Management

The challenges of ethical
leadership

Leadership is the key factor that establishes whether a company is long-sighted and able to integrate ethics successfully into strategy - the tone comes from the top. Only effective and dynamic leadership can set a corporate culture that goes beyond merely averting the reputational damage risked by unethical behavior. It can also transform the dangers posed by ethical challenges into commercial opportunities, thereby ensuring that the organization is fit for the future.

The people at the top exemplify the true ethical standards of an organization - whether these are the same as the company's stated values or not. It is up to senior employees to demonstrate to others the ethical expectations within the business. Unless they model these desired behaviors themselves, ethics training for other employees will have a seriously limited impact.

Leaders who fail to understand the changing context in which they operate are not providing a sustainable foundation for their companies. They will permit outmoded business models to be pursued, even when the assumptions that these were based on have altered. Specifically, ethical leaders need to recognize the threats and opportunities posed by factors such as climate change, the declining reserves of fossil fuels and the corrosive economic impact of endemic bribery in certain sectors and regions. Ethics and sustainability are two sides of the same coin.

A failure to understand these factors has already become evident in some industries - it's arguably a major reason behind the crisis that engulfed US carmakers last year. Competitors such as Honda anticipated the increase in gasoline prices and benefited from this. Similar scarcity trends are predicted in water, land and food. If companies are to survive these changes to the balance of supply and demand, their leaders must both understand the threats and see the opportunities.

Dynamic leaders who can see the problems and prospects ahead must use this knowledge to set the right tone across their organizations. This tone from the top is vital in all aspects of governance. In ethics, the CEO's personal perspective is crucial. Once the leader champions the ethical approach, the rest of the organization is more likely to notice the shift and follow suit.

But leaders have to do more than inspire. Policy statements need to be backed by action that is clear, effective and brings about changes in direction. These changes demonstrate to middle managers that their leaders mean what they say. If they realize that there is a genuine corporate commitment to a particular course of action, they are more likely to support it in practice.

Middle managers need to be given explicit and implicit authority to speak up where they believe that the welfare of the organization and its employees is being threatened. They must be converts and evangelists for the corporate mission - including the ethical dimension. The leader who understands the value of ethical principles and practices will effect real change only if their enthusiasm can be converted into a strong culture that permeates the whole organization. Employees need tailored training to understand what ethical dilemmas they may face and have clear guidance as to how they might tackle them.

So what are the special responsibilities of accountants in making business more ethical? Countering bribery is an obvious starting place. Professional accountants are bound by strict ethical standards. Because of this, they are valued by organizations as a bulwark against morally questionable practices.

They can be instrumental in countering the development of a culture that normalizes the payment of bribes. However, corporate culture is powerful and it is often difficult to change it. Bearing in mind the complex politics of workplace convention: It takes courage to suggest doing things differently, especially if it is on the grounds that current practice is unethical.

Management accountants have a further important responsibility: The delivery of accurate management information is vital to understanding a firm's overall sustainability, gauging its environmental impact and showing how effective its governance systems are, for example. In effect, they are the business navigators - planning the route and providing the key performance indicators to ensure that the desired destination is reached.

There is a strong business case for running companies in an ethically responsible way and for finance professionals to facilitate this. A socially and environmentally ethical approach ensures a company's ability to thrive in the long term by protecting its reputation, its license to operate, its supply chain, its relationships with partners and its ability to recruit talent.

It's also about avoiding corporate collapse as a result of litigation or fraud. Management accountants must be courageous enough to stand up for what is right, but companies must also ensure they are instilling high standards of ethics. For those that do break the rules, government must step in to curb unethical behavior with the right regulation and appropriate sanctions.

Some accountants may feel that being a cheerleader for a cause such as sustainability clashes with the dispassionate role of the traditional finance function. Undeniably, people with professional accountancy qualifications are valued because of their ability to stand above the fray and perform impartial analyses. But, by understanding how ethical principles support the long-term viability of a business, accountants can feel confident of taking a leading role in the sustainability debate.

The writer is CIMA enterprise governance specialist. This article is based on CIMA's recent report, published in February 2010 on www.cimaglobal.com/thought-leadership/research-topics/sustainability/ titled Incorporating ethics into strategy: developing sustainable business models. For more information about CIMA, please visit www.cimaglobal.com.

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