The Enemy Within: How Employee Loyalty—Or Lack Thereof—Creates Risk

Neil Hodge


November 1, 2016

employee loyalty risk management

It is often said that one of an organization’s greatest assets is its employees, yet many workers are unwilling to reciprocate by swearing unwavering loyalty in exchange for a paycheck.

After all, why should they? It is hard for employees to feel deep loyalty when, for many, investment in training and equipment has withered, pay has been frozen in the aftermath of the financial crisis, and the remuneration of those in the C-suite continues to skyrocket, even when not seemingly aligned to company performance—according to the AFL-CIO, CEOs were paid 335 times more than the average worker in 2015.

In an era where employee rights are often contested—not just in the United States, but around the word—employers have had much greater freedom to fire workers and move operations (even when governments have given them money to stay), and replace long-serving employees with people who can do the job more cheaply, perhaps even on a freelance basis, in low-cost countries like India and South Africa. Such “rationalization” and “efficiencies” may produce an immediate spike in company share prices, but they can devastate the lives of those who have been made redundant and even shatter entire communities.

This March, for example, hundreds of workers were laid off when Mondelēz International, Nabisco’s parent company, decided to move its cookie and cracker production lines from Chicago to Mexico. Executives offered workers the chance to keep the bakery open—so long as they agreed to give up 60% of their wages and benefits in perpetuity. In the United Kingdom, business tycoon Sir Philip Green decided to sail around the Mediterranean on his £100 million ($126 million) luxury yacht for the summer as 11,000 of his employees at clothing retailer BHS prepared to head for the welfare line, and while questions still remained about the company’s £571 million ($720 million) pension deficit.

Meanwhile, greed, dishonesty and a penchant for risk-taking are often cited as the main factors for employees turning on their employers. Perhaps all of these attributes are evident in a recent case. In January, five GlaxoSmithKline workers, two of them scientists, were charged by a federal grand jury in Philadelphia with conspiracy to steal cancer research “potentially worth hundreds of millions of dollars or more” and market it to government-backed Chinese companies, one of which the conspirators themselves set up.

According to the indictment, these employees had received training in the need for trade-secret confidentiality and had been warned that storing sensitive trade data on personal computers breached company policy. If convicted on all charges, each defendant faces prison terms, fines, restitution orders and other penalties.

In the GSK case, the motive for the alleged disloyalty was significant financial gain. It seems, however, that workers could be enticed into providing access to potentially sensitive corporate information for much less. Identity governance specialist SailPoint’s recent Market Pulse Survey found that one in five employees around the world would willfully give up their work passwords to hackers in exchange for cash. Of the employees who stated they would sell their passwords, 44% needed less than $1,000 to persuade them, and some even said they would accept as little as $100. (From the sample of 1,000 employees, workers in the United States were the most likely to sell passwords to opportunistic hackers while workers in the Netherlands were the least likely to say they would be tempted).

The survey also revealed that 40% of respondents still had access to work accounts even after leaving the company, opening an incredible opportunity for potentially disgruntled employees—a vulnerability that may be larger than many employers realize.

According to a 2015 Gallup study, only three out of 10 U.S. workers feel engaged by their job. That disengagement has cost the U.S. economy up to $550 billion in lost productivity each year. Studies by management consultancy McKinsey have also shown that top managers rate their own performance and skills more highly than do the frontline workers they depend on to actually do the work. According to a 2014 report, while 86% of top executives and managers think they do their jobs well, only 53% of workers share that opinion.

“Millennials”—those born between 1982 and 2000—are even more disengaged. As this group of employees is likely to work at a variety of organizations during their lifetimes, it is difficult for companies to inspire their loyalty, especially early in their careers. In a Gallup report this year, 60% of millennials said they are open to a different job opportunity, and 21% have changed jobs within the past year—more than three times the rate seen among non-millennials who report the same, although this could be in part because they are at the beginning of their careers and in lower-level positions.

The research also found that the majority of millennials (55%) do not feel engaged with the company they work for. Another 16% are actively disengaged, meaning they may be “more or less out to do damage to their company,” Gallup said.

