This article was originally published in MarketWatch on June 20, 2019. Ann Skeet is the senior director of leadership ethics at the Markkula Center of Applied Ethics. Views are her own.
Carnival Corp. and its subsidiary Princess Cruise Lines was fined $20 million earlier this month by the U.S. Department of Justice for violating the terms of probation and dumping plastic and other waste overboard. The original transgression cost the company $40 million two years ago. The case points out, pardon the pun, how hard it is to “turn the ship around” when the ship is a large, multinational company. The story also synthesizes some key trends executives and boards should be aware of as they go about the business of managing and governing corporations in today’s business climate.
First, the case facts:
The original charge to Carnival’s CCL, -1.20% subsidiary, Princess Cruise Lines, of $40 million for dumping oil-contaminated waste into the ocean and then attempting to cover it up was the largest penalty of its kind at the time.
The terms of the five-year probation called for the company to comply with a court approved and supervised environmental compliance plan, which included audits by an independent company and oversight by a court-appointed monitor. The $20 million penalty follows Carnival’s admission to six probation violations. The company prepared for the independent audits by sending undisclosed teams to their ships to ready them for the inspections. Though this practice was discovered and a cease and desist order from a U.S. District Court judge was issued in December 2017, the company began a second, similar program.
“A corporation is responsible to its shareholders and board of directors to be profitable, but not by breaking the law and destroying the very environment in which it navigates for profit,” said U.S. Attorney Ariana Fajardo Orshan of the Southern District of Florida, where the court-appointed monitor revealed the new, deceitful practices.
Carnival’s CEO, Arnold Donald, apologized for the continued mistakes. “I sincerely regret these mistakes. I do take responsibility for the problems we have had. I’m extremely disappointed we have them. I am personally committed to achieve best in class for compliance.” Carnival reported $18.8 billion in revenue in 2018 and Donald earned $13.5 million in total compensation that year.
Here are the noteworthy trends to be learned from Carnival’s punishment:
Ethical fading is a legitimate business risk:
Many companies focus on compliance and indeed, we see that best-in-class compliance is where the Carnival CEO is focused. But even with that focus, the company repeatedly violated industry standards and court orders. Fines can convert ethical issues — like the effects of dumping plastic and oil in the ocean — into business problems by attaching a price tag to them. Money converts the issue into a business decision for many, instead of framing it as an ethical issue.
Values statements only help when they are used in decision-making:
Carnival’s website has this to say about the company’s values. “Our core values are entrenched in our vision statement: To consistently deliver fun, memorable vacations at a great value. This simple statement binds all Carnival team members who are passionately focused on hospitality and guest service. We work in an environment where safety, hospitality, teamwork and respect for the environment and each other are essential.”
There is a way for companies to use such statements to effectively frame ethical issues in decision-making. When deliberations don’t jibe with mission and values, companies create reputational and business risk. Quite simply, they appear hypocritical.
Employees, customers, and investors care about ethics; so must executives in C-suites and boardrooms:
Companies regularly measure ESG factors to assess the impact of environmental, social, and governance concerns on shareholder value. Consumers, employees, and investors are enlightened as evidenced by the growth of impact investing funds, and studies capturing the interest millennials have when working and consuming to see their values upheld by corporations.
Climate change is, perhaps, the most significant risk businesses face:
Add to this the fact that a tipping point has been reached around the dangers dumping poses to the world’s oceans. Trash has become a political hot potato as trade wars between the world’s superpowers heat up and countries including China and others in southeast Asia refuse to take the Western world’s garbage any more. Indeed, Carnival and other cruise operators face a existential business risk, now that many consumers are focusing on how leisure travel impacts climate change.
CEOs are on the hook:
We can look to indictments against Volkswagen VW, -1.08% CEO Martin Winterkorn for the company’s diesel-duping scandal, and the abbreviated tenure of Tim Sloan at Wells Fargo WFC, -0.24% and see that individual accountability is increasing in the corner office.
Though many dismissed the Yates memo, issued by the Department of Justice in September 2015, as inconsequential, it served notice that a wedge could be driven between corporate interests and those of senior management in in corporate compliance cases. Add to this the increasing attention to outsized CEO salaries compared to worker’s incomes, fueled by the Dodd-Frank compensation ration requirement and the collapse of earning power resulting from the 2008 Great Recession, and it’s no wonder CEOs are experiencing more scrutiny.
To date, Carnival CEO Donald’s apologies ring hollow, as not even a vague course of action has been offered by Carnival to suggest its behavior will improve. Donald does not appear to be employing any of the basic practices of ethical leadership to enhance his credibility.
Increasingly, it appears that shareholder value is an outcome of how a corporation’s capital is used and not the objective of the corporation, as argued in a working paper published in September 2015 by Robert Eccles and Tim Youmans at Harvard Business School. Stakeholders beyond shareholders have always mattered, as their responses to corporate action is eventually reflected in purchasing decisions and stock prices. Corporate board members should watch the case of Carnival Cruise Lines to appreciate the ethical complexities leaders now must acknowledge in their management and governance roles.