Ethical Management: How Conduct at the Top Can Drag Companies to the Bottom

Top-level management often represents the face of a company. In today’s society, where public scrutiny and opinions spread like wildfire, the integrity of a firm is not only affected by the organization’s performance, but it is intrinsically linked to the ethics and reputations of its senior executives.
By Tali Bartkunsky
January 16, 2022
Ethical Management strong influence a business reputation

The role of ethics in management

What are the repercussions that a company faces when managers overlook standard moral principles? Disreputable behavior and ethical management lapses in judgment have become more publicized since the growth of the #MeToo movement in 2018. The reasons behind terminating C-level executives from their companies have even changed—it used to be that poor company performance or financial downfalls were the predominant driving force behind the dismissal of a company leader. Now that employees are empowered to speak up against improper unethical conduct in the workplace, allegations of sexual misconduct, negligence, substance abuse, and racial discrimination have a signficant impact on the image of a company’s values and worth. As a result, a company’s credibility can be called into question, regardless of its operational success.

Disreputable behavior and ethical lapses in judgment have become more publicized since the growth of the #MeToo movement in 2018.

We live in an era where corporate performance and reputation are completely intertwined. It has become increasingly necessary for companies to ensure that their policies are of a high ethical standard and be vigilant about monitoring their administration. Consequently, investors have become increasingly attentive to management ethics when it comes to making business decisions. Given the rise of the #MeToo movement and the unfolding stories of past incidents that are only now being brought to light, it is crucial for companies to invest in preventive measures to best avoid this unfortunate predicament.

The age-old tale of corporate misconduct

While the recent #MeToo movement has certainly rattled corporate culture, the truth is that the issue of ethical management has been around for a long time. In a Harvard Business Review article published in 1994, the author calls attention to the concept of management recognizing their role in shaping organizational ethics: “In fact, ethics has everything to do with management. Rarely do the character flaws of a lone actor fully explain corporate misconduct. More typically, unethical business practice involves the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs, language, and behavioral patterns that define an organization’s operating culture. Ethics, then, is as much an organizational as a personal issue. Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds.”

The approach to expunging immoral behavior in the workplace, both then and now, is a zero-tolerance policy towards unethical conduct. It is only when company leadership is made up of exemplary characters that uphold strict ethical principles can a company operate successfully and maintain a positive reputation.

The shift in ethical management

According to a 2019 study by PwC, since the #MeToo movement, misconduct and unethical behavior are the most common reasons for corporate leaders leaving their lucrative positions. Turnover among CEOs at the world’s 2,500 largest companies soared to a record high of 17.5% in 2018. Firms are coming to terms with the fact that their long-term reputation depends on ensuring a high standard of ethical business management.

This shift is meaningful according to Dana Rakovsky, Chief Research Officer at Intelligo Group:

“We see how increasingly, investors are approaching allegations of executive social misconduct with a zero-tolerance stance ignited in part by the societal pressures and the reputational and economic liabilities associated with a public court case, both in lawsuits and bad PR.”

Evidently, while significant strides are being made in the direction of improved ethical management, there is still good reason for investors to be wary. We, at Intelligo, analyzed the alerts (or flags) raised on over 3,000 executive background checks and found that behavioral risk accounted for 15% of alerts (or flags) denoting executives’ involvement in questionable behavior such as: substance abuse, discrimination, domestic violence, assault, sexual misconduct, and other related behaviors.

In contrast, financial risk (actions or events related to an individual’s personal financial situation) only accounted for 14.2% of system flags. This does not imply that 15% of executives are actively engaged in unethical behavior. However, it does indicate that unethical behavior among company executives is rather prevalent, and could be a significant threat to the viability of future investments with these executives.

Real-world business repercussions

Grand-scale repercussions have been faced by many corporations following the MeToo era. For instance, in 2018 when Kate Upton accused Guess co-founder Paul Marciano of using his power to “sexually and emotionally harass women,” the company’s shares dropped almost 18% soon after the story became breaking news. The company lost more than $250 million in one day, despite the fact that the company denied her claims. Another example involves Steve Wynn, a casino mogul and CEO of Wynn Resorts. After several employees accused him of sexual harassment and assault, the company lost billions of dollars when shares fell 10% on the day it was revealed in the media. An additional 9% drop occurred soon after. In addition to the millions of dollars paid in settlements, the company’s overall financial loss was astronomical.

Investors in the aforementioned events experienced devastating financial losses from these unfortunate management scandals. These real-world repercussions further emphasize that a lack of transparency will ultimately result in inadequate decision-making and lead to considerable deficits.

Taking action against immoral behavior

Companies are approaching misconduct more seriously and following through on carrying out appropriate action to protect their reputation. For example, KPMG recently conducted an internal investigation into allegations that some of their employees misled regulators during inspections of their work on audits. As soon as the misconduct was confirmed, KPMG’s UK chief executive Jon Holt said in a statement that the wrongdoings were immediately reported to the Financial Reporting Council to be examined. Additionally, Peloton Interactive Inc. promptly removed a viral ad featuring actor Chris Noth after sexual-assault accusations against him were published online. Even Zimbabwean President Emmerson Mnangagwa recently fired his State Security Minister for inappropriate conduct.

Although these instances shine a ray of hope onto the progression of universal cooperation against unethical behavior, we still have a long way to go. One simply cannot make well-informed decisions regarding businesses and their managers without full transparency. Before proceeding with an investment opportunity, it is crucial that a reliable screening procedure is executed on a firm’s management team in order to minimize their risk of going into business with a character that could cause irreparable damage to a firm’s reputation. Furthermore, ongoing monitoring is another essential component of due diligence practices. By rapidly identifying adverse developments in real-time, risk-reduction strategies can be carried out as quickly as possible. After all, the sooner investment risk is discovered and addressed, the better.

Intelligo’s platform reviews legal filings at the federal, state, and county levels; regulatory listings such as PEP lists, sanctions, and watchlists; as well as social media and other online sources. This exhaustive review of tens of thousands of data points enables companies to receive a comprehensive understanding of an individual’s past and current activities. This data is of particular relevance to investment deals.

While a person’s previous actions and conduct is no assurance of how they will continue to behave, a background check outlines an individual’s integrity and serves as an indicator for future performance.

Armed with this information, one can make a well-informed decision on the investment potential of any company.

It’s better to be prepared

Unethical management behavior can have harsh repercussions. As we’ve seen, the market value of a company is more than just its book value. Company reputation has the power to generate revenue. The longer a business has been around and upheld its good reputation, the more value it will have in the eyes of customers and investors.The potential long-term damage that immoral behavior can cause can no longer be ignored. Companies are being held accountable for their business and management ethics, especially senior executives.

Once the damage has been done, it’s incredibly challenging to recover from the blow. Far better is for investors to devise ethical management strategies and implement proper due diligence practices before moving forward with a deal knowing that they made every effort to truly minimize their exposure to risk. Being unaware of the full picture can lead to a regrettable outcome. As a result, it’s better to be prepared and gather all of the facts before moving forward with a decision.

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