt or are capable of adapting to major change. The organization has to accept that certain employees will have to be dismissed and some will leave on their own. To accomplish the change as smoothly as possible, the company will have to educate its employees through planned communication and interactive workshops.

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Yatarō Iwasaki started his business with three rented steamboats as a small, local trading company.

Accordingly, he named his company “three water chestnuts”, or better known in Japanese as “Mitsubishi.” More than 145 years later, it is one of the world’s biggest and most-well-known conglomerates.

But Iwasaki’s business activities were not all about the money. He strongly believed in Japan’s growth and welfare opportunities as the country opened itself up to the world, and especially to the United States (after the 1854 Convention of Kanagawa).

This growth and opening was an extreme change for the country, and ended 220 years of self-imposed national seclusion.

Take good care of the business and stay true to your vision

Besides this, Iwasaki used his business success to re-establish the honor and Samurai-status of his family. Years before, his grandfather had made the difficult, but necessary, decision to sell that status in order to cover existing debts.

The combination of honor and trade has a long tradition and can be found in many different cultures, as the examples of the German Fugger or the Italian Medici families show.

Both houses started with trading activities and later became even more respected because of their banking businesses. This natural development can also be found in today’s Mitsubishi conglomerate.

Knowing this history, it is understandable that Mitsubishi meant more than a source of income for Iwasaki. It also makes sense that this entrepreneur would ask his employees and successors to:

Take good care of the business and stay true to my vision.

Such wise advice continues to guide the company today, as well as the business philosophies behind some of today’s most well-known companies.

As I explained in my previous article, “How corruption spreads like a virus and what you can do to stop it from infecting your company,” losing discipline in production, and in all other aspects of business life, starting with low scale violations to internal guidelines, affects the long-term quality of production and project execution.

Never sacrifice the integrity of your products or services

Enzo Ferrari made his vision clear:

What we do here is elite work.

Ferrari lived discipline throughout his life.

Into his old age he never gave up this value – even if it meant the termination of key employees, including engineers and race-car drivers, who violated verbal or written guidelines.

All of these cases had only temporary effects. But, in the long run, the company became even stronger through these difficult decisions. Additionally, basing employee development on performance gave two young, inexperienced engineers the motivation and opportunity to design one of the company’s most iconic creations: the 1962 Ferrari GTO.

Don’t fear failure, enable growth

Twice, General Electric employees won the Nobel Prize – the first went to Irving Langmuir for Chemistry in 1932, and second to Ivar Giaever for Physics in 1973 by. This was by no means an accident.

One of the company’s co-founders had been the famous inventor Thomas Alva Edison. Besides his scientific reputation, he always had an interest in capitalizing on his discoveries. This resulted in 1,093 patents in his name.

One of Edison’s credos had been:

I have not failed. I’ve just found 10,000 ways that won’t work.

If we agree that this motto is not only valid for technical inventors, but also for managers and all other employees, it sets a positive corporate culture that allows employees the possibility of failure – and the opportunity to learn from it.

Many examples show that an atmosphere where employees are more afraid to fail than they are motivated to win leads to a downturn of the whole organization.

Edison shared one value with all the aforementioned entrepreneurs – respect. He had respect not only for employees, society and clients, but also for his competitors. The most well-known of his competitors was Werner von Siemens, as General Electric and Siemens competed in many sectors against each other.

Nevertheless, both had a mutual respect for each other. In 1889, von Siemens had even invited the Edison Family to visit him in Germany and stay at his private house. There had been healthy competition but, based on this friendship, the two companies also cooperated in matters of mutual benefit.

Take long-term sustainability over short-term profits

By saying “I won’t sell the future for short-term profit”, von Siemens defined a concept that much later would become known as “sustainability.” A hardworking man, he knew that success did not come overnight.

He also believed that short-term actions without a long-term strategy can bring even a healthy organization down. It is an omnipresent risk, as managers tend to overestimate opportunities and underestimate risks.

Sustainability covers three parts: the proper long-term development of environment, society and business. In other words, sustainability is the maximization of profit over the long-term.

With these few examples, it’s clear that a company’s founder – even 100 years later – still has a tremendous impact on the company’s perception and its culture. So it is no surprise that these companies present their founders prominently on their websites and/or dedicate whole museums in their honor.

A company is more than just about earnings; it is the dream and vision of its leaders and employees. We have to take good care of it.

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Philosopher and novelist Ayn Rand recognized in her masterpiece “Atlas Shrugged” that corruption leads to the interference of trade and, eventually, to a doomed society.

