Scientists recently announced the arrival of light from 10.5 billion years ago.
It reached earth from the most distant known supernova. It had been travelling all that time. Such a journey offers a sobering insight on personal ambition. No human being can hope to make an impact lasting for even a smidgen of that total.
Someone asked China’s leader in 1971 about the impact of the French Revolution. Premier Zhou Enlai replied:
Chinese premier Zhou-Enlai
“It’s too early to say.”
Despite these daunting perspectives business leaders still get asked:
“Once you depart, what kind of a legacy do you want to leave behind?”
A legacyis central to what it means to be human. Without a sense of working to create a legacy, adults can lose meaning in their life. It offers a glimpse into human relationships, communities, and the human spirit.
A positive legacy could be the most important thing a business leader can achieve in life. It means exerting an influence well into the future. Beyond one’s short stay here on earth. Yet creating such a legacy proves both complicated and difficult. Most FTSE-100 company CEOs only last about five years. Not much time to build a strong legacy.
How will Martin Sorrell now ex CEO of WPP be remembered? Is this empire of 130,000 people really his legacy? Or is there more to life than making a fortune from advertising?
Alfred Nobel read a bleak obituary about himself before the died. It trashed Nobel for inventing dynamite and selling arms. Worried how history would judge him, Nobel left his entire fortune to the Nobel Prizes. And that’s how most of us remember him today.
Answering that question: “What do you want to be remembered for?”
can be the start of defining a worthwhile legacy. For millennia, leaders everywhere have wrestled with this issue.
The greatest of the Egyptian Pharaohs was Ramses II, or Ozymandias. None of his great works have survived. In a famous poem Percy Bysshe Shelley evokes a picture of a single pedestal half buried in the desert. On it are the words:
“My name is Ozymandias, King of Kings; Look on my Works, ye Mighty, and despair!” Nothing beside remains. Round the decay Of that colossal Wreck, boundless and bare The lone and level sands stretch far away.
Three other Pharaohs did rather better. They built the pyramids at Giza to endure an eternity. So far they have done just that.
Talking of builders, you can still visit Sir Christopher Wren’s famous legacy. In London’s St Paul’s Cathedral there’s a wall plaque with a Latin inscription. It translates as:
“If you seek his monument, look around you.”
Leadership legacies can be be almost anything. From a building, to a resilient reputation, such as Nelson Mandela’s. Alexander the Great conquered half the world and cut the Gordian Knot. The latter was a metaphor for solving intractable problems. A less impressive side of his legacy wasdestroyingPersepolis . The Greek city was one of the most advanced and civilised in the world.
Henry Ford’s legacy was a process. His moving assembly line slashed the time it it took build a car. Instead of more than 12 hours, Ford did it in two and half. His legacy lives on in countless factories around the world.
More recent business legacies? How about Anita Roddick’s Body Shop, Steve Jobs’ iphone, and the Internet of Tim Berners-Lee?
The legacy puzzle
Only the most committed business leaders crack the legacy puzzle. Many struggle to make a significant difference in the short time they have at the top. For instance, how do you leave a long-term legacy of sustainability?
What at the time can seem so permanent, may soon fade into insignificance. The much admired “HP Way” once described the approach of the two founders of Hewlett Packard. Yet what’s left of “The Way” resides in history, not daily practice.
Jack Welch of GE
In the 1990s Jack Welch must have thought his legacy was secure. After all, Fortune magazine named him Manager of the Century . Admired for leading the best-run company in the world, he generated double-digit earnings. Meanwhile other conglomerates fell apart.
Yet within a few years his successor dismantled Welch’s legacy. Worse, a relentless re-examination of that legacy marked him a bully and a tyrant.
This paragon of managerial expertise often humiliated people in GE meetings. Many witnesses confirm that Mr Welch could be a formidable, even terrifying, boss. One former GE executive confessed that one of his boss’s attacks “caused me to soil my pants”.
Few business leaders leave anything approaching a worthwhile, lasting legacy. Once they’re gone, they’re gone. Even in the firm they ran no one may even mention their name, especially if they die or get fired.
Leaving a negative legacy
No so those who bequeath a negative legacy. Years later people still talk about them. Their harm and the hurt they caused may live on It’s like lava from a volcano. Their terrible reputation slowly sets hard, becoming immovable.
For example, Al Dunlap, also known as the Chainsaw, continues to appear on lists of the worst ever CEOs. He spent his career hopping from one corporate boardroom to the next. Dunlop made thousands redundant without a second thought. Finally, he engineered a massive accounting scandal at Sunbeam Products. The firm never recovered and filed for bankruptcy in 2001.
He may not have been a shouter. But he bullied senior managers during his daily 9.30 am meetings. He questioned their competence. He too could reduce a senior executive to tears.
How does legacy building work?
How people make decisions that affect future generations suggests some specific strategies. Ethical leaders will be the most likely to leave an ongoing legacy. They do so by refusing to go for the quick fix. They maintain a relentless focus on the long term. They show personal respect for others, and a determination to do what’s right.
Through social commitment business leaders make more than a passing impression. See panel on the right: What sort of legacy?
Social commitment now appears on many corporate agendas. There’s a growing resistance when short-term comes at the expense of senior employees and shareholders.
Yet few companies have taken the necessary step back. Only the most insightful business leaders see the link between short termism and social inequality.
In fact, short termism can distort corporate strategy. Many business leaders feel compelled to focus on satisfying activist owners. Or to pursue corporate arrangements such as mergers and acquisitions.
Legendary investor Warren Buffet
Not all companies and leaders though, succumb to the siren voices calling for short termism. Famous investor Warren Buffet sets the CEOs in whom he invests some hard to ignore goals. These stress the long term--“you can’t sell it or merge it for at least a century”.
Major Indian firms like Wipro and Tata Group build social commitment into their culture. They have won the trust of their stakeholders with such commitment. It has helped develop their legacy.
Jamsetji Tata founder of Tata Group
People still talk of the ethical approach of the founder Jamsetji Tata of Tata Group. Business he believed, must respect the rights of all its stakeholders. It was there to create a benefit for society.
Ethical behaviour remains intrinsic to how the company conducts its business. It’s part of the founder’s legacy.
“increased attention to the relationship between business and society as part of a company’s ethical legacy”
Over seven years to 2014, PwC found that CEO’s responses to the legacy issue had changed. Creating social value had become more important. Many wanted their legacy to be a long term one. It included:
Making their business a pioneer in its field
Introducing a culture of innovation
Entering new markets
Growing a company against all odds.
Many CEOs felt personal attributes were important for their leadership legacies. Such as integrity, honesty, ethical leadership, transparency, and fairness
ESG–a possible route to a legacy
One way to help identify a possible legacy is by focusing on ESG factors. These refer to Environmental, Social and Governance issues. Many investors now take these into account when making their investment choices.
Stuart Rose, ex CEO of M&S
Using the E of ESG, a leader may decide to make a difference in areas dealing with environmental factors. For example, Sir Stuart Rose, then CEO of Marks and Spencers produced his Plan A for the company. This steered the entire organisation towards sustainability practices.
The S of Social Commitment might include: make a difference in how a company treats its employees. Or how it responds to the human rights of the people and the communities it touches.
Finally, Governance can be yet another route to a legacy. No longer confined to rules and regulations it encompass a far wider remit. Land use; energy; water; emissions, human rights, equal opportunity, and health, safety, and wellness, volunteerism and so on.
Anyone wanting to leave behind a legacy might best start by reflecting on the shortness of life.
Second, hold onto the aim of remaining in other people’s memory. Turning such thoughts into action play an essential role in a sustained legacy. Committed ethical leaders must therefore aim to create something meaningful–that is leaving something that will outlive them:
“Your legacy touches people you do not know and may never meet” E.Bell Smith, Professor of Business Administration, Centre for Leadership
The right time to start building a business legacy is now!
Wade-Benzoni, Create Your Legacy as a Leader HBR December 2016
Chesley, Legacy: what CEOs say they want to leave behind, PWC, Sept 2015
J.Boss, 6 Principles Of A Leadership Legacy, June 12, Forbes, 2014
T.Blackwell et al, Markets need to thing long-term to benefit society, Daily Telegraph, 31st May 2018.
Martinuzzi, What type of legacy do you want to leave? Open..
“We want to stay a family business. We want to be able to think long term. We want to be able to concentrate on the values—the ethical and moral values, of course that we have…”
Sir James Dyson, in Boldness in Business, FT.Com March 2018
Ethical business leaders develop their resilience to impressive levels.
Apart from being adept at bouncing back from adversity, they know resilience helps define their existence and inspires it. Dyson’s personal story is not unique. Other leaders too grow their resilience, often without ever bothering to think: “I’m being resilient.”
His now familiar tale from struggling inventor to world acclaim combines remarkable determination with consistent creativity. Togetherthese add up to formidable levels of resilience.
And if there’s one consistent piece of advice about success, he and other leaders receive from those they admire and from an ever-expanding army of leadership “experts” it’s
The Harvard Business Review for example, confirms its “authors over the years have offered “an astonishingly wide range of advice” about bouncing back from setbacks, both large and small.
Route to resilience
We can view resilience through two lenses. The first is Bounce-back-ability. This is your ability to rebound despite set backs, obstacles and a rock-strewn route to success.
The second lens is Lack of resilience. This shows lessons arising from leaders who don’t bounce back. We may briefly glimpse them before under-powered resilience forces them into some other mode or role—permanent or temporary.
