Profits with Principles
Building an ethical foundation for success
Happy Thursday, 👋
Rarely do companies intentionally engage in unethical behavior; in almost every case, ethical boundaries are slowly eroded over time. We have previously discussed several instances of fraud and found the majority occur when a team outgrows its internal controls or is unprepared for the challenges of sudden success.
The Subtle Descent into Unethical Behavior
Ethical erosion is a gradual process. It might start with a founder expensing a personal lunch over the weekend. If nobody says anything, the team may start to believe that such behavior is acceptable. Ethical challenges are like fog rolling in, as challenges develop slowly, and often before we realize it, we have lost our ability to navigate.
When we hear the phrase, “that’s just who they are,” it’s a signal to pay closer attention. Making excuses for team members' behavior often begins the ethical slide. It happens subtly, as team members begin by making excuses for others. Then, as new people join the team, they perceive the culture as one where ethical violations are tolerated. Often, the founder or CEO acts surprised when a large company is charged with fraud, as we often hear talking points about how they had no idea what was happening. As the company grew, the new culture of ethical excuses perpetuated to a point where the company ultimately lost its sense of direction as the lower standards became acceptable behavior.
The Bathsheba Syndrome
Moving into a leadership position or finding sudden success as a startup opens the door to numerous opportunities for ethical failure. A research paper from the early 1990s focused on why ethical violations often result from success, terming it The Bathsheba Syndrome. The paper draws from the story of King David, who believed his authority and political position could cover up several ethical violations resulting from his rapid rise to power.
Four byproducts of success which may lead to ethical failure include:
👓 Success allows leaders to become complacent and lose focus.
🚧 Success results in privileged access to information or people.
✈ Success provides leaders with greater control over how they utilize company resources.
🧙♂️ Success increases a leader’s confidence in their ability to manipulate or control outcomes.
Proactive Ethical Vigilance
Having the right ethics policy within a company from the beginning serves as a lighthouse to guide the team when ethics become clouded by success. If we start to suspect a leadership team may face ethical challenges, during our investment research we ask:
What are the areas of ethical concern within the company?
What is the team’s policy for addressing ethical concerns?
Teams should constantly ask themselves the above questions to build an environment where the unethical byproducts of success can be identified early and openly discussed. As early-stage investors, we have seen the challenges teams face with increasing success, so always ask about the ethical aspects of a culture.
The story of King David reminds us of the importance of having a pre-defined ethics policy, as in the story nobody had the ability to challenge David’s decisions without severe repercussions. We previously talked about building advisory boards which often becomes the first line of defense against ethical slippage. We are constantly reminded of why it’s important to ask founders and CEOs: who tells you no?
Additional Thoughts
Ethical challenges can and will arise, and are often not identified until much later. Similar to how fog can roll in slowly and catch sailors off guard, ethical violations are rarely a sudden occurrence. Discussing areas of potential ethical concerns early in the formation of a company builds a framework for raising concerns as the team expands.
The greater the success a company encounters, the more opportunities there are to take shortcuts and justify unethical behavior. Success brings with it a host of challenges and diversions, often slowly eroding a team’s ethical decision making. Build your company’s foundation for the future by developing a culture where active discussion of ethics is embraced, and everyone on the team understands the byproducts of success.
Wishing everyone an enjoyable weekend,
-The Caymont Ventures Team.