• Tweet

  • Post

  • Share

  • Save

  • Get PDF

  • Buy Copies

  • Print

The Thought in Brief

Companies have poured time and money into ethics training and compliance programs, simply unethical behavior in concern is even so widespread. That's because cognitive biases and organizational systems blind managers to unethical behavior, whether their own or that of others.

All these serve to derail fifty-fifty the best-intentioned managers:

  • Goals that reward unethical behavior
  • Conflicts of interest that motivate people to ignore bad behavior when they have something to lose past recognizing it
  • A tendency to overlook muddy work that'south been outsourced to others
  • An inability to notice when behavior deteriorates gradually
  • A tendency to overlook unethical decisions when the outcome is adept

Surveillance and sanctioning systems won't work past themselves to improve the ethics of your organization. You must be enlightened of these biases and incentives and carefully consider the ethical implications of every determination.

The vast majority of managers mean to run ethical organizations, nevertheless corporate corruption is widespread. Part of the problem, of course, is that some leaders are out-and-out crooks, and they direct the malfeasance from the top. But that is rare. Much more often, we believe, employees bend or intermission ideals rules because those in charge are bullheaded to unethical behavior and may even unknowingly encourage it.

Consider an infamous case that, when it bankrupt, had all the earmarks of conscious top-down corruption. The Ford Pinto, a compact motorcar produced during the 1970s, became notorious for its tendency in rear-end collisions to leak fuel and explode into flames. More than than 2 dozen people were killed or injured in Pinto fires before the company issued a recall to correct the problem. Scrutiny of the decision process behind the model'due south launch revealed that under intense competition from Volkswagen and other minor-car manufacturers, Ford had rushed the Pinto into product. Engineers had discovered the potential danger of ruptured fuel tanks in preproduction crash tests, but the assembly line was ready to go, and the company'due south leaders decided to proceed. Many saw the decision as show of the callousness, greed, and mendacity of Ford'due south leaders—in short, their deep unethicality.

Just looking at their decision through a modernistic lens—one that takes into business relationship a growing understanding of how cognitive biases distort ethical conclusion making—nosotros come to a different conclusion. We suspect that few if any of the executives involved in the Pinto decision believed that they were making an unethical choice. Why? Patently considering they thought of it every bit purely a concern determination rather than an upstanding ane.

Taking an approach heralded every bit rational in nearly business concern school curricula, they conducted a formal toll-benefit analysis—putting dollar amounts on a redesign, potential lawsuits, and even lives—and determined that it would exist cheaper to pay off lawsuits than to make the repair. That methodical process colored how they viewed and made their choice. The moral dimension was not part of the equation. Such "ethical fading," a phenomenon first described by Ann Tenbrunsel and her colleague David Messick, takes ideals out of consideration and even increases unconscious unethical beliefs.

What about Lee Iacocca, and then a Ford executive VP who was closely involved in the Pinto launch? When the potentially dangerous blueprint flaw was starting time discovered, did anyone tell him? "Hell no," said one high company official who worked on the Pinto, according to a 1977 article in Female parent Jones. "That person would have been fired. Condom wasn't a popular subject around Ford in those days. With Lee it was taboo. Whenever a problem was raised that meant a delay on the Pinto, Lee would chomp on his cigar, look out the window and say 'Read the product objectives and get back to work.'"

We don't believe that either Iacocca or the executives in charge of the Pinto were consciously unethical or that they intentionally sanctioned unethical beliefs by people farther down the concatenation of control. The decades since the Pinto case have immune united states to dissect Ford's controlling process and use the latest behavioral ethics theory to information technology. We believe that the patterns evident at that place continue to recur in organizations. A host of psychological and organizational factors diverted the Ford executives' attention from the upstanding dimensions of the problem, and executives today are swayed past similar forces. Nonetheless, few grasp how their own cognitive biases and the incentive systems they create can conspire to negatively skew beliefs and obscure it from view. Only past understanding these influences tin leaders create the ethical organizations they aspire to run.

