Author: David Gebler

If you only looked at the headlines of today’s feature in the Wall Street Journal: The Case Against Social Responsibility, you might think that the ire of business ethics professionals would be raised to the level of hysterics. But Professor Aneel Karnani raises a critical point that is at the heart of not only corporate social responsibility, but of business ethics as well.

“In cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare.”

While at first Karnani’s seems provocative. However, the logic is that companies won’t engage in practices that aren’t profitable. Therefore, only when socially responsible practices make business sense and are what the public wants, will companies be acting in a socially responsible manner. But to them, it’s just good business, therefore the “green” labels are mere PR window dressing.

But the heart of Karnani’s argument is exactly at the heart of today’s business ethics issues as well:

When talking about why a company would not do the socially responsible thing, even if it is a profitable avenue, Karnani states:

Unfortunately, not all companies take advantage of such opportunities [of benefiting society while acting in their own interests], and in those cases both social welfare and profits suffer. These companies have one of two problems: Their executives are either incompetent or are putting their own interests ahead of the company’s long-term financial interests. For instance, an executive might be averse to any risk, including the development of new products, that might jeopardize the short-term financial performance of the company and thereby affect his compensation, even if taking that risk would improve the company’s longer-term prospects.

The heart of the argument is that long-term financial interests are in the best interests of both the shareholders and the public. Companies that plan for the future are the ones that see the business benefit of ensuring that their markets and customers will be around the the long-term as well. The problem is not profit per se, the problem is short-term self-interest over long-term corporate interest.

So how do companies position balance profit and socially responsible activities?

The challenge is to design self-regulation in a manner that emphasizes transparency and accountability, consistent with what the public expects from government regulation. It is up to the government to ensure that any self-regulation meets that standard. And the government must be prepared to step in and impose its own regulations if the industry fails to police itself effectively.

It always comes down to values: companies that actively foster transparency and accountability internally will have the easier time creating the alignment between profit and social responsibility, because leaders will have the sense and the capabilities to look out for the long-term interests of shareholders, which will benefit all of the organization’s stakeholders.

Thank you Professor Karnani for highlighting that the source of true social responsibility comes from the core values of leaders and not from a superficial “greenwash” that masks a short-term outlook.

The speed of the announced departure of Hewlett Packard CEO Mark Hurd was in and of itself newsworthy. At first blush it would seem that an action by a leader to warrant such fast response from a board must be quite nefarious; if not fraud, then at least a juicy sex scandal. Instead, as was reported in the Wall Street Journal:

H-P said Friday that Mr. Hurd, 53 years old, didn’t violate the company’s policy regarding sexual-harassment but submitted inaccurate expense reports that were intended to conceal what the company said was a “close personal relationship” with the contractor.

Expense Reports? One CEO friend of mine mused that it would be one thing if Hurd had claimed personal expenses as business expenses in order to hide a liaison from his wife. That would be fraud, even if it was a small amount. But mere false categorization? “That’s absurd,” he said, “to fire a successful leader for not mentioning this contractor on his expense reports.” However, nothing can be farther from the truth.

I give tremendous kudos to the HP Board for taking such swift action on something that might seem so small.

Unlike opportunities for major fraud, which really can only be carried out by a small number of people, expense report violations is something that is within the domain of thousands and thousands of HP employees. False expense reports may seem minor, but it is often the place where larger crimes start, and can serve as a convenient hiding place for many varied violations.

Several pharmaceutical companies have recently paid hundreds of millions of dollars to settle claims by the FDA of kickbacks to doctors. The place where these violations appear: expense reports.

Moreover, there is no more powerful negative influence on a workforce than perceptions of unequal treatment of senior leaders. If a junior manager could be disciplined or fired for the kind of violation that mark Hurd engaged in, and if he was only given a slap on the wrist, the reverberations of inconsistent treatment spread like wildfire. Employees are willing to make sacrifices for the company and to even look out for the company’s interests over their own, but only when they feel they are being treated “fairly.” Once an event occurs that gives them grounds to perceive they are being “suckered,” then all that commitment vanishes in a flash. It’s back to looking out for #1.

The Board did the right thing, signaling to all HP employees that no one, even the CEO is exempt for holding to the stated standards of business conduct.

Today’s New York Times published another in a string of articles highlighting safety issues on the Deepwater Horizon rig at the heart of the Gulf of Mexico oil spill crisis.

