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How do  you stop a risk from becoming a crisis? Most business leaders know that various risks can segue into a crisis at any time and they want answers. Two main causes create such a change. 

First, there’s the familiar boiled frog syndrome. What seems a trivial issue quietly builds from being a niggle in the background into a full blown disaster.

That must have been how things looked at Wells Fargo. First, the managers knew something was going awry. But their unethical tactics were bringing business results, so they ignored the danger signals. Pressure from above made sure of that.

Next came staff complaints about being bullied into unethical behaviour—opening unrequested accounts and charging for them. Again there was no serious management reaction, except some people were fired for protesting.

Then wang! In 2016 the dirt finally hit the fan. From being a highly respected bank with a long history of decent behavior, damning headlines now ricocheted around the world.

The bank’s name was trashed for its unethical practices. The CEO resigned and even today the organisation continues to pick up the pieces. It was the equivalent of the frog finally dying of excess heat.

Commenting almost explicitly on the boiled frog syndrome experienced at VW, Fed officials pointed to “persistent misconduct” at the bank. They said the two former most senior  managers had presided over “many years pervasive and serious compliance and conduct failures.

In case you think that you’re well protected again the boiled frog syndrome, take a look at Kobe Steel and the mess it’s in right now. Here’s a company with apparently a culture of compliance with rules and regulations, and quality control systems. It has compliance committees, compliance directors, whistle blowing programs, and internal reporting systems.

Kobe execs bow to apologise

Yet Kobe’s boiled frog disaster has been slowly heating up over years.  First this October the company announced it had found one case of falsified data on iron ore powder. This is used in vehicle parts such as gears. It followed an admission it had falsified figures about the strength and durability of its aluminium and copper products–used in the transport and defence industries.

Kobe’s shares plummeted 18% after the iron ore admission. This brought the company’s stock-market losses since the scandal broke to $1.6bn (£1.2bn). It is now examining other possible data manipulations going back a decade.

The boiled frog experience, in which something happens so slowly that one hardly notices the important differences building, can occur just about anywhere in a business. Watching out for the signs is partly what ethical leadership is all about.

Sometimes the syndrome takes years to emerge as a fully fledged crisis. Both Corrillion and Capita have hit the headlines recently for “suddenly” being in trouble. Yet in both cases the problems have long been gestating. As Capita’s new CEO puts it  Capita was spread over too many markets. It had under invested with much emphasis on acquisitions to drive growth”. He also mentioned “weakness in new sales”. Worse, the organisation was 

” too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility.

On top of this, Mr Lewis said the firm still had too much debt, at £1.15bn, and that this urgently needed to be brought down through selling assets. Hardly a short term sudden on set of risk. 

Lightening Strikes 

Then there are the lightening strikes. These are situations you cannot easily predict. Seemingly they come from nowhere.

Sometimes there are bad things that you least expect. As when some employees behave irresponsibly and leave the organisation and its leaders reeling.

Human behavior is the trickiest risk factor to predict, manage and defend against. Despite years of high-profile breaches, security training and anti-phishing campaigns, end users persist in using weak and compromised passwords, clicking on suspicious links, sharing accounts and using insecure apps and websites. 

Lightening recently struck Bankers of Steinhoff International, the South African-based home retailer in late 2017.

The bankers suffered billions in paper losses when the retailer’s shares plunged 75% and the chief executive resigned. Like a lightening strike, “accounting regularities” had unexpectedly emerged into the light of day.

Much the same occurred in Tesco, when  the retailer suddenly “discovered” a huge hole in its accounts. The case ended up in court, after Tesco announced in September 2014 that its profit forecast had been overstated. This was mainly due to booking commercial deals with suppliers too early. 

Tesco’s unexpected disclosure saw its shares tumble, plunging the company into the worst crisis in its near 100-year history.

What remedial action?

So what can a business leader do about either the boiled frog syndrome, or the lightening strike?

The best avoidance strategy stems from being an ethical leader. Ethical Leadership is one of the most effective risk mitigation strategies a company can adopt.

Ethical leadership relies first on a high level of emotional intelligence (EQ). This is the ability to own an organization’s values as well as one’s own. It means linking the means of achieving success with the business strategy. “How” matters just as much as “what.”

Second, ethical leaders are good at listening to multiple points of view. Consequently they’re open to differing input and feedback.  Rather than “killing the messenger”, ethical leaders welcome those who bring them the bad news. They even reward them. Such leaders are more likely to come across a boiled frog situation or be warned about a potential lightening strike vulnerability. 

For example, one new chief executive asked his team to list all the “red” signs of danger on their various business projects. At this first meeting nobody admitted anything bad was happening. They preferred to let the “frog boil”. They hoped somehow it might be OK.

The insightful new CEO sent all the team away. He said return back next week with more honest information about their projects. When the following week his team reassembled, one of them stood up and admitted his main project was Red and in trouble. The CEO refrained from yelling at him, or criticising him for the bad news.

Instead, the CEO stood up and applauded the surprised excecutive. The others got the message. Soon more useful information started flowing their respective “boiling frogs.” The CEO had found a way to mitigate the combined risks before they spiralled into a crisis.

At VW the new anti-corruption czar, Kurt Michels found a team unwilling to voice its thoughts, fears or uncertainties despite the gravity of the diesel crisis. Michels had to encourage his team members to speak up during meetings.

“During the first two (conference) calls, I didn’t receive a question at all. No one asked a question.”

Many were passive, waiting for instruction and interpreted his brainstorming suggestions as straightforward orders not to discuss but to carry out. VW has paid $30 billion in costs from its boiled frog experience since 2015.

VW also suffered from a lightening strike, when it was recently revealed that the company was testing the impact of pollution from its diesel engines on monkeys. Apparently nobody in the section carrying out the tests thought to ask the classic ethical filter questions: “How would we look if what we’re doing appeared on the front papers of the major media?”

Why is this a moral or ethical issue?

Today’s risk environment differs significantly and is less understandable than a few years back.  Complexity,  globalisation, and large forces such as climate change and cyber insecurity have transformed the risk scene.

Consequently many organizations now face a large variety of intangible and hard to predict risks. These may range from unwanted disclosure of information due to the behaviour of errant employees, through to breaches of conduct driven by skewed incentive systems, such as at Wells Fargo.

The task of risk management in a company is therefore expanding. From protecting the balance sheet and having a mainly bottom line focus, today’s risk management must  encompass wider possibilities.

Two capabilities can help companies tackle this trickier risk environment.  First, there’s the more widespread adoption of ethical leadership. This tends to be more open to the unpredictable implications of the boiled frogs and lightening strikes syndromes.

Second, no amount of attention to devising codes of practice, adopting compliance technology or issuing threats of punishment will mitigate the risk factors companies could encounter. Instead, organisations need to become more explicitly in being values-driven.

The combination of ethical leadership and a reliance on core values can affect people’s responses to the intangible risks ahead.

Ethical assessment

Another helpful tool in tackling the transformed risk environment is a more analytical approach to risk management. This has resulted in the production of a variety of guidelines, frameworks, and standards to assist leaders assert better control over risk.

These frameworks help them tackle a common problem shared across many types of business enterprise. In highly competitive or fast changing environments people under stress may not only suffer from burnout and health threats. They may also fail to see there is an ethical or moral dimension to their decision making.

That certainly happened in VW. There, the decision to install defeat software to hide the extent the company’s engines were polluting, was initially seen as a technical one. Not as a moral or ethical choice.

Starting with the values

Much risk management effort relies on using bogus objective measures of mitigation. For example, one much-used approach asks: how much impact would a particular issue make if it occurred? This is then ranked on a scale from one to 10.  Next the approach asks: how likely is the risk to occur–again described on a scale?

Combining impact and likelihood produces a deceptively easy to grasp risk assessment measure. The resulting number has the comforting appearance of logic and objectivity.

Yet you cannot turn risk into a value free zone. It is deeply embedded in the ethical dimension of the organisation. Something may be wrong, no matter what the risk scale tells you.

Ethical leaders therefore need to ensure the risk assessment process becomes values-driven and built permanently into the company’s overall governance.

If and when his happens it should be possible to detect the values-driven approach affecting strategy and planning, management, reporting processes, policies, and culture.

Therefore the best place to start in handling boiled frogs or lightening strikes is not with a so-called objective tool for measuring risk. Instead, invest in time and resources to understand the interplay between corporate values and risk management.

Reaching this understanding remains more art than science. It means viewing social, cultural and organisational values as a source of risk. Values and culture for example, produce their own range of risks and these need to be managed.

The connection between an organisation’s values and broader societal values may therefore be an important yet much ignored source of ethical risk—see panel

CLICK HERE TO READ ABOUT:

Is your dirty supply chain secret waiting to trash your reputation?
Ford’s Pinto’s fuel tank design
GM faulty ignition switches

Finally, the effective management of ethical risk must become an on-going discipline. Not a one-off event.

