29 March 2017

Hiding skeletons in the closet is bad for business

By John Seaman and Arielle Gorin

Earlier this month, Harvard University hosted a conference on the historical connections between universities and slavery. This capped a long string of admissions by institutions of higher education – including Yale, Brown, Princeton, Georgetown, Columbia, and Harvard – of their involvement in the “peculiar institution”. “Only by coming to terms with history,” said Drew Gilpin Faust, Harvard’s president and a respected scholar of the Civil War, “can we free ourselves to create a more just world.”

Such a stance is to be expected from universities, who are supposed to be committed to unfettered inquiry. But what about for-profit enterprises? Many have their own skeletons in the closet – whether in the form of connections to slavery or complicity with the Nazi regime, or less sinister but still embarrassing missteps such as accounting scandals, price-fixing, product recalls, or white-collar crime. Shouldn’t they, too, confront their darker chapters?

Many don’t. Fearing legal liability or reputational damage, they bury their historical mistakes or pay them lip service. Family enterprises, in which past transgressions can evoke personal shame and embarrassment, may be especially reluctant to delve into their past.

This is a mistake. In fact, companies have much to gain by facing up to and learning from a difficult past – in reputation, culture, and compliance – and much to lose when they don’t.

Long before its recent troubles, one big bank demonstrated what can be gained from confronting a dark past. In the run-up to its 125th anniversary in 1995, Deutsche Bank commissioned several professional historians, including Lothar Gall, Harold James, and Jonathan Steinberg, to produce independent studies of its history, including its relationship with the Nazi regime.

What they found was damning: the bank had actively aided the expropriation of Jewish businesses, financed Hitler’s rearmament campaign and war machine, and traded in gold stolen from Jews.

While the historians exposed the perfidy of many of the bank’s Nazi-era leaders, they did not offer simplistic moral judgements. Instead, they placed the Deutsche Bank story in context. In particular, they showed how a confluence of circumstances – the evaporation of retail deposits through hyperinflation and exchange controls that limited access to foreign capital – had rendered the bank dependent on business from the Nazi regime. This hardly excuses Deutsche Bank’s behaviour, but it does help us understand why the bank chose to cooperate with the Nazis.

Deutsche Bank acknowledged “its moral and ethical responsibility for the darkest chapter of its history”. It also took steps to make financial restitution with the creation of a foundation, joined by other German firms, that compensated victims of the Nazi regime and funded ongoing research. The very act of opening a window into its past was a boon to Deutsche Bank’s reputation, establishing the bank as a leader among its peers and marking it out as an institution with a higher purpose. This was deliberate.

“It’s a signal to younger people in the company that the bank is willing to confront its past,” Manfred Pohl, a company historian, said at the time. “We can only show them why we fear and fight the right today by being open about how things happened then.”

Chiquita Brands International, best known for its bananas, faced up to a difficult past on its own terms. By the mid-20th century, Chiquita (then the United Fruit Company) had become notorious for its behaviour throughout Latin America. This included aggressive labour practices (such as the company’s alleged complicity in the 1928 massacre of striking workers by Colombian troops) and efforts to prop up friendly “banana republics” whose land-use policies helped Chiquita squeeze out foreign competitors and local peasants alike.

No single event, such as a public revelation or threat of a lawsuit, compelled Chiquita to face up to this bitter legacy. Instead, in 1992, amid a growing chorus of criticism from non-profit groups about the agricultural practices of US companies abroad, it decided to partner with the Rainforest Alliance, a pro-conservation NGO. Championed internally by Chiquita’s director of Costa Rican operations, the partnership aimed to achieve more sustainable banana production and labour policies.

The partnership was more than just good PR. Chiquita reflected on the implications of its past. The company drew on external academic research to create a timeline of its history – one that acknowledged some of its darker chapters – while also commissioning internal research into the worst episodes in its history. These reflections, in turn, moved the company to adopt new codes of social responsibility.

Chiquita’s efforts to make amends for its earlier transgressions did not mean the end of controversies. In 2007, for example, it faced allegations of paying off terrorist groups in Colombia. Still, its willingness to understand and right past wrongs helped the company to forge a new, more socially conscious identity.

