CH-7 Managing Ethics Risks and Opportunities – Business and Professional Ethics for Directors, Executives and Accountants : Book Guide

Chapter 7 – Managing Ethics Risks & Opportunities Chapter Questions and Case Solutions Chapter Questions 1. In what ways do ethics risk and opportunity management as described in this chapter go beyond the scope of traditional risk management? Risk management is currently usually narrowly focussed on financial matters. Even where the more robust enterprise risk management (ERM) is employed, ethics risks are treated as reputation risks and are now searched for in a haphazard manner. The chapter provides an organised, systematic approach to defining ethics risks and for identifying and evaluating them. 2. If a corporation’s governance process does not involve ethics risk management, what unfortunate consequences might befall a corporation? Unexpected consequences leading to embarrassment, loss of reputation, trust, credibility, and finally the ability to retain employees and conduct business normally – or sometimes at all. 3. How will the U.S. external auditor’s mind-set change in order to discharge the duties contemplated by SAS 99 on finding fraud? Statement of Auditing Standards (SAS) 99 requires the U.S. external auditor to focus more on finding fraud, which is an unethical act. In the past, auditors have reviewed the corporation’s system of internal controls as a basis for their audit opinion, but this review has been focussed on the assessment of material errors in the accounts and financial reports. The new focus on discovering fraud will broaden this focus to surface transactions that, in themselves, may not be material in a financial sense, but may indicate patterns of misbehaviour that could affect the company’s future fortunes, not its past transactions. The intent of transactions, and how they are transacted, will become relevant rather than just the outcome. 4. How could a corporation utilize stakeholder analysis to formulate strategies? Stakeholder interest assessment and impact analysis, and the utilization of frameworks such as that in Figure 6.2, can inform corporate strategists on those strategies that will lead to greater and more sustained support by stakeholders that are identified as key the company’s future. 5. Descriptive commentary about corporate social performance is sometimes included in annual reports. Is this indicative of good performance, or is it just window dressing? How can the credibility of such commentary be enhanced? Sometimes such disclosures are window-dressing, but continued disclosures often become more and more detailed and can have a driving effect on performance. The credibility of such disclosure can be enhanced by including as much hard measurement data as possible, and by comparing the actual performance data with standards set in advance and operational plans to achieve the next stage of improvement. External independent verification may also improve credibility. 6. Why should a corporation make use of a comprehensive framework for considering, managing and reporting corporate social performance? How should they do so? Corporate social reporting (CSR) is growing in importance since it has become expected, particularly of larger companies. This means that there is greater vulnerability now for oversights and mistakes, in the form of criticism and loss of the support of stakeholders. Referring to a comprehensive framework for CSR will help ensure that nothing is missed and that comparisons to established practice are made. There are a number of comprehensive models and related reports emerging including the Global Reporting Imitative (GRI G3) and AccountAbility approaches that could provide a useful template against which a company’s CSR performance can be compared. 7. Do professional accountants have the expertise to audit corporate social performance reports? Absolutely! They possess skills at seeking out relevant evidence, avoiding measurement faults, and organizing and disclosing it. Present audit practices involve using experts where necessary - such as engineers, or gemologists, etc. - so this aspect should come as no surprise. The new audits may well need a team approach that involves several experts, but the expertise developed by professional accountants will be needed and is not part of the training of other professionals. 8. What would you list as the five most important ethical guidelines for dealing with North American employees? Guidelines leading to the five major items on Table 7.8 9. Is trust really important – can’t employees work effectively for someone they are afraid of, or at least where there is some “creative tension”? Yes, but if they have an opportunity to leave, they may view the “grass to be greener” elsewhere and take the opportunity. They may also look for another opportunity. It is better to fulfil or meet an excellent employee’s needs, than to attack them. Trust is important if the organization is one that relies upon employees to share new ideas without fear of ridicule or retribution, or to perform at high levels of initiative and performance without supervision. Employees that prefer ego and social need stimulation (Maslow’s system of human needs) will respond well to trust situations. However, some workers prefer a system where they are under constant and independence relieving supervision. Creative tension can be positive in these situations, and where an employee is not self-motivated. All employees, however, will respond to systems they can trust to be fair. 10. Should a North American corporation operating abroad respect each foreign culture encountered, or insist that all employees and agents follow only one corporate culture? This is currently being researched, so there isn’t a correct answer yet, but the trend is toward a unified culture. The best approach is for a company to articulate its values in a code of conduct for its employees to follow, and be prepared to abandon an opportunity where these values would be so compromised as to lead to the loss of support from stakeholder groups such as: decision makers, consumers, and capital providers. Moral imagination can sometimes help, such as was the case in the illustration of operations in China in Chapter 4. Also, a company may sometimes take the view that they are better to stay in a foreign country because they are making a contribution to the betterment of life there although they don’t agree with all the policies of the country. (Motorola staying in China is an example here.) If hyper norms can be developed through future research, we will all benefit and will avoid practicing cultural imperialism. 11. What should a North American company do in a foreign country where women are regarded as secondary to men, and are not allowed to negotiate contracts or undertake senior corporate positions? The answer to question 10 is also relevant here. If possible, the company may be able to promote women from that country to positions in other countries where traditions are more compatible with company policies. It goes without saying that women from North America should not be put into jobs in the foreign country where their career or personal outlook would be damaged. Such a posting might be made as a short term learning experience, with the prior agreement of the individual. 12. How would you advise your company’s personnel to act with regard to expectations of guanxi in China? The advice should be to act in accordance with company policy having in mind that the new extraterritorial reach of the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act may now apply in China even if Chinese regulations do not. Increasingly there will be penalties for guanxi that is beyond reasonable limits, and these limits should be set by top management, not left to the judgment of employees lower down. If such employees get faced with a guanxi situation, they should be advised to ask for clarification from their boss, or a central authority that is well-informed on company policy, as well as legal and ethical trends. 13. What would you advise that corporations do to recognize the new worldwide reach of antibribery enforcement related to the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act? Take the new statutory provisions into account as noted above in question 12. 14. Why should ethical decision making be incorporated into crisis management? The decisions taken during crises usually shape the ongoing operations of a corporation to a greater degree than day-to-day decisions, so they are critical. Ethics, we have shown, ought to be part of day to day activities, so why not also in the more important crisis decisions. The downside of non-ethical crisis decisions will be more difficult to counter because they have such a lasting impact on corporate reputation. Case Solutions 1. Harry Potter and the Green Brigade What this case has to offer This case examines how Harry Potter books came to be printed on recycled paper and identifies the significant environmental savings resulting from this decision. This case discusses the roles of the books’ author, J. K. Rowling, the publisher Rainforest Books, and the Rainforest Alliance in enabling the change to the more environmentally-friendly recycled paper. This case is a good example of the potential costs and benefits that may be considered when taking an ethical business decision. Teaching suggestions I start this case asking students what factors may motivate a company to switch to more environmentally-friendly products and technologies. Following, I ask students what factors may deter a company from switching to more environmentally-friendly products and technologies. Finally, I discuss the pros and cons of switching to recycled paper in the Harry Potter case, and ask students if the publisher’s decision makes sense from the ethical and business perspective. At the end of the discussion, I ask students to take a vote on whether or not they would support this decision as shareholders of the publishing company. Discussion of ethical issues 1. If the cost of printing Harry Potter books on recycled paper added 3% to the cost, was the publishing company really serving the interest of its shareholders, given that the demand for Potter books was so high that all copies would probably have been sold in spite of any boycott? Explain why and why not, and come to a conclusion? If the publisher only cared about the one-off profits from the sale of the new edition of the Harry Potter books, it would be value-destroying to increase costs while expected revenues remain the same; however, there are long-term benefits from this move. This move is likely to improve the publisher’s reputation and may bring the following benefits: • Attract consumers that prefer books printed on recycled paper; and, • Attract authors that want their books printed on recycled paper, including future J.K. Rowling/Harry Potter books and reprints of Harry Potter’s older editions. • Lead to premium pricing to permit cost recovery with later publications. 2. There is the possibility of huge environmental savings by shifting to recycled paper. Would the savings would be even greater if books were published in digital format? Should publishers move to the 100% digital mode immediately? Why and why not? Going 100% digital is a complex business decision, not only driven by potential environmental savings, but also by consumer preferences. The shift may take time and is more likely to happen gradually instead of being an immediate shift. The following reasons may motivate a publisher to go 100% digital: • Relatively new technologies, such as portable tablets and hand-held devices, are enabling readers to access digital formats in an easier way and this may help in changing consumer preferences; • Libraries are starting to offer digital contents to their users and a 100% digital publisher could exploit that niche market; • Moving to 100% digital before other companies may become a competitive advantage in terms of being ahead in the learning curve and creating consumer awareness; • The digital format may attract consumers and authors that are environmentally conscious and a 100% digital publisher could exploit that niche market; • The digital format may enable interactive content and improve the reader’s experience; and, • The digital format may be more profitable than the paper format, given the large cost savings and the possibility to generate a higher percentage operating margin, even after offering the digital books at a lower price than the printed books. However, there are some negative aspects that a publisher should consider before going 100% digital: • There are additional costs of setting up the infrastructure needed to go digital; • Printing and distributing books is a different business than producing and distributing digital content; • The copyright of digital content is more difficult to enforce, as it is really easy to copy and distribute unlicensed copies of digital content; • There is still demand for books printed in paper; and, • Competitors in the book publishing business have a mixed model, offering both printed and digital books. 