Can you explain in one 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. He was later charged with money laundering, fraud, and conspiracy, despite the company's board having signed off every transaction.

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.

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 assess for cultural risk Fastow proposed to the audience of the Corporate Governance Board Asia and Straits Interactive "Financials hidden in Plain Sight" conference, that you should ask your organization these 5 questions:

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 illustrate that the reputation risks associated with cultural risk are not a new concept, NYU's Professor Ingo Walter, linked reputational risk back ten years ago. 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.

Columbia University’s Shivaram Rajgopal's research has found that “a slippery slope of small but repeated increases in unethical behavior eventually leads to a hardened attitude whereby employees rationalize such behavior by telling themselves, ‘everyone else in our industry is doing the same thing."

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.

I loved one of the key takeouts of the recent Ethical Corp conference on Conduct Risk - "Tone from the top, mood in the middle and belief at the bottom".

#bigidea If you can't explain yourself in one minute, you need to stop and reassess or as Enron's Fastow says "if you can't say it in a tweet"...

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If you are interested in using the RepTrak model to benchmark your reputation or in developing your reputation risk management, digital, communications or responsible investment strategies, do connect with us at RL Expert Group.

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

• Financials hidden in plain site - Ask "Why?"
• 5 steps to take if your supply chain is morally corrupt
• Getting boards into reputation risk management
• Carmakers python - a matter of outrage and trust
• Social License to Operate Risks Matter in Mining
• Facts Everyone Should Know about Child Labor
• Reputation Risk in Banking
• Addressing McDonald's $39B Reputation Risk Challenge
• Challenges for CxO's with APAC's top 10 Risks
• Reinventing Risk for an Asian Century
• New weapon of choice for complex global supply chains?
• 5 steps for effective due diligence in Asia

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.

As a serial en/intrepreneur, Leesa has worked for 20 years on the cutting edge of strategy, communications, technology, cybersecurity and risk consulting. She has advised more than 400+ multinationals and their start-ups in 19 sectors across Europe, Asia Pacific and the Americas. She has led companies with turnovers from $4M to $14B USD into new markets and has shared the exhilaration of one IPO, numerous exits and the hard knocks of lessons learned.