Broken Business: Seven Steps to Reform Good Companies Gone Bad

By José R. Hernandez

How to prevent corporate scandals and fix good companies that do wrong

The news media is replete with stories of corporate scandal, corruption and misdeeds. The need for effective crisis management and corporate governance strategies has never been greater. Broken Business explains why corporate scandals happen, what to do when scandals arise in your company, and how to prevent their future occurrence.

Offering real-world anecdotes and solutions, this book details how corporations can mitigate the risk of scandal, reform corporate image and install structures to create a more ethical and profitable company. This insightful resource dispels common misconceptions of corporate misconduct and its causes through fascinating research into human nature, and compelling storytelling that demonstrates fundamental flaws in corporate culture.

Author José Hernandez draws on decades of experience working with high-profile global corporations to present seven essential steps for transforming a company, including building a better culture, more effective compliance systems and re-focusing the strategy. This book allows you to:

• Examine current and highly publicized cases of corporate scandal and their impact on corporate credibility
• Employ practical methods to rehabilitate your corporation’s public image
• Implement managerial frameworks to quickly address cases of misconduct
• Promote a culture of compliance and integrity to encourage good conduct in your corporate environment

At its core, this book is a simple, engaging “how to” guide that offers practical advice on institutionalizing integrity in any organization. Broken Business: Seven Steps to Reform Good Companies Gone Bad is an essential text for leaders seeking a concise review at how things can go wrong, how to deal with scandal fallout and how to ultimately become a better company.

• Language: English
• Publisher: Wiley
• Release date: Dec 10, 2018
• ISBN: 9781119547525

Book preview

Table of Contents

COVER

ABOUT THE AUTHOR

PREFACE

WHY I WROTE THIS BOOK

WHAT THIS BOOK CONTAINS AND HOW TO READ IT

WHO SHOULD READ THIS BOOK

ACKNOWLEDGEMENTS

PART I: INTRODUCTION

THE PROBLEM

PART II: THE TALE OF WIND INTERNATIONAL

THE CRISIS AT WIND

THE STORY OF WIND INTERNATIONAL

TWELVE MONTHS LATER…

ANALYSING THE PROBLEMS AT WIND

WHAT WENT WRONG AT WIND?

SYSTEMIC BUSINESS FAILURES ARE THE ROOT OF PROBLEMS

PART III: THE BIGGER PICTURE

WHY THE SYSTEM FAILS

PRESSURE

POWER

PERSPECTIVE

THE PROBLEM IN THE SYSTEM

A PATH TO REFORM AND CHANGE

WILFUL BLINDNESS AND ITS REMEDY

LEADERSHIP, INTEGRITY AND THE ‘PLAGUE’ ON THE WALL

EMPOWERING INTEGRITY: THE SEVEN STEPS

A NOTE ON REGULATORS AND PROSECUTORS

THE SOLUTION

PART IV: THE STEPS TO ADDRESS A CORPORATE SCANDAL

STEP 1 – UNDERSTAND THE CRISIS

NOW I AM IN CRISIS

THE ILLUSION OF THE ‘PERFECT STORM’

HOW COMPLEX SYSTEMS FAIL

WHEN CRISIS STRIKES: WHAT NOT TO DO

KNOWING WHAT'S MATERIAL

NEVER LET A CRISIS GO TO WASTE

NOTE

STEP 2 – UNDERTAKE AN INDEPENDENT INVESTIGATION

WHO'S IN CHARGE?

COMMUNICATING THE INVESTIGATION

GETTING TO THE FACTS – CORPORATE CSI

EMPOWERING WHISTLE-BLOWERS

CLOSING THE INVESTIGATION

NOTE

STEP 3 – DEFINE A ROADMAP TO RECOVERY AND REMEDIATION

TEARING DOWN WHILE BUILDING UP

AGENTS FOR CHANGE OR TENTACLES FROM THE PAST?

RENEWING LEADERSHIP AND ACCOUNTABILITY

THE CURSE OF THE GOLDEN PARACHUTE

THE GATEKEEPERS: NO MORE SILOS

SELLING A GREEN BANANA

NOTE

STEP 4 – ACHIEVE CRIMINAL AND CIVIL RESOLUTION

A PRIMER ON CORPORATE CRIMINAL LIABILITY

GOING AF TER THE COMPANY OR INDIVIDUALS?

