Tag Archives: risk_management

On My Honor as a Salesperson. A New Look at Why Sales Ethics Matter

Which risk poses the greatest threat to a company’s market value – Pandemics and natural disasters? Terrorism? Product defects? Patent infringement? Theft of intellectual property? Lack of moral boundaries?

If you answered anything but the last choice, think again. The decimation of market value at Tyco, Worldcom, and Enron – three of the most prominent ethical meltdowns of our time – illustrates what can occur when a company lacks ethical footing. According to Public Citizen’s Congress Watch, the cumulative decline in market capitalization resulting from fraud at these three companies was $136 billion.

The financial impact of Covid-19 on the global stock market may never be fully known. But one thing stands out: unlike most risks, companies have ultimate control over their moral conduct.

Many corporate scandals are hatched in the executive suite and metastasize into the organization. The sales operation is a fecund spot for seeding schemes because it is directly connected with the most watched measurement a company maintains and shares: revenue.

Sales is also the linchpin for the trust between a company and its customers. For example, the Wells Fargo consumer credit card scandal was the consequence of stock-price bonus incentives granted to then-CEO John Stumpf and a cadre of senior executives. To enrich themselves, they usurped customer trust and exploited employees by encumbering them with onerous performance quotas, and followed through by browbeating them into hitting targets that would be attractive to investment analysts. The rationale was that when thresholds were met, analysts would make buy recommendations for Wells Fargo stock, elevating its price. The scheme worked for a while before the business media uncovered the story. In the end, Stumpf was fired over the scandal and his bonuses clawed back or terminated.

Bad ethics can take root elsewhere in the hierarchy. When governance and audit controls are ineffective, they can easily spread, infecting employees, suppliers, channel partners, and customers. In 1998, ethical violations at Prudential Insurance Company’s sales organization became so pervasive that the company’s management eventually estimated its liability from the pending class-action lawsuit at $2 billion. Among the voluminous courtroom testimony from the case was this statement from a Prudential sales rep: “Your judgment gets clouded out in the field when you are pressured to sell, sell, sell.” More than two decades later, sales reps face the same difficulty.

How can harm from unethical behavior be prevented? First, accept that no company is immune from facing ethical dilemmas, and second, understand that there are no guarantees that ethical decisions will somehow prevail. This is especially true for companies proclaiming themselves “customer-focused” or “customer-centric.”

Companies must purposefully and actively reduce the opportunities for unethical behavior to enter an organization. Taking key steps such as developing and communicating a corporate code of conduct, modeling ethical behavior in the C-Suite, implementing strong governance and accountability, and making it safe for employees to speak up without fear of retaliation are vital. Importantly, companies must take prompt and decisive action when incidents are reported.

Still, when it comes to acknowledging the possibility of malfeasance in their organization, many senior executives are dismissive. I often hear, “that type of thing could never happen here,” quickly followed by “we don’t hire those kinds of people,” as if “those kinds of people” are easy to spot in the interview. In fact, in companies large and small in any industry, the potential for making unethical choices always exists. If the risks aren’t acknowledged, understood, and managed, stakeholder harm becomes not only probable, but certain.

One “sales-driven” company I worked for felt immune to ethical risks, and their hubris cost them more than $1 million from a scam that began with one rogue sales employee, “Travis Doe.” Travis was a reseller account manager. He was tall, charismatic, confident. He was good at golf. At sales meetings, Travis could always be found in the center of a group of colleagues, sharing a bawdy new joke, or regaling them with something useful he learned over his long career in computer sales.

Travis’s compensation plan earned him a comfortable six-figure income. But he figured out a way to augment that. Travis began his scheme with a transaction my employer made routine: he established a new reseller account. In this case, Travis gave this one a bogus name, bogus address, and bogus line-of-business. Bogus everything. He even anointed himself CEO – a move that came back to haunt him.