3. What do you think would be a reasonable environmental strategy to recommend to authors and publishers for books to be published in the next five years? A reasonable environmental strategy may include the following aspects: • Increase the percentage of recycled material in printed books; • Source paper from environmentally-friendly suppliers; • Move progressively into the digital publishing business; • Offer mixed editions of books with paper and digital content, for example sell paper textbooks with online questions and exercises; and, • Offer premium environmentally-friendly paper versions as well as digital versions to raise reputational awareness on this issues. 2. The Carbon Footprint of British Airways What this case has to offer This case discusses the actions taken by British Airways (BA) to be a more responsible company, focusing on reducing emissions by modernizing its airplane fleet and increasing efficiency, as well as other socially responsible initiatives. Nevertheless, contrary to these actions, the company launched a new business service between London and New York that flies 32 passengers across the Atlantic Ocean in an airplane that normally holds 100 passengers. This is a good case to discuss how a company needs to balance business and ethical practices. Teaching suggestions I start this case by discussing the actions taken by BA to be a more responsible company, and I ask students whether or not the company’s actions were motivated by business reasons. Following, I ask students whether or not the new business class flight to New York contradicts the overall responsibility objective stated by BA and how could the company reconcile its for-profit objective with its responsibility goals. Overall, it is unlikely that the company will cancel this flight, but it is possible for BA to take other actions to be responsible and offset the incremental emissions from the new business class flight. Discussion of ethical issues 1. Do you think that British Airways is being hypocritical? Arguably, the new business class flight between London and New York is against the company’s goals regarding the reduction of its overall carbon emissions. This seems hypocritical. But, BA may be able to go on with this business decision, motivated by the profitability of this new flight, if the company commits to offsetting the incremental emissions with further actions to reduce its total emissions. Presently, the company offers a service to calculate individual emissions at the moment of purchasing a ticket and allow the company’s customers to buy carbon credits. “British Airways was the first airline to introduce a voluntary passenger carbon offset scheme in 2005 and were also the first airline to achieve the UK Governments Quality of Assurance. We strive to make it as easy as possible for you to offset the impact of your journey when buying a ticket with us on ba.com. Contributions are automatically calculated based on the volume of carbon dioxide your flight produces and the cost of carbon per tonne at the time of your booking. Payments can be made safely and securely via credit or debit card, with the money raised going to help fund hydro-electric power plants and wind farms around the world.” This is a good step, but it is obviously not good enough. The company needs to show its commitment with further actions to reduce emissions. 2. British Airways is attempting to reduce its carbon footprint by flying more fuel efficient airplanes, such as the A318. The carbon footprint per passenger is lower if 100 people occupy the A318 rather than only 32 people. Does the airline also have a responsibility to reduce each passenger’s carbon footprint? In general, the company is responsible for reducing the overall emissions for a given level of activity. This means that if the company grows in size and the number of flights, then total emissions will increase as a result of a higher level of activity. Scaling total emissions by the number of passengers results in a useful benchmark; however, this benchmark is also subject to the different characteristics of each flight including number of seats sold, distance, type of aircraft, etc. It is difficult to make complex business decisions based on a single benchmark. The company should clearly state reasonable goals in terms of reducing carbon emissions and show progress towards achieving its goals. This may demonstrate to the company’s stakeholders that BA is actually committed to be responsible. 3. The passengers who fly on the Club World London City flight pay a substantial premium for the luxury accommodation. Do you think that the increased premium they pay offsets the increased carbon footprint of having only 32 passengers in the airplane? In simple terms, the additional emissions would be covered by the increased premium under two conditions: 1) The price of this new business flight is over three times the price of a regular flight; and, 2) Emissions have a price in dollars, considered as part of the total price of the ticket. Under the carbon credit system suggested by the Kyoto Protocol, if carbon emissions had a price considered as part of the cost of making a product or providing a service, similar to a carbon tax, then companies would be aware of that cost and would offset it by buying credits or by reducing total emissions. 4. Is it socially responsible for British Airways to fly 32 passengers in an aircraft that can normally hold 100 passengers? Not from the point of view of the carbon emissions; however, the company also has a responsibility to be profitable and compete in the marketplace. As suggested in the answer to Question 1, the company may undertake other actions to offset the incremental emissions from the business class flights. References British Airways. Climate change - Carbon offsetting. 2011. http://www.britishairways.com/travel/csr-your-footprint/public/en_gb 3. Pollution Caused by Cruise Ships What this case has to offer This case examines whether cruise ships that sail through two countries should dump their ‘grey water’ in the country that has the more relaxed pollution standards. In addition, this case discusses the trade-off between enforcing tougher environmental standards and the incremental cost to business and travellers using cruise ships. Teaching suggestions I start this case by asking students how a company would behave if there are two different environmental standards with different compliance costs. Moreover, I remind students that barely complying with laws and regulations may not be enough to act ethically. Once the sea is polluted, it is practically impossible to clean up afterwards and the damages to the marine life have vast implications. The videos on the pacific sea garbage patch, available at www.youtube.com, are an excellent resource to support this point. Discussion of ethical issues 1. If the laws are strict in one country, but lax in another country, do cruise ship companies have an ethical obligation to follow the stricter laws even when they are temporarily sailing through the waters of a country with more lax regulations? Cruise ships companies have an ethical obligation beyond complying with existing laws and regulations. If all jurisdictions had the same restrictions on dumping sewage water and air pollution, the cruise ship companies would have to install treatment plants on board and switch to cleaner fuel. The cost of cruise travel should include the additional costs of operating cleaner ships. It is not acceptable to act as if it were free to pollute the oceans. 2. Many cruise ships travel outside the 200-mile limits set by the United States and Canada. Do these ships have any environmental responsibilities when they are sailing in international waters? The answer to this question is related to the answer of the previous one, it is not ethical to pollute the ocean waters just because the cruise ship is far from the coast. Ultimately, pollution comes back to land through ocean currents and it directly affects marine life. 3. How much should port cities compromise on pollution standards in order to generate tourism? It is short-sighted to allow cruise ships to pollute the air and water of a port city based on short-term economic gains. Port cities should set comprehensive plans to move towards tougher environmental standards. Eventually, cruises have to stop along the coast, and it just takes a sufficient number of cities agreeing on pollution standards to change what are considered acceptable business practices. Port cities may even demand an environmental fee or environmental tax added to each cruise ticket. Such fees would make consumers aware of the environmental consequences of cruise travel. 4. Texaco’s Jelly Beans What this case has to offer This case examines the role of corporate culture in fostering racial discrimination against people of color. It was apparently common for top management to depreciate and hold back employees from promotion and pay raises based on their color. This treatment became evident when a whistleblower who was caught up in another unsavory Texaco practice – losing his job just before retirement – came forward. This scenario happens frequently, so students will benefit from experiencing the problems before they are caught up in them themselves. The benefits of whistle blowing within the company are able to be debated as well as the remedies that Texaco put in place to provide for a wholesome future. Other issues include: the cost of getting caught is usually misunderstood to be much lower than it actually turns out to be; the ethics of lawyers and others who sometimes counsel getting rid of documents; executive responsibility to shareholders via derivative actions; and the ethics of the press for publishing possibly erroneous details of taped conversations thus damaging the reputations of the company and its executives. Teaching suggestions/Discussion of ethical issues Following a brief introduction to the case that stresses the frequency the events of the case are repeated, I ask for discussion on: Question 1 which brings up a discussion of the role of several elements of Texaco’s corporate culture. We then explore the elements of corporate culture in general to give the students a complete picture – see the discussion in the text. Question 2 about prevention is then asked. Of course there are the issues raised in the terms of settlement of the Texaco lawsuit. In addition, I am looking for a discussion of the role of top management in making sure they do not condone such behavior. In fact they should make it very clear that they do not agree with such discrimination. This could involve discipline in any cases found, news articles supporting the promotion of employees of merit regardless of race, stories highlighting those promoted, record keeping of the number of white/non-white hires and promotions, the setting of area-by-area objectives in these areas, and the inclusion of such factors in the set of performance goals that lead to salary and promotion decisions for managers. Question 3 is a good one because condoning or encouraging whistle blowing is counter to the norm in many cultures, including those in North America. We are just not raised to “snitch, rat, or tell on” our friends or enemies. However, if the executives of a company want their employees to act ethically, they would benefit when whistleblowers come forward within the company so that questionable practices can be checked and unethical practices be stopped. Executives cannot be everywhere themselves, so they need to rely on as many others as possible. It is just too costly to repair the damage after the problem becomes public in terms of fines, loss of executive time and company reputation, and lost morale causing loss of efficiency and opportunities. In an atmosphere permitting discrimination, it is unlikely that sufficient trust exists in company practices for important practices involving vulnerability (like sharing ideas and developing innovations) to be successful. Question 4 is aimed at getting across to the students that companies must encourage whistle blowing or else it will not occur. You would have to be an ethical hero or a fool to come forward if you thought the prospect of further discrimination against the whistleblower was likely. Consequently a protected whistle blowing scheme and/or a conscientious ombudsperson would be attractive. Loss of stakeholder support results in even larger losses Normally executives do not appreciate the fact that fiascos like the Texaco discrimination case have another even more expensive cost that the fines and other items described. They fail to realize that when the problem becomes public, the company risks losing the support of the stakeholder group(s) adversely affected and offended. This often results in a consumer boycott thus losing millions more than the combined fines and reparations. Legal ethics Destruction of documents is a questionable practice if they are accurate. It could make the lawyer liable for aiding in a felony. Expecting these documents to stay secret is naive. Executive duty to shareholders/derivative actions Shareholders have the right to expect executives to demonstrate their fiduciary duty by acting responsibly, ethically and legally. If this responsibility is not properly discharged, a derivative action against the company and its directors may be successful. Ethics of the press Was the initial transcription of the tape recording erroneous. If so, the press is guilty of unethical behavior leading to defamation of character. If not, and they can prove it,… Useful Videos, Films & Links White, Jack E. (1996) “Texaco’s White-Collar Bigots” Time, Nov. 18thhttp://www.time.com/time/magazine/article/0,9171,985551,00.html “Texaco Discrimination Settlement Endorsed” The New York Times, March 26th 1997 http://www.nytimes.com/1997/03/26/business/texaco-discrimination-settlement-endorsed.html C-Span “Texaco Discrimination Issues” Council of Institutional Investors, Mar. 24th 1997 http://www.c-spanvideo.org/program/79911-1 • Mr. Bijur discusses the 1994 incident in which Texaco employees were taped in a meeting making negative remarks about black employees. He turns to examine an anti-discrimination plan proposed by the Texaco and later takes questions from the audience. 