Ethical trauma: Cyclical or rogue waves

Organizational crises that are caused by ethical failings can imperil the survivability of the firm and significantly impact stakeholders. They can also have a broader impact on entire industries and society as a whole. This study explains these crises as ethical traumas and seeks to demonstrate that they tend to occur in waves. It will also empirically test their correlation to other factors such as corporate governance, regulatory actions and the business cycle. The relevancy of this research is underscored by the most recent wave of ethical trauma that started last year, impacting some of our leading financial institutions and arguably serving as a catalyst to the economic recession.;The wave-like pattern of ethical traumas is illustrated by plotting the magnitude of financial loss for firms that experienced them from 1980-2008. An analysis of the dispersion of ethical trauma events did not indicate a cyclical pattern that could be used to determine the likelihood of future waves. Instead, periods of heightened ethical trauma activity appear to occur randomly like a rogue wave. Other measurable factors that might exhibit patterns similar to ethical traumas were identified and tested.;Metrics for ethical trauma were correlated to the frequency of financial restatements as an indicator of corporate governance, the number of SEC filings as a measure of regulatory actions and the S&P 500 and GDP as representations of the business cycle. The data identified the number of SEC litigation filings as having a strong correlation to the occurrence and magnitude of ethical trauma whereas financial restatements, the S&P 500 and GDP did not.;The implications of this research for management practitioners is in providing a heuristic for anticipating periods of heightened risk of ethical trauma by following a measure of regulatory actions - SEC filings. The identification of a strong correlation between these independent variables could enhance risk assessment, facilitating the implementation of policies and procedures that might help avoid an ethical trauma altogether or mitigate its impact should one occur.