Last week I delivered a speech to an AICD function hosted by The Ethics Centre on the topic of “How does an organisation recover from ethical failure?” An edited version of the speech appears below.
How does an organisation recover and rebuild from ethical failure? What do you do when you have failed your ethical duties as an organisation, and significantly compromised trust with your stakeholders? These are difficult times for any organisation. The good news is, I do believe that organisations can emerge from ethical failure stronger than what they were prior to the incident.
To achieve this I believe we need three things – sufficient goodwill, a strong and unequivocal response and a willingness to learn from the incident.
Firstly, the nebulous concept of goodwill. This is earned in the months and years leading up to the incident when an organisation demonstrates, consistently and repeatedly, that its actions and choices are aligned to its stated values and principles. It is by doing this that an organisation develops a reputation for integrity.
The process of cultivating goodwill is not something an organisation can expedite – the paths to a reputation for virtue and a reputation for deceit are asymmetric. That is, integrity is earned by acting in alignment with values and principles over an extended period of time. It only takes a handful of dishonest acts to be seen as unethical.
When goodwill is in short supply recovering from ethical failure is far more difficult. What’s more, even minor ethical transgressions serve to validate the public’s adverse opinion. Take the recent decision by our major banks to not pass on the RBA rate cut to borrowers. When viewed in isolation, the response to this decision appears extreme. However, when viewed in light of the industry’s goodwill deficit, the response is not surprising.
How an organisation responds in the immediate aftermath to an ethical failure is by far the most important determinant of how it recovers. This is crucial. Amongst other things, the response should:
‒ Provide an admission of failure and acceptance of full responsibility.
‒ Explain what caused the incident, without trying to diminish responsibility in the process.
‒ Outline the steps the organisation is taking to address the issues.
‒ Highlight what the incident says about the organisation’s values and principles and how any misalignment is being addressed.
The response should be open, honest and transparent. Failing to act openly, honestly and transparently will only further erode credibility when the facts finally surface (as they inevitably will). Avoid the finely crafted communication that attempts to paint a rosy picture and cloud the facts. In addition, communicate frequently, and leave no room for surprises.
Zenefits, a young human resources company based in the U.S., provides a great example of how an organisation should respond in the aftermath of an ethical failure. Without going into the detail, the causes of Zenefits ethical decline are very typical. The organisation embarked on an aggressive growth strategy that placed money and money making ahead of purpose and principles. As Luke Anear wrote in a recent article
I am not sure if the founder was motivated by solving a big problem, or if he was more motivated by creating a company that was valued at billions of dollars, but one thing that is obvious now, is that the company lacked ethics in pursuit of growth at all costs.
The founder that Anear refers to is former CEO Conrad Parker. Shortly after the unethical conduct that Parker was a party to became public earlier this year, Parker resigned and the company’s Chief Operating Officer David Sacks was appointed CEO. In the past six months, Sacks has engaged in a very open, honest and transparent renewal process.
In his first email
to staff as CEO, Sacks successfully did three things. Firstly, on behalf of the organisation, he accepted full responsibility. Secondly, he outlined the practical steps being taken to address the shortcomings in formal mechanisms (systems, processes and procedures) that led to ethical failure. And finally, and most importantly, he devoted the majority of the communication stressing the importance of values, and the central role they play in the organisation’s success.
His next communication
to staff three months later had a very similar tone. It was very open, honest and transparent. It once again devoted a lot of attention to the importance of values, but also outlined in some detail the steps the organisation had taken to address shortcomings in formal mechanisms, thus holding themselves accountable to previous commitments. This is how the path to restoring integrity begins, one step at a time, slowly but surely.
As was the case with Zenefits, some ethical failures result in directors or executives either resigning or being dismissed. In some instances this can mean that the honourable thing to do for a director or executive is to step down, even though you may not have been personally involved in the unethical conduct or for that matter had knowledge of it.
Unfortunately this is one of the burdens that is carried by leaders. They are held accountable to higher standards. Sometimes it is not sufficient to plead innocence on the basis that you were not personally involved or were unaware of the unethical conduct. Rather, the question you need to ask yourself is “Should you have known?” Were there moments when you walked on by or failed to act and by doing so implicitly condoned unethical behaviour?
Finally, embracing the lessons from ethical failure will also help an organisation recover and emerge stronger from the experience. Our tendency whenever we go through a tumultuous period is to put the incident behind us and sweep it under the carpet, a response that actually does more harm than good. It is by reflecting on the incident, facing into the lessons it provides and sharing these openly with our people that the organisation grows and its ethical foundations are strengthened in the process.
Seven questions recommended to Directors and Executives thinking about renewal.
But one thing that directors and executives need to recognise is that you don’t need to wait for an ethical failure to undergo renewal. Directors and executives should be constantly thinking about renewal by reflecting on the following types of questions:
‒ Is there, amongst the directors and executives, a collective agreement and deep commitment to a virtuous purpose?
‒ Are we as directors and executives continually placing our principles ahead of our privileges?
‒ Is the organisation embarking on an aggressive growth agenda that is causing us to cut ethical corners and compromise our values?
‒ Is there a dynamic in the boardroom and around the executive table that allows us to openly, honestly and respectfully hold one another accountable when our decisions or conduct compromises the organisations values and principles?
‒ Are we aware of who the people are throughout the organisation that are the centres of influence and custodians of the organisation’s purpose and values?
‒ Are these people, like the board and executive, deeply committed to the organisation’s purpose?
‒ Are the formal mechanisms, wherever possible, aligned to the organisation’s purpose and values?
You do not need to experience a crisis to engage in this type of thinking and work. And indeed it is this type of work that will significantly decrease the likelihood of experiencing a crisis, surely a far more desirable outcome. This work is difficult, relentless and continuous, but well worth the effort. And it won’t just be the ethics of your organisations that benefits.