September 13, 2021

Caremark & Beyond: The Risks of “Cost-Cutting” Culture

In her opinion last week, Vice Chancellor Zurn also made note of the lengthy tenure of many of Boeing’s directors and their skill-sets as “political insiders or executives with financial expertise.” She then discussed at length the transformation of the company from an organization run by engineers to one run by finance folks – recounting how the company moved its headquarters from Seattle 20 years ago in order to “escape the influence of the resident flight engineers.” The focus on cost-cutting allegedly impacted quality and resulted in more safety violations.

This is only the latest iteration of a story that keeps repeating. In his Radical Compliance blog, Matt Kelly highlighted that a cost-cutting culture was also to blame in last week’s SEC enforcement action. Here’s an excerpt:

Our point today, however, is that 3G made cost-cutting a strategic goal for the company. It tied employees’ performance metrics and compensation to their ability to cut costs. Procurement division employees said internally that the former COO “push[ed] like crazy” for them to meet cost savings goals, and increased cost savings targets to unreasonable levels.

Faced with that relentless pressure to cut costs, employees then engaged in the prebate chicanery we mentioned above, and lots more.

That’s the lesson for internal control and compliance officers. If your business is based on a misguided strategic goal, eventually it will warp your corporate culture to the point where misconduct is the only way to execute the strategy — and then, all the internal controls in the world won’t do you any good.

Liz Dunshee