White-Collar Crime
Despite efforts to crack down on illegal activity, crimes like fraud, bribery, embezzlement, and money laundering are rampant in corporations. What steps can leaders take to fix this growing problem?
When I began practicing law, in the 1970s, white-collar crime didn’t get much attention outside my old office, the U.S. Attorney’s Office for the Southern District of New York. Prosecutors cared much more about homicides, drug kingpins, and the mob. Financial crimes weren’t considered very serious or interesting by most prosecutors. That’s changed for a variety of reasons.
Over the past 30 years, we’ve had a large body of white-collar prosecutions, and they’ve shown us that deterrence really works. For instance, people on Wall Street pay a lot of attention to how prosecutors treat insider-trading cases. They say, “Gee, somebody just like me went to jail for a significant period of time.” There’s no bigger deterrent than a jail sentence. Most white-collar defendants have nice lives, and they value their freedom and liberty. Prosecuting these crimes and getting judges to send white-collar criminals to jail really does alter people’s conduct. As a prosecutor, I prioritized white-collar crime and helped make people more aware of the costs of crossing the line.
I’ve also done a lot of defense work, and that’s given me a window into what motivates people accused of white-collar crimes. As a prosecutor, you tend to stay at arm’s length from alleged perpetrators, but when you’re defending them, you wind up exploring their motivations in a very intimate way.
Why do they do it? Part of it is that white-collar crime doesn’t seem to inspire the deep feelings of guilt caused by, say, a crime such as assault, where you’re doing tangible, significant harm to someone. Some of these crimes, like tax fraud, may be perceived as “victimless,” even though that’s not really true. Part of the motivation is greed, of course, but there’s more to it. The piece that the public underestimates is ego. Many of the people who commit these crimes have been successful, and they don’t want to fail. Very often the market has turned on them, but they need other people to still see them as successful. There’s often a financial motive, but in a highly charged business where there are temptations, you have to account for human nature and the need for status and continued success, too.
When I do an investigation for a company that’s experienced an ethical or legal lapse—I’m doing a lot of that work right now—I’m not just trying to uncover what happened. A standard part of the process is to make recommendations about how to prevent future wrongdoing. Compliance programs are important, but what really matters is the culture and the tone that a leader sets for the organization—that’s often a more effective way to increase the odds that lapses won’t happen again.
In the aftermath of a scandal, some leaders will claim they didn’t know what was going on. Sometimes that’s true. But when it is, you have to ask if the leader built a communication system that’s designed to bring bad news up to his or her level, or whether the system is designed to insulate leadership. Every company has hotlines for whistle-blowers; only some of them directly reach the board’s audit committee or the CEO’s office. In those systems, in which the most-senior leaders are actively seeking out complaints and allegations, the compliance culture is much stronger. In contrast, some hotlines seem designed to give leaders plausible deniability: We have a system for reporting complaints, and there haven’t been many. Leaders have to ask, Why is that? Are employees reluctant to come forward for fear of retaliation?
The biggest mistake companies make in trying to prevent crime or misconduct is to ratchet up compliance simply by throwing more resources at it. They believe every extra dollar has the same incremental effect. That’s incorrect. Particularly when you’re dealing with potential violations of the Foreign Corrupt Practices Act (which targets bribery) or the Bank Secrecy Act (which focuses on money laundering), you need to be surgical and intelligent about where the biggest risks are. This is especially true in global organizations—very often problems are popping up far from headquarters, in overseas subsidiaries or with joint venture partners.
Much of prevention really comes down to culture. If you’re a new leader in an organization, my advice is to let people get to know you—and your values. Let them know how serious you are about doing the right thing. Make it clear that if they see someone do something wrong, they must report it—and that by doing so, they’re supporting all the people in the organization. When someone strays, it diminishes the entire company, and employees can’t let that happen. That’s the message leaders need to deliver—and it’s how they must act, too.
One vital marker of an ethical culture is whether there really is a zero-tolerance policy for wrongdoing. Many companies claim to have one, but when high producers or senior people break the rules, leaders may go easy on them, either for business reasons or out of loyalty. That undermines everything. You can’t rely just on compliance and audits; you have to be willing to punish people who cross the line. To build an ethical culture, you have no choice but to follow through on your no-tolerance promise. Don’t just talk the talk; walk the talk.
Despite government-mandated corporate expenditures on systems to deter white-collar crime, data and anecdotal evidence indicate that it’s continuing to rise.
Extensive research suggests that the real culprit is not the systems but weak leadership and flawed corporate cultures that push employees to make the numbers at all costs.
Leaders need to broadcast that crime hurts everyone in the organization, punish perpetrators equally, hire managers with integrity, create decision-making processes that reduce the opportunity for illegal or unethical acts, and champion transparency.
In the late summer of 2016 allegations that employees of Wells Fargo’s retail banking unit had opened more than a million unauthorized accounts and sold customers thousands of unneeded products hit the national news. The scandal cost Wells Fargo dearly. On September 8 the Consumer Financial Protection Bureau (along with the Office of the Comptroller of the Currency and the City and County of Los Angeles) fined the company $185 million—and after revelations of more consumer abuses came out, Wells Fargo would later be fined an additional $1 billion and shell out $575 million to settle legal claims. By the end of September, the bank’s stock price had fallen 13%, slashing Wells Fargo’s capitalization by some $20 billion, and it continued to stagnate while the market soared. John Stumpf, who resigned as CEO that October, and Carrie Tolstedt, the head of the retail bank who’d announced her retirement that July, were forced by the board to forfeit tens of millions of dollars in pay. Four of the unit’s senior managers were terminated for cause. Wells Fargo’s reputation was left badly tarnished—a humiliation for the 160-year-old institution.
Misconduct was widespread in the retail unit even though Wells Fargo had control and risk-management systems, which were overseen by its board of directors. So what went wrong? An investigation commissioned by the board found that a warped corporate culture, a decentralized organizational structure, and poor leadership were to blame. The postmortem revealed that much of the illegal behavior had been prompted by pressure to hit overly aggressive sales targets linked to bonuses and promotions. Management had received ample warning signs: From 2000 to 2004 the number of cases in which employees had gamed sales and compensation goals rose 10-fold, and critical articles that raised questions about the new accounts, the pressure on the sales force, and increasing employee turnover had appeared in the Wall Street Journal in 2011 and the Los Angeles Times in 2013. Yet leaders of the retail bank had blamed a few bad employees for the problems. Accustomed to deferring to the business units, Stumpf simply accepted that explanation.
