Research

When ethics take a back seat to corporate culture, a crisis is too often in the making

Everybody has heard about companies that fail to take adequate action when their products show faults and end up on the front page. Professor Emeritus Marianne Jennings has spent several years researching why these internal ethical lapses happen in the first place.

2017-04-10

Why didn’t someone just say, “Stop”…

… When General Motors Co. kept building cars with an ignition switch that shut down the car, causing it to suddenly stop and the airbags to fail?

… When Wells Fargo & Co. created checking, savings, and credit card accounts that customers never authorized?

… When Blue Bell Creameries skimped on ways to prevent contamination on its food-production lines?

In these cases and too many others, a corporate culture squelched bad news, executives emphasized performance over ethics, and ethics codes were too long and legalistic to remember, says Marianne Jennings, professor emeritus in the School of Accountancy at the W. P. Carey School of Business. She and co-author Lawrence Trautman of Western Carolina University analyzed the GM case in hopes of helping other companies examine their own practices and prevent similar crises.

These ethical lapses were years in the making and widely known within the companies, Jennings says, and their eventual outcomes proved to be horrendous. The GM ignition switch crisis was blamed for at least 100 deaths and led to massive recalls, a United States Department of Justice investigation, and a $900 million settlement. Wells Fargo’s conduct led to fines totaling $185 million, 5,300 employees losing their jobs, and the CEO retiring. Blue Bell’s laxity resulted in three deaths from a listeria outbreak, an 8-million-gallon product recall, lost jobs, furloughs, and pay cuts for employees. Company reputations suffered unquantifiable damage.

Jennings specializes in corporate ethics and culture. Her interest in the GM case started with a few newspaper clippings that suggested something was amiss. Her file only started growing after that.

In such sagas, there are both large cultural flaws and small turning points, she says. “Everyone has the macro level, and everyone has those micro points where, if they just stopped to think about it, they could have stopped the progression of the locomotive,” she says.

Cultural, financial, legal pressures

When companies create a culture in which failure is not an option, employees tend to take liberties to meet that standard, Jennings says. GM’s longstanding culture of keep going and don’t deal with problems manifested itself with the company’s slow response to the Corvair’s instability in the 1960s, the Chevrolet Malibu’s fuel-tank fires starting in the 1970s, and the Chevrolet Cobalt ignition switch failure starting in the late 1990s.

Problems are even more likely to build up when a company is struggling financially because that pressures people to deal with problems quickly and not address the long-term effects. By the Great Recession in 2008, GM’s losses were rising into the billions of dollars and the company filed for bankruptcy.

Jennings says one reason problems arise is that managers and top executives are tone-deaf to problems such as the conflicting goals of safety and cost containment. Issues come up over and over, and multiple committees form to research and revisit them, each failing to share knowledge and collaborate on solutions. No one takes responsibility, and the problem is suppressed. Executives may view the problem as a one-time event due to bad employees, instead of asking, “Why would our employees think this is acceptable behavior?”

The second reason for ballooning problems is workers’ reluctance to speak up, chiefly because they’ve seen bad things happen to others who did. In such an atmosphere, issues can’t rise from the level of employees who are aware of problems to the level of those with the power to resolve them. “They get the signal that ‘I’d better keep it down below,’” Jennings says. “‘To the extent I can solve it, even though it may be a false solution, I’m going to keep it down here.’”

Under that kind of pressure to suppress bad news, people often get diagnostic bias, in which they see a problem as not so bad or a solution as close enough. But when that solution doesn’t work and the issue keeps coming up, that’s a signal that the diagnosis was inaccurate or incomplete.

A related bias is framing an issue in terms of the path of least resistance. People at GM may have felt good about coming up with a solution that kept cars on the road and jobs in the factories, but framing the issue as an internal one meant they were discounting or ignoring the need for a more external solution that would have kept customers safe.

A third hindrance can be lawyers’ focus on a company’s legal liability instead of on its broader ethical lapses or the problem’s impact on reputation and customers. Protecting the company and minimizing damage to it is “the legalistic approach,” Jennings says. “The ethical approach is very different, and often saves money in the long run if you look at the penalties and consequences.”

Lessons learned

In the GM case, Jennings says she was surprised by the vast scope of people who were aware of the problem and who were willing to accept that it was simply the way GM did things. Even though the company today is very profitable, she finds it hard to say whether the switch crisis has reversed decades of ingrained culture.

"I sometimes read these cases and I say, ‘Wait a minute, I’ve studied this case before,’ and I realize this is a different company but the same situation over again,” she says. “It goes across industries … It’s just an incredible pattern that we keep repeating."

The outcome of the GM case could have been much different if managers had acted when test drivers and employees reported that their Cobalts were suddenly shutting down, Jennings says. The outcome also could have changed if suppliers had refused to help GM evade regulators by providing new switches under the old parts number.

Her GM analysis shows that executives should examine how often they talk about performance and results versus how often they talk about honesty and ethics. Repeatedly emphasizing the importance of ethical behavior sends employees the signal that the company values such behavior. And instead of codes of ethics that run on for pages without defining terms or specifying consequences, Jennings recommends straightforward codes that convey a simple message, such as the classic, “Just don’t hurt anybody.”

Problems can’t stay below the radar if top managers are out and about on the front lines, Jennings says. Asking employees about what they are working on can make them less hesitant to bring up problems and can help managers grasp the company’s true culture. Rather than punish employees who call attention to problems, executives need to signal that bad news should percolate up, and any incentives need to reward those who deliver it.

Jennings wants companies and their investors to learn that taking the long-term view can help prevent crises. “What I hope to do is convince them of what happens when people suppress bad news, and certainly this case and many others I’ve studied are the evidence,” Jennings says, “Framing the issue from the quarterly perspective is really going to harm the company in the long run. And that takes some education of the stock market as well.”

The bottom line

No one should think their company is immune from ethical lapses or misguided cultures. “It’s happening everywhere,” Jennings says. “As long as there are humans in a company, it’s possible.”

She has these takeaways for the various stakeholders:

• For top executives: Get out and walk around, unscheduled and unannounced. Be an “undercover boss” so you can see what’s happening in your company.
• For employees: When you spot a problem, start thinking through the possible consequences, not just for you, but for the company if the problem isn’t fixed. Put emotions aside and make a business case for fixing the problem.
• For middle managers: Ask yourself when was the last time someone told you that something couldn’t be done or wasn’t going well? How did you respond? Instead of focusing on how schedules or profits would be affected, sit down and work through the problem. If you hear a competitor is having problems, figure out why everything is supposedly going smoothly at your company.
• For boards of directors: Realize that you are the most isolated group of stakeholders. If the company’s performance is consistently good, ask why and where the numbers came from. It doesn’t hurt to check hotlines for what employees are saying or for you to also be out and about at unexpected times and places.
• For consumers and investors: Look for the small stories about what’s happening at a company, because, like the GM case, they can pile up into big ones.

Accounting