5. Gender Discrimination at Dell Inc. What this case has to offer This case describes a $9.1 million class-action settlement after Dell incurred in a systemic pattern of gender discrimination. The company was accused of compensating female employees less than their male counterparts; segregating female employees into lower paying grade levels than their male counterparts; denying female employees development, placement, promotion, and advancement opportunities resulting in their remaining in lower classification and compensation levels; and disproportionately terminating female employees compared with their male counterparts. This is a good case to identify the controls should be in place to ensure equal treatment when hiring, retaining, and promoting employees. Teaching suggestions I start this case by asking students what constitutes sexual discrimination, and how a company’s top management and/or directors may uncover cases of sexual discrimination. While discussing the solution to the case’s questions, I make sure that the students focus on the causes and consequences of sexual discrimination, as well as on the potential controls that could be put in place to avoid this problem Discussion of ethical issues 1. What factors contribute to a firm engaging in sexual discrimination? As explained in Chapter 7, in regard to hiring and firing decisions, the key principle is that decisions must be based upon a person’s ability to do the job. Providing different working conditions, salaries, hiring, promotion or bonus criteria to women and men based on gender and not on personal abilities is a form of sexual discrimination. Several factors may contribute to a firm engaging in sexual discrimination, for example: • Wrong attitudes from top management (weak tone at the top) with respect to fairness in the workplace; • Lack of an ethical policy addressing sexual discrimination; and, • Cultural stereotypes against female employees, for example viewing women as having lower levels of competency compared to men doing the same job. 2. What factors should the board of directors consider if there is an internal complaint of sex discrimination on the basis of pay and promotion? A complaint of sexual discrimination should be taken very seriously. The following factors may be important in addressing a complaint: • Whether the complaint refers to a single individual in a position of power, or if it is a widespread problem; • Whether there are other similar complaints; • What evidence is provided by the affected individual and whether that person needs a safe environment to provide more details about the case; • What steps are necessary to investigate the complaint further; and, • What steps should be taken in order to fix the problem. 3. What other costs might Dell incur because of its practice of discrimination? There are other costs that may follow this lawsuit: • Additional lawsuits by other affected individuals; • Managerial time and company resources devoted to correct this issue; and, • Loss of reputation resulting in: o Qualified female employees leaving the company, o Qualified female employees not applying for jobs at the company, o Low employee morale and loss of productivity, and o Loss of sales from consumers that may react strongly against sexual discrimination. 4. How can a firm ensure that it does not engage in sexual discrimination? There are several actions that may help a company to avoid engaging in sexual and other forms of discrimination. • Management should have an intolerant attitude towards all forms of discrimination (tone at the top). Management should be aware of the possible repercussions and seriousness of discrimination; for example, class action discrimination lawsuits have become more prominent and more costly in recent years. Discrimination may cause low employee morale and loss of productivity. • Management should make a concerted effort to hire a diversified workforce. • The company should adopt a whistleblower policy for discrimination cases. • The company should adopt a code of conduct and ethics policy that addresses sexual discrimination (and other forms of discrimination based on the basis of race, religion, age, etc.) for directors, executives and all other employees of the company. This policy should clearly state the company’s commitment not to tolerate discrimination, bullying or harassment. • The company should establish internal controls avoiding discrimination, for example: o Managers should make new employees aware of the policies prohibiting discrimination when joining the company and this should be noted in all employee contracts; o Provide training to all employees to help them understand exactly what discrimination, bullying and harassment is, and that these behaviors will not be tolerated; o Develop open and well-understood procedures for hiring, promoting and firing employees; o Maintain job descriptions and documentation regarding hiring, promoting and firing decisions, for example, a point-scoring interview system could be implemented to ensure that the best performer is awarded the job; o Develop monitoring controls to keep track of hiring, promoting and firing decisions by gender, race, religion, age, etc. Conduct pay audits to uncover and address unexplained pay disparities; o Report statistics on hiring, promoting and firing decisions by gender, race, religion, age, etc.; and, o Create a special office or designate an impartial person within the company to deal with discrimination cases. 6. Novartis $250+ Million Gender Discrimination Case What this case has to offer Novartis, a Swiss-headquartered drug company, was found guilty of discriminating against women, and on May 2010, the jury awarded total punitive damages of $250 million, about $44,000 for each of the 5,600 women represented in the class action. This was the largest award of punitive damages for any discrimination case in the U.S. The amount was equal to 2.6% of the $9.5 billion revenue Novartis reported in 2009. After the verdict, Novartis indicated they would appeal, and on July 2010 a $152.5 million settlement was announced, subject to verification by a judge. According to the jury of five women and four men, Novartis engaged in a specific pattern of discrimination against pregnant women, with respect to the terms and conditions of their employment, and also engaged in a general pattern of discrimination against female representatives, with respect to pay and promotions. This is a good case to discuss the consequences of sexual discrimination and the controls should be in place to ensure equal treatment when hiring, retaining, and promoting employees. Teaching suggestions I start this case by asking students what constitutes sexual discrimination and how a company’s top management and directors may uncover cases of sexual discrimination. While discussing the solution to the case’s questions, I make sure that the students focus on the very high costs of sexual discrimination, as well as on the potential controls that could be put in place to avoid this problem. In addition, this case raises awareness about the way punitive damages are determined, and about the large legal fees involved in class-action lawsuits. Discussion of ethical issues 1. Was the verdict fair? It is very difficult to determine what constitutes a fair verdict in a case were pervasive actions have a general impact over a large number of people; however, the verdict should send a clear message to the company and all other companies that discrimination should not be tolerated. It should motivate the management of all companies, not just Novartis, to take corrective actions to ensure that discrimination of all kinds does not occur. Moreover, a fair verdict should compensate the affected women in terms of differential pay and promotions. Almost 15 percent of the total damages were designated to improve the company’s controls, and two thirds of the total damages were designated to compensate the women promoting the class action lawsuit. 2. Will this verdict cause other companies to review for and remedy any systematic discrimination uncovered? This case may motivate other companies to review their policies on discrimination and harassment, particularly in the pharmaceutical industry, where similar practices may be prevalent. 3. How should systemic discrimination be prevented? There are several actions that may help a company to avoid engaging in sexual discrimination, including: • Management should have the right attitude towards sexual discrimination (tone at the top), and not underplay the importance of this issue; • Management should be aware of the possible repercussions and seriousness of sexual discrimination, class action sexual discrimination lawsuits have become more prominent and more costly in recent years, moreover discrimination may cause low employee morale and loss of productivity; • Management should make a concerted effort to hire a diversified workforce; • The company should adopt a whistleblower policy for sexual discrimination cases; • The company should adopt a code of conduct and ethics policy that addresses sexual discrimination (and other forms of discrimination based on the basis of race, religion, age, etc.) for directors, executives and all other employees of the company, this policy should clearly state the company’s commitment not to tolerate discrimination, bullying or harassment; • The company should establish internal controls avoiding discrimination, for example: o Managers should make new employees aware of the policies prohibiting discrimination when joining the company and this should be noted in all employee contracts; o Provide training to all employees to help them understand exactly what discrimination, bullying and harassment is, and that these behaviors will not be tolerated; o Develop open and well-understood procedures for hiring, promoting and firing employees; o Maintain job descriptions and documentation regarding hiring, promoting and firing decisions, for example, a point-scoring interview system could be implemented to ensure that the best performer is awarded the job; o Develop monitoring controls to keep track of hiring, promoting and firing decisions by gender, race, religion, age, etc. Conducting pay audits to uncover and address unexplained pay disparities; o Report statistics on hiring, promoting and firing decisions by gender, race, religion, age, etc.; and, o Create a special office or designate a person within the company to deal with sexual discrimination issues. 4. Were the lawyer’s fees fair? More than one fourth of the total damages went on legal fees. On average, every woman was awarded an amount between $15,000 and $20,000, while the partners of the legal firm representing them shared $40 million. This could be considered unfair and may motivate a number of other class action lawsuits without merit. On the other side, given the complexity of this case, its length, and the legal resources available to Novartis, the lawyers’ fee may be commensurate to the skills and effort necessary to win the largest gender discrimination case to ever go to trial. Sanford, Wittels & Heisler LLP has represented employees in a number of discrimination cases: • Bayer Gender Discrimination Case • CIGNA Healthcare Gender Discrimination Case • Dell Gender Discrimination Matter • Eaton Corporation Gender Discrimination Matter • Fairfield Resorts Gender Discrimination & Sexual Harassment Class Action • General Electric Gender Discrimination Matter • KPMG Gender Discrimination Case • Novartis Pharmaceutical Gender Discrimination Class Action • Public is Groupe and MSL Discrimination Matter • Sanofi-Aventis Gender Discrimination Class Action • Toshiba Gender Discrimination Case 5. Could this case have been successfully prosecuted if it were not a class action? It would have been very difficult for a single person to prove sexual discrimination. Moreover, it would have been difficult to attract and retain the services of a large legal firm to aid a single plaintiff. References Sanford, Wittels & Heisler LLP. Our Cases. 