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Sascha Matuszak (Sascha.matuszak@corporatecompliance.org) is a reporter at SCCE & HCCA in Minneapolis, MN.
An organization that experiences an unethical event is faced with a choice of two general options: seek to openly and candidly repair the ethical breach, or attempt to bury the scandal and move on without instituting serious organizational change. Several examples of both options can be seen in recent corporate history. For instance, Swedish company Telia Co, AB is working hard to change its culture. On the other side, the repeated ethical problems surrounding consumer privacy at Facebook, despite a consent decree with the United States government and multiple public breaches, shows how a company with enough clout – and hubris – can attempt to overcome unethical behavior without truly changing anything about its business model.
The Statement
An example of an organization that evolved following a breach of public trust is the journey of Swedish telecommunications company Telia Co. AB. Media reports in 2012 alleged that Telia had paid bribes to the daughter of the president of Uzbekistan to secure a license to operate in that country. A review found no evidence of bribes, yet concluded that the company’s ethical guidelines at been violated. Top executives, including the CEO, resigned or were let go; several large stakeholders divested; and the company’s reputation and stock value took a nosedive. Over the next five years, new leadership instituted a sustainable business model that was, in the words of the company’s new sustainability director/corporate development, Henrik Weinestedt, a move “from a corporate strategy with sustainability programs to a sustainable strategy.” (https://bit.ly/2IpsbWv)
Telia released “The Statement” in 2016, detailing the new direction the company was taking. Telia executives communicated the strategy to its shareholders and employees as the new culture of Telia, and not merely a one-off response that would peter out in a few months’ time.
The Statement noted that “[it] is Telia Co.’s firm belief that the best way of ensuring sustainable growth and profitability is by integrating sustainable, responsible business practices into all parts of business and strategy, to create long-term shared value for the company, its stakeholders, and society.”
Lagging morale
It is unclear how great an impact Telia’s efforts are having on restoring the company’s reputation, both internally and externally, but Facebook’s morale woes are public knowledge. Numerous media reports discuss lagging morale at the company following two years of scandal and conflict at the top. According to an article in The Verge (http://bit.ly/2wzcrtc):
“[A] former Facebook director said he has seen a rise in the number of his ex-colleagues who have reached out to ask about openings at his current company, and these employees often ask about advice on the best way to leave Facebook. He’s also experienced an increase in calls from other companies that are running references on current Facebook staffers. ” Once it becomes weird to tell people that they work at Facebook, or once their moms aren’t proud of them anymore, that’s when people are going to head to the exits,” he said. “I think we’re already getting there.”
The Street (http://bit.ly/2wJhisd) reported that an ethical scandal – and an inability to repair the damage – can also have a serious effect on productivity:
“You always have a drop in productivity — people complaining around the water cooler, texting each other complaining during work,” said David Lassman, a professor of organizational management at Carnegie Mellon University. “And unfortunately, you always lose your best people first because they're the most mobile. The people who stay are either incredibly personally invested in the stock or the work, or they're just not that good.”
Problem at the top
Marianne Jennings, Emeritus Professor of Legal and Ethical Studies in Business at W.P. Carey School of Business, Arizona State University, divides ethical problems into two broad categories: problems that involve leadership and the board, and problems that are not just CEO misconduct. For breaches of public trust that are contained within the leadership, her advice is simple: get rid of the leadership. She cited two instances in which leadership needed to be removed, at United Way and Wells Fargo, and how each company dealt with it:
“[W]ith United Way and former CEO William Aramony’s excessive spending, the drop in trust was so great that United Way had an initial 42% drop in donations (and that was in an era when overall charitable giving was up 9%). Now Aramony went to prison, and United Way’s reputation was already suffering from poor relationships with local chapters and the Boy Scout controversy. Aramony had issues well beyond the embezzlement. When you have a situation such as this one, the only way is new leadership.”
