The Test for Bad Actors in a Bad Company
Some business people are “bad,” meaning they engage in misconduct and either feel no remorse or rationalize why their conduct is acceptable. In a company that embraces bad acting, breaking rules or cutting corners, bad actors are likely to flourish. A bad company is the breeding ground for bad actors.
How do you define a “bad” company? We all know examples of bad companies that were eventually caught but there are plenty of bad companies that continue to operate in violation of the law and without impunity.
Some of the telltale signs of a “bad” company are fairly basic. Here are some of the key indicators:
- A CEO and senior leadership team that repeatedly push accounting issues to achieve financial goals, especially quarterly projections and results, with no regard to sustainability, ethical principles or values;
- The absence (or mere perfunctory) statements of compliance commitment by the CEO and other senior executives with no participation or reinforcement by middle management;
- The lack of any real disciplinary system nor performance and ethical conduct expectations for the CEO and senior executives;
- A dated code of conduct that reflects a “cookie-cutter” approach to ethics and compliance without any real tailoring to the company’s operations or risks;
- A moribund compliance department, which is understaffed, and narrowly focused on issues such as gifts, meals, entertainment, and other ministerial tasks, without regard to other more serious risks surrounding foreign government interactions;
- A check-the-box training system that consists almost exclusively of online training programs that do not address key risks nor provide any meaningful guidance on the company’s internal policies and procedures for operationalizing its compliance program;
- An aggressive sales department that has no interaction with compliance nor little contact to ensure that they are aware of risks of sales activities;
- The absence of a speak up culture and a chilling of employee concerns, investigation of any concerns, or remediation of any issues that may be of concern; and
- A disengaged corporate board committee and weak reporting relationship between the CCO and the specific committee.
This list is not exhaustive. It does offer a parade of horribles for a CCO and a company’s culture.
The profile listed above is not as unusual as everyone thinks. We spend a lot of time discussing compliance issues, and often self-select our examples, speakers at conferences who have robust programs, and reinforce the message we want to hear.
A “bad” company will breed more bad actors, who will in turn evade or stretch internal controls. In the end, the company’s ability to self-regulate and avoid controversy will suffer. Not every company that engages in misconduct gets caught, and for every company that does undergo investigation and enforcement, there are large multiples of companies that escape detection and prosecution.
One key indicator of a company’s culture and adherence to ethics and compliance is the sustainability of a company’s financial growth. If a company performs relatively well with typical ups and downs that reflect a consistent range of performance and outside influences (e.g. overall strong economy, or the converse, a recession), the company is likely to have a strong culture with minimal misconduct risks.
On the other hand, when you see companies with sky rocketing performance based on questionable market strategies (e.g. Valeant Pharmaceuticals), the old adage comes to mind – if it is too good to be true, it likely is not true. In most of these cases, I am sure if you looked under the hood of the company, you would find some or all of the above-listed characteristics. Eventually, these companies are brought down to earth, shareholders suffer, and legal problems compound, eventually resulting in some kind of enforcement action.