Unfortunately, the Wells Fargo saga is not unique. White-collar crimes—such as fraud, embezzlement, bribery, and money laundering—have destroyed enormous amounts of shareholder value at companies like Alstom, Odebrecht, Petrobras, Rolls-Royce, Siemens, Telia, Teva Pharmaceutical, VimpelCom, and Volkswagen. In aggregate, the losses add up to billions of dollars. The legal penalties companies incur can be substantial: Siemens was hit with $1.6 billion in fines, Odebrecht $3.5 billion, and Volkswagen about $20 billion. And then there are the business costs: the time and energy that management must devote to cleaning up the mess and negotiating settlements rather than to beating rivals; the reputational damage; the impact on sales, profits, and stock price; declines in employee engagement and productivity; and increases in employee turnover. Research by the University of Washington’s Jonathan Karpoff and others indicates that those costs swamp the legal penalties.
In response to high-profile cases and rising public concern, regulators in the United States and other countries have demanded that companies increase their efforts to deter wrongdoing. As a result, almost every multinational company now invests heavily in compliance and espouses zero tolerance of illegal behavior by employees. Yet in practice, increased regulation and controls alone do not guarantee that crimes are detected early or averted. Indeed, both anecdotal evidence and the data indicate that white-collar crime not only is still rampant but is actually rising. In a 2018 PwC survey, 49% of 7,228 organizations reported that they had experienced economic crime and fraud in the prior year—up from 30% of organizations in a 2009 survey—and that more than half the perpetrators were “internal actors.” Meanwhile, stories about white-collar crime—including allegations that Goldman Sachs employees were involved in a multibillion-dollar fraud in Malaysia, that Deutsche Bank helped clients transfer money from criminal activities to tax havens, and that Airbus engaged in corrupt contracting practices—continue to abound in the media.
The root cause of the problem isn’t ineffective regulations and compliance systems, however. It’s weak leadership and flawed corporate culture.
Indeed, our research reveals that many of the firms hit by major scandals had controls similar to their peers’ and, like Wells Fargo, had received early warning signs of impending problems. But at each of those companies, a culture of making the numbers at all costs trumped any concerns about how the targets were being met.
For the past 10 years we’ve studied white-collar crime and explored how companies can create an environment that discourages it. We used data from individual companies and from surveys by PwC, Transparency International (an NGO founded in 1993 to combat corruption), the World Bank, executive recruiting firms, and other organizations. All told we looked at data on thousands of organizations and individuals. In addition, we interviewed more than 50 senior and middle managers at 10 organizations that had experienced scandals. And in our research we’ve found time and again that while compliance systems are important, leadership plays a critical role in shaping an organization’s attitudes toward preventing crime and its responses when wrongdoing is detected. Yet all too often, executives abdicate responsibility.
A culture of making the numbers trumped any concerns about how targets were met.
In our interviews we heard a common sentiment: Senior executives at most companies that suffered highly publicized transgressions didn’t see these incidents as their personal responsibility to address or as evidence that something was fundamentally amiss in their organizations. Rather, those leaders viewed them as extremely rare occurrences caused by “a few bad apples” and insisted that they couldn’t have been prevented. Although the leaders accepted the importance of investing in compliance systems and said they expected employees to act with integrity, they typically saw outperforming competitors and wowing investors—not enforcing high legal and ethical standards—as their priorities. Even worse, all too many leaders overlooked questionable business practices or were lenient toward members of their old-boy networks who were caught committing crimes. That indifference trickled down to employees. It encouraged them to develop a “check the box” mentality: to satisfy training and reporting requirements without internalizing the standards that compliance programs are supposed to instill.
Our research also shows that the leaders who are effective in combating illicit employee behavior are deeply involved in setting social norms at their firms and in managing the risk of misconduct. They do so by broadcasting a clear message that crime hurts everyone in the organization. They do not make exceptions when they punish perpetrators. They recruit and promote managers who value integrity, and they create decision-making processes that reduce the opportunity for illegal or unethical acts. Finally, they go the extra mile in making their transactions in corrupt countries transparent, are proactive when it comes to cleaning up their industry’s dirty practices, and support societal institutions that empower corporate accountability and honest business behavior.
In our work we made two startling discoveries: Business obtained through illicit means adds little or nothing to the bottom line, and people across the company—not just the perpetrators, their supervisors, and the CEO—suffer when a crime is exposed. Leaders need to understand this and spread the word throughout their organizations.
In public, leaders of multinationals state that their companies do not tolerate corruption. But many turn a blind eye when people in their organizations pay bribes—either directly or through local partners—in developing economies where anticorruption laws are weakly enforced. Their rationale: “We have no choice. If we don’t pay bribes, we won’t be able to compete in those markets and will suffer financially.”
The facts paint quite a different picture. Two cases in point are Siemens and SNC-Lavalin, engineering and construction companies that in the past 12 years were separately charged with bribery. Senior executives at those firms told us that audits conducted afterward revealed that the profits on the transactions involving the illicit payments were unexpectedly low—largely because of the substantial cost of the bribes (as much as 10% of the contract value).
Those companies’ experiences appear to be the rule, not the exception. In our research we looked at the financials of 480 multinationals that had been rated by Transparency International in 2006 on the anticorruption systems and activities disclosed in their annual reports and on their websites. When we compared their performance from 2007 through 2010, controlling for industry, host country, stock market listing, and other relevant factors, we found that the firms with poor anticorruption ratings had 5% higher annual sales growth in weakly regulated regions than firms with good ratings did. However, the multinationals with poor ratings also saw lower profitability on their sales growth in weakly regulated regions than their highly rated peers did. The profitability differences were comparable in magnitude to the bribes typically paid in those regions.
The extra sales growth generated by illicitly obtained business also doesn’t boost shareholder value—even if the bribes go undetected. Using standard valuation models, we found that among poorly rated firms, the increase in shareholder value from additional sales in weakly regulated regions was offset by lower profitability. Of course, if corrupt practices come to light, a company’s reputation will suffer and its stock price will take a hit. That is no small risk: When we examined the data from 2007 to 2010, we found that companies with poor anticorruption ratings had a 28% higher likelihood of having a scandal break in the media.
Perpetrators of crimes who are punished obviously pay a price financially and professionally. But what is less obvious or widely recognized is the damage to employees who had nothing to do with the crime. When we studied more than 2,000 senior managers (C-level executives and leaders of business units and functions) who had changed employers, we found that people who had left companies with criminal scandals to join new organizations were paid nearly 4% less than their peers. The difference in salaries persisted for years, resulting in a significant loss of wealth for the affected executives—even those who’d left a company before a scandal and were completely uninvolved. The cost of this stigma was greater for more-senior executives (a 6.5% difference in annual pay), for women (7%), and in countries with strong regulatory and governance systems (6%).
All these findings, not to mention the legal penalties and business costs, should persuade leaders to take a personal stand against corruption. They should use the data from our and others’ research to show people throughout their organizations that crime is costly to the firm and to their own careers, and that it’s everyone’s job to fight it.
