Balancing Business Ethics, Shareholder Value and Leadership Skills
Thanks to the scandals of Enron and Arthur Andersen, classes on Business Ethics were made mandatory in almost all schools offering MBA programs in mid 2000s. Before that, the Accreditation Council for Business Schools and Programs (ACBSP) encouraged schools to incorporate ethical behavior in MBA curriculum and provided guidelines on various moral and ethical topics, but gave schools the freedom in how to introduce such studies. Back then, business ethics teaching was often left to the school administration and the professor’s discretion, but never taught as a class in its own right until recently.
A lot has happened since the Enron scandal. Unfortunately, many more scandals have surfaced since then. We need not walk so far back in history lane to name a few, most of these scandals took place in recent years.
From the various unethical and illegal operations of Uber leading to the dismissal of CEO Travis Kalanick, to the multiple sexual harassment cases of Harvey Weinstein in Hollywood. The Equifax’s data breaches, which the company knew of but did not disclose till much later, leading to the information of 145 million people being compromised. Wells Fargo’s creation of 3.5 million fake accounts between 2016 and 2017, and its admission that the bank charged as many as 570,000 customers for auto insurance they did not need. Even Apple, our beloved company of all times, had purposely slowed down older iPhones to compensate for decaying batteries in a bid to force consumers to upgrade to newer versions without warning consumers first! Apple of course, claims it was all a misunderstanding.
For those of you interested in the history of business scandals, this infographic gives a good overview of the world’s 10 worst accounting scandals dating back to 1998.
Whatever the corporate scandal, be it corruption, greed, bribery, fraud or misconduct, there is a big impact on the economy, the society and its individual consumers. Some of these impacts are detrimental and irreversible, such as the suicides of ex-Enron executive J. Clifford Baxter, Daniel Pirron of Deliotte, and Mark Madoff, the son of the Ponzi schemer. Others, have long lasting effects such as baby food and formula discoveries, the Flint water crisis and wildlife suffering from oil spillage.
So why do these scandals happen?
It seems some executives get blind-folded by their ambitions and unrealistic shareholder demands to the point they can no longer tell what is ethical, legal or a misconduct. And when questionable business initiatives are pointed out, either internally or by a whistle-blower, executives fall into the habit of rationalizing the conduct. They will either deny responsibility, deny the injury, or deny there were real victims!
Luckily, and due to past scandals, many ethical codes have been applied to various functions of the business. From the Sarbanes-Oxley Act (SOX) governing accounting ethics, to financial ethics prohibiting insider trading, marketing ethics, production and IT ethics governing copy right and intellectual property laws.
But the simplest formula to avoid falling into such pitfalls in the first place is to ask yourself five questions before proceeding in whatever business action you are about to conduct: -
1. Is it the truth?
2. Is it fair to all concerned?
3. Will it be beneficial for all concerned?
4. Will it build goodwill and better relationships?
5. Will you be proud if it was made public (if your family and friends knew)?
Answers to questions above will serve well in determining whether or not to move forward with the business initiative.
Executives will benefit in learning that maximizing shareholder value, under all circumstances, is the academic economy of the 1970s as put by Joseph L. Bower and Lynn S. Paine in the Harvard Business Review May-June 2017 issue. The HBR article goes into explaining how shareholders are shielded by the doctrine of limited liability from legal responsibility of misconducts committed by company executives. Shareholders can also buy and sell shares as they please and are only required to disclose their identities in certain circumstances.
Questionable business activities can be prevented with disciplined leadership skills and a culture of which we choose to build our business environment on. I wrote about leadership skills in my June 2018 blog, where I discuss the three main categories of leadership. Please also checkout the “Creating Inspiring Workplaces” workshop, which addresses business ethics and culture among other pillars necessary to create a healthy work environment.
Business mistakes, even big scandalous ones, can happen. But as long as people learn from them and see the path to enlightenment, they can recover. Martha Stewart was able to bounce back from her insider trading scandal and regain her company in 2012, her company was later acquired by Sequential Brands Group in 2015. It doesn’t have to be all gloom and doom, we must recognize the silver linings from any bad situation, and most importantly come out of such experiences with long tasting learnings.