Leadership and Ethics: Ethical Obligations of Leader in Managing Finances

Ethics, is the heart of leadership - as titled in the thought provoking 1998 publication on leadership by Joanne B. Ciulla. 

In a model organisation, leadership and ethics both go hand in hand. If one adheres to the literal meaning of leadership, which is to influence others to attain a common objectives, both Hitler and Ghandi would be perceived and respected equally as successful leaders. However, the distinct in their ethics led to contrasting outcomes.

Figure 1 : Unethical and Ethical Leaders (Source: Google)

Principle Theories of Ethical Leadership

In today’s modern ethics, this quality is deeply divided between deontological and teleological theories (Duignan, 2023). The deontological theory stresses the action carried out that determines the ethicality of the issue, while teleological theory justifies ethics by the consequences it results to. 

When managing a company's finances, the most common unethical acts by leaders are found to be falsifying data and the act of promoting external moral standards to satisfy self-interest (Williams, 2021). 

1. Unethical Act in Deontological Theory - Falsifying Data

Falsifying a company’s data is an exemplar of flouting ethics in deontological theory. When fuelled with the need to triumph economically and stand out from competitors, leaders are pressured to prove their worth through the company’s financial statements. In more desperate attempts, leaders resulted to falsifying financial reports to whitewash their lack of success.

In 2016, the Singapore company Trek 2000, was reported to authorities for discrepancies in its financial statements by external auditors. Trek 2000 was found to have been falsifying financial statements between 2006 - 2011 and cooked its books for financial year 2015 (Wong, 2022). The motive of the FY2015 fraud was to boast Trek 2000’s net profit for the year and to give the impression that the company, which is listed in the Singapore Exchange, is in a good financial position. 

Trek 2000’s founder and inventor, Henn Tan, fabricated a non-existent US$3.2 million sale transaction, together with false relevant documents, to increase reported revenue (Devaraj, 2023). Among all of the high-ranked employees involved, Tan was found to have benefitted the most from this fraud as he was the biggest shareholder in the company (Wong, 2022). Despite the other members involved gaining far less than Tan, Tan was successful at influencing them to do the unethical acts of defrauding the stakeholders of the company and underestimating the statutory audit system. 

In deontology theory, upholding ethics in our actions is entirely within our responsibility (The Ethics Centre, 2016). Regardless of what influence or outcomes there will be, a leader and subordinate are in control of their own actions and ethical values.

2. Unethical Act in Teleological theory - Promoting external moral standards to satisfy self-interest

In the eyes of some leaders, businesses are perceived to only exist for financial gains of shareholders. In 2004, National Kidney Foundation (NKF) was placed in the spotlight for a series of questionable transactions which then led to the discovery of the former chief operating officer (CEO), T.T. Durai, misused of NKF charity donations (Foo, 2013). 

During his term as CEO, Durai under-declared the amount of NKF’s funds and exaggerated the amount of NKF registered patients, with the intent to portray a lack in NKF reserves, which will further motivate more donations from the members of the public (Henson, 2006). Durai faced further backlash from NKF donors and the public when details of his salary, bonus and extravagant benefits emerged during a trial proceeding in 2005. (Arasu, 2005).

Durai remains adamant about his entitlement as a CEO and that he deserves all the monetary benefits he had received, as he had built NKF into a multi-million organisation over his 12 years term (Quah, 2005).

As a leader of a non-profit organisation, Durai had prioritise the economic growth of NKF and his own privileges, over patient care. Durai’s unethical methods of seeking donations and apparent greed ought to be condemned, although the NKF remains a financially strong organisation under his leadership.

In teleological theory, the consequence of an act may be seen as of a greater importance to a leader. However, to lead based on teleological theory, a leader must lead with purpose that aligns with the organisation’s mission rather than own self-interest. 

Ethical Acts in Managing Company Finances by Using 4-V Model

Transparency and honesty are core ethical principles when managing company’s funds. An ethical leader is expected to be transparent of the company’s financial activities to stakeholders and to maintain trust in interpersonal and professional relationships (Sherman, 2019).

Figure 2 : 4-V Model (Source: Google)

In Dr. Bill Grace’s 4-V model, ethical leadership is developed from the internal beliefs and external actions of the leader. The 4V model recognises the values and vision of the leader, and the voice that provides clarity in communication and strategy as the externalities. Whereas, the virtue instilled by the leader as the internal quality. The combined demonstration of both external and internal qualities - values, vision, voice and virtue, are the traits that build an ethical leader.

Recommendation

Upholding ethics in financial management involves balancing, safeguarding, and maintaining the interests of stakeholders. A leader, regardless of superiority in hierarchy, has a responsibility to follow the law and behave in good faith. Confidential information must not be divulged or exploited for their own benefit. Organisation must too exercise internal controls to prevent or detect unethical behaviour among leaders.

References 

Arasu, S. (2005, July 17). How NKF vs SPH became The people vs T.T. Durai. The Straits Times, p. 26. Retrieved from NewspaperSG 

Devaraj, S. (2023, May 10). Jail for former division head of thumb drive inventor Trek 2000 for cheating, falsifying accounts. The Straits Time. Retrieved from: https://www.straitstimes.com/singapore/courts-crime/jail-for-former-division-head-of-thumbdrive-inventor-trek-2000-for-cheating-falsifying-accounts

Duignan, B. (2023, April 29). Moral Theology. The Editors of Encyclopedia Britannica. Retrieved from: https://www.britannica.com/topic/teleological-ethics

Foo, T. (2013, June 25). National Kidney Foundation financial scandal (2005). National Library Board Singapore. Retrieved from: https://www.nlb.gov.sg/main/article-detail?cmsuuid=3b84ddbc-c732-4e7b-9cfe-4000b098bb5a

Henson, B. (2006, April 19). NKF saga: Durai, four others charged. The Straits Times, p. 24. Retrieved from NewspaperSG

Quah, M. (2005, December 20). KPMG uncovers excesses by Durai. The Business Times, p. 3. Retrieved from NewspaperSG

Sherman, F. (2019, Nov 5). Thumb drive inventor and Trek 2000 founder Henn Tan jailed for accounting fraud. The Straits Time. Retrieved from: https://smallbusiness.chron.com/business-ethics-finance-manager-20490.html

The Ethics Centre. (2016). Ethics explainer: Dentology. Ethics. Retrieved from: https://ethics.org.au/ethics-explainer-deontology/

Williams, R. (2021, August 13). The Perfect Storm: Unethical Leaders Spread Like a Virus. Medium. Retrieved from: https://raybwilliams.medium.com/the-perfect-Storm-unethical-leaders-spread-like-a-virus-daaf97e93530

Wong, S. (2022, Oct 11). Thumb drive inventor and Trek 2000 founder Henn Tan jailed for accounting fraud. The Straits Time. Retrieved from: https://www.straitstimes.com/singapore/courts-crime/thumb-drive-inventor-and-trek-2000-founder-henn-tan-jailed-for-accounting-fraud