By Margaret Steen
When a corporate scandal throws a company into crisis or even destroys it, many onlookers’ reaction is that the people involved must have been immoral. Certainly they, the onlookers, would never become involved in cooking the company books, approving mortgages without proper documentation, or lying to customers about a product’s capabilities.
Yet it’s easier than most people realize for ordinary, well-meaning people to get caught up in activities they should have known were wrong. These activities do “real harm to real people,” says GSB accounting Professor Maureen McNichols, who teaches an elective course called Understanding Cheating. Among other things, the course helps students see how good leadership and the right organizational structure can cut down on the opportunities for corruption.
Creating a structure that reduces the chances of cheating requires a balancing act: between too few controls and too many, and between understanding why people cheat and intolerance for such behavior.
corruption and bribery
Many people, including students at business schools, resist discussing how the influence of a group or a situation can lead good people to do bad things. It seems to excuse the behavior, and they want individuals to be held accountable for their actions. But research indicates that leaders who don’t acknowledge that group pressure exists—so they can use that understanding to promote an ethical organizational culture and appropriate controls—may be setting their organizations up for corruption.
“I would say that there are some people who are just flat-out corrupt: They would steal the offering from the church plate,” says Douglas Brown, MBA ’61, who was named treasurer of the state of New Mexico in 2005 after a corruption scandal led to the indictment of the two previous treasurers. But there’s a much larger group who are deeply conflicted about what to do and finally “just kind of tunnel under and put up with it.”
Brown didn’t fire everyone who had had a hand in his department’s corrupt practices. For example, an employee who was asked by her boss to send out invitations to a golf tournament “which was basically lining the pockets of the state treasurer” was kept on.
Just as posting speed limit signs and exhortations that “Speed Kills!” will do little to reduce speeding if the police aren’t issuing tickets, so businesses need controls and independent auditors to rein in potential cheating. But “too many controls can breed enormous inefficiencies,” Brown says, causing business to grind to a halt. “This is a common managerial problem: You have to trust your people and empower them” while still monitoring what they’re doing.
The idea that ordinary, good people can end up involved in corruption is counterintuitive to some. “We underestimate the power of a situation to control people’s actions,” says GSB organizational behavior Professor Deborah Gruenfeld. “Most of us believe we’re much more auto-nomous than we are.”
Social science research suggests leaders need to take into account group power, organizational structure, rationalization, and fear and confusion.
• GROUP POWER. If the supervisor of the storeroom notices supplies are disappearing fast, he or she is likely to remind coworkers that too many people are stealing. That’s exactly the wrong approach to take, psychologist Robert Cialdini of Arizona State University told researchers at a recent Business School conference. In an experiment in Petrified Forest National Park in Arizona, Cialdini placed signs at entrances asking people not to take home petrified wood. The sign at one entrance showed three thieves with an X over them, while at another entrance, the sign depicted just one thief. The latter was far more effective at reducing theft.
“You want to alert people to the extent of a problem as a way of mobilizing them against it,” Cialdini says. But when you emphasize how common cheating is, “there’s a subtext message, which is that all of your neighbors and coworkers are doing this. And if there’s a single, most primitive lever for behavior in our species, it’s the power of the crowd.”
• ORGANIZATIONAL STRUCTURE. “My lifetime’s work in business ethics suggests that business corruption has everything to do with culture and with incentives,” says Kirk Hanson, MBA ’71, executive director of the Markkula Center for Applied Ethics at Santa Clara University and an emeritus GSB faculty member.
For example, Don Moore, associate professor of organizational behavior and theory at the Tepper School of Business at Carnegie Mellon University, has written about how the relationship between accounting firms and their clients “makes it impossible for auditors to be objective, given what we know about human psychology.” Auditors want smooth working relationships with their clients, and they don’t want to be fired, so they have an incentive not to ask awkward questions.
Executives may also “look the other way when a salesperson overpromises,” Cialdini says. They may ignore exaggeration in the company’s marketing materials or use proprietary information gained from one vendor in negotiation with another.