For example, in 2011 Lloyd’s Banking Group won a blaze of publicity by appointing Antonio Horta-Osorio as CEO. He was hired to guide the part state-owned Group back to health.
Within a few weeks though, after suffering five sleepless nights, Horta-Osorio finally agreed he had a problem: unacceptably high levels of stress. Just eight months in at Lloyd’s top job he took a much-needed stress break. To the shock of the banking industry he admitted himself to a London clinic,
The bank’s terse statement to the stock exchange merely said its chief executive was temporarily stepping back “due to illness”. He was done in by stress and exhaustion, brought on by working round the clock, seven days a week. Ironically, the news came on National Stress Awareness Day.
His career as well as his marriage seems to have survived the experience. Now he claims to arrive home with his family every night and is in bed by 10:30 p.m. He doesn’t read emails or take calls between 7 p.m. and 7 a.m. He eats more protein and less carbohydrates, and has learned how to be more patient.
“And I became a better person, more patient, more understanding and more considerate. It was humbling but you learn…. I thought I was Superman. I felt I could do everything. The burnout showed me I was not Superman.
“Many CEOs I speak to are on the verge of exhaustion “says Steve Tappin, an executive coach and co-author of a book about CEOs. He points to the large number of CEOs who must deliver against a background of high expectations and low or zero growth. For example 2017 saw a raft of chief executives leave their companies.
Some exits were expected and came after years of service. Others were more surprising, victims of low levels of resilience, brought on after the shock of wrongdoing—theirs or someone else’s in their companies. The failures offer lessons about the importance of transparency, accountability, how to handle shifting marketplaces, and stress management.
A poster child for these lessons is Uber’s controversial founder and now ex CEO. He appeared resilient. Until he wasn’t.
Travis Kalanick officially resigned in June when important personal survival lessons emerged. The main one being that simply staying resilient in the face of reputational disaster seldom works. It takes much more than that.
Senior leaders whose resilience
was sorely tested
Jeff Kinder, CEO of Pfizer who resigned saying the demanding role had worn him out; “The combination of meeting the requirements of our many shareholders around the world and the 24/7 nature of my responsibilities has made this period extremely demanding on me personally.”
Andy Hornby, former CEO of HBOS then Boots resigned to take a break “After an intense last five years as CEO of two major companies, I have decided to take a few months break and, having discussed it with the board of Alliance Boots, to stand down from my post as group chief executive.”
John Binns a high-flying partner at accountancy firm Deloitte for more than five years suffered from a worsening depression – “it was like disappearing down a dark tube”. He couldn’t make decisions, lost weight and everything seemed pointless.
James Green, former CEO of Giant Realm, began dreading his daily commute through New York’s Penn Station. Though emotionally drained, he never hinted at his condition. Instead, the stress led him to sell off his company.
Yishan Wong CEO of Reddit, a social news site, resigned saying “I’m basically completely worn out, and it was having significantly detrimental effects on my personal life,”
This cumbersome acronym was invented by the US military in the late 1990’s. It describes an environment that’s Volatile, Uncertain, Complex and Ambiguous. Just right for battle fields. Yet it’s also caught on in business since in various forms VUCA happens there too.
All business leaders must deal with VUCA but ethical leaders tend to have a more sophisticated appreciation of it. For instance they usually make more systematic effort at risk assessment. They also seek out longer term strategies that can help them cope with set backs and obstacles.
On its own, being ethical is not enough to ensure a leader’s personal success. Though it certainly helps, particularly over the longer term. There are two key facts emerging from research factors that can make a big difference to whether the leader is resilient when facing a VUCA challenge:
Desire to leave a legacy
Strong personal values
These drive many ethical leaders. They help feed their relentless focus on making a social difference. It also primes their longer term view. For instance in 2017 Unilever’s chief Paul Polman came out fighting fending off the Kraft Heinz’s £115bn hostile takeover bid. His heroic efforts defeated the unwelcome invasion in a weekend.
He continues to defend his company’s “inclusive capitalism” business model. He persists in championing the returns Unilever shareholders have enjoyed during his eight years at the head of the Dove soap-to-Lipton tea consumer goods giant.
And he keeps trying harder than ever to provoke a wider debate about the perils of short-termism in business. This is CEO resilience in action.
Resilience is more than just recovering—the bounce back. It also includes reacting in responsible and mindful ways to serious setbacks and challenges. Almost without exception Boards of Directors say they want two qualities in a CEO: Integrity and resilience.
Why? Because they transcend any single business situation. Quite simply they help leaders to handle almost any adversity.
But such valued qualities are still hard to measure.Any metric will be an approximation, not a sure-fire statistic. Most of the attention around choosing a CEO for example, relies on observable personality traits, such as charisma, influence and passion.
First, executives high in integrity—i.e. ethical leaders, tend to be more likely to score high on the ability to
Connect with others
Be reluctant to take risks
Second, leaders those leaders perceived as having strong integrity do not necessarily score well on: the ability to galvanize people into action; having a high tendency to take risks, or the ability to be disruptive.
In an effort to produce an approximate measure of resilience Management Institute Roffey Park created a Resilience Capability Index. This uses an ultra simple questionnaire approach—see below
An approach developed by PWC looks at resilience from an organisational rather than a personal perspective. This relies on variables such as the ability to respond to change and the organisation’s relationships with customers, business partners, and other stakeholders.
The PWC variables for measuring organisational resilience uses six forms of organisational behaviour: Coherence, Adaptive Capacity, Agility, Relevance, Reliability, and Trust
Zenger Folkman a US consultancy specialising in strengths-based leadership has developed further ways to identify resilience These include leaders who must be coachable, build trusting relationships, develop others and are decisive. It collected data on more than 500 leaders. Using views from managers, peers, direct reports and others on 40 behaviors. What emerged was
“Most resilient leaders are also viewed as the most effective leaders”.
Yet few attempts to measure resilience fully acknowledge the importance of integrity, and ethics as underpinning the ability to be resilient.
Recent years have seen considerable advances in understanding the pressures and resilience demands face by leaders. These plus the large amount of practical wisdom offered by leaders themselves, suggest some practical ways ethical leaders can build their resilience.
CHANGE: Build situational awareness through embracing change; accept the need to adapt and maintain a realistic perspective
VALUES: Be guided by your values and trust your judgement; resist short term pressures to cut corners or just go through the motions in some way
STEPS: Focus on concrete steps to bring ethics and compliance alive for others; don’t be satisfied with elaborate rules and words.
CHALLENGE: Be willing to challenge other senior leaders to embrace accountability and transparency
SIGNS: Demand evidence that ethics and compliance programs are effective and responsive to change
WALK: Get out there and make contact with stakeholders i.e. walk the walk.
CONSCIENCE: Pursue corporate conscience through promoting values and ethical culture, if necessary against the resistance from other stakeholders.
RESIST TRADE OFFS: Refuse to accept a trade off or “choice” between ethical business practices and profitability. The two are inextricably linked.
LEARNING: When misconduct occurs make sure it’s properly analysed and the lessons learned and shared with employees.
NO QUARTER: Support effective sanction or penalties on senior executives and high performers involved with misconduct
CELEBRATE: Ensure there is proper reward and recognition for ethical conduct, don’t just take it for granted.
GOALS: Set realistic goals and establish a clear sense of purpose that you can explain with enthusiasm to others; each day, take one small action to move forward.
CHALLENGES: View challenges as opportunities, not rocks in your way; take positive action to tackle them and avoid passivity
NETWORKS: Build your networks and set out to connect with others and encourage collaboration, not isolated working
STRESS: Accept it’s a real factor in your life and must be managed; practice optimism; don’t blame yourself and resist thoughts such as “I can’t do this”.
J. Folkm, 7 Ways To Become A More Resilient Leader, Forbes, New Research: April 6, 2017
The Resilient Leader Debunking the myths and growing your capabilities, Roffey Park
N. Pratly, Paul Polman: ‘I could boost Unilever shares. But cutting costs is not our way’, The Observer, 20 May 2017
Chesley, Creating a Culture of Resilience, What really enables organizations to survive and thrive? Insights Ethisphere
Roffey Park, The Resilient Leader, Debunking the myths and growing your capabilities
6 traits that define a resilient business leader, Laura Gitman and Anita Hoffmann, Greeen Biz, Monday, July 13, 2015
C. Alexandrakis and D. Stamoulis, Integrity, Resilience, and the Power of Quiet Leadership, Board & CEO Advisory Group, December 18, 2017
A.Hill, Do not take it personally: business leaders working under pressure, FT 11 March 2018
“There is mounting evidence that funds which observe environmental, social and governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin.”
Financial Times, Sept 3rd 2017
Activist investors such as growth-orientated hedge funds have woken up to environmental, social and governance (ESG) concerns. There is nothing philanthropic about such awareness.
In simple terms, stakeholders are following the money. In emerging markets for example, as the ever vigilant FT points out, ESG driven investments now do better than conventional benchmarks:
It’s increasingly in the interests of mainstream investors to pay attention to (ESG) factors. Financial giants such as Bloomberg, Morgan Stanley, and Goldman Sachs are all busy expanding their ESG product and service offerings.
And in the coming years, women and millennials will start to manage a greater share of global wealth. They’ll also want to align their actions with their values about fairness, the environment and human rights.
ESG is now part of investment jargon. It describe the performance of investment and fund portfolios using environmental, social and governance criteria.