The cleverness of Travis’s scheme came from the fact that resellers received 40% discounts for all IT hardware. When customers and prospects sent requests for quotes or placed orders, Travis circumvented them to his bogus company. In this way, Travis pocketed a healthy margin on every order his bogus company processed. There’s more. In addition to that revenue stream, my employer also paid Travis commission on his “reseller’s” sales because, of course, the bogus company was in Travis’s portfolio.

It took an alert order administrator who spotted a part number anomaly to unravel Travis’s scheme. When she called the “reseller” to explain the problem, she was told, “Our president, Travis Doe, will call you back.” The order administrator reported Travis, and he was quietly fired about a week later.

Travis’s scheme created only losers. A characteristic common to all ethical breakdowns. If Travis’s immediate boss knew about his dishonesty, why didn’t he stop him? If he didn’t know, what excuse could he offer for being ignorant about a scam happening in his own office? You know it’s a bad day when any answer you provide isn’t a good one.

In their desire to move on, many executives at the company looked no further than blaming Travis. “You’re always going to have a ‘bad apple,’ or two,” senior managers somberly told me. A convenient rationalization, but very misleading. Other people, from the CEO down, were culpable. Sales Administration allowed account managers to establish reseller accounts without any oversight. Internal audit didn’t see a glaring opportunity for fraud in the order entry process. Contracts administration had no vetting rigor beyond “can you fog a mirror?” Flush with sales orders, the company blithely looked askance despite ongoing grumbling from staff that large dollar orders were routinely being processed through a “reseller” whose qualifications were murky, at best.

This incident happened before social media platforms became ubiquitous. The total direct cost from Travis’s scheme totaled more than $1 million. But that’s without adding the incalculable cost of broken morale and corroded trust. The company issued no press releases or public explanations. No trade journal carried the story. The cost of this scam got paved flatter than a pancake into company’s Income Statement.

Any discussion of ethics involves drawing boundaries. But drawing boundaries for sales ethics is much easier said than done:

“I’ll sell an early version of my software that isn’t fully tested, but I won’t sell anything that I know doesn’t work.”

“I won’t bring up the fact that I’m missing a key feature, but I won’t lie about its absence.”

“At the end of the quarter, I will commit resources I don’t control so I can win the sale, but I won’t promise my prospective customer anything I know cannot be delivered.”

“I won’t overcharge anyone, but I won’t sell at the lowest possible price, either.”

“I’ll look out for my client’s best interests but only if doing so doesn’t jeopardize my business.”

As author David Quammen writes in Wild Thoughts From Wild Places, “Not every crisp line represents a triumph of ethical clarity.” An individual’s ethical interpretations are rarely constant. Rather, they’re a combination of of a person’s current emotions, situation, values, experience, logic and personality. What makes a practice ethical or not can be difficult to define.

This is why evaluating what’s ethical, what’s the right thing to do, or how to get the right thing done requires having conversations about dilemmas. Unfortunately, that idea is heretic in many sales cultures today, where perceiving things as black or white is often considered a badge of honor. “Never lie!” and “A half-truth is the same as a lie,” were among the opinions readers posted when I asked about resolving ethical dilemmas on LinkedIn sales forum. The problem is, judging actions as “right” and “wrong” discourages conversations about ethics in the first place. Most situations business development professionals encounter are not that clear.

Mitigating ethical risk is a vexing challenge for organizations – particularly those with global operations – because ethical standards must first be defined, documented, communicated and followed. In addition, companies must remember that their employees don’t enter the workplace a tabula rasa. Corporate expectations for ethical conduct will always be interpreted through an individual’s awareness of his or her own values.  Even then, we can only be protected when people have the motivation and resolve to act accordingly.

Companies should embrace ethical dilemmas by fostering a culture for open, candid discussion about them. That means  encouraging salespeople and marketing personnel to identify issues, confront them, and take action before they spiral out of control.

