When Innovation and Trust Are at Odds

In 2009, when Fisher-Price debuted the Rock ’n Play Sleeper — a portable, soothing bassinet-like device for infants — Fisher-Price and its parent company, Mattel, were under pressure to reverse what had been an ongoing decline of their stock price. The Rock ’n Play was a success: By 2019, Fisher-Price had sold 4.7 million of them, more than one for every 10 babies born in the United States since the launch. Today we know that this success came with a high price: Since 2009, the Fisher-Price Rock ’n Play Sleeper has been linked to 32 infant deaths. Initially, Fisher-Price argued that the deaths occurred because parents failed to properly strap infants into the sleeper. But on April 5, 2019, approximately four years after the first death that regulators eventually linked to the product, Fisher-Price joined with the U.S. Consumer Product Safety Commission to issue a warning that the sleeper should not be used with children who could already roll over. In an attempt to pacify customers, the company issued a statement, saying, “Generations of parents have trusted us for almost 90 years to provide safe products for their children.…Fisher-Price and every one of our employees take the responsibility of being part of your family seriously, and we are committed to earning that trust every day.” On April 12, after more pressure from the American Academy of Pediatrics and Consumer Reports, Fisher-Price finally issued a total recall of the product. Analysts with UBS estimate that the recall will cost Mattel between $40 million and $60 million. But these kinds of estimates rarely calculate the long-term cost associated with the loss of stakeholder trust. When a company fails to live up to the basic expectation of trustworthiness — when they lack competence, integrity, or benevolence, for example — stakeholders feel betrayed. This feeling of betrayal often leads customers to mistrust the company’s actions in the future. In the Fisher-Price case, parents are likely to question the company’s competence in developing safe products and may doubt the integrity of its communication about safety risks. My research shows that trust violations like Fisher-Price’s are not usually the result of rogue employees or a one-time problem at the company. Rather, they are frequently caused by company-wide pressures to grow and innovate. In order to understand why growth can lead to trust violations, and how you can identify whether it’s happening in your own company, you need to first understand when innovation becomes reckless — and how to identify signs of organizational drift, which can lead to disaster. How Manic Innovation Works Manic innovation occurs when companies fail to balance growth with risk management. It relieves constraints and speeds along the innovation process while transferring or increasing risks to stakeholders. There are signs of this in the Rock ’n Play debacle. Fisher-Price researched the infant-gear market and saw the need for an infant sleep device that would help sleep-deprived parents. But in the search for a hit product, the company innovated by rethinking infant sleep while ignoring key safety controls in a number of ways: violating guidelines for safe sleep set by the American Academy of Pediatrics; asking the Consumer Product Safety Commission for an exemption from its bassinet and cradle specifications; and marketing the Rock ’n Play, through pictures and statements, as a device an infant could sleep in all night long. Because the multiple lawsuits are ongoing, there’s still much we don’t know about how this faulty process operated. But as in many other cases—GM’s ignition switch problem, Barclay’s LIBOR scandal, Citibank’s subprime mortgage disaster, and Facebook’s fake news complicity and privacy violations—manic innovation was allowed to continue because the forces concerned about risk and long-term reputation were systematically marginalized within the company. Controlling Organizational Drift in the Innovation Process In order to see how this marginalization happens, we need to understand the process of organizational drift. This term refers to the slow and gradual evolution of the way in which the organization functions — strategy, culture, processes, governance, and so on — to attempt to reach goals that cannot be achieved through normal and legitimate means. As this occurs, risk management and compliance officers are not able to temper the push to take new products to market. As a result, some stakeholders (e.g., executives in the bonus pool) receive benefits at the expense of others. In companies where this happens, rather than having to take into consideration any control functions — such as legal, compliance, and risk reviews — innovators are shielded from them. At the same time, those innovators are rewarded for moving quickly. As the risk management and compliance functions fade into the background, a rogue subculture gradually comes to dominate the enterprise. This subculture celebrates goal achievement, rewards team players that go along, and punishes any “non-cooperators” whose concern for risk is making achieving goals more challenging. Organization leaders only realize how far the company has drifted when this unsustainable process crashes. When I work with compliance professionals who want to do more to protect their companies from organizational drift, I ask some key questions about the early-warning signs. The first set speak to the conditions that can cause organizational drift; the second involve common signs that drift is already happening. Organizations can use them to help avoid potentially disastrous trust violations. Identifying the Potential for Organizational Drift Underlying Cause Diagnostic Questions Sales, profit, expense, stock price pressure Is the pressure to achieve goals unreasonable and fear inducing? Speed, time, deadline pressure Can people take the time to do things right? Short-term goals Do short-term goals trump long-term goals? New management Is management stable? Is new management recklessly trying to make a mark? Identifying Whether Organizational Drift Is Present Signals Diagnostic Questions Turnover Are good people leaving the company? Disengagement Are employees vigilant, or are they just going through the motions? Hotline calls Are we hearing more warnings from employees? Abnormal growth and beating expectations Are we growing beyond our capacity for quality? Jokes about controls and control functions Are we cynical about the lack of controls? Exceptions to policies Are we cutting corners? Even if you answer yes to some of these questions, the solution isn’t to stop all innovation. Instead it’s to engage and collaborate with the organization’s control functions to make sure that the innovation process does not go off the rails. Innovators and risk managers need to work together, early and often, and they need to keep constant watch for organizational drift. Working together, they are better able to achieve rapid — but not manic — innovation. While this may sound good in theory, in practice it is hard to achieve. Innovators and people in control functions (e.g., risk managers, compliance, legal, and internal audit) think differently and often have conflicting incentives. Some managers in control functions think they are only in the risk-prevention business; in truth, they need to be rewarded when they help find ways to encourage innovation safely. In fact, PwC’s 2018 Risk in Review study found that risk managers who were more involved throughout the innovation cycle — proactively adjusting risk appetite, sharing risks, working more closely with innovators, and expanding continuous risk assessment — were better able to manage risk exposure. But change is also required on the part of the innovators, who must be taught to see risk management hurdles as important and legitimate, rather than as bureaucratic commands from the growth-prevention departments. Managing the balance between innovation and control requires more sophisticated innovators and control personnel who can deal with these tensions without retreating to simplifications that ignore either growth or risk. For example, according to a senior compliance manager at Google, the company is endeavoring to improve collaboration between innovators and compliance personnel, and is also experimenting with addressing potential risks earlier in the innovation process. When innovation is done well, companies manage both growth and compliance to sustain innovation and company reputation. Consider an example where Chase Bank got it right. Chase was one of the first financial institutions in the 1990s to experiment with derivatives to create synthetic mortgage instruments. While Citibank and Merrill Lynch grew explosively in the early 2000s using these instruments, Chase took a go-slow approach, combining innovation with good risk management. Through this process, the bank determined that it couldn’t manage the downside risks of the instruments, and decided to limit its exposure, effectively managing the need to balance the growth of new products and processes with controls to manage risk and stability. Had Fisher-Price followed their example, they could have avoided the unfortunate situation in which they find themselves now. The Big Idea

When Innovation and Trust Are at Odds

Partner Center