Markkula Center of Applied Ethics

A Good Start

New ventures can make ethics part of their business plan.

By Kirk O. Hanson

The entrepreneur has so many things on his or her mind: the "value proposition," the features of the product or service, financing, technology, building the team, getting the phones installed, just surviving from month to month. What role can and does ethics play in the critical first months and years of a company's existence? What can the entrepreneurial team do to give ethics a role in the start-up?

The study of how ethics works in companies known as "organizational ethics" has unfortunately focused primarily on larger enterprises. Starting in the mid-1980s, many larger companies established ethics programs staffed by ethics officers. These officers have encouraged others to study how they operate and to measure the effects of their programs. Those who study organizational ethics, fortunately, have been just as interested in how other enterprises those without formal ethics programs succeed in making their companies ethical and value-centered. These insights help us examine how start-ups deal with ethics.

It is obvious the start-up company is unlikely to establish a formal ethics program or appoint an ethics officer, though some start-up CEOs proudly declare that they are the new ventures "ethics officer." Even without a formal program, however, start-ups can create and many have created a very effective commitment to ethical practice.

Examination of the best practices of these start-ups reveals several key steps new ventures can take to make ethics a distinguishing mark of the start-up's culture:

1. Ethical start-ups recognize the ethical dilemmas that surround them in the first few months. The pressures to cut ethical corners are great in a start-up. How much puffery do you use in presenting your idea to venture capitalists? How do you divide stock ownership and options fairly among the founding team and later hires? How reliable does a product have to be before you ship it? How creative can you be in your accounting when the value of your stock is so sensitive to a stumble? When a deal falls through, how quickly do you tell your board and your funders? How generous can you afford to be in employee benefits in the early days?

2. Ethical start-ups make ethics a core value of the enterprise. Start-up founders have discovered that they must explicitly embrace doing business ethically to counter the temptations to fudge various standards. Ethics should appear in business plans, in company mission statements, and in all other company documents.

3. The ethical entrepreneur finds early opportunities to make his or her ethical commitment real. A Silicon Valley entrepreneur who took over a months-old company recently refused to send faulty financial data to the venture capitalists, over the objections of his new team. "You just don't do business that way," reflects the entrepreneur, who enjoys both financial success and a superb reputation today. He communicated clearly from that day the ethical standards he and the company would follow.

4. The ethical entrepreneur anticipates the ethical tensions in day-to-day decisions. As business plans are written and product capabilities are described, the ethical tension between the truthful and the "hopeful" is inevitable. As a start-up tries to attract top talent, there is an unavoidable ethical tension in determining how rosy a picture to draw for the prospect. The ethically thoughtful entrepreneur anticipates these tensions and talks about them with the team before the situations are confronted. In later years of a company's life, this practice will become more formal "ethics training."

5. The ethical entrepreneur welcomes ethical questions and debates. Some situations cannot be anticipated, and the ethical entrepreneur must always keep an open door so that new ethical issues can be worked out. Even the willingness to take time to discuss and resolve tough ethical dilemmas gives the signal that ethics is important in the start-up.

6. The ethical entrepreneur is watchful about conflicts of interest. It is hard to single out one area of particular ethical concern in start-ups because there are so many of importance. However, the world of high-tech start-ups emphasizes partnerships, strategic alliances, and "virtual relationships." These arrangements are rife with opportunities for conflicts of interest where an entrepreneur or start-up employee can line his or her own pockets to the detriment of the organization. An early and consistent stand against questionable conflicts of interest is an important dimension of a start-up ethics effort.

7. The ethical entrepreneur talks about the ethical values all the time. The frantic pace of start-ups and their rapid growth create short memories and a staff that is often very new to the enterprise. Only by continually articulating the ethical commitment can the entrepreneur be sure the members of the organization particularly new hires understand the ethical commitment and know it is real.

8. The ethical entrepreneur weeds out employees who do not embrace the ethical values of the company. Hiring is among the most important strategic steps a start-up takes. Inevitably, the venture will hire some individuals who believe financial success, perhaps just personal financial success, is the only value. The ethical entrepreneur is on the lookout for "teammates" who do not share the company's values and weeds them out before they can do damage to the reputation or culture of the firm.

9. The ethical entrepreneur looks for opportunities to engage the company in the community. The start-ups preoccupation with meeting product and financial goals and with its own growth can lead to blindness about anything other than personal gain. Ethical entrepreneurs find ways to engage the team in community service and to emphasize the continuing importance of the teams family relationships.

10. The ethical entrepreneur takes stock occasionally. Just as the entrepreneur must keep an eye on the start-up's cash flow and produce a balance sheet periodically, so he or she must also take stock of the company's commitment to its ethics and other values.

11. The ethical entrepreneur renews the commitment to ethical behavior. Companies change as they grow. The most pressing ethical dilemmas of a $10 million or $100 million company differ from those of a fledgling start-up. Ethical values and the commitment to ethical behavior must be recast and re-communicated periodically, preparing the company and its employees to deal with the ethical dilemmas currently faced.

The rewards of being an ethical start-up are many. Personal and team satisfaction is the most prominent. Workers who feel free to act ethically and to deal with others ethically feel better about themselves. Greater personal satisfaction translates into higher productivity and to lower turnover.

For the individual entrepreneur, a reputation for ethical dealing can increase the opportunities for business partnerships and lower the "transaction costs" of managing an ongoing relationship. "The ability to trust the other party and to do business on a handshake speeds up the progress we can make," commented one entrepreneur. A reputation for ethical dealing can make it much easier to attract employees and financing to the current venture or the next.


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Woodstock Theological Center. "Creating and Maintaining an Ethical Corporate Culture" (Monograph). Georgetown University Press, 1990.

Kirk O. Hanson has been appointed executive director of the Markkula Center for Applied Ethics; he assumes that post in August 2001. Currently, he is the director of the Sloan Program at Stanford University Graduate School of Business.