How best to recover from a breach of ethics

A breach of ethics can occur even in the most ethical organisation. How the organisation deals with the incident is clearly important, not least because it can either stabilise and retain the organisation’s ethical reputation or undermine it. Our guidelines of how to deal with ethical failure (below) will go a long way to getting back on track. But there is a scenario where this is much more difficult.

This situation concerns misconduct that has been happening over an extended period. The 2010 collusion charges in the South African construction industry related to numerous construction projects and reflected pre-existing behaviour; the Volkswagen emission scandal affected some 11 million diesel-powered vehicles world-wide; and MTN’s failure to abide by Nigerian legislation related to unregistered SIM cards applied to 5.2 billion mobile phones. None of these scandals related to a one-off incident or isolated behaviour.

The oft-used claim that the organisation’s leaders “did not know” is not convincing. The leadership role warrants that they keep themselves informed and that they receive regular, reliable assurances that the organisation is operating ethically. In South Africa this ethical assurance should be forthcoming from the Social and Ethics committee and the assurance should be based on real, current insight into the organisation’s ethical status (achieved, for example, via a quantitative ethics assessment among all employees).

The problem with long-term misconduct is that it easily leads to the perception that the unethical behaviour was condoned by the leadership. From there it is a small step to making the judgement that the organisation’s goals – for example, financial returns – took precedence over ethics. And once a company is viewed as pursuing profit “at any cost”, its reputation is likely to suffer.

When an ethical breach has occurred, the author’s A5 methodology is very effective at re-establishing a measure of confidence in the organisation. This is a critical step to getting back to a situation of some trust, which is an essential ingredient for a successful – or even for a functional – relationship with all stakeholders, whether employees, customers, unions, followers, voters or citizens. The A5 approach entails five steps, namely, admit, apologise, take accountability, make amends and do not do it again.

Admitting as a first step is crucial. This may well cause damage, but when the facts are exposed by someone else, such as the press, it is almost certain to cause more damage. If a business leader admits to the problem as soon as it comes to his/her attention, the admission can even be positioned as being transparent.

The 1982 Johnson & Johnson Tylenol case is still a good example of this that continues to be used as a best practice case study. When Tylenol capsules laced with cyanide led to seven deaths in US in the Chicago area, Johnson & Johnson’s admission extended to taking action to recall 31 million bottles of Tylenol capsules and to offering free replacements in the safer tablet form. A measure of their successful handling of the problem saw the company regain a 30% market share from a prior 37% share of the market in just a year after reintroducing their tamper-proof product.

Admitting can also take the form of keeping relevant parties informed when there is a reasonable suspicion of misconduct or a formal allegation of misconduct. A South Africa example where this was badly handled involved Pinnacle Holdings, a prominent provider of information and communication technology products and services. An executive director of the company was arrested on 5 March 2014 (and released the same day on bail) after allegedly offering a R5 million bribe to a member of the South African Police Service to secure a multimillion IT contract. He appeared in court on 24 March 2014 – and the company waited until then before informing the market. The result was a massive 40% fall in the company’s share price. Under the circumstances – the seriousness of the charge and the company’s claim that the director is innocent and that it was a “misunderstanding” – shareholders rightly expected the company to be transparent and forthcoming. Instead, the information was withheld for almost three weeks – as was shareholders’ confidence thereafter.

Apologising is a critical step, ideally done in conjunction with admitting. It will not right the wrong, but it can create a platform for moving forward. An apology can also have a moral value as well as an economic or business value if, for example, it reduces the damage of an ethical failure.

Lawyers will often advise against apologising because it can entrain legal liability. By way of example, the Church of England guidance, written in 2007 and only replaced in 2015, explicitly warned bishops not to apologise fully, if at all, to sex abuse victims to avoid being sued. Legal advice circulated among the most senior bishops, told them to “express regret” to sexual abuse victims by only using approved wording: “Because of the possibility that statements of regret might have the unintended effect of accepting legal liability for the abuse, it is important that they are approved in advance by lawyers, as well as diocesan communications officers (and, if relevant, insurers),” the report says.

