Ethics for Credit Managers
While I was researching a book on credit management in 1994 I spoke to a credit manager in Melbourne, a very competent operator. He told me, among other war stories, about the time that he discovered that the managing director of a business which was going down "the gurgler" had committed fraud. The business owed his company a significant amount of money. He went to the MD and told him what he knew, then got him to sign a security in favour of his company covering all of its current debt, but back-dated two years to avoid any unpleasantness over voidable security. My shock at this tactic must have showed on my face because the credit manager felt obliged to explain, "it’s a tough ballgame we play in here."
Rightly or wrongly, I advise credit staff to take a very pragmatic approach to credit management ethics. It involves a simple three step test:
- Would I be committing a criminal offence? If yes, don’t do it.
- Would I be uncomfortable defending my actions on "Holmes"? If yes, don’t do it.
- Even if I am comfortable defending my actions on "Holmes", is it likely that a normal company would end up with egg on its proverbial face? If yes, don’t do it.
Obviously, the actions of the Melbournian were highly unethical and fail all three tests. (Clearly, some people carry their dedication to their jobs too far.) He was probably committing an offence which could have led to his imprisonment. In New Zealand he would arguably have been breaching s229A (using a document with intent to defraud for the purpose of obtaining for himself or another person any pecuniary advantage) and s238 (threatening to make disclosure of any offence and compelling a person to execute a valuable security).
Dealings with insolvent debtors and payments by failing companies is clearly one of the major areas of ethical uncertainty for credit staff. The US "National Association of Credit Management" seems to agree, in that over half of their "Canons of Business Credit Ethics" touch on this area. (To my mind, their "canons", which are listed below, have something of the fragrance of waffle.) In my view, there are three other main areas where credit staff and the businesses they work in should consider their ethical position. They are:
- The use of third parties - debt collectors, private investigators, and repossession agents - who employ dubious or illegal methods;
- Harassment of debtors; and,
- Lying in the course of payment negotiations.
In the last year, there has been scandal over the practice of some debt collection agencies of paying staff in government departments for confidential information. This sort of thing has been going on since time immemorial. It may even be that your business is doing something similar. I have had front-line credit staff in reputable organisations - councils and major public companies, for example - tell me that they have "a cousin down at Housing Corp" or "a friend at WINZ" with whom they swap confidential address information.
These are generally people who are well-meaning, and who desire only to do their job effectively and prevent debtors from avoiding their responsibilities. But what they are doing is certainly unethical, probably a breach of the Privacy Act, and in some cases a criminal offence. At the very least, their cousin or friend at the government department or SOE stands to lose his or her job.
Another way businesses deal with this is by keeping it at arms’ length. "We don’t use unethical means to obtain information; we use a private investigator who has very effective confidential sources. We don’t inquire into his methods." This is clearly dubious moral ground, and even though you might appear to be sufficiently distant, there have been cases where the furore has splashed back as far as the creditors who employed the PIs. A New South Wales Royal Commission early in this decade criticised the banks who used such people, confirming the general Australian view that all banks are bastards.
The better approach was expressed by a collection agency which had a contractor - used for debt collection, repossession, and tracing - with a phenomenal success rate. "He was just too good at finding people," they told me sadly. "He had to be collecting his information illegally, so we had to stop using him."
The use of bikie gangs to collect your debts, also fails the test. Effective, yes: good PR when you appear on Holmes, no.
Harassment of debtors is another potential problem area. If your staff ring debtors at 3am, they may not fail the first test (although there is a rarely-used offence called disturbing use of a telephone under the Telecommunications Act which they could fall under) but they will certainly fail the other two. Some forms of harassment - for example, telling the debtor’s boss that she hasn’t paid her debts - are clearly in breach of the Privacy Act.
The last of the three major issues is simply lying while trying to collect your debts. Credit staff commonly say things like:
- If we don’t get payment by the end of the week, we’ll commence bankruptcy proceedings (when they have no intention of doing so).
- "I’m sorry, the computer says you don’t meet the criteria" (when there is no computer);
- "If it were up to me, I’d hold off taking legal action but head office insists that we have to have the money by tomorrow" (when head office has never been consulted);
- "Our policy says we couldn’t accept anything less than $20 a week in this situation" (when there is no such policy);
- "If you’re going to use that language I’ll have to put you through to the manager. I’ll put you through now... Hey, Debbie, would you mind being the manager for this call?" (when Debbie is not really the manager);
When you are dealing with seriously overdue accounts, you will inevitably be told lies. You can seldom catch the debtor out. Your weapon is to tell your own lies. Collection haggling is a game in which there is considerable latitude for exaggeration and bluff. The use of a "bad cop" is also standard. I’m sure there are lies told by credit staff which may breach one or more of my criteria but to me, the examples I’ve used don’t.
One further ethical issue may be worth considering. Credit managers are relatively lowly paid employees who, despite this, may be in a position to make a major buying decision for their business - the decision on which debt collection agency gets their business. It’s not unheard of for kickbacks to be offered. The agency gets the debts to collect; the credit manager gets a cash payment, or a car, or a boat.
There was a major scandal in Florida a few years back where a large number of credit managers were prosecuted for taking kickbacks from a debt collection agency. I have it on good authority that this sort of thing has gone on relatively recently in Auckland, with a credit manager at a division of a major company apparently losing his job as a result. I’m not aware of it happening in other parts of the country. Obviously, it’s not difficult to work out that blatant kickbacks are absolutely illegal. The trickier questions of Christmas parties at the casino and tickets to the corporate box at the rugby need only a written policy and some consistency from higher management.
Chartered Accountants Journal of New Zealand