Personal Ethics & the Entrepreneur Chapter 9 Dowling BA 560 Fall Term 2006

Personal Ethics & The Entrepreneur What is ethical and what is not often is not obvious. What is ethical and what is not often is not obvious. Situations regarding ethical issues are often ambiguous. Situations regarding ethical issues are often ambiguous.

Personal Ethics & The Entrepreneur Ethical behavior is at the core of long-term success, because it provides the glue that binds enduring successful business and personal relationships together. Ethical behavior is at the core of long-term success, because it provides the glue that binds enduring successful business and personal relationships together.

Entrepreneurial Ethics Ethics: the guidelines or rules of conduct we aim to live by; a system or set of moral principles. Most business decisions involve some degree of ethical judgement. The ethical standards of a new venture founder or a business are judged by actions, not by pious statements of intent.

Why do normally honest, intelligent, compassionate business founders and entrepreneurial managers act in unethical ways that are dishonest, wrongheaded, and often illegal? Why do normally honest, intelligent, compassionate business founders and entrepreneurial managers act in unethical ways that are dishonest, wrongheaded, and often illegal? Unethical Behavior

Lessons from the Sadhu “Real ethical dilemmas are ambiguous, and many of us are likely to hike right through them, unaware that they exist. When, usually after the fact, someone makes an issue of one, we tend to resent his or her bringing it up. Often, when the full import of what we have done (or not done) hits us, we dig into a defensive position from which it is very difficult to emerge. In rare circumstances, we may contemplate what we have done …” From The Parable of the Sadhu “Real ethical dilemmas are ambiguous, and many of us are likely to hike right through them, unaware that they exist. When, usually after the fact, someone makes an issue of one, we tend to resent his or her bringing it up. Often, when the full import of what we have done (or not done) hits us, we dig into a defensive position from which it is very difficult to emerge. In rare circumstances, we may contemplate what we have done …” From The Parable of the Sadhu

A belief that the activity is within reasonable ethical and legal limits - that is, that it is not “really” unethical or illegal. A belief that the activity is within reasonable ethical and legal limits - that is, that it is not “really” unethical or illegal. –Where is the line between profit maximization and unethical/illegal conduct? –Founders/entrepreneurial managers sometimes leave the impression that there are things that they don’t want to know about. Rationalization #1

The difference between becoming a success and becoming a statistic lies in knowing where the ethical line is. Successful venture founders know that there is a difference between taking risks, and knowing which risks to take. The difference between becoming a success and becoming a statistic lies in knowing where the ethical line is. Successful venture founders know that there is a difference between taking risks, and knowing which risks to take. Maximizing profits is a new venture’s second priority, not its first. The first is ensuring its survival. Maximizing profits is a new venture’s second priority, not its first. The first is ensuring its survival. Rationalization #1

The smartest venture managers know that the best answer to the question, “How far is too far?” is don’t try to find out !!! The smartest venture managers know that the best answer to the question, “How far is too far?” is don’t try to find out !!! Rationalization #1

A belief that the activity is in the individual’s or venture’s best interests - that the individual would somehow be expected to undertake the activity. A belief that the activity is in the individual’s or venture’s best interests - that the individual would somehow be expected to undertake the activity. –“All new ventures need to do whatever is expedient to survive.” –“I have the right to do this, after all, I am the founder of this venture.” Rationalization #2

This ethical dilemma nearly always results from a limited, narrow-minded view of what those interests (individual or venture) are. The real interests of the venture (and its founders) are served by ethical, honest conduct in the first place. This ethical dilemma nearly always results from a limited, narrow-minded view of what those interests (individual or venture) are. The real interests of the venture (and its founders) are served by ethical, honest conduct in the first place. Venture managers need to be concerned with more than just results, they need to look hard at how these results are obtained. Venture managers need to be concerned with more than just results, they need to look hard at how these results are obtained. Rationalization #2

A belief that the activity is “safe” because it will never be found out or publicized; the classic crime-and-punishment issue of discovery. A belief that the activity is “safe” because it will never be found out or publicized; the classic crime-and-punishment issue of discovery. –Why do venture managers/employees believe that they won’t get caught? –What is the role of investors, professional advisors, and boards of advisors in guiding a venture’s ethical conduct? Rationalization #3

