Everyone knows that “tone at the top” is important in the ethics and compliance area but the phrase has become a tired and hackneyed cliché. The recent public implosions of established companies and start-ups however, add a fresh perspective and meaning to the concept by illustrating what happens when a CEO or C-suite sets a toxic tone at the top.
The iconic and legendary company Volkswagen, previously revered for its green image, is now labeled “Hoaxwagon” by Fortune Magazine and liable for billions of dollars in remediation and fines, not to mention plummeting worldwide sales and stock price. In essence, it appears that the company deliberately hid the truth about emissions from its cars by rigging devices that defeated testing.
As the scandal has unfolded, emails surfaced from 2004 showing that U.S. employees repeatedly and appropriately questioned decisions by German headquarters to blow off regulatory requirements, but got shut down and, in essence, told to obey. Volkswagen’s former CEO, Martin Winterkorn was apparently known for his autocratic management style and silencing his middle managers.
The leaders of Theranos Inc. and Valeant Pharmaceuticals, companies that have suffered precipitous declines in value, share key traits with Volkswagen leadership.
Theranos Inc., formerly a hot startup, saw its $9 billion valuation fall to $800 million in a matter of months. CEO Elizabeth Holmes’ misstatements and extreme efforts to hide the truth from employees, customers, and even regulators, fits the profile of executives responsible for major ethics crises. Holmes went to extraordinary lengths, some possibly fraudulent, to shield the company’s work from internal as well as external scrutiny.
Before he resigned, Sunny Balwani, Theranos’ former president and chief operating officer, chastised an employee who raised questions internally about the efficacy of Theranos’ tests. Balwani then requested that the employee apologize for raising the concerns in the first place. Now Theranos may be in a death spiral as it appears that their signature blood-testing technology doesn’t actually work. Holmes is banned by regulators from owning, operating or directing any lab for two years.
Valeant Pharmaceuticals, a darling of hedge fund investors, has lost 90% of its share value since last August. The company hid its relationship with a specialty pharmacy, Philidor, from shareholders and regulators. Its employees apparently used fake comic book aliases to hide their collusion with Philidor. Valeant blamed its recent earning restatement and “material weaknesses” on bad tone at the top and pressure on employees to meet unrealistic sales targets. Its CEO stepped down and its former COO and CFO was terminated.
This isn’t a new phenomenon. One of the most egregious examples occurred when Jon Corzine, former U.S. Senator and New Jersey Governor who became CEO of MF Global Inc., fired his compliance officer when he was the CEO of MF Global Inc. in January 2011. Ten months later the firm imploded as a result of the issues the compliance officer had raised repeatedly with Corzine (as subsequent inquiries by regulators documented).
It should be no surprise that C-suite insistence on blind obedience and lack of transparency leads to misconduct. LRN’s research shows that this leadership model is at the bottom of the barrel when it comes to trust, innovation, performance and values. What is surprising is that seemingly savvy investors, including hedge funds and corporations, haven’t been looking at these factors or asking tough questions when deciding to invest. Instead of focusing on “value investing,” perhaps it’s time to consider what values are motivating the C-suite before making a major investment or deal.
Susan Divers , a senior advisor with LRN Corporation, has more than 30 years experience in the ethics and compliance area, including serving as the Chief Ethics and Compliance Officer of a Fortune 500 corporation. LRN’s mission is focused on values-based leadership and ethics.