The quality of these portfolios can be measured against specific ESG factors and duly reported to shareholders.
ESG analysis can provide important insights into the long-term prospects of companies. Investors can find new market opportunities with companies placing the management of ESG factors at the core of the business.
“Almost three-quarters of investment professionals worldwide (73 percent) take environmental, social, and corporate governance — ESG issues–into consideration in the investment process. Only 27 percent do not consider ESG issues.” CFA Institute ESG Survey, August 2015
The Leadership Impact
While under pressure from so many diverse sources, senior executives are encountering yet a new kind of demanding investor. These are activists wanting higher returns who have realised that the route to this is through integrity and ethical business performance.
Such investors may not be experts on leadership. Yet they know what to look for in company leaders. They expect to encounter ones who talk regularly about integrity and then demonstrate it through daily performance.
More specifically they want signs that a business leader knows how to reduce the risks associated with ethics or compliance failures.
Demand for risk reduction comes within a context fraught with significant levels of uncertainty.
High profile cases such as VW or Wells Fargo are already part of business history. Devastating weather events continue to make their presence felt. The relentless decline in the coal industry has meant investors have lost 85 per cent of their money since June 2014. Once a sure money loser, renewables now look a sound bet.
These are storm force gales, whose waves continue to batter the investment shores. In consequence, the pull of ESG has reached critical mass.
For instance, Swiss Re, one of Europe’s biggest insurers, now benchmarks its entire $130bn portfolio against ESG indicators.
The ESG phenomenon continues despite an absence of detailed, globally agreed definitions of either ethical leadership or what constitutes ESG standards. Meanwhile the overall trend to take into account ESG continues to bring ethical leadership in business into ever sharper focus.
Mirage or reality?
As a source of profits is ESG real, or mere mirage?
Sceptics argue the current enthusiasm for investing which takes into account ESG factors stems from a mere statistical distortion. This they say, combines with a vanity urge to be part of the latest investment bandwagon.
Yet consultancy Create-Research, reports 60 per cent of investors say they plan to increase their allocation to responsible investment over the next three years. That’s a lot of investors living an ESG delusion.
“…ESG has affected the valuation and performance of companies both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk.)
Other studies too have consistently shown how ethical leadership and its form of decision-making fosters employee morale, boosts brand reputation, encourages loyalty in customers and employees, and improves a company’s bottom line.
In summary, ethics and ethical leadership are more than the right thing to do: it’s also the smart thing to do.
The E of ESG
Broadly the E of ESG means the environment which includes
Globalization effects – e.g., exploitation, child-labour, social and environmental damage anywhere in the world
Corruption, armed conflict and political issues
Staff and customers relations – for instance education and training, health and safety, duty of care, etc.
And other social impacts on people’s health and well-being
Business needs leaders able to make sense of these diverse factors. Rather than ignore them, as many businesses still seem prepared to do, ethical leaders embrace the challenge. They also often take a highly personal interest in the implications.
To be an ethical leader is therefore to be concerned with the organisation’s own culture and environment in which employees work. This shows up in the increased interest in employee engagement as a clear route to financial success.
The S of ESG
Larry Fink CEO of Blackrock
In January this year (2018), CEOs of the world’s largest public companies received a letter from Larry Fink, CEO of Blackrock. It’s one of the largest asset and risk management firms, so a letter from Fink was at least likely to be read.
While originally developed for governments, these standards now affect the business context. They provide a strong foundation on which to clarify the scope and meaning of a company’s “social” performance. Fink’s appeal was emphasised the role of public companies in growing economic inequality.
He argued for long term value creation since ethical companies have a better financial performance in the long run.
“It’s the right thing to do”
E- and G-factors of ESG have achieved considerable traction with both investors and business executives. In contrast, the S-factor, has yet to make a lasting impact. This is against a backdrop of rising economic inequality and mounting evidence of the negative forms of many business practices.
So it’s entirely relevant to ask: can business deliver value in today’s global economy in ways that work for people and communities around the world?
Once CSR, or Corporate Social Responsibility seemed like the start of a sustained shift. It seemed to herald a move by business to showing a genuine social concern for the company’s effects on environmental and social wellbeing.
In practice, CSR has acquired a serious credibility gap. There remain few examples where CSR has delivered measurable business gains, let alone sustained benefits for the community. See Goodbye to CSR, welcome to Social Commitment.
The current lack of interest by some business leaders in the “S” of ESG partly reflects a disbelief that social commitment can pay. Many still view it as a check-the-box exercise, one where investors and companies only appear to comply with rising consumer expectations.
Despite this roll call of negative forces constraining social investment, leading corporate CEOs do emphasize for example, positive reasons they are considering human rights in their business models and operations:
“…we firmly believe that if we focus our company on improving the lives of the world’s citizens and come up with genuine sustainable solutions, we are more in sync with consumers and society and ultimately this will result in good shareholder returns.” Unilever’s CEO Paul Polman
Others argue that sustainability and human rights investments have led to increases in their company’s ability to recruit and retain outstanding employees, They also point to improved quality control, and better worker retention throughout their supply chains.
Yes as the Centre for Business and human rights comments, more work is needed to :
“…reconcile the myriad approaches that currently exist for defining and measuring social performance.”
The G of ESG
Corporate governance was once merely a response to corporate scandals. Now it is making important inroads on leadership accountability, especially in Europe.
Corporate governance has shifted from the wings where is was seen narrowly, in a legalistic sense of rules and regulations that must be obeyed. Today it has evolved into a whole new approach. This now includes general support for better run companies and in particular support for sustainability.
Sustainability is one of those phrases that can mean what you will. In practical terms it means looking at social, environmental and economic impacts and making decisions using a broader perspective than in the past.
When sustainability permeates governance in this way, business leaders become accountable for environmental, social, and economic performance.
Using the sustainability lens to view governance changes how the organisation approaches issues such as:
Land use, energy, water, and emissions
Human rights, equal opportunity, and health, safety, and wellness
Charitable giving and volunteerism
Systems and strategies for engaging with stakeholders,
Product development, procurement, and innovation
Board composition and compensation
Ethics, standards, and codes that apply within an organization and to its value chain.
With these multiple factors to consider, how can leaders make sense of the current ESG landscape?
How can they better include such information into their approach to business?
The sheer diversity of the ESG landscape explains why governance tends to be its least understood aspect. Yet at its core, governance prompts business leaders to pay attention to the culture of the organisation.
Investors too increasingly recognize that companies practicing good governance as part of a larger ESG-aware strategy will be more likely to see these factors translate into improved long-term investments. What that means in practice is up for debate. For example, some critics say we need a complete overhaul of corporate governance:
Bob Garratt, Professor Extraordinaire; Chairman Centre For Corporate Governance
“I can’t find a single corporate governance model that works well,”
Bob Garratt, Visiting Professor at Cass Business School
The direction of change would put more weight on directors doing their job responsibly and professionally. This would include developing corporate governance to include a social audit–in simple terms more focus on the E and S of ESG.
Better governance would also mean more focus on new challenges such as cyber security and the shift to digital.
Nobody invests in governance for its own sake. Instead stakeholders look to ethical leaders who will place a high priority on good governance as a way of achieving long term financial benefits.
Giese, Executive Director, Applied Equity Research
Has ESG affected stock performance? MSCI, May 2017
L.Portado, Activists look to the ethics route for higher returns, FT 27th December 2017
Kynge, The ethical investment boom, FT, Sept 3 2017
Ethical Leadership Around the World, AND why it matters, ECI 2017
Jackson-Obot, Ethical investments still on trend, FT Adviser Nov 2017
O’Connor and S.Labowitz, Putting the “S” in ESG: Measuring Human Rights Performance for Investors, Centre for Human Rights, March 2017
Explaining the G: Putting Governance in ESG, FlexShares, Jul 31, 2017
ESG Investing: Should Start with the “G”, Magni Global Asset Management
Hale and J Glase, Sustainable investing trends for 2018, Morning Star, 21st December 2017
R Sullivan, Which direction for corporate governance?, Board Agenda, February 2018
A. Filabi, Prioritizing Social Responsibility in Companies: A coming firestorm? Ethical Systems, 17th January 2018
At least in a most basic form. Jobs previously doable only by people can now be automated and the trend keeps accelerating. What passes as thinking machines are replacing human tasks and jobs. They are altering the skills organisations want from their people.
Even in the most sophisticated businesses, ethical business leaders must learn how to master AI, before it masters them. Ginni Rometty, CEO of IBM, for example, says her organisation is
It’s a particular challenge for ethical business leaders, let alone those who suffer from a faulty moral compass.
Society is starting to run scared. Science fiction has long spelled out doomsday scenarios. Now though, real life luminaries such as Steven Hawkins have issued dire warnings. AI could indeed mean the end of mankind.
Some believe this fear is overblown. Despite obvious advances in AI, there are no convincing signs of genuine, sentient machines. That is, ones that are fully self-aware and in need of moral guidance.
Still, governments, business and the public are rightly starting to demand more accountability in the application of AI technologies. So, how far do ethical leaders need to make sense of AI. What’s the connection? In particular, how do leaders make sense of the many legal and ethical issues that keep surfacing?
At base camp, one view of the summit looks clear. We need an ethical framework to help with decision making and to ask the right questions.
The reasons for wanting such a framework stem from the dangers AI seems to pose. For example, we have no real idea what happens when an AI machine learns.