“Discovery” - the process in which a plaintiff’s attorneys can comb through a company’s records to look for incriminating evidence. “Discovery” - the process in which a plaintiff’s attorneys can comb through a company’s records to look for incriminating evidence. The most effective deterrent is to heighten the perceived probability of being caught in the first place. The most effective deterrent is to heighten the perceived probability of being caught in the first place. The point is to prevent misconduct, not just catch it. The point is to prevent misconduct, not just catch it. Rationalization #3

As the main deterrent to unethical behavior or illegal conduct is the perceived probability of detection, venture managers should announce any misconduct and how the individuals were punished (within legal HR limits). As the main deterrent to unethical behavior or illegal conduct is the perceived probability of detection, venture managers should announce any misconduct and how the individuals were punished (within legal HR limits). Rationalization #3

A belief that because the activity helps the venture, the venture (and its managers) will condone it, and even protect the person who engages in it. A belief that because the activity helps the venture, the venture (and its managers) will condone it, and even protect the person who engages in it. –How do founders/venture managers keep loyalty from going berserk? –How does a venture founder harness the passion to succeed short of unethical/illegal behavior? Rationalization #4

Venture founders have the right and the responsibility to exert a moral force within the business. Venture founders have the right and the responsibility to exert a moral force within the business. Venture founders/managers are responsible for clearly delineating between passion and loyalty, and actions that are unethical and illegal. This has to be done well in advance, ideally as part of the founding principles of the venture. Venture founders/managers are responsible for clearly delineating between passion and loyalty, and actions that are unethical and illegal. This has to be done well in advance, ideally as part of the founding principles of the venture. Rationalization #4

As this line can become obscured in the heat of the moment, the ethical line needs to be drawn well short of where reasonable men and women could even begin to wonder about the ethical and legal consequences of their actions. As this line can become obscured in the heat of the moment, the ethical line needs to be drawn well short of where reasonable men and women could even begin to wonder about the ethical and legal consequences of their actions. Rationalization #4

Believing that the activity is not “really” illegal or unethical. Believing that the activity is not “really” illegal or unethical. Believing it is in the individuals’ or new venture’s best interest. Believing it is in the individuals’ or new venture’s best interest. Believing that the activity or behavior will never be found out. Believing that the activity or behavior will never be found out. Believing that because it helps the ‘venture’, the company and its senior managers will condone it. Believing that because it helps the ‘venture’, the company and its senior managers will condone it. From: Why “Good” Managers Make Bad Ethical Choices From: Why “Good” Managers Make Bad Ethical Choices 4 Rationalizations Summary

Personal Ethics & The Entrepreneur Dilemmas of entrepreneurial management Promoter: Promoter: –Entrepreneurial euphoria –Impression management –Pragmatic vs. moral considerations

Personal Ethics & The Entrepreneur Dilemmas of entrepreneurial management Innovator: Innovator: –New types of ethical problems –Ethic of change

Personal Ethics & The Entrepreneur Dilemmas of entrepreneurial management Relationships: Relationships: –Conflicts of interest and roles –Transactional ethics –Guerilla tactics

Personal Ethics & The Entrepreneur Dilemmas of entrepreneurial management Other dilemmas: Other dilemmas: –Finders-keepers ethic –Conflict between personal values and business goals –Unsavory industry practices

Differences among partners’ notions of what constitutes ethical and unethical behavior can be a major source of ‘venture divorce’. Differences among partners’ notions of what constitutes ethical and unethical behavior can be a major source of ‘venture divorce’. Unfortunately, it usually takes the “test of battle” during the actual heat of start-up to discover the ‘real’ ethics of partners. Unfortunately, it usually takes the “test of battle” during the actual heat of start-up to discover the ‘real’ ethics of partners. Chapter 9 - Key Points

This argues to know whom you are dealing with! Try to work under ‘real world’ conditions with potential venture partners. Get reliable references from sources who have observed their performance in situations that would test their integrity. This argues to know whom you are dealing with! Try to work under ‘real world’ conditions with potential venture partners. Get reliable references from sources who have observed their performance in situations that would test their integrity. Investors and high quality prospects for the venture team will not settle for questionable standards of integrity and ethics. Investors and high quality prospects for the venture team will not settle for questionable standards of integrity and ethics. Chapter 9 - Key Points

Financial success at the expense of your integrity is not success at all. Financial success at the expense of your integrity is not success at all. Chapter 9 - Key Points

Exhibit 9.1

Exhibit 9.2

Exhibit 9.3

Exhibit 9.4