Malfeasance thrives in the eye of the perfect storm 1) high financial incentives for fraud, 2) lax audit controls and governance, and 3) non-integrated processes. We need a tocsin to sound in the boardroom and executive suite. Ethical lapses can destroy the best business plans, corporate and personal reputations, and brand integrity. There are too many opportunistic Travises in the world, and too much value at risk, to ignore the warning signs

Three Reasons Sales Forecasts Don’t Match Results

“Our sales results never match what’s forecast!” As the saying goes, “if I received a dollar every time I heard this complaint, I’d be contentedly fly fishing in a remote river right now, untethered from the grid.”

Inflated expectations? First, we need to understand what match means in the context of forecasting. If match means equals – as some people believe – we only need one reason: because it’s a forecast. Trying to get sales forecasts to hit actual revenue bang-on is a fool’s errand.

And accuracy might not be as valuable as you think. If I have a customer who reliably places an order for 100 units every month, I can forecast that amount, and – assuming the order is received – my forecast will be 100% accurate. Strange as it sounds, a lot of purchasing is just that way: steady, predictable, consistent.  What is the value of that forecast to my company? Minimal, because they already know it’s coming and they have planned production, personnel, and materials accordingly.

Accurate as it is, there’s little value in my forecast because there’s no intelligence behind it, and little possibility of variability. If you and I are standing in the middle of a nascent hurricane, would there be value to you if I said, “over the next 24 hours, we’re going to experience heavy rain.”? I’d be accurate as all get out, but my statement wouldn’t be particularly valuable. Yet, companies encourage salespeople and their managers to indulge in similar forecast gaming by penalizing them for “inaccurate” forecasts, and rewarding them for playing things safe, and predicting revenue only when it’s solidly assured. This discourages probabilistic thinking and situational awareness – two essential competencies for salespeople today. And vital for planners.

On the other hand, if match means in the ballpark, then companies need to specify what that means in terms of variance, because an acceptable variance for one company might not be acceptable for another. And acceptable variance might change for a given company, depending on market conditions and other forces.

In sales, there are three reasons for forecast variances (defined as the delta between expected results and actual, usually in terms of revenue or unit volume):

  1. Sales forecasts are projections dependent on human decisions, which are exceedingly difficult to predict. That’s true with just one decision maker. And when there are multiple decision makers – for example, with buyer committees or additional levels of approval – forecast complexity skyrockets, often defying intuition and mathematical prediction.
  2. [Stuff] happens – though most sales managers are loathe to admit it. Across a broad spectrum of situations, unanticipated events occur with such frequency that there is vernacular for them: Black Swans. In forecasting, salespeople and their managers seldom allow for them, and they include such things as supply chain interruptions, buyouts, executive defections, sudden strategy changes, and reallocation of project funding.  These are frequently catastrophic deal-killing events, and they are out of the salesperson’s control. Every forecast must consider these possibilities and more, and account for them.
  3. Senior management injects biases. Sales managers commonly demand that their reps carry “healthy” revenue pipelines, and they stigmatize their reps as “low performers” if they don’t project revenue that’s congruent with quota. The result: forecast candor is systemically discouraged, while forecast inflation gets rewarded with a pat on the back.

Sales VP’s often tell me that forecast variances result from sales reps who are “overly-optimistic.” That’s often partly to blame. Optimism can cloud situational awareness, which creates volatility – the bane of CFO’s and production planners. But there are many other risks that come into play, and it’s incumbent on managers to know what they are.

My next article will cover what makes a sales forecast high quality.

Six Strategies for Managing Revenue Risk

When you boil off the ancillary stuff that business developers do, four distinct objects remain:

1. Capture: Acquire new customers
2. Maintain: Keep current customers happy
3. Grow: Encourage customers to increase spending with your company
4. Reclaim: Win back former customers

No mere coincidence that the word customer appears in each one. This indicates the basic element has been revealed. Time to stop boiling.

The problem is that the slew of activities involved in augmenting the Income Statement’s top line have obscured these fundamental objectives. For revenue generation, organizations now employ specialists for direct selling, indirect selling, measuring, forecasting, dashboarding, best-practicing, comparing, spreadsheeting, analyzing, planning, content developing, press releasing, training, storytelling, elevator pitching, and social-media-ing! How did this happen? Discuss . . .

