Bloomberg BusinessWeek: Integrating Ethics at the Core
Building your company on an ethical basis isn't easy. But staying true to your principles will make you stronger in the long run
Entrepreneurship is a fascinating journey along treacherous paths. You'll find tough choices at every juncture. And while business decisions usually have clear consequences and outcomes, ethical decisions are always hard. Making the right choice doesn't necessarily bring success, but ethical lapses almost always lead to failure.
I've learned that no matter what the consequence, doing what's ethical and right is always the best long-term strategy. So business leaders must be proactive in setting and enforcing ethical standards and values for their companies.
When I look back at the first half of my career, I realize how naive I was about the business world. I used to believe that corruption was only a Third-World ill. Having worked for top American corporations and a technology startup in which ethics and integrity were values we lived by, I had no reason to think differently.
SHADY DEALINGS
Then I became a tech CEO and got to see the world from a different point of view. I once needed to negotiate a distribution deal with a company that controlled market access to my products. The company's CEO demanded that I give his spouse partial ownership of my business in return for his support. Making the stock gift would lead to millions. Not making it would forfeit the business opportunity.
I was totally dumbfounded. In other parts of the world, things like this are common business practice, but we were in America -- and I was dealing with a public company. After extensive soul-searching, I decided that I would rather sink my new startup than compromise my values.
I declined the deal. My team was forced back to the drawing board to develop new technologies. Eventually, we built a company with better products for a larger market, and we were able to raise millions from top investment firms.
TOUGH DECISION.
A key to achieving success is to assemble a strong and stable management team, and we did a great job at recruiting the very best. But just as the company was taking off in a big way, I heard whispers about sexual harassment.
After investigating, I found a potential problem with one of my senior executives. Losing an executive so critical to our operations would be a major setback, yet I couldn't tolerate a situation like this. So I decided to accept his immediate resignation.
The company lost significant momentum, and morale took a hit, but we survived. Later, I was made aware of other ethical breaches by the same executive. If I hadn't made this decision, the fallout would likely have cost me the company.
In my first column, I wrote about winning battles with my company's investors after my heart attack (see BW Online, 1/21/04, "Bollywood, Here I Come"), at a time when the dot-com burst brought out the worst in venture capitalists who were reeling from their losses.
LONG-TERM REGRETS
I was in precarious health, yet I had to decide whether to fight an ugly battle or concede. At stake was ownership in a company that my employees had worked hard to build. And the financial investment that saved us came from my friends and our executive team, not the venture capitalists.
My wife encouraged me to fight, no matter what the cost. She knew that giving in would be easier for me in the short term. But I would have lived with regret for the rest of my life if I didn't do what was right.
Over a period of months, investors who held board seats made one questionable move after another. It seemed to me that they had completely forgotten about fiduciary duty and proper corporate governance. I saw first-hand what happens when people who are normally ethical start making all decisions from the perspective of their pocketbooks. It's a slippery slope.
ETHICAL LINING
My experiences may be unique, but corporate scandals seem to be pervasive. It seems that every month brings another spectacular fall. Big companies get all the press attention, but I have no doubt that the problems are widespread.
Is there a better way?
Corporate executives and small-business owners need to realize that business ethics need to be carefully sewn into the fabric of their companies. They need to start by spelling out and communicating their values. Then they need to lead by example.
Corporate culture is built from the top down. Employees embrace the ethics and values of their leaders. You simply can't have one set of standards for management and another for staff. And every executive and employee needs to be held accountable.
NAILING THE BOARD
When a mistake is made, it's better to deal with the immediate fallout rather than allowing it to build its own momentum. A corporate culture that doesn't allow for mistakes is destined for disaster. The best strategy is to encourage employees to come clean and learn from their errors. The worst is when employees are pressured to hide information. A company can usually survive short-term snags. But covering up a problem is likely to create even bigger problems later on. No truth remains hidden forever.
The best organizations build ethics into their management and compensation systems. They reinforce corporate values by making these an integral part of how success is measured and rewarded. Performance reviews and bonuses tied to corporate goals can be very effective.
As businesses grow, corporate boards take on increasing importance. Laws and Securities & Exchange Commission rules govern how public-company boards must operate. But in private industry, things aren't that clear.
In tech, venture firms often demand a majority of board seats as a condition for their investments. Conflicts invariably arise. Attorney Reid Phillips of law firm Brooks Pierce argues that the majority of directors should be independent. Otherwise, the board simply serves insiders -- typically management and venture capitalists.
RISING CHALLENGE
The fact is, venture capitalists are usually motivated by quick, short-term profits. Management typically wants high salaries, perks, and more stock options. Independent directors are needed to protect the interests of all shareholders, because ultimately, it's the board that needs to enforce the corporation's ethical standards.
The bottom line is that there are no shortcuts to creating an ethical organization. The challenges are different at every stage of the game, and it only gets harder. But if you do everything right, you will have laid the foundation for a sustainable and successful business.