Category: Business Laws & Ethics

Today’s Wall Street Journal reported the story of the progress BP is making in re-characterizing its culture in the aftermath of the April 2010 Gulf Oil Spill.

According to the Journal, new CEO Bob Dudley has created a new global safety division at BP, a company that also suffered a 15-fatality refinery explosion in Texas five years before the lethal Gulf accident. He has given the division power to intervene in or shut down any operation seen as too hazardous.

The safety issue goes to the heart of BP’s corporate culture, say some critics, who contend that compared with its Big Oil rivals, the company has historically been focused more on deal-making and less on safety and operational excellence. “Other companies were less aggressive on growth and more focused on their safety-management systems,” says John Hofmeister, a former president of Shell Oil Co. “Changing the culture is hard.”

BP is under tremendous pressure to make changes. Reorganization may look good on reports to government regulators, but strategic plans won’t succeed if there aren’t changes in the field. And those changes often involve the way in which individuals are treated, and given incentives.

The Journal reported that Phil Dziubinski became BP’s ethics and compliance leader for Alaska operations in mid-2006, shortly after the company suffered a 4,000-barrel oil spill on the North Slope. That happened a year after the refinery explosion in Texas City, Texas, an accident that led a federal agency called the Chemical Safety Board to suggest BP managers didn’t listen enough to what workers were telling them.

“Reporting bad news was not encouraged,” the report said, “and often Texas City managers did not effectively investigate incidents or take appropriate corrective action.”

Phil earned a reputation as a bulldog, staying after organizational leaders that lagged in implementing safety fixes in Alaska operations.

At a meeting in March 2007, Mr. Dziubinski disagreed with a supervisor’s assessment that the company was on track to fix all safety issues. Mr. Dziubinski said that several problems flagged by workers in the past still hadn’t been addressed, and that BP was taking too long to deal with workers’ current concerns.

“We tend not to listen to the workers,” Mr. Dziubinski said, according to notes of the meeting taken by union leader, Marc Kovac, who was there.

Dziubinski raised tough issues, such as how excessive overtime was linked to safety violations because the sheer exhaustion of employees working repeated 16+ hour shifts. As reported in the Journal, after repeated efforts to raise these issues, Dziubinski’s responsibilities were assigned to others and eventually he was laid off as part of a reorganization in Alaska operations.

Listening is hard. But any serious effort to change the culture of an organization as large as BP’s must start from the ground up. Developing new safety policies is one thing. But real change won’t happen until the organization demands that managers listen to those in field that are living the issues that need to be addressed.

To bring about change directors should be comfortable with their role as leaders. They should also be comfortable with the traits that they must display in order to build credibility with their followers, both within the boardroom and beyond.

In the definition of Jim Kouzes and Barry Posner,[1] credibility is all about the way in which leaders earn the trust of their followers and about what followers demand as a necessary prerequisite to willingly following. Many directors have had successful executive careers before embarking on board pursuits. Leadership in an executive situation is often facilitated by authority or power. In the boardroom there is no such facilitation and the leadership skills must be honed to maximum effectiveness, especially if one director is attempting to change the thinking of the rest of the team.

Few directors receive any additional leadership skills training after moving on from their executive roles and yet this is probably the career point when leadership is most needed.

In Kouzes and Posner’s research over the last twenty years covering diverse organisations and geographic locations they found four traits to be the key to credibility as a leader. If a director can demonstrate those traits then he or she is well on the way to leading the organisation towards the culture and actions that will satisfy his or her personal passion.

Followers choose leaders who are honest, forward looking, competent and inspiring (in that order of preference). This is a simple check list for a director wishing to change the way the board addresses an issue. Is the change honestly in the best (even if long term) interests of the organisation? Is the director acting honestly and in good faith in proposing the change? Has the director thought through the future implications of the proposed change? How can this forethought be demonstrated and communicated? What special skills make the director an authority on this issue? Skills from experience, such as suffering from a disease or being a helper of disadvantaged persons, are as valid as formal qualifications but it is important to let others know how the competence has been achieved. And finally; what outcome could be achieved that will inspire board members to follow your lead? What is in it for the organisation, for society and for them?

It is also important to remember that leadership is personal. As Kouzes and Posner put it “If people don’t believe in the messenger, they won’t believe the message”. All board members should strive to demonstrate their personal and ongoing commitment to the organisation and its aims and to demonstrate their own honesty, forethought, and competence.