2011.http://www.swhlegal.com/cases.html?category_id=62600&f^81=152&searchon=1 7. Downsize or Bonus Allocation Decisions What this case has to offer This case forces the class to consider a common scenario involving often gut wrenching decisions. In the process of making these decisions, students must confront their biases. They should also be aware that their decisions are signalling to the work team what the manager’s values are, or at least how the manager wishes to interpret the company’s values. These values will impact on the motivation of the employees in the future, because they will indicate what the team’s shared values should be and what level of trust to count on. I also use the case to illustrate how moral imagination can be triggered and be very helpful. From the corporate perspective, the impact of how downsizing and bonus decisions are designed is shown to have a direct impact on how the corporate culture is perceived. Teaching suggestions I usually use the question of downsizing first. I ask which employee the class would chose, and why. Usually there will be a range of choices and I encourage this range by playing devil’s advocate by indicating that their choice signals that they are ignoring or don’t care about a value that one of the other choices represents. This forces the student to defend his/her choice and encourages other students to speak about their choices. For example, the individuals listed are proxies for the following values based on the person to be cut: Carol Performance relative to salary counts, family doesn’t Gord Seniority counts and possibly personality and family, performance doesn’t Jane Ability to withstand impact counts, performance and seniority may not Ralph Performance relative to salary counts, seniority and family do not Hilary Performance counts, family does not Seniority can also be considered a proxy for loyal performance. In the end, students realize that trade-offs must be made. I ask for a vote on which staff member to cut just to drive home that different decisions can be made by reasonable people. The important question is what kind of a team is needed to fulfill the company’s goals. Should the team be focused on meritorious performance at work only, or loyalty, or performance that will make allowances for the personal and family lives of the team members, or personality issues, or favoritism. Students rarely make the ethical link and realize that their decisions show their value choices and govern future performance. Values determine motivation. Sometimes I push the class to use their moral imagination to come up with a different and perhaps better solution favoring shared values. If the class does not come forward with a suggestion, I indicate that the manager might call a meeting of the team and ask for their input. One of the staff may step forward since they may wish to retire or have another opportunity they could move to. The team may also wish to share a cut in salary so that no one needs to be discharged. The decision of which staff to bonus is less rich a learning experience, but does offer the same opportunity to signal values. Consequently, what kind of culture and values is wanted should be part of the decision process. 8. Walt Pavlo’s MCI Scams and Frauds What this case has to offer This case illustrates some of the techniques that fraudsters can use in order to hide their fraudulent activities. These include: • kiting payments, • falsifying documents, • lapping payments, and • recording false transactions. Students who want to become auditors need to know about these techniques so that, when conducting audits, they will be alert to signs of their presence. Referred to as ‘red flags’ these indicators may be internal control weaknesses in the firm’s accounting and/or operating systems. Teaching suggestions Have the students read the case in advance of the discussion. If any students have auditing experience ask them about the importance of internal controls, and how they would test the strength of an internal control system. If they encountered any problems or weaknesses in the system, ask them how they addressed these weaknesses. Discussion of ethical issues 1. There are a variety of ethical aspects to the case, including greed, deception and treating people as a means to achieve personal objectives. • Walt’s deceptive accounting policies were designed to mislead his superiors into think that he was managing his department well. He was presenting false and deceptive information about the collectability of the accounts receivable and loans receivable. He did not care that his superiors were making important business decisions based on incorrect information. • Walt demonstrated greed. He stole from MCI and MCI’s customers in order to pay for a lifestyle that was beyond his means. • He treated people as a means to his end. Customers and his employer were used to further Walt’s narrow self-interest. Contributing to false financial statements, stealing money that did not belong to him, and lying to the National Bank of Canada are all illegal activities. Fraudulent behavior, according to the Institute of Internal Auditors , involves: “Any illegal acts characterized by deceit, concealment, or violation of trust.” According to the AICPA and PCAOB, “The primary factor that distinguishes fraud from error is whether the underlying action is intentional or unintentional.” Consequently, all of the activities Walt was involved with wherein he purposely misled management or his employees or external parties, could be considered fraudulent. 2. Skepticism means that an individual does not accept explanations at their face value, but continuously challenges and compares what people say to other credible evidence. For example, an auditor could gather sufficient appropriate evidence to substantiate the explanations of the economic transactions of the firm. In the case of Pavlo’s accounting shenanigans, the auditors obviously did not gather sufficient evidence to substantiate the collectability of the accounts receivable and the loans receivable. Nor did they verify the veracity of the allowance for doubtful accounts. Management, on the other hand, may be more willing to accept the verbal explanations of subordinates. Nevertheless, management should maintain a skeptical mindset and periodically ask for some evidence to substantiate the activities of subordinates. In this situation, management should have asked for detailed explanations of the various programs that Walt was operating, such as the Rapid Advancement Program, and should have thought through the reality and risks involved for themselves. 3. “Victim crimeless” is a euphemism to pretend that no one (that matters) is significantly harmed or that if the victim is not readily observable, then there is no victim. Pavlo and Mann cheated MCI out of $2 million that was owed to MCI by Hilby’s company Simple Access. MCI was not considered to be harmed by the Hilby caper because Pavlo and Mann assumed that MCI would not be able to collect anyway. Since MCI had already lost the receivable, it could not be a victim of further actions. MCI was not given any choice in this matter, however, and Pavlo took his salary on the basis that he would continue to collect MCI’s receivables. Ultimately the interests of MCI’s shareholder and creditors were jeopardized. Also, because Pavlo and Mann considered Hilby to be a ‘hustler’ they therefore considered him not to be a worthy victim of their illegal activity, and so they considered it to be a victimless crime. However, even hustlers are people and need to be treated as such. The reality is that there are no victimless crimes. Both hustlers and corporations can be victims. 4. The major ethical issue in this case is cheating, putting personal interest ahead of all other considerations. Walt was only thinking of himself and the life style that money could buy. He gave insufficient thought to taking advantage of other people and organizations in order to achieve his self-centered goals. 5. There are numerous governance mechanisms that might have prevented this fraud from occurring. • Management is responsible for setting a positive ethical attitude. If the tone at the top is based only on self-interest, then employees will mimic that attitude and only look out for their personal welfare. The objective of management was to show high net income, regardless of the means, in order to make their stock options more profitable. A more balanced attitude, that profits are important but they need to be generated in a legitimate fashion, might have helped. • Management needs to set realistic goals and incentive schemes that motivate ethical actions Making the numbers is a worthwhile objective as long as the budget numbers are reasonable. An unreasonable ceiling on bad debts and the allowance for doubtful accounts encourages employees to make the numbers by illegal and unethical means. • Management needs to listen to employees. Management is ultimately responsible for setting the budget, but management needs accurate and truthful input from subordinates in order to set a reasonable budget. Management at MCI was not willing to listen to Walt’s objections to the unrealistically low allowance that his department was being given. • Both internal and external audits need to gather sufficient appropriate evidence, rather than to accept management assertions at their face value. If they had thoroughly investigated the collectability of the accounts and loans receivable the auditors would have realized that extent of the bad debt and collectability problems. • Firms need to have clear lines of authority and responsibility and to make those well known. Bank lending agreements, such as the one Walt signed with the National Bank of Canada, need proper approval and authorization. 6. Depending upon the size of the firm and the internal audit staff, internal auditors have a variety of responsibilities. At a large firm, such as MCI, they would be responsible for evaluating the firm’s internal controls to ensure that they were not flawed and were operating effectively. This would include conducting routine consideration of the wholesomeness of and risk management protection afforded by company policies, and compliance audits of both the accounting and operating systems, especially the computer systems. Also, they would be responsible for ensuring that the financial statements are presented fairly. Because they are full-time employees of the company, internal auditors have the time and responsibility to gain an in-depth knowledge of the firm’s operations, internal controls and information systems. It would appear that at MCI, the internal auditors either (a) did not gain a sufficient level of expertise about the firm’s collection routines, or (b) did not have sufficient time and/or staff to conduct thorough compliance audits of Walt’s department, or (c) did not report concerns to an appropriate executive or to the Audit Committee of the board. Useful Videos, Films & Links Bashir, Martin (2006) “Walt Pavlo: The Visiting Fellow of Fraud” ABC News, Jan. 30th http://abcnews.go.com/Nightline/Business/story?id=1557957 Weinberg, Neil (2002) “Aggressive Accounting: Ring of Thieves” Forbes.com, Oct. 6th http://www.forbes.com/forbes/2002/0610/064.html 9. Jail and the German Subcontractor What this case has to offer This is a real-life example, with the names changed. The case is useful in pointing out the differences in legality and culture that executives can face in foreign countries. Companies must be aware of these differences and advise their executives accordingly. In turn, the executives must make sure that their employees, and even their sub-contractors comply with the relevant local laws and customs, or else the company should pull out of the engagement. Teaching suggestions In a brief introduction to the case, I stress that foreign operations are not always in jurisdictions of lower levels of legality. A real effort should be made to find out and respect those aspects of foreign legal and ethical custom that are important where these customs do not offend the company’s corporate culture and values. Where they do offend the company’s culture, specific decisions should be made as to the company’s actions before problems arise. These decisions are necessary to prepare the executives in question as to how to respond to problems, and which executives to pick for foreign duty, based on a proper match of their values with the country or corporate culture to be followed. Discussion of ethical issues Question 1 asks about the fairness of the German law. The point of the question is that it doesn’t matter whether it is fair is not. Laws ignored or belittled thus inducing employees and sub-contractors to ignore them probably will trigger prosecution, and that should be expected. Arguing later that it is an unfair law usually has no positive affect. Question 2 gets the class thinking about how to prepare the executives and the company to keep out of trouble. This would involve actions such as:  Collecting knowledge about local legalities and customs  Raising the awareness of executives and employees to the problem areas and to the recognition of sensitive areas  Design of a code of conduct that integrates desired behavior  Sign-offs of the code by new employees and suppliers, and also annual signoffs  Training sessions and other notifications to reinforce expectations of proper behavior  Verification that company policies were followed by internal auditors or other means  Inclusion in remuneration considerations  Linkage to strategic planning to consider long-run attractiveness of operation, and changes to the company’s overall code of conduct. In