Late payments exemplify how rotten corporate ethics can erode company culture from inside
Imagine this: It’s payday, but instead of your usual envelope containing your payslip, you receive an email. “Dear employee,” it reads. “Looking for your payslip? Afraid we’ve changed our payment terms. You’ll be being paid every six weeks from now on. Hope you don’t mind. If you do, of course, we can always find someone else to do your job.”
But what about the mortgage? And your train fare? And the car tax, the gas bill, the water rates? How will these monthly outgoings be paid if you suddenly don’t get paid? Does this sound improbable and outrageous?
And yet it is the situation in which many small and medium-sized businesses find themselves because customers pay late, or insist upon punishingly long payment terms, or change payment terms retrospectively.
SMEs report that this is the most important issue for them after access to finance. Data from BACS – the bank automated clearance scheme – shows that the average SME was owed over £31,000 in April 2013. That translates to over £30bn across the UK economy. Evidence from the Federation of Small Businesses indicates that more than half of small businesses are not paid promptly by large companies with the average payment time of 58 days, nearly double normal contract terms. And the situation has got worse in the current economic climate.
Paying suppliers late is an ethical issue that doesn’t receive the column inches of Libor Fixing or phone hacking, and yet it is a scandal that affects the lives of many. Late payments, for no valid or legitimate reason, are unethical. They are an abuse of “power” and in essence bullying behaviour by customers who hold all the cards. Small businesses are reluctant to use legislation, or they agree to punishingly long payment terms, for fear of losing contracts with bigger businesses on which they are often reliant.
The ethical principle underlying any contract is trust. And trust comes from fairness, honesty and mutual benefit. A reputation for trustworthiness can provide sustainable competitive advantage – it enables the organisation to attract and retain top talent and establish effective business partnerships and a loyal customer base.
But when the customer abuses a contract by late paying of invoices or changing payment terms, trust is quickly broken. In reality, suppliers, especially SMEs, are rarely in a position to challenge their customers for fear of damaging the business relationship. Small businesses are often unable to walk away and look for another customer, especially if an existing one owes them significant money; and charging interest on the outstanding balance rarely works.
Customers are paying their suppliers late to ease their own cash flow problems, pushing the financial risks onto their suppliers, which is unfair and an abuse of trust. There is a natural tension between a customer and a supplier which can result in the emergence of innovative solutions and mutual benefits. Far better for customers and suppliers to work together, to share the risk, to be truthful and honourable in their undertakings.
Paying suppliers late reflects the leadership and prevailing culture in the organisation. When it comes to business ethics, companies focus on employees potentially doing “bad” things – fraud, bribery, corruption. When in reality, it is the seemingly little things which show the true colours of a company’s culture.
Strategic decisions such as changing contractual terms, not paying on time, “losing invoices” or not passing invoices for payment or actioning requests for purchase orders, may seem to be “victimless crimes”. But during the 2008 recession it is estimated that 4,000 businesses failed as a direct result of late payments.
The decision to not pay promptly begins at company board level where the strategy is set, and ripples throughout an organisation until it reaches the accounts staff who press the payment button. A culture of late payments is an example of how rotten corporate ethics can erode company culture from the inside. Because if suppliers are not treated with respect, then other stakeholders – customers, employees, investors, society at large – are not likely to be either.
An organisation with an ethical approach to business practice will consider prompt payment of suppliers as an essential element of doing business ethically. To do so shows respect for the supplier relationship and is an example of the company’s fairness.
Business ethics is not rocket science: it can be summed up simply as “being nice to one another”. In today’s world, it is easy to become detached from the lives we are connected to by the click of a button. Suppliers are not a number – that company has a name, with livelihoods attached to it. Late payments are not a victimless crime, but they are a preventable one.
Philippa Foster Back is the director of the Institute of Business Ethics