It’s been a pretty rough few months for the reputation of people we trust to look after money.
Sadly, executive dishonesty seems to be one of those “undiscussibles” when it comes to assessing organizational risk issues.
Last month JP Morgan Chase agreed to pay about $1 billion in fines after admitting wrongdoing in the “London Whale” trading debacle which cost their shareholders over $6 billion. And a year ago, London-based HSBC agreed to pay almost $2 billion to settle money-laundering charges, the largest penalty ever paid by a bank. It’s little wonder the 2012 Edelman Trust Survey found that, for the second successive year, banking and financial services were the two least trusted business sectors.
Moreover, it’s not just the multinational financial giants at risk. Within the past few months a strategic supply manager at the National Bank of Australia admitted stealing more than $140,000 to pay himself bonuses he felt he was “owed”; a former facilities manager at the Reserve Bank of Australia pleaded guilty after being charged with swindling about $600,000 by falsifying invoices; and another RBA employee has been committed for trial charged with dealing with the proceeds of crime totalling $300,000, and a further count of attempting to take over $47,000 belonging to the bank.
Similarly, a former bookkeeper at Australian logistics group TZ Ltd pleaded guilty to defrauding his employer of $130,000, and in August the former CEO of timber company Gunns was fined after pleading guilty to insider trading which netted him around $3 million.
While these and similar individual cases create headlines, it is easy to overlook the cumulative effect on corporate reputation. As insolvency specialist Dean Newlan told The Age, companies are often reluctant to take legal action against fraudsters “because of the embarrassment internally within the organization, but also externally in terms of embarrassment to the organization.”
Meanwhile executive dishonesty remains a major factor in reputation risk. In fact the Institute for Crisis Management (IMC) has found that about two thirds of all crises are caused, not by workers or unexpected external events, but by management.
A real challenge here is that it is all too easy to focus mainly on operational, industry-specific risks such as leaks and spills and fires, safety and security and infrastructure breakdown. These risks are very important, but the IMC data shows that mismanagement, white-collar crime, sexual and racial discrimination and employee misbehaviour are far more likely causes of corporate crises. However, companies are much less comfortable dealing with what are sometimes called the “undiscussibles.” These are often areas which constitute a real vulnerability, particularly where there is a desire to avoid “sensitive issues” which might prove embarrassing to management.
What’s needed is formal processes and systems to provide an objective framework for analysis and planning. Remember, it’s not simply about embarrassment. These issues represent a major risk to corporate governance and reputation, not to mention bottom line cost. Just ask JP Morgan or HSBC.