Which business risk represents the greatest threat to shareholder value? Natural disasters? Terrorism? Product defects? Piracy? Patent infringement? Lack of ethical boundaries?
If you answered anything but the last choice, think again. The massive collapse of market capitalization at Tyco, Worldcom, and Enron underscores the grave dangers posed to shareholder value when employees lack an ethical compass. The cumulative decline in market capitalization resulting from fraud at these three companies was $136 billion, according to Public Citizen’s Congress Watch.
These scandals originated in the executive suite and required an ecosystem of compliant people to execute. What about ethical problems that originate elsewhere? What happens when ethical violations spiral from what are euphemistically called “aggressive sales practices?” In 1998, ethical violations at Prudential Insurance became so pervasive that the company’s management eventually estimated its liability from the pending class-action lawsuit at $2 billion. Among the voluminous courtroom testimony from the case was this nugget: “Your judgment gets clouded out in the field when you are pressured to sell, sell, sell.”
Could ethical problems affect your company? No company is immune. How might your company’s reputation or your personal reputation be affected? How real are the ethical risks you face, and what, if anything, should you do about them? These are risk-related questions that one company should have asked—but didn’t. As a result, the indiscretions of a person I’ll call Travis Doe cost MegaCorp (not the company’s real name) more than $1 million.
Travis Doe was a reseller account manager for MegaCorp. He was affable and gregarious, and his compensation plan enabled him to earn a comfortable six-figure package. But Travis had a revenue scheme that would make his day-job earnings pale in comparison, and it paid him very well—before he was caught. When the dust began to settle a year later, the total estimated cost to MegaCorp was more than $1 million. That’s before adding the 40 percent revenue loss of the diverted direct sales. What about the greater cost of diminished employee morale and broken customer trust?
The loss was buried in the income statement of MegaCorp’s financial report, away from the eyes of investors. No mainstream publication or trade journal carried the story. What was Travis’s scheme? I’ll get to that in a moment.
Any discussion of ethics involves drawing boundaries. But drawing boundaries for sales ethics is much easier said than done:
- “I’ll sell an early version of my software that isn’t fully tested, but I won’t sell anything that I know doesn’t work.”
- “I won’t bring up the fact that I’m missing a key feature, but I won’t lie about its absence.”
- “At the end of the quarter, I will commit resources I don’t control so I can win the sale, but I won’t promise my prospective customer anything I know cannot be delivered.”
- I won’t overcharge anyone, but I won’t sell at the lowest possible price, either.”
- I’ll look out for my client’s best interests but only if doing so doesn’t jeopardize my business.”
As author David Quammen writes in Wild Thoughts From Wild Places (Scribner, 1998), “Not every crisp line represents a triumph of ethical clarity.” What causes this obfuscation? Individual ethical interpretations are a function of a person’s current emotions, situation, values, experience, logic and personality. What do blurry interpretive boundaries mean for sales? They mean that ethical practices and behaviors are difficult to define.
Travis executed his plan by setting up a bogus reseller account. When prospective clients sent requests for quotes, Travis intercepted them and sent the requests to his bogus company, instead of sending them to a legitimate reseller. Because the bogus reseller purchased from MegaCorp at a 40 percent discount, Travis made a tidy personal profit on every order his bogus company processed. Only when an order administrator on the West Coast spotted a benign part number anomaly did Travis’s ruse begin to unravel. She phoned the “reseller” with a question, and the person who answered stated that “our vice president, Travis Doe, will contact you tomorrow with an answer.” The order administrator blew the whistle. An embarrassed MegaCorp quietly fired him about a week later.
Travis’s laptop contained evidence that exposed how far the ripples from the scam had traveled. There were copies of letters and proposals bearing the name, “Travis Doe, Vice President,” on fake letterhead. Under the guise of a legitimate reseller, Travis had created price lists, spreadsheets that tracked the status of quotes, customer lists, marketing material and more.
Surprised colleagues (and some not-so-surprised) came forward to describe how Travis had pressured them to send orders to his bogus reseller rather than place them directly with their employer. Betrayed customers who had unwittingly placed orders with the reseller loudly expressed their woes because Travis’s company had no capabilities to support them. Legitimate resellers were especially irate because they had been deprived of valuable orders.
No one else was terminated, but except for the alert order administrator, Travis’s indiscretion created no winners. Where were the boundaries of ethical responsibility? MegaCorp utterly failed by not having adequate controls to prevent Travis’s scheme. If Travis’s immediate boss knew about his dishonesty, why didn’t he stop him? If he didn’t know, why not? You know it’s a bad day at the office when any answer you provide isn’t a good one.
Ethical risk presents vexing challenges for organizations because ethical standards must first be defined, then documented, communicated and followed. In addition, the subjectivity of what constitutes good ethics, and resulting interpretive challenges, defy standard-setting. Senior managers should not avoid this problem. Instead, they should embrace it by creating an environment for open, candid discussion about ethical challenges that will encourage salespeople, and those who support their efforts, to identify issues and confront them before they spiral out of control.
Establishing an ethical culture requires strong leadership; expectations for ethical behavior must be visible and consistent throughout the enterprise. Similar to many operational risks, the likelihood of ethics problems is magnified when multiple risk conditions coexist. When high financial incentives for dishonesty, lax audit controls and non-integrated processes exist simultaneously in an organization, a shrill alarm should sound in the boardroom or executive suite indicating a condition ripe for exploitation. Ethical lapses can irreparably undermine the best business plans, corporate reputations, and brand building. There are too many opportunistic Travises in the world, and too much value at risk, to ignore the alert.
© 2007 Andrew Rudin