Author: Rita Trehan, Human Resources Director, Honeywell and AES
28 Feb 2017
Corporate scandals are becoming increasingly common in the business world. They cause significant reputational damage, and they can cost organisations millions every year. Consequently, businesses and investors need to start prioritising the role that workplace cultures play in eliminating corporate negligence. Ignoring this role could cost investors even more in the long run, while also costing companies the loss of potential future investment.
In recent years, the banking world has been rocked by numerous high profile scandals. In one example, two former HBOS employees were jailed after defrauding £245m from shareholders, taxpayers and small businesses. As a result, the banking group is now under increasing pressure from the UK Government to compensate the victims. HBOS joins Co-operative Bank in reeling from the fallout of corporate mismanagement. Failing leadership led to Co-op’s ill-fated merger with Britannia in 2009, and the subsequent disappearance of £1.5bn from its accounts. Its decision to put itself up for sale emphasises the severity of the crisis it faced.
Banks are not the only ones suffocating under the weight of scandals. Following its accounting disaster in 2015, industrial giant Toshiba is now facing a desperate situation. After reporting losses of $6.3bn, its Chairman was forced to resign. Toshiba’s share price has since fallen dramatically, and with bankruptcy looming, shareholders could stand to lose even more.
As corporate structures grow and become more intricate, scandals like these will become more frequent and severe. In an increasingly globalised and competitive world, where news stories can destroy a business’ reputation in a matter of days, scandals have never posed a bigger threat. Their danger is heightened when we consider that branding accounts for three quarters of a business’ value.
Few businesses acknowledge workplace culture. Instead, they focus on maximising profits and dividends
Scandals not only cause businesses to lose share value and consumer confidence. High-profile cases of corporate negligence can cripple any market. Investors are burdened with overwhelming losses as a result, while future speculations are driven away. A loss of confidence can be detrimental not just to the future of a business – it can also harm stakeholders who once believed that a business was a prudent and profitable venture.
And yet, businesses will not attract investors by implementing more red tape within their workplaces. Nor is there a solution in investors shying away from future ventures, given the persistent risk of corporate mismanagement,. Instead, both parties need to tackle the underlying cause of corporate scandals – toxic workplace cultures.
Few businesses have acknowledged – let alone prioritised – workplace culture. Instead, they have focused primarily on maximising their profits and dividends to shareholders. Although financial performance is key to growing a business, nurturing a healthy workplace culture is essential to growing it ethically and sustainably.
Investors can no longer fixate solely on business plans and profit margins. As such, they must begin to scrutinise the workplace culture of businesses they may invest in. Specifically, they should avoid businesses swamped with poor employee morale, or ventures headed by an overly powerful CEO. These are warning signs that a business has already started to slip towards the depths of scandal. Investors can glean most of this through public sources, but should encourage businesses to offer further information that will truly uncover the state of their workplace culture. Essentially, this process is another safeguard against making a poor investment.
Moreover, investors must encourage businesses to champion workplace culture at the highest levels of management, including the corporate board. HR directors have an impressive overview of how a company is operating, which includes the potential issues it is facing, but are often sidelined. Promoting the chief human resources officer to board level will allow decision-makers to make better business decisions, and will give investors the full picture of where they may be investing their money.
It is no longer possible to pretend that corporate scandals happen once in a blue moon. As such, investors can no longer afford to approach future ventures in the same outdated fashion as in days gone by. Instead, they must value the importance of workplace culture – and they must start today.