A confidential survey of workers on the Deepwater Horizon in the weeks before the oil rig exploded showed that many of them were concerned about safety practices and feared reprisals if they reported mistakes or other problems.

In the survey, commissioned by the rig’s owner, Transocean, workers said that company plans were not carried out properly and that they “often saw unsafe behaviors on the rig.”

Some workers also voiced concerns about poor equipment reliability, “which they believed was as a result of drilling priorities taking precedence over planned maintenance,” according to the survey, one of two Transocean reports obtained by The New York Times.

“At nine years old, Deepwater Horizon has never been in dry dock,” one worker told investigators. “We can only work around so much.”

“Run it, break it, fix it,” another worker said. “That’s how they work.”

In reacting to the allegations, note how the company responded:

The spokesman, Lou Colasuonno, commenting on the 33-page report about workers’ safety concerns, noted that the Deepwater Horizon had seven consecutive years without a single lost-time incident or major environmental event.

This statement highlights the challenge organizations have in creating a true safety culture. What went on at Deepwater Horizon happens across thousands of job sites across the country on a daily basis. The difference here is that the consequences for failure were so great.

Making it through another day without incident is a misleading indicator of safety. Seven consecutive years without incident says little about the risk of what may happen tomorrow. More telling is the fear factor among the workers as to what are the real safety risks.

Ethics Risks

On the Deepwater Horizon the two primary ethics risk factors for safety seemed to be far outside normal limits: fear of reprisal and focus on the numbers vs. actual safety.

Fear of Reprisal –

As one worker wrote in the report;

“I’m petrified of dropping anything from heights not because I’m afraid of hurting anyone (the area is barriered off), but because I’m afraid of getting fired.”

Workers who feel intimidated not to report safety risks for fear of losing their jobs will think twice before saying anything that isn’t an immediate danger. However, on a ship as complex as the Deepwater Horizon, there are hundreds of systems and areas in which early signs of trouble are noticeable, but can be ignored on a daily basis without risk of immediate personal injury.

Bureaucracy –

The other issue that impacts safety is when the process of reporting incidents or near-misses becomes its own bureaucratic mess. Employees and managers become focused on the metrics, i.e. number of incidents, with the risk of losing sight of the underlying danger.

Investigators also said “nearly everyone” among the workers they interviewed believed that Transocean’s system for tracking health and safety issues on the rig was “counter productive.”

Many workers entered fake data to try to circumvent the system, known as See, Think, Act, Reinforce, Track — or Start. As a result, the company’s perception of safety on the rig was distorted, the report concluded.

Many managers are penalized for too many incident reports being filed, creating pressure on them and their workers to not report.

Real safety occurs when workers feel safe enough to report their concerns, and field managers do not feel disinclined to report because of negative consequences to their own career.

—————————————————————————————–
David Gebler is the President of Skout Group, an advisory firm helping global companies manage ethics risks. Send your thoughts and feedback to dgebler@skoutgroup.com.

As BP continues to be in the spotlight, with every business practice being scrutinized, we can learn some lessons on how ethical companies balance safety and costs.

Ethical Culture

There is nothing inherently “ethical” about balancing safety and costs. Few programs, even government projects, can reduce safety risks down to zero. The key factor is how does the company balance the risks and how are those decisions made known to key stakeholders, both inside and outside the company.

As reported in today’s Wall Street Journal:

Until the April 20 explosion of the Deepwater Horizon oil rig in the Gulf, Mr. Hayward (BP’s CEO) repeatedly said he was slaying two dragons at once: safety lapses that led to major accidents, including a deadly 2005 Texas refinery explosion; and bloated costs that left BP lagging rivals Royal Dutch Shell PLC and Exxon Mobil Corp.

In a review of internal documents, BP seems to have taken a reactive approach to managing safety issues. Only when confronted by government agencies did BP make commitments to take action:

The agency had inspected a refinery in Toledo, Ohio, which BP now jointly owns with Husky Energy, in 2006, uncovering problems with pressure-relief valves. It ordered BP to fix the valves. Two years later, inspectors found BP had carried out requested repairs, but only on the specific valves OSHA had cited. The agency found exactly the same deficiency elsewhere in the refinery. OSHA ordered more fixes and imposed a $3 million fine.

