OPINION: Good conduct and ethics are key to SME longevity

Opinions

Wed 01 Mar, 2023

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By David Kaahwa

In 1995, the Enron Corporation – an American innovative energy company founded in 1985 – was named "America's Most Innovative Company" by Fortune[1] magazine. It went on to win this award for six consecutive years and boasted $63.4 billion in assets in its prime.

However, in December 2001 – less than 20 years into the company’s operations - it filed for bankruptcy, its CEO and Chief Financial Officer were imprisoned for fraud and other offences[2] and its auditor - Arthur Andersen - was convicted of obstructing justice and ceased doing business.

The Enron scandal highlighted the disastrous effects of poor conduct and a lack of ethics – not just for the company’s leadership and auditor, but for the thousands of the company’s employees, business partners and investors.

On the flip side, a 2008 Bank of Korea study found that of the 5,586 companies in 41 countries that are older than 200 years, 56% of them are found in Japan, and in 2019, there were over 33,000 businesses in Japan that were over a century old[3].

One of the key drivers of this longevity is the fact that these businesses prioritise cultures of ethical conduct and the need to protect their brands’ reputations to maintain the trust and loyalty of customers, employees and other stakeholders[4] - deprioritising short-term gain for long-term sustainability.

In Uganda, a study conducted by the Makerere University College of Business and Management Sciences found that one of the most serious causes of failure of ’s Uganda Micro, Small And Medium Enterprise (MSMEs) is inadequate entrepreneurial and business management skills, which includes poor corporate governance structures that don’t prioritise ethical practices[5].

Additionally, the Ministry of Trade, Industry and Cooperatives (MTIC)’s Uganda Micro, Small And Medium Enterprise (MSME) Policy lists promoting ethics and integrity in doing business as one of its objectives towards building sustainable MSMEs for wealth creation and socio-economic transformation[6].

It is therefore imperative for Ugandan SMEs to build strong organisational cultures that prioritise good conduct and ethics if they want to guarantee their longevity – especially because we live in a highly globalised environment where 70% to 80% of a business’s market value comes from intangible assets like brand equity and goodwill, which makes businesses vulnerable to anything that damages their reputations[7].

Why? Because a business’ ethical conduct also affects its ability to qualify for credit from supervised financial institutions or attract reputable and sustainable investors – which would help address the challenge of lack of capital affecting Ugandan SMEs.

Good ethical conduct also saves businesses money in terms of reducing or outrightly eliminating the costs that come with crisis management to counter negative publicity, legal fees and compensation resulting from litigation and fines or sanctions by regulators.

All that being said, many individuals and businesses are only ethical in compliance with the prevailing regulatory requirements – often skirting the line between what is legal and what isn’t.

The CFA Institute – the global association of investment professionals that sets the standard for professional excellence and credentials – however, states that compliance with regulation alone is not enough and that individuals and firms must develop a “culture of integrity” that cuts across all levels of operations[8].

Developing a culture of ethical conduct is something that SMEs and their leaders must therefore work to incorporate and not compromise throughout every aspect of their operations.

The Ethics & Compliance Initiative (ECI)’s 2021 Global Business Ethics Survey found that as ethical culture strengthens, so does employee conduct, and organizations with strong cultures of ethics are 467% more likely to demonstrate a positive impact on employees than organizations with weak-leaning cultures – which impact includes employees’ recognising and adhering to the organisation’s values, feeling prepared to handle any risks, reporting suspected wrongdoing, and reducing levels of misconduct overall[9].

Employers and business leaders must therefore build cultures of ethics by leading by example; setting and enforcing codes of conduct and; rewarding good ethical conduct and taking appropriate action against defaulting behaviour in a timely, open and transparent manner to deter such future behaviours.

By doing the above, SMEs can ensure that they reap both the long-term benefits of good ethical conduct and in turn ensure their businesses meet longevity.