PMAN 638 Case Analysis 1: Why Didnt We Know?

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HBR CASE STUDY AND COMMENTARY
How should
Galvatrens
strengthen its
system for
uncovering
misconduct—and
what roles should
the board and
management play?
Why Didn’t We Know?
by Ralph Hasson
•
Four commentators offer
expert advice.
Reprint R0704A
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
A whistle-blower’s lawsuit alerts Galvatrens to deep flaws in its system
for uncovering misconduct. How should management and the board
respond?
HBR CASE STUDY
Why Didn’t We Know?
COPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
by Ralph Hasson
It was 9:30 in the evening of what had been a
very long Friday when the phone rang in Chip
Brownlee’s home study. On the line was Arch
Carter, the lead director of Galvatrens, the
Houston-based consumer products company
that Chip had led as chairman and CEO for the
past ten years.
“I just got your voice mail,” Arch said. “The
parts about a lawsuit and accusations that we
manipulated our sales numbers certainly got
my attention. What’s going on?”
“At this point, I don’t know much,” Chip responded, “but I wanted to give you a heads-up.
A former divisional sales manager has ?led a
lawsuit against the company, charging he was
wrongfully terminated because he tried to report an illegal scheme to in?ate sales.”
Chip had received a copy of the lawsuit that
afternoon. As he’d read through the complaint,
he’d gotten a whole new perspective on the
multiple departures that had rocked Sales dur-
ing the past four weeks. The plaintiff was Mike
Fields, who had left Galvatrens three weeks earlier. He claimed that he’d come across a plan
devised by Greg Wilson, another divisional sales
manager. According to Mike, Greg had proposed shipping goods to a few of his bigger customers, billing them, and booking the sales—
but with a side agreement that they wouldn’t
have to take ownership, could return the shipments at any time, and would get a 2% discount
on any goods they accepted and paid for in the
following quarter. The purpose of the channelstuf?ng scheme was to meet quarterly sales targets and trigger bonuses, Mike contended.
“So what’s the wrongful termination charge
about?” Arch asked.
“Mike says he found out about the scheme by
accident and, since he didn’t know who else
might be involved, contacted Harry about it,”
Chip said. In the lawsuit, Mike claimed that he
had left a con?dential voice mail for Harry Mart,
HBR’s cases, which are ?ctional, present common managerial dilemmas
and offer concrete solutions from experts.
harvard business review • april 2007
page 1
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? •• •HBR C ASE S TUDY
Galvatrens’s COO, asking to speak with him
about a matter of the utmost urgency involving
possible misconduct by a company manager. He
said Harry never followed up with him and instead referred the matter to Mike’s boss, Terry
Samples. Until a week ago, when he left
abruptly to take another job, Terry had been
the senior vice president of sales.
“Mike alleges that Terry subsequently told
him his performance was not up to snuff and
that he’d have to accept a demotion and a transfer to Indianapolis if he wanted to stay with the
company,” Chip continued. “Mike says the demotion and transfer were in retaliation for exposing the channel-stuf?ng scheme—and Terry
knew that Mike, as a divorced father with joint
custody of his kids, couldn’t leave town.”
“Yikes! So Terry could have been involved
in this?”
“We don’t know at this point,” Chip said. “At
the very least, it looks like he found out from
Mike about Greg’s plan. We don’t even know
yet whether Greg followed through on it.”
“What about this Greg guy?” Arch asked.
“He resigned about a month ago. He took
a job in California. When Terry left so suddenly last week, I was beginning to wonder
if the turmoil in Sales was more than unhappy coincidence.”
“Oh, man,” Arch muttered.
“That’s not all,” Chip added. “Mike also says
our channels for con?dential reporting of
misconduct don’t work very well. He claims
that, as a company, we made it easier for
Terry to retaliate.”
“How could that be? I thought we had everything in place,” Arch said. “Well, as I’m sure
you’ll agree, the board should know about this.
Can you set something up?”
“I’m already working on it.”