Of course, leaders must also take seriously any concerns raised by employees about possible wrongdoing and performance pressures. A failure to do so makes it more likely that good people will find themselves in situations where they feel compelled to behave badly or to tolerate transgressions. Though that may sound obvious, we have found that in far too many instances, leaders don’t act on problems that have been brought to their attention. The board-commissioned postmortem of the Wells Fargo scandal found that Tolstedt, who had led the retail unit since 2007, didn’t like to be challenged or to hear negative information; she intimidated people—even senior managers—at the retail bank. Stumpf, the parent bank’s CEO, minimized concerns about misconduct in retail banking that were first raised in 2002 and then raised again in 2004 and from 2012 to 2014. When the critical Los Angeles Times articles appeared in 2013, Stumpf (and the board) failed to recognize the full harm to customers and adequately investigate the allegations. And although the reports of misconduct under Tolstedt were persistent, Stumpf continued to support her, even when Wells Fargo’s lead independent director and the chairman of the board’s risk committee suggested that she be dismissed in late 2015.
Ensuring that whistle-blower programs work effectively is crucial. (Recent research conducted by our colleague Eugene Soltes found that 20% of whistle-blower hotlines do not function properly and that organizations with weak internal controls do not permit whistle-blowers to remain anonymous.) Leaders should honor—or at least protect—whistle-blowers, who too often are treated poorly by managers and their colleagues for “ratting out” perpetrators. Even generous financial rewards for whistle-blowing, which can take years to collect, pale in comparison with the steep costs: lost relationships, stress on the individuals and their families, difficulty in landing another job.
Last, leaders must be crystal clear with employees about the behavior they won’t tolerate. Interviews we did at Siemens and SNC-Lavalin revealed that those firms’ executives failed to set explicit boundaries between acceptable and unacceptable practices for salespeople and business partners operating in highly corrupt countries. One Siemens executive told us that the message employees received from their managers was “Get the business—I do not need to know how you got it.”
In contrast, consider the steps a large pharmaceutical maker that had experienced a fraud took to communicate its stance on such behavior: It commissioned Harvard Business School to write a case about the incident and used that case in its own training sessions to help managers diagnose the causes of the problem and brainstorm ways to deter future incidents.
To make it clear to everyone that they really mean it when they say illicit behavior will not be tolerated, leaders must respond decisively to crimes, dismissing and taking legal action against all perpetrators on a uniform basis. Yet anecdotal evidence and our research show that many leaders fail to do this.
Siemens permitted managers caught paying bribes in Italy to retire with full pensions, and it paid a $1.6 million settlement to the departing CFO responsible for overseeing the contract involved. The #MeToo movement’s spotlight on harassment and assault faced by women has brought to light numerous cases in which corporate leaders, and in some cases boards, allowed senior male executives to remain in their jobs despite multiple allegations that they had abused female employees. And leaders of the Roman Catholic Church treated clergy accused of child molestation leniently, often by moving them to other parishes rather than expelling them or supporting their prosecution.
To examine whether that kind of permissiveness is pervasive in business, we analyzed the punishments companies gave to perpetrators of white-collar crimes. We used data from a PwC survey that asked firms about their experiences with crime in 2011, including data on the nature of the offenses, punishments, and main-perpetrator demographics. Of the 3,877 firms responding, 608 reported detecting white-collar crimes by employees that year. When we looked at the most serious crime each firm reported, we found that 42% of the main perpetrators had been dismissed or left the organization and faced legal action, 46% had been dismissed with no legal action, and 13% remained with the organization (with or without a transfer or warning). The low rate of legal action against the perpetrators most likely reflects the practical challenges of prosecuting white-collar criminals: Evidence that an individual committed an act doesn’t suffice; there also has to be proof that he or she intended to commit it or had knowledge of wrongdoing. Given the potential penalties and reputational risks to companies, corporate attorneys often advise executives to quietly dismiss perpetrators without any legal action.
Treating perpetrators leniently, however, sends a message to potential offenders that crime pays or isn’t risky, and it also damages the morale of honest employees. At several companies plagued by crime, the employees we interviewed expressed frustration over their leadership’s unwillingness to remove senior managers accused of wrongdoing; the employees said it hurt morale and led some people to quit.
Another troubling finding of our research was the uneven pattern of punishment. Controlling for the type of crime and its magnitude, our analysis of the PwC data revealed that perpetrators who were junior managers or staff members were 24% more likely to face legal action and dismissal than perpetrators who were senior executives. Even when crimes were similar, senior executives were more likely to be given a warning or an internal transfer, and junior managers were more likely to be dismissed.
Undoubtedly, leaders are more reluctant to fire a senior executive because of his or her relationships with customers or the belief that the person’s expertise will be difficult to replace. But our findings about how women are treated relative to men suggest that this is not the full story and that cronyism and favoritism are significant factors. Senior women, who are often seen as outsiders in informal male social networks and are less likely to have close personal relationships with the male decision makers who determine punishments, are disciplined more severely than senior men who’ve committed crimes of the same type and magnitude.
Most senior executives were given warnings; most junior managers were dismissed.
Companies operating in countries with greater workforce gender inequality (such as India, Turkey, Middle Eastern nations, Indonesia, and Italy) were also more likely to impose harsher punishments on senior women than on senior men. In addition, we found that punishments were harsher for senior women at firms that had a weaker commitment to internal controls and that failed to report crimes to regulators, thereby making it easier to respond to them inconsistently.
The obvious remedy is to create and religiously enforce a policy of punishing everyone equally. That’s what Erik Osmundsen did at Norsk Gjenvinning (NG), a Norwegian waste management company. Soon after being appointed CEO, in 2012, he set out to eliminate widespread fraud, theft, and corruption at the firm. He created a set of values that included behaving like a responsible entrepreneur—one who did not cut corners—and being a team player within both the company and society. The values were translated into specific codes of conduct for each job, which every employee had to agree to follow. The company then implemented a four-week amnesty period, during which employees could confess any transgressions they had performed or witnessed. After that, nobody was forgiven for any infraction. Altogether about 170 operating and staff managers—roughly half the total—left the firm over the next 18 months. The vast majority chose to quit; a handful were fired. (See “We Were Coming Up Against Everything from Organized Crime to Angry Employees,” HBR, July–August 2019.)
To change the culture of a company plagued by systemic crime, you need to bring in new leaders with a reputation for honesty. If the industry itself is rife with corruption, it may be necessary to hire executives from other industries, who will have a different perspective and are likely to shake up the status quo.
