Forecast 2016: David Mayer Speaks on Rebuilding Trust with an Ethical Culture

December 9, 2015

Michigan Ross Professors Cindy Schipani and David Mayer say building a culture of ethics at all levels can prevent scandals and restore trust

Corporate scandals, like the Volkswagen emissions cheating and FIFA corruption cases, were all-too-frequent headlines in 2015.

How can we see fewer of these in 2016 and restore public trust? Michigan Ross Professors Cindy Schipani, professor of Business Law, and David Mayer, professor of Management & Organizations, say it comes down to doing more than just following the law and pursuing profits. Incentives and corporate cultures need to be infused with a sense of higher purpose and ethics, in addition to thorough laws.

Though the number of scandals isn’t necessarily higher, the level and scale of recent ones like Volkswagen and FIFA have been staggering. Why do we keep seeing this?

Schipani: They’re an example of the pressure on management to show profit at all cost, and the importance of effective internal monitoring. If something is too good to be true, it probably is. Look at Volkswagen — it was well-known that meeting the EPA emissions standard would decrease fuel efficiency, yet somehow the company escaped the trade-off. Top executives and the board need to ask questions about how a company could seemingly do the impossible. Either they knew and authorized the fraud, or they were caught up in the success and took their eye off the ball.

Mayer: A few factors usually create the perfect storm for misconduct — leadership failures, corporate culture, and incentives. Leadership sets the tone for a company, and these scandals revealed serious leadership failures. Companies often have a myopic view of success and don’t permit employees to safely challenge decision makers. Incentives too often focus on short-term profits and self-interested behavior by high-level leaders.

Should the corporate world worry about its image in the wake of these scandals?

Mayer: Yes. Although the majority of companies are ethical, and there is a growing movement to view capitalism through a more humane lens, these scandals fit the narrative of greed in big business. It’s up to business leaders, and business schools, to change the conversation about business and how it can be a force for good in the world.

Schipani: Public trust is fragile and easily broken when scandal erupts. When companies violate that trust, the recovery is often a long, slow road.

What should corporations do to show they’re behaving ethically?

Schipani: Acting ethically will go a longer way than publicizing every act of ethical behavior. Following rules and regulations, being honest in financial reporting, and treating employees and customers with respect are all important. But companies also need to encourage employees to voice concerns and present ideas for improvements.

Mayer: It’s critical for corporations to be about something bigger than profits. Making money is important and benefits society through its impact on shareholders, but it’s also important to have a purpose that upholds fundamental values and contributes to society. By getting clarity about what a company stands for and aligning key decisions with that purpose, companies are more likely to act in ways that benefit society.

What kinds of laws and regulations would help prevent corruption?

Schipani: I would propose stiffer financial penalties on corporate leadership for violations of the law on their watch. Individual accountability matters. To the extent executives personally profit in compensation and bonuses based on bogus numbers, the excess compensation should be returned with a significant multiplier penalty. It is also important to select leaders with high integrity and who insist on the same levels of integrity from all those who work with them.

Mayer: Laws definitely help, but they’re not a cure on their own. It’s important to shift the lens from “avoiding bad behavior” to doing good things that benefit the world. Successful entrepreneurs and companies deserve to enjoy financial rewards. But society also needs those business leaders to not just avoid making things worse. They need to play an active role in helping eradicate societal problems such as income disparity, climate change, and discrimination. Fortunately, I think business is heading in that direction. The next generation of business leaders, millennials, demand more meaning from their work lives and will hopefully play a large role in revitalizing the image of business in society.

Reprinted from Ross Thought in Action