Ill-Conceived Goals

In our teaching nosotros oft deal with sales executives. By far the most mutual problem they report is that their sales forces maximize sales rather than profits. Nosotros ask them what incentives they give their salespeople, and they confess to actually rewarding sales rather than profits. The lesson is articulate: When employees conduct in undesirable ways, information technology's a skilful idea to await at what you lot're encouraging them to do. Consider what happened at Sears, Roebuck in the 1990s, when management gave automotive mechanics a sales goal of $147 an hour—presumably to increase the speed of repairs. Rather than work faster, however, employees met the goal by overcharging for their services and "repairing" things that weren't cleaved.

It'southward a skilful idea to look at what yous're encouraging employees to practice. A sales goal of $147 an hour led automobile mechanics to "repair" things that weren't broken.

Sears is certainly not unique. The pressure at bookkeeping, consulting, and police firms to maximize billable hours creates similarly perverse incentives. Employees appoint in unnecessary and expensive projects and creative bookkeeping to attain their goals. Many police firms, increasingly aware that goals are driving some unethical billing practices, accept made billing more transparent to encourage honest reporting. Of course, this requires a detailed allotment of fourth dimension spent, so some firms have assigned codes to hundreds of specific activities. What is the effect? Deciding where in a multitude of categories an activity falls and assigning a precise number of minutes to it involves some guesswork—which becomes a component of the billable hour. Enquiry shows that as the dubiousness involved in completing a chore increases, the guesswork becomes more unconsciously self-serving. Fifty-fifty without an intention to pad hours, overbilling is the outcome. A system designed to promote upstanding behavior backfires.

Permit's look at another case in which a well-intentioned goal led to unethical behavior, this time helping to drive the recent fiscal crisis. At the center of the problem was President Bill Clinton'south desire to increase homeownership. In 2008 the BusinessWeekeditor Peter Coy wrote:

Add President Clinton to the long list of people who deserve a share of the arraign for the housing bubble and bust. A recently re-exposed certificate shows that his administration went to ridiculous lengths to increase the national homeownership rate. It promoted paper-sparse down payments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes. It'southward clear at present that the erosion of lending standards pushed prices upwardly by increasing demand, and afterwards led to waves of defaults by people who never should have bought a domicile in the kickoff place.

The Sears executives seeking to heave repair rates, the partners devising billing policies at law firms, and the Clinton assistants officials intending to increment homeownership never meant to inspire unethical beliefs. But by declining to consider the effects of the goals and advantage systems they created, they did.

Function of the managerial challenge is that employees and organizations crave goals in order to excel. Indeed, among the best-replicated results in inquiry on managerial behavior is that providing specific, moderately difficult goals is more than effective than vague exhortations to "practice your best." But research as well shows that rewarding employees for achieving narrow goals such as exact product quantities may encourage them to fail other areas, take undesirable "ends justify the means" risks, or—nearly important from our perspective—engage in more unethical behavior than they would otherwise.

Leaders setting goals should take the perspective of those whose beliefs they are trying to influence and think through their potential responses. This will aid head off unintended consequences and prevent employees from overlooking culling goals, such as honest reporting, that are just as important to reward if not more so. When leaders fail to meet this responsibility, they tin can be viewed as non only promoting unethical behavior but blindly engaging in it themselves.

Motivated Incomprehension

It's well documented that people see what they want to see and easily miss contradictory information when it'southward in their involvement to remain ignorant—a psychological phenomenon known as motivated blindness. This bias applies dramatically with respect to unethical beliefs. At Ford the senior-well-nigh executives involved in the conclusion to rush the flawed Pinto into production not merely seemed unable to clearly see the ethical dimensions of their own determination but failed to recognize the unethical behavior of the subordinates who implemented it.

Let's render to the 2008 financial collapse, in which motivated incomprehension contributed to some bad decision making. The "independent" credit rating agencies that famously gave AAA ratings to collateralized mortgage securities of demonstrably low quality helped build a house of cards that ultimately came crashing downward, driving a wave of foreclosures that pushed thousands of people out of their homes. Why did the agencies vouch for those risky securities?

