Why Cultural Breakdowns Lead to Scandal

Its rigged emissions testing in 11 million of its cars made Volkswagen the subject of the Environmental Protection Agency. The scandal led to VW’s being wacked with a $4.3 billion in a criminal settlement on top of an indictment of six corporate executives.

After the scandal hit, the German carmaker said auf wiedersehen to its CEO Martin Winterkorn. Shortly afterward, the EPA accused Fiat Chrysler of using secret software that allowed illegal excess emissions from at least 104,000 diesel vehicles. Whether it was Wells Fargo employees creating fake accounts in the names of real customers, or pharma giant Mylan imposing big price increases on users of its life-saving EpiPen, there were plenty of stories that kept business leaders wondering, how deep within the corporate culture did these deceptions live? And how do they fester long enough to explode into these kinds of ethical issues?

Leonard Sherman, an executive in residence and adjunct professor of marketing and management at the Columbia Business School and the author of If You’re in a Dogfight, Become a Cat! Strategies for Long-Term Growth, believes many well-intentioned business leaders often unwittingly put themselves and their companies at risk by confusing desired outcomes with operational strategy. “VW’s insistence on growing its business at any cost, for example, seeped into its corporate culture and resulted in people cutting corners,” Sherman says. He argues that the insidious nature of corporate cultural breakdowns emerge as gradual backsliding from a company’s noble founding vision, rather than as a sudden, reckless ethical breach. Executives and employees deeply immersed in the day-to-day activities of a decaying corporate culture are often unable to see emerging danger signals that are glaringly obvious to an outsider granted access to observe a company’s operations.

One direct way companies can arrest this tendency is for board directors to take it upon themselves to independently source information within the company, rather than be spoon-fed information, as is often the case. Sherman remembers presenting to the directors of GM prior to its bankruptcy troubling information he and his team had gathered from readily available sources. “I could see their collective jaws drop,” he recalls. “They said ‘we had no idea.’ But there was nothing we revealed to them that they couldn’t have found on their own if they bothered to look independently.”

Proactive CEOs actually encourage their board directors to seek an independent view. When he ran Emerson Electric, Chuck Knight (Chief Executive’s 1987 CEO of the Year) asked directors to brief him directly on what they learned when visiting a facility elsewhere in the country. “I wanted to know if the outside view was consistent with what we believed to be true internally. If it wasn’t, we had an opportunity to fix it,” Knight observed.

Another effective way to prevent a scandal in one’s business, Sherman argues, is to reward honesty rather than merely to encourage it. Some companies have a values statement or code of ethics that emphasizes honesty, but they still pay and promote salespeople based on the sales figures alone or give bonuses to supervisors based on short-term profits without any other consideration. If the company’s incentive structure rewards employees who get results regardless of how they do it, some employees may use dishonest means. This is what tripped up Wells Fargo. Bonuses and performance reviews should be based on upstanding professional behavior as well as results.