Here is a model that I have found useful when analysing my own behaviour and impact in a board situation:

Thinking through what I am attempting to achieve and what I skills will be required to apply allows me to focus efficiently. Thinking about the behavioural preferences of the board members allows me to modify my own behaviour to give my message the best chance of being heard and understood. Understanding why I am seeking to achieve the outcome allows me to position this strategically and also to signal how important I believe the issue to be. Finally, thinking through my network of friends (aka unpaid mentors!) allows me to consider and attain additional information that may assist my cause.

Leadership development is an important aspect of the director role, and not just something that is recommended for executives. All directors should review their own leadership skills from time to time and determine what and how to improve.

What do you think?

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[1] Kouzes, J, and Posner, B, Credibility: How leaders gain it and lose it, why people demand it, Jossey-Bass, 2003

Today’s NY Times reports the story of Kansas City Royals pitcher Gil Meche, who was contractually entitled to $12 million in compensation for 2011, but instead forfeited the money by retiring. As reported by Tyler Kepner, Meche was contractually entitled to the money if he showed up to spring training next week, even if he didn’t end up playing. But Meche didn’t perform well in 2010, and was uncomfortable receiving a star starting pitcher’s salary, even if he was in the bull pen.

As reported in the Times:

“When I signed my contract, my main goal was to earn it,” Meche said this week by phone from Lafayette, La. “Once I started to realize I wasn’t earning my money, I felt bad. I was making a crazy amount of money for not even pitching. Honestly, I didn’t feel like I deserved it. I didn’t want to have those feelings again.”

The Royals fully expected to pay Meche what was due him. “Still, the Royals fully expected Meche to pitch in relief, and to pay him the $12 million — three times more than any other player on the team. If nothing else, they believed, Meche could be a positive influence for a young roster.”

Is Meche showing strong ethical character by rejecting the money? He certainly was entitled to the money, and no one has to feel that his employer was being taken advantage of.

We like ethics heroes. When someone does something extraordinary we like to hold them up as a standard that we can aspire to. So it’s interesting when someone comes along and follows their own conscience and does something right, but it may not be a model for others to follow. Someone could argue just as passionately that the ethical thing to do would be for Meche to receive the benefit of his contract and if he felt bad about it, donate the money to a worthy cause.

I respect Meche for living up to his own values. I am intrigued though that this may be a case where my respect is for his individual integrity and not necessarily for the act itself.

Any thoughts?

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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to clear the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com.

I’m not intentionally picking on Johnson and Johnson. But their current ethical challenges couldn’t be a better case study for the financial impact of not living one’s values.

As reported this morning, Johnson & Johnson, the world’s largest health products company, said fourth-quarter profit fell 12 percent, hurt by product recalls and declining sales. The company forecast 2011 earnings below analysts’ projections.

J&J forecast 2011 earnings excluding some items of $4.80 to $4.90 a share. J&J’s McNeil Consumer Healthcare division has recalled dozens of over-the-counter drugs, including Tylenol and Rolaids, since late 2009. The company was forced to shut down a factory temporarily in Fort Washington, Pennsylvania, in April that may cost J&J $650 million annually in lost sales, Derrick Sung, a Sanford C. Bernstein analyst, wrote in a Jan. 21 note to clients.

“Consumers are reluctant to switch back and are continuing to switch to other brands,” Larry Biegelsen, an analyst at Wells Fargo Securities, wrote in a Jan. 14 note to investors. “If this trend continues, we believe that growing consumer loyalty to new brands or comfort with private labels could slow McNeil recovery relative to expectation.”

Consumers have lost confidence in the brand. Just putting the products back on the shelves is not going to be enough. What questions is the Board of Directors asking of management and are those questions getting to the heart of the matter?

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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to clear the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com

One of the biggest misconceptions about the Fundraising Committee is that its members are to do the fundraising for the nonprofit. No, the job of the Fundraising Committee is to ensure that the fundraising is done very well. The actual fundraising should be done by all Board members, with various staff members supporting those Board members.

What’s the Primary Role of Any Board Committee?

The role of any Board Committee is, at a minimum, to ensure “best practices” in the activities, or the function, that the committee is assigned to. Just like people need to do certain things to stay healthy (such as eat, sleep and exercise), organizations need to do certain activities, too. Many people might refer to those activities as “best practices.” (There are many strong feelings about whether “best practices” even exist, but most people would assert that the phrase has more usefulness than not.)

When recurring crises occur, it’s usually because people are attending only to what’s urgent and not to what’s important. Best practices ensure that the most important activities are done. So Board committees should ensure “best practices” are implemented in the major functions in an organization, for example, in Board operations, planning, marketing, staffing, finances and (in the case of nonprofits) fundraising.

