Companies involved in corporate scandals often put the blame on rogue employees. However new research has found that in most cases, the company’s organisational design is to blame. So what can be done to help prevent such incidents in the future?
The bankruptcy of the energy giant Enron in 2001 shook Wall Street to its core. America’s seventh largest company had once been the darling of the stock market, but its success turned out to be nothing more than a complex accounting fraud. The collapse wiped out billions in stocks and damaged confidence in corporate America.
In the wake of the crisis the US government responded by introducing strict new accounting rules which made CEOs personally responsible for financial statements. Just a few years later, however, the same type of practices which Enron had used to disguise debt came to the fore once again, this time in the shape of the global financial crisis.
The Enron case illustrates that even tough legislation may fail to prevent corporate fraud and other violations of trust. Indeed, corporate scandals occur on a regular basis despite the best efforts of regulators. Barclays’ LIBOR rigging scandal, the News International phone-hacking case and the BP Deepwater Horizon oil rig explosion have been amongst those hitting the headlines in recent years. Meanwhile public trust in businesses has plummeted.
So why do these trust violations occur with such frequency? And, if regulations fail to prevent them, what can? Research by Dr Nicole Gillespie, a management expert at UQ Business School, has cast new light on the subject.
“Companies involved in corporate scandals tend to put the blame on ‘rogue employees’ or ‘a few bad apples’,” says Dr Gillespie. “However our research indicates that organisational failures of trust are almost never the result of rogue actors. The root of the problem generally lies within the organisation itself – in its systems, culture, strategies and the way it functions. The problems are predictable in organisations that allow conflicting or incongruent elements to take hold.”
Dr Gillespie cites theDeepwater Horizon case in 2010, which highlighted the conflict between BP’s strategy and culture of minimising costs to lift profits on the one hand, and its focus on safety, on the other. Goldman Sachs is another example. A US Senate investigation into Goldman’s Abacus fund in 2011 found that the bank’s stated values of client focus and integrity were at odds with an informal culture that emphasised getting deals done with less than full disclosure.
Dr Gillespie worked with experts from New York, Singapore and Durham in the UK on the research project. The team found that virtually all companies involved in corporate scandals had at least some safeguards in place and some had well-developed compliance procedures, quality checks, codes of conduct and ethics training. The problem was inconsistency, typically with the organisation’s culture, strategy and management practices.
Dr Gillespie explains: “One factor that frequently leads to a trust failure is a company strategy that favours the interests of one stakeholder group while betraying those of another – typically letting shareholder profits take precedence over core responsibilities to employees, customers and communities.
“It’s not uncommon for organisations to prioritise some stakeholders interests above others. Where the trust and reputational problems start is when organisations go beyond merely serving one stakeholder group better than another, to serving the selected group at the expense of and even causing harm to the other group – for example through health and safety breaches. Given the prevalence of social media, issues like this can undermine an organisation’s reputation in a matter of hours.”
According to Dr Gillespie, regulation has a very important role to play in preventing abuses but it is not the complete answer. In fact ineffective regulation can actually be part of the problem, by creating a false sense of security that lulls companies and their stakeholders into complacency.
She adds: “The real answer to avoiding trust failures and reputational risk is to embed trustworthiness within all aspects of an organisation – the corporate culture, the leadership and management practices, the business strategy and the structures and processes. Engineering trustworthiness into each element of the organisation involves setting constraints, incentives, expectations, values and norms. Having positive signals right across the organisation sets the tone and inspires employees to be trustworthy, whereas mixed or deviant messages lead to cynicism and unpredictable behavior.
“If leaders and managers get smarter about how to manage trust perhaps we can stop this deluge of damaging headlines and reverse the declining levels of trust in large corporates.”
HOW TRUSTWORTHY IS YOUR ORGANISATION?
- Is the company strategy in line with its values – and does it meet triple bottom line responsibilities of people, planet and profit?
- Do management put stakeholders’ interests first, act with integrity and deliver on commitments?
- Are values of respect and fairness so deeply held that it would feel wrong to act against them?
- Does the structure of the business provide clear roles, responsibilities and accountability?
- Are there robust mechanisms for reporting violations of ethics?
- Are products and services advertised in a way that avoids deception?