It May Be Painful In The Short Term, But A Strong Ethical Code Is What Builds Lasting Value For A Start-Up.
“It is better to lose a billion dollars than a good night’s sleep.” NR Narayana Murthy
IT TOOK place nearly a decade ago, but is still fresh in the mind of R Satya Narayanan, founder of Career Launcher. Officials from the income-tax department were scrutinising the account books of his online education services firm, when an officer suggested he planned to disallow some expenses and impose tax on them. Mr Narayanan argued the expenses deserved to be tax-free, but the officer didn’t agree. After much haggling, the officer suggested he could allow the expenses if a certain sum was paid to him. It was the entrepreneur’s moment of truth. He had to decide whether to pay the bribe and get rid of the headache, or refuse and face the consequences.
“It is one thing to talk about ethics, but quite another to deal with it when you come face-to-face with such a situation,” recalls Mr Narayanan, whose fledgling firm was then still trying to find its feet on a modest revenue of Rs 4 crore. His company needed to move fast, and focus on growth. It simply could not afford to lose valuable time and energy on income tax procedures and litigation. The tax official must have reckoned he had the firm cornered and Mr Narayanan would simply pay up.
But Mr Narayanan disappointed the official. “I said I want to build the company on certain values. So, I told him you are not the final authority. We will appeal and see, but we won’t pay,” says Mr Narayanan. The officer disallowed the expenses and slapped a tax demand, but Career Launcher accepted the challenge. It won an 18-month long legal battle and got the decision reversed. Mr Narayanan believes the incident sent a strong message to everybody concerned: The taxmen knew this company can’t be bullied and the employees knew that there was no place for unethical practices here. Today, Career Launcher has an annual revenue of Rs 70 crore, operates from 130 locations and serves 50,000 students each year. Honesty has not dragged down the company’s growth, but has reinforced it.
The biggest question before most start-up entrepreneurs in India is how to tackle corruption in the government and a propensity for unethical behaviour among, at least, a section of employees, vendors, customers, competitors and everybody else. Unfortunately, many business leaders choose the easier answer. They factor in some amount of cheating at all levels and start playing by the system. They vigorously take part in cutting corners — be it in taxes, product quality, paying out liabilities or in their treatment of employees. They bribe their way through. They cheat to avoid being cheated. In the short term, these practices save money and thus look attractive. With everybody else also in the game, it becomes easy to justify one’s poor conduct by blaming it on the society.
In the long term, however, this race to the bottom hits back with a cancerous force. Employees figure out that the boss has lost the moral high-ground and start imitating the entrepreneur in their own dealings with the company. It may start as an inflated expense bill or a quickly stolen long-distance call, but the cheating spreads in scope and reach. Customers, government officials, shareholders and all other stakeholders imbibe the poisonous spirit and resort to I-Squeal-Before-You-Do game. Exploitation becomes the norm and the company self-destructs. Some victims end in the start-up stage, while others hold on longer and go bust only after they become Enrons or Arthur Andersons. But fail they do.
“It may be the tougher path, the road less travelled, but good ethics is an important element for long-term survival,” says Satish Doshi, founder-chairman of Executive Recruiters Association, and a fellow of the Computer Society of India. “What it means to an organisation is that you don’t need to look from behind the shoulders of people to see if there are any vested interests at play. Ethics build a trust-based environment.”
To build this ecosystem within one’s company, an entrepreneur must start by formally writing down a code of conduct for all employees and be the first to start practising it, say experts. Such a code of conduct must be fully aligned with the personal value system of the entrepreneur and it helps if one is honest to start with. “It is painful to see entrepreneurs say they are in business to make money. I tell them, first define what is money,” says MS Pillai, founder of Sadhana Centre for Management and Leadership Development, and a member of The Indus Entrepreneurs. “Is it just the currency notes or is it the wealth of goodwill and respect you build for your company?”
Mr Pillai says an entrepreneur must check if he or she has the “inner stamina” to sustain an ethical business and if not, should stay out of business. Great companies have built this strength among their entire workforce and do not tolerate any violation. Mr Pillai cited the example of a fast-moving consumer goods company, one of the largest in India, which sacked a general manager for accepting a forbidden Diwali gift. A reputed vehicle maker sacked two top performers for touching women colleagues in an indecent way at a cocktail party. Both these decisions came less than 24 hours of the violations. “The message to the employees was loud and clear. There will be no compromise if certain things take place,” recalls Mr Pillai.
Just like financial, marketing or production plans are written down, a company needs to write down its ethical policy too, say business mentors. This will communicate the code of conduct across the organisation, offer an objective frame of reference and stipulate proper responses for specific situations that arise. For this reason, a code of conduct is a highly customised document for each company, reflecting its own peculiar needs.
The right time for a start-up to institute of a code of conduct is before the first employee is hired, say human resource veterans. It may be easy for an owner to hire like-minded people when the company is small, but the personalised approach won’t work once staffing reaches double-digits. Thus, a strong human resource head must be employed as the company’s gatekeeper to avoid bringing in dissonant attitudes in the first place. Wipro is a good example of a company that follows this approach. It puts candidates through a test of honesty by verifying their testimonials. It not only denies employment to those who had forged documents, but also hands them over to the police. Nowadays, candidates with less than proper documents fear walking into Wipro’s campus.
Mr Doshi says a successful code of conduct starts with a top-down approach. It all starts with the actions of the entrepreneur. The set of all choices that the leader makes, eventually becomes the code and culture of the company. However, it should not stay top-down for ever. There should also be a feedback system that lets employees shape the nuances of the code and take the firm’s objectives further. “The code has to evolve but you won’t evolve it all the time. We at Career Launcher evolved our code until we were 40 people. When we arrived at that number we got down to broadcasting and implementing it. Of course, we are alive to feedback that will make the code better suited to our company,” says Mr Narayanan. The ethical code is a generic guide based on values and principles, but a code of conduct is the specific dos and don’ts of corporate behaviour. So, it helps to start by defining the business’ value system and then get down to finding answers for specific situations that may arise. Mr Pillai defines business ethics as management by truth, transparency, partnership and collaboration. Mr Narayanan says the value system of his firm is founded on five pillars: risk-taking, openness, ownership, honesty and commitment, and innovation.
The biggest danger for a start-up, or for any company for that matter, is to have a code of conduct, but not implement it vigorously. There are many companies that have one set of rules on paper and another set of rules in practice. Again, this deception may prove profitable in the short term but over time, all those coming into contact with the firm will realise its true worth and pay it back in its own coin. As big companies realised that markets reward companies seen as ethical, they have unleashed a marketing propaganda to manage their image along ethical lines, without changing their core business practices. The fashionable concept of Corporate Social Responsibility, or CSR, as spin doctors call it, comes in handy. What started as a theme for good corporate behaviour that must start with reforming core business processes, has now become the buzzword for donations, tree-planting, sponsorships and other trivial exercises. Genuine CSR must begin by making benign products and selling them ethically. Hence, a code of conduct is not merely a smart marketing tool, but a deeper value that guarantees all stakeholders a predictable, fair and uncompromising behaviour pattern. The reward for the entrepreneur is a good night’s sleep.
Author: Srinivasan S. is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".