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Integrating Ethics Into The Core Of Your Startups: Why And How

When I came to the U.S. in 1980, I was young and naïve. I used to think that corruption and ethical lapses were just a third-world ill. Eventually, I became a tech CEO and learned the harsh realities of American business. Yes, standards are much higher, and breaches are punished, but the temptations are just the same here as they are in any other country. Ethical lapses (which are a form of corruption) are quite common.  You watch stories about these on TV every other day and read about them on TechCrunch.  It was the ethical lapses of our financial institutions that threw our economy into a tailspin, and for which we are paying the price, after all.

It is best to be aware of the temptations and to prevent the lapses from occurring. As Enron, Bernie Madoff, and Lehman Brothers have shown, it’s a slippery slope. Once you start compromising your values for short-term gains, there is no turning back. Business ethics are not something you need to start worrying about when your company reaches a certain size; they need to be sewn into the fabric of your startup from the get-go. The lessons are the same for tech businesses as they are for investment banks and for third-world economies.

Harvard Business School professor Michael Beer researched the difference between companies that perform at high levels for extended periods and those that implode when they reach a certain size. When analyzing the spectacular failures in the recent financial meltdown, he found that:

• Of the original Forbes 100 (named in 1917), 61 had ceased to exist by 1987.  Of the remaining 39, only 18 stayed in the top 100, and their return during the period 1917 to 1987 was 20% less than that of the overall market.

• Of companies in the original Standard & Poor’s 500-stock index of 1957, only 74 remained in 1997; of these, only 12 outperformed the S&P 500 in the period 1957 to 1998.

• The average CEO tenure in the U.S. is 4.2 years, less than half the 10.5-year average in 1990.

Beer posited three core reasons for the failure of so many Wall Street firms in the fall of 2008: the firms lacked a higher purpose (in other words, they were focused on short-term gains, profits, and bonuses); they lacked a clear strategy; and they mismanaged their risk. Companies like Charles Schwab and US Bancorp were able to avoid the fallout by having a laser-like focus on customer service and on honesty and transparency. Neither company touched the subprime mortgage securitization market, because they saw it as risky and simply not the kind of business that served the company’s long-term interests.

Even outside Wall Street, companies like Cisco Systems, Southwest Airlines, and Costco Wholesale, with the strongest sense of higher purpose, achieved the greatest success. Take Costco. Wall Street analysts have long chastised Costco’s management for paying high wages and keeping employees around for a long time, because this results in higher benefits costs. But the company’s CEO, Jim Sinegal, lives by his belief that keeping good employees is strategic for Costco’s long-term success and growth. The company’s per-employee sales are considerably higher than those of key rivals such as Target and Wal-Mart; customer service at the stores is phenomenal and fast; and Costco continues to expand, both in number of warehouses and in products and services for business and consumer customers. The culture of the company flows downward from Sinegal and his focus on employees and, by extension, to customers.

One of the problems that Beer found with the failed banks was that their employees lacked the ability to “speak truth to power”. Employees felt intimidated by superiors; the institutions’ internal voice of conscience and purpose was silenced by a maniacal focus on short-term profits and whatever scheme would bring them in. The silencing of employees who sought to challenge strategy and risk-management practices likely also undermined the banks’ moral authority and emboldened those who already felt inclined to do the wrong thing. With a muted internal voice, these organizations lacked a moral compass. As a result, they drove off a cliff with astonishing speed.

The same things happen in Silicon Valley companies.  I asked management guru — and head of the CEO Institute of Yale School of Management — Jeff Sonnenfeld for his advice on how startups can sow the seeds for building a Cisco or Costco. Here is Jeff’s advice:

1)  Create a culture of openness and welcome dissent – Internal constructive critics are your best friends — too often, founders are blinded by their own enthusiasm for their creative vision and then are surrounded by sycophants, kissing up. Founders who fall out of touch rapidly lose their ethical bearings. At Intel, founder Robert Noyce and Gordon Moore did not look for sycophantic followers in selecting the brilliant, contentious, but relentlessly honest Andy Grove as their colleague and successor. Similarly, Craig Barrett and Paul Otellini have consistently fought for different points of view internally — without undermining the enterprise, and always reinforcing Intel’s self-critical core ethic.

2)  Lead by example.  The authenticity of the leader’s character is essential — if colleagues don’t believe you, they will not take needed risks on your behalf — such as training subordinates to be able to do their own jobs.  Startups are often defined by the hip clichés of VC firms, adoring press, and HR consultants — but the startups don’t really practice what they preach.

3)  Learn from immediate peers or distant models. Too often, founders atrophy because they believe that the unique quality of their business or technological mission means that they too are truly unique in leadership values.  Steve Jobs has patterned himself after Polaroid founder Ed Land — and tried to learn from Land’s strengths and weaknesses.  Henry Ford regretfully once claimed “History is bunk” but in reality revered Thomas Edison.  Michael Dell put legendary tech entrepreneur (Teledyne) and educator Dr. George Kozmetsky on his board right from the start to learn from this brilliant then septuagenarian.

