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Learning from the mistakes of the (formerly) rich and infamous

The corporate failures of Enron, WorldCom, HealthSouth and Tyco were separate tragedies, but they share a common theme: ethical breakdown that started at the top and permeated the organizations. In her newly-released book, ethics expert and W. P. Carey management Professor Marianne Jennings dissects the failures and identifies the cultural flaws that led to disaster. "The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies... Before It's Too Late" provides guidance to those in charge of cultural reform in companies as well as those looking for good investments.

2006-08-30

At the end of her new book, Marianne Jennings marvels that people continue to be surprised by ethical collapses in corporations. A professor of legal and ethical studies at the W. P. Carey School of Business, Jennings says that it's possible to see these business train wrecks coming — no one should be surprised at the crash.

The behaviors that lead to ethical collapse in companies are known to result in damage and pain. Companies that engage in them will slip, employees and investors will be hurt … but everyone will still be surprised. That's why Jennings' new book, "The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies … Before It's Too Late," is such an important read right now. In spite of the ruin to lives and livelihoods brought about by the collapse of Enron, WorldCom and Adelphia — and the regulatory reform that followed — companies and employees will continue to find ways to flirt with the edge.

Jennings' book mines the history of the past decade, and recounts the inside stories of the corporate shenanigans that have kept headline writers happy and Eliot Spitzer's staff busy. It is fascinating to read about the insider conflicts of the HealthSouth board, the do-anything pressure at WorldCom to make stratospheric numbers, the distorting influence of Svengali CEOs on young minions. Jennings' reports include the details, the e-mails and the anecdotes that allow readers to understand what happened and who was involved.

But these are not simply war stories. Jennings analyzes the events, beginning with the first who-will-notice compromise right through to the full-blown hubris that infected the giants at their fall. Along the way she highlights the warning signals that were ignored. A CFO who browsed through "The Seven Signs of Ethical Collapse" recently observed that at 285 pages of pretty small type, it's a commitment to read this book. Then he ruefully admitted that his company showed evidence of three of the seven warning signs. That simply makes Jennings' point.

Leaders and workers can become inured to the habits and justifications that point a company in the wrong direction, and it takes lots of thought and hard work to make a change. Jennings' book offers practical advice on how to identify the pattern, and supplies prevention tools to halt it. So put on your glasses and set aside some weekend hours to hear what she has to say about keeping your business on solid ground.

The seven signs

Jennings is well-qualified to advise on this topic. One of her long-term research projects yielded the 2000 book, "Building a Business through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends." She has conducted more than 300 workshops and seminars in the areas of business, personal, government, legal, academic and professional ethics.

Her book, "A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit," a fable about business ethics, was chosen by Library Journal as its business book of the year andwas a finalist for two other literary awards for 2004. She is famous among her students and her consulting clients for her no-backing-down style of communicating — always accompanied with the trademark smile. Look for the same candor spiced with wit in "Seven Signs."

The companies she examines all demonstrated qualities of what she calls the "Yeehaw Culture" — a term her expensively tailored subjects would probably despise. You know that the Yeehaw Culture has taken hold when "the bright line" between right and wrong is ignored — when companies cook the financial reports, or engage in price-fixing, or find ways to circumvent bid processes. So what are the warning signs?

Number 1: Pressure to maintain those numbers

"In this first sign of a culture at risk for ethical collapse, there is not just a focus on numbers and results but an unreasonable and unrealistic obsession with meeting quantitative goals." Jennings has no problem with achievement, but she warns against achievement at any cost. The antidote? "Surround goal achievements in a square box of values." Means to the end do matter. Fire those who cross the line, and watch out for verbal and non-verbal signals that might lead employees to believe that success means numbers — just numbers — after all.

Number 2: Fear and silence

"Moral meltdown cannot occur with objection in the air," Jennings writes, but companies in the grip of the Yeehaw Culture suffer from fear, silence and sycophancy. The treatment is to build systems that enable employees to speak out, be heard and take corrective action free from fear of retribution.

