The franchise you want to buy follows regulations but is it ethical?

‘First, there is the law. It must be obeyed. But the law is the minimum. You must act ethically.’

This statement – from IBM’s Employee Guidelines – is one that should be adopted by all enterprises. Not copied of course, as that would constitute breach of copyright which is both illegal and unethical, but certainly embraced as an underpinning philosophy for the enterprise as a whole from the shop floor to the boardroom.

In fact, irrespective of whether Australian franchisors expressly adopt a similar proposition they are obliged behave to behave ethically. All members of the Franchise Council of Australia – franchisors, franchisees and suppliers – are bound by the FCA Member Standards which demand conduct that goes beyond compliance with the law:

“Members are expected to behave professionally and refrain from illegal, unethical or improper dealings or otherwise act contrary to the image of franchising or the FCA”.

Volkswagen is simply the most recent highest profile example of an organisation which would be in a much better place today if such a philosophy had been hardwired in the organisation’s DNA.

The practices which have cost the car firm billions of dollars in fines and compensation (in well as a plunging share price and massive reputational damage) were flagrant breaches of emission regulations but would not have occurred if the organisation had an entrenched corporate culture of regulatory compliance and ethical conduct.

The circumstances surrounding Volkswagen’s behaviour is still a work in progress but it is obvious that this scandal was not caused by the conduct of one bad apple – a risk for any enterprise – but reflected a lack of ethical awareness by a number of employees at a number of levels.  

Ethics is a branch of philosophy, moral philosophy, which is concerned with how people ought to act.

The study has engaged philosophers for centuries from the times of Socrates in 400BC to the present day. From a philosophical perspective it may be unsound to draw too close a connection between business law and business ethics; the law is what you must do, ethics is what you should do.

But although ethics has a life and a role separate from the law it is important to the note that the law which governs the franchise sector has an increasingly ethical influence.

The legislative directions not to engage in misleading conduct and unconscionable conduct reflect broad ethical standards. The unfair contract terms regulation and the addition of an obligation of good faith to the Franchising Code of Conduct are more recent examples.

It is not suggested that the enactment of these broad standards cover the ethical field and leave no room for ethical conduct beyond the statutory minimum.

Those familiar with the vast literature on misleading and unconscionable conduct know that that most of the litigation on these provisions are forensic battles about the reach and extent of the statutory provisions and not philosophical debates as to ethical obligations.

In many of the litigated cases – perhaps most – the impugned conduct would not pass the ethical test.

At the end of the day much litigation (and the accompanying time, cost, stress, adverse publicity, business disruption) would have been avoided if business ethics had been considered as well as business law. This will be even more important under the new good faith obligation.

There is a massive cost to litigation for all parties to it and in so many cases a greater attention to business ethics will avoid it.

It is no doubt a cynical approach but although an ethical approach to business is presumably meant to protect those who deal with that business it also protects the business itself from the financial and reputational cost of litigation.