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The Recovery of Trust: Case studies of organisational failures and trust repair

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Abstract

Commissioned report on six successful cases of organizational trust repair
Occasional Paper 5
BY GRAHAM DIETZ AND NICOLE GILLESPIE
The Recovery of Trust:
Case studies of
organisational failures and
trust repair
Published by the Institute of Business Ethics
All rights reserved. To reproduce or transmit this book in any form or by any
means, electronic or mechanical, including photocopying, recording or by any
information storage and retrieval system, please obtain prior permission in
writing from the publisher.
The Recovery of Trust: Case studies of organisational failures and
trust repair
Price £10 ISBN 978-1-908534-00-2
© IBE www.ibe.org.uk
First published February 2012
by the Institute of Business Ethics
24 Greencoat Place
London SW1P 1BE
Registered Charity No. 1084014
The Institute’s website (www.ibe.org.uk) provides information on IBE
publications, events and other aspects of its work.
Dr Graham Dietz is a Senior Lecturer in Human Resource Management and
Organisational Behaviour at Durham University, UK. His research focuses on
trust repair after organisational failures, as well as trust-building across cultures.
Together with his co-author on this report, his most recent co-edited book is
Organizational Trust: A cultural perspective (Cambridge University Press).
Dr Nicole Gillespie is a Senior Lecturer in Management at the University of
Queensland, Australia. Her research focuses on building, repairing and
measuring trust in organisations and across cultural and professional
boundaries. In addition, Nicole researches in the areas of leadership, teams
and employee engagement.
The authors would like to thank the contact persons in the featured
organisations for their comments on an earlier draft of this report.
Author
Acknowledgements
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THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR
Contents
Page
Case Study 1: Siemens 8
Case Study 2: Mattel 12
Case Study 3: Toyota 17
Case Study 4: BAE Systems 22
Case Study 5: The BBC 27
Case Study 6: Severn Trent 31
Concluding Comments 36
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – INTRODUCTION
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Trust is a fundamental building block to any successful organisation. Yet trust is
at a premium for many contemporary organisations. Surveys point to a persistent
and debilitating scepticism among customers, investors and other stakeholders
in the trustworthiness of the business world. The Edelman Trust Barometer,
conducted on a global basis, found that trust in business plummeted across the
globe after the 2007-08 financial crisis. In 2011, a little over half of their sample
of educated Western citizens said they trust corporations.1
Understanding how trust is built, supported and recovered is a critical
competency for any organisation, and particularly those that take their ethical
values and commitments seriously (see Box 1).
Building an organisation’s reputation for trustworthiness can take a long time,
and requires considerable effort and investment. But what happens when a crisis
or scandal hits an organisation, and its reputation for trustworthiness comes
under sustained threat? Recent examples include BP, News International,
Castlebeck Care Homes, several banks (HBoS, Royal Bank of Scotland, UBS,
Goldman Sachs) and Foxconn. The process of trust repair, and the recovery of
reputation, can be arduous, but it is achievable.
Introduction
Linking business ethics and trust
Trustworthy conduct is a core principle in ethics. In many respects, to be
ethical is to be trustworthy:
• Trustworthiness and ethical conduct share many common themes,
including the centrality of values such as integrity, actions matching words,
promise fulfilment, trying one’s best, showing genuine concern for others,
and fairness.
• Principles of ethics underlie and inform our expectations of what
constitutes trustworthy behaviour.
• To abuse another’s trust suggests an ‘inauthenticity’ in the way we have
portrayed ourselves that, in many situations, would be unethical.
• Trustworthiness is a precursor to an ethical business culture, where
behaviour is steered by values.
• A reputation for trustworthiness and strong trust relationships are founded
on a robust ethical culture, supported by leaders, systems and policies
that are designed to nurture employees’ trustworthiness and trusting
relations at work.
Thus, as part of a robust ethical culture, trustworthiness needs to be
fostered.
Box 1:
1
Edelman (2011) ‘2011 Edelman Trust Barometer’. www.edelman.com
5
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – INTRODUCTION
In our recent report, ‘Building and Restoring Organisational Trust’, published by
the Institute of Business Ethics (IBE) in June 2011, we showed how trust in
organisations can be re-built. We carefully defined the nature of trust, and
explained how it is established over time, between individuals and, most of all,
at an organisational level. We showed how an organisation’s trustworthiness is
built and sustained over time, and we provided a model and set of best-practice
interventions for how organisations can protect and recover a reputation of
trustworthiness when faced with a major trust failure or crisis.
This case study report supplements our earlier report by examining how six
organisations faced a trust failure, and attempted to respond. By describing and
analysing the experience and responses of these companies, we aim to share
insights into the process of organisational trust repair:
Siemens: Accused of systematic bribery in 2006, the German engineering
giant overhauled its structures, leadership, processes and culture.
Mattel: Faced with a series of toy recalls in 2007, the firm’s exemplary
response has drawn widespread praise, and minimised reputation damage.
Toyota: By contrast, Toyota’s initial response to its own product recall crisis in
2009-10 has been widely criticised. However, its subsequent programme of
thorough reforms has attempted to recover its lost reputation.
The BBC: The Corporation’s phone-in scandals in 2007-08 led to a
comprehensive review of its operations, and a series of innovative reforms and
interventions, but implementation has not been easy, or necessarily welcome.
BAE Systems: Beset with persistent allegations of corruption and bribery in
several arms deals, the company appointed Lord Woolf in 2007 to examine its
working practices, and have undergone a major cultural, structural and
procedural transformation in pursuit of a more ethical corporate reputation.
Severn Trent: Found guilty of distorting performance data for the industry
regulator Ofwat and fined a total of £38m, Severn Trent had, within two years,
been voted Utility of the Year by its peers, in part due to its innovative and
impressive recovery efforts.
The cases are based on information taken from reliable media sources in the
public domain. In the case of BAE Systems and Severn Trent, the desk-top
research is supplemented with a series of interviews with senior leaders and
employees involved in the trust recovery. For each case we briefly describe the
trust failure, followed by a discussion of the organisation’s immediate response,
the investigation, the reforming interventions, and an evaluation of the
consequences of the failure and the effectiveness of the trust repair response.
We link organisational responses with trust repair principles from our model.
Box 2 below provides a recap on what trust is, the drivers of organisational
trustworthiness, and our model for organisational trust repair.2In each of the
case studies that follow, we examine how the organisation attempted to repair
trust and conclude with insights linking ethics and trust repair.
2
For a full description of the nature of trust and how it is built and repaired, we refer the reader to our earlier report (available
from the IBE): Dietz, G. & Gillespie, N. (2011) ‘Building and Restoring Organisational Trust’, London: Institute of Business
Ethics (available at www.ibe.org.uk). See also: Gillespie, N. & Dietz, G. (2009) ‘Trust Repair After an Organization-level
Failure’, Academy of Management Review, 34 (1), 127-145.
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – INTRODUCTION
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Understanding trust and trustworthiness
Fundamentally, trust is a judgement of ‘confident reliance’ in either a
person or, in our scenario for this report, an organisation.
In the most common model of trust, we judge another other party’s
trustworthiness along three dimensions: their Ability (i.e. technical
competence), their Benevolence (i.e. their motives and interests) and their
Integrity (i.e. honesty and fair treatment). If the overall judgement is
positive, this increases our willingness to take a risk in our dealings with
that entity – to trust them. This trusting act might involve buying an
organisation’s products and services, investing in their stock, or serving as
an employee. But, should any of these attributes be called seriously into
question, this makes us wary, and reluctant to engage in any risk-taking.
Such distrust can hamper collaboration, exacerbate the inefficiencies of
monitoring, stifle innovation, and damage relationships.
Thus, every encounter provides each party to a relationship with evidence of
the other’s trustworthiness, and hence the potential to nurture, or
undermine, trust.
An organisation can demonstrate its trustworthiness through the technical
competence of its operations, products and services (ability), as well as
through its positive motives and concern for its multiple stakeholders
(benevolence), and honesty and fairness in its dealings with others (integrity).
But a deficiency or abuse of any of these attributes, in the form of a
scandal or failure, can see trust evaporate in an instant.
An effective response to a trust failure requires targeted interventions
aimed at both controlling distrust, and demonstrating trustworthiness anew.
The first, ‘distrust regulation’, involves imposing constraints, conditions
and controls on employees’ conduct that are designed to ensure no
reoccurrence of the failure. Interventions include new compliance
procedures, revised incentives, an overhaul of deviant cultural norms, and
the removal of guilty or complicit parties. But this is the minimum expected,
and is not sufficient for trust repair.
The second mechanism is ‘trustworthiness demonstration’: statements
and actions that provide compelling new evidence of the organisation’s
ability, benevolence and integrity, over and above the distrust regulation
reforms. Interventions include apologies, paying penance, transparency,
and substantial investments in promoting trustworthy, ethical practice.
Box 2:
Organisational
trustworthiness
Trust repair
7
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – INTRODUCTION
3
For full details see Gillespie, N. & Dietz, G. (2009) ‘Trust Repair After an Organizational-level Failure’,
Academy of Management Review, 34 (1), 127-145
In the IBE report, we outlined four stages of effective trust repair, which
follow a simple chronological sequence:
1) The immediate response (in the first 24-72 hours);
2) A thorough and systemic diagnosis of the causes and facilitators of the
failure;
3 A comprehensive and targeted series of reforming interventions aimed
at producing an organisational system that engenders and sustains
trustworthiness; and
4) Regular evaluations of progress.
Figure 2 depicts this sequential model. Actions at each stage work through
the two repair mechanisms to help recover organisational trust.
Figure 2: The four-stage process of organisational trust repair 3
Box 2:
continued
Trustworthiness
demonstration
Distrust
regulation
Employees’
trust in the
organisation
Stage 1: Immediate
responses
Verbal: acknowledge the
incident, express regret,
announce full
investigation, commit
resources to prevent
reoccurrence
Action: interventions
against known causes
Stage 2: Diagnosis
Accurate (systemic and
multi-level), timely &
transparent
Stage 4: Evaluation
Accurate (systemic and
multi-level), timely &
transparent
Stage 3: Reforming
interventions
Verbal: apology (subject to
culpability) & reparations
as appropriate
Action: derived from
diagnosis, full
implementation of reforms
across the organisational
system (as required),
prioritisation of
mechanisms according to
failure type
Case Study 1:
Siemens
4
Gow, D. (2008) ‘Siemens boss admits setting up slush funds’, The Guardian, 27th May.
5
Dougherty, C. (2008) ‘Ex-manager tells of bribery at Siemens’, New York Times, 27th May.
6
Gow, D. (2007) ‘Siemens tries to head off shareholder revolt’, The Guardian, 25th January.
7
Dougherty, C. (2008) Op cit.
8
Dierks, B. (2006) ‘Corruption probe reaches ever higher at Siemens’, The Guardian, 13th December.
9
Gow, D. (2007) Op cit.
10
Ibid.
11
Ibid.
12
Landler, M. & Dougherty, C. (2007) ‘Scandal at Siemens tarnishes promising results’, New York Times, 28th February.
