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Future Leadership: Ethics is a business case!
Ethical leadership is not just a matter of personal attitude, it is a matter of business, so good intentions alone are not enough to ensure that the right thing is done in sensitive situations. In times of multiple crises, proactive risk management is essential to avoid being left behind. A key element of this is effective corporate governance, of which a corporate culture based on ethics and integrity is an integral part. This culture is shaped to a large extent by the “tone from the top”, i.e. the credible behavior of supervisory and management boards. It is not enough to delegate this task to the compliance or communications departments; boards must actively address this issue. Boards need to define ethical goals and ask themselves how apolitical they can be today.
What is expected of ethical leaders?
It’s not about being flawless or demonstrating moral superiority.
Rather, it is important to base leadership and decision-making on principles and values that are recognized by the majority of a society as the basis for the common good. These include in particular
Integrity as the basis for trust
Honesty in communication and keeping promises
Fairness towards all stakeholders and equal treatment of all employees
Transparency in decision-making processes and disclosure of relevant information
Respect and consideration for the rights, cultures and dignity of all.
These principles must become a lived reality, not just well-intentioned intentions. Often, perhaps too often, morals and ethics fall by the wayside in the tension between intention and implementation. There is no doubt that it is not always easy to stand up for ethical values in everyday business life and implement them as a guiding principle, and it requires attitude, clarity and courage.
What is expected of ethical leaders?
Ethical leadership is becoming increasingly important for sustainable business success in a world where transparency and interconnectedness are constantly increasing and new expectations of ethical leadership are being formulated. From regulators, investors, employees and customers to society at large, expectations of ethical leadership have grown rapidly:
Regulators: Ethical leadership helps boards and senior management to exceed regulatory standards and, by setting an example for the organization, to significantly reduce the risk of violations and fines. In addition, the increasingly stringent regulatory environment in recent years regarding transparency, sustainability, and corporate social responsibility is a clear sign of the importance that regulators place on ethical leadership.
Investors: While individual investors like Warren Buffet have always believed in the value of ethical leadership, global investors are increasingly focusing on ethical leadership as part of the G (governance) of ESG. Investors around the world are recognizing that ethical corporate governance is one of the key drivers of ESG success. Ethical corporate governance is also increasingly taken into account in ESG ratings. Investment attractiveness is therefore increasingly influenced by the credible ethical leadership of top managers.
Employees: Most studies conclude that ethical leadership is one of the most important factors in improving employee satisfaction, retention and productivity. Studies show that the younger generation, in particular, has very clear ideas about the social responsibility of employers and defines the purpose of a company more broadly than in the past. Honesty, fairness and transparency are now expected, while at the same time employees are very sensitive to inauthentic communication. In a job market that is increasingly focused on purpose and culture, credible ethical leadership is becoming more important in attracting and retaining talent.
Customers: ESG ratings and ethical governance are increasingly important to suppliers and service providers. Consumer behavior has also changed: While brands continue to play an important role in purchasing decisions, consumers are becoming increasingly sensitive when companies violate ethical or moral principles.
Society: Reputation is one of the most important assets for managers and companies today. A reputation built over many years by a leader or a company can be destroyed in a very short time by misconduct, especially in the ethical and moral area. This is all the more true as transparency and the speed of information dissemination continue to increase. Conversely, leaders and companies can improve their reputations by taking ethical and moral values into account.
Why ethics is a business case!
Ethical leadership and a culture based on it foster an atmosphere of openness in which challenges and differing views can be freely discussed. This leads not only to more effective governance, but also to tangible economic benefits. Not all studies come to a clear positive conclusion, but the positive findings outweigh the negative ones, which in particular attribute business cases in cost and risk reduction, improved reputation development and the achievement of competitive advantages to ethical leadership1 . When considering the triple bottom line (economic, environmental and social criteria)2, the following concrete win-win-win results can be achieved
- Cost savings through more efficient use of resources
- Risk and litigation avoidance through responsible and compliant behavior
- Increased competitiveness through increased customer loyalty as a result of fair dealings with customers
- Increased competitiveness through increased customer loyalty as a result of fair dealings with customers
- Attract new customers and increase public acceptance by improving awareness and reputation
- Increased ability to influence the public and policymakers through “tit for tat
- Reduced risks and penalties from misconduct and malfeasance
- Increased attractiveness as an employer by promoting equal opportunity and diversity
How can ethical management be established?
