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Ethical leadership is the missing link

Sep 02 2018 06:01
Bonang Mohale

In the decade since the onset of the phenomenon of state capture in South Africa, we have learnt some painful lessons about corporate governance in both the public and private sectors.

These lessons are not unique to South Africa – or to state-owned enterprises (SOEs) in developing countries generally.

For well over a generation the trend in public administration and business in developed countries has been to subvert systems of good governance and accountability.

The failure of Enron in late 2001 – which filed for bankruptcy – apart from signalling the largest corporate bankruptcy in the US, threw up myriad questions about the effectiveness of contemporary accounting, auditing and corporate governance practices.

To sustain corporate performance, a rules-based application of business ethics developed mainly in response to the growing rate of corporate wrongdoing.

At the same time, however, the application of these measures has not yielded the desired results.

The growth in what in common parlance is known as transactional leadership of executive authorities within corporates has tended to erode the power of boards by subverting dysfunctions and loopholes in the governance system. The trend has been to cut back the power of boards and to turn over functions that have been improperly appropriated by corporate and government executive leadership.

In more recent years ethical scandals have become almost commonplace, exemplified by the number of top executives of corporate giants such as Arthur Anderson, Lehman Brothers and WorldCom in the US, Satyam Computer Services of India and the spate of corporate corruption involving top management of deposit money banks in Nigeria, among others.

Steinhoff in South Africa, for instance, grew over a period of five decades to become one of the largest companies in the country. The stakeholders never imagined that top executives could be embroiled in unethical practices because the company had a code of ethics.

However, after the collapse it was found that profits declared by Steinhoff were false; some company executives saw wrongdoing and ignored it; and top executives ignored the code of ethics.

In other words, the code of ethics was about protecting Steinhoff’s interest rather than inculcating ethical values, virtues and norms in the organisation. Similarly, some executives in multinational auditing firm KPMG fell into ignominy for flouting its corporate governance and corporate social responsibility practices in South Africa.

Sadly, some NPOs/NGOs formed with noble intentions and premised on ethics and righteousness have not escaped the pervasive malignancy and greed of corruption.

The persistence of unethical and illegal business activities by top managers in SOEs and corporate organisations is a pointer that a code of ethics is not enough for an organisation to be ethical. For the post-state capture period in South Africa, the chief governance issue for government and corporate South Africa will not be how to enforce rules but how to ensure we cut back dependence on their enforcement.

Internationally, governance has been eroded de facto for a variety of reasons.

Institutional compliance is weak and the rise of transactional leadership has led to the emergence of public sector and corporate corruption.

These failures have posed threats and challenges to the post-Enron governance order because they are the source of grave abuses and have become potential breeding grounds for abuse.

Venality seems to be the order of doing business.

A critical issue facing South Africa (and the world) that blocks possibilities for economic development and shared growth is the inadequate level of ethical consciousness and ethics management in the business domain.

SOEs and corporates do not need overwhelming rules; they need strong and effective values within the limited scope of corporate governance functions.

There is therefore a missing link between corporate governance and compliance.

Regulators around the world are carefully considering the limited effectiveness of rules and regulations to address governance matters.

In South Africa the King IV report clearly recognises this.

Although the letter of the word in terms of requirement differs only slightly between King III (published in 2009) and IV, the notion of the outcomes versus rules-based application of the code of ethics should greatly improve the effect of the increased focus on an ethical culture.

Strengthening ethical leadership by mainstreaming ethical behaviour throughout the culture of organisations is a task that has become vital to good governance, but it is one that few SOEs and corporates have mastered.

While recognising that business is inherently transactional, shifting the governance paradigm to ethical leadership – exemplified by integrity, competence, responsibility, accountability, fairness and transparency – driven by virtuosity rather than self-interest is central to good governance.

It is modelled to anticipate and prevent, or otherwise ameliorate, the negative consequences of organisations’ activities and outputs on the economy, society and the environment.

The question is whether the link between governance and ethical leadership can be practically established. While typically corporate culture is described as a “soft” matter, it is most often the hardest to implement because there is no box to tick to conclude that an end goal has been reached.

The “what” and the “how” begins in the boardroom.

In the ethical leadership model, substantive engagement and oversight is required and a mere process focus will not be good enough.

While leadership starts with each individual director, it finds its expression through the board as a collective, setting the appropriate example and tone which is referred to as ethical governance.

When an ethical culture is properly understood, and well embedded, desired corporate values and conduct should be reflected in the daily habits and practices of executives and employees – how they work, how they are evaluated, who is hired, promoted, rewarded, how employees act when managers are not present and when matters of personal judgement arise and whom the company does business with.

Corporate governance is an internal system encompassing policies, processes and people that serve the needs of shareholders and others by directing and controlling management activities with good savvy, objectivity and integrity leadership, and ethical leadership.

South Africa – and the world – is crying for ethical leaders.

With ethical leaders at the core, there are likely to be good policies. Economic growth, investment and jobs are the natural outcome.

No country in the world has ever achieved social cohesion without ethical leadership.

Ethical leadership is not the responsibility of boards and executives alone; it should flow throughout the society and organisations.

This is because ethical leadership reflects societal values.

Can ethical leaders please stand up?

* Bonang Mohale is CEO of Business Leadership SA. 

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