Changing the Guard
Ralph Hasson ([email protected])
is a fellow at the University of Texas at
Austin’s IC2 Institute, a research organization devoted to the acceleration of
wealth and job creation, where he focuses on corporate governance. He has
helped a number of major U.S. corporations design systems for uncovering
misconduct and managing conflict. He
is a coauthor of Controlling the Costs of
Conflict (Jossey-Bass, 1998).
harvard business review • april 2007
The board, employees, and Wall Street had
rejoiced when Chip agreed to become the
chairman and CEO of Galvatrens in January
1997. He had previously led Paloreq, a pharmaceutical and medical devices company, during a period of tremendous growth, building
businesses in medical devices and diagnostics
and broadening the ?rm’s pharmaceutical offerings through shrewd acquisitions. He had
attracted a team of stellar managers and scientists through the same sorts of “people” initiatives he would launch at Galvatrens.
The year before Galvatrens’s board hired
Chip, it had reached an impasse with longtime
CEO Walter Nikels over strategy and management style. Walter, who had taken the helm
when Galvatrens was a midsize ?rm, had run it
in an authoritarian, hierarchical fashion. As
the company grew larger and more complex,
the board urged him to delegate more and inject some fresh blood into the executive team,
but he resisted. As a result, top-performing employees were defecting to the competition, and
Galvatrens recruiters were having a hard time
getting MBA students to sign up for interviews.
The word was out that Galvatrens was not the
place to be. With earnings deteriorating, the directors ?nally decided they had to act. Walter
announced his plans to retire at the end of
1996, and Chip stepped right in.
Chip had lived up to his reputation. Expanding beyond Galvatrens’s core businesses in
home health care and personal beauty, he took
the company into nutritional and wellness
products, medical diagnostics and devices, and
products for infants and the home. Revenues,
earnings, and the share price rose steadily.
So that Chip could focus on developing strategy and building relationships with customers
and business partners, he had sought a COO
who would concentrate on the company’s dayto-day operations. Harry Mart, whom Chip
had lured away from a competitor, had ?t the
bill nicely. Once on board, he modernized the
management of Galvatrens’s supply chain,
greatly improved manufacturing ef?ciency,
and increased capacity.
In addition to dramatically expanding Galvatrens’s product portfolio, Chip worked hard
to change the company’s culture. Early in his
tenure, he announced an ambitious initiative
to make Galvatrens an organization that excelled in listening to and learning from its employees and its customers. He combined the
initiative with a diversity campaign in an effort
to achieve preferred-employer status in the
consumer products industry. He replaced the
general counsel, a member of the old guard,
with Sydney Baydown. She had been Chip’s
general counsel at Paloreq, where she had
played a central role in a number of people initiatives that had enhanced the company’s ability to attract and retain talent.
At her urging, Galvatrens took steps to upgrade its procedures for uncovering misconduct and solving con?icts in the workplace—
page 2
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? •• •HBR C ASE S TUDY
“Mike says our channels
for confidential reporting
of misconduct don’t work
very well. He claims that,
as a company, we made it
easier for Terry to
retaliate.”
harvard business review • april 2007
reforms Syd had championed at Paloreq. Chip
gave Syd the go-ahead to have a consulting
?rm review the existing system. Following the
consultants’ advice, Galvatrens instituted an
open-door policy for raising workplace concerns or problems, formalizing rules and practices that some operations had adopted on
their own. While the policy encouraged employees to go to their immediate supervisors
whenever possible, it emphasized that they
could approach any manager at any level for
assistance. The policy included a speci?c ban
on retaliation.
The company also added a toll-free, 24hour hotline for reporting violations of the
code of conduct, added an ethics of?cer to its
ranks, and launched an ethics awareness campaign. The ethics of?cer, who was responsible
for ethics training and enforcement of the
code of conduct, reported to the general
counsel. After the passage of the SarbanesOxley Act, the company mandated that the
ethics of?cer inform the board’s audit committee of any allegations of ?nancial wrongdoing or other possible code violations that
involved company executives.
