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Prof David Grayson, chair of the Institute of Business Ethics, reviews a new book by Marc Epstein and Kirk Hanson: “ROTTEN - WHY CORPORATE MISCONDUCT CONTINUES AND WHAT TO DO ABOUT IT.”
Marc Epstein and Kirk Hanson have over 80 years combined experience of trying to understand why companies do bad things. They have spent most of their careers working on questions of business ethics and responsibility. They have been professors at several of the most prominent business schools in the world, including Harvard, Stanford, INSEAD (European Institute of Business Administration), Rice, and Santa Clara. But they are not some “Ivory Towers” rarefied academics! They have advised dozens of major companies on the design of their corporate ethics and responsibility programs and on how to handle scandals that have occurred.
“We have,” they write in the preface to Rotten, “given untold numbers of speeches to students, executives, and the public. Regretfully, we have to admit that our efforts and those of so many others in the business world have failed to reduce the plague of repeated misconduct. We have taken a hard look at what we and a host of other individuals and institutions have done to address the problem. This book is an insiders’ account of what has been attempted to date—and why it has failed.”
Epstein and Hanson reject the idea that corporate scandals like VW’s “Dieselgate” or the wholesale fraud of Enron, can generally be attributed to the “bad apples” theory: namely, the idea that a few rogue employees can be blamed. Obviously, sometimes it is a bad apple or a few bad apples – as in the case of Nick Leeson, the “rogue trader” who brought down Barings Bank; or Bernie Madoff’s giant Ponzi scheme.
Sometimes though, it may be more a case of a “bad barrel” – an unethical corporate culture which causes wholesale wrong-doing: thousands were ultimately implicated and fired at Wells Fargo Bank over institutional fraud.
And sometimes, rather than just bad apples or bad barrels, it is a bad orchard – a sector or a country where unethical behaviour, bribery, corruption, cheating and so on are “the way we do business around here.”
But ROTTEN is much more than a well-written rehashing of some of the worst corporate scandals of the last twenty years. Epstein and Hanson analyse the steps that organisations have typically taken to try and avoid mis-conduct, why they have generally failed and what can now be done. Businesses can be more proactive at spotting potential “bad apples” before they are recruited or can be removed earlier.
More systemically, boards need to be much more active in defining what organisational culture they want and in regularly checking to assess what their culture actually is. Yet Epstein and Hanson say, “Many boards pay little attention to the social purpose or ethical behaviour of the corporation.” (P.133)
As the Institute of Business Ethics regularly recommends, Boards need to define Codes of Ethics and ensure these are effectively communicated – and regularly re-communicated. Codes on their own are of limited value. New employees need to be properly inducted in their organisation’s Code:
“The most important thing that can be done in onboarding is for the direct manager or supervisor of a new employee to discuss in some depth how the social purpose and ethical commitments of the company apply to the specific work of the unit the employee is
joining.” (P.137).
All employees need effective training in their Code:
“(Ethics) training must be a dialogue between management and employees on how the purpose and ethical commitments can be achieved in the day-to-day work of the company. In some circumstances, employees are going to know more than supervisors
and managers about where ethical challenges arise.”
I know many Institute of Business Ethics’ supporters and associates would agree with the analysis of ROTTEN that:
“The problem is not that most companies seek to act unethically but that they instead reduce ethics to compliance.”
Epstein and Hanson emphasise the importance of middle-management to ensure the “tone from above” is consistent and correct:
“Line executives and middle managers must be trained to translate the company’s purpose into detailed ethical commitments and clear goals for their individual units. This may require detailed discussions involving top management about the meaning of the social purpose and how the social and economic goals are to be balanced. Goal setting requires more sophisticated key performance indicators, and effective communication of these goals to all employees requires a different kind of management skill.” (P.136)
This they say is especially important because: “Corporate culture is built on motivating middle managers to be the ambassadors of the purpose and values of the company and its culture.”