Actions speak louder than words. “You can’t dupe people by saying, ‘This is what we stand for,’ when promotions are based on something else,” Gruenfeld says.
• RATIONALIZATION. Because people generally want to view themselves as ethical, they will reframe a situation to justify their actions, says Elizabeth Mullen, assistant professor of organizational behavior at the GSB, whose courses on negotiation and organizational behavior include ethics topics. “The division of labor required for much corporate work, with many people contributing a small amount to a project, makes this easier. For example, an employee can tell himself, ‘I’m not the person who falsified the safety data for the product; I just reported the data that I had,’” Mullen says.
People also accept uncritically information that confirms what they want to believe, Moore said, while poking holes in statements they wish weren’t true.
• FEAR AND CONFUSION. GSB political economy Professor Jonathan Bendor, who teaches a course on negotiation that includes discussions of cheating, thinks for most people fear is a more common cause of corrupt behavior than greed. People want to avoid conflict, and being a whistleblower can ruin a person’s career, even if the person is vindicated. So many people keep quiet.
“It takes a huge amount of courage to say ‘stop.’ Some of this stuff is a judgment call, and you may be wrong, and then you really look stupid. But you have to take the risk,” says Bowen “Buzz” McCoy, a former member of the Business School’s Advisory Council who spent 30 years at Morgan Stanley. He has written and consulted on business ethics and, with his wife, endowed a GSB chair in leadership values and helped fund the Stanford Program in Ethics in Society.
Although many cases of corruption involve behavior that anyone should know is wrong, it’s not always so clear cut. For example, says Professor Blake Ashforth of Arizona State’s W.P. Carey School of Business, “Small gifts are ways of cementing friendships. Big gifts are bribes. How big is big?”
McCoy points out that a good salesperson may use hyperbole but doesn’t lie, and that in some cases the sophistication of the customer plays a role in how far a salesperson should go in making claims. Adds Gruenfeld: “When people say someone is entrepreneurial or resourceful, part of what they mean is that person knows how to work around constraints in the system.”
GSB Professor Emeritus James March adds that “without a certain amount of cheating—violating rules—and corruption—inducing others to violate rules—no organization can survive. It is often called ‘taking initiative’ or ‘using your head.’ That is not a justification of egregious behavior, but a reminder that the boundary between art and obscenity is often hazy.”
Tepper’s Moore describes “an endless process of co-evolution” in which businesses explore new models. Some are deemed by society to be unethical or undesirable and eventually outlawed. Others become the norm.
Moore explains how auditors can go from behavior that is technically correct but ethically borderline to outright corrupt in just a few years. First, the auditor sees the client doing something that’s just on the edge of permissibility and doesn’t say anything. The next year, the client pushes just a bit further, this time over the line. Now the auditor doesn’t confront the client about it, since the practice is so similar to the one that went unremarked the previous year. By the third year, the client’s practice is clearly wrong, but the auditor realizes that to challenge it would be to admit mistakes in previous audits. And by the fourth year, the auditor is actively engaged in a coverup with the client to prevent the corrupt practice from being discovered.
“Not everyone who starts down the slope winds up slipping all the way to the bottom,” Moore says. “But people do become comfortable with actions when they occur in small steps that they would never allow if they happened all at once.”
Once these actions take hold, they are harmful to the organization and to the individuals involved. It’s difficult to lie to the outside world and tell the truth internally, McNichols says, so people wind up distorting their own company’s decisions with lies as well.
Other costs of dishonesty include turnover of more honest employees, pilfering by dishonest employees who stay, and the monetary and psychological costs of increased monitoring of employees’ behavior.
With all these forces conspiring against honesty, is it possible for individuals to be held responsible?
FROM A LEGAL PERSPECTIVE, psychological research may sometimes provide a defense. For example, the legal definition of fraud in the United States requires that the person who makes a fraudulent statement knows it is false when he or she says it. “The psychology shows quite clearly that people are capable of persuading themselves of all kinds of crazy things. If you’ve persuaded yourself that this falsehood is true, it’s not fraud when you say it,” Moore says, adding that he would advocate changing the legal definition of fraud to make this defense more difficult.