Office of the answer lies in powerful conflicts of interest that helped bullheaded them to their own unethical behavior and that of the companies they rated. The agencies' purpose is to provide stakeholders with an objective determination of the creditworthiness of fiscal institutions and the debt instruments they sell. The largest agencies, Standard & Poor's, Moody'due south, and Fitch, were—and still are—paid by the companies they rate. These agencies made their profits past staying in the good graces of rated companies, non past providing the well-nigh accurate assessments of them, and the agency that was perceived to have the laxest rating standards had the best shot at winning new clients. Furthermore, the agencies provide consulting services to the aforementioned firms whose securities they rate.

Inquiry reveals that motivated incomprehension can be but equally pernicious in other domains. It suggests, for instance, that a hiring manager is less likely to notice ethical infractions past a new employee than are people who accept no need to justify the hire—particularly when the infractions help the employee'southward functioning. (We've personally heard many executives describe this phenomenon.) The manager may either not see the behavior at all or chop-chop explain away any hint of a problem.

Consider the world of sports. In 2007 Barry Bonds, an outfielder for the San Francisco Giants, surpassed Hank Aaron to become the all-time leader in career home runs—perhaps the near coveted status in Major League Baseball. (Bonds racked up 762 versus Aaron's 755.) Although information technology was well known that the employ of performance-enhancing drugs was common in baseball, the Giants' management, the players' union, and other interested MLB groups failed to fully investigate the rapid changes in Bonds's concrete appearance, enhanced forcefulness, and dramatically increased power at the plate. Today Bonds stands accused of illegally using steroids and lying to a grand jury about information technology; his perjury trial is set for this spring. If steroid utilize did help bring the abode runs that swelled ballpark attendance and profits, those with a stake in Bonds'due south functioning had a powerful motivation to look the other way: They all stood to benefit financially.

Information technology does little good to simply note that conflicts of involvement exist in an organisation. A decade of research shows that awareness of them doesn't necessarily reduce their untoward impact on conclusion making. Nor will integrity alone preclude them from spurring unethical behavior, because honest people can suffer from motivated blindness. Executives should be mindful that conflicts of involvement are often not readily visible and should piece of work to remove them from the organisation entirely, looking especially at existing incentive systems.

Indirect Blindness

In August 2005 Merck sold off two cancer drugs, Mustargen and Cosmegen, to Ovation, a smaller pharmaceutical business firm. The drugs were used by fewer than 5,000 patients and generated annual sales of merely about $1 million, so at that place appeared to be a articulate logic to divesting them. Just subsequently selling the rights to manufacture and market the drugs to Ovation, Merck connected to make Mustargen and Cosmegen on a contract basis. If modest-market place drugs weren't worth the try, why did Merck keep producing them?

Soon after the deal was completed, Ovation raised Mustargen's wholesale price past about one,000% and Cosmegen's even more. (In fact, Ovation had a history of buying and raising the prices on pocket-sized-market place drugs from large firms that would have had public-relations problems with conspicuous price increases.) Why didn't Merck retain ownership and raise the prices itself? We don't know for certain, only nosotros presume that the company preferred a headline like "Merck Sells Ii Products to Ovation" to one like "Merck Increases Cancer Drug Prices by 1,000%."

Nosotros are non concerned hither with whether pharmaceutical companies are entitled to gigantic profit margins. Rather, we want to know why managers and consumers tend not to hold people and organizations accountable for unethical behavior carried out through third parties, fifty-fifty when the intent is clear. Bold that Merck knew a tenfold toll increase on a cancer drug would concenter negative publicity, nosotros believe most people would agree that using an intermediary to hide the increase was unethical. At the aforementioned time, we believe that the strategy worked because people accept a cognitive bias that blinds them to the unethicality of outsourcing dirty work.

Consider an experiment devised by Max Bazerman and his colleagues that shows how such indirectness colors our perception of unethical behavior. The study participants read a story, inspired past the Merck case, that began this mode: "A major pharmaceutical company, X, had a cancer drug that was minimally profitable. The fixed costs were high and the market place was express. Simply the patients who used the drug actually needed it. The pharmaceutical was making the drug for $2.50/pill (all costs included), and was simply selling information technology for $3/pill."