However, as we have seen from the fallout from the Gulf Oil Spill, the recent mine accidents in West Virginia, as well as FAA intervention on airline safety issues, relying on government identification of safety issues may no longer be a viable fall back position for companies that have greater knowledge of the issue than the government.

In February 2009, Allison Iversen, a coordinator at Alaska’s Petroleum Systems Integrity Office, sent BP a letter saying it had failed to inspect the stretch of pipeline for more than a decade before it broke. A scheduled 2003 inspection was never performed because the pipe was covered in snow and the company never returned to do it. The state also said it was “deeply concerned with the timeliness and depth of the incident investigation” conducted by BP. It took four months to provide a report that other oil companies typically submit in two weeks.

The result has been a spotty record of being proactive on safety issues:

“They claim to be very much focused on safety, I think sincerely,” says Jordan Barab, deputy assistant secretary at the Occupational Safety and Health Administration. “But somehow their sincerity and their programs don’t always get translated well into the refinery floor.”

At the same time, BP has been focused on cost reductions:

Meanwhile, company officials continued hammering home the message on costs. Mr. Shaw, the Gulf of Mexico head, made the point at a meeting for top managers in Phoenix in April 2008. His aim, according to an internal BP communication, was to instill a “much stronger performance culture” in the organization, based on strictly managing costs and “this notion that every dollar does matter.” BP declined to make Mr. Shaw available for comment.

But there have been challenges in balancing a “performance culture” with maintaining adequate safety standards:

Obstacles soon emerged. A 2007 internal document setting out the safety policy spoke of an industry shortage of engineers and inspectors that could endanger plans to implement new standards for inspecting and maintaining critical equipment. An internal presentation in May 2009 cited a shortage of experienced offshore workers and said more training was required to “maintain safe, reliable and efficient operations.”

Some think the cost drive affected safety. Workers had “high incentive to find shortcuts and take risks,” says Ross Macfarlane, a former BP health and safety manager on rigs in Australia who was laid off in 2008. “You only ever got questioned about why you couldn’t spend less—never more.” BP vigorously denies putting savings ahead of safety.

Ethics and Safety

So how do companies effectively balance safety and costs?

The first step is to differentiate two critical types of safety expenses: the cost of identifying safety risks and the cost of mitigating them. Organizations cannot make an intelligent decision to bear the risk of a particular action if they are not getting adequate data on which to make such a decision.

In today’s world, with a global corporation’s daily actions affecting so many external stakeholders (e.g. the public), it is ethically unacceptable for a company to not have full knowledge of the risks it generates. Cutbacks in safety personnel, as well as creation of performance incentives that quash disclosure of safety issues, is questionable at best.

It is a separate matter to act on mitigation once a safety issues is fully acknowledged, even just internally within the company’s decision-making hierarchy.

From BP to Toyota, companies have to make decisions daily as to what level of safety they can economically bear. If a decision to take a certain level of risk is legal, within industry guidelines and best practices, and fully vetted internally among subject-matter experts, such a conclusion, even if it leads to a problem, will result in far less damage than if the company either never evaluates the risk, or intentionally quashes discussion on how to manage that risk.

The public accepts the inherent risk in deep water drilling as well as manufacturing safe automobiles. What is not acceptable is an organization that abrogates its responsibility to fully weigh those risks by short-cutting the internal intelligence gathering mechanisms that keep critical data from being openly discussed.

—————————————————————————————–
David Gebler is the President of Skout Group, an advisory firm helping global companies manage ethics risks. Send your thoughts and feedback to dgebler@skoutgroup.com.

For nearly 30 years the heroic story of Johnson & Johnson quick action to remove Tylenol from the shelves after a deadly tampering incident has been folklore in business circles. So what do we make of the news today that The Food and Drug Administration is considering “additional enforcement actions” that might include criminal penalties against the Johnson & Johnson unit that makes Tylenol.

As reported by the Wall Street Journal:

According to written testimony of the FDA’s principal deputy commissioner prepared for a U.S. House committee hearing later Thursday about a wide-ranging recall of children’s Tylenol and other medicines, the agency said it was working with the company “to address its systemic quality issues.”

On April 30, McNeil Consumer Healthcare announced a recall of more than 40 kinds of liquid formulations of infant and children’s Tylenol, Motrin, Zyrtec and Benadryl products because of manufacturing problems at its Fort Washington, Pa., plant, which remains shut down.