However, Ashforth notes that even though people can be easily corrupted by the situation or culture, they still know right from wrong. Often people who are engaged in wrongdoing don’t talk much to their friends about it, a sign that they know it isn’t right. “People are still responsible for their choices.”
“It has to be very clear to the employee that the culture doesn’t allow cheating. There should be close monitoring,” says Maurice Schweitzer, associate professor of operations and information management at the Wharton School, University of Pennsylvania.
Some experts stress the importance of government action. “It’s just silly to pretend that we can solve problems like fraudulent reporting of financial results with voluntary measures,” Moore says. Like pollution, fraudulent reporting is a “public good problem,” where each company would like “to get away with a little more than everyone else does,” so the government needs to establish a level playing field.
Santa Clara’s Hanson says the government also plays a role by putting executives in egregious cases behind bars. Without this, “executives believe that it’s all a cash game, that I can make substantial amounts of money with a low probability of having to pay a fine. However, if there is even the remotest chance that I may go to jail, the incentives are changed dramatically.”
But there are also steps business leaders can take to encourage honest, ethical behavior.
• HIRE AND PROMOTE FOR AN ETHICAL CULTURE. People tend to be most comfortable in organizations where ethical standards are similar to theirs. Those who are opposed to the behavior they see “will migrate out, either by choice or they’ll be asked to leave,” Cialdini says. Many employees may not know whether the CFO is cooking the books, but they do see and hear about others’ behavior.
The problem is magnified when the unethical players are in management. “It becomes very reinforcing as managers select and promote people who are like themselves,” Ashforth says. That will leave more people in the organization who think cutting ethical corners is OK.
Adds Wharton’s Schweitzer: “If a senior manager has employees pick up his dry cleaning or wash his car or use company money to fund a birthday party, you’re setting a tone that’s really corrosive throughout the organization.”
“There are cultures where you’re perceived as dumb if you’re not taking a little bit on the side,” Hanson says. “There are cultures where you don’t tell the customer anything more than what you have to, and there are cultures where you genuinely watch out for the customer’s interests.”
• ENCOURAGE DISSENT. Corruption is less likely if employees feel comfortable speaking up. “Managers need to convey that they want their subordinates to disagree with them, or to speak up when something doesn’t feel right,” Gruenfeld says.
• APPOINT AN ETHICS OFFICER. Have someone who knows both legal and ethical issues and can offer advice to employees when they don’t know how to handle a situation. “You need to have people you can actively go to to get advice,” Ashforth says.
• RETHINK GOALS AND REWARDS. A system that bases people’s pay solely on how much they sell provides no incentive for behaving responsibly with respect to recruiting, training, and character. “If you tie compensation solely to production, you’ve lost control—you’re no longer a manager,” McCoy says.
Schweitzer has found that people with specific goals are more likely to cheat in order to reach them. This is true even when there is no extra compensation for meeting the goal—the psychological benefit is enough to make people stretch the truth. He suggests managers weigh the motivation that goals provide against the potential ethical cost, especially when those goals, such as billable hours, are difficult to monitor. “In some cases, the benefits of motivating with goals and incentives are really worth it,” he says. “In other cases, the damage you do to your ethical climate could be far worse than the benefit you get in productivity.”
• MARGINALIZE MISCONDUCT. Instead of telling employees not to steal from the storeroom because too many pencils have disappeared, try this message, Cialdini says: “‘If even one of us does this, it undermines the integrity of the system and the fairness by which we all treat one another.’ The key is to marginalize the undesirable conduct, rather than to normalize it.”
An ethical culture—one in which honesty is normal and cheating is not—can go a long way toward minimizing corruption. But just as creating it requires balancing competing approaches, so does dealing with offenses when discovered.
“I do think people have to be held accountable for actions,” Gruenfeld says, but she adds that punishing wrongdoers should be accompanied by an examination of the organizational structure that contributed to the problem. Simply replacing the people is not enough.
