Ethics, company culture, and the entrepreneur

Ethics, company culture and the entrepreneur (May 15, 2006)

By Ben L. Teehankee

Green Light, Manila Standard Today

As the Enron case has shown, businesses that do not behave morally can suffer tremendous loss of value as they lose credibility with the public. Government attempts to improve the ethical behavior of business through tougher rules, improved monitoring and stiffer penalties may help but will not suffice. Moral behavior is guided by values and not rules. A survey of corporate ethics officers by the US-based Conference Board stated that “an absence of ethical leadership and a culture of 'anything goes as long as it makes a buck' will prevail over even the best training, code of conduct, or hotline. … This emphasizes the critical importance of building integrity into the essence of the corporation.”

During one of the recent Enron hearings, former CFO Andrew Fastow made a dramatic admission: “I was greedy, yes. When you misrepresent the nature of your company, when you artificially inflate earnings, when you improperly hide losses, when you do things like that to cause your stock price to go up, that is stealing.” Not admitted by Fastow but mentioned by some insider accounts, it was considered alright within certain sectors of Enron to be greedy, to lie and to steal. If the accounts are to be believed, it was the company’s culture.

Shaping the Ethical Culture

Where does one begin to build integrity into a company? As the Conference Board survey indicates, moral behavior is promoted by a company’s culture. Social psychologist and MIT Professor Edgar Schein has long noted that a company’s culture is shaped early in the life of a business–during the entrepreneurial stage. Therefore, entrepreneurship at the outset should be aligned with ethics to lay the foundation of a business that will continuously create value and promote trustworthy behavior.

Entrepreneurs as company founders can shape the ethical culture of a company in many ways (e.g., personal attention to operational issues which involve ethics, role modeling, training of members, rewards and promotion, etc.). Early on in Henry Ford’s business career, he explained that:

I don’t believe we should make such an awful profit on our cars. A reasonable profit is right, but not too much. I hold that it is better to sell a large number of cars at a reasonably small profit… I hold this because it enables a larger number of people to buy and enjoy the use of a car and because it gives a larger number of men employment at good wages. Those are the two aims I have in life.”

Is this a uniquely Western view? In Built to Last, authors Collins and Porras also cite the case of Masaru Ibuka, co-founder of Sony Corporation in 1945, who, long before the company had any positive cash flows, laid down the management guidelines for the company:

We shall eliminate any unfair profit-seeking, persistently emphasize substantial and essential work, and not merely pursue growth.

We shall place our main emphasis on ability, performance, and personal character so that each individual can show the best in ability and skill.

Achieving Profitability with Integrity

Thus, the core values of a company are laid down by its entrepreneurial founders. These values, if planted well, serve to act as internal guidance for company members for years to come. There is a tricky challenge, however. As Schein points out, for cultural values to take root in a company they must be seen by members to work, that is, the company must do well and survive. Thus, the entrepreneurs’ emphasis on values emphasis alone is not enough. The company must eventually achieve profitability as well; otherwise, the values themselves are seen to have failed and will not take root.

Achieving financial returns while behaving ethically and producing social value is the fundamental entrepreneurial challenge. Many are tempted to make compromises, believing that ethics and profit are an “either/or” proposition. The common thinking of making profits first and then being ethical later is a culture trap—if the company becomes profitable while ignoring issues of right and wrong, the culture of insensitivity to ethics has already began to form and may be irreversible.

The economic perspective often uses “trade-off thinking.” While this can be a useful approach to problems, it tends to discourage the search for creative solutions. This is a major limitation since creative solutions that achieve economic returns while achieving more qualitative goals for the business are crucial to the sustainability of business. Collins and Porras called the tendency for compromise as “the tyranny of the OR.” Their research revealed that successful visionary companies combine profits with bigger goals in a practice called “pragmatic idealism.” I prefer to call it moral business creativity.

Acting Creatively to Achieve Goals

For ethics and profit to co-exist, creativity is a must. It is fortunate that entrepreneurship, by definition, is an act of creativity. Entrepreneurship is often defined as the creation of new value—a creative act and the engine of capitalism. In fact, while we usually associate capitalism with the use of capital resources, author Michael Novak links the term to the Latin “caput,” meaning the head. We can, therefore, say that if entrepreneurship is the engine of capitalism, then creativity is the fuel while ethics is the directional compass.

Entrepreneurs are used to applying creative problem-solving to issues in product or service design, logistics, and other areas of operations while achieving profit. Businesses that fail to do this are not viable—they become financially bankrupt . Therefore, entrepreneurship per se is a creative act.

There is a need to push the creative envelope one level further to achieve all the operational and financial requirements and also achieve ethical imperatives. Businesses that fail to do this are not ethically viable—they become morally bankrupt.

As an entrepreneurial company successfully applies creativity to achieving both financial returns and ethical imperatives, a culture of trust and moral direction will develop, which will allow the business to thrive. The company thus created will be a potent contributor to society.

Entrepreneurship is often described as essential for achieving economic progress. If we think of it as moral business creativity, it is essential for achieving any social progress at all.