Why are values, morals, and ethics important?

Overview

  • What are values, morals, and ethics?
  • How are they used?
  • How do they impact company value growth and preservation?
  • What role should they play in hiring, promotions, and terminations?
  • How do you understand your company’s position?

What are values, morals, and ethics?

People often use these terms interchangeably. The concepts are different, which can result in confusing sets of expectations. e.g. many board of director’s mandates mention meeting “highest ethical standards”, but what does that actually mean? Many in corporate leadership1 believe ethics means compliance with laws, regulations, and company policies.  Many in the broader public associate ethics with morals and doing what is right.

To illustrate the confusion: for a few years Apple Computer only paid .005% income tax on billions of Euros of profit in Ireland.  The CEO stated that what Apple did was alright because all the laws were followed.  Many people felt that paying .005% income tax was “not the right thing to do.”  As it turned out, the European Commission ruled in August 2016 that Ireland’s tax agreement with Apple was illegal and that Apple owed billions of income tax.

The following are my definitions.  You should have your own definitions.  You cannot have a discussion about VME (values, morals, and ethics) if everyone has different definition of what the words.

Values: Values are the rules by which people make decisions about what they should or should not do. Values have different importances, which is helpful when needed to trade off or balance one value versus other values. Values are what someone thinks and feels internally.

Morals: Morals are decisions, actions, and behaviours which people feel are right or wrong, good or bad.  Morals are actions and behaviours arising from one or more values.  Not all values are related to morals.  Morals are based on a broader perspective than just the individual. You are judged by others as to whether or not your actions are moral or immoral.  You make a decision based on what you believe is “the right thing to do.” Morals reflect external observable actions and behaviours.

Ethics: Ethical decisions, actions, and behaviours are based on following a document set of standards or principles.   Many companies and professions have a Code of Ethics.

VME should also tie back to the purpose of the corporation.2 Is the sole purpose to make as much money as possible, constrained by laws, regulations, and company policies?

How are values, morals and ethics used?

Values and ethics are used by individuals when making decisions regarding their actions and behaviours.

Corporate leadership makes decisions and recommendations within an ecosystem3 where stakeholders and third parties have VME with major differences and conflicts.  Corporate leadership uses their VME to manage the conflicts of interests within corporate leadership, and with stakeholders and third parties.

Lawyers would point out the fiduciary duty e.g. in Canada to act in the best interest of the corporation (fiduciary duty varies by country).  But is that the right thing to do?  Professor Didier Cossin makes the following observation, “The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.”4

Documented ethics arise from interactions between the company, stakeholders5, and third parties6. Companies, stakeholders, and third parties all lobby the government to change laws and regulations to benefit what they believe is important (i.e. their values and morals).  How should corporate leadership deal with the conflict of interest regarding laws and regulations which provide value to society vs providing value to the corporation?  Some people believe laws and regulations exist to protect the interests of society as a whole or protect those who cannot protect themselves.  Some companies have Codes of Ethics written to minimize legal risks to corporate leadership.

When, if ever, do “the needs of the many outweigh the needs of the few”?7

 How do values, morals and ethics impact company value growth and preservation?

Many companies have formal ESG (Environment, Social, and Governance) policies.  Commonly these are focused on corporate or shareholder value enhancement.  In other words, ESG is good for growing long-term profits and value.

But what do you do when ESG could reduce long term profits?

Some companies consciously decided to take actions which they believe is better for the broader society but may result in lower profits.  E.g. Vancity Credit Union (in Vancouver, British Columbia) pays its workers a living wage and expects its suppliers to pay their workers a living wage.  On the other hand, Loblaws shareholders, in an early 2018 Annual General Meeting, voted not to pay workers a living wage.

The value from mergers and acquisitions can be threatened when companies have different sets of VME. It can be extremely hard to change the values and moral behaviour of people.  Even ensuring compliance with a new set of documented ethical standards may be a challenge.

VME impacts the type of employees who want to join and stay with your company.  I have met MBA graduates who deliberately decide not to pursue the highest paying jobs, but rather focus on the purpose of the company and its VME.

Shareholders trust the board of directors to make the right decisions.  The board, in turn, delegates the bulk of authority to the CEO.  The board and the CEO must be able to manage a broad range of conflicts of interest, especially personal.  E.g. with average CEO tenure below 4 years, it can be a challenge for the CEO to focus on the long-term, rather than maximizing the value of short-term bonuses and stock options.  Directors have been known to question a merger when their own director roles are in jeopardy.