Then a subgroup of study participants was asked to assess the ethicality of "A: The major pharmaceutical firm raised the price of the drug from $3/pill to $9/pill," and some other subgroup was asked to appraise the ethicality of "B: The major pharmaceutical Ten sold the rights to a smaller pharmaceutical. In order to recoup costs, visitor Y increased the price of the drug to $15/pill."

Participants who read version A, in which visitor 10 itself raised the price, judged the company more harshly than did those who read version B, even though the patients in that version ended up paying more than. We asked a third subgroup to read both versions and judge which scenario was more than unethical. Those people saw visitor Ten's beliefs as less ethical in version B than in version A. Farther experiments using dissimilar stories from within and exterior concern revealed the same general pattern: Participants judging on the basis of just one scenario rated actors more harshly when they carried out an ethically questionable action themselves (directly) than when they used an intermediary (indirectly). Only participants who compared a directly and an indirect action based their cess on the outcome.

These experiments suggest that nosotros are instinctively more lenient in our judgment of a person or an organization when an unethical action has been delegated to a third party—particularly when we have incomplete information most the effects of the outsourcing. Only the results also reveal that when nosotros're presented with complete information and reverberate on information technology, we tin can overcome such "indirect blindness" and encounter unethical actions—and actors—for what they are.

Managers routinely consul unethical behaviors to others, and not always consciously. They may tell subordinates, or agents such equally lawyers and accountants, to "do whatsoever it takes" to achieve some goal, all but inviting questionable tactics. For example, many organizations outsource product to countries with lower costs, oftentimes past hiring some other company to do the manufacturing. But the offshore manufacturer frequently has lower labor, environmental, and safety standards.

Managers routinely delegate unethical behaviors to others, and not always consciously.

When an executive easily off piece of work to anyone else, information technology is that executive'southward responsibility to take ownership of the assignment's ethical implications and be alert to the indirect blindness that tin can obscure unethical behavior. Executives should ask, "When other people or organizations exercise work for me, am I creating an surroundings that increases the likelihood of unethical actions?"

The Slippery Slope

Y'all've probably heard that if you place a frog in a pot of humid water, the frog will jump out. Just if you lot put it in a pot of warm water and raise the temperature gradually, the frog will not react to the slow change and volition melt to death. Neither scenario is correct, just they make a fine illustration for our failure to observe the gradual erosion of others' ethical standards. If we find minor infractions adequate, research suggests, we are likely to take increasingly major infractions as long equally each violation is only incrementally more serious than the preceding 1.

Bazerman and the Harvard Business Schoolhouse professor Francesca Gino explored this in an experiment in which the participants—"auditors"—were asked to decide whether to approve guesses provided past "estimators" of the amount of money in jars. The auditors could earn a pct of a jar's contents each time they approved an calculator'southward approximate—and thus had an incentive to approve high estimates—only if they were caught blessing an exaggerated approximate, they'd be fined $v. Over the course of 16 rounds, the estimates rose to suspiciously loftier levels either incrementally or abruptly; all of them finished at the aforementioned high level. The researchers institute that auditors were twice as likely to approve the loftier final estimates if they'd been arrived at through pocket-sized incremental increases. The slippery-slope change blinded them to the estimators' dishonesty.

Now imagine an accountant who is in charge of auditing a large company. For many years the client's financial statements are make clean. In the showtime of two scenarios, the company then commits some clear transgressions in its fiscal statements, fifty-fifty breaking the law in certain areas. In the second scenario, the auditor notices that the company stretched only did non appear to break the police in a few areas. The side by side twelvemonth the company's bookkeeping is worse and includes a minor violation of federal accounting standards. By the third year the violation has go more severe. In the fourth twelvemonth the client commits the same clear transgressions equally in the first scenario.

The auditors-and-estimators experiment, along with numerous similar ones by other researchers, suggest that the accountant above would be more likely to decline the financial statements in the first scenario. Bazerman and colleagues explored this effect in depth in "Why Good Accountants Do Bad Audits" (HBR November 2002).

To avoid the slow emergence of unethical behavior, managers should be on heightened warning for even trivial-seeming infractions and address them immediately. They should investigate whether at that place has been a modify in behavior over time. And if something seems amiss, they should consider inviting a colleague to accept a wait at all the relevant data and evidence together—in effect creating an "abrupt" feel, and therefore a clearer assay, of the ideals infraction.