This means having constant checks on how the organisation’s declared values and the risks they cause arise in daily ways of working. Here are five specific ways to combat the twin evils of boiled frog syndrome and lightening strikes:

Sources:

  • Jondle et al, Managing risk through the ethical business culture model, European Financial Review June 19, 2013 
  • Disparte, Simple Ethics Rules for Better Risk Management, HBR Nov 2016
  • FT Reporters, Banks stand to lose billions in Steinhoff, FT 8th December 2017
  • A. Sancheti, Combating Your Company’s Insider Risk,  Corporate Compliance Insights, December 11, 2017 
  • A.Gray and B.Mclannahan, Fed’s rap puts fear of God into bank board rooms, FT 6th February 2018

Acknowledgement: Thanks to David Archer of Socia.co.uk for inspiring this title, –the rest with all its faults, is down to me.

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EMPATHY: “If I’d only known how being nice to customers was going to work so well, I’d have started many years ago.”
Michael O’Leary CEO of Ryanair, 2016

Sadly, his new awareness didn’t lead to sensitive handling of the chaos  a year later caused by his airline’s last minute cancellations. So he and you might well wonder: how important is it for a business leader to show empathy?

There are two ways to answer this perfectly sensible question. The first is the human side; and the second is what I call the hard-nosed reply.

The human side suggests as a leader you need empathy to help you build essential relationships at work. Only with effective relationships can you expect to bring  your vision for the company to life. 

Now for the hard-nosed side of the answer. This refers to the impact a leader with empathy can have on a company’s financial performance. For example:

The 2016 study by the Harvard Business Review (HBR) used a Global Empathy Index to measure how much empathy was happening in a company. It found the top 10 companies in terms of empathy increased in financial value more than twice as much as the bottom 100. Surprising eh? 

Also, what HBR calls high empathy performers generated 50% more earnings  than their less empathic competitors. Or putting it slightly differently, firms with higher empathy scores correlated strongly (80%) with high performers.

Successful ethical leaders do a good job of conveying empathy. This partly explains their success—whether you define this in financial or non-financial ways. Let’s take a closer look at this empathy thing in action. 

Deconstructing Empathy

It’s almost impossible to untangle ethics from empathy. Describing what makes an ethical leader means you are talking about someone who also conveys empathy.

Let’s start the de-construction with ethical issues. At some time in their business life most responsible leaders find themselves wrestling with ethical issues. It could be bad things happening down the supply chain. Or employees whose behaviour undermines the firm’s core values.

Or it might be the challenge of  “doing what’s right”. This may not be at all obvious at first and the smart business leader therefore stays ready to hear different perspectives.

Also the leader takes care to avoid punishing those who express challenging views.  Such opinions surface due to a readiness to listen, to hear what others have to say despite disagreeing with them.  Achieving a diversity of views can be as important to company success as diversity of employment. 

Empathy is notoriously hard to measure convincingly. And because it’s not obviously connected to a company’s bottom line even a responsible leader may not feel on safe ground talking about it. Yet empathy can be measured–see box on the right suggesting some ways.

And like engagement, empathy is a proven critical factor behind leadership success in business. Why?  No leader enjoys being told they’re wrong. Which is why showing empathy is seldom as easy as it appears

Major current influences on how one leads in business include teams, globalisation and the need to retain talent. Yet all three require the leader to do far more than just talk the talk. They requires leaders to take into account others’ feelings when making decisions.

Many corporate environments do the reverse. They short-circuit our natural capacity for cooperation and compassion. Instead much of business promotes paranoia, cynicism and self-interest. The space for empathy remains small.

If you’re someone who lives life as a zero sum game—”if I win you must lose. “That empathy actually produces great business results seems counter intuitive  As one critic of the way so many businesses operate argues:

“In business we give bonuses to people who gained when others sacrificed.”
Simon Sinek, author   

The ethical leader does more than spout platitudes about “doing what’s right” or “I strongly believe in our values.”

Instead, an ethical leader pays close attention to how others are being, not just doing. It is hardly surprising an attention focusing discipline such as “mindfulness” appears to be making a serious impact in many parts of business.

For example, everyday gestures, such as holding an elevator door open for others or refilling the coffee machine can seem irrelevant to the wider business goals of success. Yet neuroscience reveals how even small acts of kindness release a tiny shot of feel-good oxytocin. Feed people with oxygtocin and you have a sure way to gain friends and influence people.         

Research also suggests around half of all practising mangers are ineffective. In which case it’s a smart move to find out what skills really matter. One of them turns out to be the ability to convey empathy.

“Our results reveal that empathy is positively related to job performance. Managers who show more empathy toward direct reports are viewed as better performers in their job by their bosses.”
W. Gentry et al, Empathy in the Workplace

Empathy generates an interest in and appreciation of others. It paves the way to more productive working relationships. For the ethical leader empathy is therefore more than just a tool of management to be learned alongside other techniques.

It is an important way of being, it helps them work across organisational and even cultural boundaries. As mentioned earlier, empathy helps to understand people with different perspectives and experiences.

“Let’s cut to chase” you may well be muttering by now!  What are some simple ways for an ethical leader can show empathy in business:

Partly adapted from B Martinuzzi: What’s empathy got to do with it?, Mind Tools

Sources:

  1. C. Cherniss The Business Case for Emotional Intelligence, Consortium for research in emotional intelligence, 1999
  2. B. Parmar, The Most Empathetic Companies, HBR December 2016
  3. S. Levitt, Why the Empathetic Leader Is the Best Leader, Success Magazine, March 15, 2017
  4. W. Gentry et al, Empathy in the Workplace: A Tool for Effective Leadership, Centre for Creative Leadership 2007
  5. J. Meister, Future Of Work: Mindfulness As A Leadership Practice, Forbes, April 27th 2015
  6. Building the Case for Mindfulness in the Workplace: The Mindfulness Initiative Private Sector Working Group, 2016
  7. C. Chi, 7 Books to help you develop more empathy, Hub Spot

    1) Mindsight: Transform Your Brain with the New Science of Empathy

    2) The Age of Empathy: Nature’s Lessons for a Kinder Society

    3) Well-Designed: How to Use How to Use Empathy to Create Products People

    4) Wired to Care: How Companies Prosper When They Create Widespread Empathy

    5) The Art of Empathy: A Complete Guide to Life’s Most Essential Skill

    6) Empathy: Why It Matters, and How to Get It

    7) Empathy

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The campaign group the European Coalition for Corporate Justice wants the European Union to force firms to do human rights due diligence on their supply chains.

And not a moment too soon. Amnesty International for example, recently asked 29 companies about their use of the mineral cobalt in their products. Almost half of them  failed to show even minimal compliance with international standards.

No responsible business leader wants to risk being found supporting child labour.  Even fewer want to risk being accused of supporting child slavery. Yet for many their supply chain is a car crash waiting to happen—most recently and publicly over the use of cobalt mined by children and adults, in horrendous conditions in the Democratic Republic of Congo (DRC). 

Cobalt powers batteries for mobile phones and the upcoming tsunami of driverless and electric cars. The price of the commodity is soaring—see chart. So this is no mere footnote to ethics in company supply chains.

Companies showing little concern with their cobalt supply chain sources include such iconic names as Sony, Samsung Electronics, General Motors , Volkswagen, Fiat-Chrysler, Microsoft, Lenovo, Renault, Vodafone and many others.

Yet the leaders of all these firms know that human rights risks and abuses cannot be separated when it comes to cobalt mining in the DRC.

Purchasing and supply management professionals face growing pressure to to show the supply chains they manage take ethical and social responsibility issues into consideration. Even back in 2012 Phil Knight then CEO of Nike, ruefully admitted:

“The product has become synonymous with slave wages.”

This led to a complete re think at Nike, with sweeping reforms to its supply chain approach. Other companies too have realised they must take a fresh look at their entire supply chain.

For instance, the London Metal Exchange recently sent a low key directive to its members asking them to show how they guarantee “responsible sourcing “ of commodities traded on the exchange. This was part of a broad push to address responsible sourcing and unrelated to any product or brand.

The complexity and length of some supply chains can make it a challenge to meet moral and legal obligations. Forces pushing to ensure supply chains are more ethical include:

  • media or consumer pressure
  • codes of conduct or legal imperatives
  • inclusion of such issues in annual financial or social accounts
  • results of social audits
  • demands from ethical investors
  • perceived high risk from supply chains based in a particular country or on a particular product
No hiding place

Business used to deny any responsibility for the behaviour of their oversees suppliers’.  Such disinterest in the supply chain no longer stands up to scrutiny. Those firms associated with the 2012 Dhaka fire in Bangladesh found this out the hard way. 

