Corruption scandals show why leaders should highlight ethics

In January, Rolls-Royce agreed to pay £671m to the authorities in the UK, the US and Brazil. In return, the company will not face criminal prosecution for corruption, false accounting and failure to prevent bribery.

The agreement followed a four-year investigation by the UK’s Serious Fraud Office into the engine-maker’s conduct over three decades.

The investigation and its outcome was a humbling moment for one of the UK’s leading companies. “The behaviour uncovered in the course of the investigations by the Serious Fraud Office and other authorities is completely unacceptable and we apologise unreservedly for it. This was unworthy of everything Rolls-Royce stands for and what our peop­le, customers, investors and partners rightly expect from us,” Warren East, Rolls-Royce chief executive, said when the investigation had been concluded.

Rolls-Royce said that as a result of the investigation, it was no longer using any of the “intermediaries” implicated in the corrupt practices. The investigation into the company uncovered corrupt behaviour in Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia.

The case, which is still continuing with the investigation of individuals, raises important questions. How can companies ensure they behave properly while still meeting sales targets, especially in industries where bribery and payments to intermediaries are common, even when they are illegal?

For Rolls-Royce, the answer lies in various specific remedies. The company has introduced a staff training programme on its policies on bribery, gifts, hospitality and lobbying. It has reduced the number of intermediaries it uses around the world, and says those it has kept understand what is expected of them. It has also set up a 24-hour ethics hotline, which is available to staff worldwide.

When it comes to targets the board needs to say: ‘We will not reach the numbers at any cost’

Is this enough? Why apparently good companies do bad things is one of the most perplexing questions in business. The London interbank offered rate (Libor) scandal, which involved the manipulation of a key financial benchmark by bank staff; the Volkswagen diesel affair, in which the carmaker manipulated emissions tests; and the Wells Fargo fraud, in which employees set up fake customer accounts, all involved highly respected companies.

In the case of Wells Fargo, staff were under pressure to hit targets. The push to make up the numbers often drives unethical behaviour.

The reason employees behave badly is usually more complicated, however. “It is often a combination of financial incentives, desire for status among colleagues and peer pressure that pushes employees to cross ethical lines,” says Alison Cottrell, chief executive of the UK’s Banking Standards Board, a private sector body set up to improve banks’ behaviour. “[They think] ‘because everyone is doing it, it must be right’.”

Whatever doubts people have about what they are doing subside if they notice not only that the practice is the norm, but it is encouraged by those at the top. People who are new to an organisation, and who might be surprised at dubious-looking behaviour, come to assume it is acceptable. If it is wrong, the thinking goes, someone would have put a stop to it?

In the above cases, someone did eventually put a stop to it. Prosecutors and regulators intervened, imposed fines and penalties and, in some cases, removed employees’ liberty. Several Libor traders went to jail.

For companies to ensure they do not reach that point, their boards and leaders must make firm decisions. “They need to start with the values: how they want to do their business,” says Philippa Foster Back, director of the Institute of Business Ethics. When it comes to financial targets, “the board needs to say, ‘We will not reach the numbers at any cost’.”

The problem is that investors and financial analysts are watching those numbers, ready to punish companies that do not reach them. What can be done about that, especially if competitors have no difficulty in hitting theirs? “Conversations between companies and investors still need some work,” Ms Foster Back says. “There’s still a focus on the numbers.”

She advocates more open discussion between companies and investors. Companies must explain when they have to walk away from an opportunity because it is contrary to their ethics policy.

But if companies are to avoid scandal, the message from the top needs to reach people lower down, who must be prepared to speak out if they see something dubious happening or if they are asked to do something they find uncomfortable.

“Why may people be reluctant to speak out?” Ms Cottrell asks. “There are myriad reasons. People are worried about the consequences. It may be because it makes your manager look bad, or nothing’s going to happen. Why are you going to do it, if it’s not going to have any effect?”

One thing companies can do is give people ways to respond if customers or intermediaries ask them for a bribe, for example. They can be advised to ask to speak to the person’s manager, or they can ask for a receipt.

“That usually knocks it on the head,” says Ms Foster Back.