Corporate Culture & White Collar Crime
Enron, Andersen, WorldCom, Parmalat . . . over and over again, the neglected corporate culture has been named as a key culprit for the disgrace, and sometimes demise, of major respected organizations.
Insiders and experts talk about conspiracy and collusion, illegal practices and turning a blind eye to wrong-doing. The negative values, attitudes and behaviours of toxic cultures permeated throughout esteemed organizations, twisting policies and processes. The domino effect could only lead to downfall and disgrace.
Case Study: Enron
The Enron collapse sent shockwaves through the financial world when it emerged that management had used off-the-books, unregulated private partnerships to absorb losses and support inflated revenues. When concerned analysts questioned where the money came from, Enron refused disclosure. Only under mounting pressure did they eventually comply, in November 2001, to communicate the overstatement of profits. This event triggered the collapse of the company and its bankruptcy filing by 2 December 2001. This resulted in the loss of more than 5,000 jobs and at least US$1 billion in retirement funds.
During investigations it emerged that Arthur Andersen, the Enron auditing firm, had supported the deceit by turning a blind eye to questionable accounting practices in order to secure lucrative consulting fees. A 217-page report by Enron’s Board condemned management for inflated profit reports and failure of controls at every level. The report states the following: “. . . a culture emerged of self-dealing and self-enrichment at the expense of shareholders, as accountants and lawyers signed off on flawed and improper decisions every step of the way”.
Former Enron bosses Kenneth Lay and Jeffery Skilling faced a lifetime in prison after a Texas jury found them guilty in one of the biggest corporate scandals in American history. In May 2006, Skilling was convicted of 18 charges of fraud and conspiracy, and one count of insider trading, while Enron founder Kenneth Lay was convicted of six counts of fraud and conspiracy, and four counts of bank fraud (Lay subsequently died on 5 July 2006).
Enron Corporation’s Espoused Cultural Values:
Case Study: Arthur Andersen
Arthur Andersen was founded in 1913 and in time would take its place as one of the “Big 5” accounting firms. The motto of the founder was “think straight, talk straight”, and over time Andersen earned a reputation in the marketplace for his integrity. This reputation transferred across to the company brand. Unfortunately, and behind closed doors, Andersen encouraged groupthink, creating a workforce of followers, not leaders. This led to the creation of a soulless cult and by the 1990s it was all about the dollar. In Final Accounting (1) Barbara Ley Toffler, former partner-in-charge of Andersen’s “Ethics and Responsible Business Practices” consultancy practices from 1995 to 1999, reports that, eager to rake in millions in auditing and consulting fees, Andersen executives turned a blind eye as clients such as Waste Management, Global Crossing, WorldCom and Enron cooked their books. Inward-looking executives lost sight of the customer and other key stakeholders. Staff were applauded for the amount of money they brought in, but nobody was acknowledged and rewarded for standing up to unethical conduct.
Unfortunately, while there were attempts in some quarters to improve the corporate culture, these failed due to collusion, corruption and resistance to change at the top of the hierarchy. Self-interest triumphed. The culture of Andersen did not have ethical principles as its central paradigm. The real paradigm was money. In her book, Toffler named the cause of Andersen’s downfall succinctly:
. . . a corporate culture emerged that put loyalty to the firm above loyalty to the client or the investing public.
This intriguing insight suggests that the organization had come to take on a fictitious personality all of its own in the minds of employees, and that it was the duty of executive management to protect the mothership above and beyond any calling to protect the interests of the non-fictitious (shareholders, customers, the workforce and society). In The Corporation (2) professor of law and legal scholar Joel Bakan explains how this thinking took root:
By the end of the nineteenth century, through a bizarre legal alchemy, courts had fully transformed the corporation into a “person” with its own identity, separate from the flesh-and-blood people who were its owners and managers and empowered, like a real person, to conduct business in its own name, acquire assets, employ workers, pay taxes and go to court to defend its actions. The corporate person had taken the place, at least in law, of the real people who owned the corporations.
Arthur Andersen’s Espoused Cultural Values:
Case Study: WorldCom
When WorldCom, the US’s number two long-distance phone company, revealed US$7.2 billion in improper accounting in July 2002, it filed for the largest bankruptcy reorganisation ever. In the ensuing investigation, the report of court-appointed monitor, Richard Thornburgh (a former US attorney general), stated:
. . . our investigation strongly suggests that WorldCom personnel responded to changing business conditions and earnings pressures by taking extraordinary and illegal steps to mask discrepancies between the financial reality at the company and Wall Street’s expectations.
In 2005, Bernie Ebbers, former chief executive of WorldCom, was declared guilty of fraud, conspiracy and filing false documents in an accounting scandal which eventually totalled US$11 billion in irregularities and made for the biggest bankruptcy scandal in history. He was sentenced to 25 years for his role in the massive accounting fraud.
Incidentally, the WorldCom top team had previously worked for Arthur Andersen!
WorldCom’s Espoused Cultural Values:
Figure 9 shows some of the prevalent attitudes, behaviours, outcomes, artefacts and results of these corporate cultures as documented in the media. Working backwards, one can divine the basic needs and beliefs which served as the seedlings for the disastrous domino effects. These corporate cultures were not principle-centred in word and spirit and were using glossy marketing campaigns to misrepresent their true nature.
The needs are normal and valid. It is in the central paradigms where the seedlings of malfeasance sprout, as the beliefs entertained go a long way towards influencing attitudes and the means used to achieve ends. Given that white-collar crime has proven to impact whole economies and the value of national brands, the new lack of tolerance for shady dealings means that we can expect more and more corporate governance scandals to come to light. A glance in the business section of any major newspaper, on any given day, would confirm this trend as senior executives, consultants, banks and auditors continue to be brought to task for white-collar crime.
The challenge in identifying a toxic culture is that it often hides behind expensive packaging, be it an organization’s glossy marketing campaign or an individual’s designer suit and watch. Recent findings by International Survey Research (ISR) have confirmed that ethical (or unethical) behaviour is part of an organizational culture which develops over time. This study is based on employee surveys in 72 companies from 1999 to 2000. According to ISR, the aspects of corporate culture that are likely to put a company at risk include an environment in which:
- Discussion of company values is seen as a public relations ploy rather than a true commitment;
- Acting with integrity is seen as an obstacle to success rather than a vehicle to it;
- Open debate and questioning of the status quo is discouraged;
- Bad news is “spun” rather than confronted head-on, and there is a “shoot the messenger mentality”, particularly as one goes up the chain of command;
- Information of all kinds is hoarded rather than shared;
- Behaviour of high-performing employees is not questioned and the ends are emphasised (particularly the financial ends) while the means are largely ignored;
- The external environment - including customers, investors, and the general public - is something to be manipulated, rather than respected;
- There is an exclusive focus on short-term financial results, often matched with unrealistic performance expectations (3)
It is interesting to note that the behaviours identified by the ISR research will not surface in cultural audits through scientific-based tools alone. Instead, they require the use of qualitative tools, including the direct observation of staff, by a neutral party, as they go about their daily business.
(1) Barbara Ley Toffler, Final Accounting, Doubleday, 2002.
(2) Joel Bakan, The Corporation, Constable & Robinson Ltd, 2005, p. 16.
(3) International Survey Research (ISR), “Ethics and Organizational Culture: How Corporate Culture Impacts Shareholder Security”, September 2002.
This article is an adapted Exerpt from The Corporate Culture Handbook, by Gabrielle O’Donovan. Published by The Liffey Press 2006 and available from www.theliffeypress.com