"There are seven things that will destroy us: Wealth without work; Pleasure without conscience; Knowledge without character; Religion without sacrifice; Politics without principle; Science without humanity; Business without ethics". Mahatma Gandhi.
When you evaluate the reasons for the collapse of global companies such as Enron, Tyco, Lehman Brothers, WorldCom, Global Crossing, and Indian company Satyam Computers, it is obvious that there was a complete disregard for ethics in their leaders. There is a need to emphasize ethics to ensure corporate governance.
Corporate governance means how companies can be controlled with a set of standard guidelines, principles and practices, policies and procedures. It includes ethics, morals, and values to do business to generate profits without violating the rules and regulations and cutting corners. It is about emphasizing on "means" rather than on "ends" to earn profits with integrity.
Causes of Corporate Governance Failures
Accounting frauds are one of the major reasons for the downfall of companies. Most of the bankrupt companies manipulated their accounting records and showed false records to their shareholders by inflating figures. Hence, there must be stringent guidelines to adhere to accounting practices to avoid manipulation by the leaders and promoters of the companies.
Accounting fraud happens when companies want to cut corners and compete with others. In some cases the leaders are bullish to perform better in the next quarter and present a rosy picture to the public by violating rules and regulations. There is a number of reasons for falsifying the company reports. Whatever the reasons might be, companies must emphasize on right means to achieve their ends to stand out ethically in the long run. In a few cases, the board of directors and CEOs are tempted to do wrong things but it proves to be costly at the end.
At times, the leaders are overambitious resulting in cutting corners and ending up in a fiasco. Leaders can channel their ambition either for good or bad. In fact, ambition is a double edged sword. It is both a vice and virtue. You can use it either for good or bad. For instance, leaders like Huey Long, the Governor of Louisiana in the Thirties improved the State's infrastructure through public works, but he achieved his goals through ruthless and corrupt means. Being ambitious is not bad, but how to implement is more important. If you emphasize on right means to achieve your goals, being ambitious is good. In contrast, if you emphasize on wrong means to achieve your ends, being ambitious is bad. Edmund Burke, rightly said "Ambition can creep as well as soar".
Some of the collapsed global companies including Enron and WorldCom suffered from lack of internal control; inability to manage the risk; inability to forecast the external challenges; shortcomings in accounting practices; and above all weak and unethical leadership at the top. Some of them were under pressure to meet quarterly earnings projections. Worse, some companies followed outdated and rules-based accounting standards.
When we look at corporate governance failure in Satyam Computers, one of the top ten IT major companies in India, Ramalinga Raju failed to estimate the intensity of the challenge in the organization. He was confident that he would turn around financial tide; took the auditors for granted; and presented a rosy picture to the public resulting in many skeletons coming out of his cupboard.
Towards Transparent Corporate Governance
There is often relation between good corporate governance and good leadership. Hence, encourage ethical leaders to lead from the front. Additionally, companies must realize that their social responsibility is to maximize profits for their companies without violating laws of the land. Here are the ways to ensure effective corporate governance:
- Maintain ethical values.
- Be transparent.
- Be accountable and responsible.
- Be clear in roles and responsibilities; and dos and don'ts.
- Avoid concentration of powers by delinking Chairman and CEO.
- Monitor performance constantly.
- Ensure proper checks and balances within the system.
- Encourage whistle-blowers to alert if there are any irregularities.
- Invite independent directors on the board from outside.
There must be coordination among shareholders, suppliers, customers, employees, financial institutions, government and society as a whole. If companies emphasize on corporate governance, they can enhance their organizational excellence and effectiveness.
We cannot conclude that corporate governance is ineffective in India alone. When you look at the collapse of companies including Enron, WorldCom, and Lehman Brothers, it transpires that the corporate governance was ineffective in other countries also. What happened in India about Satyam Computers is only the tip of the iceberg compared to the international corporate fraud. Instead of taking solace from the collapse of global companies we must have our own mechanism to ensure effective corporate governance to win confidence from all stakeholders including shareholders.
Leaders must realize that it is tough to climb the ladder of success, but very easy to fall from the top due to wrongdoing. When leaders emphasize on ends instead of means, they will end up in a great disaster. They should not get tempted by short-term gains, which prove to be costly in the end. Here is a list of some leaders who fell from grace:
Jeff Skilling, the former CEO of Enron, which went bankrupt due to an accounting scandal, was convicted in 2006 on one charge of insider trading and 18 counts of fraud and conspiracy. He was sentenced to 24 years in jail.
