The high cost of leaders who lose their moral compass

Little sympathy can be spared for bosses with a record of ethical failures. Often though, their resulting downfall proves the start of an incredibly costly and seemingly endless saga of damage repair as successors try to pick up the pieces.

Almost simultaneously, both CEOs of global security companies Serco and GS4 have had to resign. Both these senior executives had fronted a dismal record of blatantly irresponsible corporate behaviour.

As the replacement CEO of one of them told MPs the other day, the company’s so-called tagging fiasco was caused by “mistakes in telling the difference between right and wrong.”

More precisely the senior management of both companies had clearly mislaid their moral compass. Unfortunately, it’s hardly a rarity these days, as the litany of scandals, fines and resignations shows all too clearly.

Just to take one example of mislaying a leader’s moral compass–when confronted with evidence of corruption in Mexico, Wal-Mart top executive focused more on damage control than on rooting out wrongdoing.

When the bribery case was discussed in one meeting, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being persistent in pursuing the issue. He had the effrontery to complain they were being “overly aggressive.” 1

It takes months and probably years before a firm with a track record of a serious ethical failure wins back the trust and respect of the communities in which they operate.

At the UKs Co-op bank, the enforced exit of the former chairman Paul Flowers is mired in ethical failures. Literally years of energy and resource-draining attrition will follow, as probes seek to establish what happened to bring down the bank.

Similarly, although Barclays’ CEO Bob Diamond resigned in 2012 over the attempt to manipulate the interbank lending rate, his damaging unethical legacy lives on.

In fact, his replacement has publicly admitted it will take “at least five years” to restore the bank’s former reputation, and even this is beginning to look optimistic.

While many leaders puzzle over what it means to run a responsible business and shy away from talking about ethics in business, the price paid for not knowing keeps rising.

A study in 2009 found companies involved with a scandal suffered decreasing book and market leverage. The horse meat scandal involving Findus products for example, wiped £300m off Tesco’s market value. The company’s stock fell 1% because of the likely difficulty of regaining consumer confidence. 2

 

“It’s not just Findus that is going to suffer here, it’s the processed beef brand more generally,” said Vince Mitchell, professor of consumer marketing at Cass Business School in London.

When leaders leave behind them an ethical scandal, the price their organisations pay is like a typical iceberg—the true cost lies hidden below the water line.

Employees for example, are generally more reluctant to work for such companies–so the cost of recruitment rises significantly. Likewise the scandal-laden company finds it harder to retain staff.

Boeing, Wal Mart, Home Box Office, Hewlett Packard, Starwood Hotels and Resorts Worldwide, BP and Best Buy are all important corporation whose executives lost their moral compass and had to resign over an ethical issue.

The reverberations continue to bedevil their companies’ reputations, even though the original causes have perhaps long been forgotten.

  

1 How Will Wal-Mart’s Bribery Scandal Affect CEOs? ChiefExecutive.net, April 26 2012

2 S. Bonini, Corporate Scandals, Capital Structure and Contagion Effect New York University, Stern School of Business, New York, NY.

 

Andrew Leigh is author of Ethical Leadership: Creating and sustaining an ethical business culture, Kogan Page 2013

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