Firms that have been more defensive about their troubled pasts, however, have paid the price. When news broke in March 2000 that insurance giant Aetna had helped slaveholders insure the lives of slaves in the 1850s, the company undercut its own subsequent apology by circling the wagons.

Slave policies were legal before slavery was abolished, it noted; it had issued no more than a dozen anyway; and besides, the story was old news, with the company having first admitted its connections to slavery in 1956. “We have concluded that no further actions are required at this time,” Aetna said.

Aetna’s refusal to open its archives made it the target of lawsuits and negative publicity for years. The company’s position has not changed much over the years. Yet the story keeps resurfacing – most recently, during the media coverage surrounding Aetna’s decision to exit from many of the state-run healthcare exchanges under Obamacare – and will doubtless dog the company in years to come.

Even companies that do deal honestly with their past can nonetheless fail to learn from it.

Take Volkswagen. In the 1980s, the company launched an internal investigation into its use of forced labour during the Nazi era. That proactive approach enabled the company to fend off US-based lawsuits in 1998 with a public apology and financial compensation to victims and their descendants.

The company went further, creating a memorial at its Wolfsburg headquarters, establishing education programs at Auschwitz for its managers and workers, and commissioning internal publications on its history. But this culture of remembrance was distinctly at odds with a parallel culture of secrecy and strict hierarchy that is widely acknowledged to have led to the company’s 2015 emissions scandal.

Contrast Aetna and Volkswagen with C&A, the Dutch clothing retailer.

The company’s family owners, the Brenninkmeijers, knew there was a dark side to their history, but they didn’t realise just how dark until they engaged Mark Spoerer, a German economic historian, to study it. Spoerer discovered that members of the German branch of the Brenninkmeijer family had been enthusiastic Nazi collaborators. They had snatched up Jewish-owned properties in Berlin and Bremen at below-market rates in exchange for huge sums paid to the Nazi regime. They also used the forced labour of Eastern Europeans, mainly Jewish tailors and leather workers corralled in the Lodz ghetto in Poland.

The Brenninkmeijers might have left Spoerer’s internal study to collect dust. Instead, the family permitted him to publish a forthcoming warts-and-all study of C&A’s history that puts the company’s Nazi-era transgressions in the context of a much larger story dating to 1841, concluding with the furious postwar growth that made C&A one of Europe’s largest fashion retailers.

The Brenninkmeijers, in other words, recognised the revelations of their Nazi ties not only as a reputational risk but also as a learning opportunity. By understanding the full dimensions of their corporate and family history, they gained a deeper sense of their own present-day culture and values and the need to live up to them.

This, explained Maurice Brenninkmeijer, chairman of C&A’s holding company, was imperative for the family “to have an understanding of our history, not as a burden but as a platform”. He plans to use Spoerer’s study in training managers about ethical dilemmas, as well as in assessing the labour practices of C&A’s contractors.

How else can firms deal with past mistakes? One approach is to adopt and adapt the rhetoric of national reconciliation – a process of bringing together victims and perpetrators to acknowledge past wrongs and mend relationships – that  South Africa, Northern Ireland, and Canada have successfully used to confront their past.

A similar framework of “corporate historical responsibility” (a term coined by Claudia Janssen) would embrace transparency as a means to rebuild trust, capture lessons from a shared experience of the past, and ultimately move forward together.

Facing up to a dark past has other advantages. It can defuse tensions around difficult subjects in general, fostering a culture of open communication that can improve compliance and avoid or minimise future ethical lapses. It also can stimulate a renewed sense of purpose that is all the more compelling because it is authentic, forged in the crucible of setback and adversity.

Ultimately, an honest reckoning with the past – yes, warts and all – may be a firm’s only defence against wilful misrepresentation.

Because if they don’t tell their story, someone else will.

John Seaman is the founder and CEO of Saybrook Partners, a historical consulting firm. Arielle Gorin, a Saybrook consultant, specialises in the history of the US and Canada