When machines develop their own language
In one celebrated case, the techies rushed to turn off their learning machines when they realised these were rapidly evolving their own, impenetrable language.
Developments in AI are rapid, varied and hard to classify. About the best criteria is to sketch out what we might expect in the next three, five or 10 years. Even that looks clumsy and not entirely convincing.
Augmented intelligence—fundamental changes to the nature of work in which humans and machines collaborate to make choices, happening to some degree in many places;
Autonomous intelligence –automated systems taking over decision making and the roles left for humans are in doubt—it’s already happening in some places, from farming to medicine, from transport to aerospace.
Beyond that we are already facing AI machines tainted with ethical, gender, and other types of bias. This is not so much learned as built in by human beings using their own unconscious biases.
Nor have we yet established whether all interventions with AI machines really do generate better business performance. For example, if we leave hiring choices to AI machines could this be doing more harm than good?
Some firms already rely on AI to weed out candidates for interview. Applicants can be rejected without ever interacting with a live human being. That is not merely unethical, it is the height of stupidity in wasting potential.
But in simple terms it’s technology that replicates basic human functions. It’s about computers doing things ever smarter than we used to expect of machines. AI brings computers closer to what we thought only humans could do.
Recent advances all involve some sort of neural network. This is modelled on how we believe the human brain works. Machines and computer systems simulate human intelligence. They seem to: learn; reason and evolve—using newly acquired information.
In essence therefore, AI is machine learning. It’s computers working things out for themselves, but without being explicitly programmed to do so.
Instead, they progress by processing and analysing huge amounts of data, identifying patterns and improving their performance as they go.
All this is scary because AI is apparently taking over much of our world. We fear it could threaten to our human existence through its impact on
ethics; the workforce; technology
For example DeepMind’s CaseCruncher Alpha beat a team of UK lawyers in a competition to predict the outcomes of court cases. And AI-enabled machines are starting to outperform specialist radiographers at detecting early signs of cancer. We hardly think twice about decisions in professional tennis being made by “Hawkeye” and football is going the same way. How long will we need human refs?
Do AI machines think? Not as we know it. They’re not fully self aware or sentient—yet. They’re still missing important yet familiar human characteristics such as:
empathy, a sense of justice, integrity—knowing right from wrong, a natural gift for feelings and emotion, respect for privacy; passion, compassion; suffering, pain, love, human wisdom and so on.
These missing elements partly explain why we fear AI—all brains and no humanity. Despite this: AI relies on algorithms or decision routines of ever increasing complexity. It’s becoming more difficult to make sense of how they work.
AI technologies are not ethical or unethical, per se. The real issue is around the use that business makes of AI and whether it undermines human ethical values.
Issues for Ethical Leaders
Of the many issues posed by AI for ethical leaders, some are more easily grasped than others. Here are some that an ethical leader may need to confront.
Need for an AI Ethics Officer: As AI penetrates all aspects of a business, leaders will benefit from having a human adviser to help steer the ship through the ethical breakers.
An AI ethics officer would highlight not just ethical dangers. But also enable business leaders to see the bigger picture. AI has so many ramifications.
The business may need to develop its own clear philosophy and approach in making the best use of AI while managing the attendant risks.
Profits versus ethics: Ethical business leaders must take seriously the implications of AI when it means hundreds or thousands of job will be destroyed.
The assumption that innovations will automatically create new jobs to compensate could prove to be dangerously complacent.
Leaders need to review carefully what introducing AI on a large scale means for the local community and to plan accordingly.
Previous failures associated with globalisation provide a warning that ignoring the social consequences can be de-stabilising, not just for a community but for the company itself.
AI can make mistakes: When a human makes a mistake it may involve a single wrong transaction. In contrast, AI can systematically affect all transactions on a large scale.
It is harder if not impossible for AI to admit it is wrong or mistaken. Leaders need to be aware that AI may need special attention over handling mistakes.
Rush to use: Enthusiasm for AI can mean leaders take short cuts and fail to test the implications of the processes.If a program learns through new data then inevitably there will be unpredictable results.
For example, US trading firm Knight Capital lost $440 million in a computer glitch in 2012. The firm sold all the stocks it accidentally bought Wednesday morning because a computer glitch.
Much of the volatility in money markets for example, has already stemmed from computers being allowed to make decisions without full human oversight. Trends become exaggerated leading to runaway mass movements.
Some experts point the finger of culpability at computerised High-Frequency Trading (HFT). Algorithms and software do not muse about global economic events. Instead, they merely chase mechanical patterns they’re programmed to find. Such as as movements in trend or momentum. They do not make decisions based on real-world eventualities, such as political events.
Data deluge:AI partly relies on the ability of the technology to make sense of huge amounts of raw data. An ability to track ever more data raises important issues for business leaders around privacy and how such data analysis will be used.
Ethical leaders need to ensure there is a continual review of how personal data is used when being processed by AI.
Trust: Are we right to trust AI? Business leaders who fail to address this issue could find themselves facing serious risks to reputation and branding.
Its authors suggest sending independent investigators into organisations to check how their AI systems operate, and propose certifying “how they are used in critical arenas such as medicine, criminal justice and driverless cars…
“We need transparency as far as it is achievable” Luciano Floridi, Oxford Internet Institute
Framework of values and criteria: for all the mush about corporate values, the essential core of integrity remains what it has always been—honesty, practical wisdom, courage, self control and justice. We need to apply these even more stringently with the coming wave of robotics and the idea of thinking machines.
For example, ethically-minded business leaders need to establish a framework of values and criteria incorporating the ethical impacts on an organisation’s products and services. Can a program for instance be given a sense of values and beliefs. Business leaders need to address the issue of “what path will we set AI to walk?”
What are the founding values for an ethical framework of AI in business? According to one study the main components include:
Accuracy, respect for privacy, transparency and openness, interpretability, fairness, integrity, control, impact, accountability, and learning.
Hold to account: How do we develop a shared guide on AI developments that protect the common good? So far, we have no way of holding AI designers and developers to account.
A key issue concerns legal liability. With ever more elaborate algorithms, the consequences of these may be far removed from the individual who wrote and developed the Code.
Without clarity around legal liability for instance, we cannot have proper accountability and governance of artificial intelligence. Without such accountability and governance we place multiple stakeholders and future generations at risk of unmitigated harm.
For example, if driverless cars make decisions which adversely impact innocent bystanders, who is culpable? Ultimately, blame must lie with human individuals – this should be a key principle.
AI from I Robot
One rule to bind them all: Can we develop a basic rule for AI that can be universal and robust within business?
For example, Asimov’s three rules on robots may look credible. But as shown vividly in the film I Robot, the rules can potentially be subverted in the so-called interest of human beings.
Business needs to adopt some principles for applying AI that are both credible and viable.
Democratic control: We need new regulators to oversee and limit the application of AI and to ensure that our Government has control over any products and services imported from abroad. The aim must be to ensure local democratic control of the impact on our society.
Education: Almost a quarter of the UK’s population lack basic digital skills, let alone an understanding of machine learning. We need to prepare people for how artificial intelligence may impact their work, private lives, relationships and future well being.
People need a basic understanding of the use of data. For example, how these systems will become an important tool required by people of all ages and backgrounds.
New mechanisms are needed to create a pool of informed users or practitioners. This will help various sectors and professions absorb the use of machine learning so these are useful for them
Further support is needed to build advanced skills in machine learning. There is already high demand for such people and there is an urgent need to increase this talent pool.
The French Sodexo company has a global workforce of nearly 450,000 and, 50% or more of its current jobs could change or disappear.
“What keeps me awake at night is that …. everything leads us to believe the changes and the disruption are going to come at an incredibly fast pace …. So, it’s a matter of urgency that we seize the opportunity to mitigate the challenges.” Sylvia Metayer, Sodexo’s Group Executive Committee
How do you stop a risk from becoming a crisis?
Most business leaders know that various risks can segue into a crisis at any time and they want answers. Two main causes create such a change.
First, there’s the familiar boiled frog syndrome. What seems a trivial issue quietly builds from being a niggle in the background into a full blown disaster.
That must have been how things looked at Wells Fargo. First, the managers knew something was going awry. But their unethical tactics were bringing business results, so they ignored the danger signals. Pressure from above made sure of that.
Next came staff complaints about being bullied into unethical behaviour—opening unrequested accounts and charging for them. Again there was no serious management reaction, except some people were fired for protesting.
Then wang! In 2016 the dirt finally hit the fan. From being a highly respected bank with a long history of decent behavior, damning headlines now ricocheted around the world.
The bank’s name was trashed for its unethical practices. The CEO resigned and even today the organisation continues to pick up the pieces. It was the equivalent of the frog finally dying of excess heat.
Commenting almost explicitly on the boiled frog syndrome experienced at VW, Fed officials pointed to “persistent misconduct” at the bank. They said the two former most senior managers had presided over “many years pervasive and serious compliance and conduct failures.
In case you think that you’re well protected again the boiled frog syndrome, take a look at Kobe Steel and the mess it’s in right now. Here’s a company with apparently a culture of compliance with rules and regulations, and quality control systems. It has compliance committees, compliance directors, whistle blowing programs, and internal reporting systems.
Kobe execs bow to apologise
Yet Kobe’s boiled frog disaster has been slowly heating up over years. First this October the company announced it had found one case of falsified data on iron ore powder. This is used in vehicle parts such as gears. It followed an admission it had falsified figures about the strength and durability of its aluminium and copper products–used in the transport and defence industries.