Two of the consultants’ recommendations,
however, were not adopted: proposals that the
company should hire an ombudsman and that
the board should make a director or a committee of directors responsible for ethics oversight.
Focus groups and interviews had revealed that
many employees would not feel comfortable
raising concerns through formal management
channels. Having a truly impartial ombudsman who reported to the CEO and had access
to the board would make employees much
more likely to come forward. The ombudsman
would allow people to report issues anonymously or con?dentially and could offer a
range of informal means for helping them resolve issues, the consultants said.
Dale Willis, the senior vice president of HR
at the time and a holdover from the Walter
Nikels era, had opposed both of these recommendations. Anything that operated outside
management’s chain of command, he argued, might let serious problems slip through
the cracks and was therefore a recipe for disaster. With some reservations, Chip agreed
not to create the ombudsman role.
Chip also acceded to Dale’s request to delay
training related to the new open-door policy
until HR had completed existing programs.
Then other priorities arose, and the training
initiative was forgotten.
Getting the Lowdown
On Monday, three days after Mike’s lawsuit
had been ?led, Chip opened a conference call
with the eight directors he’d been able to
round up.
“Okay, I think we’re all here—or at least everyone we could get on such short notice,”
Chip said. “The negotiations for the Aletha
Products acquisition are at a critical stage, and
Harry couldn’t break away,” he said, referring
to Galvatrens’s COO. “And Dan Richardson is
on a trek in the Himalayas.”
When Chip asked Syd to brief the group, she
said, “We’ve con?rmed that Greg Wilson
pitched a channel-stuf?ng scheme to two of his
biggest customers. However, we don’t know at
this point whether he got any further than that.
“We’ve also determined that Mike’s performance declined considerably in his last ten
months here,” she continued. “Records show
that his team missed sales targets by a growing
amount during that period.” Syd noted that
Mike had been unreachable during business
hours with increasing frequency and had
missed important meetings. Prior to that period, though, he had been a solid producer. In
an initial phone conversation with Galvatrens’s
outside counsel, Mike’s lawyer hadn’t disputed
the change in performance but claimed it was
due to a nasty custody ?ght between Mike and
his ex-wife. Terry’s reaction to the slide in performance had been brutal, contributing to
Mike’s emotional stress, the lawyer said.
“Given this information, we intend to ?le a
response to Mike’s lawsuit, denying his charges
of wrongful termination,” Syd said. “We’re also
having an independent investigation of the
channel-stuf?ng allegations. Chip has asked
me to be the liaison between the outside investigators and the board. We’ll try to delay discovery in the lawsuit to give the investigators
time to do their job.”
“This is Sheila,” interjected Sheila Cruse, the
chair of the board’s audit committee and an accounting professor at Valhalla University.
“What should the board’s role in the investigation be? To whom should the investigators report? Do we need a special committee for
something like this?”
“We do need to sort that out,” replied Arch,
the lead director, “but ?rst let’s focus on how
page 3
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? •• •HBR C ASE S TUDY
we’re going to respond to the lawsuit. How
does battling with a guy who attempted to
raise some serious allegations square with our
mission and values? I see giant reputational
risks on every front here. If we don’t handle
this well, we could hurt ourselves with employees, customers, and shareholders.”
“Arch, this is Syd. We do have to respond
to the lawsuit. Denying Mike’s claims while
we also investigate and negotiate is just
standard procedure.”
The other directors acknowledged that
while Arch had raised some good points, it still
made sense to proceed as Syd had outlined.
They agreed to take up the issue again in six
weeks at a scheduled board meeting. By then,
they should have more facts and would be in a
better position to weigh their options.