4)  Recognize your own fallibility as a leader, know your limits, and beware of the myth of immortality.  Entrepreneurs often are horrified at the thought of leadership succession. The founders of great firms such as Google, Cisco, Amgen, and Microsoft have known that they would need to prepare for a day when they no longer could be the lone day-to-day internal boss, primary external ambassador, and symbolic cultural icon. The founder of the original (pre-Starbucks) coffee house chain Chock-Full-o-Nuts started his first café on Broadway 43rd Street in 1923 and was a great national success.  Sadly, sixty years later, as a dying man who had been flat on his back for two years at Massachusetts General Hospital in Boston, he still clung to the job of leader of the enterprise, his full-time physician serving as acting president.

5)  Remember that institutional character — like a liquid cupped in your hand — is fragile; easily lost; and hard, if not impossible, to regain. Egomaniacal moves, personal grandiosity, greed, and deception create impressions that are hard to erase.  Whole Foods founder, John Mackey, sabotaged the integrity of his own exalted brand, damaging the company’s internal pride and customer admiration far more badly than any competitor could have, due to his self-inflating and his misleading “anonymous” blogging, hiding his identity through an anagram of his wife’s name, “rehodab.”

I’ll add another very important point: Establish an independent board. Venture firms often demand a majority of board seats as a condition for their investments. Conflicts invariably arise. The board begins to serve the needs of VCs and management, rather than of the company itself, which loses the independent voice to warn it not to do the wrong things. The inconvenient truth is that all board members have a fiduciary duty to act in the interests of the company, and not in their own interests. Board members must not engage in transactions in which they or their partners stand to gain. They are legally required to avoid these conflicts of interest.

Finally, remember that in business, you have to make tough choices at every juncture. Though business decisions usually have clear consequences and outcomes, ethical decisions are always hard. Making the right choice doesn’t always bring success, but ethical lapses almost always lead to failure. No matter what the consequence, doing what’s ethical and right is always the better long-term strategy.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

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Roundup: DOJ approves Oracle-Sun deal, Gamestop falls short, Twitter’s charming memory loss

The Department of Justice cleared Oracle’s purchase of Sun — Larry Ellison’s $7.4 billion acquisition of the Valley’s rockstar server maker and owner of the rights to Java software, is a transaction on the scale of Yahoo’s ad sales deal with Microsoft. European antitrust regulators are still evaluating whether or not to launch an investigation. The Wall Street Journal reports that an issue about the way Sun licenses rights to Java had held up approval. What’s in it for you? Oracle will be able to sell integrated systems that bundle its database software with Sun’s hardware and widely-used Java software.

GameStop profits miss the mark – The world’s largest videogame retailer reported second quarter net income of $38.7 million, down from $57.2 million last year. The Grapevine, Texas-based firm’s CEO claimed on a conference call that a lack of compelling new releases was part of the problem. Bloomberg has the long version.

Lehman Brothers, the movie — The BBC is producing a TV movie about the collapse of the financial services firm scheduled for the anniversary of last year’s September 15th bankruptcy filing, the largest bankruptcy in U.S. history. The Brits see the story differently, since Barclays picked up the firm’s North American investment banking and trading divisions. The New York Times reports on who’ll play who.

Xbox 360 failure rate is above 50 percent, survey says — The Red Ring of Death is all too familiar to owners of Microsoft’s game console. In a survey of 5,000+ owners, 52.4% reported having experienced either the Red Ring of Death, the E74 error, or another hardware failure. Sony’s Yellow Light of Death only hits 10.3% of owners. Nintendo owners lack a clever name for when their stuff breaks.

Twitter founder apparently forgot that they tried to trademark “tweet” once already — Why do we love Twitter? Partly because the management team behind the inexplicably super-popular messaging service exudes the messy-haired charm of a couple of college kids who haven’t slept because, you know, they got sucked into working on this Twitter thing. In today’s episode, computer scientist Sam Johnston points out that Twitter founder Biz Stone claimed the company has applied to trademark the word “tweet” because “it is clearly attached to Twitter from a brand perspective.” Johnston links to US Patent and Trademark Office records that show the Twitter team already applied to trademark the word in April. Their application, being for the word “tweet,” was turned down the same day.

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Kontera Raises $15.5M For Annoying In-Text Advertising Technology

In-text advertising technology provider Kontera has raised $15.5 million from its current investors Sequoia Capital, Carmel Ventures and Tenaya Capital, the former venture capital arm of Lehman Brothers. This is the second Israeli startup to announce multi-million VC rounds today after 5min informed the public about its $7.5 million Series B round, and once again first reported by business news site Globes.

Kontera provides publishers with real-time semantic analysis technology that can enhance content and other information to dynamically link terms that most accurately represent and predict user-intent and engagement. This is known as in-text advertising, and you might recognize the double-underlined words on some sites that make display ads pop up when you hover your mouse over them. Other market players include Vibrant and Infolinks.

Personally, I find this type of contextual advertising annoying from a reader perspective, and I don’t think I’ve ever clicked on any ads launched by in-text advertisements, unless it was by accident. But I keep hearing from publishers and advertisers who have implemented campaigns using in-text advertising that it’s actually a highly effective way of pay-per-click promotion, and you wouldn’t be the first to tell they were skeptical at first but lauding the technology afterwards.

With the fresh injection, the total amount of capital pumped into the company has now reached $32.8 million. The $10.3 million Series B round now dates back nearly two years.

Crunch Network: CrunchGear drool over the sexiest new gadgets and hardware.

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