Kobe’s shares plummeted 18% after the iron ore admission. This brought the company’s stock-market losses since the scandal broke to $1.6bn (£1.2bn). It is now examining other possible data manipulations going back a decade.
The boiled frog experience, in which something happens so slowly that one hardly notices the important differences building, can occur just about anywhere in a business. Watching out for the signs is partly what ethical leadership is all about.
Sometimes the syndrome takes years to emerge as a fully fledged crisis. Both Corrillion and Capita have hit the headlines recently for “suddenly” being in trouble. Yet in both cases the problems have long been gestating. As Capita’s new CEO puts it Capita was spread over too many markets. It had under invested with much emphasis on acquisitions to drive growth”. He also mentioned “weakness in new sales”. Worse, the organisation was
” too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility.
On top of this, Mr Lewis said the firm still had too much debt, at £1.15bn, and that this urgently needed to be brought down through selling assets. Hardly a short term sudden on set of risk.
Then there are the lightening strikes. These are situations you cannot easily predict. Seemingly they come from nowhere.
Sometimes there are bad things that you least expect. As when some employees behave irresponsibly and leave the organisation and its leaders reeling.
Human behavior is the trickiest risk factor to predict, manage and defend against. Despite years of high-profile breaches, security training and anti-phishing campaigns, end users persist in using weak and compromised passwords, clicking on suspicious links, sharing accounts and using insecure apps and websites.
The bankers suffered billions in paper losses when the retailer’s shares plunged 75% and the chief executive resigned. Like a lightening strike, “accounting regularities” had unexpectedly emerged into the light of day.
Much the same occurred in Tesco, when the retailer suddenly “discovered” a huge hole in its accounts. The case ended up in court, after Tesco announced in September 2014 that its profit forecast had been overstated. This was mainly due to booking commercial deals with suppliers too early.
Tesco’s unexpected disclosure saw its shares tumble, plunging the company into the worst crisis in its near 100-year history.
What remedial action?
So what can a business leader do about either the boiled frog syndrome, or the lightening strike?
The best avoidance strategy stems from being an ethical leader. Ethical Leadership is one of the most effective risk mitigation strategies a company can adopt.
Ethical leadership relies first on a high level of emotional intelligence (EQ). This is the ability to own an organization’s values as well as one’s own. It means linking the means of achieving success with the business strategy. “How” matters just as much as “what.”
Second, ethical leaders are good at listening to multiple points of view. Consequently they’re open to differing input and feedback. Rather than “killing the messenger”, ethical leaders welcome those who bring them the bad news. They even reward them. Such leaders are more likely to come across a boiled frog situation or be warned about a potential lightening strike vulnerability.
For example, one new chief executive asked his team to list all the “red” signs of danger on their various business projects. At this first meeting nobody admitted anything bad was happening. They preferred to let the “frog boil”. They hoped somehow it might be OK.
The insightful new CEO sent all the team away. He said return back next week with more honest information about their projects. When the following week his team reassembled, one of them stood up and admitted his main project was Red and in trouble. The CEO refrained from yelling at him, or criticising him for the bad news.
Instead, the CEO stood up and applauded the surprised excecutive. The others got the message. Soon more useful information started flowing their respective “boiling frogs.” The CEO had found a way to mitigate the combined risks before they spiralled into a crisis.
At VW the new anti-corruption czar, Kurt Michels found a team unwilling to voice its thoughts, fears or uncertainties despite the gravity of the diesel crisis. Michels had to encourage his team members to speak up during meetings.
“During the first two (conference) calls, I didn’t receive a question at all. No one asked a question.”
Many were passive, waiting for instruction and interpreted his brainstorming suggestions as straightforward orders not to discuss but to carry out. VW has paid $30 billion in costs from its boiled frog experience since 2015.
VW also suffered from a lightening strike, when it was recently revealed that the company was testing the impact of pollution from its diesel engines on monkeys. Apparently nobody in the section carrying out the tests thought to ask the classic ethical filter questions: “How would we look if what we’re doing appeared on the front papers of the major media?”
Why is this a moral or ethical issue?
Today’s risk environment differs significantly and is less understandable than a few years back. Complexity, globalisation, and large forces such as climate change and cyber insecurity have transformed the risk scene.
Consequently many organizations now face a large variety of intangible and hard to predict risks. These may range from unwanted disclosure of information due to the behaviour of errant employees, through to breaches of conduct driven by skewed incentive systems, such as at Wells Fargo.
The task of risk management in a company is therefore expanding. From protecting the balance sheet and having a mainly bottom line focus, today’s risk management must encompass wider possibilities.
Two capabilities can help companies tackle this trickier risk environment. First, there’s the more widespread adoption of ethical leadership. This tends to be more open to the unpredictable implications of the boiled frogs and lightening strikes syndromes.
Second, no amount of attention to devising codes of practice, adopting compliance technology or issuing threats of punishment will mitigate the risk factors companies could encounter. Instead, organisations need to become more explicitly in being values-driven.
The combination of ethical leadership and a reliance on core values can affect people’s responses to the intangible risks ahead.
Another helpful tool in tackling the transformed risk environment is a more analytical approach to risk management. This has resulted in the production of a variety of guidelines, frameworks, and standards to assist leaders assert better control over risk.
These frameworks help them tackle a common problem shared across many types of business enterprise. In highly competitive or fast changing environments people under stress may not only suffer from burnout and health threats. They may also fail to see there is an ethical or moral dimension to their decision making.
That certainly happened in VW. There, the decision to install defeat software to hide the extent the company’s engines were polluting, was initially seen as a technical one. Not as a moral or ethical choice.
Starting with the values
Much risk management effort relies on using bogus objective measures of mitigation. For example, one much-used approach asks: how much impact would a particular issue make if it occurred? This is then ranked on a scale from one to 10. Next the approach asks: how likely is the risk to occur–again described on a scale?
Combining impact and likelihood produces a deceptively easy to grasp risk assessment measure. The resulting number has the comforting appearance of logic and objectivity.
Yet you cannot turn risk into a value free zone. It is deeply embedded in the ethical dimension of the organisation. Something may be wrong, no matter what the risk scale tells you.
Ethical leaders therefore need to ensure the risk assessment process becomes values-driven and built permanently into the company’s overall governance.
If and when his happens it should be possible to detect the values-driven approach affecting strategy and planning, management, reporting processes, policies, and culture.
Therefore the best place to start in handling boiled frogs or lightening strikes is not with a so-called objective tool for measuring risk. Instead, invest in time and resources to understand the interplay between corporate values and risk management.
Reaching this understanding remains more art than science. It means viewing social, cultural and organisational values as a source of risk. Values and culture for example, produce their own range of risks and these need to be managed.
The connection between an organisation’s values and broader societal values may therefore be an important yet much ignored source of ethical risk—see panel
Finally, the effective management of ethical risk must become an on-going discipline. Not a one-off event.
This means having constant checks on how the organisation’s declared values and the risks they cause arise in daily ways of working. Here are five specific ways to combat the twin evils of boiled frog syndrome and lightening strikes:
Jondle et al, Managing risk through the ethical business culture model, European Financial Review June 19, 2013
Disparte, Simple Ethics Rules for Better Risk Management, HBR Nov 2016
FT Reporters, Banks stand to lose billions in Steinhoff, FT 8th December 2017
A. Sancheti, Combating Your Company’s Insider Risk, Corporate Compliance Insights, December 11, 2017
A.Gray and B.Mclannahan, Fed’s rap puts fear of God into bank board rooms, FT 6th February 2018
Acknowledgement: Thanks to David Archer of Socia.co.uk for inspiring this title, –the rest with all its faults, is down to me.
Sadly, his new awareness didn’t lead to sensitive handling of the chaos a year later caused by his airline’s last minute cancellations. So he and you might well wonder: how important is it for a business leader to show empathy?
There are two ways to answer this perfectly sensible question. The first is the human side; and the second is what I call the hard-nosed reply.
The human side suggests as a leader you need empathy to help you build essential relationships at work. Only with effective relationships can you expect to bring your vision for the company to life.
Now for the hard-nosed side of the answer. This refers to the impact a leader with empathy can have on a company’s financial performance. For example:
The 2016 study by the Harvard Business Review (HBR) used a Global Empathy Index to measure how much empathy was happening in a company. It found the top 10 companies in terms of empathy increased in financial value more than twice as much as the bottom 100. Surprising eh?
Also, what HBR calls high empathy performers generated 50% more earnings than their less empathic competitors. Or putting it slightly differently, firms with higher empathy scores correlated strongly (80%) with high performers.
Successful ethical leaders do a good job of conveying empathy. This partly explains their success—whether you define this in financial or non-financial ways. Let’s take a closer look at this empathy thing in action.
It’s almost impossible to untangle ethics from empathy. Describing what makes an ethical leader means you are talking about someone who also conveys empathy.
Let’s start the de-construction with ethical issues. At some time in their business life most responsible leaders find themselves wrestling with ethical issues. It could be bad things happening down the supply chain. Or employees whose behaviour undermines the firm’s core values.
Or it might be the challenge of “doing what’s right”. This may not be at all obvious at first and the smart business leader therefore stays ready to hear different perspectives.
Also the leader takes care to avoid punishing those who express challenging views. Such opinions surface due to a readiness to listen, to hear what others have to say despite disagreeing with them. Achieving a diversity of views can be as important to company success as diversity of employment.