I particularly like the three tools that Epstein and Hanson outline in chapter six:
“The first tool, the Ethical Performance Audit, is a backward-looking evaluation of a company’s past ethical performance and capability. What has been the company’s record of ethical performance in the past? And what is the current strength of the company’s
efforts to manage ethical behavior?
The second tool, the Ethical Risk Audit, is a forward-looking approach, identifying companies that are likely to engage in misconduct and what type of misconduct may occur. It evaluates whether a company is crisis-prone or crisis-prepared. Taking past performance and current capability into account, this audit assesses the risk of future ethical violations.”
I especially like the third tool: the Sin-Dex. This
“helps with the processes of both looking back and looking forward. It measures which scandals or incidents of misconduct are the most serious. It can also aid the company’s own efforts to evaluate ethics risk by anticipating how serious a specific type of ethical failure might be.”
Our IBE experience tells us that one of the best indicators of how strong or weak is an organisation’s ethical culture, is whether employees feel confident and ready to “Speak Up” if they see behaviour which makes them uncomfortable.
If I was being super-critical, I would question whether Epstein and Hanson are under-estimating the potential leverage of institutional investors – especially as ESG factors become more widespread amongst investors.
Overall, however, ROTTEN is a must-read for anyone interested in building more ethical and therefore more resilient and sustainable businesses. It is immensely readable, insightful and highly practical. It is also very timely!
Kirk Hanson joined us for a webinar in January 2021, find out more...
IBE Future Leaders Ethics Network - Fraud
With fraud accounting for 40% of all crime in England and Wales and the UK's new 'failure to prevent fraud' corporate criminal offense, the focus on corporate fraud is arguably at an all-time high. Join the IBE Future Leaders Network for a session covering the new legislation, current fraud trends and themes and a deeper dive on the influence of corporate culture on fraud. Why attend? Learn about fraud with expert speakers from law, accounting and business, network with other early career professionals with an interest in ethical leadership.
Author
Professor David Grayson CBE
Chair
David is Emeritus Professor of Corporate Responsibility at Cranfield School of Management. From 2007-2017, he was director of the Doughty Centre for Corporate Responsibility and Professor of Corporate Responsibility.
David became Chair of the Trustees Board on 01 April 2019.
He joined Cranfield in April 2007, after a thirty year career as a social entrepreneur and campaigner for responsible business, diversity, and small business development. This included founding Project North East which has now worked in nearly 60 countries around the world; being the founding CEO of the Prince's Youth Business Trust and serving as a managing-director of Business in the Community.
David has an Honorary Doctorate of Law from London South Bank University and was a visiting Senior Fellow at the CSR Initiative of the Kennedy School of Government, Harvard (2005-10).
He has served on various charity and public sector boards over the past 35 years. These have included the boards of the National Co-operative Development Agency, The Prince of Wales' Innovation Trust and the Strategic Rail Authority. He chaired the National Disability Council and the Business Link Accreditation Board; in each case appointed by the Major Government and re-appointed by the Blair administration. David now serves on the board of a financial services company in Asia where he leads on embedding ESG/sustainability and chairs the board’s Group Risk Management Committee.
He has previously chaired the national charity Carers UK and one of the UK's larger social enterprises and largest eldercare providers, Housing 21 during which the organisation made corporate history by becoming the first-ever not-for-profit successfully to acquire a publicly quoted group of companies. David received an OBE for services to industry in 1994 and a CBE for services to disability in 1999. He is a Companion of the Chartered Institute of Management.
David has written a number of books on responsible business and corporate sustainability including most recently: ‘All in - The Future of Business Leadership’ and The Sustainable Business Handbook – both with Chris Coulter and Mark Lee. He is part of the faculty of the Forward Institute and of the Circle of Advisers for Business Fights Poverty.
The Guardian has named David as one of ten top global tweeters on sustainable leadership alongside Al Gore, Tim Cook - CEO of Apple, and Facebook's COO Sheryl Sandberg.