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The Impact Zone

Iana Stahov

"I have definitely learned to work a lot faster, make quicker decisions, and better delegate work to my peers thanks to the Tippie Full-time MBA Program." Read more...

The Impact Zone

Corporate Governance in a Scandalous Age:
Rediscovering the Hidden Efficiencies of Ethics

by Cheeni Rao, 2014 MBA Candidate

The Corporate Governance Roundtable held the 18th of October provided an opportunity to talk about the headlines concerning boards behaving badly. The public wants its business leaders to be examples of integrity, especially when, as the events of the past decade have shown, a few unethical moves can vaporize billions of dollars, shatter consumer confidence, and bring the gears of the economic engines of the world to a shuddering halt. But corner a person on the street and ask them what integrity means, and you’ll get a hundred different answers.

It is similar to when I taught a poetry class to undergrads and had to caution them against carelessly throwing big words like “hate,” or “good,” or “soul” into their poems. The words themselves were so full of meaning that, left without proper guidance from context, they paradoxically took on too many meanings to have any meaning at all, becoming words the reader passed over as effortlessly as the commas where they took breath.

“Integrity” suffers the same curse. It has become a buzzword in the business world, its meaning so open to interpretation that it too easily becomes a word without meaning. So how does a board govern effectively, with integrity, when all that seems to really matter to shareholders is increasing profits? What makes “integrity” have any meaning, or any value, to a board?

The Path of Integrity

Corporate Governance roundtable Leonard Hadley (Retired Chairman and CEO, Maytag Corporation), Kathleen Dore (retired President, CanWest Media, Inc.) and
Casey Mahon (Director, United Fire & Casualty Company)
shared their experiences and opinions during a roundtable discussion on Corporate Governance.
A few years ago, when my editing business was booming, several literary agents approached me with a collaborative business offer. The agents could relay all their author submissions to us, and my business could charge a fee to every author to read their manuscript, selling contracts for “creativity coaching” and “one-on-one editing” to weak authors the agents would have otherwise rejected. I could save time for the agent by pinpointing the writers with the best chance for publication, while the agents could send back the weaker writers for another lucrative round of editing. In return for increasing our revenues, I would be obligated to give the agents a kickback from our new editing contracts and reading fees. Of course, we'd be stringing a majority of the writers along, extracting as much money as possible from them, but it wasn't as if they weren't getting some benefits in return.

It was a “win-win” situation, the agents kept saying. And they were right. It would be a win for my business, a win for the agents. Only the aspiring writers would lose out, paying a fee for the chance to keep dreaming.

I turned the offer down. As a writer, I had started my business with lofty ambitions: to help other writers, to foster creativity, to put out great new books for others to enjoy. Unfortunately, not everyone else in my business saw things the same way. A few of my employees bolted and started up their own venture, taking the agents up on their offer. My business took a huge hit in the years that followed, while the business of my former employees steadily grew. Taking the path of integrity cost me financially, pushing me to the verge of bankruptcy, but if the agents approached me again with their offer tomorrow, I’d still turn them down cold.

cartoon
It’s easy to look at the world, complex as it is, and argue that integrity doesn’t really mean anything. The business world is competitive, and if you don’t take advantage of an opportunity, no matter how unethical, your competitor will crush you. And, of course, in some parts of the world, corruption is a way of life. You have to pay off the right politicians in order to get to the front of the line. You have to bribe the right unions in order to get your work done. Each and every day business leaders are faced with a very simple choice: do you stick with what your gut says is “right” or do you do what you know will get you a profit? And as many have discovered, it becomes increasingly easy to rationalize just about anything when the difference between one path and the other has a payoff of millions of dollars. If a board doesn’t maximize shareholder profit, the shareholders punish them. If they don’t go along with what the CEO wants, they might find themselves kicked off the board. In the giddy pursuit of profit, it’s easy for integrity to get left by the wayside.

The Role of a Board

The consequences of a lack of integrity, however, present a sobering reality. As was discussed in our Corporate Governance Roundtable meeting, a company can very quickly and very easily be ethically derailed and hurtle towards ruin. Prevention of that possibility is born of a very simple fact: diversity of talent, provided with a mechanism for integrating and cultivating those unique talents, enables a company to thrive. CEOs organize the upper level talent that comprises a company, but too often they are given free rein to dictate the direction of the company. A board, composed of both men and women, with experiences and skills from all facets of a company, such as operations, legal, financial, and marketing, will provide the larger perspective necessary to effectively advise the CEO. But they also need to be strong and involved, willing to truly guide a CEO and say “No!” when necessary, instead of just rubber-stamping every initiative. And that board will be stronger and act with more conviction, if the members had to truly earn their position on the board, working their way into that position of responsibility rather than being handed the job because of how they were related to the CEO or because the job was granted as a favor.

Sarbanes-Oxley is an incomplete one-size fits all band-aid. Increased financial reporting responsibilities combined with vigilance from shareholders and outside agencies has a limited ability to affect the path of a company willing to play ethical pinball in pursuit of profits. Little can change if the CEO is blind or willing to act unethically, but if the CEO has the right vision, and is supported by a board willing and capable of truly helping, then ethical behavior becomes less of a rarity, and more a consistent strength that catalyzes company growth.

The problem with ignoring integrity is that it actually leads to a very inefficient and shortsighted approach to doing business. When we step outside of the practices of good ethical conduct, our behaviors, instead of creating real value by building on what exists, begin to create illusory value by siphoning from what has already been created. The Enron scandal, the housing bubble, the boards that did nothing while books were cooked in order to make a quick buck, they are all clear examples of the disasters unethical behavior enables.  But there are other, less dramatic losses that occur when our behavior loses its integrity.

Each act of bribery, each kickback and lie erodes our faith in each other. That lack of trust forces us to expend energy and resources guarding ourselves and protecting our companies from the thieves that lie in wait around us. Perhaps unethical behavior is an inevitable aspect of human behavior, but it has a long-term cost that erodes efficiency and weakens us all. The path ahead for all of us isn’t easy, but if we are truly leaders, then we can start by leading others down that path that helps build us all, rather than the one that inevitably tears us apart.