What’s the Primary Role of a Fundraising Committee? What Are Its Ongoing Responsibilities?

Notice the nature of the following activities — how they are not focused on very near-term, detailed tasks for Committee members to raise money. The following responsibilities should be included on a work plan for a Fundraising Committee. Notice that the activities are recurring — they should be done on an ongoing basis.

1. Ensure there’s a specific fundraising target

How much money needs to be raised? Usually the amount is the difference between expected revenues and expenses. Usually those revenues and expenses are identified during strategic or program planning.

2. Ensure prospect research occurs to identify how much money might be raised from different types of resources

Good prospect research will look at the nature of the nonprofit’s services and its locale, and identify similar nonprofits and the sources of funding used by them. For example, similar nonprofits might have raised 50% of funds from individuals, 20% from government contracts, 20% from grants and 10% from fees. That profile suggests the mix that the nonprofit might aim for. Good prospect research will go beyond searching a database of foundations to submit proposals to.

3. identify specific, potential sources of funds from a diverse mix of sources

Now the nonprofit is ready to start selecting specific sources of funds from individuals, foundations, government and/or fees. These activities should result in the names of specific sources, for example, names of people, foundations and government agencies, and/or the specific amounts of fees to charge for certain services. (The amounts of fees to charge might be recommended by, for example, a Marketing Committee.)

4. Develop an action plan about who is going to approach what source, how and by when

This responsibility includes identifying which Board members will approach what source, along with what staff members will support those Board members. All Board members should have assignments, not just the members of the Fundraising Committee.

5. Compile the results of items 1, 2, 3 and 4 into a Fundraising Plan that is approved by the Board

The Plan should include more than merely a listing of what foundations to approach. The Plan becomes the roadmap for generating sufficient revenue. It should include realistic expectations from a diversity of sources, and justify how those sources were identified. It should include an action plan (from step 4) that the Fundraising Committee ensures is implemented on a timely basis.

6. Ensure effective administrative systems to track grants and donations

As funding comes into the nonprofit, its various sources and amounts must be closely and accurately documented. Acknowledgements and receipts must be provided back to donors. Grant requirements must be monitored to ensure they are met. In the United States, fundraising information must be included on the IRS Form 990.

Summary — Job of the Fundraising Committee is to Ensure Planful, Strategic Fundraising

So, again, notice that the job of the Committee is NOT to just ask the Executive Director to provide a list of foundations to write grants to. It’s much more strategic than that. And its responsibilities are recurring — Committee members should never say they don’t have anything to do.

Members of the Fundraising Committee should not be picked because they are “big names” or “big pockets.” Popular and rich people rarely want to serve on Fundraising Committees. Many times, they’d rather write a check, than be expected to attend monthly meetings. And foundation officers see right through the “game” of listing big names on a list of Board members. Instead, select members who know how to think strategically, develop a plan and ensure that the plan is implemented.

Also see

• Should You Try Get “Big Pockets” and “Big Names” on Boards?

What do you think?

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 800-971-2250
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.

The window is closing for Johnson & Johnson to retain realistic hopes of regaining its trusted position with customers. Customers are moving away from the brand and are increasingly finding suitable substitutes.

Today’s New York Times offers an update on what is happening with J&J. But what is most striking to me is how this industry leader still seems unable to get to the heart of the problem. As reported in today’s article:

Those reassurances [by the company that the worst is behind them], however, have been followed by yet more recalls. What is most perplexing is the seeming inability of executives to solve — and satisfactorily explain — the manufacturing issues that dog the company.

As someone focused on culture and values, the issue seems so clear to me: J&J is not digging deep enough to uncover the root causes of the problem.

As reported in the Times, consumers were complaining as early as April 2008 about moldy-smelling Tylenol capsules manufactured at the Las Piedras, Puerto Rico plant. It J&J 18 months to start a recall of the offending products. In January 2010 the FDA sent a warning letter to J&J criticizing the delay in taking action.

My question is whether J&J has ever undertaken a comprehensive assessment of the culture, both at the Puerto Rico facility, as well as within the McNeil Consumer Healthcare division? Does J&J know why employees were hesitant to come forward? Does J&J know what were the pressures that caused leaders to not respond in a manner consistent with J&J’s Credo? It’s one thing to look at flaws in the supply-chain or in production, but that does not get to the people issue. Individuals must have known what was going on, and they didn’t come forward.

This lack of transparency is certainly one of the factors that is inhibiting the ability of J&J to act effectively, and rebuild its reputation. J&J talks about the corrective actions it is taken. But are they putting only a Band-Aid over the problem, or are they actually getting to the root cause of the problem?