THE EFFECTIVENESS OF CORPORATE RESOLUTIONS QUESTIONED

NOTES

PART V: INSTITUTIONALIZING INTEGRITY AND GOOD CONDUCT

STEP 5 – STRENGTHEN STRUCTURES TO PREVENT, DETECT AND RESPOND TO MISCONDUCT

AN ETHICS AND COMPLIANCE PROGRAMME: WHY YOU NEED ONE

THE HALLMARKS OF A GOOD ETHICS AND COMPLIANCE PROGRAMME

A FOLLOW-UP ON GATEKEEPERS

A NOTE ON INTERNAL AUDITS

I HAVE A PROGRAMME IN PLACE BUT IS IT GOOD ENOUGH?

SUMMING UP – WHY PROGRAMMES MATTER

NOTES

STEP 6 – RESHAPE THE CULTURE

WIND INTERNATIONAL – TWO YEARS LATER (THE INTERVIEW)

WINDS OF CHANGE

TONE FROM THE TOP

A PLATFORM FOR RISING STARS

EMBEDDED ‘SPEAK UP’ CULTURE

THE BIG STICK: ROBUST OVERSIGHT, INVESTIGATIONS AND GOVERNANCE

NEW CULTURE = NEW INCENTIVES

EXPANDED INFLUENCE

JOHN KOTTER'S LEADING CHANGE

ACHIEVING CULTURE 2.0

NOTE

STEP 7 – REFOCUS THE STRATEGY

THE ROAD TO A REFOCUSED STRATEGY

FOCUS ON CORE MARKETS AND LINES OF BUSINESS

EXPAND WITH PURPOSE (OR: INTEGRATE, INTEGRATE, INTEGRATE)

IMPROVE OVERALL GOVERNANCE: SEVEN LESSONS FOR THE BOARD

A FINAL THOUGHT ON THE BOARD

WRAPPING UP THE SEVENTH STEP

A RECALIBRATED SENSE OF LEADERSHIP

PART VI: CONCLUDING THOUGHTS AND LEADERSHIPROADMAP

NOTES

REFERENCES

INDEX

END USER LICENSE AGREEMENT

I recommend this book to all Corporate Directors and Executives. It provides a concise look at how things can go wrong, how to deal with the fallout and how to ultimately become a better company. More importantly, Broken Business provides insights to those who have not had to experience an ethics crisis and therefore hopefully will not have to!

Ian Bourne, former Chairman, SNC-Lavalin Inc.

"The Empowering Integrity process illustrated in Broken Business properly describes the steps a company must take to master the journey from crisis to successful transformation. I got to know Hernandez in 2005 as part of his work for Daimler. I appreciate Hernandez as a person, value his convincing professional work and competence, as well as his understanding of business."

Bodo Uebber, CFO of Daimler AG

José Hernandez' Broken Business: Seven Steps to Reform Good Companies Gone Bad," is a current and compelling treatise on how to prevent, detect and fix corporate mismanagement, the condition precedent to corruption, fraud, waste of shareholder property, reputational harm and costly enforcement action. Infused and instilled throughout this corporate governance failure ‘post mortem,' Hernandez drives home the core lesson for corporate managers that ‘integrity' is the sine qua non of business success and sustainability. Beyond a good product or service, good business strategy and leadership, a strong commitment to integrity is critical in making a company strong and profitable in the long run. Every CEO, board member, CFO, general counsel and business manager should read and embrace Broken Business.' "

Louis J Freeh, Former FBI Director, Former US Federal Judge, Chairman of Freeh Sporkin Sullivan LLP

"Excellent reading: very clear and to the point, lively through real-life examples, and ready to implement with practical recommendations based on deep corporate experiences. Broken Business underlines the importance of culture and tone from the top, and how crises are opportunities to make the company stronger and more valuable for society."

