The Price of Poor Ethics

Auto Show in Detroit
Volkswagen, led by Matthias Müller, has become synonymous with bad ethics. Source: dpa

Volkswagen and Deutsche Bank share a common managerial flaw: false incentives.

The Dieselgate scandal highlighted the importance of good managerial ethics for a company’s long-term success, and the bank’s quest for profit at all costs during and after the financial crisis shows that unethical behavior pays off only in the short term.

Remuneration that is balanced, oriented toward the long term and adequately takes risks into account is important to avoid distortions in decision-making incentives. High, variable compensation oriented toward short-term success encourages managers to take risks.

If there are losses later on, they are the company’s responsibility. In the majority of cases, there is insufficient proof that managers acted intentionally, which is why the company, or rather the shareholders, are liable for managers’ misconduct.

About 13 percent of top German managers believe that business and morality are incompatible.

Although misconduct can be blamed on one-sided bonus systems, it goes deeper than that. According to Jeffrey Pfeffer of Stanford University in California, successful managers are often “egoistic, dishonest and ruthless.” Mr. Pfeffer does not question that companies would benefit from an ethical management style, but he believes this is unrealistic and recommends that young managers should behave unethically if they hope to further their careers.

Psychotherapist and human resource consultant Madeleine Leitner confirms his theories. According to Ms. Leitner, the upper levels of management are increasingly populated by egoistic individuals who are only interested in their own careers and are indifferent to the well-being of the company. Are Mr. Pfeffer and Ms. Leitner right? Is ethical behavior not worthwhile for managers and companies? What can be done about it?

An ethical management style is not limited solely to ethical behavior. Instead, active, ethical management must set an example by adhering to values, rewarding ethical behavior and punishing violations. Empirical studies show that employees associate this type of management primarily with fairness and honesty. It was shown that such ethical behavior encourages employees to be more committed to their jobs than average. In other words, an ethical management style leads to greater productivity in the long term.

Dissatisfaction with managers results in costs and loss of productivity. According to a 2013 survey of employees and managers in Germany conducted by the consulting firm Information Factory, 50 percent of the respondents had left a job because of a supervisor, while another 20 percent had considered doing so.

Nevertheless, there seems to be a lack of understanding in business of the great importance of ethical values for long-term corporate success. According to one study, only a third of high-level German managers believe that ethically responsible actions are desirable and largely implement them in everyday corporate life.

About 13 percent of top German managers believe that business and morality are incompatible. Managers often characterize each other as egocentric, narcissistic, vain, obsessed with status and power, distanced and uncommunicative.

How did they reach such high-level positions in companies? Studies on the fraud scandals at US firms Enron and WorldCom found that corporate selection mechanisms for managers led to the choice of individuals who were aggressive and, in some cases, even resorted to criminal methods to achieve high incomes. This suggests that the behavior of managers needs to be monitored.

This could be achieved through a regular, anonymous evaluation of managers by employees. In addition, internal ethics officers and internal audit departments should monitor corporate processes. External ethics consultants can be brought in if the employees have lost confidence in management.


To contact the author: gastautor@handelsblatt.com

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