Ethical leadership in firms reflects in their net worth

Sometime in 2015, Volkswagen admitted to an emission-cheating scandal that caused it massive losses (almost a quarter of its market value was wiped out or about Sh2 trillion). This threatened its viability to contend for the position of the world’s biggest carmaker.

Interestingly, in the same year Kenya was also having its own share of corporate scandals. First, there was Mumias’ ethanol scandal, which led to the ouster of both its managing director and commercial director (to date, its stock has lost 70 per cent of its precious value) followed by East African Portland Cement scandal (which triggered a 66 per cent valuation loss from 2015 to date). Then there was Uchumi insider trading mess (to date, more than 70 per cent drop has been wiped out).

In all these cases, one thing stands out—the shocking destruction of shareholder value.

Now, much debate has been around board oversight, self-policing, regulations and the role of auditors. But it’s time the conversation shifts to involve other related actors, namely top company leaders, business schools and shareholders.

On company leaders, these firms need to ensure that top level management is populated with bosses who possess great virtues. They shouldn’t be seen to be only replacing management: changing leaders ought to demonstrate high integrity.

This is vital as they are the most closely watched by their subordinates.

Furthermore, the new school of leaders will need to be committed to ensuring that these organisations will operate ethically at all times. They must engage with employees to ensure that high standards are enforced with a zero-tolerance policy.

Regarding business schools, a study of their role in this “ethical mess” is necessary. Although far from being responsible, business schools can be said to be partially culpable for their graduates’ ethical lapses.

Specifically, the idea of self-interested leadership. As it is now advanced in most business schools, it can be said to foster “careless” corporate behaviour.

It’s sad to say that some business schools are graduating Masters of Business Apocalypse (MBA) without ideals. Going forward, a total revamp of ethical classes (if at all they exist) is a must.

Change is required to give way to something new: servant leadership. At the core of this new curriculum should be the emphasis that performance and ethics go hand in hand. 

Lastly, passive shareholding should take considerable blame.

But looking ahead, through a small shareholder outfit retail investors can ensure better corporate governance through litigation, negotiation with management and or “vote no” campaigns targeted against one or more of the board members.

A management that knows that it will be questioned and held responsible for its actions, will always be on its feet.

Activist campaigns have been shown to result in substantial long-term gains in overall shareholder value.

The bottom line is that good ethics is good business. There is a direct correlation between behaving ethically and creating long-term shareholder value.

Great organisations can only be built from a solid ethical foundation. Besides, cheating breaks investor trust.