Klaus Patzak, CFO of Bilfinger SE; former Corporate Vice President of Siemens AG

"From a European perspective, Broken Business is an extremely important resource for boards, especially in the context of today's global regulatory environment. It provides invaluable lessons learned about how to uphold your governance duties in the face of a major crisis arising from misconduct, and how to mitigate the risks to your organization. I would recommend it to all corporate leaders, directors, and prospective directors."

Peter Wakkie, former Executive Board member of Royal Ahold NV; Chairman of TomTom NV; Partner, Spinath+Wakkie

"This book brings together key insights from José Hernandez's career working with business leaders to navigate high-profile corporate crises. In Broken Business, Hernandez shows how to identify and address the root causes of such crises, which very often lie in systemic failures of a company's ethical leadership and culture."

Roger Dassen, former Global Vice Chairman of Deloitte; CFO of ASML

"Every current and aspiring business leader should read Broken Business. This foundational work shines a much-needed light on the murky business systems failures that lead to corruption and wrong-doing. It provides business professionals with a practical and clear seven-step-road map to fix the inherent problems within their organizations. Author Hernandez conveys critical insights through compelling stories illustrating how leaders can take action to strengthen their organizations. Broken Business is an easy yet inspirational read. Business leaders who take up Hernandez' challenge and adopt the Empowering Integrity framework will be reshaping their organizations is ways that generate real, sustainable and positive benefits for employees, stakeholders, and society."

Joy Thomas, President and CEO, Chartered Professional Accountants of Canada

BROKEN BUSINESS

SEVEN STEPS TO REFORM GOOD COMPANIES GONE BAD

JOSÉ R. HERNANDEZ, PhD

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This edition is published by special arrangement with Vakmedianet, the Netherlands, copyright © 2018 José Hernandez and John Wiley & Sons, Ltd.

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The right of José R. Hernandez to be identified as the author of this work has been asserted in accordance with law.

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Library of Congress Cataloging-in-Publication Data

Names: Hernandez, Jose R., 1974- author.

Title: Broken business : seven steps to reform good companies gone bad / Jose R. Hernandez.

Description: Hoboken, NJ : Wiley, 2019. | Includes bibliographical references and index. | Identifiers: LCCN 2018035676 (print) | LCCN 2018045110 (ebook) | ISBN 9781119547532 (Adobe PDF) | ISBN 9781119547525 (ePub) | ISBN 9781119547501 | ISBN 9781119547501(hardcover) | ISBN 9781119547532(ePDF) | ISBN 9781119547525(epub)

Subjects: LCSH: Corporate governance. | Corporations—Corrupt practices—Prevention.

Classification: LCC HD2741 (ebook) | LCC HD2741 .H47 2019 (print) | DDC 658.4/06—dc23

LC record available at https://lccn.loc.gov/2018035676

Cover Design: Wiley

I have a separate acknowledgements section. However, I must make special mention of those who stand up for what is right, not just what is convenient.

In my work, I have been honoured to meet courageous people all over the world who speak up about corruption and misconduct, and with good reason. We cannot progress as a society without their voices. All too often, whistle-blowers are ostracized, silenced and pushed out of the way by those with power who are threatened by the truth coming out. A critical tenet of this book is removing the muzzle and the stigma associated with being a whistle-blower.

As such, is dedicated to those who speak up and question business practices that cross the line. These individuals risk a great deal and put their careers in harm’s way. Their voices are heroic. They lead by example and strive for a better world.

To the courageous women and men

Who speak up heroically

When it matters most

Pressing their leaders to do the right thing

Beyond personal agendas

Fighting past the point of fatigue

Meeting threats and retaliation

Their selflessness and integrity inspires

Seldom recognized

Often stigmatized

Their message eventually prevails

Many times too late for them

They are a source of light

Organizations ultimately respond

New leaders turn the tide

Paving the way for the next generation

A transformation may take hold

A decade after the first issue erupted

May this book support your judgements

It is lonely at the top

Leaders must choose words of contrition

Separate from the past

Connect to the future

Taking an illuminated path to rehabilitation

Steering under pressure

Battling through darkness

Themes from the book of Genesis

The sentences are mine

The words come from the few with courage

That inspire

And create a better world

* * *

To my homes: El Salvador, Canada, and The Netherlands

To my family and friends

With thanks to:

