Why do good companies go bad? Why do corporate scandals happen so often? What lessons can be drawn from the corporate scandals that so often dominate the news headlines?
Over my career advising global companies on crisis management and remediation in the wake of major ethical scandals involving fraud and corruption, I have noted that cases of serious organizational misconduct predictably follow certain patterns. Among others, they typically share a key central character: the high-performing executive or, as I call them, the “Superstar Manager.”
Superstar Managers are a highly intelligent, charismatic, and ambitious breed of employee whose enviable talents in networking, innovation, and winning deals permit them to operate largely unchecked. Their successes are celebrated at the same time that questionable—or downright unethical—business practices are overlooked, downplayed, and even rationalized by senior management. There are usually warning signs in the form of rumors, complaints, and allegations, especially from subordinates who have experienced the darker side of their nature. Unfortunately, these red flags too often go unheeded when whistle-blowers with the courage to speak up are ignored (or even punished) for daring to rock the boat.
Typically, boards, CEOs and other senior organizational leaders who find themselves mired in ethical scandals don’t set out to do wrong. Quite the opposite: They aspire to do the right thing and see themselves and their organizations as making a positive impact for their stakeholders and society at large. But they often have “ethical blind spots” around questionable business models, business partners, and business practices —and, above all, around their Superstar Managers, who are willing to do whatever is needed to win the next big deal. Meanwhile, the Superstars have a natural interest in avoiding accountability, and when challenged, often use their power and influence to subvert fact-finding efforts. Confusion and lack of transparency helps them achieve their goals.
Failing to hold Superstars accountable for their actions allows isolated incidents to infect the culture, proliferating into widespread misconduct that can have catastrophic consequences for a company’s reputation.
For example: A whistle-blower submits a report to the CEO about a high-flying sales manager who has approved the provision of inappropriate gifts to clients by a shadowy third-party “consultant.” Even when the company’s Internal Audit function calls attention to the risks posed by such a practice, the CEO chooses to take comfort in the fact that a third party handled the actual dirty work on the company’s behalf. Since the organization values the Superstar Manager and wants that person to keep producing big deals, the leadership team convinces themselves that the executive meant well and it is the third party that is to blame for any ethical transgressions. Meanwhile, they downplay the whistle-blower’s complaint as the ranting of a disgruntled employee with a personal vendetta against the supervisor. Accordingly, the Superstar gets a pass.
Months later, the Superstar is promoted after winning another major deal, becoming even more autonomous from the head office. He continues to win deal after deal. However, the following year, the extent of the corruption finally is revealed in the course of a massive investigation by law enforcement agencies. Prosecutors tend to view the “outsourcing” of misconduct (via third parties) no differently than when it occurs within the company’s own walls, and the corporate leaders who turned a blind eye to the problem—or tolerated it based on a thin rationalization—find themselves directly in the investigative crosshairs.
So how can we prevent situations like this?
First, we have to recalibrate our sense of leadership to be more attuned to the intense pressures that cause employees to do wrong in the first place. Rigid, incentive-based compensation systems—which have been developed in response to the relentless demands for growth imposed by the capital markets—can lead to a corrosive culture. In my experience, the hallmarks of this culture are a “no excuses” approach to meeting performance targets and a “move up or get out” model for employee advancement. In these environments, misconduct often is seen as inevitable, and individuals who don’t fall in line have reason to fear they will lose their job or be marginalized. Meanwhile, those who do conform to the prevailing unethical practices find themselves rewarded with bonuses and promotions.
One thing we can do is to embed integrity-related targets into HR processes for performance evaluation, promotion and reward, as a counterweight to the environmental pressures to meet financial targets at all costs.
Second, we should aim to create a “Speak Up” culture where employees feel empowered to raise ethical concerns in good faith without fear of retaliation or discrimination. Moreover, it is important to provide easily accessible channels for employees to report these concerns (anonymously if desired). When there is an allegation of misconduct, the first question many leaders ask is: “Who raised this issue?” This places the focus on the messenger rather than the message, and, as in the example above, often leads to downplaying the severity of the allegation—or dismissing it outright. Shooting the messenger is the wrong approach; instead, foster a culture where employees play an integral role in helping to detect misconduct early—and make sure to thoroughly investigate all allegations that do arise.
Third, regular training and communication plays an exceptionally important role in establishing the company’s ethical expectations and educating employees on how to navigate the dilemmas they inevitably will face. Every organization should have a Code of Ethics that covers key topics such as:
- Conflicts of interest
- Money laundering
- Gifts and entertainment
- Interacting with third parties
- Reporting concerns
But don’t take it for granted that employees have read and understood the policy, or appreciate its importance. Accordingly, training on ethics and compliance should be made mandatory for all employees, tailored to local business customs, and refreshed from time to time.
Scandals do not arise overnight. Most of the time, they have deep roots in the culture, structure, and strategy of the organization. Too often, issues are ignored—or allowed to fester—by corporate leaders until they become impossible to contain. Even when a crisis boils over and hits the headlines, there are things a company can do to mitigate its effects and start the long work of rebuilding the trust of stakeholders. Whether you are responding to a crisis or looking to avoid one, keeping a close eye on your Superstars is a good place to start.
Excerpt from “Broken Business: Seven Steps to Reform Good Companies Gone Bad” (Wiley) by José R. Hernandez, Ph.D. For more information, visit: www.brokenbiz.com
José R. Hernandez, Ph.D., grew up in El Salvador and witnessed the business his father worked for collapse due to corruption and war, plunging his entire town into destitution. After emigrating to Canada, he studied mathematics and accounting at university and became a partner at PricewaterhouseCoopers, before being awarded a Ph.D. on the subject of fraud. Hernandez was founding partner of FGI Europe, set up with former FBI Director Louis Freeh, and still acts as a senior advisor for Freeh Group International Solutions. He is CEO of his own crisis response consultancy, Ortus Strategies. Hernandez is also CPA Canada’s representative on the federal government’s Advisory Committee on Money Laundering and Terrorist Financing. He is the author of “Broken Business: Seven Steps to Reform Good Companies Gone Bad” (Wiley).