Several different studies and articles confirm the negative consequences and costs of corruption for a country.

But it does not stop there. As business is part of society, corruption also dooms companies.

The known corporate corruption cases of the past show that it is impossible to control bribery and limit it to just one area or region. Even if corruption is practiced only in receptive sectors and/or countries, it is not a sustainable business strategy.

The infection can begin with one simple bribe

Companies are like living organisms that can be infected by the virus of corruption.

Similar to a viral contagion, corruption will spread throughout an organization if not treated intensively at the onset of symptoms with an antibiotic called “zero tolerance.”

To illustrate this point, let’s imagine that a sales employee pays a bribe to a procurement person at a potential customer’s company to ensure a project win. From this point in the decision-making process, the combination of price and quality plays only a subordinate role.

The winning factor is the bribe.

Inside the selling company, the impact is a decline in the importance of production and project management relative to sales. Management attention and employee focus shifts to sales, as this function is considered most valuable for the company.

In this situation, the selling company ensures business by strengthening relationships through illegal payments.

Production and project management employees are less motivated, as they feel they are no longer valued.

In response, these teams produce lower-quality work. Poor motivation leads to a decreased sense of employee loyalty, which can result in higher rates of theft, sabotage, internal fraud and employee turnover.

Meanwhile, management loses interest in how tasks are achieved, preferring instead to focus only on sales results.

The virus easily spreads from department to department

The growing infection soon spreads to the procurement department. As the internal priority is clearly the “successful” sales department, procurement loses its independence and is now advised by sales.

Procurement is pushed to use certain providers, based on whether the bribery model requires a third party or if the supplier is a family member of the prospective customer. As with the production team, we find the same effects of employee demotivation.

Corruption is not part of a culture, but a learned behavior often used to create a shortcut through complex legal environments. Many companies have an extensive system of guidelines, policies and tools.

Employees who see that bypassing external laws is acceptable corporate behavior may also assume this practice applies to internal regulations.

Conflicts of interest can increase, as internal connections become more important than the quality of employee output.

A common result is that talented employees offered the opportunity to work elsewhere will leave, while less talented employees remain.

In addition to the psychological effects on employee behavior, corruption also affects transparency and internal processes.

Winning a project with a bribe sends the wrong message to the development team, as they can only analyze the relationship between price and quality to the project win rate, but cannot include illegal payments as a key factor.

The infection starts effecting quality of work, competitive edge

Due to this hidden information, the development team wrongly concludes that the company’s solutions are competitive and that investment is unnecessary. In contrast, competitors that work with full transparency foster the development of better solutions.

Over time, the company that succeeds because of bribery loses its competitive edge. To compensate for this weakness, it has to increase the size of bribe payments – a situation that the potential recipients exploit.

Eventually, the bribes are not large enough to justify the difference in competitiveness. And if a significant number of talented employees have left to work at another company, it will be difficult to switch strategies to foster the development of superior products or identify less costly production methods.

By this time, the virus has also infected the bribed company. Because of bribe payments, the procurement employee has selected a sub-optimal solution for the company. Now this company is not using the best and/or the most cost-effective materials for its own production.

It becomes less competitive and no longer offers attractive solutions. A sales employee working for the bribed company needs to find another factor to win business, and may be tempted to offer a bribe.

You can kill the virus

If we see a company as a living organism, then some kind of preventive treatment should be prescribed for this disease.

Compliance workshops can work much like vaccinations. With relevant case discussions and role-playing exercises, employees can learn about potential situations they could face, how to react, and what consequences could occur.

Like an antivirus, this knowledge stays inside the employee and can be activated when needed.

Bureaucracy provokes corruption and vice versa.

To avoid this downward spiral, a company should establish internal processes that are as simple as possible to ensure transparency and employee accountability. Compliance Officers cannot do their jobs only from behind closed office doors.

They must be easy to reach and well-known across the company. Trusted employees can be offered the additional role of “Compliance Promoter,” and IT tools can ensure that an anonymous reporting system is available 24 hours a day.

Compliance training sessions cannot be limited to presentations about rules and regulations. It they are, employees will only behave if they feel controlled.

Instead, companies need to establish a values-based culture where employees understand their role inside the organization and how corruption could affect their job.

In this culture, everyone is equipped to face difficult situations – and not just employees in typical risk groups such as sales or procurement.

Is your company protected against this kind of “corruption contagion”? What kinds of “vaccinations” does your company have in place to stave off bribery and corruption?

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