Trying to deceive regulators, inflating profits, even flying their pets on holiday on a corporate jet….all reasons for resignation. In 2015 we saw CEOs all over the world (dis)gracefully resign from their positions as they led their companies through reputation shattering corporate scandals.
All of them, however — at Volkswagen, Toshiba and Industrivärden, respectively — have involved big losses for shareholders, or billions of pounds of potential fines and serial lawsuits.
What is the effect of a scandal on a business?
The effects of a corporate scandal can be devastating to a company. The Volkswagen scandal was one of the biggest of 2015, and possibly the 21st century. After the scandal, Volkswagen’s market value dropped 23% in September after they came clean on their emissions cheating and public deception. In America, where the story broke, sales dropped nearly 25% in November 2015 alone. The projected cost of the scandal is estimated to exceed $8 billion.
The fines and legal bills, while extensive, aren’t the only thing to make the Volkswagen board fidget in their Lederhosen. The now have to look at the long term damage inflicted on their trusted brand by their actions. Even if you didn’t know pay much attention to cars, everyone has heard about the German manufacturer as being a safe, efficient and trusted choice. That reputation has now been torn apart and trust, once lost, is particularly hard to regain.
According to research compiled by the Quoted Companies Alliance and BDO, 28% of a UK company’s value is accounted for by its reputation. They reported that a small-to-midsized company can lose up to £90m if its good reputation is destroyed.
With more than a quarter of the value of these companies connected to their reputation, many companies still fail to make their good name a priority, the research found.
Are recent scandals scaring businesses into cleaning up their act?
One would assume that seeing corporate dirty laundry being hung in media with such scrutiny, would be enough to deter any executive from proceeding down the line of deception for personal or corporate gain. However, a recent study by CIPD, the professional body for HR and people development, has warned that more business scandals could be just around the corner if corporate management practises aren’t reviewed.
The CIPD research surveyed more than 5000 business leaders about ethical decision making and governance in their businesses. The report found that 30% of business leaders will choose to reward individuals in the company that are high-performing regardless of the values or ethics followed when increasing performance.
This suggests that many of these companies risk breeding another corporate scandal. With only 24% of the business leaders surveyed saying they are prepared to make short term sacrifices for the long term interests of the organisation and society.
CIPD chief executive Peter Cheese said: “The VW scandal is a stark reminder that organisations – particularly large and complex ones – need to think carefully about how they create organisational culture and how they increase the chance that people at all levels of the organisation will make ethically sound decisions.
“Our research suggests that far too many business and HR leaders continue to be focused on the short-term at the expense of the long-term interests of the organisation and its people. This risks unintended consequences when people try to cut corners or maximise short-term returns without thinking about the consequences of their actions on all their stakeholders, which includes employees, customers, suppliers, and communities, and, as we’ve seen in the case of VW, the shockwaves are considerable and can significantly damage even the biggest brands.”
Furthermore, the survey revealed a feeling among managers that upholding principles can hold back their firm’s success. The astonishing study found that 29% of managers admit to compromising their principles to meet the needs of their business.
Who should be taking responsibility?
“As CEO I accept responsibility for the irregularities. I am doing this in the interests of the company even though I am not aware of any wrongdoing on my part. This is the only way to win back trust.”
This was the apology given by former Volkswagen CEO Martin Winterkorn, where he smartly accepted blame and denied any of it at the same time.
How can these high level executives deny blame for any wrong doings by its employees, but accept performance related bonuses when they and their company exceeds targets. If you claim to be unaware about what is happening in your company when things go wrong – how can you justify taking credit when the company does well?
How can we put an end to corporate scandals?
Good governance is critical for any organisation to avoid scandal. If a CEO or high level executive, then truly wanted to keep their company on the straight and narrow they would pay closer attention to those governance codes and practises.
In the modern world of ‘board portal software’ such as BoardPacks, which makes good governance and risk management much easier, there is no excuse anymore for a company to trip over another ‘accidental’ scandal. With good corporate governance practises and the use of BoardPacks as a digital governance solution, we should only see more scandals if a company truly is corrupted to the core.