Harvard Case - Lie, Cheat, and Steel: Governance and Scandal at ThyssenKrupp
"Lie, Cheat, and Steel: Governance and Scandal at ThyssenKrupp" Harvard business case study is written by James Shein, Evan Meagher. It deals with the challenges in the field of International Business. The case study is 12 page(s) long and it was first published on : Mar 20, 2017
At Fern Fort University, we recommend that ThyssenKrupp implement a comprehensive and multi-faceted strategy to rebuild trust, restore its reputation, and ensure long-term sustainability. This strategy should focus on strengthening governance, enhancing transparency, promoting ethical behavior, and fostering a culture of accountability throughout the organization. This includes a thorough review of its business practices, corporate culture, and leadership structure, with a particular emphasis on ethical decision-making and risk management.
2. Background
This case study explores the series of scandals that plagued ThyssenKrupp, a German multinational conglomerate, in the early 2000s. The company faced allegations of bribery, fraud, and corruption in various countries, particularly in emerging markets like China and Russia. These scandals resulted in significant financial losses, reputational damage, and legal repercussions.
The main protagonists in this case are:
- Eberhard Rechtholz: The CEO of ThyssenKrupp at the time of the scandals. He was responsible for overseeing the company's operations and ultimately held accountability for the unethical practices that were uncovered.
- ThyssenKrupp's Board of Directors: The board was responsible for setting the strategic direction of the company and overseeing its governance. They were criticized for their failure to effectively monitor and address the ethical concerns that were emerging.
- The employees involved in the unethical practices: These individuals were responsible for carrying out the illegal activities, often under pressure from superiors or driven by personal gain.
3. Analysis of the Case Study
The case study highlights a breakdown in ThyssenKrupp's corporate governance and ethical framework. Several key factors contributed to the scandals:
- Aggressive growth strategy: ThyssenKrupp's pursuit of rapid expansion into emerging markets, particularly in sectors like steel and construction, led to a focus on short-term gains and a disregard for ethical considerations.
- Weak internal controls: The company lacked robust internal controls and oversight mechanisms, allowing unethical practices to flourish. This was exacerbated by a culture of secrecy and a reluctance to report wrongdoing.
- Lack of ethical leadership: The leadership team failed to establish a strong ethical culture and set the right tone from the top. This created a permissive environment where unethical behavior was tolerated or even encouraged.
- Cross-cultural challenges: Operating in diverse and complex international markets presented challenges in navigating cultural norms and legal frameworks. This increased the risk of unethical practices, particularly in countries with weaker regulatory environments.
This analysis can be further explored through the lens of the following frameworks:
- Porter's Five Forces: The case study demonstrates the competitive pressures faced by ThyssenKrupp, particularly in emerging markets. The company's aggressive growth strategy was driven by a desire to compete with other multinational corporations, leading to a focus on cost reduction and market share gains.
- The Agency Theory: The scandals highlight the potential conflict of interest between the company's management and its shareholders. The pursuit of short-term gains by management, at the expense of long-term sustainability and ethical behavior, ultimately damaged shareholder value.
- The Stakeholder Theory: The case study demonstrates the importance of considering the interests of all stakeholders, including employees, customers, suppliers, and the wider community. ThyssenKrupp's unethical practices negatively impacted these stakeholders, leading to reputational damage and a loss of trust.
4. Recommendations
To address the challenges faced by ThyssenKrupp, we recommend the following:
- Strengthening Corporate Governance:
- Implement a robust code of ethics and conduct, clearly outlining expectations for ethical behavior at all levels of the organization.
- Establish an independent ethics committee to oversee ethical compliance and provide guidance to employees.
- Enhance internal controls and risk management processes to prevent and detect unethical practices.
- Implement a whistleblower program to encourage employees to report wrongdoing without fear of retaliation.
- Promoting Ethical Culture:
- Foster a culture of integrity and accountability throughout the organization.
- Provide ethics training to all employees, emphasizing the importance of ethical decision-making and compliance with regulations.
- Implement a system for monitoring and measuring ethical performance.
- Rebuilding Trust:
- Be transparent and accountable for past mistakes.
- Communicate effectively with stakeholders, providing clear and accurate information about the company's actions and progress.
- Engage with stakeholders to rebuild trust and demonstrate commitment to ethical behavior.
