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On the Road to Unethical Conduct Jennifer Sawayda Program Specialist Anderson School of Management University of New Mexico Albuquerque, NM.

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Presentation on theme: "On the Road to Unethical Conduct Jennifer Sawayda Program Specialist Anderson School of Management University of New Mexico Albuquerque, NM."— Presentation transcript:

1 On the Road to Unethical Conduct Jennifer Sawayda Program Specialist Anderson School of Management University of New Mexico Albuquerque, NM

2 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…

3 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.

4 Common Reasons for Misconduct Pressure Foot in the door The greater good Rationalization Groupthink Authority No way out Self-serving bias Greed and narcissism

5 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

6 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.

7 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.

8 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.”

9 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.Asch experiments –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.Harvard Business Review 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.

10 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.The Milgram experiments –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.

11 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.”

12 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.

13 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.

14 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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