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01
In November 2006, regulatory investigations of the German engineering giant
Siemens revealed that hundreds of employees had been siphoning off millions of
Euros into “phoney consultants’ contracts, false bills and shell firms” in order to
pay massive bribes to win contracts.4A trial judge described it as “a system of
organised irresponsibility that was implicitly condoned” (senior managers used
removable Post-It notes to authorise potentially incriminating documents).5
The scandal shamed Siemens, not only in the eyes of furious shareholders and
investors but also the German public, and it brought humiliation to thousands of
its employees. Its trustworthiness came under intense scrutiny, its integrity was
called into question, as well as the benevolence of its senior leaders in
appearing to tolerate such practices. One leading group of shareholders
questioned the Board’s basic competence for its handling of the affair.6
Yet Siemens’ belated, full response to the scandal has been widely praised by
many independent anti-corruption and ethics experts, including the Organisation
for Economic Co-operation and Development (OECD), and U.S. Federal
authorities.7It is instructive, therefore, to analyse its scale and depth for the
impact that each intervention had on Siemens’ external reputation for
trustworthiness, and internal trust levels among its staff.
At the time of the German authorities’ first raids, Siemens played down the affair
as a matter of a few million Euros. Within a month, its own estimate of the sums
involved had spiralled to 420m.8Key Executives, including the then recently
installed CEO Klaus Kleinfeld (2005-07), repeatedly denied awareness or
involvement. Chairman Heinrich von Pierer, CEO during the period under
investigation (1992-2005), was “visibly contrite” when he faced shareholders in
January 2007, citing his “deep distress” that his compliance regime had not
prevented the alleged misdeeds.9
Thus, the firm’s first statements appear to be an example of an ill-suited cursory
or defensive acknowledgment, attempting – unsuccessfully – to downplay a
developing scandal prematurely. This tactic appeared self-serving and did little to
protect, let alone enhance, stakeholders’ impressions of Siemens’ integrity.
Many viewed it as incompetent. Indeed, senior Executives made public pledges
to restore the firm’s battered reputation just a month later.10
As well as four international investigations, Siemens announced their own
internal inquiry. Siemens wanted to have in place “a system that will prevent and
detect unethical and illegal conduct and serve as a benchmark for other
companies”,11 and “a Harvard Business case on how you do it right” 12 quotes
suggestive of a commitment to ethical best practice.
Immediate
response
Diagnosis
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THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CASE STUDY 1: SIEMENS
The exhaustive internal investigation was overseen by a New York law firm,
Debevoise & Plimpton. Their rigorous approach alienated some Siemens’
managers. However, the length, depth and breadth of their investigation seemed
to convince most sceptics inside the firm of the pressing urgency of reforms, its
thoroughness being a tangible display of ability and integrity.
But this exhaustive diagnosis still met with internal resistance, and it was not
until the following year that the most serious revelations came to light. This
followed the departures of the CEO and Chairman, and the decision by the newly
appointed CEO, Peter Löscher (2007-present), to announce a month-long
amnesty for employees to come forward, explicitly excluding former Directors.
Forty whistleblowers brought more incriminating evidence, extending the
scandal’s reach into the previous management Board.13
Several systemic elements have been cited as contributing to the scandal,
including: an aggressive growth strategy that, arguably, compelled managers to
see bribes as a “tempting short-cut” to hitting tough performance targets; 14 a
complex, de-centralised, matrix-like structure that allowed divisions to effectively
run themselves, with minimal oversight from HQ, and “feeble” processes on
checks and balances and accountability that allowed the payments to be made.
But perhaps above all, commentators remarked upon Siemens’ corporate culture
at the time which seemed openly tolerant of such activities, helping staff to feel
that bribes were “not only acceptable but implicitly encouraged”, allowing them
to be complicit in the deceit. A Professor at the University of Frankfurt said:
“It is hard to believe that something on this scale could be so organised and that
no control was in place to catch it”.15
However, it should be noted that bribes were common practice in German
business at the time, and even tax-deductible.16
Early on, the Board appointed Michael Hershman, co-founder of
Transparency International, to serve as its adviser – a shrewd and high-profile
act of ‘trustworthiness demonstration’, via affiliation with a leading anti-
corruption expert.
Hershman argued that the challenge facing Siemens was to “create a culture in
which managers do not fall back into easy, and illegal, patterns of behaviour”.17
With Hershman’s guidance, Siemens rolled out a new set of strict rules and
processes on anti-corruption and compliance across the global business,
designed to affirm what constitutes trustworthy business, and to impose
constraints on operating procedures to make it happen, including a global
Compliance Programme with a three pillar system: ‘preventing, detecting,
responding’. They hired over 500 full-time compliance officers (up from just 86 in
2006), and their new investigation unit would be led by a former Interpol official –
a tangible investment in controlling for trustworthy conduct (‘distrust regulation’).
Reforming
interventions
13
Gow, D. (2008) ‘Siemens prepares to pay $2bn fine to clear up slush fund scandal’, The Guardian, 25th January.
14
Landler, M. & Dougherty, C. (2007) Op cit.
15
Sims, G.T. (2007) ‘Siemens struggles to regain equilibrium’, New York Times, 27th April.
16
Nash, N.C. (1995) ‘German business ethics loses some luster’, New York Times, 20th July.
17
Landler, M. & Dougherty, C. (2007) Op cit.
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Alongside stricter requirements concerning relationships with ‘consultants’,
Siemens established compliance help-desks and hotlines, and an external
ombudsman based worldwide and online. They created a web portal for
employees to evaluate the risk in their client and supplier interactions. These
interventions are targeted at shaping employees’ integrity through improvements
in their ability, while treating any potentially compromised employee coming
forward with benevolence and fairness.
Yet, as Hershman says, “there are new processes, new people, new
procedures... but that does not make a difference in the world unless there is a
change in culture”.18 To which, Siemens launched a comprehensive programme
of training and education on anti-corruption practises for its employees. By 2008,
Siemens had trained more than half its 400,000-strong global workforce on anti-
corruption issues, whether on web-based courses or in ‘classroom’ formats.
Siemens also signalled a shift in strategy, in terms of commercial opportunities,
announcing early on (February 2007) that it would avoid competing in certain
known hotspots for corruption or unethical practice, such as Sudan – a simple
gesture, though not materially punishing to the company’s finances. More
substantial was the announcement to voluntarily suspend their applications for
funding from the World Bank for two years. Siemens and the World Bank also
agreed to a fifteen-year program which binds Siemens to pay $100 million to
non-profit organisations fighting corruption (both are forms of ‘penance’,
suggestive of remorse and renewed benevolence). Finally, the firm has taken
over 900 internal disciplinary actions, including dismissals (‘distrust regulation’).
Neither Kleinfeld nor von Pierer survived the furore, both being pushed to resign
during one week in April 2007. Kleinfeld’s replacement, Peter Löscher, has
declared, “Highest performance with highest ethics – this is not a contradiction,
it is a must”. As well as the amnesty, he supplemented the previous reforming
interventions by replacing Siemens’ dauntingly complex matrix structure with a
more streamlined structure comprising just three divisions, whose MDs sit on
the Board. Löscher called for “clear lines of responsibility, a high level of
transparency and maximum speed” to enhance communications between
managers and direct reports.19
The firm continued its review of millions of bank account statements, documents
and transactions throughout 2008, and has been praised for its efforts to
identify unacceptable practice and to prevent reoccurrence (‘distrust regulation
via a systematic evaluation).
Overall, the scandal cost Siemens 2.5bn, including $2bn of fines, as well as
the cost of an exhaustive and exhausting analysis of its financial transactions,
bail payments for indicted Executives, and fees (around 63m) to outside
advisers. The firm was also barred from dealings with certain clients. The cost to
employees of two long years of shame under intense and hostile public scrutiny,
especially in Germany, is difficult to calculate.
Löscher, the current CEO, has been commended for his approach to ending
corruption within Siemens, but he has argued that changing the corporate
culture to one driven by ethical standards “is a marathon for us, not a
sprint”.20 By June 2008, however, some company Executives were sufficiently
18
Dougherty, C. (2008) ‘The Sheriff at Siemens, at work under the Justice department’s watchful eye’, New York Times, 8th October.
19
Dougherty, C. (2007) ‘Chief of Siemens pledges to streamline operations’, New York Times, 5th July.
20
Dougherty, C. (2007) Op cit.
Evaluation
11
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CASE STUDY 1: SIEMENS
confident to declare Siemens “the most squeaky clean company”.21The
Executive charged with overseeing its compliance and ethics, Peter Solmssen,
said in October 2008: “We are quite confident we have eliminated anything
systemic... But it’s never over”.22
Insights on ethics
and trust repair • Unethical behaviour can be very costly, indeed.
• Premature dismissals of developing scandals can appear self-serving
and incompetent, and a further violation of trust compounding the
original problem. The trustworthy course of action is to acknowledge the
accusations and to share any known facts, but to initiate a full, urgent
and independent enquiry.
• Independent, ideally external, investigations are the most credible
indicator of trustworthiness. The painful rigour of such an investigation
can be resented, but it must be endured, until the full extent of the
failure is laid bare (see also Severn Trent).
• Discovering the true scale and depth of a trust failure may only be
possible when senior leaders leave, and an amnesty is offered to staff
to encourage them to come forward (see also Severn Trent).
• The time-scale for a major ethics overhaul is long - measured in years
not months - as it invariably involves cultural change (see also BAE
Systems, Severn Trent). Have Siemens ‘declared victory’ prematurely?
• Structural, procedural and cultural interventions should be adopted
concurrently. For example, strengthening compliance monitoring and
codes of conduct (a form of ‘distrust regulation’) must be backed up
with senior leaders’ exhortations and training investment
(‘trustworthiness demonstration’).
• Voluntary penance is often necessary for effectively restoring trust. It
helps to demonstrate that the organisation has learnt from the
experience, and the willing submission to punishment implies remorse
and concern for damaged relationships (see also Severn Trent).
21
Gow, D. (2008) ‘Scandal-hit Siemens now “squeaky clean”, The Guardian, 24th June
22
Dougherty, C. (2008) ‘The Sheriff at Siemens, at work under the Justice department’s watchful eye’, New York Times, 8th October.
Case Study 2:
Mattel
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Mattel’s multiple product recall crisis in 2007 highlights “how quickly a problem
in the global supply chain can erupt into a fiasco of such magnitude that it
threatens the reputation” of a company”.23 It is an instructive lesson in the
vulnerabilities that can flare up even in firms with long-standing and thorough
ethical processes. It is also an admirable case study, for the depth and vigour of
the senior leaders’ response.
Mattel was first alerted to a potential problem with the toy giant’s Chinese
suppliers on the 6th July 2007 when a European retailer discovered Fisher-Price
products containing illegally high levels of lead-tainted paint.24 If ingested, the
lead paint could lead to serious health effects. When subsequent investigations
uncovered concerns with other products sourced from China, Mattel realised it
had a systemic problem.
