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Reputability LLP are pioneers and leaders globally in the field of reputational risk and its root causes, behavioural risk and organisational risk. We help business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Thursday, 29 May 2014

Bribery and Boards

No-one doubts the GSK board had excellent ethics and good intentions, or that the company has an excellent set of values, but allegations reported in the Financial Times make alarming reading.

On 14 May, the FT reported:
"Police at the [Chinese] Ministry of Public Security said 46 suspects at GSK’s Chinese subsidiary had been identified as part of a “complete bribery chain” that funnelled money to hospitals, doctors and government officials between 2009 and 2012. Mark Reilly, a Briton who was head of the unit, ordered subordinates to offer the illegal payments, they said." 
On 27 May, the Serious Fraud Office in London “opened a formal criminal investigation into the group’s commercial practices”

The next day, the FT reported that GSK salesmen were demanding reimbursement of ‘bribes’ they had financed on GSK's behalf.

This isn't the first time GSK has been in trouble over sales practices.  In 2012 the company was fined $3 billion in the USA after admitting marketing medicines beyond their authorised uses, a case that also revealed "lavish junkets" for doctors.  At the time Sir Andrew Witty, the Chief Executive, said that the charges related to "a different era" at GSK and that he "had since taken remedial measures, including axeing all bonuses linked to prescription sales".

One likely root cause of the  problem is hinted at by Sir Andrew.  Late last year, he announced another overhaul of marketing practices, including an end to target-based pay for sales representatives, presumably those that weren't actually ended in 2012.  Those pesky incentives to meet sales targets can easily produce undesirable behaviour, as UK banks and energy companies know all too well from their mis-selling experiences.

But there is a deeper issue: the fact that the well-intentioned board clearly did not know what was actually going on in their company.  This is a widespread problem, about which we have written previously.  The danger is that boards live in a rose-tinted bubble divorced from reality.  For a variety of reasons they are too often the last to realise that something is seriously amiss even when there are people below them who are aware of the problem.

These are but two of the family of behavioural and organisational risks that afflict all organisations.  Regulators are beginning to insist that they are tackled before they cause harm.  This is no small challenge but there are practical  solutions.

Anthony Fitzsimmons
Reputability LLP
London
www.reputability.co.uk





Wednesday, 21 May 2014

Trust

Trust is crucial within boards, between leaders and 'followers' and between the company and its stakeholders. Loss of trust can be disastrous. It can cause severe reputational damage.

But too much of the wrong kind of trust - for example unquestioning trust - can be dangerous.  Amongst other issues, it can cause complacency, ineffective NEDs, dazzled subordinates, groupthink and risk blindness.  All are serious behavioural and organisational risks that have regularly led to disaster.

Leaders should aspire to trust of a mutual kind that will, for example, listen to and digest other perspectives and welcome perceptive questioning, constructive criticism and robust challenge - not to mention unwelcome news.

Anthony Fitzsimmons
Reputability LLP
London
www.reputability.co.uk




Monday, 19 May 2014

Learning from mistakes

"Central banks don't like analysing their past mistakes but should." That's what Tim Geithner, former US Treasury Secretary, told the FT's Martin Wolf.
 
Analysing mistakes is one of the best ways of learning from experience for everyone, not just central banks.  But it isn't as easy as it sounds.
 
When a big mistake has a bad outcome, the mistake becomes public knowledge and there is often a post-mortem.  As Anthony Hilton has sagely observed, post mortems are often inadequate: 
"...[I]nquiries focus on the processes within an organisation until they find some hapless individual or group who departed from the manual. Identifying that person becomes a proxy for solving the problem.

Such inquiries are often superficially impressive but fail to deliver what is needed because they fall short on psychology. It is not what people did but why they did it that matters. Too few inquiries actually unpeel the layers of a problem to get to its root; to pinpoint what it was about the firm’s culture — the incentives, the regulatory environment — which caused a normal employee to engage in rogue behaviour."
But the vast majority of mistakes don't have bad or obvious outcomes and can easily be kept quiet.  This may be because someone doesn't wish to acknowledge having made a mistake.  Perhaps they fear the reaction of their boss.  Or they may have have a boss who doesn't want to hear about problems as long as the problem is solved.   These and other behavioural risks drive underground the knowledge of mistakes without obvious consequences.  They stay there, unacknowledged and unanalysed.  The organisation learns nothing.  

It all seems very comfortable until something big goes wrong and it is discovered that the organisation has known about the problem for years and done nothing.  Often the problem is well known below a certain level but a 'risk glass ceiling' keeps it hidden from leaders.  So the board thinks all is well until it discovers that there is a huge unknown known - important stuff they really want to know but can't find out.
 
When things eventually come into the open, and they usually do, the organisation is seen as dysfunctional, an organisation that doesn't learn from its own mistakes.  It loses its reputation and heads roll.  Justifiably.
 
The challenge for business leaders is to embed a learning culture through out the organisation and its supply chain.
 
This isn't pie in the sky.  It can be done.  Aviators, including the entire aviation supply chain, work hard at it. It's no accident that flying has become so safe.

With good leadership, any organisation can do it.  Even a Central Bank.

Anthony Fitzsimmons
Reputability LLP
London

Tuesday, 6 May 2014

Caffè Nero Blackened

One of Caffè Nero's customers, Steve Pottinger, has written to return his loyalty card.  He complains of their failure to pay any corporation tax on their profits.  "I'm aware that what you do is perfectly legal... but at a time of austerity when vital services face cutbacks, it sticks in the craw.  Loyalty cuts both ways. But you seem to have a disconnect when it comes to your responsibilities to paying your dues."

The story is that whilst Caffè Nero made £21m profit last year, it didn't pay any corporation tax.  At least the previous year, when it paid no corporation tax on almost £40m profit, the reason seems to have had to do with tax-deductible interest the company pays to its Isle of Man parent company on debt used to buy the business.  There is no suggestion this is illegal; but many see it as amoral.  The company has declined to comment on the exact explanation.

Whatever the truth, Mr Pottinger's letter has gone viral and Caffè Nero faces a Starbucks moment because at least Costa provides a decent alternative cup of coffee from outlets that regularly advertise their corporation tax paying virtues.

The episode illustrates two important points.

The first is how the internet has disestablished the establishment.  Nowadays if you have a grievance and know how to catch the public mood, it is easy to coalesce large numbers of fellow-thinkers in a way that was unthinkable before the internet.  Starbucks and Maclaren (the buggy-makers) and United Airlines are among the many who have learnt this to their cost. 

Second, if an individual's issue fires the public imagination to damage a company's reputation, it ceases to be the individual's problem and becomes the company's.  This was rapidly appreciated by United, who responded well to Dave Carroll's viral video.  Maclaren also responded nimbly.  Starbucks eventually recognised that the way it arranges its tax affairs can affect its business adversely and now pays some UK corporation tax.

No doubt it will not be long before Caffè Nero too wakes up and smells the coffee.

Anthony Fitzsimmons
Reputability LLP
London
www.reputability.co.uk