Wells Fargo waited too long to switch out CEOs, she said, and that protection cost them dearly in public trust:
“Wells Fargo took too long in leaving two CEOs, who were both there when the fake accounts built up from 2000–2016 under an incentive program that they developed and as they ignored compliance reports, terminations for employee gaming of the system, and warnings from audit and risk. They needed new leadership, including at the board, which did not come fully until the Federal Reserve made the bank change out 4 more board members – that resistance to change is antithetical to building trust.”
Her advice is to tell the truth.
“In dealing with getting everything on the table, remember that the truth is always going to come out. Employees know the truth and when leaders tell the public something different – they lose credibility in their efforts to change the culture,” Jennings said. “Truth tends to emerge slowly, so you have these dribs and drabs that keeping plopping in – contradicting what you have said and leading to further erosion of trust. Be in charge and take responsibility for what has happened.”
Owning up to the scandal and doing one’s best to fix the problem can have a strong positive effect, however, and the evidence is not just in the anecdotes related above, but is also reflected in science. According to a March 2014 study, Better than ever? Employee reactions to ethical failures in organizations, and the ethical recovery paradox (http://bit.ly/2WaUI5R), earnest actions to repair the problem could leave organizations better off than they were before the scandal.
In a blogpost (http://bit.ly/2Z5pLC8) discussing ethical recovery, Jeffrey Kaplan, partner at Kaplan & Walker LLP, reviews the study and the impact of ethics on a company’s performance and morale:
“[T]he authors review the results of a laboratory study and a field study showing ‘an ethical recovery paradox, in which exemplary organizational efforts to recover internally from ethical failure may enhance employee perceptions of the organization to a more positive level than if no ethical failure had occurred,’ Kaplan writes. “These results are very encouraging even if, while perhaps paradoxical in the way the authors describe, they do not seem totally surprising. After all, a [compliance and ethics] failure can also be seen as presenting a test – and ethical standards at a company that have fared well on a test could seem more meaningful to employees than those that haven’t been tested at all. Of course, the same could be said of nearly any attribute of an organization – but it would be hard to find another area where the gap between what is proclaimed and what is practiced is as wide as, generally speaking, it is in the field of business ethics. So, there is every reason for much weight to be placed on the results of the sort of test that ethical failures offer.”
Kaplan concludes that ethical recovery is not a once- or twice-in-a-lifetime event for a company, but an ongoing process that should become part of the DNA of an organization. The establishment of a system of controls, policies, and procedures that is communicated across departments and adhered to doggedly by top-, middle- and entry-level employees is the best (and only) way for an organization to do what it does best, be it generate profit for shareholders, or provide relief and aid for veterans.
In the case of helping veterans, the Wounded Warrior Project (WPP) experienced an ethical challenge in early 2016, when news reports in the New York Times and CBS cited former employees who alleged that spending at the non-profit charity was out of control, and that executives had lost sight of the original mission: helping veterans.
The board of directors reacted by firing top executives, reducing the workforce, and instituting financial changes that began to have an effect in mid-2018, after an exodus of support led to the non-profit’s worst two years on record. But there were no reports of a compliance program, or compliance officer, and critics of the board’s decision asserted that turning the boat around financially would have little long-term effect if the ethical challenge wasn’t met with an equally forceful ethical response. The jury is out regarding WWP’s recovery from the media reports and ethical lapses, and it will take more time to understand what exactly constitutes an “exemplary recovery” from an unethical event.
As the authors of the March 2014 study wrote, “[w]e know little about the attributes of an effective recovery.”
Jennings agrees. Finding an example of a company that regained public trust is difficult, and determining a one-size-fits-all approach even more so, but there are lessons to be learned and basic steps every company can take.
Jennings points to Walmart, “...they have done a phenomenal job in fighting back on the labor front,” she said. “In their ESR report, released just a few weeks ago, they had data about their average wages, and then the wages of store managers – well into six figures and that 75% of those managers came through the ranks, beginning as hourly employees. They are putting policies in place, they are telling exactly what they are doing, and they are motivating employees with their progress. But it is a real program, not fluff, with real results.”