addition to the issues dealt with above, students should be made aware of the discussions in the text about universal codes of conduct vs. tailored codes, and of the pursuit by Tom Donaldson and Richard De George of hyper norms and or general principles of conduct. The readings by Donaldson and Roth are very good. 10. AIDS Medication in South Africa What this case has to offer This case presents a dilemma that will confront directors and executives repeatedly in the future – the problem of political leaders who over-ride legally protected corporate property rights because of a declared national emergency. The nations involved will not always be from the third world. The Canadian government decided (when faced with post-9/11 terrorism threats) to go ahead and manufacture an anthrax remedy (CIPRO) through a low-cost Canadian manufacturer instead of buying from a multinational (Bayer) at a higher price (and some delay). They later settled with Bayer, after strong urging. Corporations have the power of life and death tied up in their property rights, and politicians will be unable to resist the cry of their people for action. There is no effective world police force for the violation of corporate property rights at present. Legal rights will give way to human needs, unless corporations develop programs that are seen to be responsive and humanitarian, and understanding among political leaders that respect for property rights is warranted in the light of those programs. Political leaders have the power to change local laws to suit their perceived needs. As a result, students will realize that legal behavior is different from ethical and/or moral. They will also realize the need for a long-term, corporate global strategy, rather than local, domestic or foreign strategies, and the need to preserve corporate reputation by doing and appearing to do the right thing for all stakeholders, not just current shareholders. Teaching suggestions I ask the students to read the case in advance. After recapping the case details, I ask the class to provide and discuss answers to the first two questions listed at the end of the case. Inevitably, the class is uncertain of the differences between moral and ethical behavior – some don’t see the difference form legal behavior either, but they are rapidly declining in number. To resolve the discussion over differences, I offer the class the following scheme for discussion: Legal behavior - compliance with laws – usually the difference between domestic and local foreign laws is quickly pointed out, leading to a discussion of the need for corporations to pre-determine their policy as to which they will follow. Moral behavior – compliance with morals – morals comes from ‘mores’ or habits in Latin. Here again the class will note the potential differences in domestic, local and foreign morals and the need for corporate strategy clarification. I also point out that morals/mores change over time – slavery was OK once, as was the persecution of certain religious groups, but not now. Ethical behavior – compliance with ethical standards - here I note that ethical behavior involves compliance with ethical principles. I like to have the class focus on the fact that ethical principles are relative and have changed /do change over time showing a trend toward greater respect for the interests of stakeholders such in regard to life, and health. I like to point the class to the principles that are emerging along this trend line to focus on as ethical principles. A progression emerges from legal to moral to ethical behavior which is good for business folk to reflect upon. They would not build a plant based on a 1-2 year projection of conditions, so why should they create corporate strategy/policy a short-term basis. It would be unsound. Discussion of ethical issues The answers to the questions posed at the end of the case are as follows: 1. Is it legal, moral or ethical for South Africa to override AIDS medication patents? See discussion above. Currently, legality depends upon the definition of a ‘national emergency’. However, the Government of South Africa can change their laws to make their interpretation legal. It would be illegal based on World Trade Organization rules, but this is unlikely to be enforced except in the long term. I would say that as more and more nations override patents for humanitarian reasons, it will be considered both moral and ethical. 2. Is it legal, moral or ethical for drug patent holders to resist? While it may be legal, resistance without a humanitarian alternative program is likely to be considered immoral and unethical. While the costs of R & D need to be recovered and a reasonable return earned for shareholders to induce them to continue to support innovation, new humanitarian programs must respond to real needs as they arise. Otherwise, drug patent holders will continue to lose in the court of public opinion. 3. If you were a senior executive in an affected drug patent holder, what solution would you suggest? Here, I am looking for a discussion of alternative humanitarian programs, and all ideas are welcome. Continual scan of the WTO and major drug company websites will provide access to their solutions. See also: http://www-tech.mit.edu/V121/N19/aids_19.19w.html and http://query.nytimes.com/gst/fullpage.html?sec=health&res=9905E0DC173BF933A15752C1A9659C8B63 Useful Videos, Films & Links “Head-to-head: Aids drugs” BBC News Thursday April 19th 2001 http://www.simonbaker.me/2/hi/africa/1285677.stm Swarns, Rachel (2001) “South Africa May Cite Crisis To Lower Cost of AIDS Drugs” New York Times, Mar. 12th http://select.nytimes.com/gst/abstract.html?res=F70D11FA385E0C718DDDAA0894D9404482 11. BP’s Gulf Oil Spill Risk Management What this case has to offer This case documents how BP, their consultants, and suppliers mismanaged the risks leading to the extremely tragic 2010 Deep Horizon/Macondo oil spill. This is a good case to discuss the elements of a risk management system. BP’s risk management system systematically failed to assess, mitigate and monitor risks. This case is related to the following two other cases in the book: • BP’s Gulf Oil Spill Cost (Chapter 4), discussing the potential costs of the oil spill and whether it is possible to estimate all the relevant costs in a situation with a high degree of uncertainty; and, • BP’s Corporate Culture (Chapter 5), discussing the problems within the company’s culture and attitudes towards risk. Teaching suggestions I start asking students what are the elements of a comprehensive risk management system. Following, I list how BP failed to assess, mitigate and monitor risk with disastrous consequences. Ultimately, it is interesting to try to figure out who was responsible for the oil spill and whether or not it could have been avoided if reasonable controls and safety measures had been in place. BP’s history of negligence is thoroughly examined in PBS’ documentary The Spill, which I assign before beginning to discuss the case. Furthermore, the “Final Report on the Investigation of the Macondo Well Blowout”, prepared by The Deepwater Horizon Study Group (DHSG) in 2011, constitutes an excellent resource on the technical details and poor risk management practices that led to the crisis. Discussion of ethical issues 1. Why did BP fail its oversight and decision capabilities? BP’s history of negligence is thoroughly examined in PBS’ documentary The Spill. There were some specific issues with the Macondo well project, mainly that the project was over budget in 2010, and several safety measures were skipped to cut costs. Moreover, safety issues were magnified by major technological challenges involved in deep sea drilling. In addition, there were several systemic issues that led to a continuous disregard to safety within the company: • BP’s board of directors operated in a continuous “crisis mode”; • BP grew too fast through a strategy of mergers and acquisitions; • BP took to many risks; • BP’s executives pushed for aggressive cost-cutting without little regard for safety; • There were strong stock market incentives to keep cutting costs, even after Tony Hayward replaced John Browne as CEO; • Liability penalties were capped by the U.S. Government to encourage deep water drilling in the Gulf of Mexico; • BP valued profits more than safety; • BP repeatedly ignored red flags, including the previous accidents at the Texas City refinery in 2004 and 2005, a leak at the company’s oil complex in Alaska in 2006, and the damages sustained by the Thunder Horse platform in 2005; and, • BP not only ignored a number of red flags, but also paid large amounts of money to possible whistleblowers to keep quiet about BP’s poor safety practices that led to numerous accidents. According to the “Final Report on the Investigation of the Macondo Well Blowout”, prepared by The Deepwater Horizon Study Group (DHSG) in 2011, the disaster was preventable and had its roots on a culture of complacency (p. 9): “This disaster was preventable if existing progressive guidelines and practices been followed—the Best Available and Safest Technology. BP’s organizations and operating teams did not possess a functional Safety Culture. Their system was not propelled toward the goal of maximum safety in all of its manifestations but was rather geared toward a ‘trip-and-fall’ compliance mentality rather than being focused on the Big-Picture. It has been observed that BP’s system “forgot to be afraid.” The system was not reflective of one having well-informed reporting, or just cultures. The system showed little evidence of being a high-reliability organization possessing a rapid learning culture that had the willingness and competence to draw the right conclusions from the system’s safety signals. The Macondo well disaster was an organizational accident whose roots were deeply embedded in gross imbalances between the BP’s provisions for production and those for protection.” 2. Describe your vision of a good risk management process that BP should have been following. The 2004 Enterprise Risk Management Framework, provided by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), explains the general ideas behind enterprise risk management: “Enterprise risk management is a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” The COSO framework proposes the following good principles of enterprise risk management: • “Aligning risk appetite and strategy – Management considers the entity’s risk appetite in evaluating strategic alternatives, setting related objectives, and developing mechanisms to manage related risks. • Enhancing risk response decisions – Enterprise risk management provides the rigor to identify and select among alternative risk responses – risk avoidance, reduction, sharing, and acceptance. • Reducing operational surprises and losses – Entities gain enhanced capability to identify potential events and establish responses, reducing surprises and associated costs or losses. • Identifying and managing multiple and cross-enterprise risks – Every enterprise faces a myriad of risks affecting different parts of the organization, and enterprise risk management facilitates effective response to the interrelated impacts, and integrated responses to multiple risks. • Seizing opportunities – By considering a full range of potential events, management is positioned to identify and proactively realize opportunities. • Improving deployment of capital – Obtaining robust risk information allows management to effectively assess overall capital needs and enhance capital allocation.” In addition, the COSO guidance on “Effective Enterprise Risk Management Oversight: The Role of the Board of Directors” (2009), highlights that the company’s board of directors has a preeminent role in the risk management process. The board of directors should: • “Understand the entity’s risk philosophy and concur with the entity’s risk appetite. Risk appetite is the amount of risk, on a broad level, an organization is willing to accept in pursuit of stakeholder value. Because boards represent the views and desires of the organization’s key stakeholders, management should have an active discussion with the board to establish a mutual understanding of the organization’s overall appetite for risks. • Know the extent to which management has established effective enterprise risk management of the organization. Boards should inquire of management about existing risk management processes and challenge management to demonstrate the effectiveness of those processes in identifying, assessing, and managing the organization’s most significant enterprise-wide risk exposures. • Review the entity’s portfolio of risk and consider it against the entity’s risk appetite. Effective board oversight of risks is contingent on the ability of the board to understand and assess an organization’s strategies with risk exposures. Board agenda time and information packets that integrate strategy and operational initiatives with enterprise-wide risk exposures strengthen the ability of boards to ensure risk exposures are consistent with overall appetite for risk. • Be apprised of the most significant risks and whether management is responding appropriately. Risks are constantly evolving and the need for robust information is of high demand. Regular updating by management to boards of key risk indicators is critical to effective board oversight of key risk exposures for preservation and enhancement of stakeholder value.” 