Preventing a Repeat
“How does battling with
a guy who attempted to
raise some serious
allegations square with
our mission and values? I
see giant reputational
risks on every front here.”
harvard business review • april 2007
The board met six weeks later at the Houstonian. Located on sprawling, heavily wooded
grounds in the center of Houston, the hotel and
spa complex was a popular choice for off-site
Galvatrens meetings. Arch and Chip stood outside the conference room as the directors ?led
in, complaining about Houston’s legendary humidity. Dan Richardson, a software entrepreneur and a friend of Chip’s from the Paloreq
days, was back from his trek in the Himalayas;
he was sunburned and noticeably leaner. But
Harry, the COO, was absent again—this time
because of continuing problems at factories
damaged by hurricanes Katrina and Rita, the
ongoing merger talks, and a labor dispute.
The independent investigators had reported
to the board the previous week. They found
that the customers had simply ignored Greg
Wilson’s channel-stuf?ng proposal. It appeared
that Terry had forced Greg out when he
learned about the plan, but he’d allowed Greg
to resign and hadn’t told anyone else about the
scheme. Greg had not responded when the investigators tried to contact him. Terry’s only
reply had been a terse note, delivered through
his lawyer, saying that Terry was reviewing
their questions and would respond appropriately. The investigators had also con?rmed the
decline in Mike’s performance, although
Terry’s role was still murky. What was clear
was that Mike had done his best to raise the
alarm about Greg’s scheme. The judge had allowed discovery to begin, and the company
had initiated settlement discussions with Mike.
“For the life of me, I still do not understand
why we didn’t hear about all this sooner and
why no one except Mike Fields came forward,”
said Dan, who served on the board’s corporate
governance committee. “It’s disappointing
enough that Terry didn’t report this, but I can’t
help wondering if others in Sales knew about
it, no matter what the report says. And why
didn’t we hear about it from our customers? It
doesn’t seem like we have a handle on these
kinds of problems.”
Syd pointed out that extensive research over
the years had demonstrated that, in many
cases, employees who see misconduct in their
organizations don’t come forward. “And in our
own defense, Dan, we’ve come a long way
since Chip took over,” she added.
“That may be the case,” Sheila said, “but
clearly the good things we’ve already put in
place—the open-door policy and the code of
conduct—aren’t working. Harry didn’t take
the original complaint seriously and just
passed the buck. Nothing came in through
the hotline. And no one contacted the ethics
of?cer or HR.”
“Is it realistic to expect Harry to deal with
something like this?” Arch asked. “After all,
he’s the guy responsible for making the trains
run on time—it’s not like he’s lying around
drinking cocktails on the beach.”
Sheila shook her head in disagreement. “I
know we don’t expect Harry to personally investigate and resolve complaints that come directly to him, but we do expect him to follow
up and refer a problem like this one to the ethics of?cer. He didn’t do that.”
“A lot of this is at my doorstep,” Chip said.
“I’ve kept Harry’s plate full. He realizes now
that he should’ve given this more attention.
I’ve asked Syd to think about how we can ensure that something like this doesn’t fall
through the cracks again.”
Arch and Sheila exchanged skeptical looks.
Later, when they were walking to their cars,
they agreed to meet for breakfast the next
morning at the Four Seasons.
Taking Charge
When Arch walked into the hotel restaurant
at 7 AM, the summer sunlight was pouring
into the beautiful room, which was elegantly
set with white linens and ?owers. It was
Arch’s favorite place for breakfast meetings.
He spotted Sheila standing at the buffet ta-
page 4
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? •• •HBR C ASE S TUDY
“After we put all these
procedures in place, why
did only one guy come
forward—and he ends
up suing us?”
harvard business review • april 2007
ble, admiring the glistening berries. He
joined her.
After they sat down at their table and the
waiter poured them coffee, they compared reactions to the meeting the day before.
“I’m thinking that we need a board retreat
to deal with this situation,” Arch said. “We’ve
got a lot to chew on. We should look at ourselves ?rst. I don’t feel we’ve met our oversight
responsibilities. We were not ready for something like this.”
Sheila wholeheartedly agreed. “Once we got
into this thing, it seemed clear to me that we as
a board didn’t know what our role was supposed to be,” she said. “And I certainly took it
for granted that Chip and Syd had established
the channels for anonymous reporting that the
audit committee—and the full board, for that
matter—needs in order to provide oversight.”
