Big Governance Will Thwart the Next Corporate Ethics Disaster

0
155 views

Share on LinkedIn

Imagine you are at an airport bar waiting for a long-delayed connecting flight. A villain sidles up to you and offers to buy your next drink. How would you react?

I don’t mean a fictional villain like Norman Bates, Hannibal Lecter, or Nurse Ratched. I mean a real-life corporate scoundrel, dressed for success, jetting his way to Somewhere Important. A Shigehisa Takada, Martin Winterkorn, Ray DeGiorgio, or Michael Pearson.

If identifying white collar villains sends you reaching for the nearest facial recognition app, that’s the point. Unlike popular villains from movies and literature, corporate villains are pretty ordinary. No weird tics, quirks, or evil laughs. Mainly, they’re paunchy and middle-aged. Quintessential bureaucrats, who blend discretely with the polished wood and carpet at the United Club. I can visualize any of these men standing at a conference room lectern, droning about revenue projections, while confidently twirling a laser pointer in a haphazard circle around some inscrutable pie chart. “Questions? No? Well, then – let’s call it a wrap. I’m late for my next meeting.”

Ordinariness partly explains how companies lose their ethical way. Business-as-usual provides a vital smokescreen for unethical shenanigans. The many VW functionaries whose efforts unleashed 11 million CO2-belching vehicles onto the planet’s roadways unwittingly performed this travesty while enduring countless dull operations meetings, prosaic management requests, and bland internal emails. In essence, crafted code words and Euphemisms kept the devious sales machinery humming. Someone should compile a dictionary for 2016. I’ll supply the first entry: “defeat device.”



Still, I’m an optimist. I believe commercial enterprises generally begin life without corruption baked into the strategic plan. So how does corporate deceit begin and become systemic? What makes some organizations fecund for scandals, while others consistently maintain the ethical high road? There are three conditions, but they are not always apparent: High motivation to attain a financial reward, opportunities to cheat, and an individual’s ability rationalize his or her deceit. Elements that Donald Cressey labeled The Fraud Triangle (see Other People’s Money: a Study in the Social Psychology of Embezzlement.)

The first two conditions are near-ubiquitous in the workplace, and I don’t know any human over age two incapable of rationalizing a lie. Yet, most employees don’t deliberately drag their companies into scandals. What else? I thought hard about this conundrum, and realized the need to conjure additional reasons. It didn’t take long to find two suspects: unicorns and lack of governance.

Unicorns. In a December, 2015 article, The Creed of Speed, The Economist describes the pressures that Unicorns – startups on steroids – create. “Unicorns can win billion-dollar valuations within a year or two of coming into being. In a few years, they can erode the profits of industries that took many decades to build. Like dorks in awe of the cool kids, the rest of America’s business establishment chastises itself for being too slow.” Yikes! The revenue rug ripped out from under your feet not over years or months, but over crazy-short time frames. As we have learned, “Get creative about driving revenue!” now carries sinister meaning. Around the world right now, Takada automotive airbags, sold with known defects, continue to explode, killing and maiming vehicle occupants.

“If you ask the boss of any big American company what is changing his business, odds are he’ll say speed. Firms are born and die faster, it is widely claimed. Ideas move around the world more quickly. Supply chains bristle to the instant commands of big-data feeds. Customers’ grumbles on Facebook are met with real-time tweaks to products. Some firms are so fast that they can travel into the future: Amazon plans to do ‘anticipatory’ shipping before orders are placed,” according to The Economist. “We are putting a premium on speed,” GE CEO Jeff Immelt wrote in his letter to shareholders. IBM CEO Ginny Rometty, echoed his sentiment. “People ask, ‘Is there a silver bullet?’ The silver bullet, you might say is speed, this idea of speed.”

Revenue flows to the nimble and quick. Slow movers are losers. No doubt that deposed VW CEO Martin Winterkorn would adamantly agree – if anyone sought his opinion. Facing rapid upheaval in the automotive market, Winterkorn and his management team discovered an opportunity to juice sales that was too fantastic to ignore. Instead of investing hundreds of millions of Euros in diesel engine development over a long lead time, they could spend a pittance to modify some closeted software, and sell today’s production sehr schnell. Duh! The ROI numbers in Wolfsburg must have soared off the charts faster than a departing Lufthansa jetliner. At the time, the multi-billion dollar costs of government penalties, class-action lawsuits, and widespread customer backlash didn’t make it onto spreadsheets. Oops. “Cheating? No. It’s Event-Induced-Sensor-Reconfiguration. That’s longish, so for marketing purposes, we’re calling it Clean Diesel.”

Lack of governance. When inmates run the asylum, [stuff] happens. Shortly after news of the scandal broke in 2015, Volkswagen CFO Hans Dieter Poetsch told reporters “We are not talking about a one-off mistake, but a whole chain of mistakes that was not interrupted at any point along the line.” Interim Chief Executive Matthias Mueller gave a different spin, saying the investigation had revealed that “information was not shared, it stayed within a small circle of people who were engineers.” Those damn engineers. What do they know about designing systems with integrity? But I like Poetsch’s version, which I’ll rephrase: “No one in authority said, ‘That’s wrong. We will not do that. Period.’” The absence of anyone at VW to stand tough and pull the plug on cheating cost billions of dollars, thousands of jobs, and continues sicken and kill people suffering from respiratory disease. That’s a price no society can afford to pay. And Poetsch’s statement applies not just to VW, but to every high-profile ethics debacle.