Driven to distraction.
“The sales models for many large companies have become more complex and less efficient, putting pressure on profit margins,” a Bain & Company survey explained. Using financial data between 2003 and 2011, Bain compared the income statements of about 200 US healthcare, technology, and financial services companies. “More than half of these companies had increasing sales and marketing expenses as a percentage of revenues over the period, or they failed to demonstrate the scale benefits that one would expect from their growing size.”

Sales pundits offer a reason for this by proclaiming that customers have suddenly become “more demanding than ever.” That’s an illusion designed to induce panic, sell services, or both. Customers are not more demanding. They have demands that are new and different, which throws vendors for a loop. Bain attributed the increased cost percentage to four emerging buying trends:

1. Customer needs becoming more sophisticated, evidenced by faster revenue growth in vertical industry solutions over general enterprise systems.

2. Customers defining value as derived from outcomes or results, rather than in simply receiving the lowest price.

3. Customers becoming more experienced conducting disciplined, competitive bid processes.

4. Customers becoming more wary about risks of incurring high switching costs.

These trends complicate almost every activity between trading partners. More intricate, collaborative processes for buyers drive congruent challenges for sellers. And for both, increased transaction costs, and greater risks. For B2B vendors, longer sales cycles and less predictable outcomes have become the new normal. Not everyone is upset. These problems represent red, billable meat for strategy consulting companies, which predictably promise “solutions” by positing new, box-intensive revenue frameworks.

Here’s one from PwC: The Sales, Channels & Distribution Diagnostics Framework. Despite the impenetrable title, multiple layers, lots of arrows pointing left-to-right and top-to-bottom, and odd categories under the Sales Technology Solutions stack (CRM Solutions/ Sales Portals/ Channel Integration Solutions/ MIS/ Sales Dashboards), it’s a useful visualization that takes a spaghetti bowl of cross-departmental projects, and organizes them into a concise, linear arrangement.

It’s easy to believe that adopting a more complex selling framework offers salvation from revenue calamity. But without knowing a company’s current situation, it’s hard to know whether that’s true. Regardless which selling model or framework your company uses or chooses to implement, expect to encounter a unique collection of risks. Some familiar, some brand-spanking new. For mitigation, consider one or more of these risk strategies:

1. Accept. Many executives regard risk as something to get rid of. But every business strategy involves risk acceptance. The challenge is knowing which are appropriate. For example, any company unable to accept the risk that a sales opportunity might fail is not market-ready. So for commercial organizations, the possibility of losing a deal is an appropriate risk to accept. From there, the question becomes how much capacity the company has for failed opportunities.

Examples of risk acceptance:
• “We expect that [X%] of our pipeline leads will not result in a sale.”
• “We’re going to monitor trends X, Y, and Z. But for now, we’re not mitigating their risks.”
• “We have budgeted [X%] of gross sales for Bad Debt Allowance.”

2. Reduce. This is the most common approach to revenue risk. After all, when it comes to risk, shouldn’t less be better? Maybe. Yet, some companies want the very risks that other companies willingly chuck over the fence. In fact, entire companies have been built on this idea. Who can’t think of an entrepreneur or two that has created a business by providing an effective solution for the difficult or hard-to-serve customer?

Examples of risk reduction:

• “We are tightening our lead-scoring requirements before handing opportunities to Sales.”
• “We are increasing our sales pipeline multiplier.”
• “We are conducting background checks on all of our new hires.”

3. Eliminate. Some risks can be so catastrophic – bad ethics, for example – that they exceed a company’s capacity to bear them. But eliminating a risk is rare, because it means crushing it to zero probability. When getting rid of a risk is the objective, often the best that can be achieved is making it a very, very low possibility.

Examples of risk elimination:

• “No orders will be shipped without payments clearing in advance.”
• “Moving forward, we’re discontinuing all channel sales and adopting a direct model.”
• “Our CRM system will not advance an opportunity to the next stage until we know [X.]”

