FROM ETHICS TO TRUTHINESS

I had decided to take an early flight from Mumbai to Chennai for meetings during my trip earlier this year to India. I had no idea what kind of shocker lay in store for me and over a billion other Indians as I picked up the day's newspaper at the airport - Ramalinga Raju, CEO of Satyam Computer Services, one of India's best-known IT companies, 'unburdened his conscience' revealing a multi-year, 7136 crore ($1.45B) fraud within Satyam that he had been party to and had helped engineer along with his close circle of inside men.

The irony was not lost on anyone who spoke one of 10+ Indian languages - in each one of them, Satyam meant truth. Besides, the name was an indirect reference to the national motto of India - truth alone triumphs! In other words, it was a metaphor for the values that the country and its rising crop of successful businesses believed in, and reflected a legacy that had been built since these words were connected with the newly formed Indian Republic in 1950.

As someone who had built a technology business during the "IT nuclear winter", it brought back memories of a few "bad apples" who had hastened the collapse of the U.S. economy in the afternath of the dot-com collapse in 2001. Memories of the $157 billion collapse of Worldcom, the bankruptcy of the once Fortune 500 company Enron (and its accountant Anderson Consulting) and closer to home for me, the collapse of Peregrine Systems (Nasdaq: PRGN) - a then close partner of Aeroprise, the company I co-founded - came back to mind. And more recently, the financial accounting scandal and subsequent collapse of two of the so-called pillars of the Government sponsored enterprises (GSEs) - Freddie Mac and Fannie Mae.

The malaise is not just within large businesses. Scandal looms large everywhere from the auctioning off of empty governor seats, to politicians' misuse of everything from airport toilets to pages working for them and our exposure to Ponzi schemes disguised as respectable financial institutions. It seems like even Major League Baseball and the Catholic Church do not escape being on the scandal train! (Sidebar: do not miss Enron: Smartest Guys in the Room and Deliver Us from Evil both great documentaries on these topics, if you have not seen them!)

Seriously though, something larger than millions of ordinary people's life savings has been lost in the process -our faith in organizations that were supposedly created to be surrogates for and something larger than ourselves. And who is to blame?

The collective finger-pointing has been towards those in charge, and rightly so. Satyam's key management has been put in prison and the board replaced by a team of government-approved representatives who bring credibility from running some of the largest corporations in India. Bernie Ebbers, CEO of Worldcom, has received a 25-year prison sentence. But blaming the ceo and key management alone for these scandals is like saying that Al Gore invented the Internet. Distancing ourselves from these entrepreneurs and ceos when they are disgraced and not getting inside the head of the entrepreneur to understand what led to this in the first place would be to fix the symptoms while the cause would remain unaddressed.

When all our collective outrage dies down eventually about the class of 2009 scandals, we may not learn much more about the cause and temptations that lead to these scandals - particularly, why some of it might lie in our own everyday expectations from our leaders (business or otherwise).

Most business leaders (simplifying the issue for now to just why business leaders are involved in scandals, but the principles apply across the board) come with a basic ambition, a cultivated "can-do" attitude that has been given direction through a grounding at one of the top global business schools. One of my friends is a graduate of one of the top business schools and a rising star in the corporate world. Not surprised by the extreme steps taken by leaders to make their companies succeed, she blames this behavior on the basic urge of ambitious people, fueled by the MBA stint and its associated peer pressure to "succeed at all costs" - the implication being that representing the truth to investors or owning up to business realities in the face of industry or market changes as opposed to manufactured growth is an act of weakness.

As simple as it sounds, this seems to stem from a deep lack of ethics training at that level of seniority which helps distinguish not only strategic initiatives from undifferentiated but also good from bad.

Does our entrepreneurship education system teach that long-term success (not just moral but bottom-line) lies in creating and preserving trust? I know that legal safegaurds (like Sarbannes-Oaxley) are in place in recent years but can they be a surrogate for personal responsibility? Speaking of long-term, it's unfair to expect business leaders to react any differently from the way they do when they get rewarded only for creating quarterly results and short term up-swings in stock prices - not long-term value. Companies like Berkshire Hathaway and Google shying from providing financial guidance is a right step in that direction.

A World Bank Study commissioned in the aftermath of the 2002 scandals recommended that an incentive-based system as opposed to a deterrent-based system would enable more reliable financial reporting.

Since they became private companies, Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public about any financial difficulties that they may be having. In the event that there was a financial collapse within either of these companies, U.S. taxpayers could be held responsible for hundreds of billions of dollars in outstanding debts. I would wager that there was a time (when trust in our leaders trumped the need for legal oversight and detractive laws) when quality products, customer trust and employee benefits ranked higher than stock price and quarterly results alone.

Or as Charlie Munger would say, "building a bad company is similar to building a bad bridge. Folks know the consequences of building a bad bridge, but what about the consequences of building a bad company?" Detraction through laws and collective outrage alone cannot replace what systematic changes in entrepreneurship education and a re-focus on values driven leadership can. Several role model companies exist around us that exemplify them. If only we chose to build the companies we start or run based on them.