By Neil Smith
Managing Partner, SmithOBrien
Does a commitment to corporate responsibility provide cover for bad corporate behavior? Three recent stories about companies behaving badly – the disastrous BP oil spill, GlaxoSmithKline’s disputed diabetes drug trials, and Apple’s lame response to the reception problems with its new iPhone – make commitments to CR look hollow at best. It’s not just commitments that matter, it’s corporate culture, set by the person at the top of the organization, but in reality determined by the employees and managers well below the C-suite.
Corporate culture is the underlying values and norms that tell employees and managers “the way we do things around here.” Although it doesn’t appear on a balance sheet, corporate culture is central to how a company performs. Within every organization there are also different subcultures, which define day-to-day behaviors and ultimately the performance of business units and corporate functions. Operating in silos, these subcultures are typically not well understood by each other and therefore often work at cross purposes. It’s this lack of alignment that causes operational failures like the BP oil spill in the Gulf of Mexico or the reception problem following the launch of Apple’s iPhone 4.
A company’s commitment to its core values often appears inconsistent or worse, opportunistic. A 2004 study by Booz Allen, following a series of ethical breaches and billion-dollar lawsuits, and fines for legal and regulatory violations, found that three-quarters of the executives surveyed said they “felt personally pressured to demonstrate corporate values.” Yet when pre-occupied with maintaining the organization’s growth and financial survival, senior executives find it harder to observe and influence the basic work and behaviors within their organizations. As a result, operating responsibly becomes an after-thought rather than deeply ingrained in the culture.
Case in point: The environmental and safety goals BP posted on its Web site as far back as 2003 are no different than those of most other companies: “no accidents, no harm to people, and no damage to the environment.” Yet for the last decade, investigations into BP’s environmental, health and safety practices, starting with Alaska’s Prudhoe Bay pipeline spill in 2000, revealed a “pattern of the company intimidating workers who raised safety or environmental concerns” and “managers shaved maintenance costs by using aging equipment for as long as possible,” according to Newsweek magazine. Following BP’s ruptured pipeline on Alaska’s North Slope in 2006, newly appointed CEO Tony Haywood promised to improve safety amid what others internally have since described as a “toxic culture.”
According to news reports, in an effort to cut costs, layoffs at BP “seemed to target the best and most seasoned.” In a recent article in Compliance Week, an outside expert on offshore platform disasters, hired by the company to study its approach to catastrophic risk management, said “BP worried a lot about personal safety slips, trips and falls, but did not worry as much about low-frequency, high-consequence accidents.” Survivors of the Deepwater Horizon drilling rig explosion reportedly said, “it was always understood that you could get fired if you raised safety concerns that might delay drilling.”
In reading through BP’s sustainability reports since 1999, there is no mention of the Prudhoe Bay spill in 2000, a $100 million settlement with the state of Calif., in 2002 for falsifying inspections of fuel storage tanks, more than 700 safety violations at its Texas City refinery where an explosion in 2005 killed 15 people, or the subsequent impacts to the environment and the local economy on Alaska’s North Slope where BP later admitted to breaking safety laws by failing to guard against corrosion of the ruptured pipeline.
GlaxoSmithKline’s obscuration of the heart risks of its diabetes drug, Avandia, offers another case study of how senior management’s failure to ensure ethical behavior was inherent to the company’s culture resulted in a reputational nightmare, which underscored that corporate responsibility was not, in fact, a company priority. In its 2009 Corporate Responsibility Report, GSK’s CEO, Andrew Witty, renewed his company’s commitment to “increasing transparency of clinical research.” He went on to say, “I believe that being open and transparent about how we do business will help us build trust with our stakeholders.” Yet only a few months after the report’s release last March, the British pharmaceutical giant faced charges that it withheld from U.S. Food and Drug Administration regulators data showing that Avandia may cause heart attacks.
Coverage in The New York Times, claims GSK hid from consumers and federal regulators an Avandia drug trial from as far back as 1999 that showed the drug showed a risk of heart damage. A GSK spokesperson said that the company did not release the result of its study because it “did not contribute any new information.” In July Bloomberg Businessweek reported the company also “allegedly pressured medical researchers, who observed heart and liver problems in patients taking Avandia to stop disseminating their findings and in several cases contacted the doctors’ superiors.”
A study by cardiologists at Cleveland Clinic made public in 2007 found the drug increased the risk of heart attack by 43%. GSK officials contend no studies have proved Avandia is dangerous, yet the company has reportedly paid out almost $500 million to settle about 10,000 consumer lawsuits, which claim the company hid the drug’s heart risks. The company’s first U.S. trial over Avandia is set to start in October. In a pre-trial deposition, a former FDA official lawyers that GSK withheld from regulators a 2001 study showing Avandia may cause heart attacks. Further, GSK failed to disclose emails from researchers who concluded that the diabetes drug “strengthens the signals” of heart ailments.
Yet another example of a company saying one thing about its responsibility to stakeholders, while doing something else entirely was Apple’s recent release of the new iPhone 4. With a culture that reportedly extends beyond its employees to its customers, Apple’s initial response to consumer complaints about the smartphone’s signal coverage was anything but customer-centric. As reported in Computerworld, the company’s initial response, telling customers to “avoid gripping it in the lower left corner,” struck many as insulting. When contacted by a customer complaining about the iPhone’s poor reception, CEO Steve Jobs was dismissive, telling the customer “Just avoid holding it that way,” wrote The Mercury News. The company also advised users to buy and wrap a Bumper case around their new phones to improve reception.
Moreover, according to the Wall Street Journal, Apple engineers warned their superiors of the antenna’s signal problems before the June launch. After a flood of criticism, at a press conference in mid-July at Apple’s Cupertino, Calif., headquarters, Jobs, appearing far more humble, finally did the right thing, offering buyers a free case and a full refund if their phones were returned within 30 days.
These three stories are common in the corporate world. Anyone who has worked for a large company can quickly recognize the mixed messages that come from those above. While people at the top, with their sights set on becoming the CEO, will mimic their boss’s behavior, those at the bottom, where most of the best operational solutions come from, grow disillusioned and cynical, and start looking elsewhere for an employer whose values more closely match their own.
There is a bright side to all this. The Booz Allen study found, among those companies that reported superior financial results, their core values, such as adaptability, innovativeness, inclusion, and respect for others, “were explicitly linked to how they do business” and reinforced day-in and day-out by their CEOs.
The CR and sustainability movements are filled with success stories that include improvements in environmental practices, increases in corporate giving that today reach millions of people around the world, and greater oversight and responsibility for the working conditions of contract workers. Yet the role of the CEO as a leader and model for others in building and sustaining a truly responsible and transparent organization should take center stage. Equally important: a board of directors that insists the company doesn’t just pay occasional lip service to integrity and ethical behavior. The board should hold itself and the company’s top executives, to the highest standards of corporate responsibility.
Neil Smith is managing partner of SmithOBrien, a management consulting firm in New York City that specializes in corporate responsibility strategy development, organizational change and measurement.