Empathy is notoriously hard to measure convincingly. And because it’s not obviously connected to a company’s bottom line even a responsible leader may not feel on safe ground talking about it. Yet empathy can be measured–see box on the right suggesting some ways.
And like engagement, empathy is a proven critical factor behind leadership success in business. Why? No leader enjoys being told they’re wrong. Which is why showing empathy is seldom as easy as it appears
Major current influences on how one leads in business include teams, globalisation and the need to retain talent. Yet all three require the leader to do far more than just talk the talk. They requires leaders to take into account others’ feelings when making decisions.
Many corporate environments do the reverse. They short-circuit our natural capacity for cooperation and compassion. Instead much of business promotes paranoia, cynicism and self-interest. The space for empathy remains small.
If you’re someone who lives life as a zero sum game—”if I win you must lose. “That empathy actually produces great business results seems counter intuitive As one critic of the way so many businesses operate argues:
“In business we give bonuses to people who gained when others sacrificed.” Simon Sinek, author
The ethical leader does more than spout platitudes about “doing what’s right” or “I strongly believe in our values.”
Instead, an ethical leader pays close attention to how others are being, not just doing. It is hardly surprising an attention focusing discipline such as “mindfulness” appears to be making a serious impact in many parts of business.
For example, everyday gestures, such as holding an elevator door open for others or refilling the coffee machine can seem irrelevant to the wider business goals of success. Yet neuroscience reveals how even small acts of kindness release a tiny shot of feel-good oxytocin. Feed people with oxygtocin and you have a sure way to gain friends and influence people.
Research also suggests around half of all practising mangers are ineffective. In which case it’s a smart move to find out what skills really matter. One of them turns out to be the ability to convey empathy.
“Our results reveal that empathy is positively related to job performance. Managers who show more empathy toward direct reports are viewed as better performers in their job by their bosses.” W. Gentry et al, Empathy in the Workplace
Empathy generates an interest in and appreciation of others. It paves the way to more productive working relationships. For the ethical leader empathy is therefore more than just a tool of management to be learned alongside other techniques.
It is an important way of being, it helps them work across organisational and even cultural boundaries. As mentioned earlier, empathy helps to understand people with different perspectives and experiences.
“Let’s cut to chase” you may well be muttering by now! What are some simple ways for an ethical leader can show empathy in business:
Partly adapted from B Martinuzzi: What’s empathy got to do with it?, Mind Tools
C. Cherniss The Business Case for Emotional Intelligence, Consortium for research in emotional intelligence, 1999
B. Parmar, The Most Empathetic Companies, HBR December 2016
S. Levitt, Why the Empathetic Leader Is the Best Leader, Success Magazine, March 15, 2017
W. Gentry et al, Empathy in the Workplace: A Tool for Effective Leadership, Centre for Creative Leadership 2007
J. Meister, Future Of Work: Mindfulness As A Leadership Practice, Forbes, April 27th 2015
Building the Case for Mindfulness in the Workplace: The Mindfulness Initiative Private Sector Working Group, 2016
No responsible business leader wants to risk being found supporting child labour. Even fewer want to risk being accused of supporting child slavery. Yet for many their supply chain is a car crash waiting to happen—most recently and publicly over the use of cobalt mined by children and adults, in horrendous conditions in the Democratic Republic of Congo (DRC).
Cobalt powers batteries for mobile phones and the upcoming tsunami of driverless and electric cars. The price of the commodity is soaring—see chart. So this is no mere footnote to ethics in company supply chains.
Companies showing little concern with their cobalt supply chain sources include such iconic names as Sony, Samsung Electronics, General Motors , Volkswagen, Fiat-Chrysler, Microsoft, Lenovo, Renault, Vodafone and many others.
Yet the leaders of all these firms know that human rights risks and abuses cannot be separated when it comes to cobalt mining in the DRC.
Purchasing and supply management professionals face growing pressure to to show the supply chains they manage take ethical and social responsibility issues into consideration. Even back in 2012 Phil Knight then CEO of Nike, ruefully admitted:
“The product has become synonymous with slave wages.”
This led to a complete re think at Nike, with sweeping reforms to its supply chain approach. Other companies too have realised they must take a fresh look at their entire supply chain.
For instance, the London Metal Exchange recently sent a low key directive to its members asking them to show how they guarantee “responsible sourcing “ of commodities traded on the exchange. This was part of a broad push to address responsible sourcing and unrelated to any product or brand.
The complexity and length of some supply chains can make it a challenge to meet moral and legal obligations. Forces pushing to ensure supply chains are more ethical include:
media or consumer pressure
codes of conduct or legal imperatives
inclusion of such issues in annual financial or social accounts
results of social audits
demands from ethical investors
perceived high risk from supply chains based in a particular country or on a particular product
No hiding place
Business used to deny any responsibility for the behaviour of their oversees suppliers’. Such disinterest in the supply chain no longer stands up to scrutiny. Those firms associated with the 2012 Dhaka fire in Bangladesh found this out the hard way.
That fire killed 117 people, and injured over 200 others. The overseas firms using the factory as part of their supply chain tried to distance themselves from any responsibility for what went on locally. That included Walmart, the world’s largest retailer. No prizes for guessing how this sales giant initially responded to the disaster—it denied any suggestion of accountability.
Yet by 2016 Walmart was boasting of new credentials of caring. Particularly, “training in promoting factory safety in Bangladesh.” Having seen the writing on the wall its leaders adapted accordingly.
In a global economy supply chains can be lengthy and dispersed. That is, they may have many sub contractors, spread across a wide geographic area. As more suppliers keep entering the chain the chances that ethical problems will arise keep multiplying. The price for failing to monitor and regulate such supply chains to make sure they are ethical can prove commercially devastating–see panel on right.
Few academics, industry experts and company executives can agree on what an “ethical” supply chain even looks like.
Once it meant “sweat shop” conditions and environmental issues, such as pollution or energy conservation. Now though, it encompasses a much broader range of issues:
Freedom of employment and association
Eradication of child labour
Safe and hygienic working conditions
Appropriate pay and working hours
Humane and non-discriminatory treatment
Anti-bribery and corruption
What’s the pay off?
The UK’s Independent Anti Slavery Commissioner has boldly claimed:
“The business case for ethical supply chains is incredibly strong.”
Nor is the business case confined to narrow and obvious areas such as slavery. While the precise benefits from an ethical supply chain can be hard to quantify precisely, they include lower transport costs, less waste, increased efficiency, lower material costs and even access to government incentive programs.
Attractive though these gains may be, many managers remain dubious about whether they can be achieved. Instead, they find it easier to alter branding and marketing than to reconfigure or rebuild an entire global supply chain.
Getting the supply chain right though, can lead to big business wins, as PepsiCo discovered in 2010. It made over $60m in energy saving opportunities from its carbon management and energy assessment programme. This stemmed directly from working with its suppliers.
“Supply chain” used to mean the source and movement of parts and labour for making a finished product. Now, it includes everything from metals in the earth to seeds in the ground. From those making an intermediate product such as the foot pedals for a bicycle, or an ingredient added to corn syrup that goes into a breakfast cereal.
Some would argue that it’s actually impossible to ensure there’s an ethical supply chain when it’s so fragmented. A business may not know enough about all its actual suppliers, with increasing complexity of products and suppliers.
For example, a study of Apple’s supply chain found that most (90%) of the components came from companies outside the US. They included chips made in German and Taiwan, memory board and display panels made in South Korea and Japan, and data chips produced in Europe.
There has to be a better way
Demands for transparency provides a new norm making leaders acutely aware of the vulnerability of their supply chains. Social media for example, has killed off any ability to rigidly control a firm’s image. Also Wall Street and socially conscious investors now pay far more attention to ethics and especially the hard to analyse supply chains.
Given the difficulty of finding and correcting supply chain ethical problems, many companies have tried to collaborate more closely with suppliers, governments and NGOs. There is now a new tool calls the Higgs index which helps companies understand the social and environmental impact of their supply chains. It rates their policies and practice, including how materials sourcing and various operations affect sustainability.
Based on the idea that “we can’t do this on our own” some companies are both acknowledging that they don’t know everything about their supply chains, and asking outsiders to take a look. Unilever for example has even opened its factories in Vietnam to researchers from Oxfam and others, with no strings attached. Rather than reacting defensively the company’s CEO embraced the findings:
“It’s fair to say that this report highlights areas where we still have a lot to do.”
CEO Paul Polman, Unilever
The continued evolution of supply chains also means business leaders may not see the scandal heading their way. In the UK, safety standards of certain building panels hardly rated highly until the terrible disaster of the Grenfell Tower fire. Now it’s a priority across the entire building industry. Or in simple terms, selling panels that can catch fire easily is now deemed highly unethical.
While there are no absolute rules for how to keep a supply chain clean and ethical, there are certain principles. These emerge from numerous studies; here are 12 well tried ways to keep your supply chain ethical.
Harbert, Can businesses police the behavior of global suppliers? SAGE Business Researcher, April 2016
Seal, Sustainable supply chains: why placing ethics over profits pays off, Guardian 21st November 2017
H.Sanderson, London Metal Exchange probes child labour concerns over cobalt, FT 23rd November 2017
Sanderson, Amnesty warns on use of child labour in cobalt mining, FT, 15th November 2017
Industry giants fail to tackle child labour allegations in cobalt battery supply chains, Amnesty International, 5 November 2017
Beyond Supply Chains, empowering responsible value chains, World Economic Forum, Jan 2015
P. Novak, Principles and Standards of Ethical Supply Management Conduct with Guidelines, Institute for Supply Management, Inc.™ 2013
Ten tips and principles for ethical sourcing in supplier management, Chartered Institute of Purchasing and Supply
Thieves recently stole 143 million consumer records from credit reporting company Equifax.
