Satyam. If that word means nothing to you, you missed the global economy corporate scandal of last year. “Satyam” joins the dark lexicon of corporate ethical “Titanics” to join other shipwrecks like Enron, Worldcom, and Tyco.
A leading outsourcing company that serves more than 1/3 of Fortune 500 companies, Satyam is an inevitable international economy example of another corporate fall from grace.
The co-founder and chairman of Sayam has been candid about the years of dishonesty practiced by his company. Ramalinga Raju says that the equivalent of more than $1 billion in cash and bank loans the company listed as assets for its second quarter were nonexistent.(1) Earnings were inflated, with the operating margin being a fraction of what was declared. Raju gives a vivid front-line view of how ethical lapses begin: innocuously.
Raju says that “small discrepancies grew beyond control” over the years, finally becoming like “riding a tiger, not knowing how to get off without being eaten.” (1)
From the Teapot Dome scandal and Robber Barons early in the 20th century to Enron and, most recently, Satyam; it is clear that ethical scandals have always existed in corporate life…and always will. What are the red flags that precede these disasters?
1) High-level people commit or condone clear-cut wrongs…and punish the whistle-blowers. Downfalls the scope of Enron require sustained and significant unethical events. No doubt about it: people DO see the warning signs and recognize the ethical discrepancies. Sherron Watkins was the former Enron Vice-president of Accounting whose memo to chairman Ken Lay set in motion events that exposed the corrupt practices that felled the giant. The reaction of Lay proves it all starts and ends with top leadership. Watkins says “Ken Lay’s first reaction after I alerted him to accounting irregularities was to look into firing me.”(2)
2) Personal greed is the clear center of focus. In the Enron situation, “many executives based their business decisions on how they could quickly build and then protect their own personal fortunes and cared less about long-term growth and profitability of their company.”(3) Watkins confirms this red flag by elaborating on the above-market pay and bonuses of Enron that meant “people were focused on their compensation, their big bonuses, and getting the stock prices up.”(2)
3) Little perks can lead to big corruption. In recent years, pharmaceutical giants have been regulated on the freebies they give doctors, who are then required to listen to pitches that many have admitted sway the specific drugs they prescribe patients. “Who would turn down free Super Bowl tickets, or a pricey dinner at a swanky hotel?” writes Allison Connolly about the ethical red flags raised by drug company sales perks.(4)
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4) High quality employees leave. When good performers begin an exodus, it is a clear indication of deep dysfunction. Usually, these employees have tried to do the right thing, and have even loudly blown whatever whistles they could. With right conduct being punished, not rewarded, ethical employees have no choice but to exit unjust organizations.
5) Productive communication shuts down. When people withdraw to themselves for fear of reprisal for honest communication, it is a near-the-end red flag. As Sherra Watkins described about the threat of her firing when honestly communicating accounting discrepancies, people in unethical companies quickly realize that their honesty is unwelcome. “If employees feel the corporate culture does not encourage full disclosure or allow individuals to freely debate and resolve ethically sensitive issues, all attempts at integrating ethics into the organization will be viewed as the sham it probably is.”(5)
Sadly for individuals who recognize ethical red flags, one person is very limited in what they can do to correct the course. Rules are broken, and loopholes are limitless when the top leadership is not committed in reality (not just word) to truly ethical leadership. Watkins said Enron touted “honesty and integrity is how we deal with our customers,” but the real value as proven by daily actions was “basic greed.”(2)
There are steps that ethical leaders can take to ensure their organizations do not get on an ethical tiger. See part II of this article “Preventing Ethical Disasters at Your Organization” CLICK HERE.
REFERENCES
1) Timmons Heather and Wassenger, Bettina, “New York Times,” Jan. 7, 2009
2) Boenen, Gerard and Pinti, Jonathan, Academy of Management Learning and Education, 2009, vol. 8, no. 2
3) Clendenning, 2002, Associated Press, on Enron Collapse
4) Connolly, Allison, The Boston Business Journal, June 30, 2000, Vol. 20, issue 21
5) Driscol, Dawn-Marie and Hoffman, Michael, Workforce, Jan. 1, 1997, Vol.. 76, issue 6
