A study titled, The State of Moral Leadership in Business 2020, by The How Institute for Society, observed that moral leadership is in short supply, even though people believe that it enhances individual and business performance. The report discovered that only 8% of CEOs and 7% of managers consistently demonstrate moral leadership behaviour.

The recent reports of indiscretion in the Indian startup ecosystem and the report by a research firm that has bet against one of the largest Indian businesses bring an age-old question about the role of moral leadership and regulation to the fore. We argue that moral reasoning, along with principle-based regulation is the way forward.

Weak Social Institutions cause Regulation and Market Institutions to Fail

We have often been let down by people who are expected to protect us from ourselves – people who are expected to provide guidelines or be the role models for socially conscious behaviour.

Failure of Market and Governance Institutions

Many organizations get away with questionable practices, as auditors, rating firms, members of the board or compliance officers are either sleeping at the wheel or are closing their eyes to various acts of indiscretion. Even the self-designed code of conduct, disclosure norms and incentive structures are not helping businesses avoid scandals. For example, cookie-jar accounting, round-trip transactions, ever-greening of receivables or loans, mis-selling, supply chain-bullying, etc. are known practices among even the largest firms in the world.

Failure of Legal and Regulatory System

Our legal and regulatory system allows loopholes and protracted litigation to let people go scot-free. People can get away with paying hefty fines without admission of guilt, with some large businesses making it a habit.

One of the reasons for the failure of our regulation and market institutions is the failure of our social institutions, which has created an environment of distrust, where the politicians, business, and mass-media professions are among the least trusted professions.

Are misplaced Growth Narratives responsible for professional indiscretion?

In a recent discussion, a successful entrepreneur stated that the examples of accounting and financial indiscretion (not described as fraud till they are legally identified as so) among many new generation entrepreneurs are result of unrealistic goals that they and their investors set for themselves.

He argues that India’s potential for growth is limited and, therefore, it is not possible to grow at the rates the venture capital and private equity investors expect the businesses to grow for justifying the valuation multiples. India’s potential for growth, at this stage, is indeed low, as we have been destroying our ability to grow for many years now.

However, the question that we must ask is:

Who is responsible for selling this false narrative of unbounded potential and why do many entrepreneurs and investors fall for this narrative?

Misplaced Growth Narratives: How do they gain credibility and why do they lead to indiscretion?

Our regulators are part of the problem. A few years’ ago, the Indian regulator made it compulsory for new vehicle owners to buy multi-year 3rd party insurance, as the renewal rates were low. Such a policy creates immediate demand, which is sustainable only if the consumers are can afford the cost and renew the policy after the mandatory period.

Mis-Selling Financial Products and Violating Basic Principles of Finance

Similarly, we have a situation where a bank mis-sells Additional Tier I (AT1) Bonds, and the regulator goes against the basic principles of finance by allowing them to be written-off ahead of equity. In a market-based system, the banking sector’s growth depends on the amount of shareholders’ equity and not on the losses the regulators can make another class of investor bear. It creates moral hazard.

Regulatory Forbearance and Moral Hazard

The finance regulators have also resorted to using regulatory forbearance as a policy instrument to create a false sense of stability, resulting in the market players believing that they will always be saved by their central bank. During the late 80s, it was known as the “Greenspan Put. It is referred to as the “central bank put”, as all central banks are resorting to these policies to help banks make their balance sheet look better than they are.

Misplaced Narratives: Destroy Trust and inflict large Individual and Social Costs

Some of these narratives involve promising performance levels that are possible to achieve only under near-perfect conditions. However, an innovation-led business deals with uncertain or indeterminate situations and, therefore, has a very high probability of failure. Entrepreneurs and investors who buy into these misplaced narratives and/or sell them to others inflict unreasonable costs, through lay-offs and shutting down of operations, to people who trust them.

Anyone who sells misplaced narratives to unsuspecting people becomes morally responsible for costs his or her choices inflict on people.

‘Misplaced Growth Narratives’ are not the Only Problem

Misplaced growth narratives are just one of the possible temptations that have caused indiscretion. Conscious, but misplaced, leadership choices are an equally important source of problem.

Unsolicited Calls for making ‘Compelling Offers’ to Potential Customers

Customer privacy is another issue that many businesses are struggling to deal with.

Recently, the CEO of a large NBFC had to defend his company’s choices by saying that the people who don’t like receiving unsolicited sales calls can choose to register with a DND database. But if they do, they must not come back asking for a loan, resulting in serious social media backlash.

A question that we must ask is:

Why does one need to register with company specific or an independent DND database (even if it is run by the government) when he or she has not given an explicit consent to be part of any database?

Fastag: Customer does not get the Data that Bank expects it to use

Yet another example is the recent change in a bank’s interaction process with its customers. The bank’s web portal requires the customer to provide a transaction reference number in case of an overcharge on its Fastag service, but the bank’s SMS or email has stopped providing that reference number.

Why does a business need to make it difficult for a customer to register a request for resolving an overcharge?

Supply-Chain Bullying

An age-old business practice that neither the regulator nor the company’s code of conduct has been able to curtail is the supply chain bullying where a large buyer requires the smaller supplier to accept long payment period (60-90-120 days) and still delays the payment beyond the agreed to period – all in the name of better cash flow management, but without stopping to ask –

Who can raise finance with ease and at a lower cost – big or the small firm?

The socially conscious business-leaders build purpose-led organisations and work together with regulators to create and sustain a principle-based regulatory system that strives to deliver well-defined outcomes for consumers, businesses, and the society. They do not treat their existing and potential customers and partners with disdain.

A Purpose-led Business with Moral Leadership has a higher Probability of Success

Based on their work with some of the largest global corporations, Profs Sumantra Ghoshal and Christopher Bartlett argued that large organisations are “important repositories of resources and knowledge” and, therefore, are expected to “shoulder a huge responsibility for generating wealth by continuously improving their productivity and competitiveness”.

Profs Ghosal and Bartlett see business leaders as “society’s principal agents of social change” and being responsible for creating a “portfolio of entrepreneurial, competence building and renewal processes.”

As mentioned in the beginning, people also believe that moral leadership enhances individual and business performance. In most situations, if not all, people are willing to make personal sacrifices for helping create increased collective benefits. Killen and Dahl in their paper titled, Moral Reasoning Enables Developmental and Societal Change, state,

“Over the course of development, reasoning and judgments about resource distribution and other moral issues become increasingly sophisticated with individuals not only evaluating acts as right or wrong but taking the extra step to rectify inequalities, protest unfair norms, and resist stereotypic expectations about others.”

Summary

An entrepreneur who embarks on the path of building an innovation-led business deals with uncertainty or with ideas that have low probability of success. We can raise the probability of success by bringing together people and risk-capital investors who share our purpose.

In this journey, we will be tempted to side-step regulation or even trade-off the values that are dear to us – all with the assumption that it is for the greater good. If we test our assumption by reasoning with our own conscience using the universal principles of well-being, fairness, equality, and justice, we eliminate the possibility of errors of judgement and improve the probability of success.