Claimed to be the worst data breach ever, the company’s response met widespread disdain. Regarded as dishonest, and lacking in transparency in business , one critic labels it
“Full of vague cover-your-ass statements at the exact moment when consumers most need accurate information.”
The company’s reaction to the breach has been disorderly and under-resourced.
For example, although the attack occurred in July, it took five weeks before the firm admitted it to the public. A hotline for worried clients proved ineffective. It took a long time to get through and randomly disconnected or put them on hold indefinitely.
Suck lack of clarity and weak response has garnered many calls for Equifax to explain what data was compromised.
There is far more scrutiny today about what a company’s top leader delivers in the way of results. Once it was easy to reach a conclusion. You just asked “does the CEO create wealth for stakeholders?” The more wealth the better the performance.
Now though leaders face judgments about transparency in business and how they handle crises, technology, the rise of big data, employee expectations and company performance.
The demands placed on leaders for transparency in business keep ramping up. A once comfortable corporate perch has become a hot seat. And this is most true should a CEO cross ethical red lines.
For example, this year’s CEO Success study by PWC shows senior leaders facing expectations of higher levels of personal accountability. These stem from many sources, including boards, institutional investors, governments, and the media.
“CEOs have to be responsible for something more than their own profitability. You have to serve a broader group of stakeholders–from employees to the environment –and when politicians don’t get things right, corporate leaders have to act. That’s a big shift.” Marc Benioff, CEO Salesforce
Corporate fraud and ethical lapses, such as those seen at VW, or Wells Fargo also place the CEO in the spotlight as never before.
So far, the number forced from office for ethical lapses remains tiny–only 18 such cases at the world’s 2,500 largest public companies in 2016. But firings for ethical lapses keep rising as a percentage of all CEO successions.
Enforced transparency in business keeps causing leadership headaches. Recent research from Accenture Strategy found high levels of employees (60%) sharing sensitive information on social sites. This includes data about their rewards and salaries and opinions on managers’ performances.
Such unasked for transparency in business places additional demands on business leaders. It puts a premium on their ability to “walk the talk” and build collective trust throughout their organizations.
If you’re a business leader wanting to survive, two life saving tips are:
Give far more attention to affecting your company’s ethical culture
Show a strong interest in the issue of transparency
The demand for business transparency keeps rising. Some organisational experts talk of “radical transparency” to describe the present situation. Once result is the emergence of the Chief Data Officer. The new role lies beyond the remit of a conventional compliance team. The role helps corporate leaders make sense of the growing impact from vast new amounts of data, and how to manage transparency with care.
In Europe at least, waiting in the wings lies tough new regulations on privacy. This places yet more obligations on companies to do a better job at protecting it:
“For business leaders, the stakes could not be higher as their individual and institutional conduct is exposed to unparalleled levels of transparency. With 83 percent of surveyed executives saying trust is the cornerstone of the digital economy, business leaders need to demonstrate a dynamic, ethical approach toward their employees, their customers and society at large.” AccentureStrategy: The digital emperor has no clothes, 2016
Impact of behavioural science
New evidence about what triggers ethical problems in companies undermines the the value of the large sums spent on seeking compliance. For instance, social psychologists dismiss the idea that “a few bad apples” in the barrel cause ethical scandals.
Instead, it’s company leaders–the “barrel makers”–who emerge as the most potent source of ethical scandals.
How they pursue transparency, the way they affect corporate culture and how they structure the company to deal with ethical concerns all influence the ethical climate.
In particular leaders must learn to take into account three important behavioural findings:
The power and importance of peer pressure
The human desire to conform
Reluctance of people to speak truth to power
Leaders who choose to tackle them increase transparency in business and promote the free flow of information.
For example, when the CEO of a major car firm held his first staff meeting, he invited his team members to assess their respective businesses. How would each judge its current performance? Would they give it a “green,” “yellow,” or “red” light?
First reaction was everyone signaled a green light. The CEO recognised the lack of transparency was proving unhelpful in problem solving. He ordered: “Everyone come back next week with a more realistic assessment.” When the team met again, the first executive to stand up and say “I have a red light” received a standing ovation from the CEO. With the problem now out in the open everyone settled down to tackle it as a team.
This new CEO set out to create a new culture–one in which people could admit when something was going wrong, where executives for instance could more readily admit mistakes. This needed to happen early enough to still have an impact on the outcome. Creating such a culture had to come from the top.
Seven ways to promote transparency:
Tell the truth—people are more willing to stick their necks out and tell their truths when they see their leaders being candid and trustworthy
Encourage people to speak truth to power—build ethical muscle by helping people to be open to negative feedback; in contrast, over-praised Jack Welch ex CEO of GEC would criticise, demean, ridicule and humiliate people in meetings. Hardly an inducement to speak up.
Reward mavericks—contrarians challenge the culture and seldom support the status quo. They need to be nurtured; only if they attack core values should they be given short shrift; for example when Google dismissed an employee for “violating the company’s code of conduct and crossed the line by advancing harmful gender stereotypes”.
Practice having tough conversations—it helps to have practice at learning how to deliver negative messages constructively; this includes admitting mistakes—See separate panel on CEOs who admitted they got things wrong.
Expand your information sources—a leader can become isolated in the comfort of the C suite; so make time to regularly meet with a wide variety of sources of feedback, including employees, stakeholders and even annoying critics.
Tackle the culture—create norms and structures that encourage truth telling; these include protection of whistle-blowers, “town hall meetings”, internal blogs, ethics training, and financial reward systems
Share information freely—maximise information sharing across the organisation and create your own “freedom of information act” in which people have a right to ask to see any information; trust people to only ask for what they need.
Learning to love transparency
Business transparency is fast moving from a “nice to have”, to a “must have. “
It’s goes far beyond simple honesty. Its contemporary purpose is not just to appease regulators, to increase profits, or to please shareholders.
The more relevant aim of transparency must be to create a business atmosphere in which there are: few secrets, minimal silos, and sound inter personal relationships.
Any business delivering a product or service of value to customers and society has little difficulty in being truly transparent.
Like Tone at the Top, transparency depends for its impact on the commitment and love of the leadership.
The weaselly Equifax apology for exposing 143 million customer records due to “application vulnerability”, Without Bullshit, September 8 2017 A.Ahuja, Root behaviour demands AI transparency FT 3rd August 2017
Transparency, Tax Insight for Business Leaders, No 12
Lyon-Boggs, Riding the Wave, Ephisphere.com, June 2017
O’Toole and Warren Bennis, A Culture of Candor, HBR June 2009
Ethical Leadership and Transparency, Leadership Magazine, May 24th 2017
Gabriel, Ethical Leadership: Transparency and Trust, dianagabriel.com, March 3rd 2011 Llopis, 5 Powerful thinks happen when a leader is transparent, Forbes, Sept 10th 2012
C. Li, The Art of Admitting Failure, HBR, March, 2011
P. Lacy et al, The digital emperor has no clothes Are business leaders ready for a world of radical transparency? Accenture Strategy, 2016
R.Foroohar, Business can fill the leadership vacuum, FT 21st August 2017
Maynard Leigh Associates once employed a marketing manager who was brilliant at concepts.
Give him any problem and he’d devise a graphic to describe the issue, with steps showing how to resolve it.
This marketing “expert” though, proved hopeless at making anything happen in real life. His feet never seemed on the ground. Practical actions to convert concepts and insights into day-to-day actions were beyond him.
At first he seemed persuasive, but in the end had to go.
That experience re-surfaces when admiring some infographics from OCEG (Open Compliance and Ethics Group). Its revamped web site offers many useful visual messages.
This source of original drawings proves something of a tour de force. They’re replete with imaginative ideas, astute messages and the details of the issues. See for example below the business case for integrating governance, risk and compliance.
But how persuasive would this picture be with business leaders? What sort of impact might it make when presented to company power brokers?
First, there’s the messy situation shown on the left—a chaotic example of make do and somehow manage. This accurately portrays the way many company compliance systems operate.
The right side of the picture shows a rational solution—an ordered, integrated approach. All the elements mesh neatly together. It would surely appeal to tidy-minded managers.
A visual like this can make the task of compliance appear more rational than it really is. Unrelenting tidiness may encourage the inexperienced viewer to feel it’s a straight step to move from one to the other, from chaos to orderliness.
Such neatness is deceptive. It makes the complex task of compliance appear more accessible than it is in practice. As with the Maynard Leigh marketing manager though, what counts is combining all the concepts and different elements into practical day-to-day action.
This is harder, since compliance is neither simple nor straightforward. There are confusing, interwoven layers of complexity. Yet these can be critical for attaining compliance success. For example, there are the the new EU privacy requirements from next May. One compliance specialist considering these decided:
Then there are demands of operational and financial compliance. Next there is contractual compliance, and finally there’s ethics. A busy senior business leader might reasonably conclude that compliance and all its many offshoots must be beyond them:
“Best step aside and leave it to the experts.”
