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This article explores the various ways in which leaders, venture capitalists, bankers, and accountants can lead businesses in the wrong direction, resulting in corporate failures. It discusses the role of capital markets, the influence of venture firms and banks, the failure of checks and balances, the corruption of analysts, and the importance of ethical leadership. The article also highlights the limitations of conventional approaches to promoting ethics in companies and offers proposals for strengthening corporate boards.
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How leaders go wrong Professor D. Quinn Mills Harvard Business School
Capital markets • The Capital Markets are an Engine of Progress • The Social and Economic Utility of Capital Markets
How some vcs and bankers led entrepreneurs in the wrong direction • Having to go to the Venture Firms • Pressure to Spend • A Strategy’s Limitations • Like Sheep to the Slaughter • Get-big-fast instead of Get-it-Right
Building to flip • Venture Capital • Rushing to an IPO • Exiting an Investment • How their own Rules were Changed by the Venture Capital Firms • The Baby Goes out with the Bathwater
Choosing the wrong people • Whom to Back • Garden.com: A Mistake from the Get-go • Boo.com
How banks inflated the bubble • The Banks Bend the Rules • Who Brought Those Duds to Market? • Mass Hysteria or Fraud • What Did the Venture Firms Know? • Did Wall Street Cross the Line?
Influencing factors: where does responsibility lie? • What the Accountants Should Have Done and Didn’t • The Hype Machine • The FED Was Also At Fault • Alan Greenspan And The Great Bubble
Systematic deception • What Was Going On? • Corrupt Accounting • Restatements • CEOs Ask for Misrepresentation • Hiding Relative Importance • Just Like the Others • The Common Accounting Dodges • SEC Oversight • The Criminal Mind
More than a few bad apples • Conflicts of Interest: The Core of the Problem • The Conflicts of Interest Which Fed the Scandals • Awards for “The Best” in Corporate America
Infectious greed: who got the money? • Shareholders Versus CEOs: The CEOs Make It Big • CEOs Made Fortunes Without Building Companies • Aligning CEO and Investor Interests • Stock Options Begin to Dominate CEOs Pay Packages
The role of the accountants • Peer Review • Deceiving Investors Legally • An Insidious Dynamic Develops • Other Commercial Ventures • The “Integrated Audit”
The failure of checks and balances • Neither Prevent Nor Punish • Rubber Stamps—Boards of Directors • Protection for Deception: The Role of the Attorneys • The Failure of the Regulators • What the Prosecutors, Courts, and the SEC Didn’t Do • What the Fed Didn’t Do
Ordinary business at the banks • Conniving with Corporations to Deceive Investors • Greasing the CEO’s Palm via IPO Allocations
The corruption of the analysts • Use It or Lose It • May Day • Maybe 20 Percent Are Honest • What’s Said Isn’t What’s Done
The temptation to steal • The New Very Rich: CEOs • How CEOs Get Rich • The Ignorant CEO • So Strong a Temptation • The Crucial Importance of Leadership • The Courage to Speak Out
The ethics of the gutter • Do What’s Right: Why Ethics Are Very Important • What Are Ethics? • The Failure of Ethics Programs in Companies • The “Push the Limits” Environment • The Role of the Business Schools
An ethical or legal embarrassment can be devastating to a firm Nyse Martha stewart Citigroup’s japan unit Merrill at enron Citigroup at world com Aig, marsh mclennan, the hartford
Restraining Self-Inflicted Wounds • Proposals to Strengthen Corporate Boards • The Danger of Ineffective Reforms • Power Struggle: What Will Happen with Governance Reforms if the CEO Retains His or Her Power
Why individuals are very important • President Bush, Alan Greenspan, Warren Buffet all agree Failures in business arise in the individual executive and cannot be successfully dealt with by law or board process
The limitations of conventional approaches • Four common mistakes made by executives promoting ethics in their firms • Believing that having corporate compliance programs means higher ethical standards in the company • Believing that increased community involvement means higher ethical standards in the company
The limitations of conventional approaches (2) • Confusing company culture with individual’s ethics – paying lipservice to corporate ethics doesn’t necessarily translate into ethical behavior • Failing to recognize the limits of an ethical code imposed from above • Focusing on others to the exclusion of one’s self
Sources of the decline of individual standards • Overly tolerant acceptance of market outcomes • Broader social endorsement of greed • Preference for detailed rules rather than ethical judgments • Thinking of ethical issues as pubic relations matters • Seeing ethics as purely instrumental – it’s valuable to be thought ethical • The push-the-limits environment
Five basic impediments to ethical behavior • Human nature – greed, dishonesty and hypocrisy • A polygot society in which there are few common norms of ethical behavior – multiculturalism • A large and varied society in which there is no strong sense of community, so those outside the group are fair play for sharp dealing
Five basic impediments to ethical behavior (2) • Modern myopia about ethics – a focus on social issues – environment, etc – social responsibility rather than personal ethics • The widespread adoption of relativism – each person has his or her own ethics, as his own truth, so that there is no standard for choosing among different approaches
Individual behavior today • Complex and subject to disagreement • Difficult for a company or an executive to navigate • Dangerous to transgress
Legality and right behavior • Related, but different • Something may be unethical and illegal, • But • Something may be legal and unethical • And • Something may be illegal and ethical
Alternatives for what an executive sets as standards • Whatever the law allows • Avoid bad publicity • Set absolute standards • Faith-based • Fiduciary rule (the client benefits) • A universal standard – the golden rule • Borrow from a profession, like medicine • Do no harm (to customers or employees) • Set of corporate-specific guidelines
Key to coaching executives about behavior • Don’t deal in platitudes • Deal with real issues • Challenges that arise in the business • Problems that arise from different ethical standards of business and media and public • Problems that arise from different ethical standards of different people in the firm