“That’s on us,” Arch said. “It’s got to show
up in our self-evaluation this year. And I think
we have to take several aspects of this into account in evaluating Chip and deciding what
we should ask of him in the future. After we
put all these procedures in place, why did
only one guy come forward—and he ends up
suing us? Why did Chip keep Dale Willis on so
long and let him get in the way of some of the
very changes we brought Chip in to make?
When the new employee survey comes out,
I’ll be curious to see if we’re really improving
morale—especially in Sales, where we’ve had
so much turnover.”
Sheila hesitated. “I agree with you about
Chip, but the person who worries me the most
is Harry. I know you’re a big fan of his, but I am
troubled by his failure to respond appropriately when Mike Fields called him. Harry may
be technically strong, but he has got to be able
to take care of people, and he’s just no good at
it. I think we have to look at the consequences
for him as well as new expectations for Chip.”
“I’m thinking we’ll need a full day,” Arch
suggested.
Sheila nodded. “Let’s get the ball rolling.”
How should Galvatrens strengthen its
system for uncovering misconduct—and
what roles should the board and
management play? • Four commentators offer
expert advice.
See Case Commentary
page 5
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? • HBR C ASE S TUDY
Case Commentary
by Stephen R. Hardis
How should Galvatrens strengthen its system for
uncovering misconduct—and what roles should the
board and management play?
The board should
monitor how
management issues are
handled, but it should
not get directly involved.
page 6
This case study highlights a major danger. Because boards of directors are under so much
regulatory and legal pressure today, they can
lose sight of the need for an appropriate
boundary between their responsibilities and
those of management. A board crosses this
boundary when it acts as if it has to solve a
problem itself rather than hold management
accountable for the solution.
Boards should demand that senior managers have plans for complying with rules like
those imposed by Sarbanes-Oxley; for meeting
moral obligations such as fostering ethical behavior and creating a diverse workplace; and
for achieving business objectives that are critical to success in highly competitive markets—
new-product development, productivity improvements, global expansion, and so on. But
if a board is going to hold management accountable, the board should not take on the
creation or the execution of such policies.
Chip Brownlee, the CEO of Galvatrens, and
Syd Baydown, the general counsel, are clearly
committed to reform and best business practices and have explicitly accepted responsibility for dealing with the situation at hand.
There is no evidence of a pervasive problem
that would raise fundamental questions
about their values or the company’s ethical
culture. The channel-stuf?ng scheme was limited in scope and never got off the ground.
Greg Wilson, its architect, and his boss, Terry
Samples, who failed to disclose the scheme,
are no longer with the company. Although
Harry Mart, the COO, and Terry, the departed
senior vice president of sales, didn’t behave
appropriately, their actions appear to have
been isolated management lapses rather than
patterns of bad behavior.
The independent directors should not interfere in management issues that the CEO
clearly has taken responsibility for addressing. Instead, the board should evaluate how
the CEO and the general counsel have dealt
with the breakdown of policies regarding
whistle-blower complaints and how they have
handled Mike Fields’s lawsuit.
Management should have two main priorities. First, the CEO must make sure that the
COO never again ignores a complaint of this
type. Chip has to tell Harry: “Next time there’s a
whistle-blower event, you must follow the procedures outlined by corporate policy, regardless
of what your workload is like. You must set the
proper example for the organization.” Second,
the senior managers need to decide how they
should deal with the lawsuit ?led by Mike, who
is a genuine whistle-blower. Whether or not
Terry was justi?ed in punishing Mike for his decline in performance, Mike will probably have
to be given some sort of compensation, because
the whole affair was handled so badly. But
again, these are management issues. The board
should monitor how they are handled, but it
should not get directly involved.
The independent directors’ concerns about
the COO are understandable. Today, a company cannot have any senior executive who is
not fully committed to ethical practices, even if
he generates a great deal of shareholder value.
The consequences of improper behavior can
be catastrophic. However, by calling for an allday retreat without consulting the CEO, lead
director Arch Carter has crossed the line between his responsibilities and management’s.