That fire killed 117 people, and injured over 200 others.  The overseas firms using the factory as part of their supply chain tried to distance themselves from any responsibility for what went on locally. That included Walmart, the world’s largest retailer. No prizes for guessing how this sales giant initially responded to the disaster—it denied any suggestion of accountability.

Yet by 2016 Walmart was boasting of new credentials of caring. Particularly, “training in promoting factory safety in Bangladesh.”  Having seen the writing on the wall its leaders adapted accordingly.

In a global economy supply chains can be lengthy and dispersed.  That is, they may have many sub contractors,  spread across a wide geographic area.  As more suppliers keep entering the chain the chances that ethical problems will arise keep multiplying.  The price for failing to monitor and regulate such supply chains to make sure they are ethical can prove commercially devastating–see panel on right. 

Few academics, industry experts and company executives can agree on what an “ethical” supply chain even looks like. 

Once it meant “sweat shop” conditions and environmental issues, such as pollution or energy conservation. Now though, it encompasses a much broader range of issues: 

  • Freedom of employment and association
  • Eradication of child labour
  • Safe and hygienic working conditions
  • Appropriate pay and working hours
  • Humane and non-discriminatory treatment
  • Anti-bribery and corruption
  • Environmental awareness
What’s the pay off?

The UK’s Independent Anti Slavery Commissioner has boldly claimed:

“The business case for ethical supply chains is incredibly strong.”

Nor is the business case confined to narrow and obvious areas such as slavery. While the precise benefits from an ethical supply chain can be hard to quantify precisely, they include lower transport costs, less waste, increased efficiency, lower material costs and even access to government incentive programs.

Attractive though these gains may be, many managers remain dubious about whether they can be achieved.  Instead, they find it easier to alter branding and marketing than to reconfigure or rebuild an entire  global supply chain.

Getting the supply chain right though, can lead to big business wins, as PepsiCo discovered in 2010. It made over $60m in energy saving opportunities from its carbon management and energy assessment programme. This stemmed directly from working with its suppliers.

“Supply chain” used to mean the source and movement of parts and labour for making a finished product. Now, it includes everything from metals in the earth to seeds in the ground. From those making an intermediate product such as the foot pedals for a bicycle, or an ingredient added to corn syrup that goes into a breakfast cereal. 

Some would argue that it’s actually impossible to ensure there’s an ethical supply chain when it’s so fragmented. A business may not know enough about all its actual suppliers, with increasing complexity of products and suppliers.

For example, a study of Apple’s supply chain found that most (90%) of the components came from companies outside the US. They included chips made in German and Taiwan, memory board and display panels made in South Korea and Japan, and data chips produced in Europe.

There has to be a better way

Demands for transparency provides a new norm making leaders acutely aware of the vulnerability of their supply chains.  Social media for example, has killed off any ability to rigidly control a firm’s image. Also Wall Street and socially conscious investors now pay far more attention to ethics and especially the hard to analyse supply chains.

Given the difficulty of finding and correcting supply chain ethical problems, many companies have tried to collaborate more closely with suppliers, governments and NGOs. There is now a new tool calls the Higgs index which helps companies understand the social and environmental impact of their supply chains. It rates their policies and practice,  including how materials sourcing and various operations affect sustainability.

Based on the idea that “we can’t do this on our own” some companies are both acknowledging that they don’t know everything about their supply chains, and asking outsiders to take a look. Unilever for example has even opened its factories in Vietnam to researchers from Oxfam and others, with no strings attached. Rather than reacting defensively the company’s CEO embraced the findings:

“It’s fair to say that this report highlights areas where we still have a lot to do.”
CEO Paul Polman, Unilever

The continued evolution of supply chains also means business leaders may not see the scandal heading their way. In the UK, safety standards of certain building panels hardly rated highly until the terrible disaster of the Grenfell Tower fire. Now it’s a priority across the entire building industry.  Or in simple terms, selling panels that can catch fire easily is now deemed highly unethical. 

While there are no absolute rules for how to keep a supply chain clean and ethical, there are certain principles. These emerge from numerous studies; here are 12 well tried ways to keep your supply chain ethical.

 

 Sources:

  1. Harbert, Can businesses police the behavior of global suppliers? SAGE Business Researcher, April 2016
  2. Seal, Sustainable supply chains: why placing ethics over profits pays off, Guardian 21st November 2017 
  3. H.Sanderson, London Metal Exchange probes child labour concerns over cobalt, FT 23rd November 2017
  4. Sanderson, Amnesty warns on use of child labour in cobalt mining, FT, 15th November 2017
  5. Industry giants fail to tackle child labour allegations in cobalt battery supply chains, Amnesty International, 5 November 2017
  6. Beyond Supply Chains, empowering responsible value chains, World Economic Forum, Jan 2015
  7. P. Novak, Principles and Standards of Ethical Supply Management Conduct with Guidelines, Institute for Supply Management, Inc.™ 2013
  8. Ten tips and principles for ethical sourcing in supplier management, Chartered Institute of Purchasing and Supply
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Thieves recently stole 143 million consumer records from credit reporting company Equifax

Claimed to be the worst data breach ever, the company’s response met widespread disdain. Regarded as dishonest, and lacking in transparency in business ,  one critic labels it

“Full of vague cover-your-ass statements at the exact moment when consumers most need accurate information.”

The company’s reaction to the breach has been disorderly and under-resourced.

For example, although the attack occurred in July, it took five weeks before the firm admitted it to the public. A hotline for worried clients proved ineffective. It took a long time to get through and randomly disconnected or put them on hold indefinitely. 

Suck lack of clarity and weak response has garnered many calls for Equifax to explain what data was compromised. 

“This is a big deal, but the response has been underwhelming. I see no reason why the CEO shouldn’t step down,”
John Peterson, a management consultant from Boston affected by the breach

Leaders face tougher scrutiny

There is far more scrutiny today about what a company’s top leader delivers in the way of results. Once it was easy to reach a conclusion.  You just asked “does the CEO create wealth for stakeholders?”  The more wealth the better the performance.

Now though  leaders face judgments about transparency in business and how they handle  crises, technology, the rise of big data, employee expectations and company performance. 

The demands placed on leaders for transparency in business keep ramping up. A once comfortable corporate perch has become a hot seat. And this is most true should a CEO cross ethical red lines.

For example, this year’s CEO Success study by PWC  shows senior leaders facing expectations of higher levels of personal accountability. These stem from many sources, including boards, institutional investors, governments, and the media.

“CEOs have to be responsible for something more than their own profitability. You have to serve a broader group of stakeholders–from employees to the environment –and when politicians don’t get things right, corporate leaders have to act. That’s a big shift.”
Marc Benioff, CEO Salesforce

Corporate fraud and ethical lapses, such as those seen at  VW, or  Wells Fargo also place the CEO in the spotlight as never before.

So far, the number forced from office for ethical lapses remains tiny–only 18 such cases at the world’s 2,500 largest public companies in 2016. But firings for ethical lapses keep rising as a percentage of all CEO successions.

Enforced transparency in business keeps causing leadership headaches. Recent research from Accenture Strategy found high levels of employees (60%) sharing sensitive information on social sites. This includes data about their rewards and salaries and opinions on managers’ performances.  

Such unasked for transparency in business places additional demands on business leaders. It puts a premium on their ability to “walk the talk” and build collective trust throughout their organizations.

If you’re a business leader wanting to survive, two life saving tips are:
  • Give far more attention to affecting your company’s ethical culture
  • Show a strong interest in the issue of transparency

The demand for business transparency keeps rising.  Some organisational experts talk of “radical transparency” to describe the present situation.  Once result is the emergence of the Chief Data Officer.  The new role lies beyond the remit of a conventional compliance team. The role helps corporate leaders make sense of the growing impact from vast new amounts of data, and how to manage transparency with care.   

In Europe at least, waiting in the wings lies tough new regulations on privacy. This places yet more obligations on companies to do a better job at protecting it:

“For business leaders, the stakes could not be higher as their individual and institutional conduct is exposed to unparalleled levels of transparency. With 83 percent of surveyed executives saying trust is the cornerstone of the digital economy, business leaders need to demonstrate a dynamic, ethical approach toward their employees, their customers and society at large.” 
AccentureStrategy: The digital emperor has no clothes, 2016

Impact of behavioural science 

New evidence about what triggers ethical problems in companies undermines the the value of the large sums spent on seeking compliance.  For instance, social psychologists dismiss the idea that “a few bad apples” in the barrel cause ethical scandals. 

Instead, it’s company leaders–the “barrel makers”–who emerge as the most potent source of ethical scandals.

How they pursue transparency, the way they affect corporate culture and how they structure the company to deal with ethical concerns all influence the ethical climate. 

In particular leaders must learn to take into account three important behavioural findings:  

  • The power and importance of peer pressure
  • The human desire to conform
  • Reluctance of people to speak truth to power

Leaders who choose to tackle them increase transparency in business and promote the free flow of  information. 

