Follies are inevitably counter-productive and ethical follies are self-destructive — for individuals, companies, organisations and countries. Popular history writer Barbara Tuchman, in her book The March of Folly, says, to pass as folly, the acts must necessarily have four attributes: first, these must be clearly contrary to the self-interest of the organisation or the group pursuing them; second, these are conducted over a period of time, not just in a single burst of irrational behaviour; third, these are conducted by a number of individuals, not just one deranged maniac; and fourth, there have to be people alive at the time who pointed out correctly why the act in question was folly.
We hear this Marche funèbre of ethical follies in a wide range of financial crises. To give a few examples, the crisis in Greece, Italy, Spain and Portugal; the bankruptcy filing by MF Global owing to risky bets on the euro zone debt by Jon Corzine and the missing $600 million of client money; the foibles and repeated ructions of a dysfunctional HP board; the financial problems bedevilling Air India; the political interferences in SKS Finance and the unwillingness of the promoters to pay adequate attention to the small microfinance clients; and the financial quagmire of Kingfisher Airlines. All of these satisfy all the four Tuchman attributes to qualify as follies.
Companies are known to stumble for a variety of reasons — faulty planning and execution, inadequate skills and resources, short-term investment horizons, tired executive blood, organisational bureaucracy, arrogance, failure of genuine strategies due to external uncontrollable factors or simply ill-luck. But when there is a tragic error of ethics, corporate growth is illusively spectacular leading to business disruption, financial depravation and devastation. Ethics is a matter of survival for companies, not a matter of choice.
Ethical folly has three lessons to teach. First, it has an intensely deceptive characteristic — one can facilely mistake the march of ethical folly to be an Ode to Joy when it is actually a Funeral March. Second, it does not usually show up as a variable in any stochastic calculations or in stock market valuations since financial statements do not reveal much till it’s very late. Third, neither of the first two lessons is remembered by those who need to remember them and the march of ethical folly continues. Respectable people who sit on the boards, thus, share confidential information on board deliberations with friends and do not find anything unethical in it, related-party transactions are masked to ferret out shareholders’ wealth for personal gains, shareholders’ wealth is used to sponsor car races and cricket teams, lifestyles of the C-suite tend to become loud, flamboyant and philandering. Leverage increases beyond the long-term repayment capacity of the organisation and the company’s financial health is impaired beyond repair, financial bailouts are sought even at the cost of tax payers’ money and justified on a variety of unsound grounds.
Sound governance does not take place in abstraction. Neither is it the result of any altruism. It is borne out of deliberate efforts of leaders lead with integrity, dedication and the overwhelming will of the board to govern and the maintaining of the highest standards of accountability by vigilant stakeholders and informed individuals. But in all this, it is the role of the board of directors that is paramount.
There is a need to view governance as a subject or as a concept at three levels — governance of the state, governance of the public and private sector corporations that function within the state, and governance of the self, that is, of the citizens of the state who work and help run corporations and the state machinery. The relationship between these three levels is deep and complex and if not managed properly, governance can metamorphose into “turbo populism” as we have seen in all the examples cited above.
Aristotle extolled “four transcendent virtues” that promote individual and collective well-being: truth, beauty, goodness and unity. These virtues, the Greeks believed, played an important role in guiding the individual and the state and contributed to their well-being — and, as Tom Morris argues in his book If Aristotle Ran General Motors, to the workplace also. According to Morris, these virtues “must be present in our modern business environment if real excellence is to flourish.” Not all businesses realise this.
Ethical performance doesn’t just happen. It will not happen if the senior leadership team is not dedicated to ensuring the highest standards of ethical performance, and weaves compliance and supervision practices into the waft and web of the organisation. It is said that ethical performance of a company is something similar to product quality, customer satisfaction or competitiveness. It is integral to a company’s quality and brand management. Like any other important ingredient of success, ethical performance needs to be managed. An organisation would need to have ethical champions within the leadership team, the top management must demonstrate its continued commitment to ethics, there must be an understanding and involvement of employees and an ethical culture must permeate the organisation. These would have to be supplemented by continuous training, regular evaluation and periodic auditing of ethical standards. Are these utopian? Not exactly! There are several successful companies in India that have been doing this consistently over the years.
“Spotless reputation” is a phrase first used by Shakespeare, in Act 1, Scene 1 of Richard The Second, when he says through the words of Thomas Mowbray:
“My dear dear lord,
The purest treasure mortal times
afford
Is spotless reputation-that away,
Men are but gilded loam, or painted clay.
A jewel in a ten-times barr’d-up chest?
Is a bold spirit in a loyal breast.”
Mowbray, the Duke of Norfolk, is seriously aggrieved as Henry Bullingbrook, the future Henry IV, has sullied his reputation by accusing him of treason. Mowbray’s response sums up contemporary thought on the worth and dignity of man. Shakespeare says without public honour, a man’s inner virtues are like a jewel locked with 10 bolts in an obscure chest. Ethical companies are like Mowbray. They believe that ethics is one of the essential ingredients of Winning Ways to Work.
The author is former executive director of Sebi and is currently associated with the IFC’s Global Corporate Governance Forum of the International Finance Corporation and the World Bank. These views are personal
