ENRON, 2010, Written by Lucy Prebble, Royal Court Theatre, London
Ideas for Leaders #085

Corporate Scandals: Causes and Cures

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Key Concept

US corporate scandals plagued the early 2000s, with Enron, Tyco, and WorldCom becoming notorious. The 2008 financial crisis bred Libor rate-fixing and other cases of serious misconduct. Loss-hiding at Japan’s Olympus Corporation was exposed in 2011. In 2013 Shell, BP, Statoil and others came under investigation by the EU Commission for supposed oil price rigging. Fined, sued, disgraced and sometimes collapsed the consequences for organizations can be dire. What preventive measures should be put in place to ensure organizations do not fall prey to such outcomes? 

Idea Summary

What are the causes of organizational misconduct? How does it spread and what consequences does it have? These questions are the focus of research by faculty from the University of California and INSEAD. Considering the wealth of existing literature on this topic, they examine the causes of misconduct and suggest some safeguards.

Organizational misconduct is defined as behaviour in or by an organization that a social-control agent (i.e. a body that can impose sanctions on behalf wider society) judges to transgress a line separating right from wrong; such a line can separate legal, ethical, and socially responsible behaviour from their antitheses.

But how does organizational misconduct arise in the first place? Professors Pozner, Greve and Palmer review the five main organization-level theories that emphasize the role played by rational choice, strain, culture, networks, and accidents as the causes of misconduct. Certain organizational contexts, certain locations in networks appear and certain situations (e.g. failure to meet goals) appear to generate misconduct. This supports the assumption that misconduct is more a social phenomenon than an individual one. Nevertheless, discovery of misconduct tends to harm the responsible organization or individual, and leaves others largely untouched.

Business Application

Organizations should draw a line between acceptable and unacceptable behaviour, and regularly evaluate their behaviour with respect to its relationship to that line. In order not to cross the line, they should to put in place preventative measures to avoid misconduct occurring in the first place.

“Strong internal audit procedures, a competent and empowered independent auditor, and an active, informed and engaged board of directors are the best safeguards against enacting organizational practices that might run a firm off the rails,” says Professor Pozner.

But in addition to these formal safeguards, an organization’s culture and values play an essential role too; “if top leadership is able to articulate meaningful values that place customer over short-term profit, for example, or a set of principles that emphasizes long-term success over quick and easy wins, those types of cultures are less likely to fall into organizational misconduct traps,” she says. 

However, maintaining an ethical culture is not easy, and executives should not simply articulate those values and assume that will be enough; processes must be in place to ensure that they are meaningful and felt broadly within the organization. This can be achieved through adequate training and socialization of employees, as well as an evaluation system that rewards results employees that are consistent with the espoused values, and leaders who embody those values on a daily basis.

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Authors

Institutions

Source

Idea conceived

  • 2010

Idea posted

  • January 2013

DOI number

10.13007/085

Subject

Real Time Analytics