3. What aspects of a good risk management process appear does BP not appear to have been using? BP’s risk management process had severe deficiencies in risk assessment, risk mitigation and in risk oversight. • Problems with risk assessment: The risk assessment process is critical to take adequate actions to mitigate risks and BP failed to properly assess the major technological challenges involved in deep sea drilling. The DHGS’ report (2011, p. 11) summarizes some major risks resulting from deep sea drilling” “These operations pose risks (likelihoods and consequences of major system failures) much greater than generally recognized. The significant increases in risks are due to: 1) complexities of hardware and human systems and emergent technologies used in these operations, 2) increased hazards posed by the ultra-deep water marine environment (geologic, oceanographic), 3) increased hazards posed by the hydrocarbon reservoirs (very high potential productivities, pressures, temperatures, gas-oil ratios, and low strength formations), and 4) the sensitivity of the marine environment to introduction of very large quantities of hydrocarbons.” Moreover, BP ignored not only the inherent risks of its activities, but also the consequences of skipping safety measures to cut costs in the Macondo well project. The lack of risk management processes is described in the DHGS’ report (2011, p. 86): “The available evidence does not indicate that any one person or group was keeping tabs on the accumulation of risks that accompanied the individual decisions and subsequent actions or inactions. Apparently it was concluded by those involved in this operation (BP, MMS, Transocean, Halliburton) that there were no significant challenges to safety. A realistic, rigorous Risk Analysis and Management (RAM) process and Management of Change (MOC) process (for changing modes from drilling to completion) appears not to have been performed. The result was a serious compromise of process safety.” Finally, BP repeatedly ignored red flags raised by previous accidents. • Problems with risk mitigation: Once risks have been identified and assessed, a company can choose to take any of the following actions to deal with risk: avoidance, mitigation, sharing, or retention. BP failed to take several possible necessary actions to mitigate its risks, for example, meet or exceed industry safety standards. Moreover, the company showed that it had a poor crisis management system after trying several different approaches unsuccessfully to plug the well. • Problems with risk monitoring: BP’s management and board of directors failed to understand and monitor risks. 4. Has BP had other ecological disasters since 2000 that should have alerted the company to improve its risk management process? The company experienced at least three previous incidents that should have raised red flags regarding the deficiencies in the company’s risk management system: • An accident at the company’s Texas City refinery in 2005, were 15 people lost their lives, over 180 people were injured, and the company spent $1 billion in damages, this accident was preceded by another fire in 2004 and 22 employee fatalities over 30 years; • An oil leak in BP’s oil complex in Alaska in 2006, caused by carelessly extending the lifetime of equipment, delaying maintenance, and inadequately trained personnel; and, • A company’s oil platform nearly sunk after a hurricane in 2006 as a result of careless technical work. References Committee of Sponsoring Organizations of the Treadway Commission (COSO). “Effective Enterprise Risk Management Oversight: The Role of the Board of Directors” 2009. http://www.coso.org/guidance.htm Committee of Sponsoring Organizations of the Treadway Commission (COSO). “Enterprise Risk Management —Integrated Framework” 2004.http://www.coso.org/guidance.htm Deepwater Horizon Study Group (DHSG). “Final Report on the Investigation of the Macondo Well Blowout.” 2011.http://ccrm.berkeley.edu/pdfs_papers/bea_pdfs/DHSGFinalReport-March2011-tag.pdf PBS. “The Spill.” 2010. http://video.pbs.org/video/1625293496/ 12. BP’s Corporate Culture What this case has to offer This case examines a number of weaknesses in BP’s corporate culture and a continuous disregard for safety practices. Moreover, it fosters the discussion of the factors that may motivate systemic issues within a company’s culture. This case is related to two other cases in the book: • BP’s Gulf Oil Spill Cost (Chapter 4), discussing the potential costs of the oil spill and whether it is possible to estimate all the relevant costs in a situation with a high degree of uncertainty; and, • BP’s Gulf Oil Spill Risk Management (Chapter 7), discussing the failures in the company’s operating controls and risk management process. Teaching suggestions BP’s history of negligence is thoroughly examined in PBS’ documentary The Spill, at http://video.pbs.org/video/1625293496/, which I assign before discussing the case. I begin the discussion by asking students whether companies that act unethically in one case will likely continue doing so in other cases. Three additional questions that are central to the discussion of this case are: What happened? How did the company allow such big issues to continue unnoticed, and how could the company change its culture after the Gulf oil spill? Discussion of ethical issues 1. Analyze whether BP`s corporate culture was ethical. The PBS’ documentary highlights several issues that shaped a culture of unethical standards and continuous disregard to safety within the company: • BP’s board of directors operated in a continuous “crisis mode”; • BP grew too fast through a strategy of mergers and acquisitions; • BP took to many risks; • BP’s executives pushed for aggressive cost-cutting without little regard for safety; • There were strong stock market incentives to keep cutting costs, even after Tony Hayward replaced John Browne as CEO; • Liability penalties were capped by the U.S. Government to encourage deep water drilling in the Gulf of Mexico; • BP valued profits more than safety; • BP not only ignored a number of red flags, but also paid large amounts of money to possible whistleblowers to keep quiet about BP’s poor safety practices that led to numerous accidents; • BP repeatedly ignored red flags, including: o An accident at the company’s Texas City refinery in 2005, were 15 people lost their lives, over 180 people were injured, and the company spent $1 billion in damages, this accident was preceded by another fire in 2004 and 22 employee fatalities over 30 years; o An oil leak in BP’s oil complex in Alaska in 2006, caused by carelessly extending the lifetime of equipment, delaying maintenance, and inadequately trained personnel; o A company’s oil platform nearly sunk after a hurricane in 2006 as a result of careless technical work; and, o The Macondo well project in the Gulf of Mexico was over budget in 2010 and several safety measures were skipped to cut costs. 2. Why has BP`s culture developed as it has? There could be several factors influencing BP’s culture: • Lack of ethical leadership and clarity about the importance of safety as a fundamental value for the company; • Quick growth through mergers and acquisitions created a large and complex organization, dealing with difficult technical issues such as deep water drilling; • A vision to “be the first” in deep water drilling; • Management is narrowly focused on short-term profits: o Strong stock market pressures to deliver short-term profits, and o Short-term oriented executive compensation; • The company outsourced some of the technical tasks to other companies and BP’s executives might have thought that outsourcing somehow shielded BP from repercussions; • A misguided understanding of business and ethical immaturity; and, • Soft penalties or weak enforcement by the US Environmental Protection Agency (EPA) and other regulatory bodies. 3. How you would suggest changing its culture? As explained in Chapter 5, appropriate guidance reinforced by feedback mechanisms must be given to management, and reinforced by an ethical corporate culture, or else management can honestly say that no one told them what boundaries they should be operating within. This guidance will influence the preparation of financial reports and other sources of feedback, and also the behavior exhibited in dealings with customers, employees, and other stakeholders. People make things happen, so it is essential that their motivations are aligned with stakeholder expectations, which can only be reliably accomplished by ensuring that the values underlying corporate motivational elements (i.e., corporate culture, codes, policies, etc.) are similarly aligned. A number of things have to change within the company: • Management needs to change its attitude towards operating controls, including their views on safety. The company should not try to downplay any red flags pointing out new operational risks after this major accident. • The company’s code of conduct should highlight the need for change of ethical standards. • Management should make a strong statement that this situation will be resolved and take the necessary steps to reform the company’s reputation. The company needs to invest in safety measures and commit to meet or exceed industry standards. • The company should establish a strong foundation for monitoring of internal controls, including: o Support from top management (tone at the top); o Assign monitoring roles to people with appropriate capabilities, objectivity and authority; o Set a starting point or “baseline” of known effective internal control from which ongoing monitoring and separate evaluations can be implemented (for example, “meet the industry safety standards”); o Design and implement monitoring procedures focused on key controls that mitigate risks; and, o Assess and report results, including the evaluation of the severity of any identified deficiencies, and reporting the monitoring results to the appropriate personnel and the board for timely action and follow-up if needed. It is not easy to remediate severe weaknesses in the company’s culture. It takes managerial leadership and significant time and economic resources. From the pure cost-benefit perspective, the company has already suffered significant economic losses as a result of this accident. 4. What roles should the CEO and the Board of Directors play in making this change? The Board of Directors has the responsibility to oversee the company’s management in developing and implementing a turnaround program to change the company’s culture, to ensure that management commits to meet or exceed industry operating standards, to monitor management’s risk-taking behavior, and to set an appropriate compensations scheme that effectively balances motivation to deliver profits and risk-taking behavior. 5. How could this change in culture be measured? One way to measure the change in culture is by conducting an extensive investigation that determines the main issues and maybe benchmark the company against some desired target (e.g., in general “be a responsible company that exceeds industry standards”). First, the company can compile a list of issues, identified after the investigation, and rank them according to their importance (e.g., high, medium and low); following, the company can develop a detailed action plan to remediate every issue, including the time and resources necessary for the remediation; and finally, the company needs to report on the progress of the remediation effort at the appropriate levels of authority and ultimately to the Board of Directors. 13. Toyota’s Recall Problems What this case has to offer This case is an example of a major company handling an ethical crisis that will have an immense impact on the company. Many would argue that it was not handled optimally, so there are many lessons to be learned. The case is about the integrity of a corporation and how that integrity should be defended, protected and managed during a crisis and in normal times. Teaching suggestions A good way to start the case discussion is to enquire if anyone in the class owns or drives a Toyota. Then you can ask if they have been or are concerned about their safety, and why. After that the questions laid out below can be asked. This case is a good one to use to illustrate the stages of a crisis as discussed in the text. Discussion of ethical issues 1. Did Toyota handle its recalls ethically? Why and why not? Toyota was slow to respond to complaints and to develop specific recall programs. In the case of the allegations of stuck gas pedals and/or faulty accelerator linkages, the company did not effectively counter the many harrowing stories of jammed gas pedals so that the prevailing opinion was that the company was guilty or did not have a plan to check into the allegations further. In any event, public opinion surged against Toyota before meaningful response was made. The delay was unethical in the sense that many stakeholders lost confidence and became afraid of driving their Toyota. Shareholders suffered lost value. To the extent that this delay was due to poor or secretive communications practices, it was unethical. On the other hand, the company should not have responded so quickly that they were not ready to deliver on a plan for investigation. That would have been unethical. Actually, to the extent that Toyota did not have a data collection/early warning system, and a plan for rapid and effective investigation with appropriate feedback, their preparations and the resulting delay was unethical. 