CORPORATE LOYALTY - A Trust Betrayed

Introduction

We all know the face of disloyalty. Betrayal, backstabbing and backbiting by trusted friends and associates represents the dark side of business relationships. Double-dealing by a partner is doubly painful. The resulting loss of trust, like the loss of innocence, disappoints and disheartens. Nothing cuts deeper than the knowledge that loyalty, given in the expectation that it is shared, is used and then discarded. It is not just remorse or regret that one has exercised poor judgment by trusting a friend, a partner or a colleague, but it is a loss of faith in the ideal of loyalty itself. Trust abused is not easily resuscitated. Those whose trust has been misused become cynical and untrusting. A valuable human quality is lost.

It is easy to understand the meaning of disloyalty and trust betrayed; the positive attributes of loyalty are more difficult to define. The word "loyalty" is amorphous, a term with different meanings depending on who is using it and the context in which it is being used. In a legal context, loyalty is aimed at protecting confidential information, restricting conflicts of interest and promoting fiduciary duties. In corporate terms the words "trusted" or "loyal" are applied to "team players", those who are not disruptive and go along without asking potentially embarrassing questions. It is not so much that they are loyal but that they are discreet. Loyalty, in corporate terms may not indicate a faithful and trustworthy person as much as a true supporter, an adherent to corporate leadership and policy.

This book will examine loyalty by focusing primarily upon the employment relationship in a corporate setting. What are the obligations of a loyal employee? Is corporate leadership under a duty to treat a loyal employee with dignity no matter what the economic circumstances? Can loyalty be bought? How does one maintain the loyalty of employees after their associates have been fired?

Each day corporate restructuring and downsizing result in job loss. corporate management and employees are not always certain exactly why the cut-backs had to happen. They wonder what went wrong. Why was there a need to dismember a loyal and committed body of employees? The employees who have been terminated, as well as the survivors, are suddenly faced with the meaning of loyalty. The employer-employee relationship, particularly at the executive non-union level, provides fertile ground for an exploration of the nature of corporate loyalty, its limits and its future.

An inquiry into corporate loyalty raises fundamental issues about the priorities and philosophy of business management. There is a conflict between the popular ideal of entrepreneurial freedom and traditional managerial loyalty to corporate interests. Recent business scandals have shaken public confidence in the business community. Employees and the general public are now demanding ethical behaviour from corporate and political leaders. How is corporate leadership to react to these developments, in view of the fact that the business community relies on public support and employee trust?

In a business climate of free-wheeling corporate manoeuvres and rapidly changing global markets, is loyalty a dated sentiment no longer of practical value? Or is it worth preserving? Can it be redirected? Loyalty is emotional rather than logical or intellectual. It attaches to individuals, and through them to institutions. Loyalty is not a simple concept: like a chameleon it changes colour depending on the corporate environment in which it is found. The survival of loyalty in the corporate community has practical implications, and it is these that make an exploration of the concept and its contexts worthwhile.

Any consideration of corporate loyalty must review a number of important legal questions. What actions by an executive employee are likely to constitute conflict of interest? Does an ex-employee who takes advantage of a business opportunity, which he discovered when he was still a corporate employee, commit a breach of loyalty? When is a corporation protected by law from the misuse of corporate information for the personal benefit of an employee? What internal and external sanctions are available against corporate employees who engage in breach of trust and fraudulent behaviour?

Laws to govern corporate behaviour are necessary to ensure that our entire economic system remains effective. Laws regulating commercial relations set out rules and penalties that provide minimum guidance to what is permissible and what is forbidden. The rules cannot be so restrictive as to impose unrealistic limits on corporate risk-taking. At the same time, they cannot be so relaxed and non-intrusive that they fail to maintain minimum standards in corporate life. Therefore, a commitment to the health and vigour of the free-enterprise system requires that the laws governing corporations and their activities be efficient without being overly restrictive. Laws must be consistent in their application, and not too complex: arcane laws are ineffective and encourage the search for loopholes. Too many regulations inhibit corporate policy and the constant need of business to innovate in order to compete. Courts would be unwise to attempt to be a substitute for business judgment; but what the courts can do is to set the ground rules for fair play for business conduct.

Legislation is slow to adjust to new corporate realities, and even when it does it is a crude instrument by which to regulate business relationships. Laws are not framed as lessons in corporate morality. They are the expedients of government policy aimed at securing peace and fairness in society. For laws to be enforceable they must reflect the consensus of the majority. For laws to serve as a guide to conduct they must be generally accepted. The ongoing question in law is, what values are so socially and economically important that they must be protected by the courts?

