On the Road to Unethical Conduct

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On the Road to Unethical Conduct
Jennifer Sawayda
Program Specialist
Anderson School of Management
University of New Mexico
Albuquerque, NM
It’s easy to assume that organizational misconduct is
committed by rogue individuals or psychopaths. Yet what
happens when people who appear to be highly moral in
their personal lives commit unethical actions? Consider the
following case…
Betty Vinson from WorldCom
• Vinson was asked by her superiors to make improper
accounting entries to “save the company.”
• The first several times she was asked, she refused.
• Constant pressure and the belief that it was the only way to help
the firm convinced her to go against what she knew was right.
• She pled guilty to conspiracy and sentenced to five
months in prison and five months of house arrest.
Common Reasons for Misconduct
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Pressure
Foot in the door
The greater good
Rationalization
Groupthink
Authority
No way out
Self-serving bias
Greed and narcissism
Pressure
• Superiors or co-workers
– “If you can’t meet these goals, you’re fired.”
– Enron’s rank-and-yank system—nobody wanted to be in the lowest tier
• Time
– “This must be done by this weekend or else we’ll lose the account!”
– Incentive to cut corners, ignore red flags
• Market/shareholder
– “We need to engage in this risky behavior to remain competitive.”
– Big financial firms engaged in risky behaviors to earn quick profits prior to
the latest recession
Foot in the Door
• First somebody gets you to agree to a small favor, then they ask for
a bigger one.
– If you agree to commit a small ethical infraction, you are much more likely
to commit a larger one next time you are asked.
– Studies show that those who have agreed to do something small are
much more likely to agree to do something bigger .
• Escalation of commitment is a similar concept. At first misconduct
may start off small, but then it requires more and more misconduct to
meet performance targets and cover up the previous misconduct.
– Similar to the “boiling frog” anecdote
– Jerome Kerviel is a former Societe Generale trader engaged in aggressive
risk taking that nearly destroyed the bank; $69 billion in rogue trades,
sentenced to three years in jail
• After his early trades earned money, Kerviel engaged in riskier and riskier trades.
The Greater Good
• This occurs when an employee commits misconduct not to benefit him- or
herself but to help the firm.
• Organizational misconduct is more likely to come from employees trying to
reach performance goals or benefit the organization rather than personal
greed.
– “I have to do this to save the organization.”
– WorldCom’s board of directors continued to loan CEO Bernie Ebbers ridiculously large
sums of money so he could meet his margin calls. Without these loans they knew Ebbers
would have to sell his stock, which would drive down the price and harm the firm.
Rationalization
• Coming up with reasons to reduce cognitive dissonance in a misconduct situation
– When faced with an unethical decision, the employee faces a dilemma because the
action conflicts with his or her values and knowledge of what constitutes ethical conduct.
– Rationalizations are excuses used to reduce this uncomfortable feeling by attempting to
provide a valid reason for the misconduct.
– Andy Fastow confessed he used rationalization when he committed fraud. He used
phrases such as “everyone was doing it” and “it’s to help shareholders” to justify his
misconduct.
• Common rationalizations include “Everyone is doing it”; “I deserve it,”; “It’s only one
time.”
– Employee theft and employee sabotage are likely to make use of rationalization to justify
their behavior—“I’m not getting treated the way I deserve, so this is a way to make it
even.”
Groupthink
• Occurs when an employee goes along with the crowd even when he or she
believes the decision or action is wrong.
– Asch experiments: To test whether a participant would give an obviously wrong
answer because everyone else did so; 75% of participants gave an incorrect
answer to at least one question.
– The Challenger explosion: While there had been concerns over the O-rings on
the shuttle, the burden was placed on contractors to prove that the O-rings were
unsafe rather than to prove that they were safe.
• The Harvard Business Review calls groupthink the “Kryptonite of leadership”
as strong leaders must be willing to do what they think is the right course of
action.
• Best way to avoid trap of groupthink: Be willing to stand out from the crowd.