A month later, Mattel had to issue a separate voluntary global recall of 18.2
million other toys because their small, powerful magnets could bond together in
the intestinal tract if swallowed. So Mattel had two different but concurrent
issues with trust and trustworthiness: dangerous production methods among its
suppliers in China, and potential hazards from its own design flaws. The fear of a
child fatality was palpable. The company’s reputation as a capable, benign and
honest toy manufacturer was under serious threat. And, as with any organisation
mired in a potential scandal, its integrity was on the line, depending on how it
handled the failure.
Mattel’s reputation for trustworthiness, forged by its ground-breaking and widely-
admired code of conduct for overseas production and business ethics, bought
the company time and space to respond in their own way, without significant
external interference: “Independent analysts and even watchdog groups say
Mattel may be the best role model for how to operate prudently in China... it is
not just lip service”.25
The day they were alerted to the possible problem, Mattel ceased production in
the named facility, promised full cooperation with the national regulatory
authorities, and initiated a thorough investigation – an exemplary, precautionary
act of ‘distrust regulation’.26 Within a month the Executives had enough data to
launch a massive global recall. They cancelled all toy deliveries from the Far
East, stopped the affected toys (vehicles from the Cars movie) in its distribution
centres and alerted major retailers to the problem. They then began inspecting
every toy themselves. In doing so, the company claimed to have prevented two-
thirds of the toys reaching consumers,27 as well as showcasing a significant
investment in its benevolence and integrity.
23
Warner, J. (2007) ‘Mattel’s blues: Lessons from a global crisis management effort’, NACD Directorship, 1st December.
24
Story, L. (2007) ‘Lead paint prompts Mattel to recall 967,000 toys’, New York Times, 2nd August.
25
Barboza, D. & Story, L. (2007) ‘Toymaking in China, Mattel’s way’, New York Times, 26th July.
26
Warner, J. (2007) Op cit.
27
Story, L. (2007) Op cit.
Immediate
response
13
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Recognising that Mattel staff worldwide would be alarmed and anxious too,
Eckert was careful to inform and involve them about the company’s response on
a regular basis. As soon as the regulator made the first recall public, he hit
‘Send’ on a pre-prepared all-staff email, explaining to employees what had
happened, and how the company was going to react with honour. This set the
tone for subsequent communications (Eckert’s own regular ‘What’s-On-My-Mind’
email briefings, bulletins, Town Hall-style meetings at HQ every quarter) aimed at
maintaining employee confidence in the rigour and trustworthiness of the
company’s response.28
Mattel launched a huge public information campaign to urge parents to stop their
children using the affected toys. Executives delivered a message of contrition
and commitment to resolving the problems, demonstrating benevolence and
integrity. Eckert reiterated that “absolutely nothing is more important than the
safety and well-being of our children”. He and the company took full responsibility
for the issues and he indicated his own anger at the events. Eckert apologised
upfront for the failure. He then outlined specific steps to ensure product quality
and product inspection: I can’t change what has happened in the past, but I can
change how we work in the future…” 29
However, while the apologies were well received among Mattel’s Western
audiences, and did much to maintain consumer and investor trust, their implied
criticism of the company’s Chinese partners drew a hostile reaction from Beijing,
forcing Mattel into an unprecedented apology to “the Chinese people” in
September 2007. This did not go down well back in the U.S.30which highlights
the challenge of managing different trust relationships simultaneously.
A much-praised section of the company’s website provided clear instructions on
returning the toys and getting compensation in the form of a “replacement toy of
equivalent value(a small, affordable act of immediate penance, but perhaps
one unlikely to be taken up by many customers).
This set of prompt, pre-emptive and proactive measures, demonstrated
diligence, and concern for customers but stopped short of an over-reaction,
pending the details of the internal enquiry. It was well received by staff,
customers and analysts alike. Eckert received several approving commentaries
for taking personal charge of the situation, for the apology, and for being careful
in assigning blame – all credible indicators of competence and integrity, and all
the more so for being proffered in the full knowledge of the punitive legal
consequences.
The initial investigation found that sub-contractors had used the lead-tainted
paint, outside Mattel’s strict guidelines. The investigation’s remit spread to all
Mattel’s Chinese vendors, and to older products that no longer passed new
standards, demonstrating trustworthiness in the form of diligence and candour.
Diagnosis
28
Warner, J. (2007) Op cit.
29
An intriguing study from Mediacurves into audience responses to this webcast is available on YouTube – see ‘Believability of Mattel
CEO Bob Eckert’: http://www.youtube.com/watch?v=xH9O8JlvOe4 (September 2007).
30
Interestingly, the recall for the design flaw with the little magnets was much larger in scale than the lead paint problem (18m to just over
2m), but the ‘China-bashing angle’ nevertheless dominated the story.
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As with other case studies we have examined, however, there are contributing
factors elsewhere in the organisational system worthy of attention. Professor
Prakash Sethi, Mattel’s paid advisor on working conditions at the time (the
firm described him as “an appropriately positioned thorn in our side” 31),
suggested that the narrow focus on production matters and supply chains
missed a wider ethical concern:
“There is something to be said about the pressure that multinational
companies put on Chinese companies to supply cheap products”.32
Sethi does however consider Mattel “the gold standard” 33for the toy industry.
Mattel insist that they pay for costs incurred as a result of their production
specifications.34
Appearing before a U.S. Senate committee, Eckert acknowledged that the
Chinese contractors had not been monitored closely enough. Mattel issued a
new three-point check system in response to the failure, including a mandate
on approved paint suppliers worldwide; revised testing procedures carried out
on all vendors more frequently and at random, and additional checks of
selected batches, and production runs. Mattel also took the unusual step of
naming the suppliers at fault, and severed ties with many suppliers. Chinese
authorities revoked several firms’ export licenses.
Mattel conducted audits of its subcontractors’ factories on a three-year, rotational
basis, often using Professor Sethi’s independent research team. Unannounced
visits were made for sites declared to be unacceptable. When Sethi explained the
firm’s approach, it exemplifies a productive trust dynamic based on honesty and
fair treatment, as well as the trust-enhancing merits of ‘distrust regulation’:
“If they have told us upfront they have a problem with A or B, and we find that
problem, that’s OK. We can live with that. We agree on a plan of remediation.
But if they say they are in full compliance and we find that they’re not, we go
through everything, even if it takes four times longer. The companies begin to
realise that it simply does not pay to cheat us. That was the first thing we
emphasised: you will not be fired for violating the checklist. You will be fired for
not being transparent”. 35
Mattel has continued to conduct audits of its subcontractors’ factories on an
annual, rotational basis, working since 2009 with the International Council of
Toy Industries (ICTI) CARE process. 36 The ICTI CARE reports for Mattel’s owned
and operated facilities are posted on the company’s website, increasing
stakeholders’ trust in the audits through transparency, and demonstrating
integrity through such openness.37 No rival does anything like as much. The
company has its own certified testing laboratories, and many are ISO-certified
for quality, a further demonstration of voluntary ‘distrust regulation’ that
indicates a sincere commitment to improving trustworthiness. The firm also
established a new independent ‘Corporate Responsibility’ function, led by a
new senior vice-president, reporting on product quality and factory working
conditions directly to the CEO.38
Reforming
interventions
31
Dee, J. (2007) ‘A toy maker’s conscience’, New York Times, 23rd December.
32
Story, L. (2007) ‘Mattel recalls 19 million toys sent from China’, New York Times, 15th August.
33
Barboza, D. & Story, L. (2007) Op. cit.
34
Story, L. (2007) ‘After stumbling, Mattel cracks down in China’, New York Times, 29th August.
35
Dee, J. (2007) Op cit.
36
For more information on ICTI CARE see http://www.icti-care.org/
37
For more information and a summary of Mattel’s third party programmes see: http://corporate.mattel.com/about-
us/corporate-responsibility.aspx#ResponsibleManufacturing
38
For more information see: http://corporate.mattel.com/about-us/corporate-responsibility.aspx
15
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CASE STUDY 2: MATTEL
Finally, American toy manufacturers, including Mattel, took the unusual step of
asking the Federal government to impose mandatory safety-testing standards for
all toys sold in the United States (such a system already exists in Europe).39
By the end of 2007, Mattel had recalled more than 20 million toys from 43
international markets. Costs were estimated at $40m, and the stock price fell
30% in five months by December 2007.40 Yet the recall crisis seems not to
have damaged their corporate reputation. Sales for 2007 finished up 6%, and
a poll of American consumers found that 75% approved Mattel’s response to
the failure.
Mattel has been praised for its handling of the failure, notably for its prompt
and efficient immediate response. What they seemed to do particularly well
was alert consumers promptly and clearly, as well as engaging openly and
candidly with the media. Unusually, they took part of the blame themselves
and apologised – a statement of integrity all the more courageous, given the
threat of law suits (several have been filed). This honest and contrite stance
has been widely commended as refreshing and genuinely responsible.
Meanwhile, a Fortune article quoted managers saying how proud they felt
about Mattel’s handling of the failure.41
Eckert, who retired at the end of 2011, reflected on the crisis, and his insights
are compelling on trust and ethics:
“It’s not the unfortunate events that we want to be judged on. We want to be
judged on how we addressed the issues...If you can consistently try to do the
right thing, life is so much easier. If you live by your basic values, a) you’ll get
through it and b) you’ll feel satisfied that you did the best you could.” 42
“The most important thing is, the people who work for the company feel good
about the company. It’s important for me that they come to work and feel good
about the company they work for. This was more important than the financial
results last year”.43
John DeRubes, a Fisher-Price Director, summed it up rather neatly:
“How you achieve success is just as important as success itself”.44
Evaluation
39
Lipton, E. & Story, L. (2007. ‘Toy makers seek standards for U.S. safety’, New York Times, 7th September.
40
Warner, J. (2007) ‘Mattel’s blues: Lessons from a global crisis management effort’, NACD Directorship, 1st December.
41
Yang, J.L. (2008) ‘Mattel’s CEO recalls a rough summer’, Fortune magazine, 22nd January.
42
Warner, J. (2007) Op cit.
43
Taken from an insightful presentation by Eckert at the University of Arizona, ‘Bob Eckert: Crisis communication 101’, Dec
2011. Available on YouTube: http://www.youtube.com/watch?v=-Aed9JqerqY.
44
Yang, J.L. (2007) Op cit.
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Insights on
ethics and
trust repair
• There are clear benefits from having a positive reputation for ethical
principles, systems and conduct among regulators when a potential
scandal develops: it helps to buy time and enables the organisation to
have greater control of the process. By contrast, firms with antagonistic
relations with regulators and the media seem to face greater and more
sceptical scrutiny.
• Having strong corporate values embedded in a firm’s conscience can
also guide it more easily through such a crisis.
• “A crisis can strike even in places where a company thinks it is
covered”. 45 The fact that the problems occurred in a long-standing and
trusting relationship highlights the tension between balancing trusting
relationships with maintaining control in the form of monitoring.
