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Can you explain in 1 minute?

When Enron's Fastow fed his "truth spreadsheet" to the Board highlighting that the "aggregated book value of risk" would materially change Enron's investment grade rating to a BBB- junk bond status, he was rewarded with a bonus. His accounting practices as Chief Loophole Officer had resulted in the rating companies evaluating Enron as BB- or "investment grade". In fact, just weeks before it went bust, Enron had a "triple A" investment rating. Could he have encouraged the Company to adopt more conservative accounting practices? He recounts that he didn't think so. The issue was cultural. There was a long queue behind him of people who wanted his job, and the Company would have simply replaced him.

You see Enron had a very aggressive culture. They used Jack Welch's "Rank and Yank" for performance management - this meant every year they ranked all of their people and fired the bottom 10-15%. It was a brutal process. As a result of this culture anyone who attempted to suggest alternative practices or to act as internal whistleblowers were rebuffed, humiliated, or treated in an intimidating way by the various decision makers. The Enron "whistle blower" who wrote the letter to the Chairman was allegedly under a 90 day period herself, to find a new job in the company after losing her role in her department.

Yank and Rank - Artist Michael Sloan

Artist: Michael Sloan

While this later resulted in stories being fed from internal players direct to the Wall Street Journal, attributing to the Company's downgrade. So too did the "greed" based culture. When the company needed to make a decision on "protecting their rating" or raising more equity, the Directors chose to protect their equity. They had 18 months grace before any major loans were due. The resulting rating downgrade resulted in all debts being called on for payment "now" and led to the Company's rapid insolvency.

To illustrate that the reputation risks associated with cultural risk are not a new concept, NYU's Professor Ingo Walter, linked reputational risk back in 2006. In his research, centred on the financial services industry, he cites reputation risk contributors including:

  • strategic positioning and execution
  • conflicts of interests exploitation;
  • individual professional conduct;
  • compliance and incentive systems;
  • leadership; and
  • the prevailing corporate culture.

To assess for cultural risk Fastow proposes 5 questions to ask your organisation:

  1. Are there examples of culture inconsistent with stated cultural objectives?
  2. Do the Management take the hit when they make a mistake, claim the responsibility and move on with the lessons learned. Or do they make excuses?
  3. Does the Company Board or Leadership team suffer from Group Think? 
  4. Does your company follow the rules or the principles – i.e. does it justify a decision because the rules can allow it? Or because it also respects the principle behind the rule? (See Cartoon)
  5. Does your company make decisions that would be different if they were a private company? 

Fastow's advice follows the Financial Stability Board (FSB) 4 pillars of a strong risk culture:

  1. Tone from the top 
  2. Accountability 
  3. Effective Challenge 
  4. Incentives

The FSB has made it clear in its publications on risk governance, risk appetite and compensation: that looking at each indicator in isolation will ignore the multi-faceted nature of risk culture and reserves the right to "read between the lines".

To address a Company's reputation risks, it is through an understanding of the drivers of Conduct Risk coupled with addressing the 4 pillars of a strong risk culture: tone from the top, accountability, effective challenge and incentives that real change can be gained. Corporate Executives would be served well to remember that "who they are" matters more than "what they sell" in today's reputation economy and if they can't explain themselves in one minute, they need to stop and reassess.

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I appreciate that you are reading my post. Here, at LinkedIn, I write about board related issues - corporate strategy, human capital, reputation risk, technology, corporate governance and risk management trends.

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For more on this topic, check out my other recent LinkedIn Influencer posts on  the Reputation Risk Management agenda:

About Leesa Soulodre: 

Leesa Soulodre is Chief Reputation Risk Officer and Managing Partner of RL Expert Group - a reputation risk management advisory firm and the Asia Associate of the Reputation Institute.

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