Fixing a Toxic Corporate Culture
We all know about the high-profile scandals that lawyers and compliance officers point to as examples of weak to non-existent ethical corporate cultures. The case studies read like a train wreck, where everything goes wrong, controls are circumvented, crimes are committed with impunity and gatekeepers and lines of defense are either ignored or co-opted into the misconduct.
Almost every story includes failures of oversight by the board, senior management, internal audit, legal and compliance. In some cases, gatekeepers, such as lawyers and even compliance officers, have been involved in the misconduct.
Once the company resolves the matter, perhaps after an conducting an internal investigation, paying a fine, settling the litany of collateral class actions and shareholder suits, and remediating the deficiencies by terminating officers, managers and employees, and adopting enhanced controls designed to prevent the problem from recurring, the hard work of fixing a company’s toxic culture begins.
The healing of a company’s culture after a serious enforcement problem can be overwhelming. Often such changes require changes in board members and senior management. But even where such steps are taken, there is no guarantee that the ship can be righted and normalcy restored.
The posterchild for difficulties in remediation is none other than Wells Fargo. Despite suffering several repeated enforcement actions, promises to fix problems, changes in its board and leadership and implementation of remediation programs, Wells Fargo continues to suffer scandals and just continues to miss the mark in building an effective ethical culture. To me, there is a real question as to whether Wells Fargo can even fix its culture. It might be that the best it can ever do is to implement an average, less than effective, corporate culture.
We also have observed several high-flying companies fall down to earth from serious sexual harassment and misconduct scandals. These companies suffered real and substantial reputational damage and continue to suffer internal culture weaknesses that can easily grow into even more difficult challenges.
To fix a toxic culture, a company has to make a wholesale commitment to remediation. From the top, to the responsible gatekeepers, to middle management, and down to every employee, a company has to commit to a consistent, holistic strategy that is designed and implemented with discipline, consistent messaging and effort.
A company has to adopt a comprehensive plan, implement appropriate controls, monitor and measure the program, and invest significant resources into its new corporate culture. Such a program begins with a healthy assessment of the company’s culture, an understanding of the root causes of its problems and cultural weaknesses, and an honest appraisal of current deficiencies and necessary steps to begin the improvement process.
As an example, if a company suffers from serious sexual harassment and misconduct incidents, the company has to excise the wrongdoers, hold accountable and terminate those managers and leaders who had supervisory responsibilities over the wrongdoers and failed to act as a result of deliberate choices or negligence. A fresh approach is needed and the first step in that process is acknowledging why the misconduct occurred, who was responsible and holding everyone accountable. In this analysis, leaders have to be honestly evaluated and changes should be made to demonstrate a new start to the company rank and file.
A basic to-do list is a good starting point:
- Acknowledge the company’s history of misconduct and commit to a new path premised on an ethical culture;
- Train board on importance of ethics and compliance and establish meaningful measurements, reporting requirements and oversight controls applicable to ethics and compliance;
- Creation of separate board committee committed to ethics and compliance;
- Announce new values and code of conduct;
- Appointment of at least one corporate board member who has compliance expertise;
- Adopt accountability standards for board and senior management commitment to ethics and compliance, including but not limited to: (1) contractual commitment to ethical performance as a basic requirement for bonus payments; (2) agreement to clawback provisions if person engages in misconduct; (3) certification that senior executive has not engaged in misconduct in past (e.g. no prior allegations of sexual harassment or other misconduct);
- Restatement of corporate compliance policies and strict enforcement;
- Improvement of the hiring process for senior management, managers and employees to emphasize importance of ethical conduct;
- Design robust training and communications program;
- Appoint CCO that is a member of C-Suite and supported by substantial staff;
- Ensure that robust reporting system is established with detailed escalation requirements; and
- Proactive monitoring functions incorporating metrics with significant focus on culture assessments.