Leaders should look ahead to safeguard against corruption and pay attention to warning signs.
I attended an interesting talk in Wellington earlier this month from Harvard Business School professor of business administration Paul Healy, who is on a visiting professorship at Victoria University of Wellington until the end of June. A New Zealander by birth, Professor Healy, has lived in the US for over three decades and is a specialist in corporate crime.
Noting New Zealand currently ranks number one as the least corrupt country in Transparency International (TI) rankings, he talked of two recent corporate corporate examples: Siemens which has been prosecuted in Germany and the US for paying thousands of bribes estimated at between US$0.8-1.8 billion; and Wells Fargo, a US retail bank whose employees opened 3.5 million false accounts to over-charge customers fees and have been ordered by US banking authorities from growing until the culture is cleared up. He and his colleagues have also studied a large number of other cases.
According to Professor Healy, the main causes of corporate crime – which is defined as ‘non-violent crime committed in commercial situations for financial gain’ – are: opportunity, including operating in high risk regions/countries and industries and enabled by weak internal controls and compliance and inadequate supervision; rationalisation, including ‘moral disengagement’ and optimism bias; and pressure/temptation, often set by the tone at the top of the company, highly competitive product markets, stock market pressure, heavily-leveraged incentive and reward systems and the strong personal need to out-perform peers.
While management control systems are important, he said leadership is also critical and needs to pay attention to the warning signs.
Reducing corporate crime means avoiding overlooking obvious red flags and includes sending the message that crime doesn’t pay for company or employees. In addition, Healy pointed out illicit business isn’t that profitable. Citing a Transparency International (TI) study, Healy showed profits from corrupt transactions at prosecuted companies was unexpectedly low – due to the costs of the bribes, sometimes as much as 10 percent of the contract value. In addition, companies that were low-rated by TI had a 28 percent higher likelihood of media cites for corruption scandals.
In addition, everyone pays for corporate scandals. An HBR study of 2,000 executives who moved jobs showed executives who transferred from companies earned four percent less a year after moving to other organisations. This lasted for years, even for those who left before the scandal and had nothing to do with it. The costs of the stigma were also greater for women (seven percent), more senior executives (6.5 percent) and in countries with stronger regulatory and governance systems (six percent).
Leaders need to foster psychological safety, to hold people accountable and “don’t play favourites,” he said. A 2011 PwC survey conducted by Healy and Serafeim, looking at punishments of primary crime perpetrators, found while 42 percent were dismissed and faced legal action, 46 percent were dismissed with no legal action and 13 percent remained with the organisation. More junior managers/ staff who were the primary perpetrators were 24 percent were more likely to face legal action and/or dismissal than seniors. That same study showed senior men receive weaker punishments.
He advocates recruiting leaders with a record of integrity, to require employees to make tough decisions in groups, rather than in isolation, and to reach out to competitors to develop new norms.
Healy urges his own students to look ahead into the future at the changing standards of integrity. He says they need to submit their management systems to two tests: the legal standard, that will gradually increase over time; and the New York Times/Washington Post test, which is rapidly escalating, where the corruption scandal appears on the front page of major newspapers damaging a company’s reputation – and bottom line.
As the world is changing around us, it’s important to keep on top of the red flags. The tone is set from the top.
Paul Healy is the James R Willeston Professor of Business Administration at Harvard Business School. The presentation was organised by the Scots College Old Boys Association (SCOBA). Healy, an old boy of the college, was awarded a Great Scot award from the school’s headmaster Graeme Yule at the event in Wellington.