2. What changes would you recommend to Toyota’s crisis management approach? Why? An effective crisis management approach depends upon a rapid and effective response to control the problem, minimize the impact and begin remediation of damaged reputation. Preplanning is essential (see above) so that early red flags can be quickly reacted to and investigated. If Toyota had known about the existence of the “black boxes”, they could have announced that they would begin an investigation immediately. They could have released results early so that the mounting stories would have been countered rather than let grow in impact. Observers would have seen that they were taking effective action and that the results did not reflect poor Toyota safety practices. Confidence would have been restored. One of the question marks is whether Toyota’s secretive culture resulted in a slow transmission of data to top executives, or whether the top executives were reluctant to react quickly rather than stonewall as was the old recall practice. If any of these was the case, then the governance structure should be changed. 3. Do you think that Mr. Toyoda’s testimony on February 24, 2010 was effective? How might it be improved? Yes, I do. He was contrite, and took the blame, with a potential explanation and a pledge to do better, and to restore the company’s good reputation. This approach was not likely to find favor with Mr. Toyoda’s old-line predecessors, but he did a good job. In the old days, the motto was: “Never complain and never explain.” But that approach doesn’t work anymore – it just makes matters worse. One point of improvement could have been a reference to the black box investigation and its findings. 4. Toyota did not immediately disclose that each car carried an airplane-style “black box” that recorded details on how the car was functioning. Was this timing appropriate? I would argue that the existence of the black box should have been disclosed earlier, but if the data had proven that Toyota was at fault, then the lawsuits might have been stirred up and damming evidence provided. Such evidence would likely have ultimately come out anyway. 5. What possible reasons could account for Toyota’s delay in advising the NHTSA of the problems known on September 29, 2009? Several reasons could account for the delay in reporting: • A belief that the faults were driver-related, not auto-related. • A desire to gather more evidence before reporting unnecessarily • A culture of stonewalling and secrecy • Lack of compelling evidence to report • Misunderstanding of the need for quick compliance – possibly due to the low penalties for not complying • Toyota engineers had included a very difficult-to-ignore warning attached to the winter mats (sold to new car buyers) not to double-stack a winter and a summer mat or the gas pedal would stick, so they may have considered that they had dealt with the problem. Note: The author bought a 2009 Toyota Camry Hybrid in March 2009, and encountered significant difficulty in detaching the warning from the winter mats. • Legal advisers may have counseled a delay in compliance to reduce legal costs. • Incentive schemes may have incorrectly penalized bringing such disclosures forward. 6. Can Toyota recover from these recall problems? If so, how long will that take? What would Toyota have to do to recover fully? Toyota can recover, but only if it can restore its reputation for trustworthiness and safety. Customers who would have bought a Toyota, may have switched to another brand, and will not come back for many years until they buy another vehicle. Toyota may be able to come back with a stronger reputation than before if (1) the evidence that is emerging can be used very effectively, and (2) confidence is restored in the company’s investigative processes, safety-minded culture, and its reputation. This would require an aggressive approach to dealing with the problems. Perhaps such an approach will emerge after the production headaches associated with the Japanese earthquake and nuclear disasters have subsided and production is available for sale. People both inside Toyota and outside have to once again respect Toyota’s integrity and believe that its priorities really are: “First; Safety, Second; Quality, and Third; Volume.” Useful Videos For additional information on the “Toyota’s Recall Problems” case included in Chapter 7 please see: http://www.reuters.com/news/video?videoId=54378733 http://www.msnbc.msn.com/id/36634661/ns/business-autos/ 14. Digoxin Overdose – The Need for Skepticism, Courage, and Persistence What this case has to offer This case is about what is required to prevent and mediate many crises. It describes a tragic crisis that took some time to unfold. If any of the people in the chain of action (and therefore chain of decision making) had done the job expected of them, in terms of the following characteristics or virtues, the baby would be alive today: • Doctor – accuracy, skepticism, due care • Resident – accuracy, skepticism, due care, persistence • Pharmacist – skepticism, persistence, due care, accuracy • Technician – skepticism, persistence, due care • Nurse 1 – skepticism, persistence, courage, due care • Resident on call – competence, accuracy, skepticism, due care • Nurse 2 – skepticism, due care After the original mistake was made, 6 other people had a chance to correct it and failed to do so, although two were quite concerned (Pharmacist, Nurse 1). Prevention and mediation of crises often depends on finding and rectifying problems before they become critical. That in turn depends upon the actions of people with competence, a skeptical mindset that is always questioning actions, motivations and outcomes, as well as the courage to raise concerns and to stick to their guns in the pursuit of the correct answer. It is incumbent on leaders to encourage their people to have and demonstrate these characteristics and mindsets. Moreover, it is incumbent on corporations and other organizations to develop cultures, policies and practices that will prevent such tragedies. Teaching suggestions An interesting way to start the discussion would be to ask which of the people who made decisions had a chance to correct the problem before it became critical. That would lead to the list above. Then the class could be asked which of the people in the chain were most to blame, which would provoke a debate that would show that all those who were competent had a primary responsibility. At this stage the class could be asked why each of the people in the list failed to stop the tragedy, and the list of missing characteristics could be developed. Then, based on this background, the questions at the end of the case could be answered. Discussion of ethical issues 1. What should the individuals involved have done? They should have exercised adequate or due care to ensure the calculations were accurate, and if they weren’t convinced, they should not have done their part of the process until they were, even if this meant going back to the original doctor with a specific request pointing to their correct calculation. Many were partially skeptical, but didn’t discharge their full responsibility, perhaps because of a lack of understanding, or of persistence, or of courage. 2. How can the Hermann Hospital ensure that individuals do what they should? Training sessions, examples – both positive and negative, constant encouragement, a supportive culture, and discipline and punishment where appropriate. 3. Should the doctor, residents, pharmacist and nurses involved in this tragedy be fired? If not, should they be sanctioned, and if so, how? This should provoke a good debate that should expose the following issues: • People make mistakes, so firing is too harsh a punishment in this case unless the individual has a record of mistakes. • The tragedy is too horrific to ignore, so some heads will have to role, but which ones and what will be the impact on others. • Individuals involved will suffer enough, and would make another mistake like this and therefore don’t need to be fired. • Light sanctions, such as suspensions with or without pay, would allow the individuals time to think about their shortcomings and signal to the rest of the hospital about the hospital’s values. • The hospital’s culture and policies were the real culprits because they did not make it mandatory to obtain a definite answer that gave comfort to the questioner. Nor was their reference to a chief resident or doctor-in-charge, in the case of lingering concern. 4. Should such health care failures be made public? I would argue yes, because of the positive impact on the rest of the health workers who would take greater care and exercise greater diligence, and other hospitals would improve their culture and policies so that best practices would improve. Also the public have a right to know about the record of a hospital, if not the individuals, so they can make informed choices when seeking health care. This would contribute to the improvement of health care, even though it would add pressure to the people involved in this decision. I would, however, not disclose to the public their names. This was a mistake, and unless it is repeated the individuals should be protected. 15. The Exxon Valdez What this case has to offer The Exxon Valdez case presents the story of a legendary environmental tragedy. It offers an opportunity to review the multiplicity of problems that often incredibly occur when a crisis hits. In this case, negligence and unpreparedness are evident on shipboard, in Exxon’s HR policies and oversight, in Alyeska the oil spill recovery consortium, by the Coast Guard, and by the government decision makers. If any one of these had been up to their intended task, the disaster could have been avoided or its impact minimized. The case allows examination of the costs of the disaster relative to its prevention or early remediation. The tragedy led to the creation of the Valdez Principles originated by activist environmental groups and which later became the CERES Principles while the CERES group has gone on to do well on a broader activist mandate. Codes and their effectiveness are also reviewed in relation to the prevention and resolution of crises. In addition, whether drunkenness (or drugs) on personal time should be allowed to be cause for keeping an employee from his/her work or instituting substance abuse testing can be discussed. Teaching suggestions/Discussion of ethical issues I would suggest giving a brief introduction to the class discussion that covers the material in the paragraph above. Question 1 is intended to provoke debate on the relative responsibilities involved in the tragedy and to tease out the responsibilities not properly discharged that are called for in question 2. I try to ensure that the class come to the view the Captain (for his lack of supervision) and particularly Exxon (for their lack of action and oversight) were primarily at fault. In particular, the aspects of negligence that should be brought forward are:  Captain – failure to provide adequate supervision on shipboard  Exxon failed to:  act on knowledge of captain’s loss of driver’s license for drunkenness  keep Alyeska in a sufficient state of readiness  have pre-approval for use of dispersant  assess the full risk in the tanker routes chosen  double hull their tankers  Alyeska failed to maintain sufficient readiness and effectiveness  Coast Guard failed to:  staff fully (radar and pilots)  monitor traffic routes  US government failed to:  supervise Coast Guard  invest in workable effective radar  make decisions on dispersant quickly enough Question 3 is next and answers will vary. Initially the reactions by companies asked to sign off the Principles and commit to observing them were based on caution because many feared:  commitment to public release of environmental information prior to an inventory and understanding of the company’s record and exposures  uncertainty about what was meant by sustainable use of natural resources and concern over whether it could be attained  commitment to disclose harm caused, and thus lead to more and higher damage claims  intrusion into the Board of Directors of someone not in the “club”  annual assessment and audit, and a public report, all of which would cost money and possibly create liability Exxon was no exception, and they refused to sign. It should be noted that observance of the Principles without signing off and public disclosure is an option that many companies have followed because the Principles provide a great framework for managing a company’s environmental interface. Others have signed on when they made a risk assessment and got their house in order. 