If the board and CEO have different sets of VME, then the CEO’s decision making, and tone setting for the company, will not be aligned with the board.

Corporate leadership, through their actions and behaviours, communicates what the acceptable VME are. It is important that the leadership, when making difficult decisions, communicates how those decisions are related to VME. Children by the age of seven have already developed a set of values and morals.8 They observe their parents and learn from their parents.

The most difficult decisions made by corporate leadership (e.g. times of crisis, re-organization, major merger, major change in strategy, CEO appointment or termination, etc.) often reveal what the true VME are.  It’s easy to talk about VME when it does not take major personal courage to make a difficult decision.

What role should values, morals, and ethics play in hiring, promotions, and terminations?

Warren Buffet said “You’re looking for three things, generally, in a person: intelligence, energy, and integrity.  And if they don’t have the last one, don’t even bother with the first two”.

You can teach new skills and provide new experiences to corporate leadership.  It can be very hard to change values, morals, and ethics, especially with leaders who have many years of inappropriate VME.

What do you do if you are a SME (Small Medium Enterprise)?9

All of the issues discussed above apply.  It can be more complex in a private SME, with major or controlling shareholders who have different VMEs from the founders or CEO.  VME can be simpler in a startup, with everyone in the same physical space as the founder(s) and learning VME directly from the founder.

Conclusion

Value, morals, and ethics are some of the underlying factors for business success and business failure.

Your next steps

To enable discussion with your corporate leadership, download the following one page slide:

Why are values, morals, and ethics important?

The board and CEO must decide if VME is important enough to warrant time investment by corporate leadership.

What is your current situation?

  • The following next steps are a series of questions, including a survey tool. The intent is to enable corporate leadership to understand the perspectives of various individuals regarding VME.  Once there is that understanding, you’ll then need to decide actions to take, if any.
  • Does corporate leadership have an agreed upon purpose for the corporation? Is the sole purpose to make money?
  • What are the definitions of VME used by your corporate leadership? If your company has documented values, how are they used?  What are employees supposed to do with the values?  How do you know how the employees are using the values, if at all?
  • What are the differences, if any, between VME during “working hours” vs non-working hours?
  • Do you know what the employee point-of-view is?
  • Does all of corporate leadership have the same view?
  • What are the difference between the employee and corporate leadership points-of-view?
  • Read and discuss the values of the United States Army. What are the differences between your company values and morals relative to the U.S. Army.  The Army explicitly identifies morals – do your company values identify morals? The Army values guide individual conduct 24 hours a day. Are your VME intended to guide decision making, actions and behaviours only during working hours or 24 hours a day?  Some would argue that the company has no business in what an employee does in their non-working hours.
  • Look back over the past 5 years. How have VME guided critical board and CEO actions?  g. during crisis, making important one-time decisions such as appointing or terminating a CEO.
  • What questions, if any, are asked of director candidates and CEO candidates to assess their understanding and commitment to the company’s VME? Which VME, if any, are a perquisite for hiring? Which violations of VME result in immediate termination or hold back promotion?
  • Use the VME survey tool to gather input from different groups of people regarding their VME views. Corporate leadership needs to discuss the findings.  If there are differences, determine what actions need to be taken.

Footnotes

1 Corporate Leadership definition: Board of directors, CEO, advisory board and C-Suite.

2 Purpose of the corporation definition: What is the purpose of the corporation and why does it exist?

Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.  Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

3 Ecosystem definition: A business ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem.

4 “The four tiers of conflict of interest faced by boards of directors”, Professor Didier Cossin and Abraham Longze Lu, IMD Global Board Centre

5 Stakeholder definition: Stakeholders have an economic interest in the corporation: Shareholders, Non-equity capital, Customers/ users, Employees/ unions, Suppliers, partners

6 Third party definition: Politicians, Regulators, Third party standard setters (e.g. Proxy advisory firm, accountants, lawyers), Society

7 “The Wrath of Khan”, Dr. Spock, Star Trek

8 “Teaching young children morals”, Meri Wallace, Psychology Today, April 6, 2018

9 SME Definition: Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

Further reading

“Society’s trust in corporate leadership and political leadership is low”  koorandassociates.org  Society’s trust in corporate leadership and political leadership is low.

“Values – U.S. Army” koorandassociates.org  Values – U.S. Army

“Why is trust critical for transformation success” koorandassociates.org  Why is trust critical for transformation success?

Tools

“What are your values and morals?”, koorandassocicates.org   What are your values and morals? Survey Tool