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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to clear the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com.

Nobody’s perfect!

Here are three common issues that can hamper even skilled, ethical and intelligent directors:

Committee thinking

It is important to remember that a board is not expected to perform as a committee. Committees are groups of representatives brought together to resolve an issue in a manner that is acceptable to each of the groups represented on the committee. This is quite different to a board which must develop the most advantageous solution for the organisation regardless of the potential impact of that solution on other organisations or individuals.

The public sector uses a lot of committees, often under other names, to broker compromises to otherwise intractable conundrums. This is a highly important function and one which the sector does well. However, this is not the function of a board. New board members with extensive committee experience or public sector backgrounds can have trouble adapting to their new role. This is especially so when the issue is not explicitly addressed or considered. Many people who are excellent committee members wonder why the behaviours that made them successful in a committee environment fail in the boardroom.

Conflicted Relationships

The most common conflicted relationship on boards is that of the CEO, a member of management and (usually) also a director. When the CEO is also Chairman (or President) this is exacerbated. It takes a very special set of skills to enable a director to move easily from the role of a manager presenting to the board and accepting direction from the board to the role of a director, independently assessing the proposals of management and overseeing their actions to ensure they suit the strategic aims of the company. Setting remuneration becomes very difficult when there are a large number of executives on the board.

Another relationship that is common in federal organisations (those with state, branch or chapter structures where each state branch or structure is represented on the board) or joint ventures is the ‘two-tier director’. These roles require the wisdom of Solomon as decisions about funding and capital structure will inevitably involve one party ceding for the other to gain.

Family companies have very complex relationships and it can be difficult for directors to actively discuss contentious issues with people with whom they live in close family relationships. Generationally diverse family boards can have the widest range of viewpoints to assimilate into a single agreed strategy.

Shareholders

I have heard it said that a shareholder in the boardroom is much like a mother-in-law in the bedroom; intensely interested in the outcome but a great hindrance to the procedures!

A good director acts only in the interests of the company and never from his or her own personal interest. Many shareholders like to see directors have ‘skin in the game’ and ask that the director (especially in a start up or small listed company) acquire a significant parcel of equity in order to align his or her interests with those of the shareholders. This creates problems:

1. Nobody really knows what is significant to another; apparently wealthy people may be geared to excess or apparently impoverished people may be truly wealthy.
2. If the shareholding is so large as to be significant to the director it is large enough to tempt the director to act to protect the value of that holding at certain times, which may suit the director more than the company. Timing becomes an issue.
3. Insider trading immediately becomes a possible issue; directors know when dividends are to be declared, how projects are faring, if potential acquisitions exist and other price sensitive information before those items are progressed to the stage where an announcement may be made.
4. If the director leaves they will probably sell their stock and that will affect the shareprice.
5. If the director is able to gain voting control with the support of a few others the company has effectively been taken over but no control premium has been paid to the ordinary stockholders.

Of course there are always examples of boards where these conflicts are well managed. Consider Harvey Norman, a listed Australian company where the major shareholders, CEO, founder, Chairman’s wife, CEO’s husband and some longstanding employees are all members of the board which appears to function well and deliver acceptable corporate outcomes.

There are many other sources of impediment to director and board success which I could not cover in this brief post and which may, on occasion, be more serious than the three I opted to discuss here.

Which have you encountered in your dealings with boards, and, more important, how do you overcome the drawbacks to achieve success?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

Today’s business press reports that a lawsuit filed last week on behalf of Johnson & Johnson shareholders accused the company’s directors of ignoring “red flags” foreshadowing product recalls and government probes of manufacturing defects and marketing practices.

The lawsuit alleges that while J&J once set “the gold standard for integrity and excellence,” the directors’ “utter disregard for their fiduciary duties, including permitting and fostering a culture of systemic, calculated and widespread legal violations has destroyed J&J’s hard-earned reputation.”

Bloomberg Business reports that the board received “years of red flag warnings of systemic misconduct,” according to the complaint. “These red flags came in the form of federal and state regulatory investigations, subpoenas and requests for documents, FDA Warning Letters, news articles and the recall of products accounting for hundreds of millions of dollars in corporate losses.”

It will be very important to watch the progress of this lawsuit on several levels:

1. Will Directors be held liable for failing to adequately monitor the culture of the company?
2. How important is the fall of the company’s reputation (in terms of news articles being a “red flag”) in determining directors’ liability.

Stay tuned…

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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to clear the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com.

