KnowledgeUpdate

A Simple ‘I’m Sorry’

When Apologies Are Good Business

An op-ed piece today by Stuart Shapiro, head of the Pennsylvania Health Care Association, urges the Pennsylvania legislature to pass a law permitting medical professionals to “acknowledge, express empathy for, and take ownership of unforeseen outcomes” without risking a lawsuit based on the fact that they apologized.

Shapiro points out that numerous studies have shown that “anger – not greed – is the driving force behind most medical-malpractice suits.” In one study, he says, “more than a third of those who filed suit said they would not have done so if they had been given an explanation and an apology.”

Already, 35 states have passed similar legislation and “created disclosure forms for doctors, hospitals and nursing homes to acknowledge regret about outcomes,” resulting in fewer claims and dramatically higher customer-service ratings, writes Shapiro.

Just what is the value of saying “I’m sorry,” and could apologies play a role in our current financial crisis? What if all those who engaged in irresponsible behavior – ranging from CEOs to lenders to overextended consumers – announced they were sorry for their actions and asked for forgiveness?

Knowledge@Wharton looked into this question seven years ago during a time when acts of contrition from the business community were occurring regularly. The article cites Dennis Kozlowski, then CEO of Tyco International, apologizing in the spring of 2002 to investors for a $1.9 billion loss in the second quarter and layoffs of 7,100. (Kozlowski was later convicted of fraud, grand larceny and other charges, and is currently serving time in prison.)

In the financial services industries, Merrill Lynch in May 2002 issued a public apology for emails from its analysts that “may have appeared inconsistent with Merrill’s published recommendations,” adding that the statement constituted “neither evidence nor admission of wrongdoing or liability.” In June 2002, Hank Paulson, then chairman of Goldman Sachs, gave a speech in which he said recent criticisms of the business community were “deserved” and went on to suggest ways companies like his could help restore investor confidence. In the fall of 2002, Citigroup’s Sandy Weill apologized for certain activities “that do not reflect the way we believe business should be done.” About the same time, James Rohr, chairman and CEO of PNC Financial Services Group, apologized for accounting irregularities that happened during his tenure.

How effective are apologies like these, especially in light of today’s economic crisis, much of it caused by either incompetent or unethical behavior?

Wharton professor of operations and information management Maurice Schweitzer, who studies issues of deception and trust, suggests that apologies from certain individuals in the financial services industry could be effective, depending on the nature of the apology and the failure that occurred.

“Many people at the top were either incompetent, or they were unethical in attempting to game the system and maximize their own welfare,” he says. “An apology could be effective in both cases, but more so for the first case. When you apologize for screwing up, admitting that you weren’t quite as competent as you should have been, people will be more forgiving. An ethical violation should be a more powerful apology because people need to perceive that you are going to change. The admission of an ethical lapse is potentially the more damaging.”

Schweitzer hasn’t seen any apologies so far from people in the financial services industry, possibly because by apologizing they would be “admitting culpability and setting themselves up as a target.” But any apologies that do come out should be “very honest and forthright, not self-serving or deceptive. An apology is especially effective if the person apologizing gives up something. Suppose a CEO has three homes; if he says he will sell two and give the money to charity, that would be effective. Or they could give up their plane or boat – something that demonstrates contrition.” Top executives, Schweitzer adds, could also craft apologies “for the things they are responsible for, the things they regret.” He or she could refer back to the market environment just before the crisis hit, and say, “‘there are problems I should have foreseen. Nobody else was looking at them, either, but it would have been the right thing for me to have foreseen this.’ In other words, these executives would be taking responsibility for their part of the problem.”

In the case of alleged swindler Bernard Madoff, “the apology would have to be very deep,” says Schweitzer. “The problem here is that an apology from Madoff would sound shrill and insincere. And indeed, his behavior looks like it was premeditated, happened over a very long period of time and was so outside the bounds of ethical behavior that it wasn’t a failure of judgment. It was intentional. Any apology from him would be credible only if people really believed he was going to change.”

What people want in any apology, Schweitzer says, “is some recognition that somebody made a mistake, and it wasn’t them.”

While the 2002 Knowledge@Wharton article goes on to explore these issues at length, some of the observations from experts in the article seem especially relevant to today’s financial crisis. For example, Chris Nelson, a senior vice president with Ketchum who leads the PR agency’s issues and crisis management group, advises companies in crisis situations to disclose the facts about the event (such as a product defect) as quickly as possible, and talk first about what they are going to do to fix it – i.e., set that expectation – and second, make clear what they will do to prevent it from happening again.

In cases where shareholders have lost significant amounts of money because of “inappropriate actions by corporate executives, new management can always apologize,” says Nelson. But that can be relatively ineffective. Instead, managers should try to demonstrate to shareholders that they have a plan for getting the company back on track and strengthening its overall financial condition – that is, offering shareholders a future where their stock once again has value. Apologies tend to backfire, Nelson adds, “when they are not followed by actions that will rectify the initial problem.”

Additional research on apologies looks at the question of attribution, suggesting the need for a clear cause of the harm with which an individual or company is associated. Apologizers need to explain why the event occurred, either by taking the blame themselves, or by citing other factors, says Schweitzer, who along with Wharton colleagues John Hershey and Eric Bradlow wrote a paper entitled, “Promises and Lies: Restoring Violated Trust.”

In a hyper-litigious business climate, is it wise to apologize, the 2002 article asks? The advice of litigation counsel is “almost never to provide an apology except as part of a negotiated settlement or agreement, because an apology could conceivably be construed as some sort of admission of guilt,” says Larry White, former general counsel at a large research university. “Once litigation starts, it’s pretty hard to get anybody to talk to anybody.”

In many cases, however, it appears that apologies could actually make litigation less likely and/or cheaper, the article notes. According to White, “It was astonishing how often the issue of apologies came up, particularly in the context of employment litigation law. It was almost as important to the plaintiff to feel that an apology was tendered as it was to recover money or even regain a job.”

 
 

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