Repairing a damaged reputation

How new CEOs can recover from a corporate scandal

by Debby Young, illustration by Daniel Guidera -- Electronic Business, 6/1/2005

CEOs who take the reins of leadership at companies rocked by scandal face an uphill battle on a variety of fronts. To restore a tarnished reputation, they need to regain the confidence of multiple groups—investors, customers, employees, partners and suppliers—each with their own concerns. "In the old days, it was all about shareholder value or earnings," explains Dov Seidman, CEO of LRN, a consultancy specializing in legal compliance and ethics management. "Today any CEO who steps into a troubled company understands that it's more than a matter of restoring profitability and leading the workforce through a difficult time. That person is coming in to engage in an initiative I would deem a cultural transformation."

The process begins by questioning what it is about the corporate culture that allowed a single bad apple or a small group of people not only to thrive but also to rise to a level where they could damage the company's reputation. "Our leaders and institutions are losing their ethical footing," observes Seidman. "The thing that has caused so much economic damage to others is foremost a failure to do the right thing, as opposed to a failure to interpret and follow the law." He points to cases such as that of Citigroup, where trader actions triggered a short-term collapse in European government bond prices and bond future prices. Although the actions didn't violate the statutory framework in place at the time, the outcome was nonetheless clearly harmful to numerous parties.

Seidman suggests that newly appointed CEOs must take on the task of embedding into the fabric of their organizations positive values and principles, codes of conduct that focus equally not only on what the company can and can't do but also on what it should and shouldn't do. Consultants such as Lyn Turknett, executive vice president of the Turknett Leadership Group, caution that CEOs themselves need to be models of character and integrity. Pointing to ousted Boeing CEO Harry Stonecipher, she notes that though the married executive's office affair didn't exactly violate Boeing's code of conduct, it showed poor judgment and reflected badly on the company's reputation, already tarnished by his ousted predecessor. Turknett observes that a CEO's "reputation permeates the organization, creating a standard that guides the behavior of everyone there."

Seidman outlines a four-step approach for instilling a code of conduct and preventing what he calls "informed acquiescence"—that is, following the rules for the rules' sake without understanding the ethical underpinnings that make the rules wise ones.

Communicate individual responsibility. If you want everyone committed to a set of values and principles, you need to communicate those values and principles to your employees from Day 1. The orientation program should explicitly state the code of conduct and the values of company. "It should emphasize that how you do things is as important as, if not more important than, what you do," insists Seidman. "Vigilance and alertness are everyone's responsibility, not just that of the compliance department." Seidman draws a parallel with the way safety has become so ingrained in organizations that any worker automatically hands a hard hat to a visitor on a factory floor. It's no longer just the foreman's job to insist on everyone's wearing safety apparel. In the case of ethics, it means fostering an atmosphere in which employees not only feel empowered to voice the ethical implications of business decisions but also to speak up when they witness questionable ethical behavior.

Theresa Welbourne, founder and CEO of eePulse, a technology and research firm, confirms that ongoing feedback is essential to getting a company back on an ethical track. "Employees know when someone on their team is breaking the rules," she says. "If you provide them with a safe outlet for sharing their concerns, you will learn when something goes wrong."

Educate employees on how to navigate the gray areas. Whether you use team meetings, Web-based training or other communication vehicles, it's important to convey precisely how the values and the code of conduct should govern an employee's actions. Tailor the content to the actual risks and issues the employee will face on the job. Recognize that supervisors and managers face different issues than line employees. Those working abroad face different issues than those working domestically. For the education to be meaningful and effective, it has to reflect where people work, their day-to-day activities and their job responsibilities.

"Employees need to be trained in a new way of thinking," says Judith Glaser, CEO of executive coaching consultancy Benchmark Communications. "Ethics is a discipline that has real dos and don'ts that everyone needs to honor."

Align rewards and punishment with ethical standards. Ethical standards need to drive everything you do, from how you hire people to how you incentivize and promote them. According to Seidman, if the sales team is evaluated only on making the numbers, not how they do it, you haven't designed ethics into your performance management system. "If you emphasize only what's legally permissible, you'll reinforce a culture that looks for the loopholes," he says.

Integrate ethics into every decision. Seidman suggests that if you want to create "ethical athletes"—managers and staff members into whom ethical behavior has been so strongly ingrained that it becomes an automatic reflex—ethics have to be part of the corporate language. Just as TQM and Six Sigma have become part of the vernacular—transforming soft subjects such as quality and safety into measurable disciplines—Seidman feels that governance, ethics and compliance have to follow suit.

For any reputation-rebuilding initiative to succeed, the CEO needs to enlist all the stakeholders: not just employees but also suppliers, dealers, customers and investors. "Companies do business in an ecosystem," says Seidman. "Ultimately you can't have a great reputation unless everyone who comes in contact with you trusts you. And people don't trust you unless they think you do the right thing."

Marty Pichinson, cofounder of consultancy Sherwood Partners, suggests that the best way to restore trust is to make promises in small increments and then deliver on every promise made. "Making a series of promises on which you are certain you can deliver, and then communicating your progress on an ongoing basis, goes a long way toward reestablishing corporate believability."

Success in restoring a company's tarnished reputation can be measured in concrete ways such as employee retention, customer loyalty and rising share prices. Seidman cautions that you can't view the rebuilding as a one-time event. "You never want to breed ethical complacency," he warns.