Clients that shared their stories

The dynamic and creative writing team of James Geuzebroek and Mark Laurie

Family and friends that provided extensive support

Guidance and support from Shana

The art and input from Mateo and Bianca

The edits by Maria

Brainstorming support from friends

Idea development with Mark

Idea visualization with Bob and Tristan

Diligent commentary from Leon, David, and Rikkert

Prosecutors, regulators, and directors that guard the lines of business

Colleagues that provided unique perspectives

The agile and effective publishing team of Vakmedianet and Wiley

ABOUT THE AUTHOR

José Hernandez is a respected leader, entrepreneur, and professional advisor to international organizations. His practice primarily focuses on supporting global corporations that face high-profile and complex white-collar and regulatory matters.

Hernandez is a strategic advisor bringing a unique approach and perspective to supporting organizations under criminal investigation. He also advises directors and organizations on corporate governance and compliance matters, including the design of strategies, structures, and policies to mitigate risk.

Since 2008, Hernandez has operated independently and is the founder and CEO of Ortus Strategies, a consulting firm with global clients headquartered in Europe and Canada.

Prior to founding Ortus in 2016, Hernandez was a founding partner of FGI Europe, a strategy and crisis management firm that he built with former FBI Director Louis Freeh. He continues to work with Freeh as a senior advisor to Freeh Group International Solutions.

Prior to that, he was a partner with PwC, where he developed his specialty in forensic accounting, governance, and compliance, supporting Fortune 100 corporations facing regulatory investigation and prosecution. He was based in The Netherlands, Cuba, Canada, and the US, specifically Silicon Valley and Washington, D.C. His client assignments took him to North America, Latin America, Europe, Africa, and Asia.

Over the past two decades, Hernandez has worked on landmark cases that have individually resulted in fines, penalties, and restitution exceeding $1 billion.

His US experience has made him particularly valuable to European-headquartered companies unfamiliar with, and struggling to navigate, the sophisticated and aggressive approach taken by US regulators and prosecutors targeting corporate misconduct.

Hernandez is a Canadian Chartered Professional Accountant (Ontario), U.S. Certified Public Accountant (Delaware), and Chartered Financial Analyst by training. Hernandez holds both Bachelor of Mathematics and Masters of Accounting degrees from the University of Waterloo (Canada). He has a PhD in Economic and Business Administration from VU University in Amsterdam, where he is a guest faculty member. His doctoral dissertation was titled ‘Principles, Processes, and Practices of Fraud Prevention’.

He served on the Advisory Council of the School of Accounting and Finance at the University of Waterloo. He currently serves on Canada's Advisory Committee on Money Laundering and Terrorist Financing, representing CPA Canada.

Hernandez was born in El Salvador and is a national of Canada and The Netherlands. He currently divides his time between Europe and Canada with his wife and two children.

PREFACE

Why do good companies go bad? Why do corporate scandals happen so often? Is corruption and misconduct in business inevitable? And, on a more pragmatic level, what can business leaders do about it? What can they do to save their companies when scandal strikes or, better yet, what can they do to avoid scandal in the first place?

These are the questions that drive this book.

The answers are based on both academic research and years of experience working with venerable, global companies that were nearly taken down by crises of their own making, only to restore themselves and emerge stronger and better than ever. The information contained in these pages is of interest to anyone in a leadership position in their workplace; or anyone with an interest in management, business ethics, or the impact of corporate misconduct on society and what can be done about it.

With every passing year, it seems we are barraged with more and more stories of corporate scandals. Recent examples include a global carmaker rigging their vehicles to cheat on emissions tests, a major bank illegally foisting accounts and credit cards on millions of customers without their knowledge or consent, and innumerable stories about sexual misconduct by powerful entitled leaders. And these are just a few high-profile cases – the tip of the iceberg for anyone who routinely reads the business news.

Sadly, it was the cover-up in these cases by powerful but misguided leaders that caused even more problems than whatever they were trying to hide.