4. Share.
Some risks are too great for a single company to sustain, but they can become feasible when shared between two or more entities. This often occurs with co-development agreements between trading partners, or when projects are underwritten by other investors. Risk sharing occurs on the operational level, too. When a company cannot afford a salaried sales rep in a territory, the arrangement might become possible when base pay is lowered, and commission percentages are increased.

Examples of risk sharing:

• “We are engineering this new energy technology with a consortium of trading partners who will have exclusive rights if we are successful.”
• “Our reseller contract provides protected territories to our exclusive channel partners.”
• “Our suppliers have revenue incentives if we meet our target sales volumes.”

5. Transfer. This strategy is increasing, because companies have discovered rapid growth is possible through operating with few employees and scant physical assets. New business models are emerging where risks have been offloaded, and shifted to different entities in the value chain. Recently, one – AirBnB – has even become profitable!

Examples of risk transfer:

• “We are outsourcing our software development to a third-party company.”
• “Sales quotas are going up.”
• “All of our sales representatives are independent and work on full commission.”

6. Pool. As the name suggests, risk pooling is used for combining a large amount of similar risks into a single group. The rationale for risk pooling is that positive and negative spikes in variability tend to offset one another, thereby diminishing the impact, and lowering costs. Risk pooling is often used in supply chain applications where central warehouses might be used to consolidate inventories from satellite facilities, decreasing the investment in safety stock.

Examples of risk pooling:

• “We’re providing our reps a team incentive bonus if the territory meets its revenue target.”
• “Our strategy is to provide a horizontal software solution.”
• “To make quota, every rep must maintain no fewer than [X] qualified opportunities at any time.”

“The purpose of business is to create a customer,” Peter Drucker said. In a complex world, I find the simplicity refreshing. But all around Drucker’s straightforward idea swirls a constellation of risks. Don’t ignore them. Accept the right ones, and use this arsenal of choices for dealing with those that are consequential.

Is the Voice of Risk Being Heard?

“If only HP knew how much HP knows, we would be three times more productive,” Hewlett-Packard CEO Lew Platt said.

Had Mr. Platt been talking about his sales organization, he would have pumped up the multiple. Sales teams possess a trove of valuable commercial knowledge. It’s not unusual to find reps who are fluent in finance, marketing, strategy, product engineering and customer support. Some have lived or studied abroad. Some are multi-lingual. Add street smarts about customer behavior, and you’ve got formidable brainpower.

Good for customers, but a mixed bag for employers. Knowledge and risk awareness go hand-in-hand. That can threaten mangers, especially when assigning individual quotas and sales targets. A bit less knowledge makes team members more compliant. Naivete makes management’s fuzzy planning numerology and “stretch goals” easier to swallow. “Team! Get out there and nail your quota!” Woe to the salesperson who tells her boss, “I have a 70% chance of making my number.” In sales culture, determinism is revered while probabilistic thinking gets ravaged.

More! Faster! Better! In this make-your-number-no-matter-what environment, the voices of risk get stifled. Problems don’t surface. Issues remain under wraps. Objections aren’t discussed. “We need to keep meetings short and use our time efficiently,” senior sales executives tell me. “Besides, we aren’t interested in dealing with stuff we can’t change.” Yes . . . But . . . There are significant hard costs when management cannot assess vulnerabilities, let alone, even know what they are.

More than ever, organizations need to be intelligent about uncertainty and risk. Something that former Wells Fargo CEO John Stumpf didn’t appreciate before he landed in a hot seat in front of Senator Elizabeth Warren, who eviscerated him with questions about his company’s widespread abuses. Stumpf got so flummoxed, he could hardly speak. Senator Warren provided most of the answers, too.

In fact, Stumpf’s management team brutally crushed the voices of risk as a way to insulate themselves from what was happening in the field. Using a cudgel called U5, management silenced internal dissent, enabling Wells to implement practices that exploited its customers and employees. U5, a federal form, was intended to prevent financial services employees who commit fraud and other violations from hopping from firm to firm and repeating their transgressions. But Wells Fargo’s management warped U5’s beneficial purpose to intimidate sales employees into submitting to their heinous demands.