For example, when the CEO of a major car firm held his first staff meeting, he invited his team members to assess their respective businesses. How would each judge its current performance? Would they give it a “green,” “yellow,” or “red” light?

First reaction was everyone signaled a green light. The CEO recognised the lack of transparency was proving unhelpful in problem solving. He ordered: “Everyone come back next week with a more realistic assessment.” When the team met again, the first executive to stand up and say “I have a red light” received a standing ovation from the CEO. With the problem now out in the open everyone settled down to tackle it as a team.

This new CEO set out to create a new culture–one in which people could admit when something was going wrong, where executives for instance could more readily admit mistakes. This needed to happen early enough to still have an impact on the outcome. Creating such a culture had to come from the top.

Seven ways to promote transparency:
  • Tell the truth—people are more willing to stick their necks out and tell their truths when  they see their leaders being candid and trustworthy 
  • Encourage people to speak truth to power—build ethical muscle by helping people to be open to negative feedback; in contrast, over-praised Jack Welch ex CEO of GEC would criticise, demean, ridicule and humiliate people in meetings. Hardly an inducement to speak up.
  • Reward mavericks—contrarians challenge the culture and seldom support the status quo. They need to be nurtured; only if they attack core values should they be given short shrift; for example when Google dismissed an employee for “violating the company’s code of conduct and crossed the line by advancing harmful gender stereotypes”.
  • Practice having tough conversations—it helps to have practice at learning how to deliver negative messages constructively; this includes admitting mistakes—See separate panel on CEOs who admitted they got things wrong.
  • Expand your information sources—a leader can become isolated in the comfort of the C suite; so make time to regularly meet with a wide variety of sources of feedback, including employees, stakeholders and even annoying critics.
  • Tackle the culturecreate norms and structures that encourage truth telling; these include protection of whistle-blowers, “town hall meetings”, internal blogs, ethics training, and financial reward systems
  • Share information freely—maximise information sharing across the organisation and create your own “freedom of information act” in which people have a right to ask to see any information; trust people to only ask for what they need.
Learning to love transparency

Business transparency is fast moving from a “nice to have”, to a “must have. “

It’s goes far beyond simple honesty. Its contemporary purpose is not just to appease regulators, to increase profits, or to please shareholders.  

The more relevant aim of transparency must be to create a business atmosphere in which there are: few secrets, minimal silos, and sound inter personal relationships.

Any business delivering a product or service of value to customers and society has little difficulty in being truly transparent.  

    Like Tone at the Top, transparency depends for its impact on the commitment and love of the leadership.

Sources:

The weaselly Equifax apology for exposing 143 million customer records due to “application vulnerability”, Without Bullshit, September 8 2017
A.Ahuja, Root behaviour demands AI transparency FT 3rd August 2017
Transparency, Tax Insight for Business Leaders, No 12
Lyon-Boggs, Riding the Wave, Ephisphere.com, June 2017
O’Toole and Warren Bennis, A Culture of Candor, HBR June 2009
Ethical Leadership and Transparency, Leadership Magazine, May 24th 2017
Gabriel, Ethical Leadership: Transparency and Trust, dianagabriel.com, March 3rd 2011
Llopis, 5 Powerful thinks happen when a leader is transparent, Forbes, Sept 10th 2012
C. Li, The Art of Admitting Failure, HBR, March, 2011
P. Lacy et al,  The digital emperor has no clothes Are business leaders ready for a world of radical transparency? Accenture Strategy, 2016
R.Foroohar, Business can fill the leadership vacuum, FT 21st August 2017
 

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Maynard Leigh Associates once employed a marketing manager who was brilliant at concepts.

Give him any problem and he’d devise a graphic to describe the issue, with steps showing how to resolve it.

This marketing “expert” though, proved hopeless at making anything happen in real life. His feet never seemed on the ground. Practical actions to convert concepts and insights into day-to-day actions were beyond him.

At first he seemed persuasive, but in the end had to go.

That experience re-surfaces when admiring some infographics from OCEG (Open Compliance and Ethics Group). Its revamped web site offers many useful visual messages.

This source of original drawings proves something of a tour de force. They’re replete with imaginative ideas, astute messages and the details of the issues. See for example below the business case for integrating governance, risk and compliance.

But how persuasive would this picture be with business leaders? What sort of impact might it make when presented to company power brokers?

First, there’s the messy situation shown on the left—a chaotic example of make do and somehow manage. This accurately portrays the way many company compliance systems operate.

The right side of the picture shows a rational solution—an ordered, integrated approach. All the elements mesh neatly together. It would surely appeal to tidy-minded managers.

A visual like this can make the task of compliance appear more rational than it really is.  Unrelenting tidiness may encourage the inexperienced viewer to feel it’s a straight step to move from one to the other, from chaos to orderliness.

Such neatness is deceptive. It makes the complex task of compliance appear more accessible than it is in practice. As with the Maynard Leigh marketing manager though, what counts is combining all the concepts and different elements into practical day-to-day action.

This is harder, since compliance is neither simple nor straightforward. There are  confusing, interwoven layers of complexity.  Yet these can be critical for attaining compliance success. For example, there are the the new EU privacy requirements from next May. One compliance specialist considering these decided:

“…whatever we created had to be simple. That meant no complicated, multidimensional matrices or giant reference architecture charts no one could understand. In the end, we agreed there would be no lists of what to do or what to buy to become GDPR-ready, because no one product could possibly do that.”
C,. Compert, How We Developed the IBM Security GDPR Framework, Security Intelligence, October 2, 2017 

Then there are demands of operational and financial compliance. Next there is contractual compliance, and finally there’s ethics. A busy senior business leader might reasonably conclude that compliance and all its many offshoots must be beyond them:

“Best step aside and leave it to the experts.”

To cynics, that’s exactly what such bravura drawings such as those from OCEG achieve. They’re more like the “giant reference architecture charts no one could understand.”  Clever though these drawing are, on closer inspection they’re hard to follow and to the unwary can suggest:

“This is a really complex area you’re trying to understand. So don’t get in the way!”

A second, rather healthier leader reaction might be to trigger a personal determination to master the detail. This might be through attending a course, participating in a seminar, calling in the experts or consultants. Or by going further and perhaps qualifying in the subject and becoming an expert too. That too is what the drawings imply. 

Yet a third leader reaction might be to assume the whole territory demands a rethink:

“Give the experts the resources they need to re-organize us. We’ll be more likely to stick within the law.”

Another design triumph of graphic messaging. 

Back in the real world of course, things are different and far messier. No matter how well-resourced a company, infographics offer only descriptions, no certainty or timetable of practical steps to protect reputations.

For example, Wells Fargo, VW, Fox, Axis Bank–India’s third largest private lender, Panama Papers hacked from Panamanian law firm Mossack Fonseca, Bell Pottinger PR, and many others were seldom short of the resources needed to bring the OCEG charts to life. Yet all defied the logic of the charts.

Similarly, failures at large, multifaceted organizations such as Lehman Brothers, the Irish banks and AIG stemmed not from inadequate compliance resources, but internal weaknesses arising from human failings.

Being persuasive

Compliance is indeed complex. Those doing it for a living must become adept at being both persuasive and powerful communicators.

Affecting top management thinking demands not clever charts, but the ability to present the core message in human terms that makes a strong personal impact.  

Business leaders initially conceded a seat at the top table to the compliance experts. Just as they once did with finance and later IT. But expertise is seldom a permanent pass to attend board meetings. For example, the number of financial institutions whose compliance function reports directly to the CEO fell by nearly one-quarter over two years. From 40 percent of financial institutions in 2014 to 31 percent in 2016.

The more complex compliance and risk management becomes, the more business leaders need experts with high level communication skills. Sometimes that means clever charts and infographics. More often it requires the basics of how to make a strong, and memorable personal impact.

Facts, charts and numbers are no substitute for personal presence, status, appearance, rapport, smiling, body language, taking center stage and conveying gravitas. All these play a vital part in gaining attention of those in power.

Coaching and bespoke learning opportunities may also be helpful.. There is also no shortage of tools to supplement messages. For the compliance professional though, the fundamental question remains:

“How can I personally be persuasive, establish a strong presence, win influence and make an impact?”

For those interested in pursuing these important issues it may be worth spending some time with these:

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With a rogue CEO, Ryan Air ought to be going broke

The airline’s high profile boss is not a crook. But without doubt he is publicly contemptuous of those whose sole priority is a cheap ticket. Having inconvenienced three quarters of a million paying punters by badly handled mass cancellations, his reactions are those of a rogue CEO.

The airline should be on the ropes.  Nothing of the sort. The company’s shares hardly moved, and macho boss O’Leary seldom fails to look upbeat. He makes little attempt to hide his distaste for paying punters.

