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Ethics: How Good Companies Go Bad

Ever wonder how situations like Tyco and Enron happen?  The argument of whether certain people are just born to lie, cheat and steal is best left to psychologists, theologists and sociologists.  Instead, we want to explore how leaders can negatively or positively influence a company’s culture.  Our position is that overlooked and unchecked small ethic violations will over a number of years lead to increasingly larger ethics problems and ultimately mushroom into a catastrophic breach of law or regulation.  It’s not enough to simply act ethically yourself; you must also police the ethics of your organization as what you allow you teach and what you teach becomes your standard.

One of the biggest mistakes a company can make (the founder or CEO) is not establishing early and clearly what the expected behaviors are for employees.  Is it okay for you to take a pen home?  Can you use the company computer to write personal email?  Can you accept shirts or other gifts from vendors?

Does your company have a policy regarding any of this?  If not, they should.  Every employee brings their own set of moral standards to work with them but like any society there needs to be an agreed upon set of clearly defined principles that govern employee behaviors.  The absence of such principles creates moral ambiguity or worse,  a moral-least-common-denominator, where the lowest set of morals becomes the standard.

When we were young executives it was quite common for our primary vendors to offer us Super Bowl tickets, or tickets to other high value sporting events.  We never took them even if our company at the time allowed such actions.  The larger and more established companies we worked for earlier in our careers had strict guidelines around what was acceptable and these guidelines governed our behaviors even as we went to companies that had not yet created such policies.  The reason such “no gift” policies exist is that the vendors giving such gifts do so to get closer to you and to sway your future decisions. The acceptance of gifts from partners can be seen as abuses of position and power.  If an engineer making $100,000 a year takes a pen or a pair of tickets to a baseball game, why shouldn’t a CEO making $1,000,000 a year use her company administrative assistant to pick up her children from daycare or make a stop to see her family in the company jet?  Without shareholder sanction and appropriate accounting, these actions from the engineer to the CEO are abuses of position and power and set a precedent by way of example for the remainder of the organization.

Following this scenario from the individual contributor to the corner office is a chart that trends from small dollar items to large ticket items in a graph that moves from lower left to upper right outlining abuses of position, responsibility and power.  We do not know Dennis Kozlowski, Kenneth Lay, or Jeffrey Skilling but we are fairly certain that the time they got caught was not the first time they lied, cheated or abused their positions for personal gain.  More likely, they had moral issues throughout their entire career but no one ever checked them on it and in fact they might have actually been promoted or praised for it.  With each promotion they took larger steps over the line that in time took them into what were clearly illegal acts including theft from shareholders.

An example, which may appear unrealistic, is actually very similar to one that we have seen before and more than once.  A small company allows a senior executive to mislead the Board of Directors about revenue projections and working capital and routinely practices “smoothing” of results – the movement of financial performance between quarters to paint the picture of a more easily managed business.  The management team gets praised for operating results that are not completely correct.  The CTO knows of this behavior, at least in the abstract sense if not entirely clear about the details, and sees this behavior accepted.  In effect, the CTO has been conditioned that such behavior is accepted and he does not possess enough moral certitude to maintain the higher ground.  When it comes time to add more servers to the site instead of purchasing legal copies of the operating system and application server, he copies it and does not pay for it.  Again, the individuals involved get rewarded.  The engineers are now taught that such theft is okay and they in turn start making illegal copies of software for personal use.  What ultimately happens is that the company gets investigated by the Business Software Alliance and has to pay three times the original price for the software because of penalties, the BOD catches on to the senior management’s games and replaces the CFO, and across the entire organization moral starts to suffer and key people leave.

Our argument is not that you should not accept pens or shirts from vendors (although that is a pretty good position to take).  Rather, it is that you should draw clear boundaries for everyone and explain both those boundaries and the reasons for them to your employees.  Furthermore, you should create a culture where it is acceptable to question actions based on ethics without repercussion.  Doing so early and often, and rewarding people for doing so will help incent a culture of ethical excellence.  People can make mistakes, and inadvertently make a decision due to haste that can be perceived as ethically perilous without malicious intent.  Perception of an ethical violation is important here as the perception alone will incent the wrong culture, so to the previous point you should reward people for asking questions about certain decisions solely based on the notion of ethics.  This can be a very difficult thing to do, as it is easy to feel angered if someone asks you if a decision is ethically sound – it feels as though they are questioning your morality and that is never fun.  Nevertheless, if you can explain the reasons or alternatively you are willing to say “You know what, you are right – I did not think of it that way so let’s change the decision” you will go a long way to creating the appropriate culture for ethical success.

Every promotion you receive will present new challenges to your character.  Draw immovable boundaries for yourself team today and live by them.  Teach those boundaries and their reasons to your team not only through direct discussion, but through your actions and expectations of the team.

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  • F|R: Top 5 Reasons Business Execs Fail to Work Effectively with Product and Engineering Execs - GigaOM

    in August 16th, 2008 @ 19:15

    [...] The truth is, business execs don’t need to be very technical — they just need to have a strong understanding of, and respect for, the ethos of their technical leads and show the hallmark qualities of good leadership: ethics, determination, discipline and humility. By examining the top five reasons business execs fail to work effectively with technical execs, it’s possible to anticipate and avoid some common problems. [...]

  • Abbott, Keeven, Fisher &#038 Fortuna Partners

    in March 11th, 2009 @ 18:24

    [...] our article, Ethics: How Good Companies Go Bad we made the case that most people don’t start out bad but rather make small steps in that [...]

  • 4 Things I Wish I’d Learned as an Undergraduate | AKF Partners Blog

    in February 16th, 2010 @ 22:11

    [...] for personal use – potentially in violation of company policy.  Sometimes even people who are on balance “good” make ethical mistakes.  And make no mistake, there are morally bankrupt people committing [...]

  • 10 things you won’t learn in school | Yooxe

    in March 18th, 2010 @ 07:44

    [...] Most of us don’t spend much time thinking about ethical dilemmas because we think they only happen to the top management, or that they will be easy to spot given how significant they seem to be in the Wall Street Journal.  The truth is that you’ll likely be faced with ethical challenges quite often. The journey to moral bankruptcy, after all, isn’t one giant leap, it’s a series of small steps. [...]

  • 10 things you won’t learn in school « Ruben's Blog

    in March 22nd, 2010 @ 08:51

    [...] Most of us don’t spend much time thinking about ethical dilemmas because we think they only happen to the top management, or that they will be easy to spot given how significant they seem to be in the Wall Street Journal.  The truth is that you’ll likely be faced with ethical challenges quite often. The journey to moral bankruptcy, after all, isn’t one giant leap, it’s a series of small steps. [...]