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Harry Cassin
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Contributing Editor

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Thomas Fox
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Eric Carlson
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Reframing accountability to meet the new DOJ guidance

New and old corporate dishonesty stories, such as Theranos, Wirecard, and Wells Fargo, highlight a fundamental weakness. Irrespective of the industry or the business maturity, the wrongdoing escalates when the lines of defense that should protect the organization from risk become Teflon barriers to any accountability process.

When management and other functional oversight teams resist scrutiny, many negative consequences ensue. Reports of unethical conduct get ignored, retaliatory behavior becomes widespread, and power abuse turns into the predominant way of doing business. TheranosWirecard, and Wells Fargo were weakest where they should have been strongest: across their senior leadership ranks and critical control functions.

While helpful with some forms of corporate crime, a top-down approach to ethical conduct is ineffectual in the face of myopic priorities, faulty beliefs, and prevaricating behaviors. Its inadequacy stems from three weaknesses. 

First, it is across the higher tiers of the organization where monetary and status stakes have the greatest value. At these levels, the gamut of incentives is so inducive that rules and ethical principles quickly fade into the background. 

Second, stakeholders in the top echelons also have the most consequential impact on the organization’s culture; they can influence others to align with their priorities. Finally, these actors have ample power to shield themselves from scrutiny.

A New Emphasis on Accountability

The fact that the same lines of defense often used to manage ethical risk can end up shielding risk from probing eyes should be a pressing matter for organizations. The DOJ has increased its focus on accountability. In a recent speech, Deputy attorney general Lisa O. Monaco indicated that “the Department’s number one priority is individual accountability… Whether wrongdoers are on the trading floor or in the C-suite, [the DOJ] will hold those who break the law accountable, regardless of their position, status, or seniority.” This clearly articulated commitment to pursuing the perpetrators of corporate crime should garner the attention of all organizational stakeholders, especially senior leaders. Indeed, suppose the most dangerous drivers of systemic corporate misconduct are blind spots across the organization’s top ranks. In that case, those tiers can expect to become the target of close attention.

While firms remain off the hook due to the difficulty of linking individual responsibility to the institution, the emphasis the DOJ is placing on the individual signals the desire for a culture change. Given the DOJ’s commitment to holding offenders accountable in the wake of unethical conduct, opaque lines of responsibility may offer little protection. In those cases where the organization tries to pin the problem on scapegoats, the latter will likely face severe consequences. And even if the bucket is passed around, that may not prevent the investigation from expanding horizontally and upward, creating new risks for senior management.

During her speech, Monaco emphasized that individual accountability aims to achieve not just deterrence at the individual level but also to create a culture of accountability. She noted that the DOJ expects “good companies to step up and own up to misconduct. Voluntary self-disclosure indicates a working compliance program and a healthy corporate culture.” Although the DOJ can only hold individuals accountable, it expects organizations to hold themselves responsible for their own flaws by engaging in self-disclosure.

In the case of repeated offenses, Monaco underscored that the Department would look at “the nature and circumstances of the prior misconduct, including whether it shared the same root causes as the present misconduct.” Furthermore, the DOJ will evaluate whether the wrongdoing occurred “under the same management team or executive leadership.” Notwithstanding a few cosmetic changes, without an accountability mindset, most organizations will likely continue doing things the same way.

In such situations, two factors increase the chances of recidivism. First, since the gaps that led to the previous form of misconduct are not closed, they may easily produce another unethical outcome. Second, the fact that the power centers of the organization remain insulated from any material responsibility beyond those associated with poor business performance gives them renewed freedom to ignore ethical concerns.

The DOJ’s implicit call to action for organizations to help the department create a new culture of accountability is also apparent in Monaco’s words about the benefits of engaging in self-disclosure. Simply put, “voluntary self-disclosure can save a company hundreds of millions of dollars in fines, penalties, and costs” and help companies “avoid reputational harms that arise from pleading guilty.” Accordingly, organizations should control the corporate reflex to cultivate internal secrecy and sweep problems under the rug. Companies that ignore and delegate ethical challenges not only risk paying the price for their unethical conduct but also for failing to do their part in ushering in a new way of doing business.

Creating Bottom-Up Accountability

In addressing the role of corporate culture, Monaco noted that the right culture doesn’t simply stem from a robust compliance program. Since the priorities senior leaders set are far more influential than the values on the wall, especially if business goals emphasize profit at the expense of ethics, the DOJ will claw back monetary gains associated with misconduct. It is unclear, however, whether such penalties may prevent ethical fading across the organization’s senior ranks. At Theranos, Wirecard, and Wells Fargo, what blinded the top leaders was not just the prospect of monetary rewards but also the need for both iconic power and status, a drive far less sensitive to financial sanctions.

Since clawback mechanisms may have limited deterrence effects, the role of effective bottom-up accountability processes deserves even greater attention. The wrongdoing eventually became apparent in each of the corporate failures noted above. But it was not because of clawbacks, such as those included in the executive compensation at Wells Fargo, that it was expunged. Instead, it was employees blowing the whistle and the persistent investigations of independent media that eventually exposed those cases of misconduct to regulators and the public.

While it’s important that organizations foster psychological safety, developing effective bottom-up accountability requires creating and using formal independent feedback channels to regularly collect relevant and valid data. These “lines of insight” should provide both organizations and regulators with a comprehensive understanding of the wrongdoing and its root causes. Additionally, these channels should foster awareness but also create the necessary records, reinforcing the importance of timely and responsible action when faced with signs of unethical conduct.

If collecting data with a diagnostic goal is not a burden but a way forward, even when it unveils problematic practices, organizations that measure their culture and closely monitor their weaker systems should be better positioned to create organization-wide accountability. In fairness, surveys and other measurement methods are also subject to manipulations and retaliatory behavior. But these measurement processes can be designed and implemented in a way that is more resistant to unduly influence.

Ultimately, an effective bottom-up accountability approach should not only mitigate the potential costs of misconduct but also afford the business increased insight into its endemic issues. It should also provide a deeper understanding of what is refraining the organization from pursuing opportunities for ethical growth. Accountability, after all, doesn’t merely serve the goal of following up on negative outcomes but learning and problem-solving to increase the rate and relevance of positive ones.

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