Enter, Big Governance. Ethics cases demonstrate that rogue employee behavior presents significant risks for companies. Conduct risk, “the risk that arises as a result of how businesses and employees conduct themselves, particularly in relation to their clients and competitors,” now ranks #2 of the Top 10 largest fears for operational risk practitioners at financial services firms, according to Risk.net, an industry website. That’s ahead of terrorism (#9), IT failure (#8), and regulation (#3). Wow.

When scandals surface, people often ask, “why didn’t anyone speak up?” That’s part of the issue. In many cases, people did speak up. Loudly. But their concerns were crushed. The better question to ask is “why didn’t the company have mechanisms to expose and prevent the problem?” That matter deeply concerns corporate boards across many industries. Governance provides the mechanisms to mitigate ethical risk, by specifying management responsibilities, auditing and oversight, reporting, decision rights and accountability.

Governance doesn’t have to be big, but its rewards almost always are. The purpose of governance is to encourage ethical behavior. Some say that smacks of weak parenting. In today’s get-it-done business environment, encourage seems tepid. But here, it’s the right word. Ensure and guarantee don’t belong. We’re talking about people, not algorithms.

“In most instances, reputational damage is triggered by some other business or operational risks, including risks relating to the quality or safety of the company’s products or services, or illegal, unethical or questionable corporate conduct of which the public was not aware. How boards respond to these risks is critical, particularly with the increased scrutiny being placed on boards by regulators, shareholders and the media,” according to the website of Akin Gump, a law firm.

With governance, boards are the right place to start, but they face knotty challenges. Effective governance must harmonize opposing business demands: ethics, enterprise strategy, business performance goals, regulatory compliance, and the governance mechanisms themselves. That takes time, thick skin, and compromise. Things that are uncommon in the C-Suite – in combination or individually. Governance inevitably requires trade-offs.



Governance oversees decisions consequential to revenue. Decisions that affect a company’s customers, brand or market integrity, competitors, and legal situation. Effective governance requires understanding which objectives oppose one another – e.g. time-to-market versus regulatory compliance, profit margin versus product or service quality, short-term revenue versus long-term customer loyalty – and then to determine how to resolve them. These issues won’t be reconciled overnight. But absent governance, reconciliation gets shoved aside, and the risk of making catastrophic choices skyrockets. Without governance, deviant choices enter the decision space, and roam freely. Except they’re not called deviant, just choices. And sometimes, not even that.

World’s Most Ethical Companies® (WMEC’s). The Ethisphere Institute has developed a rating system to identify and honor companies that excel in: “(1) promoting ethical business standards and practices internally, (2) enabling managers and employees to make good choices, and (3) shaping future industry standards by introducing tomorrow’s best practices today . . . The information collected is not intended to cover all aspects of corporate governance, risk, sustainability, social responsibility, compliance or ethics, but rather it is a comprehensive sampling of definitive criteria of core competencies,” the Ethisphere Institute website states.

Ethisphere’s scoring system considers five factors, and assigns a weight:

Ethics and compliance program 35%
Corporate Citizenship and Responsibility 20%
Culture of Ethics 20%
Governance 15%
Leadership, Innovation, and Reputation 10%

Recently, Ethisphere discovered striking similarities in the ethics practices of the WMEC’s. High percentages of honorees used the following resources:

Code of conduct 95%
Compliance and Ethics Policies 95%
Misconduct reporting system 92%
Communication program 90%
Training curriculum or program 88%
Investigation process 88%
Organizational culture of ethics 82%
Risk assessment process 82%

Most telling, 61% of the WMEC honorees conduct annual reviews of these practices, versus 27% of non-honorees.

Clearly, not every company finds it worthwhile to invest in governance. Objections include:

1. Governance sounds too much like Government.
Rebuttal: none. This is a fair point.

2. Revenue killjoys remind them of the bratty kid who constantly tattled in elementary school.
Rebuttal: For sure. But every tattletale has, at least once, kept a planned prank from spinning hellishly out of control.

3. Governance can’t be achieved as a one-and-done – it’s ongoing.
Rebuttal: Fully agree. If you adhere to a management-by-magazine approach, governance programs won’t be your thing.



4. There’s no “value add” for customers.
Rebuttal: Ask a VW owner if he or she agrees. “Without that expected fuel efficiency, VW owners of “clean diesel” vehicles will incur lost resale value as high as $5,000 per vehicle. Adding up all the cars affected, that puts the potential loss in the neighborhood of $55 billion.”

Dave Cote, Chairman and CEO of Honeywell, a 2013 WMEC Honoree, said there are three questions he never wants any Honeywell employee to have to face when discussing Honeywell with their family and friends: “Is it true?,” “Did you know?,” and “Have you ever done that?”

Those questions might be the ideal conversational opening for the average-looking person who just offered to buy you a drink at the United Club. “Well . . . I’ve got a long story to tell. But don’t worry, I have the time. My flight doesn’t leave for another nine hours . . .”

LEAVE A REPLY

Please enter your comment!
Please enter your name here