SMEs must be cognisant of its consequences

Ethical leadership is a fundamental requirement of responsible and sustainable governance. It involves making decisions and taking actions that are not only legal but also morally sound.  A lack of it will result in far-reaching consequences, not only for the individuals concerned but also for organisations and society at large. In continuation of the last few columns on leadership blunders, this one takes a look at another aspect: How lack of ethical leadership can be problematic and how leaders of small and medium enterprises (SMEs) can overcome that.

Remember Satyam, one of the most infamous cases of a lack of ethical leadership in India? In 2009, Ramalinga Raju, the founder and chairman of Satyam Computer Services, admitted to widespread accounting fraud that amounted to over $1 billion. Raju manipulated the financial statements for years, misleading shareholders, clients, and employees. The consequences were dire: shareholder value eroded, the company went into crisis, and Raju was imprisoned for fraud. The scandal damaged India’s reputation in the global business community.

Nirav Modi’s scam involving Punjab National Bank (PNB) exemplifies a lack of ethical leadership in the Indian business world. The diamond trader and his associates allegedly defrauded PNB of approximately $1.8 billion by obtaining fraudulent letters of undertaking. This case revealed weak internal controls, corruption, and a lack of ethical vigilance within the bank. It not only tarnished PNB’s reputation but also raised concerns about oversight in the banking system.

There are innumerable examples from the world of business and politics. The consequences of a lack of ethical leadership are manifold and severe:

Financial fallout: Shareholder value often plummets, as we’ve seen in the cases of Satyam, Enron, and Volkswagen.

Legal ramifications: Leaders who engage in unethical behaviour may face criminal charges, imprisonment, and fines.

Reputation damage: Organisations and individuals involved in unethical practices will suffer long-term damage to their reputation and credibility.

Loss of trust: Trust is difficult to rebuild once lost, and the erosion of trust can affect employees, customers, investors, and other stakeholders.

Economic impact: In cases like the PNB fraud, the economic impact extends to the entire financial system and can result in higher borrowing costs and reduced confidence in the regulators and the loan write-offs will impact the common man.

Regulatory changes: Scandals can lead to increased regulation and oversight in any country (but not as yet in India, where such scams continue to occur), which can hamper business operations and innovation.

Unfortunately, many good leaders occasionally fall short of ethical standards and get into trouble. How may leaders overcome the blunder of lacking ethical leadership, especially in the SME sector?  It is vital for SME leaders to recognise the impact their actions have on employees, stakeholders, and the broader community. Here are some best practices for SME leaders:

Lead by example: Ethical leadership starts at the top. SME leaders must model the behaviour they expect from their teams. A notable example is Patagonia’s founder, Yvon Chouinard, who has consistently demonstrated the outdoor clothing company’s commitment to ethical and sustainable practices. This not only aligns with the company’s mission but also inspires employees to follow suit. There are a few SME owners I know who have never paid a bribe to any government agencies for various approvals or tax-related issues.

Establish a clear code of conduct: Create a code of conduct that clearly outlines the ethical principles and standards expected within the organisation. The code should cover issues such as honesty, integrity, respect, and transparency. Only a few SMEs have a comprehensive code of ethics that guides employees and hosts on responsible and ethical behaviour.

Prioritise transparency: Open and honest communication is essential for ethical leadership. Be transparent about your decisions and the reasoning behind them. A failure in transparency can erode trust and create suspicion. Buffer, a social media management company, is a prime example of transparency in leadership. They openly share their financials, employee salaries, and business practices with the public.

Promote accountability: Encourage accountability throughout the organisation. When mistakes occur, leaders should take responsibility, learn from them and rectify any harm caused. A powerful example is Nestle’s action when the Maggi quality crisis erupted a few years ago. The company took swift and transparent action, putting customer safety above profits.

Invest in ethical training: Provide employees with training on ethical decision-making. This helps individuals understand the company’s ethical expectations and equips them with the tools to navigate ethical dilemmas.

Create a whistleblower protection policy: Establish mechanisms that allow employees to report unethical behaviour or concerns without fear of retaliation. This encourages a culture of accountability. The Sarbanes-Oxley Act in the US, for example, provides legal protections for whistleblowers who report corporate misconduct.

Seek external guidance: When faced with complex ethical decisions like bribing senior policymakers in government, SME leaders can benefit from external counsel. This can include consulting with ethics experts, legal advisors, or industry associations that have established ethical guidelines.

One remarkable example of a company that exemplifies ethical leadership is Ben & Jerry’s. The ice cream manufacturer has been a strong advocate for social and environmental responsibility. It has consistently engaged in ethical practices, such as supporting fair trade, sustainable sourcing, and social justice initiatives. Its commitment to values has bolstered its reputation and has resonated with its customer base.