HR Management & Compliance, Talent

Q&A: How Competition and a Lack of Transparency Enabled Theranos and Enron Disasters

In part one of this article, we discussed the Enron and Theranos debacles with Scott Young, Managing Director of CultureIQ Solutions. Here, we will conclude that discussion and learn how competitiveness, forced results, and a lack of transparency all played a role in these disasters.

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HR Daily Advisor: In the case of Enron, competitiveness was overly encouraged at the cost of values and balance. We also saw a similar situation at Wells Fargo in which competition led to some very unscrupulous behavior. Was that the case at Theranos? How can organizations encourage a more healthy form of competition?

Young: With all of these firms, there were competitive pressures that eventually enabled deception. In Theranos’s case, the fakery was concentrated—two top people were holding all the cards—and a number of its employees described being uninformed and in denial. But at Wells Fargo and Enron, some employees were in on the fakery, and while some leaders directed the fraud, other leaders said they were unaware.

You’d think in these larger companies, more people would be willing to be ethical and that there would be more checks and balances—but it didn’t happen for Wells and Enron until the businesses were severely damaged.

There are a couple of ways that businesses can encourage healthy competition:

  • Don’t base rewards exclusively on financial outcomes, especially in industries where there are temptations to get outcomes via unethical means.
  • Have a less risky balance of compensation. Too much variable or “at-risk” pay tied to financial performance metrics tempts workers to use whatever possible means to get the biggest performance compensation while also signaling that management only cares about achieving financial goals.
  • Be good at seeking feedback from all directions and acting on it. Get 360-degree feedback on managers, and establish employee feedback mechanisms that give people a chance to speak up and provide good data to leaders about their culture. When you receive negative feedback on transparency and accountability, it’s a red flag that requires actions.
  • Make sure the stories your company tells are honorable. What stories are told and celebrated in your firm, and who are the heroes? If they’re always people who got 300% over a goal in sales, you are missing an opportunity to reward good behavior. An employee who takes some personal risk by speaking up and helps a firm avoid being another Theranos, Wells, or Enron should be celebrated just as much.

HR Daily Advisor: Can you explain how Enron promoted achieving results in creative ways and why that turned out to be a problem?

Young: Enron’s “creativity”—its accounting practices and how it promoted fierce competition among employees—was really just a cover to hide fraud and maximize profits. But its methods backfired because they created a culture of deception, secrecy, and denial. It couldn’t see or admit to its problems, so it couldn’t solve them, and that ultimately led to the company’s undoing—and financial disaster for many of its employees and investors.

HR Daily Advisor: I understand that leadership at Theranos did not tolerate challenging assumptions or questioning decisions, which led to harsh punishments for those who tried. Are such practices wide-sweeping? How can organizations recognize if they have such a problem?

Young: Nonverbal disapproval is a lot more common than harsh punishment. Leaders won’t listen to the employee, or they’ll ask whoever is making the complaint to fix it on his or her own. Or, leaders will question an employee to the point where it sounds like they don’t believe him or her.

Being dismissive is its own form of risk. The way companies can manage this risk is by supporting, and rewarding, employees who speak up when they see decisions, behavior, or practices that are questionable. When managers say they have a culture in which employees can speak up without negative consequences, it’s not enough. It sounds like our only job as a manager is not to be mad when people bring us bad news. You need to encourage, reward, and value when people step up to report a problem—and create a culture of positive consequences.

Simply and sincerely saying “thank you—we need people to do what you did” would be a good start.

HR Daily Advisor: How did transparency play a role in how far Enron and Theranos got before the extent of their issues was outed? Is transparency always good?

Young: A lack of transparency certainly helped the corruption stay alive and extend as far as it did at Enron and Theranos—and the fact that the corruption lasted so long meant that the consequences were much more severe. Is having a culture of transparency always good? I’d say yes, but if you are talking about transparency in every little detail, there are some things that, of course, you can’t always share—talks of a merger, detailed product plans, confidential financial data, etc. But there never would be a business case for having a company culture that doesn’t value transparency.

HR Daily Advisor: What’s the takeaway for an HR manager and/or a business leader?

For a business leader, a big part of the takeaway is that you have to insist on understanding what’s going on in your organization—to know how your successful people are succeeding. That doesn’t mean you have to micromanage it, but you need to insist on information and be aware of how your company is operating.

Everything a business leader needs to do applies to HR leaders, as well. Both need to be very mindful of how to respond when people bring bad news. You need to bite your lip and not show frustration, anger, and disappointment. You should make sure the people who bring information forward are valued and appreciated. Make them understand that what they did is always the right decision on your team.