0
Preventing Corporate Scandals | By Trenegy Guest, Alan Quintero
On August 21, 2017 / By Alan Quintero

Navigate

Politician shielding himself from paparazzi

Early in my career I asked a mentor how to tell the difference between right and wrong in the business world. He responded by saying, “Before acting ask yourself: ‘Do I want to see this on the front page of the Wall Street Journal?'” That’s great advice, but someone must have forgotten to teach it to some corporate leaders as of late. Opening fake bank accounts, rampant sexual harassment in news organizations, cheating on emissions testing, and super-expensive essential medical devices are just some of the recent examples of scandals in the news. We can learn from these events to prevent corporate scandals from happening in our business. As a leader, here are a few things you can drive in your organization.

Teach by example

When growing up, our parents and teachers did not give us written home policies and procedures, or check on us with a Kid Audit Department. So how did we learn right from wrong? We did it by watching and mimicking those people around us in positions of authority.  In other words, our parents, teachers, older siblings were teaching by example.

The same is true in an organization. People in positions of power are mimicked by others in the organization. Therefore, the first and most important step in preventing corporate scandals is to ensure that your company’s leadership models proper behavior to the organization.

For the top managers of small companies, where employee interaction happens on a daily basis, this is as simple as doing the right thing every day – simple but not easy. But many companies are large enough that direct interaction between top management and most employees do not happen daily. For those companies, other controls must be put in place.

The first thing the company must have in place is an ethics policy statement. This document is known by many names (e.g. “Our Values”), but it essentially outlines management’s expectations of how the company will conduct business, and the values the company shares and esteems. To remain credible, the company’s management has to ensure nothing the company does or espouses through policies and procedures contradicts these values.

In addition, the company must have an independent and secure whistleblower system that allows the reporting of potential infractions and unethical behaviors anonymously by any employee. The best whistleblower systems are managed outside the company and are reviewed at the highest level (including the Board of Directors).

Most companies have required annual training for their employees covering topics such as conflicts of interests, cybersecurity, etc.. It is a good practice to include a review of the company’s values and how to use the whistleblower system in this training.

Finally, there is a lot of truth in the old adage of “what gets measured get done.” Therefore, be very careful with your company’s compensation schemes. When establishing a performance indicator for bonus payments ask yourself, “What unintended behavior could this metric cause?” The very noble drive for increased sales at Wells Fargo and Volkswagen led to employees opening fake accounts for customers and inventing a way to cheat emissions tests. Also, your employees will know if you are rewarding those who “push the boundaries” to get results over those who do not. Make sure your employee evaluation programs measure the right behavior in addition to the right results.

Follow the profit chain

Now that you have set the right tone, it’s time to run your business. The goal of any for-profit business is long term profitability. In the book The Service Profit Chain, authors James Heskett, W. Earl Sasser, Jr., and Leonard Schlesinger outline the way companies turn a profit. Nowhere in that book is cheating advocated as a way to increase profitability!

Instead, a sustainable profit is achieved only through loyal customers. To keep your customers happy, you need to manage a series of properties of your operations that, when performed together, lead to customer loyalty. The authors all this the service-profit chain (See figure).

service profit chain

The authors’ research shows that to get to the ultimate goal of Profitability (shown in the upper-right hand side of the figure), a company must invest in the Employee chain (shown at the bottom of the figure), and on Customer Value.  Furthermore, each step in the chain drives the next chain (i.e., the Employee chain drives Customer Value, and Customer Value drives the Customer chain).

Therefore, to avoid corporate scandals, investment decisions must determine whether that investment is driving a step in the chain. For example, software to “cheat” emission testing does not enhance any of the steps, and increasing the cost of medicine 600% actually reduces Customer Value.

Instead, investments that enhance the chain include:

  1. Employee chainInvest in strong quality programs, customer facing systems and organizations, and systems and tools that make it easier for your employees to do their job.  An unsatisfied employee is three times more likely to leave a company than a satisfied employee. That employee is also more likely to sabotage the company or create a situation that may lead to a corporate scandal. Some studies show that the cost to hire and train a new employee is six to nine months of salary. But the real cost of losing employee loyalty comes from the cost of loss productivity. In one study, it took five years for brokers at a securities firm to rebuild relationships that had been established by their predecessors (at a total cost to the company of $2.5 million!).
  2. Customer Value:  Perceived value by the customer increases with the results that the customer sees, and decreases with the cost of these results to the customer. Therefore, invest in products and services that the customer wants (and in ensuring that these products are of high quality), and also invest in ways to reduce the cost of these products.

If a company invests in these things, the results will be an improvement in the Customer chain (the top line in the figure). To highlight the importance of that chain, studies show that those customers who describe themselves as “very satisfied” are shown to stay a customer 80% or more of the time. They are also likely to tell up to five other potential customers about you. On the flip side, those customers that describe themselves as “slightly dissatisfied” or worse are prone to remain a customer less than 40% of the time, and are likely to tell eleven other potential customers to stay away.

Not only is following the service profit chain good business, but it will keep you out of trouble.

Remain vigilant

So now you’ve set the right tone, you’re investing in the right things, and your company is running like a fine-tuned machine. Unfortunately, your job is not done (and you can blame science for that!). In science, the second law of thermodynamics states that any system, left alone, will become more disorganized over time. This is true of a corporation as well, so you must remain vigilant.

To prevent corporate scandals, diligently review the data collected in your organization and look for trends that do not make sense. Are you seeing an increase in new products sold without a corresponding increase in revenues? Did your team solve a long-standing challenge without introducing a new technology or system? Are you experiencing an increase in HR complaints or calls to your whistleblower hotline? All these could be indications of trouble brewing.

In addition, you should cultivate a culture of continuous improvement. Are you mining the root causes of incidents that did not go as planned? How are those learnings incorporated into the way you do business?

Victor Hugo said, “Initiative is doing the right thing without being told.” Thankfully, you can help the initiative of your organization to prevent corporate scandals by setting the right tone from the top, investing only where it drives customer loyalty, and remaining vigilant for signs of trouble.

 

Trenegy assists companies design and implement controls frameworks to ensure policy and procedures are in place to prevent slips and scandals. For additional information, please contact us at: info@trenegy.com.

Alan Quintero is the Senior Vice President, Chief Technology Officer at Rowan Companies. Alan served as Senior Vice President at Transocean from 2010 through 2015 overseeing Operations, Asset Management, and Major Capital Projects. He also served in various management roles at Atwood Oceanics from 1993 through 2010, where he ended as Senior Vice President with responsibilities over Operations, Technical Services, Supply Chain, Projects, Quality Assurance, and Maintenance. Immediately prior to joining Rowan, Alan was a Partner at Trenegy.