• It also highlights the networked nature of trust: Mattel trusted their
vendor, who in turn might have trusted its suppliers, of whom Mattel
knew little. The case points to the importance of re-asserting and
affirming company values, and ongoing vigilance and close
collaboration, even in long-term relationships with vendors and suppliers
(to both nurture trust, and guard against distrust).
• The initial investigation into a trust failure tends to uncover more
unwelcome evidence of misconduct, and can be very painful. But a
thorough understanding of what happened is essential to enable the
organisation to identify targeted reforming interventions matched to the
severity of the failure; to demonstrate ability, benevolence and integrity,
and to get all the bad news out at once (see also Siemens, Severn Trent)
• The trust-restoring merits of a public apology, to reassure consumer and
staff audiences, are powerful, even if it may alarm lawyers and investors.
• Communications to staff reasserting the company’s commitment to
integrity are invaluable in maintaining internal optimism, morale, pride and
engagement, which in turn are vital for effectively dealing with any crisis –
depending, of course, on how you respond (see also Severn Trent).
• Lobbying for strengthened external regulation can enhance
stakeholders’ perceptions of the trustworthiness of an industry, and by
default, the leading organisations in that industry.
• A willingness to share one’s experience of trust repair candidly can
augment one’s own reputation, and that of the company.
45
Warner, J. (2007) Op cit.
17
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CASE STUDY 3: TOYOTA
Case Study 3:
Toyota
03
On 28 August 2009 the emergency services in San Diego received a terrifying
phone call from the back seat of a Toyota Lexus. The car was accelerating out
of control. As the emergency services tried to get an understanding of the
situation, the caller was heard to cry, “we’re now approaching the intersection!
Oh, pray. Hold on and pray!” Then silence.46 Everyone in the car was killed.
Toyota, lauded for its impeccable reputation for quality and reliability, suddenly
faced a huge crisis of trust.
But they didn’t react as such. Toyota’s belated recalls, belated communications
and disclosure, and belated public apologies did far more damage to its
reputation than the original tragic accident, losing them sales, market share, and
investor and consumer confidence (its pre-eminent reputation for quality plunged
from 30% to 19% of respondents to a Consumer Reports survey 47):
“Central to Toyota’s problem is its perceived delay in identifying and addressing
the situation in the first place... There is a sense that it ignored the problem until
it was forced to take action”.48
Recalls happen every year, and affect every car manufacturer. They are usually
considered a bare minimum ‘distrust regulation’ effort. However, a series of
recalls from the same company, for different problems, mounts up to a series of
trust violations. Toyota had several (in 2004, 2005, 2007, and 2009-10) for
different problems, including with accelerators, engines and braking, totalling
more than 8.5 million vehicles. This too, has damaged their trustworthiness.
Two days after the San Diego crash, Toyota issued a statement, acknowledging
the accident, expressing concern and showing regret for the loss of life. Toyota
promised a full investigation, working with the regulator (the National Highway
Traffic Safety Administration – NHTSA), but declined to comment on possible
causes, to “avoid speculation and allow any investigation to run its course”.
On the face of it, this is a good example of an immediate response statement.
However, our model also calls for swift and decisive actions against known or
likely causes. Toyota appear to have overlooked this latter intervention,
disastrously. In the days after the San Diego crash, the company did not issue a
customer warning about its all-weather floor mats, despite these being
implicated in fatal accidents two years earlier.49 Even when the regulator’s
preliminary investigation into the San Diego crash cited the floor mats as the
likely cause, Toyota did not implement a precautionary rectification until five days
later when the NHTSA confirmed their analysis, 19 days after the San Diego
fatalities. Fortunately no new fatal accidents happened in that time. Yet even
with this tardy intervention Toyota dealers were instructed merely to inspect any
returned floor mats, rather than issue a direct customer safety warning. NHTSA
issued an alert about the floor mats on the 29th September 2009 and that day
Immediate
response
46
BBC (2010) ‘Total recall: The Toyota story’, Money Programme. See also Editorial, ‘Toyota’s recall woes’ (2010) New York Times,
8th February.
47
Bunkley, N. (2011) ‘In Detroit, Toyota vows to earn trust’, New York Times, 10th January.
48
Hemus, J. (2010) ‘Accelerating towards crisis: a PR view of Toyota’s recall’, The Guardian, 9th February.
49
The company was also in a Los Angeles courtroom in October 2009 accused of failing to recall vehicles equipped with defective
steering rods linked to four deaths, which had required a recall in Japan in 2004: see Rhee, J. & Ross, B. (2010) ‘Did Toyota wait
too long to recall U.S. cars?’, ABC News online, 11th May.
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Toyota issued explicit warnings and advice to customers, and finally announced a
recall of 3.8 million affected vehicles – a month after the San Diego crash. (The
actual recall began a month later still.)
All car manufacturers must cooperate with authorities’ investigations into fatal
crashes, and so the ‘Diagnosis’ phase began immediately. When the NHTSA
reported on the San Diego crash (10th September 2009), Toyota USA uploaded
a statement, asserting that the findings were consistent with the company’s floor
mat warning, and that their vehicle was “among the safest” on the road. NHTSA
countered this apparent denial of culpability, and took the unusual step of
condemning the statements as “inaccurate and misleading”, embarrassing
Toyota further. The American division issued a clarification stating that they had
not intended “to mislead or provide inaccurate information”, and outlined the
company’s “vehicle-based remedy” to the sticky floor mat problem.50 For many
stakeholders, the obfuscation undermined Toyota’s original best intentions, and
further dented the fragile trust with its many stakeholders.
In November 2009, Toyota admitted to a defect with the accelerator pedal in
some vehicles, promised this was the root cause, and issued a recall of affected
vehicles. However, the installation of a ‘brake override system’, intended to
reassert the company’s trustworthiness, seemed to highlight a different design
defect. Public scepticism meant that Toyota voluntarily commissioned an
independent investigation to defend its electronic control systems. These efforts
failed, it seems, because of stakeholders’ pre-existing mistrust.
Although design faults seemed at the time to be likely causes of the crashes,
many argued that the problems in the company went deeper. Commentators
pointed to Toyota’s aggressive growth strategy, epitomised by a declared
ambition to be the world’s top automobile company within a decade, involving
rapid global expansion of its manufacturing capacity beyond its native Japan.51
Even the company President, Mr Akio Toyoda, admitted as much:growth over
speed” had impaired the company’s culture of ‘kaizen’ (continuous
improvement) and ‘genchi genbutsu’ (inspecting problems at the source).52
Its own internal report noted Toyota’s tendency to dismiss customer complaints;
poor accountability for safety (as the adage goes, when everyone is responsible,
nobody is accountable”); poor safety-response procedures, and an “adversarial”
relationship with regulators.53 Commentators also cited the company’s previously
robust and widely admired corporate culture: efficient, systematic and dedicated,
but also conservative, rigidly centralised, and mono-national. At the time, the
executive board had 29 Japanese male nationals and no foreigners, and
Japanese reluctance to concede to shame, and Toyota’s prized reputation for
excellence, may account for the firm’s hesitancy in acknowledging the legitimacy
of the emerging crisis. The company’s hierarchical and centralised structure
matched this culture, limiting the speed and accuracy of information flow, stifling
the agility of the corporation’s response. Even its vaunted lean production
techniques came in for criticism, with junior employees reportedly fearful of
raising concerns.
Diagnosis
50
Toyota USA press release. Toyota (2009). ‘Toyota's Statement Regarding NHTSA News Release’, 8th November.
Available at: http://pressroom.toyota.com/pr/tms/toyota-s-response-to-nhtsa-news-release.aspx
51
Editorial (2010) ‘Toyota’s recall woes’, New York Times, 8th February.
52
Toyoda, A. (2010) ‘Back to basics for Toyota’, Wall Street Journal op-ed, 24th February.
53
Bunkley, N. (2011) ‘Recall study finds flaws at Toyota’, New York Times, 23rd May.
19
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CASE STUDY 3: TOYOTA
The diagnosis stage didn’t finish fully until March 2010, but Toyota’s reforming
interventions began during September 2009 with the floor mat safety warning
and the belated recall of 3.8 million vehicles. Their recall problems persisted
throughout 2010, with a further 1.66million vehicles recalled over other, new
problems.54 Many recalls were voluntary, and timely to prevent future accidents,
and Toyota was doubtless trying to demonstrate its ability in tackling latent risks,
its integrity in disclosing the possible lapses, and its benevolence in prioritising
customer safety. However, the confusion from so many recalls seemed to alarm
existing and prospective customers. The firm’s poor immediate response had
done huge damage to its credibility, and set the tone for the story (seized upon
by the American media).
The first apology came in early October 2009, when Akio Toyoda expressed his
sincere grief regarding the San Diego crash:
“Four precious lives have been lost. I offer my deepest condolences…
Customers bought our cars because they thought they were the safest. But now
we have given them cause for grave concern. I regret and apologise for this
development. I cannot begin to express my remorse”.55
Interestingly, a Professor of Japanese Studies, Ulrike Schaede, argued that
these difficult public apologies were meant to send a message to company
employees and car buyers” that the company was planning a new direction (our
emphasis added to indicate the trust repair targets in the statement).56
Akio Toyoda’s op-ed piece in the Wall Street Journal 57wrote of his commitment
to customer safety – his name is on the cars after all – and acknowledged the
company’s failings (mainly a preoccupation with technical responses to
tragedies), and pointed to its recall response and internal and external audits of
their vehicles’ safety features. A torrent of similar apologies followed, expressing
“sincere regretsand commitments to make fundamental changes in the way
the company operates in order to ensure that Toyota sets an even higher
standard for vehicle safety and reliability, responsiveness to customers and
transparency with regulators” to restore the trust” of its customers.58 The
apologies were well received in the media, for the most part. That month, Akio
Toyoda travelled to Washington to face Congress, and apologised again in
person – although he insisted he had not been aware of the problems until late
2009, several months after the high-profile San Diego fatalities.59
Reforming
interventions
54
Webb, T. (2010) ‘Toyota recalls 1.66m cars worldwide amid fears over brakes and engines’, The Guardian, 21st October.
55
Tabuchi, H. & Maynard, M. (2009) ‘President of Toyota apologizes’, New York Times, 3rd October.
56
Tabuchi, H. & Maynard, M. (2009) Op cit.
57
Toyoda, A. (2010) Op cit.
58
Chang, R.S. (2010).‘Toyota creates quality task force’, New York Times, 25th March.
59
Clark, A. & McCurry, J. (2010) ‘Toyota boss offers ‘sincere regrets’ for faulty accelerators’, The Guardian, 25th February.
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In terms of trying to reform Toyota, we found reference to the following key
moves:
• A declared reversion to the “basics” of the ‘Toyota way’.
• A new safety system, combining five accident-avoidance technologies
although other automakers have offered these safety features for years.
• A major restructuring, including a reduction in Directors from 27 to 11, and the
re-organisation of the departments charged with Corporate Planning and
Corporate Social Responsibility to quicken crisis responses.
• A new 50-strong global quality taskforce, based regionally, and led by the
company President, to improve quality, increase communication, improve
regional response and autonomy, and seek support from outside experts.
