The startup and its ethical positioning – a matter of choice
In the midst of all the remarkable success stories that we see in the Indian startup scene, with company X or Y being celebrated as the latest unicorn, we also read about some company or its founder getting into hot water on ethics. The issues are varied – false numbers, conflict of interest, misuse of customer data, poor HR practices, toxic work culture, and so on – but at the epicentre, there is almost always a superstar founder (or founders) caught in the media glare. Suddenly, a celebrated success story becomes an object of gossip, derision and pontification.
Symptoms of ethical collapse
Why and how does this happen? In her book “The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies…Before It’s Too Late”, Marianne Jennings, Professor of Legal and Ethical and Ethical Studies at Arizona State University, USA, lists seven early indicators or symptoms that companies exhibit before they get into ethical hot water:
- Pressure to maintain numbers.
- Fear and silence.
- Young ones (that is, the employees) and a bigger-than-life CEO.
- A weak Board of Directors.
- Culture of conflict of interest.
- Innovation like no other (Translation: “The rules are for ordinary companies. We are so innovative, and our business model so radically new, that rules don’t apply to us”).
- Goodness in some areas atones for evil in others (“Look at the five new schools I have established for the underprivileged”).
Her “seven signs” provide a neat checklist for startups to keep a lookout for such symptoms and take proactive measures to prevent ethical collapses from happening in their companies.
The startup’s DNA
When I discuss business ethics in MBA classes, some student would always put their hand up and say, “Professor, when you are a startup, you are under tremendous pressure to show dramatic growth. At that stage, you have to do what you have to do. After some time, once the company starts making money, I assure you we will turn ethical.” A discussion then ensues, and I roll out my “A startup is like a newborn baby” theory, which goes something like this:
A startup is like a baby that is just born, whose personality is malleable and open to everything. It is like a blank page that can receive and retain whatever is written on it. Just as children pick up and form their values and habits from their parents, family, teachers and – at a later stage – friends and peers, a startup is also very heavily influenced by what happens in and around the company in the formative years. Sociologists say that a human being’s core values are pretty much set by the time the child is 10 years old, and while we evolve and modify ourselves right through life, it is extremely difficult – if not impossible — to change our fundamental character and values later on in life.
My theory is that the same thing holds for startups. The company’s basic “DNA” in terms of ethical behaviour is formed right upfront in the initial period and becomes a way of life. So, my response to the entrepreneur (or student), who says they will turn ethical once they start making money, is this: “Stop kidding yourself. Ethics is not an “on-off” switch. It is a way of life. And you, as the startup leader, have to make the call on Day 1. It is a leadership and culture issue.”
Broken windows
Business ethics, or more accurately, making compromises with business ethics, is a slippery slope. Little deviations or “adjustments” lead to bigger infractions. In this context, it is interesting to study the use of the “broken window” theory by William Bratton, who was police commissioner in New York City (NYC) in the early ‘90s, to achieve dramatic reductions in crime. Essentially, this theory says that if you ignore small issues – like a broken window in a shuttered building – it leads to bigger breakdowns in law and order, because the broken window is an invitation to criminal elements to enter that building and use it for nefarious purposes. In short, small disorders create an environment which is conducive for bigger crime.
Bratton applied this principle in the subway system first and then to NYC overall. He formed small and highly mobile police teams to crack down on minor misdemeanours (the “broken windows”) rather than focus predominantly on serious crime. By the time he left his job after a few years, felonies and murders in NYC were down by 40-50%. Of course, the broken window theory had its own critics, who said that there was little or no hard evidence of its cause-and-effect linkage. However, the results were there for everyone to see.
Coming back to our “startup DNA” discussion, we can say that if a startup exhibits ignorance or wilful blindness or even active encouragement towards “small” ethical infractions (the broken windows), that behaviour will most likely create an overall culture of “anything goes”. Putting it differently, it would seem that the founder, if she or he wants to set the company on the ethical path for the long term, needs to make all attempts to do so from Day 1 and not take a convenient “waiver” for the initial years.
ESG pressures
Coming to the external environment, startups have to keep in mind the increasing emphasis being placed by powerful groups of investors worldwide on Environmental, Social and Governance (ESG) matters. There is some debate on the lack of universally standardised parameters to measure ESG performance. Accusations of “greenwashing” abound. However, there is no doubt that the ESG movement will continue to gather momentum in the coming years.
Talent retention
A company is run by its employees. One of the key factors that determines the success of a startup is its ability to attract and retain top talent. There is increasing evidence that talented people attach significant weightage to working for a company with a good reputation overall, in addition to job content and compensation (see https://www.forbes.com/sites/benjaminlaker/2023/04/19/company-values-essential-for-attracting-and-retaining-talent-says-linkedin/). They want to be proud of the logo on their company T-shirt. A sound reputation on ethics ensures this.
Regulatory trends and competitive advantage
Some years back, I came across an excellent visual representation of “legal” and “ethical” positions a company could take.
Here is a quick summary: The “legal” position is like the floor in a room. You have to be positioned at least at that minimum level. Go below that – into illegal territory – and you could be in jail. The ceiling, on the other hand, represents “ethical”. How high that ceiling is positioned is a matter of personal choice or design. (For the moment, I am keeping aside the interesting conundrum of how something legal is not always ethical, and vice versa.)
Now, here is my extension (or version 2.0) of this “floor and ceiling” concept: As years go by, regulations – on the environment, financial reporting, people policies, use of customer data, and so on – inevitably get revised and tightened up. In other words, the floor starts moving up, as regulators catch up with newer technologies and business models (Figure 1).
When that happens, if you had earlier positioned your company at the “just about legal” level, you will have to scramble to raise your game to meet the new regulations. If, on the other hand, you had positioned yourself higher than what the law demanded, you are still okay with the new laws and thus hold a competitive first-mover advantage over the other players who are now scrambling to catch up.
Your ethical stance in going beyond what the law demands also offers you the chance to work with the regulators and change the rules of the game in your favour – thereby making life difficult for competition. Lobbying does not always mean influencing of the wrong kind. It can be a force for good. Your ethical positioning can be a powerful competitive strategy that differentiates you in the eyes of an increasingly aware customer base, as well as with the talent pool that you want to attract.
Begin at the beginning
Being the parent of a beautiful newborn baby – the startup – is a proud and exhilarating moment. At the same time, bringing that child up the right way is fraught with challenges. It requires constant attention, clear values, and a sense of direction. Remember the floor, the ceiling, and the broken window. And as Julie Andrews sang way back in 1965, you need to “start at the very beginning”. It’s a very good place to start.