An all-day retreat is an extraordinary event—
especially if the outside directors are the only
participants. It risks causing employees and
other stakeholders to wonder whether the
CEO has the board’s con?dence.
Instead of holding the retreat, the directors
should privately tell Chip, “We want to be assured that Harry will abide by our code of conduct in the future, and we want to know what
you are going to do if he doesn’t.” The directors
should also make it clear that they will support
the CEO’s actions to reinforce compliance with
ethical practices, no matter what effect this
may have on corporate pro?ts.
Stephen R. Hardis is the nonexecutive chairman of
Marsh & McLennan, a former chairman and chief executive of the Eaton Corporation in Cleveland, Ohio, and a
board member of several major corporations.
harvard business review • april 2007
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? • HBR C ASE S TUDY
Case Commentary
by Hal Shear
How should Galvatrens strengthen its system for
uncovering misconduct—and what roles should the
board and management play?
Galvatrens’s board of
directors—not
management—should be
the ultimate authority
that oversees ethics.
harvard business review • april 2007
Galvatrens’s board of directors—not
management—should be the ultimate authority that oversees ethics. Toward that end,
the board should move aggressively to make
three things clear to everyone at the company:
(1) ethics matter, (2) every employee and manager is expected to comply with the company’s
code of conduct, and (3) the board is in charge
of ethics oversight. Providing oversight is one
of a corporate board’s primary duties, along
with providing strategic guidance and recruiting, evaluating, and compensating the CEO.
How Galvatrens’s board should oversee ethics was not spelled out clearly enough. Either a
special committee for ethics or the audit committee should have unambiguous authority.
Galvatrens’s ethics of?cer should report directly to the chairperson of that committee. Although the ethics of?cer is an employee of the
company, the committee chairperson and a
member of management (normally the CFO or
the general counsel) should jointly hire the
ethics of?cer, assess his performance, and determine his compensation. In addition, the
anonymous hotline function should report directly to the committee to assure employees
who know of wrongdoing that they have nothing to fear if they come forward and that the
problems they disclose will be addressed.
Galvatrens should consider joining the
growing number of companies that are outsourcing their hotlines to services like Syrus
Global’s Listen Up, Global Compliance’s AlertLine, and Ceridian Ethics Hotline. Such services have responders who are trained to ?lter
issues that need board-level attention from
those that belong in management’s bailiwick.
A service can also provide the board with a regular, comprehensive report that summarizes
the information submitted to the hotline while
preserving employee anonymity.
Now let’s turn to Mike Fields. The whistleblowing actions he took need to be valued, not
demeaned. Accordingly, the board should make
it clear to management that it wants Mike to be
rewarded for coming forward. Perhaps he could
be offered the option of rejoining the company,
with reduced hours and compensation until his
personal problems are resolved.
Even if Galvatrens reaches a settlement with
Mike, the company should press ahead with the
independent investigation of the channelstuf?ng scheme. A thorough investigation will
ensure that the full dimensions of the problem
are known, identify any ?aws in the ?rm’s procedures for uncovering misconduct, and ensure
that control systems are in place and in use.
Under no circumstances, however, should the
general counsel or one of her subordinates be
the point person for the investigation. The inherent con?icts of interest are just too great.
The board should oversee the investigation.
Under the Sarbanes-Oxley Act and U.S. stock exchange listing standards, boards can hire outside
counsel or advisers to lead such investigations
without management’s approval.
Clearly, Chip Brownlee, Harry Mart, and Terry
Samples dropped the ball. Chip should not have
allowed Dale Willis, the head of HR, to stall the
training initiative; a program for teaching managers and employees how to apply the company’s policies for raising workplace concerns
should be carried out as soon as possible. Harry
was at fault for not immediately ensuring that
the tip about the channel-stuf?ng scheme was
handled appropriately. And Terry should have informed Chip of the scheme and of Mike’s role in
exposing it—even if Mike deserved punishment
for inadequate performance.