• Two quality advisory panels consisting of outside experts to evaluate Toyota's
safety and quality control processes, in 20 dedicated facilities worldwide
(although one was criticised for being a paid consultant for the company), and
the appointment of a global Chief Safety Officer.
• In September 2010, the company settled out of court with the family of the
San Diego victims (corporate ‘penance’).
• Top management’s pay was docked 10% to help “atone” for the recall
problems, and several Executives forfeited their bonuses for two years
(individual leaders’ ‘penance’).
• Commitment to working with U.S. regulators “toward a common goal of
creating a safe automobile society.60
On 20 May 2010, the President of Toyota USA reviewed progress with the
company’s reforms to a Congressional committee. In July 2010, Toyota
published a report covering its evaluation of measures for improving quality
assurance and preventing the recurrence of quality lapses, as well as improving
internal and external communications with regard to product quality. The external
review panel is scheduled to continue monitoring progress until 2012.61
Toyota have taken serious actions to put things right. However, their sluggish
and contradictory and sluggish reaction handling of the crisis incurred retribution
in April 2010, when the NHTSA fined Toyota a record $16.4m for “failing to
react” in a timely manner, despite apparently knowing of the potential risk to
consumers. Though they denied the allegation, Toyota accepted this ‘penance’,
to avoid a lengthy dispute.62 IHS Global Insight, an automotive consultancy, said
the company was “paying the price for not taking the claims seriously at first”,
and attracting unusually negative publicity as a result.63 Multi-million dollar law
suits are still in train.
Evaluation
60
Akio Toyoda, quoted in Greiling Keane, A. & Kitamura, M. (2010) ‘Toyota credibility gap on recalls sunk in after President’s
visit to U.S.’, Bloomberg News, 10th May.
61
Bunkley, N. (2011) ‘Recall study finds flaws at Toyota’, New York Times, 23rd May.
62
Wearden, G. (2010) ‘Toyota to pay record $16.4m fine’, The Guardian, 19th April.
63
Webb, T. (2010) ‘Toyota recalls 1.66m cars worldwide amid fears over brakes and engines’, The Guardian, 21st October.
21
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CASE STUDY 3: TOYOTA
A bitter irony is that regulatory investigations in August 2010 found “driver error”
to be the most likely cause of all but one of 58 examined incidents.64 That Toyota
was unable to recover much reputational credit from this revelation emphasises
how much trust and goodwill had been damaged, and how the company
surrendered control of the narrative with its tardy initial response. Even recently,
sceptics (and lawyers) remain unconvinced of the firm’s ethical stance. They
point to evidence that the company has known about several design faults for
years, and have even boasted of $100m in savings from a limited recall in
2007.65 One commentator put it:
“Nothing erodes confidence in a company’s reputation so much as internal
documents subordinating safety concerns to the bottom line”.66
It remains to be seen how well Toyota recovers.
Insights on
ethics and
trust repair
• Guard against the downgrading or marginalisation of trustworthiness
and ethical procedures in the aggressive pursuit of quick growth (see
also Siemens, Severn Trent). Too much growth, too fast, can weaken
the robustness of organisational systems and values.
• A positive reputation is only as good as the actions that create and
sustain it. A reputation for excellence may not be enough if the
immediate response to a trust failure contradicts this reputation.
• Early in a developing crisis, avoid reticence and the impression of
reluctance to engage proactively with investigating authorities,
especially with regard to potentially faulty and dangerous products.
• The benefits brought by Toyota’s timely verbal immediate response were
offset by their inconsistent and sluggish immediate actions, which
generated substantial media scepticism and rendered Toyota’s trust
repair efforts harder to realise. The contrast with Mattel is striking.
• Centralised corporate structures can paralyse local responsiveness, as
with Toyota, but de-centralised structures can lead to ungovernable local
autonomy (see Siemens). There is a fine balance to be struck between
trust and control.
64
Clark, A. (2010) ‘Driver error caused Toyota’s ‘runaway’ cars, US study suggests’, The Guardian, 11th August.
65
Maynard, M. (2010) ‘Toyota cited $100 million savings after limiting recall’, New York Times, 21st February.
66
Noyes, T. (2010) ‘Toyota shows how to lose trade and alienate people’, The Guardian, 25th February.
Case Study 4:
BAE Systems
04
For years, BAE Systems had faced allegations of bribery and corruption in its
worldwide operations, most notoriously linked to the Al-Yamamah arms deals
with Saudi Arabia.67 The firm had always denied the allegations, in the face of
several criminal investigations worldwide. But in February 2010, BAE accepted
its guilt with regard to charges of ‘false accounting’ and making ‘misleading
statements’ with respect to the charges levelled against it. In doing so, BAE
expressed regret and accepted “full responsibility for past shortcomings”. The
firm agreed to £285m worth of fines. The settlement would allow it to deal
finally with significant legacy issues”.68
While that concluded the legal battle, the challenge of recasting the company’s
culture began in June 2007 when Lord Woolf and a panel of experts were
appointed to look into the ethics of the firm’s working practices. BAE’s response
to the “Woolf report” recommendations has seen a huge cultural change
programme which has been widely praised (though it has not silenced some of
the BAE’s long-standing critics).
In an interview, David Harris, BAE Systems’ Head of Business Conduct (who
was not with the company at the time), explained the rationale behind the
Woolf report:
“The Board recognised inadequacies of some of the company’s processes and a
need for change... An external committee led by a prominent and respected
figure was a clear demonstration that the review would be done independently,
and was an attempt to remove cynicism about the rhetoric of ethics: you know,
‘BAE saying they’ll change, but not really being serious’.”
In agreement with the company, the Woolf Committee was asked to carry out a
comprehensive review of the Company’s policies and processes and to report its
findings, publicly. It had no remit to investigate the allegations levelled against
the company’s past. This future-oriented agenda, to only recommend actions the
Company should take, was controversial. Critics dismissed it as a window-
dressing PR exercise69 but, with criminal investigations underway in several
different territories, the company had little option, and most of all wanted “to
know what was needed to be changed, and to be told that... It was about
drawing a line and moving forward” (interview, Harris).
The report took nine months to research and produce, at a cost of £1.7m, and
was released in May 2008. At the launch, Lord Woolf spoke of the allegations
casting “a shadow of suspicion and doubt over the company”. BAE had been
“overly secretive, defensive, unwilling to explain its actions and, at best,
lukewarm on reputational issues”. The company had not paid “sufficient
attention to ethical standards and avoid activities that had the potential to give
rise to reputational damage”. But Woolf also wished to stress that the company
had since made huge improvements”.70
Diagnosis
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67
Evans, R. et al. (2003) ‘BAE faces corruption claims around world’, The Guardian, 14th June.
68
BAE Annual Report (2009). Available at: http://bae-systems-annual-report-2009.production.investis.com/.
69
Gray, S., Leigh, D. & Evans, R. (2008) ‘BAE paid too little heed to ethics, says report’. The Guardian, 6th May.
70
Gray, S. Leigh, D. & Evans, R. (2008) Op cit.
Among the 100,000 or so employees not directly involved in the deals, Harris
felt that most did not see the alleged malfeasance as symptomatic of the
company, but nevertheless felt tainted by association: “You don’t like to see the
company you work for being accused of that sort of thing on the news”. In that
respect, the workforce was receptive to the Woolf enquiry. As Harris vividly put it:
“We have had the benefit of dousing a burning platform... It’s not been difficult
for people to see the benefits of the report or the specific recommendations”.
BAE Systems committed, live on Radio 4, to “implementing all of the
recommendations over a three-year period ‘sight unseen’” before the report
came out (interview, Harris), under the inspection of an external auditor. Both
moves were designed to demonstrate sincere commitment to change and the
‘sight unseen’ element is indeed suggestive of integrity, and a demonstration of
concern. The 23 recommendations included:71
• A strategic commitment to be a leader in ethical standards among global
companies, not only within the defence industry (including engagement with
NGOs)
• Ethical considerations to inform all decision-making
• Attention to ethical and reputation risk, including:
- The appointment of a Managing Director for Corporate Responsibility
- ‘Ethical business’ to be a standing item for the Board
• Ethics links in appraisals and pay, especially for Executives
• Central oversight and transparency with regard to ‘gifts’, donations and
hospitality, and ‘advisers’; a ban on ‘facilitation payments’ (i.e. bribes)
• Setting up an ethics helpline
• Corporate governance reforms – new roles for a more “proactive” Board
• Internal investigations into allegations of unethical behaviour
• All-employee training in ethics, with modules for Executives and business
leaders
• An independent and external audit of ethics and reputational risk within 3
years, and at regular intervals thereafter.
BAE established a steering committee, comprising senior Executives from across
the Group to oversee the work of a dedicated Woolf Implementation Programme
team, charged with implementation of the 23 recommendations. Six working
groups, each comprising senior managers and functional experts, were
established to cover specific areas of work.
The company has a revised ‘Operational Framework’ which provides clarity on the
roles and responsibilities within the organisation and, sitting alongside the code
of conduct, guides employees’ work and behaviour across the Group. Accessible
to all employees, it covers the organisational structure; governance (including
Board Charter and various committees); internal controls, risk framework and
business conduct; mandated reviews and reports (core business processes) and
company-wide mandated policies. The code of conduct is part of the CEO’s
portfolio of responsibilities.
23
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Reforming
interventions
71
Full details on all 23 recommendations are available on BAE Systems’ website, at
http://www.baesystems.com/CorporateResponsibility/ResponsibleBusinessConduct/WoolfCommittee/index.htm.
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Revised policies introduced in 2009 are more concise and user-friendly than
previous policy frameworks, being more principles than rules based. It is line
managers’ responsibility to implement and adapt them to local legislation (within
the incontestable parameters of BAE’s ethical approach to business), and
implement them comprehensively and carefully. Specific reforms to the firm’s
operations and policies include:
• Within the company’s Strategic Framework, ‘Responsible Behaviour’ now sits
alongside Financial Performance, Customer Focus, and Programme Execution
as one of the core standards of company performance.72
• Ethics – and, by extension, trustworthiness – has formed a significant part of
Executives’ performance and development objectives. Around 12.5% of their
bonus is set aside for safety and business conduct, monitored throughout the
year and reviewed by the remuneration committee.
• A key revision to procedures is the requirement to manage reputational/non-
financial risk for all projects and programmes, as laid out in the ‘Lifecycle
Management Framework’, which defines how BAE manages its projects stage
by stage.
These ‘reforming interventions’ had to be put in place to constrain employees’
actions in certain situations (i.e. distrust regulation), but Harris felt that BAE
Systems “may well have over-engineered the response in some areas... It
became a bit product-driven, with policies being a key product...we lacked real
focus on the culture change that Woolf’s report so often refers to”. From other
case studies (not included here), this appears to be a common problem with
trust repair; an arguably excessive attention to policy overhaul.
Harris’ challenge now is to concentrate on robust implementation, to ensure that
the changes will stick, to become cultural norms within BAE. This broader
challenge for BAE is encapsulated in this observation:
“It’s not the case of ‘we’ve got new policies in place now, so everything’s fine’.