Siemens replaced Klaus Kleinfeld, who had stepped down as CEO during the bribery investigation, with Peter Löscher, an executive from the pharmaceutical industry. One key factor in Löscher’s appointment, cited in the press release (in a rare move for such announcements), was “his upright character.” Recognizing the challenges in changing the culture at Siemens, Löscher brought in from the outside several senior managers whom he had worked with previously and who he knew had high integrity. They included Andreas Pohlmann as chief compliance officer and Peter Solmssen as general counsel and member of the management board. Both men, along with Barbara Kux, who came in as chief sustainability officer and member of the management board, played a critical role in developing a plan to address the problems at the company and reform its culture. (See “The CEO of Siemens on Using a Scandal to Drive Change,” HBR, November 2012.)
Since NG’s problems were endemic to the waste management industry, Osmundsen opted to recruit fresh blood from outside it (from building materials, aluminum, retail, oil and gas, and soft drink firms). He persuaded people to join NG with his vision of making it a model green company—one that, by pursuing innovative approaches to waste management, could play a significant role in furthering environmental sustainability. In the short term, employee turnover hurt the company’s financial performance. But within three years it had recovered financially and was well-positioned for more-profitable growth.
When Statoil, a Norwegian energy company (recently renamed Equinor), established a large market presence in Angola, its executives and board recognized that its employees would face pressure to pay bribes there. (Transparency International has ranked Angola one of the most corrupt countries.) To reduce the likelihood that they would succumb, the company’s leaders ordered employees to make decisions in groups. This was a direct result of Statoil’s experiences in Iran. In 2004 and 2006 the company agreed to pay fines in Norway and the United States, respectively, for bribing a government official to secure a contract in Iran (though the firm neither admitted nor denied guilt). A senior executive told us that one lesson from that scandal was that employees were much more likely to cut corners and do the wrong thing when they made calls on their own.
Making a tough decision in a group requires people to have open and honest discussions, and that doesn’t happen automatically. Employees must have faith that other group members are committed to hearing and valuing their opinions and that the firm’s leaders will support the group’s decisions, even if they have adverse financial consequences. If leaders don’t inspire that trust, simply relegating decisions to groups is unlikely to solve the problem. Research by our Harvard colleague Amy Edmondson has shown that it takes strong leadership to create a climate of psychological safety. Leaders must actively promote the behaviors they expect people throughout the organization to adopt—by, for example, showing that it’s OK to ask tough questions and express dissenting views, empowering frontline employees to speak frankly to their superiors about signs of potential trouble, being candid about the organization’s past errors and openly discussing them, and acknowledging their own ignorance about a topic or area of expertise.
After Statoil’s bribery charge, Helge Lund, its new CEO at the time, decided that the company would become one of the first firms in an extractive industry to publicly disclose the payments they made to foreign governments to gain access to countries’ natural resources—a practice that regulators and public interest groups had long advocated for. This decision sent a strong message to employees that the old ways of conducting business would no longer be tolerated.
Supporting institutions that investigate and report on corruption is another way that leaders can demonstrate to employees that they’re serious about conducting business in an ethical fashion. The work of these organizations promotes fair competition and increases the public’s confidence that business crimes are detected and punished; and to the extent that it reduces corruption, it stimulates economic development.
Statoil became one of the original members of the Extractive Industries Transparency Initiative (EITI), which aims to bring together companies, governments, and NGOs to reduce corruption in resource-rich countries and increase transparency about payments by oil, gas, and mining companies there. Over time participation in the initiative has steadily increased, and while early EITI reports provided aggregate information on company payments and country revenues, the latest frequently include detailed company disclosures of payments. Collective action appears to be moving things in the right direction: Our empirical research, analyzing data from 186 countries over more than 10 years, suggests that countries with EITI reporting have experienced a significant decrease in corruption, especially those that began with high levels of it.
At Siemens, Löscher and Solmssen reached out to competitors, governments, NGOs, and other stakeholder groups to make a case for broader reform. In 2009, as part of its settlement with the World Bank for its past misconduct, the company agreed to spend $100 million over 15 years to support organizations and projects fighting corruption through collective action, education, and training. By the end of 2017, it had made $73 million in grants for 55 projects. In addition, Siemens became a member of the World Economic Forum’s Partnering Against Corruption Initiative (PACI), which includes 87 major companies.
Transparency International and the World Bank (which created a program to fight corruption in 1996) both are active in educating and informing companies and the public. These organizations support research on corruption and regularly rate countries on perceptions of the extent of their public-sector corruption.
Business leaders serious about combating crime can and should support journalists.
Another institution that plays an important role is the media. Smaller organizations that report on corruption are emerging beside the major news outlets. For example, the FCPA Blog publishes news, commentary, and research findings to help compliance professionals, business leaders, and others understand how anticorruption laws work, how corruption arises, and how it affects people and organizations. In Russia, Alexey Navalny operates RosPil, a nonprofit at which a small group of lawyers investigate and report on potential incidents of corruption. In India, Ramesh and Swati Ramanathan have created ipaidabribe.com to provide a platform for people to report incidents when they’ve been asked to pay a bribe.
Research by Aymo Brunetti of the University of Bern and Beatrice Weder of the Graduate Institute Geneva confirms what you would expect: A free press lowers corruption. But press freedom is under attack: Hostility toward the media is no longer limited to authoritarian countries; it has spread to democratic nations, where efforts to threaten and delegitimize the media are on the rise, according to Reporters Without Borders, an NGO that publishes the annual World Press Freedom Index. Business leaders serious about combating corruption can and should support journalists, by publicly recognizing their legitimacy and defending them when they come under attack.
In large organizations, mistakes will be made. The world is a messy place, and humans are imperfect. But by creating a culture that encourages employees to act ethically and legally, leaders can minimize the likelihood that a scandal will hit their company and increase its ability to bounce back from any illicit actions that do occur. To set the right tone, leaders have to model high standards in both their professional and personal lives.
All too many leaders still fail to continually stress the importance of organizational integrity. They either underinvest in compliance systems or have a check-the-box mentality toward risk management and delegate the responsibility to lawyers and accountants. Red flags go unheeded. When crimes are detected, they’re dealt with quietly and unequally. These leaders justify their behavior by saying, “Corruption is an industry problem that we cannot fix,” “It’s the way business is conducted in these countries,” or “We can’t afford to lose the business.”
In contrast, other leaders, many operating in high-risk countries or sketchy industries, set high standards and practice what they preach. They don’t just install strong compliance systems; they also support training programs and performance-feedback and whistle-blowing systems; create an atmosphere where it’s psychologically safe to speak up when something seems wrong; and engage their industry peers to fight corruption together. Our research indicates that organizations with such leaders don’t pay a high financial price for their integrity. Although they may not grow as quickly as their less-scrupulous peers, their growth is more profitable.
Then there are the less widely discussed benefits. Many employees who have chosen to work at high-integrity companies in high-risk countries and industries have told us that they did so because of those firms’ values. Some people even told us that they accepted lower pay from those employers. Such companies and their leaders have the respect of their customers, regulators, and communities. They are more likely to prosper and endure.
Paul Healy is the James R. Williston Professor of Business Administration at Harvard Business School.
