Scandals are bad for business and terrible for mainstream politicians. As the number of claims of improper conduct and undue influence rise within the business world, the public is reminded of the faults in the system of capitalism, which fuels anger, distrust, and anxiety amongst many of the voting public.
For businesses relying on powerful brands and loyal customers, the damage from a scandal is immediate and real.
In the UK, the recent collapse of businesses such as Carillion and BHS has resulted in a rethink on accountability and governance. The Big 4 audit firms are now facing the backlash – regulation that could potentially see them broken-up and forced to become audit-only businesses.
In Scandinavia, a region known for their transparency, the wave of dirty money scandals stemming from money laundering amounting to hundreds of billions of pounds has shaken public confidence.
The story is far from over
The same applies to The Netherlands. In Canada, a corporate corruption scandal has now turned into a political match that has tarnished Prime Minister Trudeau.
The United States and Brazil have been prosecuting corruption issues of astronomical levels at Petrobras and Odebrecht. No matter where one looks, corporate crises are everywhere.
There are important lessons that can be drawn from the processes these organizations follow in investigating and remediating past faults. Below are 7 key lessons from these explosive corporate crises.
1. Crises build up over years – not days
Crises don’t generally arise without warning – usually issues are raised in an audit report or press article in the years prior to a crisis breaking.
It’s essential for businesses not to fall for the all-too-appealing myth that that there is just ‘one bad apple’ behind a scandal and the rest of the company is operating exactly as it should.
Allegations of corporate misconduct should act as the catalyst to begin a review of more pervasive failures. It is important to get the all facts behind the allegations of misconduct and understand the context.
2. Independent experts are key
An independent investigation is imperative to diagnose the nature and extent of issues and to signal the company’s intolerance for misconduct. Independent experts are needed to gather the facts and produce a report necessary to take action.
3. Never go back to ‘business as usual’
Remediation is critical. Following the internal investigation, facts and issues come to light that may demand immediate reviews of personnel, business practices, and organizational safeguards to prevent further misconduct.
A clear strategic plan for reform and recovery is needed to strengthen organization’s structures and rebuild trust and goodwill with various stakeholders.
4. Governments aren’t the enemy
Governance and control structures are imperative to prevent misconduct and reassure the public and regulators.
Once an independent investigation has been conducted and immediate action to prevent further misconduct has been taken, the groundwork must then be laid for (renewed) management to seek criminal and civil resolution for past corporate misconduct.
This will entail agreeing with prosecutors and other parties on fines, penalties, disgorgement of ill-gotten gains, restitution, and commitments that prevent recidivism.
5. Ethics start at the top
Criminal and civil liability are important considerations.
As part of the reform process, internal control and compliance structures need to be redesigned and enhanced, starting with the implementation of an effective ethics and compliance programme. Such a programme begins with the right tone at the top.
New leaders are likely needed to steer this process. Then suitable policies, processes, and systems need to be introduced to prevent, detect, and respond to issues. Business models and practices may need a deep risk-focused review.
6. Company culture is key
Good leadership and strong governance are imperative.
Extreme financial pressures mixed with psychological and societal factors can lead to poor judgements and short-term thinking within an organization.
One symptom of this is willful blindness towards ethical issues. Over time, the erosion of ethics will result in a potentially catastrophic system failure.
A corporate transformation is achieved when integrity is institutionalized across an organization and is reflected in the words and deeds of leadership.
7. Beware of your blind spots
Unduly risky strategies and business models must be addressed.
Companies are frequently lured in by the temptation of rapid growth by acquisition, exciting new product lines, and bold forays into new markets that are perceived as lucrative, but all too often these expansions are not a fit with the company’s core purpose.
Additionally, some of these expansions are ill-conceived, hastily executed, or have inadequate integration plans.
All in all, it leads to unnecessary risk and complexity, reduced oversight, and the emergence of ethical blind spots on the part of leaders.
History tends to repeat itself. Bearing these lessons in mind can help leaders prevent, detect and respond to issues before they explode into a scandal.
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