Managing Corporate Reputation and Risk Developing a Strategic Approach to Corporate Integrity Using Knowledge Management This Page Intentionally Left Blank Managing Corporate Reputation and Risk Developing a Strategic Approach to Corporate Integrity Using Knowledge Management D N Amsterdam Boston Heidelberg London New York Oxford Paris San Diego San Francisco Singapore Sydney Tokyo Butterworth–Heinemann is an imprint of Elsevier. Copyright © , Dale Neef. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Recognizing the importance of preserving what has been written, Elsevier Science prints its books on acid-free paper whenever possible. Library of Congress Cataloging-in-Publication Data Neef, Dale, – Managing corporate reputation and risk / Dale Neef. p. cm. Includes bibliographical references and index. ISBN --- . Corporate image. Corporations—Moral and ethical aspects. Business ethics. Integrity. Risk management. Knowledge management. I. Title. HD..N .–dc British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. The publisher offers special discounts on bulk orders of this book. For information, please contact: Manager of Special Sales Elsevier Science Wheeler Road Burlington, MA Tel: -- Fax: -- For information on all Butterworth–Heinemann publications available, contact our World Wide Web home page at: http://www.bh.com Printed in the United States of America Table of Contents Introduction vii Part One: The Case for Greater Integrity Chapter One: New Ethical Concerns for the Modern Corporation Chapter Two: Making the Business Case for an Integrated Program of Ethics and Knowledge Management Chapter Three: Key Areas of Risk: Where Knowing What is Happening Really Matters Chapter Four: How Have Corporations Responded? Part Two: A Program for Corporate Integrity Chapter Five: Moving Beyond Stage Two Chapter Six: Establishing and Managing an Ethical Framework Chapter Seven: Understanding the Value of Knowledge and Risk Management Chapter Eight: Integrating Ethics, Risk, Standards, and Knowledge Management into an Ethical Framework Chapter Nine: Creating a Culture of Integrity and Knowledge Sharing v vi T C Chapter Ten: Systems That Support Integrated Knowledge and Risk Management Chapter Eleven: Choosing and Implementing Standards About the Author Index Introduction This book is about what a company needs to do to manage its integrity and to avoid making the kind of mistakes (an Environmental Protection Agency [EPA] fine, a product safety disaster, an employ- ment lawsuit, an overseas worker exploitation charge) that can lead to penalties, a loss of share value, and a damaged corporate reputation. Integrity in business has never been more important. In many ways, companies have a lot more to lose today than even years ago, simply because the potential for being caught and exposed—by activists, lawyers, prosecutors, government agencies or the media—is greater than ever before. The penalties are larger—loss of share value, con- sumer boycotts, lawsuits, greater regulation—and more personal, with executives and board members increasingly being held accountable for the actions of the company with heavy personal fines and even impris- onment. The triple combination of personal-incentive–based pay, new levels of empowerment, and a leaner, more aggressive economy means that employees at all levels, as never before, are caught in that tug-of- war between doing what is right and doing what their superiors want and need, in order to achieve unrealistic targets. To avoid these types of disasters, companies need to do more than simply give money away in philanthropic gestures and claim that they are “socially responsi- ble.” They are going to have to start actively managing their risk in a much more effective way. Putting aside some obvious cases of pure malfeasance on the part of corporate executives in recent scandals, the fact is that most vii viii I reputation-damaging incidents happen because company decision makers, corporate officers, or board members simply don’t know what is going on in their own organization. There are hundreds of good examples which demonstrate that if executives or senior managers had only known what was happening, they would have taken preventative action. The fact that they didn’t know provides a compelling case for better knowledge management in the modern company. What do companies need to do in order to avoid making costly and self-destructive mistakes? In this book, we look at the best-practice techniques that companies can use to protect their integrity and to avoid these costly blunders. There are three important areas of focus. First, a company has to actively manage its process for ensuring corporate integrity. This means telling your employees that you expect—that is, require— ethical behavior and then putting together a better process for encour- aging, monitoring, and enforcing that behavior by having employees at all levels of the company participate actively in anticipating and resolving ethical or legal issues. In short, companies need to establish a strong and effective ethical framework. Second, a company has to actively gain a better understanding of what is happening both internal to the company and in the outside world so that it can sense potential problems and react to them in a responsive and ethical way. The good news is that never have we had so much knowledge and information at our fingertips or better tech- niques and systems to help us access, analyze, and act on that knowl- edge. This process is called knowledge management. After all, whether it is a board not knowing that executives are com- pleting off-the-books partnerships with company money or senior management having no idea that operational employees are dumping toxic wastes down local wells, these things are still essentially colossal failures of knowledge management. And as new punitive regulations from the U.S. sentencing guidelines agency and recent legislation such as the Sarbanes-Oxley act demonstrate, the excuse that “we didn’t I ix know” what was happening is no longer valid. Companies are today, more than ever before, expected—again, required—to know about and be responsible for the actions of their employees. Increasingly, a failure to manage company integrity can lead to severe penalties for the company and for executives themselves. In today’s climate, “we didn’t know” is no longer considered an excuse; it is considered to be negligence. What is needed then is to apply many of the same knowledge man- agement techniques and systems that have worked so successfully during the past years in the operational world to a company-wide process for actively managing risk. It isn’t that expensive, and it isn’t even that difficult, but it doesn’t just happen on its own; it’s something that companies need to actively manage. As the more progressive companies can demonstrate, applying these types of knowledge management techniques have many important benefits. Knowledge risk management (KRM) allows a company to anticipate issues, to avoid risks, and to behave more responsively and acceptably. It also applies many of the same tenets of quality man- agement and can be used to improve processes, reduce waste and costs, and increase productivity. In short, using KRM to actively manage a company’s integrity moves a company one step up the evolutionary ladder toward becoming both a more ethical and a more efficient organization. Finally, not only is it important that companies actively manage their integrity, but it is also important that they can demonstrate to the outside world, including investors, activists, and consumers, that they are doing so. For this, a company needs to apply internationally recognized standards and to report their performance against those standards in a clear, accurate, and verifiable way. This can best be achieved using new triple–bottom-line reporting techniques that provide a broader and more accurate view of their organization’s activities—financial, corporate governance, social, and environmental—for shareholders, analysts, pressure groups, and the media. xI These three elements—developing a strong ethical framework, actively pursuing KRM, and reporting on those efforts using triple–bottom-line reporting techniques—are key to managing integrity in the modern corporation. It has never been more easily and efficiently done, and it has never been more important. P O The Case for Greater Integrity This Page Intentionally Left Blank ONE New Ethical Concerns for the Modern Corporation A -month-old child dies from drinking bacteria-laden apple juice after a company ignores advice concerning the product’s safety. A slaughterhouse is found dumping waste, chicken blood, and entrails into one of Mississippi’s main water systems. A children’s safety seat manufacturer fails to reveal to the public dangerous defects in its car seats, cribs, and strollers that kill two babies and injure more than others. Enron collapses, costing employees millions of dollars in pension losses. Merrill Lynch agrees to pay $ million in fines for touting stocks that its own analysts expected to lose money. Hundreds of listed companies are forced to restate their profits, caught red-handed in financial manipulation and deception. Why do these things