- Strategic Review and Adaptation:
- Conduct a thorough review of the company's business practices, particularly in emerging markets.
- Develop a long-term strategy that prioritizes sustainable growth and ethical behavior.
- Reassess the company's international expansion strategy, focusing on markets with strong regulatory frameworks and a commitment to ethical business practices.
- Leadership and Accountability:
- Appoint ethical and experienced leaders who are committed to upholding high standards of corporate governance.
- Establish clear lines of accountability and responsibility for ethical conduct.
- Hold senior executives accountable for any unethical behavior within their teams.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: ThyssenKrupp's core competencies lie in manufacturing and engineering. The recommendations aim to ensure that these competencies are deployed ethically and sustainably, aligning with the company's mission to create value for its stakeholders.
- External customers and internal clients: The recommendations prioritize rebuilding trust with external customers and internal clients by demonstrating a commitment to ethical behavior and transparency.
- Competitors: The recommendations aim to position ThyssenKrupp as a leader in ethical business practices, differentiating the company from competitors and attracting customers and investors who value sustainability and integrity.
- Attractiveness ' quantitative measures if applicable (e.g., NPV, ROI, break-even, payback): While the recommendations are primarily focused on qualitative improvements, they are expected to contribute to long-term financial performance by reducing reputational risk, improving stakeholder relationships, and attracting talent.
- Assumptions: The recommendations assume that ThyssenKrupp is committed to implementing these changes and that its leadership team is willing to embrace a culture of ethical behavior and accountability.
6. Conclusion
The scandals at ThyssenKrupp serve as a stark reminder of the importance of strong corporate governance, ethical leadership, and a culture of integrity. By implementing the recommendations outlined above, ThyssenKrupp can rebuild trust, restore its reputation, and ensure long-term sustainability.
7. Discussion
Alternative options not selected include:
- Ignoring the scandals and continuing business as usual: This would have been a short-sighted and risky approach, likely leading to further reputational damage and legal repercussions.
- Focusing solely on legal compliance: While important, this would not address the underlying cultural and leadership issues that contributed to the scandals.
Key risks associated with the recommended approach include:
- Resistance to change: Some employees and executives may resist the implementation of new ethical guidelines and procedures.
- Insufficient commitment from leadership: The success of the recommendations depends on the commitment and support of the leadership team.
- Unforeseen challenges: The global business environment is constantly evolving, and new ethical challenges may emerge.
8. Next Steps
The implementation of these recommendations should be a phased process, with clear milestones and timelines.
- Phase 1 (Short-term):
- Establish an independent ethics committee.
- Conduct a comprehensive review of the company's business practices.
- Implement a whistleblower program.
- Provide ethics training to all employees.
- Phase 2 (Medium-term):
- Develop and implement a new code of ethics and conduct.
- Strengthen internal controls and risk management processes.
- Conduct a public apology and commit to transparency.
- Phase 3 (Long-term):
- Monitor and measure ethical performance.
- Continuously improve and adapt ethical guidelines and procedures.
- Foster a culture of ethical behavior and accountability.
By taking these steps, ThyssenKrupp can demonstrate its commitment to ethical business practices and rebuild trust with its stakeholders. This will be a long and challenging process, but it is essential for the company's long-term success.
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Case Description
On March 7, 2013, ThyssenKrupp Group CEO Heinrich Hiesinger was shocked to receive a resignation letter from Gerhard Cromme, chairman of the company's supervisory board. Hiesinger had been CEO since 2010. Early in his tenure, ThyssenKrupp incurred massive losses from disastrous steel investments and faced allegations of colluding with other companies to fix prices in its railway steel operations. As a result, Hiesinger had been forced to dismiss three executive board members, one for violating company policy. After a supervisory board member also was dismissed for violating company policy, the company's offices were raided in an investigation of price-fixing in steel contracts to the automotive industry. Cromme had been sharply criticized by shareholders and analysts as an impediment to the cultural, strategic, and governance changes Hiesinger was trying to make to address the scandals at ThyssenKrupp, but for months he defiantly had resisted calls for his removal. With no warning, he resigned without naming a successor or creating a plan to select one. Now that he no longer needed to deal with the distractions created by Cromme's presence, Hiesinger was free to finalize a plan to address the defects in ThyssenKrupp's governance.
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