There has been a continuing effort, on the part of government and within corporations themselves, to legitimize corporate power by increasing corporate commitment to the public interest. Over the last decade the corporate community has developed institutions, techniques and structures aimed at achieving an acceptable level of corporate responsibility while discouraging further government intrusions in the form of fresh laws and regulations. Corporate codes of ethics and constitutions are subscribed to by employers in an attempt to communicate the need for employee adherence to acceptable levels of business conduct. Corporations are intent on improving and preserving non-governmental methods of policing the internal workings of their own systems.

The role and composition of boards of directors of publicly owned corporations have changed significantly over the last few years. Outside directors have increased so that boards of directors are now more directly responsive to shareholder concerns, and executive management is less able to entrench its own lucrative positions. Internal rules regulate potential conflict of interest and the need for disclosure by directors and executive management. They duty to shareholders of loyalty, good faith and fiduciary responsibility by directors and executive management has become more closely regulated and monitored by government agencies. The liability of officers and directors for corporate misconduct has been clarified and reinforced. Most of these changes have resulted from internal corporate practice rather than from the imposition of external legislation. Corporate leadership has been compelled to think more deeply about the nature of its business and its role in society. As a result, corporations have reorganized themselves in order to achieve better self-government rather than face compulsory legislation.

At its core, corporate responsibility is very similar to individual responsibility. In our society, although individuals have a right to pursue happiness, they have an obligation to make their behaviour conform to community standards. In the same way, although corporations have a right to pursue profit, they too must limit their activities so that they are socially responsible.

Public concern for environmental issues, waste disposal, food quality, employee protection, and automobile and appliance safety increased in the 1960s and 1970s. Corporations and their leadership were criticized for their failure to remedy situations that had persisted for years. The media portrayed corporations and their leaders as motivated by greed and has having a callous disregard for public concerns, and even as ignoring the interests of their own shareholders and employees.

The integrity of corporate management is increasingly subject to public scrutiny. When entrenched management is preserving its own secure and advantageous position by rejecting takeovers and mergers that might have been of benefit to shareholders, the issue of management's duty of loyalty to shareholders must be raised. Corporate leaders tend to develop a fortress mentality when they perceive that they are under attack; this attitude is counter-productive at a time when corporate leadership needs to increase sensitivity to current concerns if additional restrictions are to be avoided.

In the past, corporate financial decisions were taken as though the public and employees were irrelevant. Seldom has there been an acknowledgment that corporate responsibility includes obligations to employees that go beyond that employment relationship itself. Shareholders have clearly enforceable rights in law if the company acts contrary to their interests. Corporation responsibility towards employees is more a matter of corporate conscience than legal obligation. Here we are concerned with how the actions of corporate leadership can maintain or destroy a working environment. Only respect for common values between employer and employee and a commitment to mutual obligations provide the basis for a sense of worth - a vital and necessary component of true loyalty.

Corporate leadership seldom exhibits critical self-awareness. Self-serving statements about the corporation's willingness to assume responsibility for its "family of employees" do little to illuminate a complex area of relationships laced with conflict and confusion. This book attempts to delve below surface solutions. All is not well in the business world and appropriate remedies are not always easily available.

This exploration of corporate loyalty and responsibility is based upon the use of true examples. They are either actual cases decided in the courts, or situations that have arisen during a law practice concerned with many of these issues over a number of years. When the examples have not been reported by the courts or in the press, the names and locales have been changed in order to protect the anonymity of those involved. The facts have, for the most part, been left unchanged.

Some chapters have many examples because the real-life situations will reveal implications for the individual employee as well as for executive management. Sad stories are not related in order to castigate corporate leadership but rather to sensitize it and the reader. In some cases actions taken were unnecessary; in others, misconceived. Examples emphasize a practical, people-oriented approach rather than a philosophical or policy-oriented one. The case examples are meant to highlight real problems and, by doing so, improve awareness of the issues.

No models are proposed of what corporate loyalty is or what it should become. What can be said, however, is that the concept of corporate loyalty, however interpreted, influences the behaviour of individuals, particularly employees, in their relationship with corporate employers. Loyalty and disloyalty impact on all corporate managers and employees at one time or another. This book is not aimed at reforming the law or providing management with easy answers to difficult questions: it is impossible to provide answers until one comes to grips with the essential questions.

Chapter One asks: what is the meaning of loyalty and how do companies develop a sense of loyalty among employees? What are the components of loyalty and how are they sustained and often lost? The corporate socializing process and the pivotal role played by executive leadership is analyzed. Messages are communicated by leadership in ways that build loyalty or destroy it. The success of attempts to increase group cohesion and commitment depend on a number of factors, including the role played by the leader. At the end of the first chapter the ethical expectations of leadership by loyal followers is briefly considered in an example dealing with police leadership.