In themselves, they change nothing. It’s more about creating and sustaining a
values-based culture... [making the changes] more behavioural... We want our
employees to think about the consequences of their actions for themselves,
their colleagues, and for the organisation: is it in line with expectations? First,
they should look at the guidelines. If they’re still not sure, talk to someone
such as their line manager, or subject matter experts in the company. That
should solve almost all problems, but after that, there is the Ethics helpline,
which is confidential and can be used anonymously if the caller so wishes”
(interview, Harris).
These were new ways of working for the firm and so a number of cultural
interventions were arranged to drive these values and arguments home. All
employees received a ‘Town Hall-style’ briefing on the global Code of Conduct
when it was issued in 2009, which they acknowledged as having received. For
Harris, the only way to secure a cultural shift within BAE is through considerable
and on-going consultation with and participation amongst staff... that’s the only
way it can work, via buy-in from staff”.
72
For more information see:
http://www.baesystems.com/CorporateResponsibility/OurApproachtoCR/Ourstrategy/index.htm
25
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Yet, while these briefings will have helped, the main emphasis in the cultural re-
orientation is on the series of training programmes. Harris noted how employees
often ask ‘Why me?’ when invited to attend ethics training. His job is to explain
“what it gives to them and to the business… and that these are expectations
BAE has of them in providing a work environment that is safe and free of ethical
concerns, at least that is the aspiration”. The focus of the training has been on
“‘speaking up’ and challenging what goes on in the workplace. It is dilemma-
based, and the idea is for an open discussion led by managers who are there to
role-model the appropriate ways of thinking and behaving, and to convince their
own staff of the importance of this stuff” (interview, Harris).
Harris is adamant that the culture change necessary cannot be delivered from
the Ethics or the Legal offices. Leaders’ integrity and conviction is vital to
demonstrate that trustworthiness is a prized corporate value, because any gap
between word and deed can undermine even the best-designed ethical policies:
“Change starts at the top, not just with commitment [to the changes] but a belief
in them. The senior managers need to ‘walk the talk’. If not, employees will see
through it in a heartbeat: ‘he’s not doing it, why should I?’ Middle managers are
the toughest to reach, support and, where necessary, change as they are
squeezed from the top and the bottom. Many of them have seen initiatives like
this come and go... So part of my role is to convert some into ‘champions’ of the
new way of doing business(interview, Harris).
Internal progress is evident:
“We’re getting to the point on projects and contracts where the ‘non-financials’
(i.e. issues impacting on reputation) are as important as cost, schedules, etc”
(interview, Harris).
Seven of the 40 questions in the staff survey are now linked to business
conduct, serving as a persistent check-up on trust matters, especially integrity.
As to the lessons of the Woolf report, Harris sees it as having given BAE the
framework for how to do things: “Other companies can pick up the Woolf report,
and can translate it for their own situation, and apply it... Any business will need
to do it their way, though, and we are happy to share our learning”.
An independent review of the business conduct programme at BAE Systems,
performed by the Ethical Leadership Group, and external assurance of the
Woolf implementation programme by Deloitte both indicate that the company
has implemented all that it set out to do, in order to meet the 23
recommendations within the 3 year time period. And whilst work will always
continue to improve things some (considered to be) best practice elements
have already been put in place.73
Evaluation
73
See Deloitte’s Assurance Statement: http://www.baesystems.com/CorporateResponsibility/ResponsibleBusinessConduct/
WoolfCommitteeandProgressagainstRecommendations/index.htm
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Insights on
ethics and
trust repair
Organisations can delay, but cannot hide from, dealing with allegations
of significant widespread trust failures. At some point the organisation
will have to deal with its ‘legacy issues’ (another case in point is News
International on phone-hacking).
• An independent external review can be a viable alternative to a delayed
‘Diagnosis’, if legal circumstances preclude the possibility of the latter.
But these are likely to be seen as a weaker option, and so to commit in
advance to the review’s recommendations, ‘sight unseen’, is a credible
indicator of organisational integrity. But this must be realised in the
implementation.
• In terms of whether such reviews should specify detailed prescriptions
to reformed policies, one perspective is that vague exhortations and
overarching principles can be circumvented, or watered down (the ‘devil
is in the detail’). The counter-position, the one seemingly adopted by
BAE, is that a ‘thin’ set of principles – accessible and workable, rather
than so detailed as to be cumbersome – provides clarity and scope for
local adaptation, increasing the likelihood of implementation. A
communication campaign, led from the top, can foster commitment to
the change agenda. General principles give the organisation discretion
to translate those aspirations and goals into locally appropriate policy.
This bestows trust on local staff, which is – by definition –a risk, and so
external monitoring imposed at the same time guards against dilution of
the principles.
• Effective implementation requires modification of policy, but also staff
engagement, including consultation and briefings, and training
programmes. The two approaches – structural/procedural and cultural –
reinforce each other: it is likely that the one cannot be realised
effectively without the other.
Case Study 5:
The BBC
05
The publicly-funded British Broadcasting Corporation faced a crisis in 2007
when a series of ‘editorial misjudgements’ on live or pre-recorded programmes
resulted in broadcasts that misled or deliberately deceived the audience. The
incidents related to phone-in competitions or features which gave the
appearance of, but did not actually allow, viewer participation in programmes.
Examples included lying to child viewers (Blue Peter, twice), and charity donors
(Children In Need). The failure caused significant damage to the BBC’s public
reputation for honesty (integrity) and broadcasting excellence (ability). In July
2007, 59% of the public felt their trust had been damaged – a massive crash
in the Corporation’s celebrated reputation.74
Though this trust failure was successfully resolved, the political and
operational repercussions have proved difficult for the BBC and its staff. Many
turned on their culpable colleagues, but also on the senior managers for their
response, perceiving it to be a fawning capitulation to industry rivals, and
debilitating for working practice. This tension – an appropriate response to the
failure set against the risk of an over-reaction – has compelling implications for
organisation-level trust repair.
In March 2007, while the BBC was investigating newspaper allegations of a
faked broadcast of Saturday Kitchen, a viewer reported a similar incident
involving the flagship children’s TV programme Blue Peter. In its live November
27 2006 edition, an “unavoidable technical difficulty” meant that no viewer
could get through to the studio to take part in a charity phone-in competition.
In the “blind panic” of a live broadcast, a junior employee – unbeknownst to
the programme editor onsite – asked a child visiting the studio at the time to
pretend to be the winner. Initially, the programme makers not only covered up
what had happened, but the researcher responsible was apparently
congratulated by the programme’s editor for “keeping the show on the road”.75
The incident was not referred higher up the editorial chain of command.
However, when the fake winner’s mother raised the alarm, the BBC’s Director-
General, Mark Thompson, had to respond.
Interestingly, although trust repair theory suggests that apologies prior to a
confirmation of the facts can be problematic, Blue Peter’s presenters did make
an on-air apology within a week of the incident becoming public knowledge,
and long before the diagnosis officially reported.76 Thompson, and other senior
managers, and Blue Peter’s Editor, all issued “unequivocal” public apologies
in which they acknowledged the seriousness of the impact on viewers’ trust,
while stressing that the incident had been an error of judgement rather than a
deliberate deceit.77 Thompson announced “a senior-level independent review”.
Immediate
response
27
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74
‘Editorial – A better broadcasting culture’ The Guardian, 28th July 2007.
75
Panorama (2007) ‘TV’s dirty secrets’, Broadcast on 27th March 2007.
76
‘Blue Peter sorry over fake winner’. BBC-online, 14th March 2007.
77
At the time, the industry regulator, Ofcom, was carrying out 23 separate investigations into ‘fake’ broadcasts on all four UK
terrestrial TV channels, while the regulator for the premium phone line industry had 15 of its own investigations underway.
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This response is astute for the stage of the failure: an acknowledgement of
the incident and the unequivocal display of regret, combined with a
demonstrable wish to understand what happened to identify remedial action,
are all clear indicators of ability, benevolence and integrity. But, as with Mattel,
the BBC also opted for a pre-emptive apology taking full responsibility, perhaps
because it felt like the right thing to do, but also perhaps because litigious
repercussions were unlikely.
The interim diagnosis report published in May 2007 was sent to the BBC’s
independent governance committee, the BBC Trust, and released on the BBC
website. It accounted in detail the timelines of the reported incidents then set
out 14 ‘pan-BBC’ “reforming interventions”, including:
• The suspension of all live phone competitions on 30-minute broadcasts
• Interim guidelines on editorial policy and training for interactive broadcasting,
including the nomination of senior persons responsible for their use
• A review into premium rate telephony tariffs for BBC Children’s programmes,
and the use of ‘text voting’
• A review of current measures against vote rigging
• Liaison with telephony service providers to close phone-lines promptly.78
Thompson also announced an extended internal investigation into a million
hours of output since January 2005, and the BBC Trust announced its own
separate enquiry into broadcasting standards, to be chaired by a respected
senior BBC journalist. Blue Peter’s editor was “moved” from his post to an
Executive Producer position, because he had failed to report the incident with
appropriate candour.
On the 8th July 2007, the industry regulator Ofcom published its own enquiry
into the Blue Peter incident, finding the BBC guilty of breaching two, and
imposing a £50,000 fine on the BBC, the Corporation’s first ever in 80 years.
In the same week, an incident came to light in which a sub-contractor, RDF
Media, edited a documentary about the Queen to imply misleadingly that she
had stormed out of a photo shoot. The BBC’s marketing then fed contentious
spins about the footage to the papers, leading to the Queen being depicted as
stroppy and arrogant – another incident, similar to Mattel, of trust in a supplier
becoming too loose. The BBC launched an immediate investigation into that
incident as well, and senior managers apologised the day after the story broke.
An all-staff email from Thompson on the 13th July 2007 damned these known
incidents before reiterating a recent demand for any contentious incident, no
matter how “sketchy”, dating back to January 2005 to be declared “as a
matter of top priority”.79 A week later, the BBC Trust reported on its extended
‘diagnosis’, which had discovered six further serious incidents of audience
deception, including two incidents on the country’s biggest charity telethons.
What is instructive here, as with other cases, is that, despite appeals for
candour and even an amnesty for staff, these initial diagnoses failed to
uncover all of the dubious incidents; indeed, the BBC had to concede several
more before the year was out.
78
Thompson, M. & Willis, A. (2007) ‘Premium rate telephony and associated issues: Final report from the BBC Director-General to the
BBC Trust, May 2007’, London: BBC.
79
Holmwood, L. ‘BBC staff told to report staff ‘deception’, The Guardian, 12th July 2007.
