Ethical Leadership Dilemmas: Maintaining integrity under pressure

Episode #356 Ethical Leadership Dilemmas: Maintaining integrity under pressure

ASPIRATION v REALITY

One of the tensions you’re going to feel as a leader is the constant trade-off between high-minded aspirations and practical outcomes.

Along your journey to the pointy end of the corporate hierarchy, you’re no doubt going to be asked to do many things, some of which are going to challenge your ethical and moral limits.

When you’re faced with any sort of ethical dilemma, it’s important to remain grounded, and one way to do this is by acquiring a deep understanding of the driving forces behind corporate decisions.

If you manage to do this, it’s much more likely that you’ll make it to the end of your career with your integrity and self-respect intact… but if you get into the habit of compromising your principles and values just to protect your position in the company, you’re going to find it increasingly difficult to look yourself in the mirror.

This newsletter deals with how to maintain your perspective and ensure you remain consistent with your values, even though you may have to do some pretty difficult things.

I look at an article about the morality of layoffs from Harvard Business School’s Working Knowledge series. I highlight some of the inconsistencies between how people say they behave and how they actually behave in real life situations.

I also do a quick dive into the ins and outs of staff layoffs, and give you five mental frames that are going to take you beyond convenient rationalisation, keeping you firmly grounded in your own ethics.

HBS RESEARCH ON CORPORATE ACTIONS

At some point in your leadership career, it’s likely that you’ll have to execute restructures, cost-cutting, and layoffs.

As I was prepping this episode, I came across an article in Harvard Business School’s Working Knowledge series on the morality of layoffs. The article, How Investors Feel about Corporate Actions and Causes, is a snapshot of a research paper by HBS Professor Elisabeth Kempf, which was titled Corporate Actions as Moral Issues.

It was quite an attention-grabbing piece, because the author positioned it as definitive findings on how investors view corporate decisions. According to the article, investors believe that companies shouldn’t lay off workers to increase profits.

You probably know me well enough by now to know that I don’t take these things at face value, and my immediate reaction was, “Hmm, that doesn’t sound right. I wonder who was included in the sample set.”

It turns out the sample size was 2,047 people, which can be statistically significant, so that’s fine… and the group was controlled for different factors:

• Gender (50% female, 50% male);
• Political affiliation (31% Democrat, 26% Republican – a little bit light – 43% Independent); and
• Investors (60% of the respondents owned stocks, 40% didn’t).

The group was comprised of both investors and non-investors, but what it tells us is that at least 40% of the respondents answered hypothetical questions where they had absolutely no skin in the game. And, for the others, the fact that they held stocks may not have been front of mind when they were being asked questions that spoke directly to their moral purity.

In my mind, this holds about as much validity as the political views that my Uber driver was kind enough to share with me last night.

The big problem with the findings is that they don’t pass the reasonableness test – for me anyway. They simply don’t gel with everything that I’ve seen, heard, read and learned over the last 40 years.

I’m sure there are plenty of people in the general population who think that layoffs are immoral, most likely because they’ve either been laid off in the past or they see the risk of being laid off at some point in the future – but those people don’t drive a management team’s behaviour.

The focus on shareholder value is driven by large institutional investors… and private equity firms… and buy-side stock analysts.

The predictable conclusion that the survey reaches from this sample set of punters is that they would rather see people-friendly decisions over investor-friendly ones.

Okay, not particularly earth-shattering. But it’s hard to know what they would choose if they were actually faced with a dilemma in real life – if they had to choose between having less money in their own pocket to save a random group of strangers from being laid off.

You’d really have to see their decision at that point, to work out what they’d really do.

Just to round out the Cliff Notes on the research findings. The survey respondents were asked to rate 10 corporate actions based on their moral concerns. The 10 things were:

1. Cost-cutting;
2. Share buybacks;
3. Layoffs;
4. Outsourcing;
5. CEO pay increases;
6. Tax avoidance;
7. Fossil fuel use;
8. Diversity pullback;
9. Leverage; and
10. CEO duality (being the CEO and the chair at the same time).

More than 85% of the respondents said companies shouldn’t lay off workers. Pay increases for CEOs came in a close second.

Interestingly, the respondents seem to be much more at ease with trivialities like cost-cutting, share buybacks, and tax avoidance.

What does this tell you about the population sample? For me, a couple of things:

1. People are still keenly interested in the things that they think might directly affect them, like layoffs; and
2. They struggle to join the dots on key issues that are directly related, like CEO remuneration and share buybacks… or outsourcing and layoffs!

At a high level, it seems like the right questions may have been asked of the wrong people. If you were to pose the same questions to the people that CEOs and boards actually pay attention to (like institutional investors), I suspect you’d get very different results.

This is why I think the findings are interesting, but moot.

LESSONS FROM ESG INVESTING

Why do companies largely ignore rank and file investors? Because they instinctively know that these aren’t the critical stakeholders who affect their future.

There are plenty of examples to reinforce the fact that, although people might have moral aspirations, in practice, they will predictably do whatever best serves their own narrow self-interest.