I have to admit that I have a conflict of interest here. All four of my kids have attended Maimonides School in Brookline, Massachusetts. But the story below from boston.com is a good example of how we can instill values in our kids in ways that matter…to them and to us.

In the last girls’ soccer game of the season at Maimonides School, an underclassman pulled off her uniform and handed her jersey over to an injured teammate.

Senior player Tifara Ramelson had torn ligaments in her knee during her final season, but Shoshana Ehrenkranz, a seventh-grader, wanted Ramelson to have one last chance to play.

Moments like these permeate the athletic program at Maimonides School, a Jewish day school in Brookline.

For its athletes and leaders, it was no surprise they were recognized for good sportsmanship this year.

“For me it’s not about winning the game; it’s about playing well,’’ said Sophie Edelman, the varsity volleyball captain. “I want to have a good relationship with my teammates rather than show them I’m the best server in volleyball.’’

Today, Maimonides will honor its athletic teams at the opening game of the girls’ basketball season by presenting the District Sportsmanship Award.

The school received the award last month at the Massachusetts Interscholastic Athletic Association’s 17th annual Sportsmanship Summit at Gillette Stadium.

The summit recognizes one school in each district for sportsmanship, and Maimonides won the award among private schools, said Peter Smith, the association’s assistant director. The summit has grown in the past several years as more schools are interested in attending, with 1,100 people participating this year, he said.

“This is the type of stuff you take for granted,’’ said Smith. “There are a lot of people out there doing good things, and they’re not things you see in the news.’’

Maimonides won the award after being nominated by Marie Laundry, athletic director at Mount St. Joseph’s Academy, an all-girls Catholic school in Brighton.

“They come prepared all the time. They’re good sports and play hard right up to the last minute,’’ said Laundry, who coaches basketball and soccer against the Maimonides teams. “They never give up, and they encourage each other.’’

Maimonides students, administrators, and coaches all agreed their sportsmanship stems from values the school teaches starting in kindergarten. Half the school day is spent in academic classes, while the other half is spent studying the Torah, administrators said.

Lashon harah, for example, is in Jewish law the prohibition of gossip. It teaches students to be mindful of what they say about others, said Rabbi Dov Huff, assistant principal of general studies.

“In the newspaper, you read about how some schools do terrible things and haze. That just doesn’t happen at Maimonides,’’ said Elan Baskir, a senior who plays soccer, basketball, and baseball.

Baskir said the men’s soccer team made the quarterfinals for the first time in school history this year. It wasn’t easy. One victory, Baskir recalled, came on a freezing, rainy day.

But when the team stood on the brink of losing in those quarterfinals, said Huff, he overheard the players chatting in their huddle, with their captain praising his teammates not only for a great season, but also for respecting others.“To me, it was shocking. . . . What was on their minds is they did it the right way,’’ said Huff.

Rabbi David Ehrenkranz, who teaches the Bible and the Talmud and coaches varsity softball, said he teaches the same concepts in class and during practice.

“Dignity and self-restraint are second nature,’’ said Ehrenkranz. “I see no difference from students in my class, the way they behave in the classroom, compared to my athletes.’’

Athletic Director Hal Borkow said other schools and referees often compliment him on Maimonides students’ behavior, such as when a tough call is made, and the athletes take it in stride.

“The ref made a point to let me know that the kids behaved like mature young adults,’’ said Borkow.

But not everyone has to study the Torah to promote sportsmanship. Students said one of the most important ways to develop good attitudes is to maintain good relationships with teachers.

Huff, who graduated from Maimonides before becoming an administrator, said every grade has a tradition called shabaton, when students will spend the weekend at a teacher’s house, eating meals together and talking about important issues.

“Teachers in the school as a whole play a big role in how to behave,’’ said Tamar Kosowsky, a senior varsity volleyball captain. “Every school should focus on what it means to be athlete on the field.’’

Administrators said receiving the award meant they were doing the right thing, in and out of the classroom.

Judy Boroschek, general studies principal for the school, said, “It felt very affirming of what we’re trying to accomplish — to think school can have that much of an impact.’’

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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to remove the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com.

A powerful tool was made available to the public yesterday. In research reported Thursday in the journal Science, scientists at Harvard University, Massachusetts Institute of Technology, Google and the Encyclopedia Britannica unveiled a database of two billion words and phrases drawn from 5.2 million books in Google’s digital library published during the past 200 years.

Just insert the phrase “business ethics” and see what emerges:

While the increase in the phrase in recent years makes sense, given the increase in the number of business books published. But look at the blip in 1930, just after the Crash of 1929. It didn’t take long for authors to be raising issues about practices on Wall Street.

Hmmm.