George Serafeim is a professor of business administration at Harvard Business School, a cofounder of KKS Advisors, and the
chairman of Greece’s National Corporate Governance Council. Follow him on Twitter @georgeserafeim.
Every sizable organization has integrity gaps—areas where what’s considered appropriate behavior diverges from the norms set by its leaders. Within these pockets, things like offensive language, overly aggressive sales practices, or conflicts of interest may be overlooked or even implicitly condoned. Such lapses not only endanger the reputation of the company but also pose regulatory and liability risks.
Many corporate leaders don’t discover the magnitude of integrity gaps until a problem has blown up into a crisis and the threat of government action or litigation looms. Board members are often taken by surprise, asking, Why didn’t we spot this earlier? Shouldn’t we have known where we were vulnerable and how? Compliance and ethics programs are supposed to prevent such crises, but the people running them are often playing defense rather than strategically rooting out trouble before it grows and spreads. Fortunately, however, company leaders can get ahead of the risks by setting up systems for early detection through routine data collection.
Integrity gaps arise for several reasons. In a geographically dispersed organization, local norms and cultures can vary widely, making it a challenge to set unified standards and expectations. In an extensive global survey examining fraudulent business practices, for instance, EY found that no senior managers in Switzerland approved of misstating financial performance. But the same survey found that more than a quarter of managers in Vietnam and Indonesia were willing to engage in such deception. Attitudes and ethics can also differ by demographic segment. EY’s survey revealed that one in five employees under age 35 could justify paying cash bribes to help a business survive an economic downturn, but among employees over 35, only one in eight could.
Before your organization can develop a plan to identify integrity gaps in its culture, it needs to accept two things:
First, some misconduct occurs at your firm. When I looked at data from a host of internal reporting sources for three innovative Fortune 100 companies—none of which has faced a recent civil or criminal charge—I found that on average, each firm had experienced a violation that could lead to regulatory sanctions (such as a bribe or financial fraud) once every three days. While their organizations have issues more frequently because of their size, these companies also have some of the most robust and effective controls I’ve seen. Their violations were much smaller than the kind that hit the news, but they illustrate that even companies that invest heavily in compliance will have some malfeasance within their ranks.
Second, a considerable amount of misconduct is not going to be internally reported. Violations that company leaders learn about through traditional channels are probably only the tip of the iceberg—and that should make leaders nervous. Though some attorneys argue that a company shouldn’t proactively try to identify misconduct because it could turn into discoverable evidence that might be used against the firm, “ignorance is bliss” is not a sustainable way to run a business. Allowing integrity gaps to grow is especially unwise in an era when employees are increasingly likely to bring allegations straight to the media or regulators if they feel ignored by their leadership.
Once you’ve acknowledged that integrity gaps exist in your organization, how can you figure out where they are? Just ask.
Randomly giving employees a simple survey can provide a ground-level view of practices that senior leadership may be missing—and help you identify where the problems lie. The survey has three questions:
Please check all that apply: (a) conflicts of interest, (b) sexual harassment, (c) bribes or inappropriate gifts, (d) accounting irregularities, (f) antitrust violations, or (e) theft.
While the kinds of misconduct companies need to ask about will vary with their business models and risks, the question above includes examples of the most pertinent problem areas. Different organizations, and subgroups within them, will get dramatically varying responses to this part of the survey. I have seen some companies where fewer than 0.5% of employees report observing certain types of questionable behavior. But that figure can reach 10% or more in individual geographic and functional subgroups in some firms.
When analyzing the survey data, you should focus on looking for integrity problems rather than strictly legal violations. For example, a senior manager might regularly say things that wouldn’t legally constitute sexual harassment but that nonetheless make employees deeply uncomfortable. Or an employee might believe he witnessed a payment that would violate the U.S. Foreign Corrupt Practices Act when it was technically a facilitation payment permitted under the law. These issues are still worth identifying because anything employees perceive to be a violation can affect workplace morale. Moreover, they often can be leading indicators of more-serious misconduct that will develop into legal or regulatory exposure.
Please answer yes or no for each of the following: (a) conflicts of interest, (b) sexual harassment, (c) bribes or inappropriate gifts, (d) accounting irregularities, (e) antitrust violations, or (f) theft.
Leaders, especially those who are legally focused, sometimes take false comfort in the fact that they have a code of conduct that requires employees to report any violations they see. In reality, however, that promise is a check-the-box exercise for many employees. The responses to the second question will often illuminate gaps between the code and actual behavior.
Gartner, which is regularly asked to survey companies’ employees about their organizational culture, has observed that reporting rates vary significantly for different kinds of violations. Workers are most likely to report a theft of company property or accounting irregularities; 46% of those who observed a theft reported it, and 41% of those who saw fraudulent accounting practices did. However, the reporting rate is considerably lower in other instances, including inappropriate gift giving (27%) and conflicts of interest (34%). Notably, Gartner’s data shows that the average reporting rate is less than 50% for all types of violations, whether they’re HR related, sales related, or regulatory related.
Please provide a separate answer for each of the following: (a) conflicts of interest, (b) sexual harassment, (c) bribes or inappropriate gifts, (d) accounting irregularities, (e) antitrust violations, or (f) theft.
The potential reasons employees don’t report wrongdoing are numerous. They may fear retaliation, be reluctant to get involved, feel conflicted because the incident involved a friend, or worry that exposing the misbehavior could undermine the firm’s goals or financial performance. Fear of retaliation tends to be most common; in surveys done within companies, 10% to 30% of employees list it as their major concern.
Many of the barriers to reporting are institutional problems that require understanding the source of employees’ concern. Others, like not wanting to get involved, indicate that the reporting process itself is—or at least is rumored to be—too cumbersome. Companies that work to reduce that perception can increase reporting rates. In a recent internal pilot, compliance leaders at Kimberly-Clark went back to employees who had reported integrity issues (nonanonymously) and asked them whether they felt the reporting process was fair and whether they would recommend it to a colleague. Notably, the compliance executives did not ask whether the people reporting problems agreed with the outcome of investigations; instead they emphasized the aim of improving the process to ensure that people knew their input was valued and respected in the organization. On the basis of the feedback, Kimberly-Clark now is refining how it communicates to and trains people about the reporting process.
Identifying gaps is not a onetime HR exercise in finding the “bad apples.”
To get answers to these three questions, organizations can simply send employees a short “pulse” survey or integrate a survey into routine compliance training. Critically, data collection should be conducted anonymously—that is, without capturing individuals’ names or identities—to encourage complete candor. Anonymity can be preserved while the firm gathers nonidentifying metadata, including the location and rank of employees (assuming there are more than a few dozen people in each subgroup). That information will reveal to managers which parts of the organization deserve greater attention. To ensure employee confidentiality, many companies hire a third-party consultant to conduct the surveys and restrict access to their data to in-house compliance, legal, and audit teams.