Let me bring this principle to life with a data-rich example: energy companies are constantly surveying their customers on all sorts of things. You can just imagine how much data has been collected in the last decade or so on people’s green energy preferences.

In Australia, the overwhelming majority of people would prefer to have their electricity come from renewable sources. But, guess what? Very few people are willing to pay any more for it. It’s easy to say you want to reduce your carbon footprint, but will you put your money where your mouth is?

The influence of behavioural economics fundamentals can be seen in the broader trends of the Environmental / Social / Governance movement, or ESG as it’s widely known.

ESG has historically been associated with green investing. The theory was that the ESG-focused funds would provide capital investment only to businesses that operated under strong ethical frameworks.

They had a particularly keen focus on companies that were looking for investment into green energy projects.

The expectation was that, as more investors jumped on the ESG bandwagon, there would be a natural decline in the availability of funding for fossil fuel projects in oil, gas, and coal. Those companies would then find it harder to acquire funding and, even if they could, the cost of funds would be higher.

But what the ESG funds might have classified as ‘unethical investments’ are actually critical to a prosperous modern society. Demand for those commodities continues to grow unabated, especially in developing countries.

I went down the rabbit hole and read a bunch of articles in the Financial Times and the Wall Street Journal to try to understand the current state of ESG investing, and even I was surprised by what I found.

Institutional investors that were strongly committed just a couple of years ago are backing away from green investing. According to Bloomberg, ESG funds have dropped sharply:

• In 2024, only 100 ESG funds launched globally: this was down 90% from the almost 1,000 funds that launched in 2022;
• Major global banks increased fossil fuel financing by 23% in 2024 to the collective tune of $869 billion;
• BlackRock, JP Morgan, and State Street have all left climate coalitions that they were previously involved in; and
• BlackRock support for climate risk resolutions in companies fell from 72% in 2021, to 15% in 2022.

Why?

Because ESG funds underperformed mainstream funds from 2022 through 2024 by a significant margin. They were short on the fossil fuel stocks that led market growth.

This is not rocket science – some might call it “Supply and Demand 101”.

It’s also been amplified by policy and regulatory backlash – mainly in the US, but also across a previously green-committed Europe.

It’s just another piece of evidence supporting what we already know: companies act in accordance with their fiduciary obligations. There’s constant pressure on CEOs to seek higher returns for their investors rather than making ESG trade-offs.

And, something I found in my travels that did surprise me: both retail investors and young investors are completely disinterested in pursuing ESG at the expense of financial returns.

Surveys like the Harvard Business School paper tell us how people feel… They tell us how they’d like to be seen to behave… but that’s not how it actually plays out in the real world.

I’m a simple man and, at the risk of appearing a little cynical, I’d like to state a general rule of thumb that I see coming through, again and again and again, in the billions of words that have been written in an attempt to explain this human behaviour:

“I care deeply… but only if someone else is picking up the tab.”

ARE LAYOFFS REALLY UNETHICAL?

I can hear you thinking now, “Okay, Marty, this is fun and interesting, but what does it have to do with my leadership?“

Well, the lesson here is to not become too closely wed to the aspirational view of leadership that’s presented in mainstream channels.

There’s no shortage of articles, books, and research papers to tell you what that aspirational world should look like, but you are in the unenviable position of having to deal with the harsh realities of leading people in complex environments… and eventually, economics is going to win out, no matter how much we’d like world to work differently.

Kirby Smart, head coach of the Georgia Bulldogs football program said (and I paraphrase), “One of the biggest costs of leadership is that you’re going to have to make hard decisions that negatively affect people you care about.“

Of all the things you’re going to be asked to do, layoffs are probably the toughest:

• People lose their jobs, often through no fault of their own;
• They lose their source of income;
• Their identity takes a hammering;
• Their self-respect is depleted; and
• The uncertainty of the future creates stress and anxiety.

Knowing all of this, how do you successfully execute on the intent of management (which is what you’re actually paid to do), and still keep your ethics and values intact?

Like a lot of things in leadership, it’s about how you frame it in your own head. For example, when wrestling over whether or not to have a difficult conversation with one of your people, framing is critical.

If you frame the situation by thinking about the discomfort and risk that it presents to you personally, you’re likely to come up with plenty of rationalisations as to why you shouldn’t have that conversation.

But if you frame it by thinking about the obligation that you have to the other person – to give them the opportunity to learn, and thrive, and grow – well, you’re not going to hesitate to step into that conversation.

How would you frame a situation where you have to execute a round of layoffs in your team?

More often than not, it’s about the greater good.

Most companies don’t take these decisions lightly. If they’re struggling to perform in comparison to their peers, they need to find a way to remain competitive… especially public companies, whose investors can easily desert them in favour of one that they think provides better long-term returns.

Layoffs are an unfortunate but essential tool in the management toolbox. Sometimes the only way to save the whole, and to keep it in the zone of profitable growth is to make tough decisions that affect a smaller percentage of the workforce… which is why you have to frame layoffs in your own mind as a necessary intervention to ensure the ongoing prosperity of the vast majority of the people who remain.