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An extensive set of reforming interventions were put in place,80 including:
• Communications to all staff (bulletins, meetings) reasserting core BBC values
and a policy of no tolerance for deception
• Suspension of all phone-related and interactive competitions
• Mandatory training on editorial ethics for all 16,500 staff involved in content
• Full, independent enquiry into the RDF/ The Queen incident; suspension of all
new commissions from RDF
• All publicity materials to be subject to formal editorial compliance
• Revised employment and supplier contracts to clarify ethical obligations
• Ongoing work on telephony issues
• Sector-wide discussions on ‘best practice’
• Several senior and junior employees were disciplined, and left
• The creation of ‘Audience Councils’, and a drive to communicate more effectively
with viewers and listeners on “decisions made on their behalf.81
These measures are notably strong on ‘distrust regulation’, concerned with
procedural solutions and preventative restrictions, although there are
‘trustworthiness demonstration’ interventions (e.g. the communications and training).
Thompson appeared on the 18th July 2007 in an “unprecedented” internal
televised broadcast to all BBC staff, in interviews on national media outlets, and
followed up with an internal email to all staff.82 The communications reasserted the
primacy of audience trust to the BBC, which would be bolstered and strengthened
by the Corporation’s adherence to its new policies, and engagement with the
culture change initiatives, such as the ethical training. Four further incidents came
to light on the 20th September 2007, arising from the second diagnosis.
The BBC asked a polling firm to survey public opinion in August, October and
December 2007. Of those who had heard about the crisis, three-quarters of
respondents confirmed that they “trust the BBC to sort out the current situation
and do the right thing in the future” 83 – an early indicator of the successful
recovery of public trust. The internal evaluation of the BBC’s response to the
scandal, released in May 2008, was more cautious, concluding:
“While some [reforming interventions] are fully in place, others are at the stage of
being ‘road-tested’ and a number are still at a negotiation or planning stage”.84
Yet, by July 2008, when the BBC published its first annual report since the
scandal, the Corporation felt bullish enough to downplay the scandal in its internal
bulletin to staff, relegating it to two short sentences, and otherwise lauding the
year’s output.85 However, subsequent crises have led to tighter operating
procedures that some in the BBC have criticised for being excessive and
cumbersome, inhibiting creativity.86
Reforming
interventions
Evaluation
80
Thompson, M. (2007) ‘Executive overview of editorial breaches of audience trust – a report from the Executive Board to the
BBC Trust’, Internal BBC report. 18th July.
81
BBC (2007) ‘Our promise to you’, London: BBC.
82
Thompson, M. (2007) ‘Untitled’, Internal BBC communication. 18th July.
83
Thompson, M. (2008) ‘The trouble with trust’, Political Quarterly, 79 (3), 303-313.
84
Neil, R (2008) ‘Independent evaluation of the BBC’s action plan: Editorial controls and compliance – January to March 2008’,
London: BBC. Available at: http://www.bbc.co.uk/bbctrust/research/editorial_standards.html
85
Thompson, M. (2008) ‘BBC Annual Report published today’, Internal BBC communication, 8th July.
86
Plunkett, J. (2008) ‘Bannister says anti-fakery regulations are damaging BBC output’, The Guardian, 1st July.
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Insights on
ethics and
trust repair
As with Mattel, the BBC benefited from a generally very positive
reputation within the industry, and with its consumer base, when the
scandal broke.
• There may, for some organisations, be a hierarchy of trustworthiness
attributes. The BBC’s senior managers, including Mark Thompson,
explained to staff that protecting its reputation for benevolence and
integrity is a far greater imperative than operational ability. Indeed, the
BBC’s legitimacy (and funding) rests on its accurate and honest
broadcasting: “If you have a choice between deception and a
programme going off air, let the programme go”. 87
• A Diagnosis is likely to uncover more evidence of wrongdoing, and may
require successive rounds of investigation (see also Mattel). As shown
in the BBC case, this can be costly, but to do so serves as both
‘distrust regulation’ (deterrence) and ‘trustworthiness demonstration’
action (diligence). A thorough investigation also maximises an accurate
understanding of the causes of the failure and hence the ability to
design effective and durable reforming interventions.
• That said, staff may still feel compelled to conceal their culpability, and
this needs to be tackled. Offering an ‘amnesty’ to staff is an effective
tactic to encourage staff to speak up and own past mistakes (see also
Siemens).
• Interim reports can be effective in uncovering the scale of any problems,
and stimulating further attention to possible reforms. But organisations
need to be careful not to attribute blame inappropriately (i.e.
inaccurately or indiscriminately).
• As with the other cases, changes to procedure need to be
complemented with cultural interventions. In this regard, interactive,
dilemma-based ethics training can be effective, and well received by
staff (see too BAE Systems; Severn Trent).
• Staff may perceive the scale of reforming interventions to be an over-
reaction, particularly when they involve major upheavals of task and
process guidelines. These can be seen as needlessly invasive, overly
bureaucratic, and inefficient. Communication is central here – senior
leaders at BBC used blogs to reflect on the corporation’s response to
the faked phone-ins, to challenge staff criticism of the scale of the
reforms, and also to encourage and instil pride.
• Strategies for repairing trust internally and externally are inter-
connected: the BBC has worked with industry rivals to introduce
standards on audience interactivity and leaders have spoken publically
about their learning outcomes.
• Internal and external evaluations of progress and stakeholder trust
demonstrate a commitment to recovering and augmenting
trustworthiness.
87
Thompson, M. (2007) ‘Untitled, Internal BBC communication, 18th July.
Case Study 6:
Severn Trent
06
Because all water companies are monopolies for their region, the regulator,
Ofwat, sets expected performance standards on behalf of the customer,
covering leakage, customer satisfaction and safety among others, and
specifies levels of investment and the prices that each company can charge its
customers. To make their calculations, Ofwat must rely upon accurate data
from the water companies, as it lacks the resources to conduct its own audits.
The entire process is, therefore, reliant on the water companies’
trustworthiness.
In July 2008, Severn Trent became the first utility to be prosecuted. The
Serious Fraud Office (SFO) had accused the company’s water division of
providing false information to Ofwat with respect to its operational performance
data over a five-year period. It was described in the trial as a “sustained and
successful campaign of dishonesty”. Severn Trent pleaded guilty, and was
fined £2m. This came on top of an earlier £35.8m fine from April 2008, for
deceitful reporting in its Customer Service department.
The following year in 2009, partly in recognition of the ‘journey’ the company
had undertaken in recovering its reputation, Severn Trent was named by its
industry peers the ‘Utility of the Year’. The story of their swift transformation is
valuable for the personal testimonies from senior managers interviewed for
this report, and especially for the imaginative combination of cultural
interventions with standard procedural adaptations.
In April 2004, an employee invoked the company’s whistle-blowing procedure to
protest at being instructed by his bosses to manipulate performance data, in
order to misrepresent the company’s performance to Ofwat. The Board’s
response to the allegations was to alert Ofwat, and announce an internal inquiry.
On the face of it, this appears to be a textbook example of an appropriate
‘immediate response’. However, what happened next was anything but.
Interviewees 88 explained how the Board handled the whistleblower’s concerns
badly, treating the situation as a litigation issue to prevent disclosure and
protect the company’s reputation. The initial internal diagnosis was overseen
by a senior STW manager, and conducted with the company’s auditors, who
had just signed off the accounts (creating potential conflicts of interest). The
auditors’ report was “worked over time and time again” by STW’s senior
managers (interview, Gavan) to produce a “palatable” summary, which rejected
the whistleblower’s allegations outright. This summary report was sent to
Ofwat, omitting key documents and evidence – the Board doing so according to
the advice of the firm’s legal team. On top of that, the whistleblower was
subjected to a formal disciplinary procedure, led by one of the managers
accused of coordinating the cover-up – a serious procedural mistake.
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Immediate
response
88
Interviewees included: Andrew Smith, Water Services Director; Peter Gavan, ex-Corporate Affairs Director; Tony Wray, Chief
Executive; and Martin Kane, Director of Customer Relations. The interviews took place in March and July 2010.
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The company’s aggressively defensive stance backfired. Dismayed by the
response, and furious at the disciplinary assault on his character, the
whistleblower took his evidence to the press, at which point the story spiralled out
of the company’s control and Severn Trent staff faced “humiliatingarticles in the
papers and on local TV condemning them for fraud and fleecing customers.
Within a month of Ofwat announcing a formal investigation into the
irregularities, several members of the Board and senior management team
left, although ST is at pains to emphasise that the departures should not be
linked to the scandal. The new Board wanted to deal with the developing
scandal efficiently, in a thorough, timely and decisive manner, for while the
uncertainties persisted the share price was remaining depressed, down-rating
the company’s value. For Tony Wray, then Managing Director and now Chief
Executive, the strategy was “to get on with restoring the company’s reputation
as soon as possible”, to take a quick and painful hit rather than endure long-
term damage. This was not only essential for the firm’s relations with its
regulator, but to reassure its shareholders and employees, too.
In February 2006, while enquiries from Ofwat and the Serious Fraud Office
were underway, the Board received word of suspicions relating to its Customer
Relations department. Knowing that Ofwat would want to come in and
investigate, ST’s preference was to lead the process themselves. Wray, now
Chief Executive, notified Ofwat immediately and set up agreed terms of
reference with them for an internal investigation. He committed to full
disclosure of the findings. The investigation fell under the aegis of a respected
senior Severn Trent Water manager, whose investigative team would be
independent of the Board, giving them clout and credibility. The team worked
with independent external assessors, too. Their investigation involved over 30
interviews, and lasted over six months. All interviewees had the right to be
accompanied to ensure fair treatment.
The team soon discovered a ‘smoking gun’ in the form of an internal document
detailing how Customer Relations employees should deliberately distort
performance data for any external parties. Effectively the department was
keeping two sets of performance data. As soon as the document came to light,
STW shared it with Ofwat, in a spirit of openness.
Ofwat’s interim findings on the leakage scandal, in March 2006, cited as the
primary cause of the failure “poor internal processes and controls”. In our
research, this rather narrow focus on procedure seems to be a common
feature of diagnoses into organisational failures. Ofwat ordered ST to cut its
customers’ bills by a total of £42m.89 Although Severn Trent disagreed with
Ofwat’s assessment, the decision was made to accept the findings and pay
any fine levied (an act of contrition, and voluntary public penance). ST’s public
pronouncements were unequivocal, expressing regret and apologising
“unreservedly”. In one senior manager’s words:
“If it’s anything to do with customers, you have to apologise with great
sincerity, then deal with the issues thoroughly… Customers want to see you
being human. People accept things can go wrong, but people don’t like to see
‘scripts’, they want to see people looking human” (interview, Kane).
Diagnoses
89
Note that this external Diagnosis report came out before the internal team had concluded their enquiries. Thus, when external
agencies become involved in investigations, the second and third stages in our model – Diagnosis and Reforming
Interventions - can become simultaneous.
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To its credit, the internal team’s report to the Board, in July 2006, went further
than Ofwat’s narrow procedural focus, noting deficiencies in several more
areas such as weak departmental and senior leadership, inappropriate cultural
values, and problems with the parent company’s corporate governance
structures and oversight regarding its vital subsidiary. Above all, the view was
that the company needed to overthrow the complacent and, arguably, corrupt
cultural values that had led some managers to believe that tactics of
deliberate deceit were acceptable.