There is a strong case for organizations to act before this leads to real problems. Employers cannot rely on other workers, even more senior or longer-term employees, to tip them off, however. EY’s Global Fraud Survey 2016 of nearly 3,000 senior business leaders found that, while 32% of respondents report they have had personal concerns about bribery and corruption in the workplace, 18% of respondents said that loyalty to colleagues would deter them from reporting any incident. A similar proportion (19%) said that they would not use a whistleblower hotline because of a sense of loyalty to the company since reporting an incident may spark a regulatory investigation and even subsequent penalty.

Professor Christine Naschberger, an associate professor in management at Audencia Business School in Nantes, France, is “not surprised that employees are rather disengaged and disloyal to organizations.” She said that part of the problem is a failure of management to recognize the importance of stimulating employee engagement. “Many studies demonstrate the value of intrinsic motivation and its role for employee satisfaction, employee engagement, turnover, productivity and so on,” she said. “In other words, intrinsically motivated employees are more satisfied with their work and their organization. They are willing to go the extra mile and are more productive.”

Some employers are doing more to try to address the problem. Many companies say that they have made or are making changes to their employee value proposition beyond pay in order to better attract and retain talent and keep employees engaged. According to human resources consultancy Mercer, among the most prevalent initiatives planned or currently in place are learning and development offerings, remote and flexible working programs, and non-monetary recognition programs.

But organizations also need to be on the look-out for “danger signals.” Naschberger said that some tell-tale signs that employees may be dissatisfied include a lack of “organizational citizenship behavior,” such as workers who have become lax about issues like clean workspaces, and general disengagement, such as not coming to work and meetings on time or avoiding work-related social events.

To detect levels of disengagement, performance reviews can provide valuable insight, as can conducting regular employee opinion/feedback surveys or workplace stress audits, and checking on absenteeism and staff turnover rates, she said. Conducting exit interviews when employees leave the organization can also produce some candid feedback on how workers feel managers and their colleagues value their efforts. Another way to monitor employee satisfaction levels is to look at comments that employees make on social networking websites. These do not necessarily need to be directly critical of the company, but phrases like “another hard day at the office” might provide some useful feedback.

According to Paul Harris, co-founder and chief marketing officer of human resource technology consultancy BrightHR, “monitoring absence is vital if you want to understand how your employees are feeling.” He added. “Keeping track will allow you to spot attendance patterns that could give you crucial insight into their wellbeing and loyalty to the company.” He also believes employees need to feel that they are valued, so investment in training and skills development can be essential.

Organizations must work to understand their “mixed” workforces as well. “With millennials gaining employment alongside generation X and baby boomers, understanding the very different expectations of each group is crucial for keeping dissatisfaction at bay,” Harris said. “What works for a millennial might not work for a baby boomer nearing retirement. Recognizing these differences will ensure your whole team is satisfied in their roles. Be flexible and trust your team members to work in a way that suits them.”
Employee Loyalty in the Courts
Some states have laws that companies can use against “disloyal” employees. Under a legal mechanism called the “faithless servant” doctrine, employees in New York can have their pay forfeited for the specific period that they were engaged in disloyal behavior, which could include fraudulent misconduct, embezzlement, theft of trade secrets or other conduct detrimental to the company.
In some circumstances, however, the legislation can be extended to cover the entire time a worker was employed if the disloyalty was conducted more or less consistently. In the 2013 case Morgan Stanley v. Skowron, Morgan Stanley sought to recover the $31 million it had paid to a former senior portfolio manager and managing director after he pled guilty to conspiracy to commit insider trading from April 2007 to November 2010 and to lying to the Securities and Exchange Commission regarding his receipt of material non-public information.
The defendant argued that his misconduct “did not permeate his service in substantial part,” meaning that he should not have to repay all the money he earned because his insider trading was limited to specific trades and times, rather than continuous activity. Skowron hoped to rely on the Second Circuit decision in Phansalkar v. Andersen Winroth & Co., which established that a disloyal employee may be permitted to retain compensation derived from transactions that were separate from his or her disloyalty.
Unfortunately for Skowron, the court rejected that proposition and ruled that the salary, management fees and incentive fees that he had received from Morgan Stanley were clearly linked to his insider trading activities and thus susceptible to forfeiture.