Ethical management is not about making no mistakes – that would be impossible – but about taking proactive measures to minimize risk, dealing effectively with misconduct, and continually reflecting and improving.
Proactive measures to mitigate risk: Establishing a culture based on ethics and morality, designing compliance policies, processes and systems
Handle misconduct effectively: Establish channels through which internal employees and external stakeholders can confidentially report misconduct. Establish clear lines of authority and processes so that contacts can address, clarify, and remediate the issue
Engage in continuous reflection to prevent reoccurrence and reduce the overall likelihood of misconduct
Ethical leadership and an ethical culture cannot be transferred or delegated. Both are essentially created by the “tone from the top,” because ethical leadership is first and foremost a question of leading by example.
To better achieve ethical goals and close the gap between aspiration and action, if-then planning has proven to be a good starting point. The basic idea is to plan in advance what to do when a certain situation arises, following the pattern: “If situation X occurs, I will take action Y.” By linking specific occasions or triggers to concrete behaviors, a bridge is built between intention and action. Our experience shows that using this method improves the ability to react in crisis situations and significantly increases the likelihood of implementation in everyday life.
In our experience, it is often the case that the underlying data, figures and facts do not match the communication. This often leads to investigations and penalties, causes lasting damage to the corporate culture, and impacts the operational business through loss of reputation. All in all, the question of credibility and trustworthiness always arises, which is why supervisory boards should critically examine how communication on this topic is structured. Are the jointly developed positions on human rights, diversity, democracy, etc. actually practiced in the company and is the communication on these issues credible? Especially when it comes to sustainability and diversity, we often find that the numbers do not match the communication. So the question is: can I credibly stand for sustainability and equality without the numbers being right, or will I lose credibility and damage a corporate culture based on ethics and moral in the long term? This is not to say that positioning should be avoided altogether. Quite the opposite. Without positioning at the top of the company, no ethical leadership can become visible, and therefore no ethical culture can develop.
Can we still afford to be "apolitical"?
At a time when social and political issues are increasingly influencing business decisions, is it even possible to be “apolitical”? Is not taking no position also positioning? The point is not that board members need to take a stand on every issue, but rather that we need to ask ourselves how apolitical top managers in business can still be today. With populism and right-wing extremism on the rise, shouldn’t boards develop a clear position on human rights, make an unequivocal commitment to democracy, and speak out politically? These issues need to be critically discussed by boards, especially given that political developments such as the rise of populists have enormous negative economic consequences3. Boards are well advised to keep asking themselves the question “How apolitical can a company still be today?” and to discuss it regularly.
In our experience, positioning should not only be about speed, but also about the resilience of the positioning. We therefore recommend that the board first discuss and agree the positioning with the most important stakeholders. This gives the positioning more weight because it is supported by multiple stakeholders and is easier to maintain in the face of headwinds. Ideally, boards are proactive and engage in a strategic dialogue with stakeholders to clarify the issues on which their stakeholders expect a position. This proactive strategic dialogue means that boards are better prepared and can better weigh alternative courses of action from the outset.
Authors
1Elizabeth C. Kurucz; Barry A. Colbert; David Wheeler: The business case for corporate social responsibility 2008; Oxford University: The Oxford handbook of corporate social responsibility
2Thomas Krickhahn: Reflexionen zur Theorie und Praxis von CSR, 2014; Nomos: Verantwortliches Wirtschaften
3Funke, Manuel, Moritz Schularick, and Christoph Trebesch. 2023. “Populist Leaders and the Economy.” American Economic Review, 113 (12)