“…Mr O’Leary’s instinctive contempt for this customers and employees appear to be intact—and ingrained in Ryanair’s corporate culture.”
FT  30th September 2017

Yet he is not alone. Tech, automotive, financial services and airlines have all experienced rogue CEOs with similar disdain for their customers. 

Conventional logic says the market will punish those who despise their customers. Or treat them as non-rational beings. Yet reality defies this reasoning.

Sports Direct for example, should long ago have reformed in the face of public ire. Yet its ineffectual chairman remains in situ. Thanks to support from the majority shareholder, a rogue CEO. He prefers a passive colleague in the chair to anyone more robust. Seemingly immune to public disapproval, the firm lurches from one anti employee action to another.

Or take Wells Fargo. The bank’s leader was “CEO of the year” by Morningstar. A year later he had been forced to resign amid revelations the bank had swindled many thousands of its previously loyal customers. Even so this rogue CEO will still collect pension accounts and stock valued at $134.1 million.

These logic defying stories suggest ethics in business hardly matter. Yet the reverse is true. There is clear evidence that in the longer term, ethical firms do far better financially than their less ethical competitors.

The same for a rogue CEO

Much the same applies to the behaviour of CEOs.  A 2010 study that crunched all the numbers concluded:

“… managerial indiscretions are associated with a significant decline in firm value and operating performance. At the revelation of an indiscretion, there is an immediate 1.6% loss in shareholder value that translates into an average loss of $110 million in market capitalization. When committed by the CEO, the loss in shareholder value is 4.1% or $226 million.”

Wherever it occurs, unethical leadership or rogue CEO behaviour damages the bottom line. 

Measures such as low morale, weak levels of engagement or poor public perceptions do their damage behind the scenes.  When it surfaces though,  it portrays a dysfunctional corporate culture that savvy investors avoid. They understand such companies face an increased risk of litigation, expensive enforcement actions and costly damage to reputation.

According to another study, this time by PWC the world’s largest publicly held companies have begun taking notice of this evidence. For example, a rising number of CEOs firings stem from ethical lapses.

The larger the company the more likely a CEO will be fired for ethical lapses. These range from shady business dealings to personal indiscretions such as:

  • Interest rate manipulation and money laundering
  • Abusive sales practices
  • Sexual harassment
  • Improper relations with employees
  • Resume fraud  

Consequently, some firms have started paying their CEOs based on soft factors based on to ethics. These may use the results from culture surveys, internal audits, ethics hotline use and response data, completed investigations and the outcome of ethics complaints.

Real business leaders demonstrate integrity, provide meaning, generate trust, and communicate values. Relying more on soft skills than hard analytics, or more easily measured financial performance,  they energize their followers.

They push their people to meet challenging business goals. They also attach great importance to developing others’ leadership skills. In more basic terms they know how to move the human heart. This can be difficult for many in business to talk about. “Moving the human heart” can seem flaky and hard for board members to discuss, let alone measure.

Boards much prefer proof of technical skills—engineering know-how, for instance, or marketing wizardry. With that kind of indisputable data boards feel they won’t go wrong in choosing the next CEO. Ethics seems just too tricky.

Yet the impact of the rogue CEOs behaviour can last well beyond the firing of the offender. For example a 2016 HBR study followed through on over 250 news stories in the media. on average. It found media coverage persisted  with references to the CEO’s actions up to an average of 4.9 years after initial occurrence.

Some rogue CEO stories never seem to go away. News items today continue to refer to former American Apparel CEO Dov Charney’s odd behavior of walking around the company’s offices in his underwear. Yet this was was first reported over 10 years ago. As for the now repentant Gerald Ratner, he will probably never escape the rogue CEO statements he made while addressing a conference of the Institute of Directors at the Royal Albert Hall on 23 April 1991.

To sum up: boards should not expect allegations of misbehavior to disappear quickly.

Accountability

In the past, rogue CEOs seldom paid a personal price for their bad behaviour. But in the last two decades accountability has begun to matter more. Most recently the 2017 study by the Rock Center for Corporate  Governance, concluded 

  • Almost half of Americans believe CEOs should be fired (or worse) for unethical behavior 
  • Violations of trust between company and customer are considered most egregious 
  • The public is surprisingly critical of CEOs who engage in “immoral” personal actions

Today’s regulatory environment makes it easier to identify transgressions and bring violators to justice.

Even so, it’s unclear whether we’re seeing more ethical violations from CEOs than in the past. But the world does seem less tolerant of unethical CEOs and more willing to take action.

“There is a perception that boards are complacent with CEO misbehavior, but when we compare the public’s assessment with what the board actually did, we see that many boards
are very proactive in punishing (either through termination or pay reduction) potentially unethical behavior”
Professor Larcker, Graduate School of Stanford Business School

Shareholder activism and changes in corporate governance for example, have transformed the CEO’s world, especially in Europe and North America. For instance, from 1995 to 2001:

  • Turnover of the CEOs of major corporations increased by 53 percent.
  • The number of CEOs leaving because of the company’s poor financial performance increased by 130 percent.
  • The average tenure of CEOs declined from 9.5 years to 7.3 years.

Standing back from the often dubious data about rogue CEOs there’s now greater emphasis on good governance, including expecting the boss to model good behaviour. 

In summary life has got tougher for rogue CEOs–see panel.

For example, when Jes Staley, Barclays CEO tried to uncover the identify of a whistle-blower in 2017 all hell broke loose.

He suffered a pay cut, faced demands for him to be sacked and attracted a blizzard of bad personal publicity.

Avoiding toxic CEOs has to be a boardroom priority. To reduce the chances of having a rogue CEO here are 12 possible actions to consider:

Sources:

  • R. Walkling The Consequences of Managerial Indiscretions, The Consequences of Managerial Indiscretions Harvard Law School Forum, May 16, 2017
  • Per-Ola Karlsson et al, Are CEOs less ethical than in the past, PWC, May 15 2017
  • S. Treagus–, Why CEOs with Personal Integrity are better for business, Everfi, August 10th 2017
  • 5 Most Publicized Ethics Violations By CEOs, Forbes, Feb 2013
  • ‘CEOs engage in unethical behavior’, Trends, November 24 2013
  • R. Christopher Small, Suspect CEOs, Unethical Culture, and Corporate Misbehaviour, HLS Forum on Corporate Governance and Financial Regulation, Tuesday, March 24, 2015
  • Why CEOs Fall: The Causes and Consequences of Turnover at the Top
  • C. Lucier, Why CEOs Fall: The Causes and Consequences, Columbia Business School, July 15, 2002 
  • W. Bennis & J. O’Toole, Don’t Hire the Wrong CEO, HBR, May/June issue 2000
  • Punishing CEOs for bad behavior: 2017 public perception survey, Rock Center
  • Larcker and B. Tayan, We Studied 38 Incidents of CEO Bad Behavior and Measured Their Consequences, HBR June 2016
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“Want a job for life?” asked a key note speaker at a compliance conference a few years ago. “Then get into the privacy business, you’ll never face a jobs crisis.”

New EU rules on data privacy start on May 25th next year. Known as the General Data Protection Regulations (GDPR) they’re a powerful job creation mechanism,  now moving to full throttle. As an earlier EY report states, these rules are

“… a game changer for organisations.”

Another report along the same lines claims the GDPR to be

“…the most momentous change in data protection legislation in the past 20 years; it’s the first attempt to create strong, meaningful and enforceable data protection laws for Europe’s 500 million plus citizens.”
The EU general data protection regulation: time to act, TrendMicro

The new legislation is indeed far reaching. It’s set to bulldoze through new corporate organisational processes. It will force changes in policies from IT, HR departments through to sales and marketing. GDPR will radically alter how data can be collected, stored and deleted. 

These new rules offer protection for EU citizens’ and residents’ personal information. It includes data related to their health, genetics, biometrics, race, sexual orientation, and political opinions.  This data is worth countless millions as companies increasingly turn to personal data for new product ideas and advertising revenues. 

Adjusting to this new world of privacy protection will challenge even the largest, well-resourced companies.

“…when you take into account the time spent by our existing teams…it is likely to cost millions of dollars.”
Facebook, FT August 31st 2017

Th rules require companies to ask for explicit consent before using personal information. Just think of how many web sites you visit that demand personal data and expect you to input everything from your date of birth to your job, or size of employer. 

Also many companies and most large public bodies will need to hire a designated data protection officer (DPO). One of their new jobs will be to ensure user requests “to be be forgotten” can be met. They will also need to be able to hours notify those who have provided private data of a breach of security. 

So right now there’s a vigorous recruitment drive underway for security personnel. To some observers this is starting to resemble the one that triggered the earlier explosion in demand for compliance professionals.

Currently, the International Association of Privacy Professionals (IAPP) estimates that Europe needs some 28,000 DPOs to achieve perfect compliance by the May 25, 2018 deadline. 

