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No guarantee of survival after company scandal - expert

Nov 10 2017 15:14
Carin Smith

Stellenbosch - There is no guarantee of survival if a company is hit by a scandal, according to Professor Deon Rossouw, CEO of the Ethics Institute and founding president of the Business Ethics Network of Africa (BEN-Africa).

At the same time, the negative impact of such a scandal hitting a firm can be turned into a strength and a competitive advantage over time if handled correctly, he said at BEN-Africa's conference on ethics and energy, which took place in Stellenbosch this week.

"The kind of mistake a company makes is of course important, but what matters most is how a company responds to mistakes," said Rossouw, referring to a view by former public protector Thuli Madonsela.

"Often companies’ responses to incidents end up becoming the real scandal, for instance laying low, being naïve and thinking it will just blow over, hiding behind legal processes, outright denial or outright attack - Nkandla is an example that contains all of these."

Rossouw emphasised that a company cannot control or force other people to trust is.

"You only have control of your own trustworthiness. The four main facilitators of trustworthiness are openness, competence, integrity and benevolence," explained Rossouw.

"If you can self-disclose before you are found out you are in a much better position. If trust is broken people don’t trust you to mark your own homework. The KMPG internal investigation added much more value once they called for independent external investigations, for example."

Rossouw said it is, furthermore, important to declare if the scandal involves just "one delinquent apple or a complete unhygienic barrel".

"Many companies tend to put the blame on a delinquent apple when the cause of a scandal was actually systemic in the organisation," explained Rossouw.

Action

In his view, it is important for a company to act against those who "failed" the company and to strengthen identified weaknesses to prevent reoccurrence of similar incidents.

"A company must demonstrate adherence. Demonstrate your goodwill. Hold a promise out to society that you will do something meaningful to remedy the situation. Compensate those injured by your actions," said Rossouw.

Research by Paul Healy and George Serafeim has found the biggest impact of a scandal on a company is actually on the morale of staff.

"Openness on the side of the company is important. Currently a lot of staff of companies [hit by scandal] in SA indicate that they have to read in the media about what is going on in the company," said Rossouw.

The second biggest impact is on business relations being damaged, followed by damage to the reputation of a company. The higher "up the ladder" the failure takes place, the greater the impact.

If the company decides to disclose an incident itself before it gets out to the public, the research shows the damage to the company's reputation is less. The damage is also less if quick action is taken against the perpetrators.

Another impact of a scandal and the way a company handles it, is that those it deals with would want to avoid being associated with the company. This is out of fear regarding their own reputations.

"It is very important that we change how we look at organisations. It is not just about saying a company belongs to its shareholders," concluded Rossouw.

"Make people understand that an entity can only keep going if all relationships are maintained."

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ben-africa  |  kpmg  |  state capture report  |  sa economy  |  ethics

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