How to avoid fatal mistakes when facing ethical dilemmas
Dean of the UPF Barcelona School of Management and Professor of Accounting and Financial Economics at Universitat Pompeu Fabra
Unethical behaviour can ruin your business and your own professional career.
The best business is to be honest
"The simple act of an ordinary brave man is not to participate in lies, Not to support false actions. Let that come into the world, let it even reign supreme, Only not through me"
Ethics helps us discern what is correct from what is not; and it helps us act consistently according to our own values and the company's values. These values tend to include honesty, keeping ones word, loyalty, objectivity, respecting others, transparency and searching for excellence among others. Unfortunately, ethical behaviours are not always abundant. To quote Mark Twain:
"Always do right; this will gratify some people and astonish the rest".
In this article we talk about the concept of ethical dilemma, how to act when facing one of these dilemmas and we also recall what could happen when acting unethically.
As I wrote a little while ago in Via Empresa, sometimes we could face situations where we have doubts on how we should act. This is what is known as an ethical dilemma, which is when a person has to decide among alternatives affecting his values.
Let's look at an example of an ethical dilemma. It is the case of a company facing liquidity problems and needs urgently a loan to pay the employees' salaries. The dilemma lies in the fact that if the company informs the bank about its real situation, it will not receive the loan, so it will not be able to pay its employees. But if the company lies to the bank manipulating its accounts, it will be able to pay its employees. However, this course of action might generate false information and become an accounting fraud. When an accounting fraud is discovered, it can lead to very negative consequences. According to Karpoff et al (2008) after an accounting fraud is discovered 91% of managers are fired, 87% of them are sued and fined and 14% of them end up in prison.
When management acts unethically, it could also damage the company. For instance, we could mention the Mike Jeffries case, CEO of the US company Abercrombie and Fitch who in 2014 made provocative statements such as:
"We do not make clothing for fat women"
Because of statements of this kind, the company was questioned and its stock valuation went from 80 Dollars per share to 20 dollars per share. Little after that, the CEO was fired.
How to make a good decision when facing an ethical dilemma
To be able to decide in these types of situations, it might be useful to consider the following process based on answering the questions below:
- Do I feel comfortable with what I am thinking of doing? If I feel uncomfortable with a specific behavior, it is better not to do it because it is likely against our values
- What I am thinking of doing: Is it Legal? If it is not, then it is clear that you can't act breaching the law.
- If we think it is legal then we could ask ourselves: What would our parents, partner, family say? If they would not see that clearly then it is better not to act in a way that could be reprehensible for them.
- If we think that it is legal and that the people close to us would approve our choice then we could ask ourselves: How would I feel if the media or the social networks reported about my action? It is better not to act if I would feel uncomfortable if my action became of public domain.
In case that the answer to all these questions is positive, we are facing an alternative which is legal, coherent with our values and the values of our closest people. Therefore, we can proceed without any problem. Otherwise, we are dealing with an inconvenient alternative that would generate discomfort to us and the people around us. Also, if we doubt, better not to take risks. As Shakespeare said: "Honesty is the best policy. If I lose honour I lose myself".
Good practices in ethical issues are needed not only to make us feel comfortable with ourselves, our company and the people related to it (employees, shareholders, customers, etc…), but they are also profitable according to many studies. For example, we could mention the study of The Economist Intelligence Unit (2008) that shows that good practices lead to a 10% increase in customers' satisfaction, between 16% and 20% increase in sales and more than 13% in cost reduction. Therefore, the best business is to be honest.
Amat, O. (2019): Detecting accounting fraud before it's too late, Wiley, New York.
Galán, A. y Cadez , S. (2017): Corporate social responsibility and financial performance relationship: a review of measurement approaches, Economic Research Ekonomska Istraživanja, 30:1.
Karpoff, J., Lee, S. Y Martin, g. (2008): The consequences to managers of financial misrepresentation, Journal of Financial Economics, num. 88.
The Economist Intelligence Unit (2008): Corporate citizenship: Profiting from a sustainable business.