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Ethical Leadership

As the leader and steward of your organisation, it will be incumbent on you to display the highest levels of ethical leadership and ensure your leadership team and every employee does the same.

Lapses in ethics have cost companies billions of dollars over the past few decades, and in some cases, like Barings Bank, led to the downfall of the company.

Barings was the oldest merchant bank in London until its collapse in 1995. One of the bank’s employees, Nick Leeson lost US$1.3 billion speculating primarily on futures contracts. Because of the absence of oversight and a lack of ethical values, Leeson was able to make seemingly small gambles in the futures arbitrage market at Barings Futures Singapore and cover for his shortfalls by reporting these losses as gains to Barings in London by corrupting the accounts.

He was able to get away with this because Leeson doubled as both the floor manager for Barings' trading on the Singapore International Monetary Exchange (SIMEX), and head of settlement operations. The positions would normally have been held by two different employees. In effect, Leeson was able to operate with no supervision from London.

After the collapse, several observers, including Leeson himself, placed much of the blame on the bank's deficient internal auditing and risk management practices. In his book, Rogue Trader, Leeson states:

People at the London end of Barings were all so know-all that nobody dared ask a stupid question in case they looked silly in front of everyone else.

An internal memo dated in 1993 had warned the London headquarters about allowing Leeson to be both trader and settlement officer: "We are in danger of setting up a system that will prove disastrous." Nothing was done.
In January 1995 SIMEX expressed concern to the bank about Leeson’s dealings, but to no avail as the bank still wired him $1 billon to continue his trading. A report by the Singapore authorities into the collapse regards with disbelief the protestations by Leeson's superiors, all of who were forced to resign, that they knew nothing of Leeson’s corrupt activities.  The problem at Barings Bank was a problem of culture. And the problem began at the top.

David Gebler, a thought-leader in business ethics, states unequivocally that:

Culture is the leading risk factor for compromising integrity and compliance in companies today. Even enlightened leaders may not be aware of how their ethical leadership is being adopted and practiced in the field. Aspects of the organisation’s culture and sub-cultures may be operating in direct contradiction to the principles articulated by the leader.

To help leaders identify culture-based risks, Gebler, together with the Barrett Values Centre have developed a Culture Risk Assessment. The assessment identifies potential areas of ethical weakness by focusing on values, particularly limiting values that could cause or eventually lead to ethical lapses and financial disaster.

Barings Bank is clearly a case where a lack of ethics was responsible for a huge financial loss. But is the converse true: Does being ethical pay?

A Wall Street Journal article by researchers Remi Trudel and June Cotte suggests that it does. They found that consumers were willing to pay a slight premium for ethically made goods, and would only buy unethically made goods at a steep discount. Furthermore, they found that consumer attitudes played a large part in shaping these results. People with high standards for corporate behaviour rewarded ethical companies and punished unethical ones.

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TNLP References

Chapter 21: External Cohesion in Organisations