This battle for the new type of security expert seems to be taking its toll. The Uk’s own Information Minister, for instance, has publicly demanded more staff. Worse, she complains large consulting firms are poaching those experts she already employs.

Those poached won’t be swanning off to a comfortable niche. This new breed of data professionals or team, will inhabit a complex workload. Just how complex is usefully explained by a long standing video from TrendMicro. The latter is a respected company specialising in the sort of security envisaged under the new regulations.

So the new job will be high profile, because as the UK’s Information Commissioner puts it:

“Data protection is not a back burner issue any more.”

Take for example the requirement for companies to report any data breach within 72 hours of it happening. This sounds sensible. Yet many firms will find it challenging to get anywhere near this performance standard.

The coming changes also pose new leadership dilemmas. For example, what exactly does it mean to be an ethical leader when privacy and the protection of data start to matter so much more?

“It underlines everything we do, in our persona lives, as consumers, as well as policing and law enforcement, criminal justice, everything relies on data. That’s why this is such a critical issue at such a critical time.”
Elizabeth Denham, Information Commissioner.

From a leader’s perspective there’s much to do. And not much time in which to do it.

Take for instance the need to scan company systems to regularly identify vulnerabilities. For companies this was once a “nice to do”. No longer. Now it becomes an essential company capability.

Yet fewer than half of all companies currently conduct such scans. The technical requirements for this form of monitoring will be demanding. Many firms do not even encrypt important private data. 

Putting all this to rights creates the nearest anyone in our era of job insecurity can hope to find as a guaranteed job for life.

Doing what’s right

Business leaders often proclaim that “doing what’s right” comes built into their core culture. Yet the goal posts keep moving. For instance, a firm may stay safely within the law yet still not follow its spirit or intention.

GDPR implies ethical business leaders must now give more than a passing nod to the issue of privacy.

For example, as role models do they possess a sufficiently acute antennae for detecting whether their company’s privacy methods are robust? Hiring professional privacy experts may help, but this won’t be enough. Nor will knowing the rules be sufficient.

According to available research, most UK companies don’t even adhere to current regulations. Only 63% companies follow the Data Protection Act. More than one in ten (11%) are even unaware which regulations their businesses need to adhere to.

Given the above situation, here are the three essential tasks facing ethical business leaders

Three essential leadership tasks:
  • New tone at the top promoting company-wide awareness about privacy 
    This is about changing the culture of an organisation. Firms must become more sensitive to the issues of privacy and the implications for every day practices.

    In particular, they must be able to show they are accountable. This will demand rigorous ways of monitoring, reviewing and assessing data processing procedures

    Such a wide ranging effort will best be led from the top, with leaders speaking out about the importance of privacy, why it  matters and what sort of changes must occur.

  • Identify new systems for treating private data with more respect
    This implies fresh thinking about how your company treats data. This includes the technical and behavioural changes needed to meet new standards set by GDPR. The latter though remain nebulous when it comes to listing solutions or technologies to achieve compliance.

    The best starting point will be to conduct a visibility assessment. What data exists within the company environment; what types of personal data – particularly regulated data –does the company collect, handle and store?

    The new aim implied by the new regulations must be to gain a deep understanding of company risk exposure. Then to prioritize further compliance efforts from there.

    The new regulations push companies to uncover what personal data they hold and where it’s located. Whether on PCs, on servers, or in the Cloud. They must develop procedures to ensure complete data removal when it receives a request to do so.

  • Install the right technologies to deal with insider and external threats. 

    This is the practical task of installing new systems and includes: 
    i)  Protect privacy 
    ii) Develop continual monitoring of what’s happening to data
    iii)Install fast remedies for breaches of privacy
    — monitoring must be able to recognize and act on breaches when they occur; there must be a formal incident recovery plan to deal with the repercussions.

It all looks uncomfortably like a bonanza for security firms everywhere. The outlays to achieve the above will be hard to avoid. Fines for breaching the regulations can be up to 4% of an organisation’s global annual turnover.

A useful recent BT report explains the five essential capabilities firms must develop    

  •                identify, protect, detect, respond and recover.
The big data revolution

The technical ability to manipulate huge stores of data adds yet another layer of urgency in mastering the new regulations.  What we must now learn to call Big Data has moved from theory into practice.

While there is no generally agreed definition of what Big Data means, we know enough to be wary of its potential for good or harm.

For example, it has the potential to combine vast quantities of digitized information previously hidden away in cabinets and files. Some data experts take a radical, even grandiose view of what is happening:

“I have come to believe that the new data increasingly available in our digital age will radically expand our understanding of human kind. “
Seth Stephens-Davidowitz, Everybody Lies, Bloomsbury 2017 “Big Data will make the market smarter and make it possible to plan and predict market forces so as to allow us to finally achieve a planned economy.”
Jack Ma, CEO Alibaba

A more modest view is Big Data allows the spotting of patterns, trends, and make informed predictions.  Responsible data scientists look for these, rather than details about specific individuals and their respective behaviours and preferences.

Such fastidiousness though, may not prevail across all businesses with access to vast stores of private data. The ability to share and combine many  huge data sets for commercial gain keeps growing. Along with the potential to shape human development for good or evil.

The new data rules will hopefully prove a counter force to those who would exploit the potential for Big Data to do harm to people’s privacy. In particular, ethical business leaders need to recognize the dangers as well as the benefits of big data.

In the front line guarding against the unethical exploitation of Big Data will be two prime movers: the ethically driven business leader, and the Data Protection Office.

The DPO may well outlast the ethical leader when it comes to job security.

Sources:

EU General Data Protection Regulation: Are you ready? Ernst and Young 2016
EU General Data Protection Regulation Report, Trend Micro 2016.
T. Fischer, Preparing for GDPR compliance: Guidance & recommendations, Proportal, June 13, 2017
N.Lord, What does the GDPR mean for global data protection? (infographic), Digital Guardian July 27, 2017
Dealing with new EU data-protection regulation, BT 2017
B.Thompson, Data protection watchdog needs more staff says commissioner FT, 4th September 2017
S. Stephens-Davidowitz, Everybody Lies, Bloomsbury 2017
The impact of GDPR Compliance on IT and Security, by Metricstream, slide show, 2017

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  What made Body Shop special was a long-term company focus on a social commitment in business 

Its charismatic founder Anita Roddick wanted to make a difference to how animals were treated. That is, not used for testing cosmetics. The firm’s reluctant owner L’Oréal got tired of poor sales, and has sold it to a Brazilian company.

The recent sale of Body Shop serves to remind us of Roddick’s legacy. Her strong social mission created a commercial winner. For a while she led the way in companies going beyond the more narrow view of Corporate Social Responsibility (CSR).

As widely practised, CSR seldom involves a genuine social commitment in business. Instead, it is mainly project based and only a part of a company may be involved.  CSR motives can be highly self-serving. They are usually tailored to give the company the maximum payoff in terms of publicity and image.

For example, in India the director of a well known non-government agency specialising in girls education received a call from a company. The firm asked if their employees could “visit the girls for 30 minutes” in their homes in an upper middle class residential area of West Delhi. When the Director asked the company why they wanted their employees to visit and what they would be doing, the only explanation was that it fulfilled their CSR quota .

Similarly, theater directors who work with disenfranchised communities have received calls from multi national companies asking if they could include them in their CSR campaigns, but without expressing compassion or any genuine interest in their artistic practice.

In searching for respectability, companies around the world have spent millions on CSR. They have donated products to support people in need, invested in clean technology to lower their environmental footprint and done other equally positive projects.

Is CSR bad for business?

But basically CSR has failed. Only about a third of consumers across the 15 largest economies say companies are good corporate citizens. Even the ones who spend millions each year on CSR do not get much of a bang for their buck. Some 4% of consumers say they are absolutely not to be trusted as good corporate citizens and 60% are not sure.

Neither has CSR done much to make a company be seen as an appealing place to work. Some 61% of companies studied did not seem to deliver on expectations when it came to treating their employees well. One recent study for example found  CSR reduces a firm’s overall performance and investment efficiency. It concludes:

“Management should carefully evaluate the risks of CSR investing and its effects on external financing and potential performance.”
Corporate social responsibility and capital allocation efficiency
Journal of Corporate Finance Volume 43, April 2017,

Many firms that have embraced CSR have been unable to capitalise on their investment. So they do not link their CSR commitment to business strategy. Instead they treat it as a separate initiative.

This contrasts to companies that make a genuine social commitment. Some of the best examples occur outside of traditional Western firms. In India, for example, the most successful global companies build social commitment into the entire fabric of the firm. It’s an important aspect of their core purpose.

Studies on perceptions of business responsibility show consumers—including in India—are more likely to buy from companies perceived as “caring” for people, communities and social issues.