“FDA is also considering additional enforcement actions against the company for its pattern of non-compliance which may include seizure, injunction or criminal penalties,” Joshua Sharfstein said. “Over the last several years, FDA has had growing concerns about the quality of the company’s manufacturing process,” he said.

What happened to the fabled J&J Credo? What is going on within the culture that is causing J&J to be seen by the FDA as slow to address quality issues?

Every manufacturing company faces quality issues that impact production. Companies with a healthy ethical culture however have the ability to respond quickly to issues internally, as well as keep regulators and externally stakeholders appropriately informed.

After seeing the issues faced this year by stalwart brands such as Toyota and now J&J, one wonders whether their core values are being taken for granted?

—————————————————————————————–
David Gebler is the President of Skout Group, an advisory firm helping global companies manage ethics risks. Send your thoughts and feedback to dgebler@skoutgroup.com.

The challenges facing Paul Levy, the embattled CEO of Boston’s Beth Israel Deaconess Medical Center, highlight the issues faced by many leaders: once in hot water, how to start on the road to recovery.

The problem is that many leaders don’t appreciate the nature of the ethics risks they face and what is in fact needed to restore trust. Most leaders don’t get that merely by being a successful manager and even a nice guy aren’t enough. Moreover, even coming clean with a confession of wrongdoing and a commitment to do better isn’t enough.

Blanket statements don’t work. Leaders have to get to the heart of what caused the problem in the first place. In this situation Levy faces two challenges to restoring trust: systems and relationships that inhibit trust as well as overcoming skeptical employees who only last year believed in him.

Levy recently contacted a local reporter for the Boston Globe as a step to get his story told. The reporter, Brian McGrory, was not impressed. As McGrory wrote in his column of May 19, 2010:

From the Wall Street Journal on May 5, 2010:

“Frankly, at this point we have to go with an open mind and determine what we may be doing wrong,” Mr. Blankfein told customers of its private-wealth-management business during a 30-minute conference call. “On a very microscopic level, we’re going to use this as an opportunity for a deep dive on our practices and how we run things.”

Goldman Sachs Chairman and CEO Lloyd Blankfein said the firm will always put clients first.

He pledged to clients that he wants Goldman to “be the leader in things like ethics, in putting clients first.” Mr. Blankfein added “we don’t want people to be OK with Goldman Sachs. We want people to be bragging that they have their accounts with Goldman Sachs.”

Making Ethical Culture a Priority

The challenge for any organization to make ethics a priority is a big one. For Goldman Sachs, it will require a deep level commitment of not just the senior staff, but from all of its Managing Directors. In today’s environment employees, as well as external stakeholders, have no tolerance for superficial ethics programs and pronouncements. Putting clients first because of Goldman’s ethics will not happen merely because every employee is given a curriculum of web-based training modules to sit through. Goldman’s leadership will need to come to understand where there are gaps between the expectations of its clients and the expectations of its directors. These gaps are real and need to be openly discussed. Clearly laying out those gaps will be the first step to creating a dialogue where real alignment of interests can happen. Keeping in mind what will earn real buy-in from clients, and from Managing Directors will be the only way Mr. Blankfein will keep his pledge.

Today in Boston the Board of Beth Israel Deaconess Medical Center today fined chief executive Paul Levy $50,000 for engaging in a personal relationship with an employee that over time “created an improper appearance and became a distraction within the hospital,” according to a statement by Board Chairman Stephen Kay.

Mr. Levy has had a stellar reputation in Boston as a business leader with a strong track record of transparency. He is a known blogger and has posted frank and open discussions of painful staff cutbacks during the 2009 recession. His openness was well received.

Challenges to the Ethical Culture

In an interview on WGBH’s Greater Boston tonight, I discussed the challenges Mr. Levy and the BIDMC Board face in addressing the ethical culture issues of having such a high standard of transparency, and the risks when that standard is not met.

Even if Mr. Levy’s actions did not violate the hospital’s code of conduct, he would be well advised to be sensitive the divisiveness that can be caused by a perception of a double standard. Inconsistency is one of the most caustic negative values an organization can face in its current culture.

Mr. Levy’s posting of an apology on his blog soon after today’s Board announcement was a good first step. The challenge in the days and weeks ahead is to ensure that transparency with regard to his previous actions is consistent with the behavior he expects for all Beth Israel staff.

David Gebler, President
Skout Group, LLC

(617) 314-6280
dgebler@skoutgroup.com
www.skoutgroup.com