When slapped onto an employment record, U5 carries serious consequences. To hiring managers, it means “don’t hire this candidate.” To employees, it means “Move to a Caribbean island and open a sunglasses stand because you’re not working in financial services. Not now. Not later. Not ever.” U5 made it possible for Wells Fargo’s Management to deliver an ominous message to its staff: if you have the temerity to speak out, blow the whistle, complain, resist, or express unhappiness or unwillingness, we will ruin you. And they meant every word.

We will never know with certainty which statements got silenced, but here are a few possibilities:

“These goals are impossible.”

“My customers don’t like our policies.”

“I’m uncomfortable doing this. It’s unethical.”

“The stress here is burning me out and making me sick.”

“No. This is wrong.”

The voice of risk, U5’d. A well-known verb in the bank’s HR Department, I am sure. With U5 and the repressive sales culture at Wells Fargo, untold millions of similar comments never reached the vocal chords – and keyboards – of its employees. A tiny few seeped out. Just not enough to awaken regulators and Wells Fargo’s board of directors from their slumber. It took an outsider’s report – an investigative article in the LA Times – to goad anyone into action. If you want to crush the voice of risk, here’s your model!

Voicing risk, pushing back, calling out red flags, blowing the whistle – use any terms you want. Wells Fargo used the threat of severe punishment to systematically turn off every communication management didn’t want to hear. An extreme case, for sure, but far from isolated. Where there’s disdain for knowing the truth, a company’s sales culture will reveal it:

“Sell what we’ve got!”

“I don’t want to hear how you aren’t going to make your number, I want to hear how you are!”

“Don’t give me problems. Give me solutions!”

“Stop making excuses!”

“Quit whining!”

One of the most effective ways to shut down the voice of risk is to brand an employee “not a team player,” or “doesn’t believe in the company’s potential.” It’s not U5, but punitively, it might be the next best thing. Try getting promoted or landing a better sales territory with those tidbits embellishing your personnel record. Management’s message: “if you want to stay here, do as we say, and don’t rock the boat.”

“But . . . nobody wants a department full of Chicken Littles, either!” Fair point. There are clear strategic advantages to being picky about the information one accepts before making a decision. Managers must be granted the flexibility to determine what’s useful and valuable, and what to eschew. After all, in sales and selling, there are no universally recognized standards for framing the truth. Look at any B2B sales organization, and you’ll see different managers using different dashboards, and no two turning the same dials and knobs. Vive la difference!

Yet, there’s a distinction between healthy selectivity and willful ignorance. Sales culture should never be an accomplice to the latter, yet the problem is epidemic. The annals of corporate failures are littered with companies that subdued the voices of risk, and created horribly skewed versions of reality. “Employees are our greatest asset! Amazing that none of them are doubters or naysayers!”

Make sure the voices of risk are not silenced at your company. That begins with the board. In an article, Culture: The One Element Most Critical for the Board’s Management of Risk , Jay Taylor, CEO of EagleNext Advisors, recommends six questions to ask:

• Is the CEO active in creating the culture for the organization? Is he or she modeling the right behaviors?

• Is there appropriate tone at the top, both during and outside of board meetings?

• During strategy, product, and investment discussions, is there transparency around business assumptions, openness to respectful but challenging views, and identification of emerging risks to the business model beyond the immediate planning horizon?

• Is there a willingness to bring forward bad news? Is there an understanding that failure may occur, but the business cannot grow and prosper without taking smart risks?

• Has the board established clear expectations for timely identification and handling of risk, particularly those around business goals and objectives? Is there clear risk ownership?

• Not everything should be filtered through the CEO. Are other executives and risk owners present at board meetings and allowed to take questions directly?