TV personality, Martha Stewart was indicted for insider trading in 2003. Stewart saved over $45,000 by dumping her ImClone stock just before it dropped, using information from that company provided by an insider. She was jailed for five months.
Former IBM executive, Robert Moffat gave inside information to New Castle Funds consultant Danielie Chiesi, who was one of the key people in Galleon's Raj Rajaratnam's network of people providing inside information. Moffat was sentenced to six months imprisonment and fined $50,000. Tyco International Ltd.'s L. Dennis Kozlowski and WorldCom Inc.'s Bernie Ebbers were convicted for similar misdeeds.
Hence, leaders must learn lessons from the collapse of several big companies due to the unethical practices and methods of their leaders. When leaders emphasize "ends" rather than "means", such downfalls happen. Hence, it is essential to strengthen corporate governance to check more worms coming out of the cans. Whether it is in India or the world, it is time the leaders to pull up their socks to streamline their corporate system and improve the bottom lines ethically to make a difference to society.
James MacGregor Burns said, "Divorced from ethics, leadership is reduced to management and politics to mere technique". Both ethics and leadership are closely connected for effectiveness of leadership. Ethics is something that should be cultivated among all people whether they are leaders or followers.
In order to make a beginning, the leaders have to take responsibility to be ethical in their practices and influence others to do the same. Hence, there is a need for ethical leadership.
Ethics is all about emphasizing "means" rather than "ends". Ethics is all about values and morals. According to Albert Schweitzer, "Ethics is the activity of man directed to secure the inner perfection of his own personality". Potter Stewart said, "Ethics is knowing the difference between what you have a right to do and what is right thing to do". Thus, we can define ethical leadership as one which leads from the front, with moral values and principles and with emphasis on means rather than ends.
Leaders are always closely observed. People search for negative things among leaders rather than positive things. Hence, leaders must be very careful all the time. They must display honesty, integrity, and total transparency in their dealings to influence others positively.
People respect leaders more for their ethical values than any other traits such as charisma, compassion, or commitment. Although all these traits are needed for effective leadership, it is ethics that differentiates leaders. It is rightly said that although the righteous person falls ten times, he rises if his means are right as God supports him. However, the person, who does wrong and emphasizes on ends, never falls twice as there is no second opportunity for him.
Leaders like Martin Luther King Jr, Mahatma Gandhi, Mother Teresa, and Dalai Lama have emphasized more on means, although ends are also important. It is their emphasis on means and methods which brought them laurels and made them legends. If Martin Luther King Jr. had adopted violent means to bring blacks on par with whites, would he have become a great leader? If Mahatma Gandhi had adopted violent means to attain India's independence, would he have lived as a great leader in the hearts of the people for so long a time? No, never!
Mother Teresa lived for the poor and the lepers and made a significant difference to their lives. Although Florence Nightingale was a rich woman, she gave up her comforts to serve patients in the Crimean war. Presently, the Dalai Lama is seeking Tibet's independence through non-violent means. Aung San Suu Kyi fought for democracy in Burma through peaceful means. All these leaders stood out basically because they emphasized more on "means" than on "ends".
In contrast, Hitler used wrong means to achieve his ends. Although Hitler was a capable leader who emphasized on German pride, he persecuted Jews and others and put them into concentration camps.
There were several leaders who misused their powers, either to misguide their people or to serve their own selfish interests. Such leaders were soon forgotten. Hence, what counts at the end of the day are the ethics and values.
It is true that all effective leaders may not be ethical leaders, but all ethical leaders can be effective leaders as they influence others through their own example. Nothing is more powerful than setting example while leading others.
To conclude, no organization can survive without ethics, rules and regulations, policies and procedures, vision and mission. However, some companies resort to "shortcuts". In a hurry to reach to the top and to beat competition, they compromise on ethics. In the end, they have to pay a heavy price when the truth comes out. Similarly, leaders who adopt unethical means end up losing whatever they earned. Hence, emphasize more on "means" rather than "ends". A life spent in simplicity and humility is far better than a life spent with fame initially and infamy finally.
"Try not to become a man of success but rather try to become a man of value." Albert Einstein.
Prof. M.S. Rao
International Leadership Guru
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