How to Avoid Corporate Scandals and White Collar Crime
I must have written it a dozen times by now: short term value creation (listening too much to financial markets and greedy investors) is a sign of poor leadership, is also the reason behind most white collar crimes and resulting corporate scandals, and was even a key reason behind the last economic downturns.
White-collar crimes include things like bribery, cheating, embezzlement, fraud, money laundering.
Recently there have been corporate scandals at Alstom, Odebrecht, Petrobras, Rolls-Royce, Siemens, Telia, Teva Pharmaceutical, VimpelCom, Volkswagen, etc.
New research by Prof. Healy and Prof. Serafeim confirms that the root causes of these white-collar crimes and following corporate scandals isn't ineffective regulations nor compliance systems, but weak leadership and a flawed corporate culture. A culture in which making the short-term numbers trumps any concerns about how the targets are met.
Not much seems to have changed since Marianne Jennings' excellent 2006 book "Seven Signs Of Ethical Collapse
". While Jennings already provided detailed antidotes to each of the 7 reasons for ethical collapses she mentioned, Healy and Serafeim say corporate leaders have to be deeply involved in setting social norms at their firms and in managing the risk of misconduct in the following ways:
- Broadcasting a clear message that crime hurts everyone in the organization.
- Not making exceptions when they punish perpetrators. Don't just talk the talk, but also walk the talk.
- Recruiting and promoting managers who value integrity.
- Creating decision-making processes that reduce the opportunity for illegal or unethical acts.
- Going the extra mile in making their transactions in corrupt countries transparent.
- Being proactive when it comes to cleaning up their industry's dirty practices.
- Supporting societal institutions that empower corporate accountability and honest business behavior.
Surprisingly Healy and Serafeim do not mention in above list that leaders should manage for long term value creation
, even when they do mention that short-termism is the ultimate reason behind most white collar crime. Anyway, the issue is not we don't know what has to be done; the issue is that a number of global firms still don't do it, a global regulator is missing and local regulators still let them get away with it, often to protect local interests.
Source: Paul Healy and George Serafeim: "How to Scandal-Proof Your Company", HBR Jul-Aug 2019.