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Recent findings from a Gallup survey of U.S. workers revealed that nearly a quarter of employees had witnessed or been aware of unethical behavior or compliance violations in their organization over the previous year (2020), particularly relevant in the startup environment. This study, titled "Harmful Leader Behaviors: Toward an Increased Understanding of Unethical and Destructive Leadership" by Schyns et al. (2021), also identified several typical leadership behaviors that can hinder productivity, including Intimidation, lack of care, self-centeredness, and excessive pressure for results.
As the startup world continues to boom, an alarming number of companies need help with ethical lapses at multiple levels of leadership. The topic is vast and very complex. I'm not trying to oversimplify that, but to highlight a couple of behaviors we should ensure we minimize in our organizations. The stakes are incredibly high, the stress is mounting, and careers are on the line. Unfortunately, some leaders get away with lacking the ethical core to navigate this intense environment for investors and many employees.
Unfortunately, we often don't see that this problem isn't only an internal issue. Another survey conducted by OpenText revealed that 88% of global consumers prioritize purchasing from companies with ethical sourcing practices, and 83% are willing to spend more on ethically sourced products. 64% of consumers aged 18-24 indicated that they would refrain from making future purchases from a company if they were accused of engaging in unethical behavior. Well, is that the future of the buying process?
So, what? Why does this matter if the buyers will never figure it out or employees will leave to be replaced by newcomers? Yes, that's the typical reaction to the issue. But let's not forget the significant financial and reputational risks of unethical leadership. Too many are getting away without any consequences for too long. In the end, some level of inevitability might be dragged on for some time, but eventually, it will catch up. At least, that's what we like to believe. A typical organization loses 5% of its yearly revenues due to unethical behavior. In 2015, the Volkswagen emissions scandal caused the company to lose over $60 billion in market value. These are not just numbers; they represent unethical leadership's real, tangible consequences.
Additionally, in 2016, the Wells Fargo fake accounts scandal resulted in a loss of over $30 billion in market value for the company. Studies have found that the damage to a company's reputation from corporate fraud is usually more costly than the fines they face. It goes deep, is multilayered, and takes years to eradicate. But not everything is so severe or acute or counts in billions of dollars.
Many smaller companies need help with their investors' supervision, ensuring the company is financially sound and focused on execution and that the company cares enough about the ethical behavior its leadership is demonstrated. Would investors care more if they knew that their C-level provides results that are simply false? I don't want to say everything is a big lie (because it's not) or must be significantly scrutinized, but let's be honest. If the culture in the organization is not well established, the leadership team might feel too comfortable, and eventually, when things are going wrong, they will be tempted to take a chance.
What exactly constitutes unethical behavior in today's startup landscape? The examples are numerous, and some are disturbing:
Misusing investor/shareholder funds. How often have you heard that a company reports losses, but their CEO flies with a private jet? That's more common than you think. That's one of the most egregious violations: using funds from investors and shareholders to cover up convenience services and mistakes, settle lawsuits, or fund a lavish lifestyle. Let's remember that startup founders have a fiduciary duty to be responsible stewards of the capital they've been entrusted with. Misusing those funds is not just unethical; it's illegal.
Employees also highlight the importance of avoiding accountability. If all goes well, the manager takes all the glory, while when everything is going wrong, it's on the employees. Call it the blame game. Great leaders take responsibility when things go wrong. Unethical leaders make excuses, blame others, and do everything possible to avoid being held accountable for poor decisions or performance failures. I'd call it cowardly behavior. You're getting paid a salary or a significant portion of the options/ shares to take responsibility for your leadership decisions. The magic terms "trust me" and "that's not what I meant" are telltale signs of leaders unwilling to own up to their mistakes.
Demanding unethical actions. Disturbing situations arise when leaders demand changes like "I need you to change the numbers," regardless of the actual data, because they have an important meeting with investors. Or worse, they say, "Everybody does that, so we do the same," to justify unethical practices. Ethical leaders never ask team members to falsify information or engage in illegal activities. If numbers are wrong, they will likely lead to a bad decision, which leads to catastrophic results. We are all going down.
