The Critical
Consequences of Culture
When management’s
expectations inspire unethical acts.
One
of our earliest lessons is to “follow the leader”. We look to our leaders for
inspiration and to show us the right path. But when leaders expect the
impossible, what happens to the followers? When employees at the bottom of the
corporate ladder behave in unethical ways to hit their numbers, are they the
ones responsible for corporate rot?
Examining
these questions, I’ve recently developed case studies about three well-known,
troubled corporations with senior management unable to lead their firms to
success while keeping within the law: Volkswagen,
Wells Fargo and Uber.
Impossible
quotas
Anyone
who has worked in sales knows the crunch of a quota and how the end of the
month looms large. But for those who weren’t hired as salespeople but suddenly
found soft quotas on their desks, like Wells Fargo bank tellers after the
merger with Norwest Bank in 1998, it changes the game. Before the merger, work
as a bank teller was a service position focused on clients rather than
customers. That is, until Wells Fargo CEO Richard Kovacevich started referring
to the bank branches as “stores”.
The
culture shift at Wells Fargo used nomenclature like “stores”, “customers” and
“products” which directed workers to see existing clients as means to hit sales
targets. Tellers were urged to “Go for
Gr-eight” – each client was to be signed up for at
least eight different Wells Fargo bank services.
Supervisors
called bank managers every two hours to check on quotas. Tellers felt harassed
by their managers. Under pressure, Wells Fargo employees did whatever they
needed to meet quotas, including tagging unnecessary services and accounts to
existing bank clients, without their knowledge.
The
Wells Fargo internal code prohibited illegal behaviour like “pinning”, i.e.
employees’ use of a client’s PIN to create new accounts in their name, but this
was so common it had a name. When violators were reported to the internal
ethics hotline, nothing was done. Bad behaviour had no deleterious consequences
and continued.
Pressure
from the top resulted into more than 3.5 million fake accounts and an initial
$185 million in fines for Wells Fargo.
Impossible
deadlines
In
order to sell 10 million cars a year by 2018, Volkswagen created impossible
deadlines for producing environment-friendly cars with so-called “clean diesel”
engines. CEO Martin Winterkorn was known as a micromanager who pushed his
executives who, in turn, imposed the ridiculously short deadlines onto
production teams. To ensure the cars would be road-ready in the allotted time
frame, engineers programmed them to trick emissions tests, while in fact, they
were polluting at up to 40 times the U.S. legal limit.
Winterkorn’s
predecessor (and also chairman) Ferdinand Piëch pushed ground-breaking design
changes with incredibly short delivery targets on his engineers, threatening to
fire them if the job wasn’t completed on time. This was a corporate culture
where high expectations were met at any cost.
The
line of fire
When
faced with large-scale ethical breaches, both Wells Fargo and Volkswagen denied
any wrongdoing by management. Neither was willing to look at how organisational
pressures had resulted in employees following their leaders over the proverbial
cliff.
Once
Volkswagen’s cheat was found out by researchers measuring
emissions (the state of California was also investigating), the CEO did not
fall on his sword or admit responsibility for setting targets that wound up
costing the company about US$30
billion. Instead, as happened at Wells Fargo,
management blamed employees.
When
first approached by the California Air Resource Board, Volkswagen managers
waffled and tried to discredit the results of the emissions tests; they waited
more than a year before admitting that their cars had been programmed
differently for testing and road scenarios. As the stock price tanked,
Winterkorn said he didn’t know about the emissions cheat and pointed at the
“terrible mistakes of a few”. The company disavowed corporate responsibility in
front of the U.S. Congress. It also suspended ten executives in the six weeks
after the scandal broke.
Even
after firing more than 5,000 employees, Wells Fargo top management insisted
that the rampant unethical behaviour didn’t reflect its culture. As my
colleague Charles Galunic noted, the bank’s sacking of 2 percent of its
workforce reveals misplaced
ideas about organisational culture. Reports
on how Wells Fargo employees unethically met their sales goals continue to
emerge. For example, they misrepresented income information in bundled loans that
contributed to the financial crisis of 2008 according to the U.S. government.
The bank is now refunding thousands of customers who were charged add-on pet
insurance.
Shifting
corporate culture
Volkswagen
and Wells Fargo have claimed that the bad apples have been removed from their
respective barrels, but their top ranks are still filled with the same “old
guard”. Uber, on the other hand, had ethical issues from the outset and within
seven years of its creation has had to disrupt its initial corporate culture.
Although
Uber has not always
accepted responsibility for its drivers, its
management has faced more fundamental ethical issues. Launching in 2010 as
UberCab in San Francisco, the firm wasn’t licensed as a transport company so
California ordered it to cease business. Instead it just dropped the “cab” from
the name and Uber was born.
The
start-up’s co-founder, Travis Kalanick, was a proponent of “principled
confrontation”, which he took to the global stage. For
example, although UberPOP was banned in France, the company told its drivers to
keep going, until its top execs were arrested.
Kalanick
was removed as CEO in 2017 yet problems with the company persist around the
world, including most recently in Spain.
The “cultural
norms” instituted after Kalanick left make it
clear that Uber recognised the need to overhaul its corporate culture. CEO Dara
Khosrowshahi, an outsider from Expedia, has said that Uber’s new slogan is
“We do the right thing. Period.”
For
companies like Wells Fargo or Volkswagen to do the right thing, their corporate
culture needs to shift. The CEOs from the time of their recent crises have
stepped down (without accepting responsibility), but contrary to what happened
at Uber, they have been replaced with people from the same corporate culture.
When problems are widespread in a company, its C-suite has some serious
soul-searching to do.
I’ve
written before about the philosophical implications of responsibility for
corporate misdeeds. While individuals must bear ultimate responsibility for
their actions, the body corporate can also have some measure of responsibility,
not least as a result of the goals set by senior management and the culture in
which employees operate. At Volkswagen, Uber and Wells Fargo, management must
reflect on its actions and promote a corporate culture that inspires followers
to achieve results without bending the law.
N. Craig Smith,
INSEAD Chaired Professor of Ethics and Social Responsibility | August
29, 2018
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