– In the Asch experiments, those participants that resisted complying with the
crowd exhibited more confidence or simply seemed to feel like they had a
responsibility to give what they felt was the right answer despite their discomfort.
Authority
• Individuals commit acts that conflict with their ethical beliefs because
somebody in authority tells them to do so.
• The Milgram experiments: Although the participants were uncomfortable,
many were willing to continue administering electric shocks if the
“authority figure” agreed to take responsibility.
– 65% of participants administered the maximum 450-volt shock, even though
doing it caused them severe distress.
• One of the strongest sources of power is legitimate power, which occurs
when a person is perceived to be in charge.
• “My boss told me to do it” is not an excuse that holds up in court.
• Being willing to ask questions and assume personal responsibility—no
matter what the authority figure says—appear to be good ways to avoid
this trap.
No Way Out
• When an individual feels trapped by his or her circumstances
• In business ethics, this might include:
– Continuing in misconduct because to do otherwise would expose it and lead to
punishment
• Weston Smith, the former CFO who blew the whistle on fraud at HealthSouth, expressed that
while the fraud started as a one-time thing, the company was forced to continue to make the
numbers.
• Smith felt compelled to sign off on the numbers under the Sarbanes-Oxley law though he knew
they were false and he could go to prison for it; he felt trapped by the situation.
• Eventually admitted his part in the misconduct and faced punishment; he comments, “I was
scared. But there was an even stronger emotion: gratitude. I was just so relieved that the lying
was over.”
– Allowing misconduct to go unchecked due to fears of punishment
• Employees at Enron who observed misconduct were afraid to step forward.
• Whistleblower Sherron Watkins faced retaliation for trying to alert company leadership.
• Former Enron executive Lynn Brewer claims Enron’s downfall was due to a culture of
“complacency.”
Self-Serving Bias
• Self-serving bias refers to our tendency to view ourselves as more
ethical than the average person.
– The Blind Spot: Why We Fail to Do What’s Right and What To Do About It
• When asked how they compared “ethically” to other people on a scale of 1 to 100, the
average score was 75. People tend to believe they are more ethical than those
around them.
– Harvard researchers believe that the reason why many accountants
perform bad audits is not so much due to fraud, but due to unconscious
bias.
– There is often a gap between our ethical intentions and our behavior;
those that believe they are more ethical than the general population are
more likely to turn a “blind eye” toward this gap and not recognize
problematic situations.
Greed and Narcissism
• The definition of greed is “an intense and selfish desire for something, especially
wealth, power, and food.”
– Dennis Kozlowski was making $170 million as CEO of Tyco; accused of stealing millions
from Tyco; almost ruined the company
• Narcissism—Thinking you are above the law
– Mark Whitacre worked with the FBI to expose his employer Archer Daniels Midland for
price fixing; however, he also committed his own fraud worth $9 billion.
– In a presentation at the John Cook School of Business, he said the following: “If I had to
put in one word what we went in prison for, we went to prison for narcissism. We thought
we were above the law and we all failed drastically because of it.”
• The movie The Informant starring Matt Damon is based on Whitacre’s experiences.
• The Need to Win
– Closely related is the need to win; many fraudsters claim they couldn’t bear the thought of
failing
• Bernard Madoff appeared to exhibit this behavior with his wide scale Ponzi scheme.
Final Thoughts…
• Many of these are not mutually exclusive. For instance, misconduct
will often start with rationalizations, escalate in severity, and result in
the person feeling that he or she has no way out but to continue the
misconduct.
• What can we learn from this?
• Companies should regularly reinforce shared values and emphasize that everyone—
whether lower-level employees or high-levels manager—must abide by them.
• Mechanisms should be put in place that allow employees to report misconduct,
including anonymous mechanisms such as hotlines.
– Unlike what happened with Enron, these reports should be investigated and acted upon.
• Realize that misconduct is misconduct, no matter how much it is perceived to be
“small.” Rationalizations do nothing to change this fact.
• Recognize that most misconduct starts off small but then snowballs into greater
misconduct.
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