Thursday, November 29, 2012

Four reasons why we're so hard on our leaders' ethical lapses

The list of prominent leaders being turfed out of office for ethics violations seems to be growing at an exponential rate. Here in Canada, Toronto mayor Rob Ford's ouster this week for breaking conflict of interest rules is no less than the third Canadian city major to bite the dust this month due to questions of integrity (the others, Gerald Tremblay of Montreal and Gilles Vaillancourt of Laval both resigned without admitting any guilt in face of corruption investigations).

 In the last month we've also seen the Director of the CIA in the US, David Patreus resign due to an admission of "extremely poor judgement" in conducting an extramarital affair. The same week, the incoming CEO of the multinational defense company Lockheed Martin resigned over "a close personal relationship" with a subordinate. Even Hurricane Sandy took its toll with the resignation of the CEO of the Long Island Power Authority after thousands of its customers were left without electricity. And over in the UK, the Director General of the BBC resigned this month due to the organization's botched child abuse investigations.

But its not just a sudden blip. Earlier in the year, Bob Diamond, the CEO of Barclays Bank, resigned in the wake of the Libor scandal, adding to a CEO head count that already included the CEO of Yahoo (falsified CV), Best Buy (inappropriate relationship with a subordinate), Nomura (insider trading), Restoration Hardware (relationship with a subordinate), Stryker (extramarital affair with subordinate), and Lotus cars (expenses irregularities). And just to stoke the fires even more, the former CEO of SNC Lavalin who resigned in March (corruption scandal), has just been arrested on fraud charges.

Depending on how you look at it, these various resignations, firings, and now arrests could be seen as a sign that leaders' ethical standards are tumbling fast .... or that our standards are tightening and that tolerance for any kind of ethical violations is shrinking. Regardless, it is always a big decision to terminate the boss, especially given the huge costs involved in terms of severance packages, the loss of valued experience, skills, and continuity - and in the context of public officials, the costs of going through another expensive election. To give a sense of what we're talking about here: Mayor Ford's removal may force a new by-election which will cost the city, and therefore Toronto taxpayers, some $7m. The termination of HP CEO Mark Hurd in 2010 for minor financial irregularities cost the firm a huge $37m pay-off, saw the share price tumble by 9%, and led to a period of significant decline for the firm after Hurd's successors failed to match his winning formula.

So why do we do it, especially when the "crimes" don't always seem to be that big: a fabricated qualification here, a few thousand in dodgy expenses there, a little bit of infidelity with a colleague when you should be home with the family. Are these really worth the trouble and expense of ousting the most important person in the organization? Here's four reasons why they might be.

1. Leaders are the chief ethics officers.
Leaders are ultimately responsible for the success or otherwise of their organizations. And that goes for ethics too. Leaders need to be the guardians of the organization's ethics. So if things go wrong, the logic goes, it is the leader that should be held accountable, regardless even of whether they knew what was going on further down their organization. And if its the leader who's actually breaking the rules, then they are putting their organization at risk ... of scandal, of fines, or of ethical culture problems further down the line.

2. Leaders set the tone.
You can't build an ethical culture if the boss breaks the rules with impunity. Many will argue that termination is too strong for relatively minor indiscretions, but they often overlook the knock-on effect of being seen to be too lenient. Employees throughout the organization can get the message that ethics isn't really taken too seriously and that although you may get your wrist slapped, the rewards in terms of bending the rules may outweigh the costs. Termination makes that risk-reward calculation crystal clear.

3. Leaders personify problems
Many ethics problems, especially when they break into the public domain, get associated with the organization's leader who becomes the public face of the scandal - and often the target of approbation. So any strategy for dealing with the problem has to tackle the issue of the leader. That's why organizations sometimes fire their leaders in the face of ethics scandals - its an attempt to demonstrate that the problem has been dealt with. The reality is rarely so simple, but the optics matter.

4. Leaders already have disproportionate power
Even minor indiscretions can gain a greater significance when its the boss who is involved. We all make mistakes from time to time, but when the leader crosses the ethical line, the stakes are immediately raised because he or she is already in a position of such power. Fiddling the expenses or having an affair with a subordinate are not just breaking the rules; when its the boss whose doing it, its an abuse of power - or even worse, its sending a message that leaders are above the rules that govern everyone else.

Of course, individual cases will also bring up unique reasons specific to that case, but the message here is simple. Terminating the leader may not make sense economically, and it may not even solve the problem ... but it still can make sense if you're looking to build a truly ethical organization.

Image by Reproduced under Creative Commons Licence.

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