To cynics, that’s exactly what such bravura drawings such as those from OCEG achieve. They’re more like the “giant reference architecture charts no one could understand.” Clever though these drawing are, on closer inspection they’re hard to follow and to the unwary can suggest:
“This is a really complex area you’re trying to understand. So don’t get in the way!”
A second, rather healthier leader reaction might be to trigger a personal determination to master the detail. This might be through attending a course, participating in a seminar, calling in the experts or consultants. Or by going further and perhaps qualifying in the subject and becoming an expert too. That too is what the drawings imply.
Yet a third leader reaction might be to assume the whole territory demands a rethink:
“Give the experts the resources they need to re-organize us. We’ll be more likely to stick within the law.”
Another design triumph of graphic messaging.
Back in the real world of course, things are different and far messier. No matter how well-resourced a company, infographics offer only descriptions, no certainty or timetable of practical steps to protect reputations.
For example, Wells Fargo, VW, Fox, Axis Bank–India’s third largest private lender, Panama Papers hacked from Panamanian law firm Mossack Fonseca, Bell Pottinger PR, and many others were seldom short of the resources needed to bring the OCEG charts to life. Yet all defied the logic of the charts.
Similarly, failures at large, multifaceted organizations such as Lehman Brothers, the Irish banks and AIG stemmed not from inadequate compliance resources, but internal weaknesses arising from human failings.
Compliance is indeed complex. Those doing it for a living must become adept at being both persuasive and powerful communicators.
Affecting top management thinking demands not clever charts, but the ability to present the core message in human terms that makes a strong personal impact.
Business leaders initially conceded a seat at the top table to the compliance experts. Just as they once did with finance and later IT. But expertise is seldom a permanent pass to attend board meetings. For example, the number of financial institutions whose compliance function reports directly to the CEO fell by nearly one-quarter over two years. From 40 percent of financial institutions in 2014 to 31 percent in 2016.
The more complex compliance and risk management becomes, the more business leaders need experts with high level communication skills. Sometimes that means clever charts and infographics. More often it requires the basics of how to make a strong, and memorable personal impact.
Facts, charts and numbers are no substitute for personal presence, status, appearance, rapport, smiling, body language, taking center stage and conveying gravitas. All these play a vital part in gaining attention of those in power.
Coaching and bespoke learning opportunities may also be helpful.. There is also no shortage of tools to supplement messages. For the compliance professional though, the fundamental question remains:
“How can I personally be persuasive, establish a strong presence, win influence and make an impact?”
For those interested in pursuing these important issues it may be worth spending some time with these:
With a rogue CEO, Ryan Air ought to be going broke
The airline’s high profile boss is not a crook. But without doubt he is publicly contemptuous of those whose sole priority is a cheap ticket. Having inconvenienced three quarters of a million paying punters by badly handled mass cancellations, his reactions are those of a rogue CEO.
The airline should be on the ropes. Nothing of the sort. The company’s shares hardly moved, and macho boss O’Leary seldom fails to look upbeat. He makes little attempt to hide his distaste for paying punters.
“…Mr O’Leary’s instinctive contempt for this customers and employees appear to be intact—and ingrained in Ryanair’s corporate culture.” FT 30th September 2017
Yet he is not alone. Tech, automotive, financial services and airlines have all experienced rogue CEOs with similar disdain for their customers.
Conventional logic says the market will punish those who despise their customers. Or treat them as non-rational beings. Yet reality defies this reasoning.
Sports Direct for example, should long ago have reformed in the face of public ire. Yet its ineffectual chairman remains in situ. Thanks to support from the majority shareholder, a rogue CEO. He prefers a passive colleague in the chair to anyone more robust. Seemingly immune to public disapproval, the firm lurches from one anti employee action to another.
Or take Wells Fargo. The bank’s leader was “CEO of the year” by Morningstar. A year later he had been forced to resign amid revelations the bank had swindled many thousands of its previously loyal customers. Even so this rogue CEO will still collect pension accounts and stock valued at $134.1 million.
These logic defying stories suggest ethics in business hardly matter. Yet the reverse is true. There is clear evidence that in the longer term, ethical firms do far better financially than their less ethical competitors.
“… managerial indiscretions are associated with a significant decline in firm value and operating performance. At the revelation of an indiscretion, there is an immediate 1.6% loss in shareholder value that translates into an average loss of $110 million in market capitalization. When committed by the CEO, the loss in shareholder value is 4.1% or $226 million.”
Wherever it occurs, unethical leadership or rogue CEO behaviour damages the bottom line.
Measures such as low morale, weak levels of engagement or poor public perceptions do their damage behind the scenes. When it surfaces though, it portrays a dysfunctional corporate culture that savvy investors avoid. They understand such companies face an increased risk of litigation, expensive enforcement actions and costly damage to reputation.
According to another study, this time by PWC the world’s largest publicly held companies have begun taking notice of this evidence. For example, a rising number of CEOs firings stem from ethical lapses.
The larger the company the more likely a CEO will be fired for ethical lapses. These range from shady business dealings to personal indiscretions such as:
Interest rate manipulation and money laundering
Abusive sales practices
Improper relations with employees
Consequently, some firms have started paying their CEOs based on soft factors based on to ethics. These may use the results from culture surveys, internal audits, ethics hotline use and response data, completed investigations and the outcome of ethics complaints.
Real business leaders demonstrate integrity, provide meaning, generate trust, and communicate values. Relying more on soft skills than hard analytics, or more easily measured financial performance, they energize their followers.
They push their people to meet challenging business goals. They also attach great importance to developing others’ leadership skills. In more basic terms they know how to move the human heart. This can be difficult for many in business to talk about. “Moving the human heart” can seem flaky and hard for board members to discuss, let alone measure.
Boards much prefer proof of technical skills—engineering know-how, for instance, or marketing wizardry. With that kind of indisputable data boards feel they won’t go wrong in choosing the next CEO. Ethics seems just too tricky.
Yet the impact of the rogue CEOs behaviour can last well beyond the firing of the offender. For example a 2016 HBR study followed through on over 250 news stories in the media. on average. It found media coverage persisted with references to the CEO’s actions up to an average of 4.9 years after initial occurrence.
Some rogue CEO stories never seem to go away. News items today continue to refer to former American Apparel CEO Dov Charney’s odd behavior of walking around the company’s offices in his underwear. Yet this was was first reported over 10 years ago. As for the now repentant Gerald Ratner, he will probably never escape the rogue CEO statements he made while addressing a conference of the Institute of Directors at the Royal Albert Hall on 23 April 1991.
To sum up: boards should not expect allegations of misbehavior to disappear quickly.
Almost half of Americans believe CEOs should be fired (or worse) for unethical behavior
Violations of trust between company and customer are considered most egregious
The public is surprisingly critical of CEOs who engage in “immoral” personal actions
Today’s regulatory environment makes it easier to identify transgressions and bring violators to justice.
Even so, it’s unclear whether we’re seeing more ethical violations from CEOs than in the past. But the world does seem less tolerant of unethical CEOs and more willing to take action.
“There is a perception that boards are complacent with CEO misbehavior, but when we compare the public’s assessment with what the board actually did, we see that many boards are very proactive in punishing (either through termination or pay reduction) potentially unethical behavior” Professor Larcker, Graduate School of Stanford Business School
Shareholder activism and changes in corporate governance for example, have transformed the CEO’s world, especially in Europe and North America. For instance, from 1995 to 2001:
Turnover of the CEOs of major corporations increased by 53 percent.
The number of CEOs leaving because of the company’s poor financial performance increased by 130 percent.
The average tenure of CEOs declined from 9.5 years to 7.3 years.
Standing back from the often dubious data about rogue CEOs there’s now greater emphasis on good governance, including expecting the boss to model good behaviour.
In summary life has got tougher for rogue CEOs–see panel.
For example, when Jes Staley, Barclays CEO tried to uncover the identify of a whistle-blower in 2017 all hell broke loose.
He suffered a pay cut, faced demands for him to be sacked and attracted a blizzard of bad personal publicity.
Avoiding toxic CEOs has to be a boardroom priority. To reduce the chances of having a rogue CEO here are 12 possible actions to consider:
R. Walkling The Consequences of Managerial Indiscretions, The Consequences of Managerial Indiscretions Harvard Law School Forum, May 16, 2017
Per-Ola Karlsson et al, Are CEOs less ethical than in the past, PWC, May 15 2017
S. Treagus–, Why CEOs with Personal Integrity are better for business, Everfi, August 10th 2017
5 Most Publicized Ethics Violations By CEOs, Forbes, Feb 2013
‘CEOs engage in unethical behavior’, Trends, November 24 2013
R. Christopher Small, Suspect CEOs, Unethical Culture, and Corporate Misbehaviour, HLS Forum on Corporate Governance and Financial Regulation, Tuesday, March 24, 2015
Why CEOs Fall: The Causes and Consequences of Turnover at the Top
C. Lucier, Why CEOs Fall: The Causes and Consequences, Columbia Business School, July 15, 2002
W. Bennis & J. O’Toole, Don’t Hire the Wrong CEO, HBR, May/June issue 2000
Punishing CEOs for bad behavior: 2017 public perception survey, Rock Center
Larcker and B. Tayan, We Studied 38 Incidents of CEO Bad Behavior and Measured Their Consequences, HBR June 2016
Read Full Article
Read for later
Articles marked as Favorite are saved for later viewing.
Scroll to Top
Separate tags by commas
To access this feature, please upgrade your account.