While some may blame the board for not playing a stronger and more active role in oversight,
the collective actions of Chip, Harry, and Terry
were clearly failures in execution. Moving forward,
the board should communicate to senior managers that it considers an active, comprehensive ethics program to be a priority—and that their execution in this area will affect their bonuses.
Hal Shear ([email protected]) is the managing
director of Board Assets, a firm that provides governance
expertise to boards and CEOs in the United States, Europe, the Middle East, and Latin America; he is based in
Annapolis, Maryland. Shear is also a professor of management and corporate governance at Hult International
Business School in Cambridge, Massachusetts.
page 7
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? • HBR C ASE S TUDY
Case Commentary
by Mary Rowe
How should Galvatrens strengthen its system for
uncovering misconduct—and what roles should the
board and management play?
An ombudsman would
help bring to light any
concerns about unethical
or illegal behavior while
maintaining
confidentiality.
page 8
How can the managers of an organization
learn about serious problems? In many ways,
but no one way will work by itself. That’s because people are afraid to come forward to report unacceptable behavior, for a number of
different reasons.
Mainly, they fear losing relationships inside and outside the company. In addition,
they hesitate to report wrongdoing if they
lack conclusive proof—people hate the “his
word against mine” scenario. They worry
that nothing will be done (especially if there
is no conclusive proof). And even if there is a
no-retaliation policy, people fear retaliation.
At a time when bullying is common, most
believe that an organization can at best prevent overt retaliation by managers. They do
not believe it can prevent covert retaliation:
a weak reference, a so-so performance
review, slashed tires, shunning or even injury
by coworkers, or an apparently legal layoff.
Most managers and employees lack the skills
to handle ethical problems that arise at work
and have no idea how to report or discuss unacceptable behavior. So an organization needs
several paths for bringing information to the
surface, ranging from formal compliance processes to informal coaching sessions and help
with problem resolution.
The most important channel for bringing
problems out into the open is line management. Galvatrens did well when it brought in
an ethical CEO and established a code of conduct. However, it also needed the CEO and senior managers to talk regularly and openly
with people throughout the company about
integrity and to insist on training all employees so they know the code and the various options for resolving serious issues.
Competent line managers, as well as ethics
of?cers and HR staff, usually ?eld lots of concerns and deal well with many issues. (Hotlines,
by contrast, generally receive few calls.) But these
people are often not seen as safe con?dants—
ultimately, they must share information about
those who come to them. This is why Galvatrens needs an ombudsperson who follows the
standards of practice developed by the International Ombudsman Association (posted at
www.ombudsassociation.org) and reports to
the board of directors or to the CEO, with access
to the board. That individual would be designated as an independent, neutral, con?dential,
and informal point of contact for all employees
and managers. She would help bring any concerns to light—especially anonymous concerns
about unethical or illegal behavior—while
maintaining con?dentiality.
Ombudsmen who adhere to the IOA standards do not accept notice for the organization.
(This means that people who talk with them
about suspected wrongdoing are not in any way
“registering” complaints. If a visitor to the ombuds of?ce is willing to make the organization
aware of an apparent problem, that person can
be referred to the appropriate manager or presented with other options.) Nor do ombudsmen
investigate formally. Instead, they serve as steppingstones for people who need to discuss their options for coming forward in a safe fashion or
anonymously. Ombudsmen keep statistics (but
no case records) about concerns that come in.
They hold frequent discussions with managers
about new concerns, exceptional problems, and
new and old tensions, patterns, and trends.
Had Galvatrens hired an ombudsperson,
she might have helped Mike Fields make an
effective presentation to the COO. She might
have helped the exhausted COO understand
that he could not ignore Mike. And she might
have helped Mike deal with his decline in performance by referring him to an employee assistance program. She would have had easy
access to the audit committee, the ethics of?ce, the general counsel, HR, and the CEO,
and could have helped Mike get to any of
them if other channels failed.
Ombudsmen are no substitute for line
management or compliance of?ces. They
are checks and balances, fail-safes, backups
and supports, problem solvers, and ?nders
of options—for employees, line managers,
compliance of?cers, or even the board.