Don’t get me wrong, we see plenty of bad behaviour here. Tech companies in particular spent like drunken sailors to acquire talent over the last 5 to 10 years because they had so much free cash flow.

I can only imagine these companies weren’t particularly well run, but the market hype and the intrinsic greed made that seem okay.

But as soon as things tightened up, the tech titans implemented massive layoffs, seemingly with very little damage to their productivity and performance. These situations are outliers, though.

I’m going to go into a personal example of this shortly, but you can see how you might apply an ethical and moral frame to layoffs.

You’re trying to achieve the greatest good for the greatest number of people. It’s utilitarian philosophy and it’s been around for centuries. It’s not perfect, but it’s the most practical frame in a sea of aspirational theories.

5 FRAMES TO HELP YOU EXECUTE CORPORATE ACTIONS ETHICALLY

Maintaining your integrity and mental state requires a pragmatic mindset and a fundamental belief in a few of life’s inalienable truths.

Here’s my checklist of five frames, which you can apply to any corporate actions that might present you with an ethical or moral dilemma:

1. Have the courage to fight for what’s right.

One of the most important things in retaining your personal integrity is to speak out against anything that goes against your values, and this includes anything you see as unethical or immoral, or in any way contrary to the best interest of the company.

This is not easy, because it often pits you against powerful people. But I never regretted leading my corporate career by this rule. At one stage, the head of HR in a company that I worked for labeled me as having “behavioral issues”, because I wouldn’t just quietly go along with things that I didn’t believe were right.

This can be expensive – trust me! – but it was also probably the key ingredient that enabled me to look myself in the mirror every day.

You can’t change everything, but you can certainly choose to fight the battles that you believe are going to make a difference.

2. Remove self-interest from the equation.

This is really an extension of the first frame. We all know deep down, if we are operating in the best interest of the company or just our own best interests.

You’ll always feel better if you choose to do what’s right for the company and the team… and your people see this. Even under the pressure of hard choices, they’ll respect that you are doing what’s best for the business and not just what’s best for you.

3. It’s their path too.

Everything happens for a reason. I learnt this critical lesson for myself over many years, and now I apply that same frame to others.

Everyone has their path to walk, and there’s a reason why all of us are presented with difficult circumstances that we’re forced to navigate. You have to believe that their journey, whatever it is, is helping them to become who they’re destined to be.

The toughest things I’ve ever had to go through are exactly the same things that I look back on with fondness and say, “Without that adversity, I wouldn’t be who I am today.”

Everyone has agency – they have choices, and the decisions they make shape their path. The choices we make will eventually bring us to where we are.

As a leader, you’ve got to realise that your involvement in this process is painfully brief. You have to trust that people are doing what they choose to do at any given point. Their future is determined by the cumulative impact of their decisions… big and small.

You actually have a lot less impact on them than you might imagine.

4. I can’t change the outcome, I can only change how it’s done.

I learned this one many years ago when I had to run my first large-scale restructure and redundancy process. I didn’t have any option. The company I was working for was on the wrong end of a semi-hostile takeover.

I didn’t have any control over the size of the cuts, but I fought really hard to see that the incoming company got the best outcome.

I actually went to extraordinary lengths to explain the high value parts of the team to the new leadership, so that they didn’t throw the baby out with the bathwater. I worked for months behind the scenes to ensure that they understood who the top performers were and didn’t discard them.

I couldn’t change the fact that we had to meet the staff reduction targets, but I could change how it was done. Instead of leaving the redundancy conversations to some faceless HR person from the other side of the world, I insisted on conducting the redundancy conversations personally.

I spoke to every individual to tell them if they had a job or not… and you know what? I learned something super interesting. You can never predict how people will react.

Many people who were made redundant were understandably devastated. But for every one of these, another person was ecstatic to be receiving a huge payout just to exit the business.

Many people who were retained were pretty happy to still have a job. But almost as many who were retained were p!ssed off, because they would’ve much preferred a large financial windfall, knowing they could get another job tomorrow.

5. Remain optimistic, no matter what.

You have to believe that your people are better off simply because you are there, and that you’ve made the choice to lead with integrity.

It’s funny, I used to get a phone call every Christmas from a guy I sacked many years before. He was a wonderful person, but he simply wasn’t cut out for the role he was in.

He would ring me every year, reliably, to thank me for sacking him. He would say, “If you hadn’t sacked me, I never would’ve made the choice to pursue the business I started. Now, I’m the happiest I’ve ever been because I’m doing what I love.“

Things like this give me unlimited confidence in the optimism I have for other people’s futures.

LOOKING YOURSELF IN THE MIRROR

If you choose to be a leader, you’re often going to be faced with a gap between the aspirational virtues that you are told you should pursue, and the practical actions that you are bound to take.

I hope these five frames help you to reduce that tension just a little.

If you lead with just a little selflessness, and a lot of conviction, you’ll find there’s always an ethical path to follow.

Leading with integrity won’t protect you from gut-wrenching challenges, but it will pretty much guarantee that you can look yourself in the mirror every day, with a deep sense of satisfaction.