Good ethics are good business

Deng Xiaopeng had a saying > It doesn’t matter whether a cat is white or black, as long as it catches mice < generally taken to be an allusion to the fact that creating national wealth is a outcome which can be achieved by many means. For companies we might consider at times that something similar is the touchstone.

Shareholder value theory suggests that the key, indeed only thing, a company should focus on is maximisation of the value of the company.

This shouldnt mean a relentless focus on shortterm profits, but instead if thought through should give the company management a mandate for steady, slow accumulation of value over time.  But the issue remains open as to how. A part of how companies act is their ethical behavior. Does it matter if a company displays poor ethics or not? And given that a company, while posessed of legal personality, is not a sentient being, how do the morals of the management align and influence the morals of the company.

There is a growing body of evidence that corporate managers characteristics do markedly affect the management styles and thus the corporate outcomes.Firms led by CEO’s who hold pilot licenses tend to be more innovative, without increasing risk. This, it is hypothesised is down to a sensation seeking intrinsic motivation rather than an external pecuniary motivation. US researchers firms managed by executives who grew up during the great depression were found to be much less reliant on debt than those managed by others. Firms managed by those with military experience are seen to pursue more aggressive mergers and investment policies. Companies where CEO or CFOs have previously been employed in companies that have exhibited cashflow difficulties tend to have a more conservative financial structure  – there is a once bitten twice shy effect in action.  Examining an unnamed (but easily guessed) irish banking CEO, Niamh Brennan of UCD uses psychological mapping and demonstrated the growing hubris of the manager as expressed in shareholder correspondence and mapped this to the bank experience. A recent study on hubris provides a strong link between same in managers and the likelihood of firms to engage in earnings management and downright manipulation. There is a lot of work on gender in corporate board settings, with strong evidence that female directors are positives for companies. Firms with younger and male CEO’s tend to be more overconfident and take risks. While this is good for their remuneration the jury remains out on its effect on firms wealth.

A part of the problem with this research is that it is generally not easy to ascertain the personal ethics and morals of managers. Inference rules. Thus a paper on religiosity, widely cited and reported as suggesting that religiosity leads to greater ethical behavior, doesnt examine religious attributes of corporate managers per se but looks at the religiosity of the lowest available area around the HQ and infers from same. Much examination of corporate characteristics remains mired in economic modelling amenable to mathematical and statistical modelling without fully focusing on the personal characteristics.   A couple of recent papers havwe however managed to get inside the managerial black box.

Using data from the Ashley Madison hack the researchers were able to make a clear link. Usage of the site was strongly linked to corporate misbehavior. Weak personal ethics on the part of CEO and CFO level executives– verifiable use of a site designed to facilitate extramarital affairs – were linked to weak corporate ethics. In fact, companies run by Ashley Madison users were more than twice as likely as others to be involved in class action lawsuits or engage in financial statement restatement.

More generally , looking at the number of corporate email addresses used to register on the Ashley Madison site researchers found that companies with higher relative registration were also those that were rated lower by external ethical rating agencies and were more likely to have been the subject of regulatory enforcement.They were also perhaps more innovative, it must be noted.

There is a growing body of research on behavioral ethics as they apply to corporates. Some findings make uncomfortable thinking – ethical failures are not uncommon, ethical failures cascade large failures require the active or tacit compliance of large numbers of actors, we generally think of ourselves as being more ethical than we are, and it is hard to change cultures. Nonetheless, the findings, that personal ethics are linkable to corporate ethics, and that the linkage is clear, should provide a warning to companies. Ethics must begin at the top and the boards and leaders must push through an ethical approach in all things. Doing so is not just good moral behavior but is also good business.

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