The answers to these questions directly influence the culture within the sales force. They influence the strategy, tactics, compensation, and measurements under which business development teams operate. When salespeople believe that the board views risk management, governance and compliance as a crucial responsibility, an ethical environment can be established within the sales organization. The converse is also true: when it’s evident the board doesn’t want to be bothered with protecting the company’s stakeholders, [stuff] will happen. We saw how that works at Wells Fargo.

In addition,

1. It’s understandable that not every anecdote from the sales force constitutes an “action item,” but make sure it’s clear that salespeople will not be penalized for voicing issues to management.

2. Don’t limit account reviews to “wins.” In meetings and internal communication, allow frank discussion about what impedes selling, and make sure no person or department is held sacrosanct in the conversation.

3. Don’t condemn people for probabilistic thinking. Instead, embrace the approach! That won’t make anyone less determined, resolute, or rabidly goal-focused. In fact, the sales team and its managers will become more risk-aware.

4. Appoint at least one board member to serve as a direct point-of-contact for salespeople who want to elevate concerns about illegal or unethical practices, or any other activity that endangers the company, its employees or its customers.

Uncork the knowledge that exists in your sales organization. Giving risk a voice, and a safe way to express it, provides a measurable financial return. And in the case of Wells Fargo, it could have saved the company from itself.

Risk Committees: An Antidote for Fraud

I have a writing problem that’s giving me fits. I’m knee-deep into fraud – that is, describing how to prevent it. Unfortunately, the subject doesn’t involve using fun, energetic words like transformative change and market domination.

Instead, I must become jazzed about ideas that are antithetical in our caffeinated, exponential growth-obsessed business culture: constancy and stability. I must double down on the Zen we supposedly derive from mom-and-apple pie values like honesty, transparency, and trustworthiness. What – no market disruption? I’d rather watch reruns of regular-season baseball games.

Please don’t take this as whining. I’m game for a new expository challenge. Fraud prevention . . . let’s see . . . I know! What’s the ROI of thwarting a nascent scam before it obliterates a company, its leaders, or both? What’s the value of slaying a scandal before it causes customers injury, death, or financial ruin? Now this gets me going! I can write about corporate managers and auditors as champions, armed with sharp ears and ready eyes. Finely-tuned algorithms able to detect the subtlest transactional anomalies. Deceit – headed off at the pass! Energy, baby!

Lead gen, content creation, and predictive analytics might nudge the revenue needle northward, but they won’t save a company from cataclysmic self-destruction. That’s a primary purpose of fraud prevention. There are cases to prove it. Oh, have I got your attention now?

Expect wretched outcomes when these are present in a company:

1. Ethical hypocrisy: senior managers model poor ethical behavior; e.g. The “Code of Conduct” or “Values Statement” – if they exist – are regularly violated or ignored by staff

2. Lame internal governance, oversight, and audit controls: revenue-generation processes that are disconnected from other departments; prevalent attitude that ‘what happens in Sales, stays in Sales’

3. Weak channels for staff to report unethical or illegal activity: no documentation provided to sales force regarding how to report problems; no formal process for mediation

4. Penalties for whistleblowing: sales personnel describe being harassed or intimidated after reporting issues to supervisors, or being castigated as ‘not a team player’

5. Dissonant strategic and tactical goals: corporate strategy champions growing long-term value of customers, while tactical goals are centered on achieving high monthly revenue targets

6. Sales incentives and compensation substantially skewed toward revenue attainment: low base salary, and commissions based exclusively on percentage of sales

7. Sales culture that glorifies achieving objectives unrelated to customer success: prominent recognition for quantity of new customer accounts opened, or number of appointments held

8. Unrealistic or supremely difficult sales performance goals, accompanied by stringent penalties for non-achievement: termination of employment for underachieving “stretch” targets

9. Arrogance: believing “fraud could never happen here . . .”; accepting the delusion that the company hires only “honest” sales candidates and managers

10. Lackadaisical or perfunctory mediation and redress for customer complaints: unabated customer difficulties with selling tactics and allegations of product misrepresentations

Preventing systemic bad behavior begins with the company’s board, whose members must recognize that executing strategy inevitably carries the possibility of doing harm to customers, employees, suppliers, and shareholders. “. . . the full board is ultimately responsible for taking ownership of risk oversight and making sure strategic risks to the business are regularly discussed,” writes Maureen Bujno, Managing Director for Deloitte’s Center for Board Effectiveness.