Data from this simple survey can produce three types of insights:
Identifying the location of specific integrity gaps—by both function and geography—can be extremely valuable. By analyzing data on violations in these areas, companies can unearth the causes of misconduct and devise a strategy to address them—perhaps by redesigning incentives, creating new controls, or conducting training.
Identifying gaps is not a onetime HR exercise in finding the “bad apples” and separating them from the good. Violations often happen among the most dedicated and successful employees. These people may even be especially susceptible to certain kinds of misbehavior. For example, high-performing sales employees may feel more pressure to inappropriately book sales if they’re behind on the budget at the end of a quarter. This is why data collection should be done periodically across different groups of employees throughout the year. Ideally, each quarter a randomized subset of employees would be surveyed.
While it may be obvious that norms will differ among countries, offices, and even teams, figuring out how they differ and what to do about them is a challenge. Employees’ survey responses helped a large consumer products company tackle this. From them the firm learned that in one country where citizens feared monitoring and reprisal by an authoritarian government, workers were hesitant to call their local integrity hotline. To make them more comfortable about reporting their concerns, the company created a toll-free number for them in the United Kingdom.
To prevent wrongdoing, you need to understand issues that may be developing below the surface. Yet it’s often difficult to know what kinds of problems are slipping through compliance processes (like hotlines) and other internal controls. The survey data can help companies better estimate the actual amount of misconduct within the organization—and the amount that’s not being reported. Ultimately, this kind of modeling will help senior leaders get a clearer picture of the integrity issues and violations that otherwise would probably never come to their attention.
Many leaders publicize their firms’ commitment to integrity and say that their employees should feel empowered to speak up if they see something questionable. Yet the best leaders don’t rely on these statements alone. Instead they collect data to monitor and assess whether their organizations actually adhere to their ethical standards. Sustaining a company’s cultural integrity requires constant vigilance—and measuring progress is the best way to manage it effectively. Data that allows leaders to proactively identify emerging gaps is a critical tool for staying one step ahead of problems that might land their companies in the next day’s headlines.
Eugene Soltes is the Jakurski Family Associate Professor of Business Administration at Harvard Business School, where his research focuses on corporate misconduct.
When Erik Osmundsen became CEO of Norsk Gjenvinning (NG), Norway’s largest waste management and recycling company, in 2012, he believed the industry was ripe for consolidation, professionalization, and international expansion—and that the recycling movement spelled huge opportunities. But what Osmundsen didn’t realize was that waste management in Norway was rife with corruption—as it was around the world. (Before serving as an outside financial adviser to the private equity firm acquiring NG in 2011, he had no experience in the industry.) Discovering NG’s problems shortly after taking the helm, Osmundsen, now 50, decided to instill ethical practices at the company and turn it into an industry role model. He recently spoke with HBR senior editor Steve Prokesch about how he led that transformation. Here are edited excerpts of their conversation.
HBR: How did you discover that NG and the industry were plagued by corruption?
Osmundsen: I spent time in the field—on the front line with our people, customers, competitors, and suppliers. Although the staff I met generally had high standards, stories about corruption and the illegal disposal of waste started to come up. We uncovered embezzlement and internal and external fraud. There were also stories about other illegal activities people were doing—not for personal profit but because things had always been done that way in the industry.
During this period the nonexecutive chairman and I agreed to touch base frequently in the evening and discuss what had come up. That led to a board meeting where the directors basically said, “We’ll fully back you as long as you’re totally transparent about what’s going on and can create a competitive advantage out of this.” Our chairman, a partner at Altor, the private equity firm that had bought NG, was adamant that we look not only at the short-term costs of cleaning up the company and industry but also at the long-term gains from doing so.
We decided that first of all, we had to have a positive and inspiring vision of where the company was going, because we needed to motivate the people who would be rebuilding the company. Our vision was that NG would become a leading player in the circular economy—one in which all waste is recycled.
How did you change the behavior of employees?
Although the majority of our 1,500 employees at the time were, in fact, not corrupt, there was an underlying culture we needed to change—a culture of taking shortcuts because “this is the way it has always been done, and everyone else does it.” To address that, we started coming up with new values. One was a balance between entrepreneurship and responsibility. Responsibility means not cutting corners, not doing things illicitly. Entrepreneurship means truly understanding your customers and creating and capturing more value in a responsible way. Another of our values was being proactive in bringing about change. The last value was being a team player—on your own team, across the company, and in society.
Next, for every job we translated those values into a very specific code of conduct. For example, if you’re a driver, this is what you can and cannot do. Then we asked everyone to formally agree to follow it. That created an uproar. Some people didn’t want to sign the agreement; others were skeptical.
We simultaneously declared a four-week amnesty and asked everyone to disclose anything illicit or unethical. We said, “If you come forward, we will, to the best of our ability, not go further with a case against you, and you’ll be able to continue to work here as long as you promise not to do it again.” However, we were clear that any very serious matters had to be reported to the authorities. The purpose of the amnesty was to draw a line in the sand. After the four-week period was over, we said, “Now we have zero tolerance for intentional illegal behavior.” A lot of people who were doing things on the fringes or in the gray zone were either fired or asked to resign, or they left by themselves.
What did you do next?
We rolled out one compliance or control system per week—things like an internal whistle-blower system; an external whistle-blower system through which customers, competitors, and others could alert us to problems; background checks that employed sophisticated technology to figure out who had economic interests with whom; and dawn raids to check on inventories to see whether their declared value was honest. It was a pretty strict regime that set a new standard for controls in the industry. We had a very good compliance officer who oversaw the new initiatives.
Eighteen months after the amnesty ended, 44% of the top 70 operating managers were gone. The normal turnover rate had been around 15%. Most of them left voluntarily, but some employment contracts were also terminated. In addition, about half the top corporate and divisional staff managers turned over. Only two of the eight people who were on the senior leadership team when I became CEO are still at NG. But it was the departure of the operating managers that was the big deal. Most went to competitors and took their customer relationships with them. They were hard to replace quickly, so it was a very difficult period. But it created a whole different atmosphere for the people who remained. Some said, “For the first time I feel like this company is something I trust and can be proud of.”
How could the business continue to function with all the turmoil?
We took huge hits, but we never went into the red. We had the benefit of being the largest company in the industry, which allowed us to absorb the costs better, and of having long-term contracts and relationships with customers. We also did all the things to lower costs and increase efficiency and profitability that any private-equity-owned company normally would do—but tried to do them twice as fast. The fact that ours is a scale business meant that there were many things we could improve.
Since the entire waste management industry has a reputation for corruption, how did you replace the people who left?