Unfortunately, many firms opt for the sort of CSR activity that “feels good.” But often this is mostly a pseudo philanthropic marketing campaign, commitment is skin deep and seldom long term.

On April 1, 2014, the new Companies Act, 2013 in India came into force. The country became the first to legally require companies to “give back” to society. Above a certain size, the law even requires firms to give a fixed percentage of their profits to some form of social commitment.

The new law seems to have stimulated more interest in social commitment, but it is too early to judge what a difference it will make to those companies who pay, and how consumers will come to see them and their reputations.

Beyond CSR

Contrast this mainly short-term approach with firms that go beyond CSR to embrace social commitment in business, or what might be called “political CSR.”

Leading the pack in India, for instance, is Mahindra and Mahindra a $19 billion global federation of companies with headquarters in Mumbai. The company’s Flagship Programme Project Nanhi Kali was set up by Anand Mahindra way back in the last century.

It supports the education of over a million underprivileged girls in ten states. They receive material support such as uniforms, bags, notebooks, shoes and socks; as well as academic support such as workbooks and study classes.

The key outcomes of this social commitment include an increase in both enrollment of girls in schools and the reduction of dropouts to less than 10%. It is not judged by the PR impact on the sponsoring firm, as happens so often with CSR.

Instead, the company’s social commitment in business is inextricably bound up with how the company sees itself as contributing to society

Or take Tata Power with its Flagship Programme: ‘Act for Mahseer’. Mahseer roughly translates as mahi – fish and sher – tiger. More simply it’s “a tiger among fish” and an endangered species.

Tata Power’s conservation initiative started in 1975 and established a breeding centre in Lonavala, a town in Pune district in the Indian State of Maharashtra. This involves eco-restoration and an eco-development project for various lakes.

The social interventions by firms like Mahindra and Tata point to a trend in which companies engage in activities normally reserved for governments.

This is especially true for multinational corporations.  Many contribute to public health, education, social security, and protection of human rights. Often they operate in countries with failed state agencies. They address social ills such as AIDS, malnutrition, homelessness, and illiteracy. Or they protect the natural environment and promote societal peace and stability.

Such social commitments go beyond the widespread understanding of corporate social responsibility (CSR). Instead, these efforts aim to meet societal expectations and upend the conventional view of what a business is about.

“…fundamental to how I see the world – the idea that companies don’t exist in a vacuum. We should be responsive to the needs of the world around us.”
Indra Nooyi,  Chairman and Chief Executive Officer, Pepsico

At PepsiCo CEO faced a lot of resistance. Critics told her to forget all this nutrition stuff and just focus on selling more chips and soda. But she persisted and created a community of supporters. With them she launched the Healthy Weight Foundation which did much more than a traditional CSR project. In total they removed 6.4 trillion calories from the company’s food and beverage products.

It exceeded the original pledge by more than 400% three years ahead of schedule. Performance with Purpose is now ingrained into PepsiCo culture. 

The traditional view of the responsibilities of a firm to maximise returns to shareholders still prevails mainly in the West. In contrast, many of the most successful Indian companies for example, particularly the global ones, attribute their business success to social, rather than CSR commitments.

The differences between conventional CSR and social commitment in business are still emerging into the full light of day. This table suggests some of them.

Looking ahead

Globalisation has been one reason why social commitment in business now figures on many corporate agendas.  For example, staying ethical, while depending on extended supply chains pushes firms to show an interest in social concerns.

It all adds up to a simple story: “CSR is dead, long live social commitment.”

 

Sources:

Nielsen, Rogers, Is CSR Dead? Or just mismanaged? Forbes Dec 11 2012
J.Smith The Companies With the Best CSR Reputations, Forbes Dec 10 2012
R. Narrain, Dear Indian corporate: here is why you need to take social responsibility seriously, Quartz India, Jan 5 2015 
U. Majmudar et al, Mahindra & Mahindra tops CSR list in India even as companies scale up operations, Economic Times Oct 26th 2015
A. Georg Scherer et al, The New Political Role of Business in a Globalized World, originally published in the Journal of Management Studies, Vol. 48, 2011
“Leave the crown in the garage”: What I’ve learned from a decade of being PepsiCo’s CEO, Llinkedin July 31, 2017

Thanks also to Sarah Saddler, Doctoral Candidate: Department of Theatre and Performance, University of Minnesota for her contribution to this post. 

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Revelations about the PR firm Bell Pottinger, again raise the issue of what exactly is an ethical business leader? 

Reports suggest this firm earned £100,000 a month in fees, running a secret campaign to stir up racial tension on behalf of its billionaire clients.

Now the firm’s own future is in doubt. Even its founder doubts the outfit can survive. There’s a noticeable rush for the exit by its clients . Potential new ones will hardly want a PR company that cannot even manage its own reputation, let alone theirs.

The PR professional body has kicked Bell Pottinger out of the organisation’s membership. The effect tells new and existing clients:

“Don’t trust this firm to be ethical.”

Such action comes not a moment too soon. Yet the core issue remains. Can society trust the PR profession to demonstrate either ethical practices or ethical leadership?

Public Relations (PR) earns its living by claiming there are always two sides to every story—sometimes no matter how damaging to people or society that story may be. Lord Bell who founded Bell Pottinger defended his dubious client list in 2014 with:

“Everyone’s entitled to put their point of view across.”

This tactic typically transforms science into politics. That is, it makes something seem debatable rather than a serious issue to be urgently tackled. This happened with countering regulations on smoking, acid rain and the ozone layer. 

The US-based Climate Investigations Center decided to research the role of PR agencies in climate policies. Of 25 PR agencies contacted, more than half said they would undertake campaigns that deny man-made climate change or hinder regulations to limit carbon pollution.

These campaigns though would breach the codes of conduct of business associations such as the International Public Relations Association or, in the UK, the Chartered Institute of Public Relations.

Ethics should be crucial to the PR professional, though in reality it isn’t.  To claim to be ethical these professionals must first have the will to be ethical, honest and trustworthy. They must be willing to reject the possibility of deliberately injuring others.

Secondly, to be ethical their actions should always avoid adverse consequences upon others. One PR practitioner, apparently on the fringe of the profession, neatly sums up the dilemma:

“I wouldn’t like seeing myself as a future practitioner to come to a point where I would have to cross the line. But on the other hand am thinking, what if this is for the greater good for the company? After all the company will sign my pay check at the end of the month.”
Ethics, Ethics, Ethics – Can PR ever be Ethical?, Georgios Mavridis

PR practitioners face a crucial ethical issue when advising company leaders. Do they have the courage to confront those who seem willing to violate corporate and even society’s values? The classic PR defense mentioned above that “there’s always two sides to every story” is both misleading and untrue.

For example, suppose a leader intends to reduce employees’ hours so they won’t qualify as full-time workers and therefore won’t receive benefits. This is wrong and it’s the PR practitioner’s duty to speak up.

Similarly, just because an interest group exists does not give it an automatic right to be heard, or to receive PR support. For instance an anti semitic, white supremacist group has now been banned in the UK by the Home Secretary as a criminal organisation. It stirs up hatred, glorifies violence and promotes vile ideology. No PR company that values its reputation would support such a group.

Likewise the tactic of making some issue seem one for debate rather than promote remedial action is a long standing one. Wendel Potter in his US book Deadly Spin, revealed how the insurance industry used the dark arts of PR to shape health care reform legislation. As for the tobacco industry and more recently the oil and coal industry over climate change– enough said!

“The Unseen Power” by Scott Cultip similarly documented the use of public relations in the halls of power – both governmental and corporate – and the ability of the public relations function to change social norms. PR favours many special interests. It applies its deadly arts to influence how we think and act every day.  

Most of us are unaware of how PR works. Which explains why this profession has been labelled the “invisible persuaders.” PR is now so deeply embedded in every major industry and the stakes have become high:

“…ethics do slip. PR often crosses the line into misleading, withholding, or simply lying. And when it does, society suffers — sometimes tragically so.”
Wendel Potter

Is this an oxymoron? 

Potter is not alone in wondering whether ethical leadership in PR is an oxymoron. That is, a contradiction in terms. In the case of Bell Pottinger, its founder Lord Bell saw nothing wrong in working for such questionable clients as Pinochet the Chilean dictator,  the wife of Syria’s dictator, and repressive regimes in Belaruus, and Bahrain. 

The PR profession in the UK at least now has a code of ethics, which gives potential clients minimal reassurance about the firm they might employ.

The Chartered Institute of Public Relations (CIPR) claims responsibility for policing the profession’s standards. Its actions over Bell Pottinger look laudable, though belated. The PR firm was using its unpleasant practices long before the CIPR got round to making its now much publicised move. Many would ask: “What took you so long?”

