Leadership, Ethics, Rules and Culture


Whenever a major organizational scandal breaks - widespread fraud in a company or terrible behavior in a university, a prestigious private high school or a religious institution, often followed by a cover-up - we wonder how what seemed to be good people could do such things. We seem to see it all around us – At Wells Fargo, in the widespread allegations of the #metoo movement, in the cover-up of the egregious activity of the national team physician of the USA women’s gymnastics team and in the recent report of the Pennsylvania grand jury about sexual misconduct by many Catholic priests in that state. For a leader, the threat to the enterprise is real, and it can be existential. It is critical to understand the conditions under which these near catastrophes happen.


Of course, there are some genuinely sociopathic people to whom laws, rules and ethics have no moral or emotional force. For them, the rule and ethical systems are there to be used for cover if that is convenient and sidestepped if they get in the way.


But most people are not sociopaths and most organizations try to rid themselves of the truly bad apples when they are identified. How about all the “ordinary” men and women who become involved in major scandals? What led them to act so badly, especially given the maze of binding rules – legal, ethical and organizational – that prohibit exactly that kind of conduct?

 

My personal observations as a corporate lawyer, regulator and regulatory policy maker suggested that people became wrongdoers by inches - each transaction or incident seemed only a little different from what they had done under similar circumstances the last time with no blow-back. Each time they moved further out toward true wrongdoing or illegality and further out on the risk spectrum.


What led them to act so badly, especially given the maze of binding rules legal, ethical and organizational that prohibit exactly that kind of conduct?

First there was a small incident reflecting bad judgment, then similar behavior but a little more egregious - and so on. And nothing happens! There are no consequences. The feeling of not having done something “really wrong” is validated if your boss or others cover up or ignore the small incident. And the person’s conscience is salved if the organization is under financial or reputational pressure and they can justify their action as helping the bottom line. Then the same thing happens with the next incident. To the wrongdoer, each step was only a little more than the last – and there were no consequences the last time so it must be “OK” and risk free. Soon it is too late to ring a bell on the behavior because of the reputational (or worse) consequences for the organization and the people involved. It is no longer possible to turn back or erase what has been done.

 

I was fascinated recently to read an account of an interview with Dr. Yuval Feldman about his new book, The Law of Good People: Challenging States’ Ability to Regulate Human Behavior.[i]


Dr. Feldman began by noting that “these same [good] people are biased, by both automatic and deliberative processes, to interpret self-interested behavior in ways that can be justified by their conscience. People often fail to recognize the extent to which self-interest affects their understanding of both moral and legal rules, and consequently they underestimate how self-interest affects their behavior.”


He went on to describe a psychological experiment which demonstrated the tendency of good people to engage in “ordinary [e.g., low-level] unethicality” when their decisions are tainted by money or other forms of self-interest. “[The more we allow them wiggle room to justify self-interested behavior—as in the experiment I just described—the more likely they are to rationalize a self-interested choice to violate a legal or ethical norm, and therefore the more likely they are to act on it. These usually are … minor instances of “ordinary unethicality,” where people can still feel comfortable enough with their ethical choices.”


And the significance of that conduct? “the many more -benign violations of the law actually accumulate to huge impacts on both law and society. In addition, ... unethical behavior gradually becomes larger and larger. Finally, the numerous subtle rule violations create new social norms of what is a permissible legal behavior, and they have much larger effects on the destruction of social capital and trust than the few gross violations by the really “bad” people.”

 

How can this downward spiral be prevented? It is important to begin with the self-interest involved, which will vary from financial gain (the account executives at Wells Fargo meeting new account quotas), to sexual gratification, to the desire to exercise power over others. The absence of consequences, amplified in some cases by the belief that the action is beneficial to the organization, is the critical step in validating the conduct. The absence of consequences stems from the corporate and organizational culture. Earlier in my career I spent a few years as general counsel of a large retail securities firm. At that firm I learned two important lessons:


1. what prompted the conduct of too many of the thousands of brokers was not the regulatory system or the rule book; it was the structure of the compensation system; and

2. the critical messages sent by management were not the hortatory memos about the importance of ethical behavior, obeying the rules and putting the customer first but the implicit messages in who was promoted and who was fired (or not fired), and who got the large bonuses.

 
The absence of consequences stems from the corporate and organizational culture.

Many people in an organization know or suspect who the bad actors are. If they are kept on board, if their bad conduct is ignored or worse, if they are highly compensated, that is an important message about how others should act. Then similar conduct spreads throughout the firm.

Peter Drucker once famously said “Culture eats strategy for breakfast.” Culture eats laws, rules and ethics for dinner. The prime determinant of culture is how the leaders act and what they do and do not do, especially when the company or organization is under pressure. The classic example is Johnson and Johnson’s immediate withdrawal of all Tylenol from retail stores when seven people died from Tylenol tablets that had been laced with cyanide. Although, it is often too late to do the right thing when a problem arises. The culture must reward those who recognize the legal and moral constraints and rid the organization of those who do not.

 

I welcome your comments, thoughts and reactions.

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[i] The interview was conducted by Dave Nussbaum, Managing editor of The Behavioral Scientist, the online magazine of BehavioralScientist.org. (Designing to Avoid “Ordinary Unethicality”: A Q&A with Yuval Feldman, (July 31, 2018). Dr. Feldman is the Mori Lazar of Professor of Legal Research at Bar-Ilan University Law School, Israel.

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