In Chapter Two, fundamental questions of ethical choice are raised. How is corporate leadership to maintain credibility in the business community and with the public generally if it is perceived as engaged primarily in the pursuit of self-interest? Is integrity in business an old-fashioned concept that has little relevance to current corporate practices? How would the central character of The Man in the Grey Flannel Suit react to today's business morality?

Do codes of corporate ethics reduce misconduct? Are corporate employers committed to these codes or do they merely pay lip service to them?

Chapter Tree deals with loyalty between businessmen and the standards imposed upon business dealings by the courts. Questions of breach of trust or fiduciary duty, particularly by competing former employees, provide examples of court-imposed standards of fidelity and fair dealing. Does an executive employee breach his duty of loyalty by taking advantage of a corporate opportunity for his own personal benefit? what is the duty owed by an employee to his corporate employer in a competitive business world? What are the limits of loyalty imposed upon a former employee who uses corporate confidential information to improve his value as a potential employee to a competing employer? It is not always easy to determine what information is actually confidential or secret and what is not. When will the courts limit disclosure and when will they permit disclosure of confidential information because it is in the public interest to do so?

Chapter Four reviews specific instances of breaches of loyalty that are prohibited by law. What is a trade secret and how can the law protect it? What is reasonable restraint that protects business from wrongdoers yet does not inhibit the useful transfer of information needed for growth in a technologically based society? The misuse of trust may result in civil litigation or even a criminal case. Circumstances that attract the application of the law are set out as examples of a growing trend to use the law when custom and practice seem to have lost their persuasive power.

Corporate restructuring and employee cutbacks impact dramatically upon morale and commitment. Long-term loyalty becomes an early casualty in the fight for economic survival. How can corporate downsize and maintain employee loyalty? Recognition by corporate leadership of the consequences of their own conduct provides the first important step to increased sensitivity to the issues involved. In Chapter Five corporate options are considered and approaches proposed. Examples illustrate corporate actions that resulted in the unnecessary loss of loyalty, and others that sustained it during difficult times.

One of the most difficult situations in which to maintain loyalty is that created by the merger, takeover, purchase or sale of the corporate enterprise. The impact of corporate change upon the loyalty of employees is examined in Chapter Six. Techniques for the management of the merger are explored so that employee commitment to the targeted company is not lost in the corporate shuffle. The transitional stage between two corporations becoming one is examined in order to determine what route best serves the interests of integration. How do employees react and adjust when in a state of transition from one set of loyalties to another? The changeover of loyalties from old to new leadership is seldom effected without disruption. Good management, aware of the implications of its actions, is better equipped to initiate change without alienating the people who must be relied on to make the change work.

In Chapter Seven the obligations of management to shareholders are reviewed in the light of laws aimed at deterring managerial misconduct. Management's accountability to shareholders and the changing nature of a director's liability are canvassed. Insider trading provides an example of corporate and individual corruption, which not only injures shareholders but affects the public's perception of corporate life. The Boesky scandal is examined, along with the fall of a young lawyer who was trapped by his own greed, and the disappearance of values in a self-serving society is discussed.

Conflict between traditional concepts of corporate loyalty and the increasing emphasis upon the benefits to business of self-serving entrepreneurial actions leads to double standards or to none at all. Has loyalty lost out in a brave new workplace to the idea men with short-term goals and a penchant for quick profit? Is the long-term loyalty for senior employees facing retirement increasingly compromised by a global business environment where the only constant is fundamental change? Chapter Eight poses these questions and attempts to provide some guideposts to the future of loyalty.

When values are under attack there is a unique opportunity to reconsider them. If loyalty is an out-dated and impoverished concept, all the more reason to understand the loss. If loyalty is expendable, what will be the cost - to the individual, to business and to society? On the other hand, if loyalty is a necessary component of humane corporate life and not merely an instrument to achieve corporate ends, then its loss deprives business of an intrinsic value. Corporate concentration on the bottom line to the exclusion of other important values leads to a sterile, inhumane environment where advantage is taken not only of competitors but of devoted employees in the race to accumulate faster. It is every man for himself.

Most corporate leaders believe that doing business involves more than taking advantage of one another, or in profit for its own sake. If the corporation is to continue to occupy a distinct and privileged role in society, it must provide a social environment that meets human needs. As corporate America searches for its ethical and moral underpinnings, it must evaluate the central role that loyalty plays in keeping companies compassionate and competitive. It is the examination of the fragility of loyalty that forms the fabric of this book.

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