Guest Post by José R. Hernandez, CEO of Ortus Strategies. José Hernandez’s new book Broken Business: Seven Steps to Reform Good Companies Gone Bad,published by Wiley, is available now in hardback and ebook.
Each year, we are bombarded with more and more stories of corporate scandals and wrongdoing. Recent examples include a global carmaker rigging their vehicles to cheat on emissions tests, a major bank illegally foisting accounts and credit cards on millions of customers without their knowledge or consent, and innumerable stories about sexual misconduct by powerful, entitled executives. And these are just a few high-profile cases – the tip of the iceberg for anyone who routinely reads the business news.
So how can we go about reforming these ‘good companies gone bad’ and prevent such corporate scandals in the first place? We asked leading crisis consultant José Hernandez, who has worked on some of the largest fraud, bribery, and money laundering cases on record.
Over many years, I have advised leaders of global companies – CEOs and board chairs – on responding to serious integrity crises affecting their organizations. However, unlike some crisis management professionals who focus their energies on reducing the short-term fallout of a scandal, my own priority is to guide companies through the challenging process of rebuilding their cultures, structures, and strategies to fundamentally transform the way they do business. I find that this is the most effective way to rebuild the trust of stakeholders and prevent serious ethical issues from recurring.
With this goal in mind, I’ve developed a seven-step approach, called ‘Empowering Integrity’ – a leadership roadmap and framework for action. This approach is designed to embed integrity deep into the very fabric of the organization. It is not a quick or easy process – it requires patience, discipline, and courage. But the payoff is immense; the end result should be a company stronger and more resilient than before it found itself mired in scandal.
Here is a brief overview of the process to reform good companies gone bad:
1. Understand the Crisis
Evaluating the severity of the situation is the first step. Don’t fall for the all-too-appealing myth that that there is just ‘one bad apple’ behind the scandal and the rest of the company is operating exactly as it should. A systemic breakdown is more likely. Allegations of corporate misconduct should act as the catalyst to begin a review of more pervasive failures. It is important to get the facts behind the allegations of misconduct, and understand the context. This may involve understanding the history of past attempts by employees to speak up about issues or respond to them. Speculation and finger-pointing are tempting at this stage, but ultimately unproductive: getting to the facts – and all the facts – is what matters.
2. Undertake an Independent Investigation
To signal the company’s intolerance for misconduct, the Board needs to lead the corporate response, starting with an independent internal investigation. Independent experts are needed to gather the facts and produce a report necessary to take action. Clear and responsible communication to stakeholders is vital, as well as cooperation in good faith with regulators and law enforcement.
3. Outline a Roadmap to Recovery and Remediation
Following the internal investigation, facts and issues come to light that the Board needs to address effectively. The situation may demand immediate reviews of personnel, business practices, and organizational safeguards to prevent further misconduct. A clear strategic plan for reform and recovery is needed to strengthen organization’s structures and rebuild trust and goodwill with various stakeholders.
4. Achieve Criminal and Civil Resolution
Following an independent investigation and the undertaking of immediate action to prevent further misconduct, the groundwork is now laid for (renewed) management to seek criminal and civil resolution for past corporate misconduct. This will entail agreeing with prosecutors and other parties on fines, penalties, disgorgement of ill-gotten gains, restitution, and commitments that prevent recidivism. Sometimes a condition of such an agreement may entail retaining and independent monitor to evaluate the company’s progress to reform itself; use this additional scrutiny as an opportunity to reinforce the company’s efforts to address misconduct.
5. Strengthen Structures to Prevent, Detect, and Respond to Misconduct
As part of the reform process, internal control and compliance structures need to be redesigned and enhanced, starting with the implementation of an effective ethics and compliance programme. Such a programme begins with the right tone at the top. New leaders are likely needed to steer this process. Then suitable policies, processes, and systems need to be introduced to prevent, detect, and respond to issues. Business models and practices may need a deep risk-focused review.
6. Reshape the Culture
Extreme financial pressures mixed with psychological and societal factors can lead to poor judgements and short-term thinking within an organization. One symptom of this is wilful blindness towards ethical issues. Over time, the erosion of ethics will result in a potentially catastrophic system failure. New C-suite leadership is needed to reset the moral compass, revisit the incentive system, and reshape the culture of an organization. Embedding integrity into the DNA of decision-making, and promoting a ‘speak up’ environment, creates a positive safeguard allowing for early detection of misconduct. A corporate transformation is achieved when integrity is institutionalized across an organization, and is reflected in the words and deeds of leadership, the system of incentives and discipline, and the choice of business practices and partners within the supply chain.
7. Refocus the Strategy
Companies are frequently lured in by the temptation of rapid growth by acquisition, exciting new product lines, and bold forays into new markets that are perceived as lucrative, but all too often these expansions are not a fit with the company’s core purpose. Additionally, some of these expansions are ill-conceived, hastily executed, or have inadequate integration plans. All in all, it leads to unnecessary risk and complexity, reduced oversight, and the emergence of ethical blind spots on the part of leaders.
As part of a post-crisis ethical transformation, a company should refocus the corporate strategy on its core purpose and capabilities. This generally entails a simplification of business models, a more integrity-focused vision for organizational growth, as well as enhanced governance.
This is not to say that a company can avoid risk altogether. After all, risk is essential to innovation and companies must evolve to remain competitive. But strong and well-reasoned judgement is necessary in order to take the right risks while ensuring there is a balanced and robust set of safeguards in place to protect the company, its people and reputation.