The challenge was to find suitable people from outside the industry to complement the high performers we already had internally. We wanted to recruit people with the right values who also had the new skills and perspectives we’d need to carry out our strategy of becoming a leader in recycling materials. So we asked, “Who has skills for international global sales of raw materials?” And then we hired the downstream manager of Norsk Hydro, the big aluminum and renewable-energy company. We asked, “Who has skills for lean manufacturing?” and then hired a plant manager from Saint-Gobain, the global manufacturer of building products. Ultimately we achieved a good balance between people who had been at NG a long time and people who came from different industries. This created the competitive advantage that the owners were looking for.
How do you hire for values if you don’t know someone personally?
In our experience there are many people who really want to be a part of the change NG is trying to bring about. To identify the people who genuinely feel that way, we spend a lot of time talking to candidates during the interview process, trying to figure out where they stand. And we also conduct reference checks, of course. We did hire some people who were wrong for us and had to address it, but for the most part we did some pretty good hiring and started to be seen as highly reputable. In fact, in 2017, we were named the 19th-most-reputable company in Norway by Ipsos, a market research firm, and we’ve since moved up to 12th. The consequence is, we now get access to a lot of talented people who would like to be part of something they believe is valuable to society. These days it’s not enough to go to work and get a salary and hopefully a bonus. People want to work at a place where they can make a difference. They want to work with colleagues they trust. They want to feel as if they’re on a team whose members are all striving for the same goal.
When I’ve recruited people, I’ve always started the interview with “Welcome to the most interesting industry in Norway and the most interesting company in that industry.” And they’ve said, “Wow, that’s a strong statement.” I’ve responded, “You could work for a telecom or consumer goods company or in other mature industries where your job is to increase the margins by a little. But at NG you can not only change how this industry works but help provide a solution that’s needed to make society work—to sustain living standards by using resources over and over again. Someone has to create the solution, and you can be a part of that story.” That’s very motivating.
Talk about the challenge of hiring outsiders who didn’t know the waste management business.
The immediate impact was net negative, of course. We tried to do things to make it easier. For example, we implemented the “junior-senior strategy.” We had a few senior guys who were very knowledgeable and valuable but wanted to cut back or were getting close to retirement. So we hired younger people who were hungry and analytical and had skills from other businesses to work as the senior people’s wingmen or wingwomen. Then after a few years, we swapped their positions. The goal of the more experienced employee became to help the younger colleague succeed in his or her leadership position. We also standardized the operating model—kind of like McDonald’s—saying, “This is the way we do the upstream logistics, this is the way we operate our machines,” and so forth. We’ve created teams of specialists who go from region to region to help people raise their game. That has been quite successful.
I gather you stopped practices that were temptations.
Yes. Paying cash for the metal waste delivered to our depots is one. It was baffling that it was even allowed in Norway—the UK had outlawed the practice, and metal thefts there had fallen by 80%. We went to the regulators and said, “Wouldn’t this be a good idea?” They said, “It would,” but nothing happened. Then we went to our competitors and industry associations and said, “We should self-regulate.” The response was “You don’t know if there is anything illegal going on.” I said, “Come on guys, we don’t have solid proof, but we know things like fencing are going on and have a moral obligation to act on it.” So at NG we banned the practice of paying cash, issued press releases, and publicly urged others to follow us. Still, no one did. Six months later I was quoted on the front page of Norway’s main financial newspaper saying this is an industry with low morality, and things blew up. One of the industry associations asked me to stop speaking up and said that if I didn’t, NG would be banned from the group. We said, basically, “Go ahead.” It didn’t ban us. In fact, a year later the association announced that it would ban players that paid cash for metals.
I reached out to three big competitors and got two to support the drive for reforms.
Shortly after the trade group had threatened to throw us out, we decided that we couldn’t clean up the industry alone and needed to build a movement. I personally reached out to the CEOs of three big competitors. All of them were family-owned businesses and seemed respectable. I got two to support the drive for reforms. Their CEOs initially told me that our public stance on the corruption in the industry was annoying. I responded to each of them: “We want to share this position. Your company is well run and has great values. So what’s the downside of being a part of this? Come and help us change the industry and take the credit for doing it.” When they joined us, it changed the dynamic, and then we got smaller competitors to join us.
Was your board nervous that you talked so publicly about this?
We all felt that speaking up would signal to our employees, customers, and partners that we were serious about cleaning up the company. But there was certainly a downside. Our openness about internal affairs and industry issues could have led the media or the government to start investigating us. So our story became “Our vision is to be 100% clean. We are not 100% clean yet, but here are the steps that we are taking.” That worked.
What response have you had from the police and regulators?
From the beginning, we reported anything illegal that we discovered to the authorities and were transparent with the media. Our position was that if we were serious about cleaning up the company and the industry, we wouldn’t hide our dirty laundry. We feared sometimes that it would backfire. If the authorities and the media had decided to come after us, the consequences could have been severe. We got fined in some instances, but in most cases we were seen as reformers and treated leniently. We just paid the fines and used the lessons learned to further improve our practices.
Has the Norwegian government helped you clean up the industry?
It has been very difficult to get support for specific things. It’s hard to understand why. When you have an industry that wants to reform and you ask legislators to change the law, you would think that would be a wake-up call.
We’re constantly trying to lobby the authorities to change relevant policies: ban paying cash for metals, enforce the strict laws that already exist, conduct randomized audits, and mandate that listed companies provide information in their annual reports about where their waste ends up. They haven’t done it. We’re a highly regulated business, but the regulations aren’t enforced sufficiently, and the penalties aren’t dished out in any effective way. We also tried to make it harder for international traders to operate in Norway without supervision. The only change that was made was that traders now have to register in the country’s company register, but they’re still not being supervised by the environmental agency. So that’s not enough.
How did customers react to your cleanup efforts?
Our customers range from industrial companies to municipalities. We have more than 40,000 of them, and hence we saw a variety of reactions. Initially, we tried to get customers to pay us a premium for being served by an honest company. But that’s a very hard sell. To them, we were just a business trying to sell our service and telling them this story. Our competitors could tell them, “That’s not true.” So it didn’t work well.
What did work was our strategy of partnering with customers, which was a brand-new approach in the industry. For example, we now co-own the upstream collection business with some municipalities in Norway. We said, “You are subscale, and we are subscale. If we could produce in one place, we would have one site, one set of excavators, one weight bridge, one set of employees, and so forth, and we could have a critical mass of tonnage going through.” We formed similar partnerships with industrial companies, where we would divide the efficiency gains with our partners. Our taking a stance against corruption and recruiting outside talent certainly were factors in those deals. A number of those parties said, “Going back a couple years, you would be the last company we would have done any type of deal with. Now you are the only party that we would.”
What kind of personal toll did this huge effort take?
