Only the Ethical Survive

Leadership in fairness and honesty makes good business sense.

By Michael Hackworth

Many business executives think the culture of their organization is what they want it to be. They conduct workshops to define values and processes; they display missions and goals on posters and in manuals; they conduct orientation sessions for new hires that describe what the company stands for. I have even seen value statements printed on the backs of business cards as reminders to employees.

In reality, a company's culture is defined by what the top executives actually do. Employees model—that is, they emulate‹their boss's behavior. They do what the boss does because they get paid by the boss, recognized by the boss, and, eventually, promoted by the boss. That makes the top leader, ipso facto, ultimately responsible for the culture of his organization—including the ethical culture.

Of course, individual employees are responsible for their own behavior and are driven by their own internal sets of values and principles by their own personal character and their courage to live by these values and principles. But, when sustenance, stature, and power are at stake, people will do what they have to do to succeed. All too few have the courage to put themselves and their families at risk based on principle, especially when the consequences seem small, remote, or undetectable.

To encourage employees to act on principle, an organization must be led by a chief executive who actually makes decisions not only within business and legal boundaries but also within ethical boundaries. In other words, the staff must see that the boss is willing to accept ethical behavior as a constraint or a cost. They have to see employees recognized and promoted who have modeled ethical behavior even at a short-term cost to the bottom line. And they have to know that those who have behaved unethically will be fired or otherwise appropriately held accountable for their behavior. This must be applied most severely to the highest level executives. While top managers are sometimes protected by their peers or forgiven for unethical conduct on the grounds that their departure would be too disruptive, the fact is that the company leadership should be expected to adhere to the highest standards.

Good Ethics is Good Business

Now, all of this probably sounds like good ethics costs money. My belief is that ethical leadership actually saves money. By way of analogy, consider the role of quality in business. For most of American industry prior to the 1970s, quality products and services were presumed to be more expensive to produce. In a great lesson taught to American industry by the Japanese (who, ironically, learned it from an American statistician, W. Edwards Deming), Japanese auto, consumer electronics, and semiconductor companies demonstrated the advantage of doing it right the first time. This proved far less expensive than shoddy construction with its attendant costs in re-work, huge inspection infrastructure, and scrap materials—not to mention loss of customer loyalty.

In fact, Japanese industries went on to dominate world markets with the highest customer satisfaction and lowest manufacturing costs. Their example completely changed the way industry thinks about the cost of quality, or, if you will, the cost of nonconformance.

I believe the same paradigm applies in the case of ethics. Poor ethical performance can lead to financial losses. Consider the following situations:

Are profits too high and exploiting the customer? The first principle of macroeconomics is replayed over and over again as naive leaders think they can beat that economic law. The principle states that when a company makes an extraordinary rate of return, well in excess of normal, competitors come in and correct. The competitors actually drive prices down, resulting in subnormal profit, and even losses, for an extended period until the least efficient are removed from the market. Unless the original gouger is also the most efficient—an unlikely case—then the gouger suffers a far greater cost (losses or even extinction) than it would have if it had operated at the normal rate of return in the first place.

Is the company exploiting the labor force? From line workers to airline pilots, exploited employees may try to correct the situation through unions, public outcry, even riots and often at far greater expense than doing it right the first time. Consider the experience of Kathy Lee Gifford. This popular TV personality and CEO of her own clothing line came under fire for obtaining her products from offshore manufacturers who paid sub-living wages. Her loss of goodwill with the American public and the resulting actions she had to take to remedy the problem cost much more than the company would have paid to police the contractors from the outset to ensure they weren't exploiting their workforce.

Has the company ignored a product defect? The examples of shortsightedness in this area abound. Remember the Pentium I "floating point rounding flaw"? Initial denial of the problem created both hard and soft losses for Intel, but finally doing the right thing made the problem go away at a relatively modest cost. In actuality, very few Pentiums were returned.

How about the tobacco industry's denials that nicotine posed a health risk? The jury is still out— literally—but if politics doesn't override the ethical conclusions, the penalty costs levied by the courts could wipe out the retained earnings of the industry.

In contrast, look at how the producers of Tylenol, using a good ethical process, turned a negative to a positive in one of the early cases of product tampering. Eschewing the short-term fix, they recalled all products, not just those in the region where the poisoning had occurred, and then invented the now ubiquitous tamper-proof seal. They went on to gain greater market share and customer loyalty as a result.

Does concern for the bottom line always trump ethical considerations? Here, the case of MiniScribe provides an excellent cautionary tale. An erstwhile disk drive maker of the late 80s, MiniScribe was embroiled in "hand-to-hand combat" with tough competitors in the high-growth, high-stakes disk drive market for PCs. The company was executing poorly, and the stock was depressed.

To deal with the situation, investors brought in legendary venture capitalist and turnaround expert Q.T. Wiles to be the CEO. Renowned for effectively focusing the organization on just five key objectives each quarte—‹and being relentless about achieving them—Wiles encouraged employees to do everything possible to carry out their goals.

At first, the strategy led to improved performance, sales growth, and market-share gains. But as pressure increased to achieve the objectives at any cost, the employees began to flirt with unsound practices. They set up warehouses near customers and reported shipments to them as revenue—a high-risk practice at best and a violation of generally accepted accounting procedures at worst. Eventually, they shipped bricks in boxes marked "disk drives" to those warehouses because the products weren¹t ready.

The end result was bankruptcy for the company and the conviction of the CEO in federal court on grounds of fraud. Was Q. T. Wiles always a crook? I doubt it. Rather, Wiles failed to attach ethical boundary conditions to his relentless demands that employees meet the five key objectives no matter what!

Employee Buy-In

It is, of course, important for employees to stand behind their leader's goals and vision, and ethical leadership can help foster that commitment. While modern participative management theory goes a long way toward making sure goals and visions are aligned and supported by the members of an organization, it is not enough. There are times when sudden change thrusts an organization into uncertainty. In the case of industry, the appearance of a new competitor, a sudden technology breakthrough, or a rapid collapse in market demand may trigger the shift.

These sudden periods of uncertainty require the troops to trust their leaders absolutely in order to stay together as a team and focus on the objectives. An ethical leader will command that trust because he or she builds it daily through actions that demonstrate concern for everyone. Ethical leaders will have a record in which outcomes were fair, rights were protected, and pain and gain were shared among the stakeholders for the common good.

Without that trust, followers take matters into their own hands. On a ship, there is mutiny; in Silicon Valley, workers quit and go to another company. Without trust in the leader, the instinct for survival takes over and the cost to the organization in misexecution, chaos, and rebuilding is huge.

If trust and good ethics are important today, they will be even more crucial in the future. Because of phenomena such as the emergence of a global perspective in all of our institutions and because of the ubiquitous, instant, and anonymous communication afforded by the Internet, unethical excesses can be easily exposed and disseminated—at little or no cost. No longer can leaders prosper at the expense of the common good while they hide behind the barriers of language, geography, or coverup tactics. In this interconnected world, only ethical leaders and companies will survive.

Michael Hackworth, CEO of Aspirian Corp. and a member of the Markkula Ethics Center¹s Advisory Board, delivered this address to the American Society of Engineering School Deans in March 1999.