The franchise industry is under grave scrutiny at the moment following recent inquiry into a Sydney franchise that’s been underpaying its staff––some earning as little as $12 an hour.

It’s not the first franchise-indignity of this nature but it may be the last according to many reports fearing the end to franchising as we know it.

While it’s reported as a pay scandal, I see this as a leadership scandal.

The latest burn in the industry comes through popular bubble tea franchise, Chatime. The outrage revolving around almost $6million in unpaid wages since 2009 has provoked a report into the $170billion industry. The company could be up on civil charges for their mistake.

An audit of the Chatime bubbletea franchise network last year found that underpaying workers was a trend in almost 86 percent of the 20 stores scrutinised. Other audits in late 2016 spotlighted “systemic” underpayment issues through the entire franchise network.

The Chatime scandal follows a damning parliamentary report into the franchising industry, stating the current regulatory environment, “manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance”.

The power imbalance in question, that between franchisees and franchisors. It also reported;

“The business model is based on franchisees growing sales, not profit, with head office taking a 6 per cent royalty from every sale as Australians slurp on a growing variety of bubble tea. Outgoings include rent, wages, royalties, 3.5 per cent to a marketing fund, payroll system fees, music and mystery shopper costs, cups, syrup, tea leaves, pearls and toppings sourced from the franchisor and refurbishment costs of up to $150,000.”

To me it seems like a system that is destined to fail for two reasons:

• Lack of leadership, and
• Lack of values.

Part blame could be in the behaviour of the franchisee, but I think from the above quote, we can all see that a business model can greatly affect the outcome, despite what happens in the store and/or management.

The fish rots from the head down they say, don’t they?

Imagine having a business handed to you whose systemic potential was zero before you even started? Your leadership efforts would have to be very robust to overcome that.

It is very obvious to me how a system like this has gone wrong. And its proof is in the reports. In the charted submissions by franchisees over the inquiry, of the top ten reported issues, at least four of them I noted correlate directly to poor leadership.

Taken from the top ten issues raised by franchisees in confidential submissions:

• Ineffective dispute resolution
• Owner and business model changes
• Bullying, threats and intimidation
• Power imbalance and unfair contract terms

All four of these come from poor leadership. And as you can deduce, poor leadership leads to massive risk, and in most cases, failure.

Let’s look at this as an ugly lesson of just how important these two things are in business. The $6million Chatime will pay back from their profits might be the lesson for them, but it’s worse than that, because while they might have got away with a few extra dollars over the years, what has happened to the company, what about their employees who have had to go without their entitlements for the sake of profit? Chatime might be unable to come out of this disgrace, and worse yet, may not be able to reclaim any business with an “unplanned” loss of $6million and a reputation in tatters. Is it worth it?

In Chatime’s case, if leadership and values that looked after individual franchisees and employees were in place, the giveback from their people would have helped with the growth of the company rather than taken it down. Moreover, the ‘penny pinching’ around wages wouldn’t have even been necessary. It’s a long game with company culture.

A good reason to get your values in place before the presence of profit outweighs the presence of integrity within a company culture.

“An organization’s culture of purpose answers the critical questions of who it is and why it exists. They have a culture of purpose beyond making a profit.” – Punit Renjen, Deloitte