More than anything this experience has given me a stronger faith in our ability to tackle obstacles and change the culture, but of course there has been a personal toll. The period when we were trying to clean up the business—2012 and 2013—was a very tough time. I wasn’t certain that reform was possible, and I wasn’t certain that I was the right person to lead the effort. We were coming up against everything from organized crime to angry employees to threats from a local criminal group.
A local criminal group?
We had a contract with an upstream collection company run by the heads of a local criminal group. We had to terminate that contract once we understood the situation. No one wanted to sign the termination note, so I ended up signing it. During this time we began receiving threatening phone calls at headquarters. When the callers failed to reach me, they reached one of my reports and started talking about his son. They told him, “Your son is a good guy and goes to that school. You should take care of him.”
These were anonymous callers?
Yes, but we knew who they were. The biggest threat, though, was from disgruntled former employees—the people who had been fired or gone to jail or were angry with us. We hired a security firm to help us. But once we had gone public about everything, there was nothing more. There was really no reason to go after us.
Did you ever think about giving up?
Of course. There were certain tough times when that thought hit me. But I believed in our social mission—to recycle waste and improve the environment—and I thought that as an individual you don’t get too many chances to really make a difference. And since I believed that I, with the talented team we had built, could do the job, and I had such strong support from the board, I felt obligated to do it. But there were some severely sleepless nights.
Where do you think NG is now?
The dramatic measures were in place by 2014. But I think the job is never done when it comes to strengthening the culture. You cannot prevent one rogue person from trying to do something. What you can do is create the best control system and culture possible—and then keep managing and developing them.
I also gather that, on top of everything, in 2014 the industry suffered a recession that lasted until the end of 2016. That must have been awful.
It has felt like a constant uphill battle, because as soon as we had passed one obstacle another would appear. Now it’s the fact that China is closing its borders to taking waste from other countries. We came into 2014 feeling great because we were pretty much done with all the compliance efforts, managers were in place, and things were starting to get going, and then boom, we got into that market downturn. But in the end we’ve done well. While our revenues have increased only 18% since 2012, we’re solidly profitable, and in March 2018, Altor sold us to Summa Equity, a Swedish private equity firm that shares our vision for the industry. Altor got two times its original investment, which is a pretty decent outcome given the turnaround we had to go through.
What allowed us to ride it out and even prevail was the human capital element—that was an investment in the ability to change. Because of it we were able to reduce the number of plants by almost half. We cut selling, general, and administrative expenses by a tremendous amount. We had more volume and more revenues than ever with fewer plants and fewer people. I don’t think that would have been possible without the previous changes in people and culture. So it was a hard time, but it was also an inspiring time because it was the first time we saw the true power of what we had built.
When I began practicing law, in the 1970s, white-collar crime didn’t get much attention outside my old office, the U.S. Attorney’s Office for the Southern District of New York. Prosecutors cared much more about homicides, drug kingpins, and the mob. Financial crimes weren’t considered very serious or interesting by most prosecutors. That’s changed for a variety of reasons.
Over the past 30 years, we’ve had a large body of white-collar prosecutions, and they’ve shown us that deterrence really works. For instance, people on Wall Street pay a lot of attention to how prosecutors treat insider-trading cases. They say, “Gee, somebody just like me went to jail for a significant period of time.” There’s no bigger deterrent than a jail sentence. Most white-collar defendants have nice lives, and they value their freedom and liberty. Prosecuting these crimes and getting judges to send white-collar criminals to jail really does alter people’s conduct. As a prosecutor, I prioritized white-collar crime and helped make people more aware of the costs of crossing the line.
I’ve also done a lot of defense work, and that’s given me a window into what motivates people accused of white-collar crimes. As a prosecutor, you tend to stay at arm’s length from alleged perpetrators, but when you’re defending them, you wind up exploring their motivations in a very intimate way.
Why do they do it? Part of it is that white-collar crime doesn’t seem to inspire the deep feelings of guilt caused by, say, a crime such as assault, where you’re doing tangible, significant harm to someone. Some of these crimes, like tax fraud, may be perceived as “victimless,” even though that’s not really true. Part of the motivation is greed, of course, but there’s more to it. The piece that the public underestimates is ego. Many of the people who commit these crimes have been successful, and they don’t want to fail. Very often the market has turned on them, but they need other people to still see them as successful. There’s often a financial motive, but in a highly charged business where there are temptations, you have to account for human nature and the need for status and continued success, too.
When I do an investigation for a company that’s experienced an ethical or legal lapse—I’m doing a lot of that work right now—I’m not just trying to uncover what happened. A standard part of the process is to make recommendations about how to prevent future wrongdoing. Compliance programs are important, but what really matters is the culture and the tone that a leader sets for the organization—that’s often a more effective way to increase the odds that lapses won’t happen again.
In the aftermath of a scandal, some leaders will claim they didn’t know what was going on. Sometimes that’s true. But when it is, you have to ask if the leader built a communication system that’s designed to bring bad news up to his or her level, or whether the system is designed to insulate leadership. Every company has hotlines for whistle-blowers; only some of them directly reach the board’s audit committee or the CEO’s office. In those systems, in which the most-senior leaders are actively seeking out complaints and allegations, the compliance culture is much stronger. In contrast, some hotlines seem designed to give leaders plausible deniability: We have a system for reporting complaints, and there haven’t been many. Leaders have to ask, Why is that? Are employees reluctant to come forward for fear of retaliation?
The biggest mistake companies make in trying to prevent crime or misconduct is to ratchet up compliance simply by throwing more resources at it. They believe every extra dollar has the same incremental effect. That’s incorrect. Particularly when you’re dealing with potential violations of the Foreign Corrupt Practices Act (which targets bribery) or the Bank Secrecy Act (which focuses on money laundering), you need to be surgical and intelligent about where the biggest risks are. This is especially true in global organizations—very often problems are popping up far from headquarters, in overseas subsidiaries or with joint venture partners.
Much of prevention really comes down to culture. If you’re a new leader in an organization, my advice is to let people get to know you—and your values. Let them know how serious you are about doing the right thing. Make it clear that if they see someone do something wrong, they must report it—and that by doing so, they’re supporting all the people in the organization. When someone strays, it diminishes the entire company, and employees can’t let that happen. That’s the message leaders need to deliver—and it’s how they must act, too.
One vital marker of an ethical culture is whether there really is a zero-tolerance policy for wrongdoing. Many companies claim to have one, but when high producers or senior people break the rules, leaders may go easy on them, either for business reasons or out of loyalty. That undermines everything. You can’t rely just on compliance and audits; you have to be willing to punish people who cross the line. To build an ethical culture, you have no choice but to follow through on your no-tolerance promise. Don’t just talk the talk; walk the talk.
Mary Jo White, currently the senior chair of the law firm Debevoise & Plimpton, is the former chair of the U.S. Securities and Exchange Commission and the former U.S. attorney for the Southern District of New York.
White-Collar Crime
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