Misaligned expectations are sometimes called "misunderstandings." Sometimes, the ethical breach happens right from the start, such as a leader saying, "I'm looking for a leader," when they mean, "I'm looking for a reporting guy," - looking for someone to follow orders without independent authority. This mismatch of expectations lays the groundwork for an unhealthy power dynamic. If you assume you need multiple servants, you are not the leader.
Personal interactions often lead to leaders making inappropriate comments that affect diversity, varying backgrounds, and gender equality. Unethical managers tend to be selective in addressing these aspects within the company and their employees' lives. Embracing diversity promotes creativity and offers sustainable solutions. If a leader treats the company or team as a social group based on race, culture, or gender, it damages credibility and prevents the company from reaching its full potential. This unethical behavior reflects the individual's character, not the team as a whole.
Conclusions: Upholding Ethical Leadership is Hard.
Taking the ethical high road may be more challenging in the short term, but it reaps significant rewards for startup leaders in the long run. A reputation for integrity is a valuable asset for attracting talent, winning customers, and gaining loyalty from investors. Employees who take pride in their leaders and the company are inspired to give their best. Ethical conduct permeates the organization, fostering a positive culture that encourages people to do the right thing. For investors, backing an ethical startup is a much safer bet. Operating with integrity reduces the likelihood of PR disasters, costly lawsuits, and other crises that could jeopardize their investment. Customers also prefer to work with companies they can trust, mainly when it involves sensitive data, financial information, or other high-risk areas. They are willing to pay a premium for ethical partners because genuine trust is invaluable.
So, what's the solution to this ethical leadership crisis? How can startup leaders operate with integrity while navigating the intense pressures of this high-stakes environment?
First, aspiring founders must look inward and be brutally honest about their moral compass. If you are trying to become a leader, ask yourself: "Do I have the strength of character to do the right thing, even when the ethical choice is the most challenging path?" Those who don't should think twice before taking on a leadership role.
If you are an angel investor, ask yourself if this team has exemplary moral and ethical leadership or is driven by general ethical principles. Yes, this organization must make money, but not at any price. The startup is a long-term investment and must have a strong foundation.
For those genuinely committed to ethical leadership, having mentors who will keep them in check is invaluable. These should be seasoned individuals willing to ask tough questions and call out any lapses in judgment. Ideally, mentors should be people founders respect enough to take their advice to heart.
Leaders must also set the standard for themselves and model the behavior they want to see from others. Ethical leaders don't just uphold the rules; they go above and beyond what's expected. They show vulnerability, admit mistakes, and never pretend to be perfect. This gives them moral authority and makes it much easier for people to follow their example. Admitting you were wrong is human; be human.
From an organizational standpoint, it's critical to clearly define and reinforce the ethical principles that will guide the company from day one. These should be non-negotiable core values, not lofty ideals that get ignored when inconvenient.
Ethical expectations must then be baked into every process – hiring, training, performance evaluations, promotions, etc. For example, demonstrating ethical decision-making should be a key criterion for advancing into leadership roles.
Mechanisms for continuous feedback about leaders' conduct, with a zero-tolerance policy for unethical behavior, are also needed. Employees at all levels should feel empowered to speak up if they see something wrong without fear of retribution.
Empower your HR business partners to enforce the principles, staying impartial between employees and executives. Yes, their work is assessed based on their performance working with the business leaders, but it shouldn't be evaluated solely based on the deliverables or opinion of that partner. Additional empowerment must lead to centrally driven initiatives around the cultural principles and follow them—not badges and slides, but genuine assessment of adopting ethical principles.
When ethical violations occur, the response must be swift and decisive. A slap on the wrist or an empty reprimand won't suffice. Natural consequences—up to and including termination—are essential to upholding standards and maintaining a culture of integrity.
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