Overvaluing Outcomes

Many managers are guilty of rewarding results rather than loftier-quality decisions. An employee may make a poor determination that turns out well and be rewarded for it, or a good determination that turns out poorly and be punished. Rewarding unethical decisions because they have adept outcomes is a recipe for disaster over the long term.

Rewarding unethical decisions because they have proficient outcomes is a recipe for disaster over the long term.

The Harvard psychologist Peppery Cushman and his colleagues tell the story of two quick-tempered brothers, Jon and Mark, neither of whom has a criminal record. A man insults their family. Jon wants to kill the guy: He pulls out and fires a gun simply misses, and the target is unharmed. Matt wants only to scare the homo but accidentally shoots and kills him. In the United States and many other countries, Matt can await a far more than serious punishment than Jon. It is clear that laws often punish bad outcomes more aggressively than bad intentions.

Bazerman'due south research with Francesca Gino and Don Moore, of Carnegie Mellon Academy, highlights people'due south inclination to judge actions on the ground of whether harm follows rather than on their actual ethicality. We presented the following stories to ii groups of participants.

Both stories brainstorm: "A pharmaceutical researcher defines a clear protocol for determining whether or not to include clinical patients as information points in a report. He is running short of time to collect sufficient data points for his study within an of import monetary cycle in his firm."

Story A continues: "As the deadline approaches, he notices that four subjects were withdrawn from the analysis due to technicalities. He believes that the data in fact are appropriate to utilize, and when he adds those information points, the results motion from not quite statistically significant to significant. He adds these data points, and before long the drug goes to market. This drug is later withdrawn from the market later it kills six patients and injures hundreds of others."

Story B continues: "He believes that the product is safe and effective. As the deadline approaches, he notices that if he had four more data points for how subjects are likely to behave, the analysis would be significant. He makes up these data points, and presently the drug goes to market. This drug is a assisting and effective drug, and years later shows no significant side effects."

Subsequently participants read one or the other story, we asked them, "How unethical do you view the researcher to exist?" Those who read story A were much more than critical of the researcher than were those who read story B, and felt that he should exist punished more harshly. Yet equally we run across information technology, the researcher'due south behavior was more unethical in story B than in story A. And that is how other study participants saw it when we removed the last sentence—the result—from each story.

Managers tin make the same kind of judgment mistake, overlooking unethical behaviors when outcomes are adept and unconsciously helping to undermine the ethicality of their organizations. They should beware this bias, examine the behaviors that drive good outcomes, and reward quality decisions, not merely results.

The Managerial Challenge

Companies are putting a great deal of energy into efforts to improve their ethicality—installing codes of ethics, ideals training, compliance programs, and in-house watchdogs. Initiatives like these don't come inexpensive. A contempo survey of 217 big companies indicated that for every billion dollars of revenue, a company spends, on boilerplate, $1 meg on compliance initiatives. If these efforts worked, one might argue that the money—a drop in the bucket for many organizations—was well spent. But that'due south a big if. Despite all the time and money that have gone toward these efforts, and all the laws and regulations that accept been enacted, observed unethical beliefs is on the rising.

This is disappointing but unsurprising. Even the all-time-intentioned ethics programs volition fail if they don't accept into account the biases that tin bullheaded the states to unethical behavior, whether ours or that of others. What can you exercise to head off rather than exacerbate unethical behavior in your organization? Avoid "forcing" ideals through surveillance and sanctioning systems. Instead ensure that managers and employees are aware of the biases that can atomic number 82 to unethical behavior. (This uncomplicated stride might have headed off the disastrous decisions Ford managers fabricated—and employees obeyed—in the Pinto instance.) And encourage your staff to enquire this important question when considering various options: "What upstanding implications might ascend from this determination?"

To a higher place all, exist enlightened as a leader of your own bullheaded spots, which may permit, or even encourage, the unethical behaviors yous are trying to extinguish.

A version of this article appeared in the April 2011 issue of Harvard Business concern Review.