But if wrong has been done, often an apology is what is most required. The significance of an apology is well illustrated by the length of time victims of abuse pursue getting an apology. Victims of forced adoptions that took place in Australia from the late 1950s to the 1970s (the practice of taking the babies from unmarried mothers, against their will, and placing them for adoption) only got a national apology in 2013 from former Australian Prime Minister Julia Gillard. A formal state apology was issued only in 2013 to the victims who suffered continued sexual, psychological and physical abuse at the Magdalene Laundries in Ireland that operated from the 18th to the late 20th centuries.

However, the apology needs to be made timeously. A high-profile example where timing undermined the apology was Rupert Murdoch’s handling of the News of the World cellphone hacking scandal in 2011. He did apologise to the family of Milly Dowler, the murdered British teenager whose phone was hacked, and this was followed the next day with two full-page public apologies in many of Britain’s national newspapers. This should have helped – but did not because the apology was only offered more than 10 days after the accusations first appeared and a week after the News of the World was closed.

Taking accountability is an important step that recognises the principle that one should be answerable for what one does. The lack of individual accountability – when, for example, subordinates are blamed – often exacerbates unethical incidents and increases public outrage. Taking accountability is also often avoided under the guise of avoiding potential legal liability and costs.

Politicians are often seen to be most guilty of avoiding accountability. While the best way of creating accountable governance is to hold guilty officials to account and to impose the prescribed punishment, this is undermined by those who are politically and financially powerful, who enjoy apparent impunity. The result, of course, is to erode citizens’ confidence in those politicians or sometimes even in the political party. Attempting to counter this, in South Africa Chapter 9 institutions (the Human Rights Commission, the Public Protector, the Auditor-General, the Electoral Commission, etc.) have been set up as independent bodies aimed at contributing to an open, accountable and transparent government, among other goals.

A rare example is when a leader or senior executive escalates the principle of accountability by taking responsibility for the action of a subordinate. This happened when Oswald Grübel resigned as CEO of UBS, a Swiss global financial services company, after the bank revealed that one of its traders had made unauthorised trades that resulted in a $2.3 billion loss for the company. Grübel acknowledged that ultimate responsibility rested with the chief executive.

Making amends is a crucial next step. Clearly this should not be a token gesture, but should recompense those negatively affected appropriately.

Volkswagen has not yet revealed the exact amount it will pay to compensate the 650 US car dealers impacted by the emissions scandal, but the Reuters news agency reported that it could be close to $1.2bn. And that excludes the settlement for vehicle owners.

Recently ArcelorMittal South Africa was given a record R1.5bn fine for its involvement in the long steel and scrap metals cartels. While a fine may not be considered to make amends, an interesting added factor is that the Competition Commission also requires that ArcelorMittal invest R4.6bn on plants and equipment in the next five years.

Timing is also relevant a s regards making amends. When the remedy or compensation that is due to the victim is not forthcoming in a timely fashion, it risks invoking the saying “justice delayed is justice denied”. In legal terms it means that that if the legal redress that is available to the person who has suffered loss or damage is delayed, it is effectively the same as having no redress at all.

Ensuring that the ethical failure does not happen again is the final step. This entails not only ensuring that the specific incident does not occur again, but also avoiding another ethical failure. For example, the company found guilty of collusion will suffer as much damage if found guilty thereafter of fraud as it would for a repeat charge of collusion.

Ensuring that misconduct does not occur again necessitates taking on the task of improving the ethics in the whole organisation. This warrants assessing and monitoring ethics and implementing a sound ethics management system, which includes that ethics is managed proactively, rather than reactively, and that it is managed regularly, rather than on an ad hoc basis.

Together, these five steps can contribute significantly to re-building confidence and re-establishing trust among stakeholders.

by Cynthia Schoeman