The reality is that it is next to impossible to eliminate misconduct and corruption; human nature, the rewards for cheating, and the relative impunity of corporate superstars in a free market system make it so. The first essential step for leaders is to accept the inevitability of misconduct (note: this is not the same as being OK with it); the subsequent steps are all about calibrating your leadership approach with this reality in mind, and building an organization that knows how to identify misconduct and address it head on before it leads to crisis.

Misconduct is inevitable. Scandal is not.

As Warren Buffett once warned his managers:

Right now, somebody in your organization or department is almost certainly doing something they shouldn't be doing – something that would bring your organization into disrepute if word got out. (Buffett 2006)

Do you have the culture and systems in place to bring the misconduct into the light so it can be dealt with it before it is too late? If your company is like most, the answer is probably not always.

The solution to addressing a crisis and institutionalizing integrity and good conduct is a seven-step process called Empowering Integrity. Empowering Integrity does not mean demanding perfection in how employees behave. It does not mean trying to scare employees into compliance and complicity. Empowering Integrity knows that problems will occur and provides a roadmap for dealing with them before they do costly damage to a company's reputation and bottom line in the form of massive regulatory fines, lost revenues, and compensatory damages. It does so while rebuilding the organization into one where transparency, openness, and, most importantly, integrity drive all decision-making. The result is a better company that is both more strategic and more profitable in the long run.

Does this sound idealistic and too good to be true?

It isn't. I know this because I have seen it work first-hand over the past two decades of professional work in this field.

WHY I WROTE THIS BOOK

I developed Empowering Integrity from many years of witnessing and remediating misconduct and corruption.

Growing up in El Salvador, one of the most troubled countries on Earth both then and now, I watched an entire industry fall victim to it. In 1987, my father was a general manager of a seafood business. The business was severely affected by strikes and got caught up in senseless violence between rival political factions. Three prominent politically-connected individuals approached the company with offers to ‘fix’ the problems, each asking for cash payments of $150 000 or more. Bribes were common then, as they are now. My father's company was eventually driven into bankruptcy by this extortion. Thousands of people lost their jobs. This was not the only company where this was happening. The business and seafood industry never recovered.

Soon after, my family emigrated to Canada, where I eventually launched my career, initially as a forensic accountant for PwC and eventually as a corporate consultant who helps companies in crisis. When an organization has been caught up in issues of corporate misconduct; when it is the subject of investigations by regulators or law enforcement; when it finds itself embroiled in a crisis that seriously threatens its reputation, future profits, and, in many cases, its future existence, one of the first calls they make is to a company like mine. My clients have tended to be well-established corporate brands that operate all over the world. And despite their sophistication and proud histories they have been caught up in some of the largest fraud, bribery, and money laundering cases on record – situations where multiple prosecutors and regulators from various countries become involved. (These investigations are usually led by authorities from the US, and we will explore why that is in subsequent pages.)

My colleagues and I work through what went wrong, advise on extensive efforts to clean up the problems and put in place measures to prevent them from happening again. It's rewarding work, but the primary credit and kudos belong to the leaders of these companies. These dedicated women and men – who are often new leadership brought in to replace those who were in charge while the misbehaviour ballooned out of control – dedicate innumerable hours over many years to bring their companies from crisis to transformation and restore their brands to previous levels of trust and respectability. I am honoured to be a part of the process, serving as guide and advisor to these venerable companies.

I was told by a client that I ought to codify the process, give it a name, and put it into a book.

So here it is: Empowering Integrity. And this book, titled Broken Business, covers the seven steps of Empowering Integrity and addresses the underlying issues at individual organizations and in the system of business in general.

WHAT THIS BOOK CONTAINS AND HOW TO READ IT

This book comprises two broad sections: the Problem and the Solution.

The Problem of why and how good companies go bad is laid out over the course of the first three parts. The centrepiece is a case study about a company called Wind International that does everything wrong and finds itself in a crisis. The case study is fictitious, but everything in the story is based on real-life examples I have seen time and time again.

The mistakes that companies make can be myriad and extremely complex, but certain themes invariably emerge, so describing them via a case study is a useful way to summarize things in a simple and dramatic