Soul-searching questions for boards to answer:

1. How might the activities of this company cause harm to its stakeholders?

2. Could our executive and sales pay plans / incentives create conditions that compromise or damage trust or safety for customers, employees, vendors, or contractors?

3. How confident are we that the senior management of this company will become aware of unethical or illegal activity when it occurs?

4. Does this company have adequate mechanisms to communicate and enforce its legal and ethical standards?

5. Has this company taken sufficient steps to reduce the possibility that its stakeholders will be harmed?

When it comes to preventing fraud and ethical abuses, boards should avoid becoming enmeshed in tactical details and operating minutia. One prominent exception: board members must be open to holding direct conversations with employees who want to report fraud. The risks to a company are simply too great for board members not to know when risky behavior or activity takes place. And as the Wells Fargo case has demonstrated, there is no certainty that the established channels for reporting problems will work, or that employees will feel safe using them.

Board-sanctioned risk committees as an elixir. Day-to-day operating risks can be addressed by a cross-departmental risk committee. Openness and transparency are useful antidotes for fraud risk, and companies can develop these capabilities in-house through a team dedicated to monitoring, identifying, and reporting conditions that might be unethical and illegal. The good news: establishing a risk committee doesn’t demand staffing it with specialized talent. And now the bad: risk committees succeed only when boards care about risk prevention, and management responses to the issues the committee exposes are both timely and adequately considered.

Some recommendations for getting started:

Step 1: If the name Risk Committee doesn’t sound catchy, or fails to entice people to join, give the committee a different name.

Step 2: Decide how to recruit and appoint members. Sales and Marketing must be represented, but make sure other departments are, too.

Step 3: Select a capable leader – or ensure that one can be chosen.

Step 4: Write a committee charter to establish the purpose, objectives, goals, and authority. For example, “The purpose of the Committee is to provide oversight to ensure that marketing and sales strategies, tactics, policies, and procedures do not conflict with laws and regulations, and that they comply with the ethical guidelines of the company. The committee is entrusted with identifying and communicating all matters of concern to senior management, and when necessary, to members of the corporate board.”

Step 5: Establish the scope of what the committee will be able to do, examine, review, and report, along with expectations and guidelines for preserving confidentiality.

Step 6: Determine how often the committee will meet, the role and obligations for committee members, and the duration they will be asked to serve.

Step 7: Create a template for how the Committee’s findings will be communicated. At a minimum, that includes how to document or record incidents, determining who should be told, describing how they should be told, and guidelines for assessing and reporting the magnitude of the threat.

Step 8: Plan a kick-off event, and make sure senior managers are involved.

Step 9: Document the Committee’s activities and the actions taken in response to situations it has identified and shared with senior management.

What signals should Risk Committee members listen for? What conditions should trigger concern? For starters, any artifacts of the ten fraud-risk elements I described. In addition, whenever opacity, process silos, limited access to customer-facing personnel, reluctance to answer questions or provide information about customer complaints or regulatory compliance occur, risk indicator lights glow red. These situations should be considered for committee oversight.

Boards must recognize that companies face new risks when executives assume fraud and abuse problems can’t be controlled, when they claim that mitigation is too expensive, or when they dismiss oversight as a distraction for the business.

Foiled business scams rarely make it into news feeds. The activities that lead to their demise hardly seem remarkable. Often, an employee – or employees – shares information with a manager or board member who cares enough to act. Then, established prevention mechanisms kick in, and perform as designed. Routine – as it should be. No matter the size, industry, or leadership, an organization is never immune from causing harm through unethical behavior, misguided strategy, and sketchy tactics. Risk committees perform a vital role that no company can afford to overlook: oversight that reduces the probability a company will cause financial and physical harm through systemic bad behavior.