The Board felt that their response to prevent a future failure would have to
tackle process, behaviours and values, simultaneously. To realise this, they
undertook a “comprehensive review” and “root and branch re-organisation” of
STW’s operating procedures, to “prevent anything like this happening again...
to ensure there can be no repetition of this unacceptable behaviour” (April 8th
2008 press release).90
Following on from the findings, the senior management team sought to issue a
direct challenge to the organisation’s dominant cultural values. The sweeping
reforms were indeed comprehensive and targeted all six organisational
elements identified in our model for trustworthiness:91
• Ethics training, led by the IBE, in which employees had the chance to talk
about situations when they felt themselves to be compromised
• Leadership development, which emphasised ethics and honesty
• A revised code of conduct, and whistle-blowing policy
• Tighter financial controls, and clearer lines of responsibility and
accountability
• A much clearer corporate governance structure (the Board of STW and its
parent, Severn Trent, are now identical, to ensure thorough oversight)
• ‘Upskilling’ employees to take more responsibility for tasks linked to their
work
• 20 key performance indicators to link each Board member’s efforts explicitly
to the firm’s performance and its values, and to make these efforts visible.
Severn Trent’s workforce was proud but shamed, and Wray sensed that he
needed to tackle both emotions. To do so, the senior management team
undertook a series of ‘roadshows’, where they explained to groups of 50 or so
employees what had happened, and what would happen. Many vented their
anger at the whistle-blower, or the Customer Relations team, but Wray made a
powerful point about “institutionalised” bad behaviour within the organisation
by confronting each group with their own ways of working, asking if any of them
could look their CEO in the eye and say that they always carried out a given
process exactly according to requirements, with no errors or omissions or
selective content? The answer was ‘no’ (as it will be in most organisations, of
course). For Wray, confronting bitter and resentful employees with their own
complicity, or potential for deceit, was vital to challenging the deep-rooted
norms and attitudes that had facilitated the trust failure in the first place. The
roadshows proved a powerful cultural intervention, to focus staff attention on
what it means to be trustworthy.
Reforming
interventions
90
Kollewe, J. (2008) ‘Ofwat fines Severn Trent £35.8m’, The Guardian, 8th April.
91
Dietz, G. & Gillespie, N. (2011) ‘Building and Restoring Organisational Trust’, London: Institute of Business Ethics
(available at www.ibe.org.uk).
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When the SFO/ West Midlands Police report in November 2007 concluded that
three criminal charges could be brought against the company, but not against
any particular individuals, ST’s internal communications stressed two
important broad themes:
• An explicit distancing of the ‘old regime’ from how ST is now (serving the
dual purpose of accepting responsibility, while diminishing the sense of
culpability for employees remaining at STW), and
• An emphasis on implementing “all actions we think appropriate”, including
cultural change, governance oversight, and tighter procedures, but the
repeated apologies and penance as indicators of the company’s character.92
In April 2008, Ofwat fined STW £35.8m (3% of turnover) for the Customer
Relations scandal. For Andrew Smith, “the price of how we used to be was a
£35m fine”. With more “unreserved” public apologies, STW offered,
proactively, to refund every household, reducing their next two years’ bills
(amounting to £10.6m) – a simple gesture of penance (‘benevolence’) that
helped to “ensure the company has not profited in any way” and to soften its
tarnished public image (although Ofwat allowed the firm to raise its water bills
above the rate of inflation).93
Three months later, in July 2008, the SFO trial concluded with a further £2m
fine. That this was reduced from £4m (it could have been unlimited) on
account of ST’s “early [guilty] plea and cooperation”, and the company having
“learned its lesson and put its house in order”,94 is a clear indicator of the
commercial merits of open and honest disclosure with the authorities, sincere
contrition and stringent efforts to address internal problems thoroughly.
At the company’s AGM in August 2008, Wray could finally draw a line under
the whole affair, three long years after it had first come to light. His two-page
message to staff began, tellingly, with: “At long last it’s done”.
Staff reactions to the messages about a ‘new ethical culture’ have been
“mixed”. Scepticism and even cynicism was common, because, as in many
organisations, “the employees had seen plenty of contradictory behaviours
regarding transparency and ethics” in the past (interview, Gavan). Wray
acknowledges this, but denies ever being “deluded”:
“That’s why our programme [of organisational reform] is so deep, and so long,
and is based on [changing] values and behaviours. This is a long journey, to
change fundamental beliefs, and then behaviours… We have to guard against
complacency, cynicism and ‘change fatigue’”.
A testament to the turnaround came in 2009, when Severn Trent won Utility of
the Year, in recognition of its greatly improved KPI performance relative to its
peers. For Wray, this was a valuable indicator of progress:
“As performance improves, we can celebrate it and people’s pride comes
back… We’re starting to get back a sense of excitement about the future of
this company”.
92
The SFO allegations are described as relating to “things that happened in the past. They have nothing to do with what we do now”;
they are “no reflection on what is happening inside the company today” – Severn Trent press release, 22nd November 2007.
93
Huber, N. (2008) ‘Severn Trent faces £36m fine and admits criminality’, The Guardian, 9th April.
94
Severn Trent (2008) ‘Chairman comments on legacy issues’, Severn Trent press release, 22nd July.
35
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CASE STUDY 6: SEVERN TRENT
Insights on
ethics and
trust repair
Take whistle-blowers seriously: they are an opportunity to fix problems
within the organisation and strengthen the organisations
trustworthiness.
• Credibility in the investigation team is vital for the results to be
perceived as accurate, and actionable. Pick senior managers with plenty
of experience and internal credibility, but independent of the Board.
Involve HR too, and externals for additional depth of analysis, and
validation of findings. Make the investigation fair: give people a chance
to be accompanied to any interviews.
• Severn Trent was able to negotiate the terms of its own internal
investigations when they adopted a more cooperative stance toward the
industry regulator. Early cooperation and proactive openness with
regulators can allow companies to control, to a degree, the extent of
investigation into the failure.
• Leaders who communicate with candour and honesty can help staff
recover trust in their employer quickly.
• Making investigation reports public can resolve uncertainty, provide
evidence of both wrongdoing (for sceptics), and prompt commitments to
remedial action. This can help re-establish trust with stakeholders.
Given transparent information about the scale of the problem, investors
can be reassured.
• Contrite apologies and offers of penance are effective tools for
rebuilding trust. When early penance is manageable in terms of
implementation and cost, it should be considered as an effective
indicator of remorse, regret and benevolence, to begin the repair in a
timely manner. A union official at Severn Trent interviewed for this report
appreciated these sincere gestures, as “the right thing to do”, as it
“shows honesty and clarity about what the company is about, and
shows a determination that this is not going to happen again”.
• Public and internal statements and actions can reinforce or undermine
each other: Severn Trent made a point of using the same language and
phrases in both communications to ensure consistency.
Concluding Comments
The link between business ethics and trust is clearly demonstrated in each of
these case studies. In some cases, trustworthiness was damaged by ethical
misconduct (e.g. Siemens, BAE Systems, Severn Trent). In other cases, it was
most damaged by the lack of integrity and competence displayed in the
immediate response to the crisis (e.g. Toyota, Severn Trent). Yet, some cases
have largely avoided any sustained damage to trust, by embarking on a
comprehensive and explicitly trustworthy repair effort underpinned by principles
of benevolence and integrity, as well as openness and competence (e.g. Mattel).
What is common to all the cases we have reviewed here is that trust failures
typically take years to resolve, and can be both debilitating and very costly. A
clear implication is that it pays to invest proactively in designing an
organisational system that encourages and supports trustworthy conduct.95
Such a system cannot rest on structures, procedures and rules alone, but
must also consider the cultural values and routine norms that guide behaviour
and decision making on an everyday basis.
Vigilance in rooting out deviant cultural values and practices is just as
important for organisational resilience against trust failures, as dealing with
deficient procedures or structures. Indeed, in most of the cases in this report,
trust repair required a deep overhaul of the organisational culture, which
appeared resistant to the perceived threat coming not only from the failure but
from the trust repair response, as well. The objective must be to embed ethical
values into everyday operations and prevent future failures.
As the Siemens, Toyota, BAE Systems and Severn Trent cases powerfully
demonstrate, a trust failure can be a catalyst to strengthening an
organisation’s reputation beyond its pre-failure state. A crisis focuses and
motivates the organisation, providing a strong and necessary impetus for
radical change, and unleashing resources and new ways of thinking that are
often difficult to leverage under normal circumstances. This is the silver lining
of trust failures.
The final positive message is this: organisational trust can be repaired. We
hope that this analysis of five prominent cases of trust failure and repair
serves as a helpful guide to those involved in this challenging task.
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR – CONCLUDING COMMENTS
Occa siona l Pape r 5
36
95
For guidance on embedding trustworthiness into an organisation’s design, see Dietz, G. & Gillespie, N. (2011) ‘Building and
Restoring Organisational Trust’, London: Institute of Business Ethics, Chapter 3 (available at www.ibe.org.uk).
37
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR
THE RECOVERY OF TRUST: CASE STUDIES OF ORGANISATIONAL FAILURES AND TRUST REPAIR
Occa siona l Pape r 5
38
The IBE was established in 1986 to encourage high standards of business
behaviour based on ethical values.
To lead the dissemination of knowledge and good practice in business ethics.
We raise public awareness of the importance of doing business ethically, and
collaborate with other UK and international organisations with interests and
expertise in business ethics.
We help organisations to strengthen their ethics culture and encourage high
standards of business behaviour based on ethical values. We assist in the
development, implementation and embedding of effective and relevant ethics and
corporate responsibility policies and programmes. We help organisations to provide
guidance to staff and build relationships of trust with their principal stakeholders.
• Offering practical and confidential advice on ethical issues, policy,
implementation, support systems and codes of ethics
Delivering training in business ethics for board members, staff and employees
Undertaking research and surveys into good practice and ethical business conduct
Publishing practical reports to help identify solutions to business dilemmas
Providing a neutral forum for debating current issues and meetings to facilitate the
sharing of good practice
Supporting business education in the delivery of business ethics in the curriculum
Offering the media and others informed opinion on current issues and good practice.
The IBE is a charity based in London; its horizons are international as it works with
global corporations based in the UK and overseas. Our work is supported by
donations from corporate and individual subscribers.
The IBE’s charity number is 1084014.
Our vision
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© IBE www.ibe.org.uk
First published February 2012
by the Institute of Business Ethics
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London SW1P 1BE
Registered Charity No. 1084014
The Recovery of Trust:
Case studies of
organisational failures
and trust repair
This IBE Paper presents six case
studies which describe and analyse the
experience and response of companies
that have faced a trust failure.
Understanding and managing trust –
how it is built, supported and
recovered – is a critical competency
for any organisation, and particularly
for those that take their ethical values
and commitments seriously. These
cases demonstrate how the companies
– Siemens, Mattel, Toyota, BAE
Systems, and Severn Trent – have
successfully repaired the loss of trust
and provide insight into the process
involved.
This Paper supplements the IBE’s
earlier report on Building and Restoring
Organisational Trust published in
June 2011.
www.ibe.org.uk
Occa siona l Pape r 5
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