Mary Rowe has been an ombudsperson for the
Massachusetts Institute of Technology in Cambridge for many years.
harvard business review • april 2007
This document is authorized for use only by James Taylor in Project Communications Mgt (2152) taught by UMUC Faculty, at College of Saint Scholastica from January 2015 to June 2015.
For the exclusive use of J. Taylor, 2015.
Why Didn’t We Know? • HBR C ASE S TUDY
Case Commentary
by Jackson W. Robinson
How should Galvatrens strengthen its system for
uncovering misconduct—and what roles should the
board and management play?
If the company does
nothing to change the
perception that Mike was
terminated for whistleblowing, why would
anyone else who spotted
wrongdoing try to
expose it?
harvard business review • april 2007
Before our ?rm invests in a company, we consider
its governance, because we have found a correlation between governance and shareholder returns. If we learned that a former employee had
accused the company of forcing him out for blowing the whistle on a scheme to in?ate revenues,
that would be a huge red ?ag for us.
The ?rst thing that struck me about the
Galvatrens story was the lack of a way for
whistle-blowers to communicate directly with
independent directors. I know ?rsthand the
importance of having such a mechanism in
place for all stakeholders. Before I became the
nonexecutive chairman of Spartech—while I
was a director—I received an anonymous letter
from someone who appeared to be an employee, accusing an executive of a serious con?ict of interest. This person contacted me because he feared retribution if he noti?ed
someone in management. That communication led me to call a special meeting of the independent directors and then a session of the
full board to talk about the accusation and
how we should go about addressing it. In the
course of our investigation, we discovered
other issues, which resulted in a clari?cation
of the company’s disclosure policies. The executive eventually left Spartech.
Another thing that surprised me about the
Galvatrens case study was that the COO, Harry
Mart, didn’t participate in the board discussions about the lawsuit. Questionable or illegal
schemes to boost revenue and issues that affect employee morale are critically important.
They concern the operation of the company,
which is Harry’s responsibility. If he isn’t making time for these kinds of issues, maybe he’s
not the right guy for the job. I don’t accept
Chip Brownlee’s excuses for him—that he has
had an exceptionally heavy workload. We’re
told that one reason the COO gave the complaint short shrift is that he was out trying to
acquire another company. Chip and Harry
should spend more time on ?xing what they’ve
got before they do another deal.
I also have questions about the CEO. It
sounds as though Chip prefers to focus on stra-
tegic, big-picture issues and, as a result, wasn’t
paying enough attention to administrative aspects of the business. When Chip allowed the
HR guy to stonewall critical parts of the initiative to surface and resolve ethical issues, something was wrong. It should never have reached
the point of litigation.
Especially given Chip’s and Harry’s performance, holding a special board meeting is de?nitely the right thing to do. There should ?rst be
an executive session of the independent directors to ensure that all of them are fully apprised
of the situation. That should be followed by a
session with the CEO and possibly other executives that focuses on management’s plans for
?xing the system. When the board awards the
next round of executive bonuses, it should take
into account the shortcomings that the lawsuit
exposed and the CEO’s and COO’s progress in
remedying them.
Finally, Galvatrens should try to reach a reasonable out-of-court settlement with Mike
Fields. I strongly agree with Arch Carter, the
lead director, who thought that the company’s
values and concerns about its reputation should
heavily in?uence its response to the lawsuit.
The company could offer Mike his old job or
one equivalent to it. I doubt he would want to
return, but the offer would still send a powerful
message to employees, all of whom probably
think he was terminated because he blew the
whistle. If the company does nothing to change
that perception, why would anyone else who
spotted possible wrongdoing try to expose it?
Jackson W. Robinson ([email protected])
is the founder and president of Winslow Management, a
Boston-based investment management firm that specializes in “green” companies. He is also the nonexecutive
chairman of Spartech, a manufacturer of plastics and engineered plastic products based in Clayton, Missouri.
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