Recognize those who speak up and who behave ethically, Jennings said. At the heart of this is a commitment to reality, including the simple fact that bad things can happen. Companies in the grip of numbers pressure will stray from reality when they have to in order to appear to hit the impossible goal, she warns. Sustaining that kind of myth sometimes means silencing protestors.

Number 3: Young 'Uns and a Bigger-than-life CEO

"The structural component that fuels fear and silence and numbers pressure is the presence of an iconic CEO who is adored by the community, the media and just about anyone at a distance," writes Jennings. Missing from the list are employees. Senior management, however, is another matter. Iconic CEOs surround themselves with a sycophantic management team, often made up of young, inexperienced direct-reports who are "hooked on the cash and the trappings."

Jennings' advice — just don't go there. She cautions boards not to hire icons, or if one develops on the job, fire him. Like the antidote for fear and silence, encourage the employees and the board to question the CEO and his team. And, she warns, remember that conduct in personal lives matters.

Number 4: A Weak Board

Jennings minces no words: "The boards of companies at risk of ethical collapse are weak and ineffectual." The particular quality of weakness depends on the company. Some are populated by friends of the management team; some are compromised by conflict; some are cowed by the icon. Jennings' first bit of advice is succinct: replace the board with a stronger group. This is easier said than done, but Jennings provides insights on what to look for.

Her next tip is similar to her antidotes for signs 2 and 3: make it easy for employees to speak up. Board members should visit the business and talk to workers, she says, then use what they discover during these walk-about reality checks to challenge the officers.

Number 5: Conflicts

"Organizations at risk of ethical collapse are family-friendly," Jennings writes — that is, they are positively inclined to doing business with family, as well as permitting any of a number of conflicts. Jennings illustrates with an analysis of conflicts with in-house analysts, then takes apart the audit and consulting problems of the pre-Sarbanes Oxley days. Eventually, Jennings writes, the people running these companies come to think that the business exists for the benefit of themselves and their cronies.

Again, the solution begins with sunlight. "We have lived through an era in which conflicts were accepted because, well, we were all big boys and girls who would never let a conflict of interest influence us," she writes. "That attitude of sophistication has cost us dearly." A few ideas: Set up the rules and don't waive them; audit the ownership and investment interests of directors and officers.

Number 6: Innovation Like No Other

Companies that have brought to market a new product or service can fall victim to this one. "These companies and those in charge see themselves as visionaries who could reinvent business," she writes. "The drab rules the rest of the world follows were little more than meaningless constraints…" What follows is a fascinating analysis of the disastrous effects of self-perceived uniqueness coupled with an illusion of control.

Hubris, she writes, is sometimes more of a factor in ethical collapse than greed. Once again, the antidote is a dose of reality and humility: be mindful of the laws of economics and leery of magic solutions; hew to the truth in your company communications; develop the strength to resist pressure; learn about the effects of groupthink.

Number 7: Goodness in Some Areas Atones for Evil in Others

In possibly the most disturbing of her warnings, Jennings cautions that "philanthropic and social goodness became the salve for a conscience grappling with cooked books, fraud, insider trading — all the usual activities of ethical collapse." Jennings says each of the ethically collapsed companies she writes about was dedicated to philanthropy and public service.

Behind it can be the big ego of an icon who craves the attendant publicity. Jennings faults business curricula which for years taught MBA students "no sweat shops," but failed to also instruct "always be honest." It's a disconnect that allowed business people to feel comfortable with fraud as long as the company was socially responsible, she asserts. "Beware the socially responsible company," she warns. So now what? Jennings would have business leaders look at the culture on a macro level to refocus on high standards and consequently restore trust.

Everyone will sleep better. And, in the end, those numbers should climb, too, because when ethical miscreants engage in slippery behavior to conceal disappointing performance, companies do not take the tough corrective steps needed to really turn things around. Isn't that ironic?

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