4. Could a better code of conduct have prevented the tragedy? No, not without an effective ethics program involving awareness, training, reinforcement including top management support, sanctions, integration in strategic planning and operating decisions, and other means to ensure observance of the code. 5.If Exxon had known, before the accident, about the captain’s alcohol problem, what actions should have been taken, if any? In fact, Exxon did know and did nothing. Some students will argue that what the captain did on his own time was his business. However, given the serious harm caused to the environment, a stronger argument is that Exxon should have acted to ensure that the public interest was protected even if the captain’s personal rights would have been tampered with. It is interesting to note that Exxon instituted a worldwide policy as a result of the Exxon Valdez disaster whereby staff are randomly but periodically tested for substance abuse. If they fail the test, they are suspended from their job and are assigned to a less exposed position, and must take a remedial program. If they complete the program successfully they may resume their job in seven years. Exxon has retained this policy even though it has been considered unreasonable in some jurisdictions. Exxon should have:  removed the captain, or had an overseer on hand to check on him, on his crew and practices  made sure Alyeska was ready to be deployed  had a crisis management plan that included:  prior government approval for the use of dispersant and other possible contingent activities  risk assessment and pre-planning for problems  considered double hulls for its high risk oil tankers. Another issue that should be considered is the high cost of cleaning up. The fines and clean-up are only part of the total cost that should include lost gross margin on sales not made to angry consumers. In addition, it should be noted that the CEO of Exxon committed a big public relations gaff when he publicly announced the company’s estimate of the total cost, but then declared that it, of course, would be deductible for tax purposes. He did not realize that this implied that the public were going to pay for the Exxon disaster in the amount of the reduced taxes. This did not sit well with many who were already angry. Update/Subsequent events June 1, 2006 “Exxon asked to pay more for Valdez spill”, CNNMoney.com, accessed 6/1/2006. “The Justice Department and the state of Alaska …asked ExxonMobil to pay another $92 million for additional clean-up of shorelines … which still contain oil from the 1989 Exxon Valdez oil spill. The action was taken under a provision of the 1991 settlement, which allowed the government to reopen the agreement in 2006 to consider issues unforeseen at the time of the $900 million damage settlement.” Dec. 22, 2006 Appeals Court reduces damages to $2.5 billion June 25, 2008 Supreme Court vacated the $2.5 billion damages and sent the case back to a lower court for re-determination, and limited punitive damages to the compensatory damages of $507.5 million. Useful Videos, Films & Links “1999: Exxon Valdez, 10 Years Later” CBC 60 Minutes, May 25th 2010 http://www.cbsnews.com/video/watch/?id=6518027n Stephens, Joe (2010) “Lessons from Exxon Valdez spill have gone unheeded” Washington Post, July 14thhttp://www.washingtonpost.com/wp-dyn/content/article/2010/07/13/AR2010071306291.html?wprss=rss_print/asection Vicini, James (2008) “Exxon Valdez $2.5 billion oil spill ruling overturned” Reuters, Jun 26th http://in.reuters.com/article/idINWBT00926720080625 Church, George et. al (1989) “Exxon Valdez: The Big Spill” Time, Apr. 10thhttp://www.time.com/time/magazine/article/0,9171,957429-1,00.html Exxon Valdez Oil Spill Trustee Council update website: http://www.evostc.state.ak.us/ Exxon Valdez oil spill backgrounder website: http://en.wikipedia.org/wiki/Exxon_Valdez_oil_spill 16. The Brent Spar Decommissioning Disaster What this case has to offer The Brent Spar oil storage vessel decommissioning story is one that shows how a company can get into a crisis without expecting it, and can make it worse in a hurry because it doesn’t understand what it’s up against, and how to manage a crisis. Shell UK was dealing with public outrage caused by a very adept Greenpeace team that used the TV to turn public sentiment to its advantage. The outrage spilled over to incite the Germans and French (not the Brits) to riot, damaging Shell stations and causing a boycott that lost at least 50% of one month’s sales. Shell UK was handling a problem that took on global proportions, apparently without input from Shell’s head office in the Netherlands, or from Shell executives in Europe. They forgot that they were in a global marketplace, with stakeholders outside the UK whose support Shell needed. Shell found that they weren’t able to combat Greenpeace’s hold on the media and the public until they created a website on which they put their research for all to read unvarnished and uninterpreted. Also, the solution Shell finally came up with showed moral imagination, but it came too late – it should have come earlier. In the end the Brent Spar became a support for a new pier in a fiord, a use for which it was admirably suited. In the end, as well, Greenpeace admitted they had misled the public with erroneous reports. The case holds many revelations for the class, and we have a good time with it. Teaching suggestions Actions of Shell UK With regard to question 1, I use the case on a surprise basis (no prior reading) if I can, and, using an overhead version of the case, only let the class read up to the date at which I want them to react. Then I get their reactions and we read on up to the next date that I want their reactions. This step-wise progress shows the students what foolish choices were made, how Greenpeace used the media, and how Shell really didn’t try to combat this influence. I have the class read only up to May 5, then to May 19, and finally to June 14th and ask them what they would do next (after each date) if they were the executives in charge of Shell UK. We then read to the next date and assess why their conclusions were wrong or right before asking what their next action would be. If I cannot use surprise, then I ask the class to comment on Shell UK’s actions after May 5, May 29, and June 14th as to what went wrong. They raise the issues I note in the opening section, or I tease them out. Actions of Shell Head Office For a discussion of question 2, I ask the class what they think. Usually they suggest that Head Office insist that Shell UK take advice to consider a worldwide stakeholder view, or transfer the decision making to Head Office. This was, however, counter to the autonomous regional culture that Shell operated under and which resulted in a reluctance to interfere with Shell UK until the full impact of this tragedy was analyzed well after the crisis had passed. Subsequent analysis led to a revision of the Shell approach to handling crises worldwide to build in broader consideration of stakeholders and the lessons learned in this crisis as well as Shell’s crisis in Nigeria. Discussion of ethical issues Greenpeace created outrage This is a favorite tactic of special interest groups, some of which have been known to bend the truth, only to admit it later after the company had responded or the crisis had passed. The public should react with skepticism at all times, but does not, particularly when the special interest group is controlling the TV video news and the company is unable or not ready to respond. Lesson: A company must be able to respond very quickly with a credible explanation/facts to refute unwarranted claims. Once they lose the trust of the marketplace it is very difficult to reclaim it. The degree to which the company and its spokespersons have developed credibility with the media and public will provide a window of time or tolerance for the company to react. But the record must be set straight quickly or the company is going to have to deal with outrage on the part of the public. Some students suggest that the company should meet with Greenpeace. Others will indicate that, if Greenpeace needs a high-profile case to stimulate financial support, then they may not agree to meet, or the meeting will not produce any positive effect. Shell needed a website Only when Shell put their scientific research on a website for all to read uninterpreted by the press did the controversy begin to subside. For effective crisis management it would be wise to have such a mechanism in operation in advance. Moral imagination This is an important issue that the class should be sensitized to. Management should push and probe very hard to make sure they understand what the best options are that moral imagination can develop before the crisis develops, not after. Using moral imagination should be an important part of the decision process. Crisis management This is an excellent case for showing how a company could have vastly reduced the impact of the crisis by early recognition, preplanning, recognition of the need for wide stakeholder consultation and support, and effective information mechanism to greatly reduce the negative impact to the company. Did top Shell UK management really think that they could quickly dispose of the Brent Spar without anyone noticing? Did they have any sense of what the reaction would be in Europe? Why not? Perhaps theirs was not a full stakeholder model of management. Useful Videos, Films & Links “Brent Star Dossier” Shell UK, http://www-static.shell.com/static/gbr/downloads/e_and_p/brent_spar_dossier.pdf • In recognition of the need to change Shell UK’s approach in its operations, the company has created a dossier which provides historical archives of the decommissioning of the Brent Star, press releases and articles published during the disaster. “1995: Shell makes dramatic U-turn” BBC News, June 20th 1995, http://news.bbc.co.uk/onthisday/hi/dates/stories/june/20/newsid_4509000/4509527.stm Rohrer, Finlo (2008) “The right way to do a U-turn” BBC News, April 24thhttp://news.bbc.co.uk/2/hi/uk_news/magazine/7364532.stm 17. Wind River Energy Inc. What this case has to offer This case involves the relatively frequent occurrence of multiple crises happening at more or less the same time. This forces the decision makers to sort out which are the more important and solve those first, and/or get out of the way smaller easier to solve and concentrate on the worst dilemmas. Some of the details are real, and particularly crawling around in a tight pipe on the other side of a door from a watery death is sure to raise emotions in the class as they read and solve the case. In addition, the class will realize the high value of pre-preparation and the development of contingency plans. Teaching suggestions Although role-playing could be effective, I would ask the class to recap the case, and then to consider the following questions, in sequence: • What are the crises that Lynn faces? • What order should the crises be considered in? (i.e. Which are the most serious?) • Why? • What solutions can they offer? • How would they guard against and prevent such crises in the future? Discussion of ethical issues 1. What would you do if you were Lynn? Lynn should establish priorities in order to respond to these crises. Generally, the crises that should be ranked as worst are those that can negatively impact life and health, followed by other impacts including financial. This approach to ranking is likely to match what the media and public prefers, and what will minimize impact on reputation and future lawsuits. This approach suggests that the West Nile virus problem should be ranked first, followed by the need for power in Freeman. The IPO and West Fork crises will require the other problems to be solved first as well. Here the class will demonstrate its ingenuity. Here are some suggestions: • West Nile virus issue – many communities have been spraying a substance deadly only to the virus-carrying mosquitoes into storm drains and stagnant water sources. Why not arrange for the local municipality or the government to spray some of this into the intake pond, until your chief engineer could arrange for a pump to circulate the water? • Freeman’s electricity 1. Ask your manager to check if the local mines could cut back their power usage or turn on their emergency generators. Also could Freeman’s old generators be turned on, or could Freeman be connected and draw power from to Alberta’s electric grid. Any of these will buy time until repairs are made. 2. Ask for the thin chap to take a camera back into the pipe to take digital pictures of the stuck hinge pin and email them to you in Toronto, and to an engineering consulting firm you will name. They and your hydro managers will determine if there are tools that the small man could use to fix the hinge pin situation. A video hook-up could also be used for getting live pictures to consultants on the surface. • Relations with the Mayors and the IPO team • It is best to advise these folk of your problems before they find out from another source. You will retain your reputation for honesty and truthfulness, and may gain reputation in regard to dealing with problems effectively. Ideas to avoid such crises in the future: • Pre-planning • Back-up engineers, consultants, plans for disasters • Emergency phone arrangements • Other suggestions Solution Manual for Business and Professional Ethics for Directors, Executives and Accountants Leonard J. Brooks, Paul Dunn 9781285182223