In most cases, human resources will lead the approach to measuring employee disengagement, with assistance from compliance. IT may also have a role to play, depending on how intrusive the employer wants to be. Several IT providers have created software tools that record and monitor email communications and phone records, picking up key words that might give clues as to non-compliant behavior. Financial services firms, for example, are required to have these in some of the countries where they operate to detect possible instances of insider trading.

One such software tool called Scout, developed by cybersecurity firm Stroz Friedberg, combs through an organization’s emails and text messages to identify high usage of words and phrases that language psychologists associate with certain mental states and personality profiles. In addition to uncovering instances of obvious danger words like “embezzle,” “cartel,” “hate” and “rip-off,” the software can measure employee dissatisfaction by using an algorithm based on language usage. For example, frequent use of negatives like “no,” “never,” “not,” the contraction “n’t” and adjectives that denote negative feelings, such as “awful,” “bad,” and “terrible” may be tell-tale signs that employees feel embittered, disgruntled or victimized. Other signifiers are the frequent use of “me” and words written in capital letters, like “LOSER” or “ZERO.”

Scott Weber, one of Stroz Friedberg’s managing directors, said that the use of such scanning techniques should not be limited to frontline employees—mangers should also be subject to heightened scrutiny. “The more senior the person is within the organization, the more potential damage he or she can cause because of their greater access to more sensitive commercial information and systems,” he said. “Managers and executives can also become disloyal very quickly if they feel they are overlooked and undervalued.”

Weber says that using such software may help corporations combat “bad leavers” who may steal or sabotage proprietary corporate data, as well as identify insider threats. Around 27% of electronic attacks on organizations come from within, according to a cybercrime survey jointly conducted by CSO Magazine, the U.S. Secret Service, PwC and the Software Engineering Institute’s CERT program last year. Although organizations typically keep such incidents secret, known victims of insider attacks in recent years include Morgan Stanley, AT&T, Goldman Sachs, and DuPont.

One of the key ways for employers to encourage engagement is for executives to lead by example. Organizations like the Institute of Internal Auditors, the Institute of Business Ethics and the Financial Reporting Council, the U.K.’s corporate governance regulator, have said that executives are responsible for “setting the tone” with regard to corporate behavior. In its Global Fraud Survey 2016, EY also said that boards should “reinforce expectations of acceptable behavior throughout their organizations.”

It appears, however, that the most popular current approaches to addressing corporate culture may be simply to punish employees for workplace infringements, rather than reward good behavior. In July, Mercer’s latest Global Financial Services Executive Compensation Snapshot Survey found that most financial services companies are taking significant steps toward fostering a sound risk culture among their staff, with 62% of respondent firms saying that they have carried out initiatives to penalize misconduct and non-compliance to a “great degree.”

Largely due to regulatory requirements, more than 90% of banks and 72% of insurance organizations have “malus” policies in place that require that all or a portion of deferred or unvested awards can be reduced or wiped out. Such policies are mostly triggered by individual misconduct (89%), individual breach in compliance (89%) and negative business performance (74%).

Few organizations are focused on the opposite approach: rewarding positive risk behavior. Just 11% of respondents have implemented such incentives “to a great degree.” As a result, disengagement often increases as employees see little benefit in pushing themselves for rewards and incentives that are just not apparent. Instead, they may be more prone to seek their own rewards—falsifying expense reports, stealing company equipment or taking company data.

Vicki Elliott, senior partner and financial services talent leader at Mercer, believes that positive reinforcement may be worth the effort, however. “Proactively rewarding positive risk behavior can be tricky,” she said, “but it is likely to have a more positive impact on culture in the long term compared to punitive measures.”
Neil Hodge is a U.K.-based freelance journalist and photographer.