There are many vociferous apologists for the PR business. As you might expect they express their position persuasively:

“In modern public relations, we can wield power in an ethical way by practicing servant leadership. Servant leadership seeks to empower others and facilitate the success of others. “
Shannon Bowen, PR Week UK, June 24th 2016

What is clear from the Bell Pottinger saga is that leaders determine the company culture and what employees see as acceptable behaviour. With a leader like Lord Bell ethics would not be high on the company agenda.

Apologists like Shannon Bowen quoted above suggest there is a solution to having ethical leaders in PR. It is for executives to be trained in ethical thinking. It’s a shame Bell Pottinger’s leaders weren’t.

By the way

At www.ethical-leadership.co.uk we’re mainly free of the usual bombardment of PR efforts. We resist attempts to tell a favourable story on behalf of a client whose ethics may be highly questionable.

Yet we’re not immune to PR approaches. We regularly receive speculative e-mails from what appear to be free lance journalists. Generously, these individuals offer to supply informed features for publication on the site.

Such individuals do not always disguise their motives. Some admit they’re acting on behalf “of our client” who would like to see their name presented on a site focused on ethics in business leadership. 

Others are more disingenuous. They claim to be experienced writers. They say they merely wish to place copy with us for no discernible gain, other than the article’s appearance.

It does not take much effort to deter these chancers. We first refer them to our Guest Post page that invites informed contributions. On that page we make is crystal clear about the sort of outside contribution we welcome. We look for input from those with something meaningful to say and an in-depth understanding of the ethical dimension.

Even guest contributors though are seldom entirely devoid of self interest. However, we screen each contribution to eliminate PR puff designed to promote solely a commercial cause or some favoured political message.

Sources:

G. Mavridis Ethics, Ethics, Ethics – Can PR ever be Ethical? Georgios Mavridis – PR blog, March 1, 2010
W.Potter, Deadly Spin: An Insurance Company Insider Speaks Out on How Corporate PR Is Killing Health Care and Deceiving Americans, Nov 2013
Special report: climate change and communications, PR Week 2016
A. Cave, Deal that undid Bell Pottinger: inside story of the South Africa scandal Guardian 5th September 2017
M. Skapinker, The Bell Pottinger debacle sounds the alarm on on spin, FT, 6th September
S. Cutlip, The Unseen Power, April 1994 
Bowen, Is PR ethical, PR Weekly, June 24th 2016

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  What made Body Shop special was a long-term company focus on a social concern. 

Its charismatic founder Anita Roddick wanted to make a difference to how animals were treated. That is, not used for testing cosmetics. The firm’s reluctant owner L’Oréal got tired of poor sales, and has sold it to a Brazilian company.

The recent sale of Body Shop serves to remind us of Roddick’s legacy. Her strong social mission created a commercial winner. For a while she led the way in companies going beyond the more narrow view of Corporate Social Responsibility (CSR).

As widely practised, CSR seldom involves a genuine social commitment. Instead, it is mainly project based and only a part of a company may be involved.  CSR motives can be highly self-serving. They are usually tailored to give the company the maximum payoff in terms of publicity and image.

For example, in India the director of a well known non-government agency specialising in girls education received a call from a company. The firm asked if their employees could “visit the girls for 30 minutes” in their homes in an upper middle class residential area of West Delhi. When the Director asked the company why they wanted their employees to visit and what they would be doing, the only explanation was that it fulfilled their CSR quota .

Similarly, theater directors who work with disenfranchised communities have received calls from multi national companies asking if they could include them in their CSR campaigns, but without expressing compassion or any genuine interest in their artistic practice.

In searching for respectability, companies around the world have spent millions on CSR. They have donated products to support people in need, invested in clean technology to lower their environmental footprint and done other equally positive projects.

But basically CSR has failed. Only about a third of consumers across the 15 largest economies say companies are good corporate citizens. Even the ones who spend millions each year on CSR are not getting much of a bang for their buck. Some 4% of consumers say they are absolutely not to be trusted as good corporate citizens and 60% are not sure.

Neither has CSR done much to make a company be seen as an appealing place to work. Some 61% of companies studied did not seem to deliver on expectations when it came to treating their employees well.

Many firms that have embraced CSR have been unable to capitalise on their investment. So they do not link their CSR commitment to business strategy. Instead they treat it as a separate initiative.

This contrasts to companies that make a genuine social commitment. Some of the best examples occur outside of traditional Western firms. In India, for example, the most successful global companies build social commitment into the entire fabric of the firm. It’s an important aspect of their core purpose.

Studies on perceptions of business responsibility show consumers—including in India—are more likely to buy from companies perceived as “caring” for people, communities and social issues.

Unfortunately, many firms opt for the sort of CSR activity that “feels good.” But often this is mostly a pseudo philanthropic marketing campaign, commitment is skin deep and seldom long term.

On April 1, 2014, the new Companies Act, 2013 in India came into force. The country became the first to legally require companies to “give back” to society. Above a certain size, the law even requires firms to give a fixed percentage of their profits to some form of social commitment.

The new law seems to have stimulated more interest in social commitment, but it is too early to judge what a difference it will make to those companies who pay, and how consumers will come to see them and their reputations.

Beyond CSR

Contrast this mainly short-term approach with firms that go beyond CSR to embrace social commitment, or what might be called “political CSR.”

Leading the pack in India, for instance, is Mahindra and Mahindra a $19 billion global federation of companies with headquarters in Mumbai. The company’s Flagship Programme Project Nanhi Kali was set up by Anand Mahindra way back in the last century.

It supports the education of over a million underprivileged girls in ten states. They receive material support such as uniforms, bags, notebooks, shoes and socks; as well as academic support such as workbooks and study classes.

The key outcomes of this social commitment include an increase in both enrollment of girls in schools and the reduction of dropouts to less than 10%. It is not judged by the PR impact on the sponsoring firm, as happens so often with CSR.

Instead, the company’s commitment to the process is inextricably bound up with how the company sees itself as contributing to society

Or take Tata Power with its Flagship Programme: ‘Act for Mahseer’. Mahseer roughly translates as mahi – fish and sher – tiger. More simply it’s “a tiger among fish” and an endangered species.

Tata Power’s conservation initiative started in 1975 and established a breeding centre in Lonavala, a town in Pune district in the Indian State of Maharashtra. This involves eco-restoration and an eco-development project for various lakes.

The social interventions by firms like Mahindra and Tata point to a trend in which companies engage in activities normally reserved for governments.

This is especially true for multinational corporations.  Many contribute to public health, education, social security, and protection of human rights. Often they operate in countries with failed state agencies. They address social ills such as AIDS, malnutrition, homelessness, and illiteracy. Or they protect the natural environment and promote societal peace and stability.

Such social commitments go beyond the widespread understanding of corporate social responsibility (CSR). Instead, these efforts aim to meet societal expectations and upend the conventional view of what a business is about.

“…fundamental to how I see the world – the idea that companies don’t exist in a vacuum. We should be responsive to the needs of the world around us.”
Indra Nooyi,  Chairman and Chief Executive Officer, Pepsico

At PepsiCo CEO faced a lot of resistance. Critics told her to forget all this nutrition stuff and just focus on selling more chips and soda. But she persisted and created a community of supporters. With them she launched the Healthy Weight Foundation which did much more than a traditional CSR project. In total they removed 6.4 trillion calories from the company’s food and beverage products.

It exceeded the original pledge by more than 400% three years ahead of schedule. Performance with Purpose is now ingrained into PepsiCo culture. 

The traditional view of the responsibilities of a firm to maximise returns to shareholders still prevails mainly in the West. In contrast, many of the most successful Indian companies for example, particularly the global ones, attribute their business success to social, rather than CSR commitments.

The differences between conventional CSR and social commitment are still emerging into the full light of day. This table suggests some of them.

Looking ahead

Globalisation has been one reason why social commitment now figures on many corporate agendas.  For example, staying ethical, while depending on extended supply chains pushes firms to show an interest in social concerns.

It all adds up to a simple story: “CSR is dead, long live social commitment.”

 

 Sources:

Nielsen, Rogers, Is CSR Dead? Or just mismanaged? Forbes Dec 11 2012
J.Smith The Companies With the Best CSR Reputations, Forbes Dec 10 2012
R. Narrain, Dear Indian corporate: here is why you need to take social responsibility seriously, Quartz India, Jan 5 2015 
U. Majmudar et al, Mahindra & Mahindra tops CSR list in India even as companies scale up operations, Economic Times Oct 26th 2015
A. Georg Scherer et al, The New Political Role of Business in a Globalized World, originally published in the Journal of Management Studies, Vol. 48, 2011
“Leave the crown in the garage”: What I’ve learned from a decade of being PepsiCo’s CEO, Llinkedin July 31, 2017

Thanks also to Sarah Saddler, Doctoral Candidate: Department of Theatre and Performance, University of Minnesota for her contribution to this post. 

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