Making “moral hazard” more moral

In a piece earlier this month in the Huffington Post,  Michael A. Santoro of Rutgers Business School   and Ronald J. Strauss of Montclair State University’s  business school  applaud the recent announcement by the Securities and Exchange Commission of that agency’s “intention to abandon the long-standing practice of settling enforcement actions that allow defendants to avoid either admitting or denying guilt. The new settlement model would require admission of guilt for those egregious cases where the misconduct caused significant harm to investors and the financial markets.” As they note: “This … revised approach reflects widespread public exasperation that the government has been unable to hold Wall Street accountable for its role in the financial crisis. Judges too have become increasingly hesitant to approve high-profile settlements without an admission of guilt.”

Santoro and Strauss state that this new approach can be said to address “moral moral hazard” – a term that they use presumably due to the traditional view of “moral hazard” as being purely of an economic dimension (the concept was used originally to refer to the fact that providing insurance tended to promote risky behavior by insured parties), rather than having an ethical component.  Given that moral hazard can be seen as part of the same territory of ethical impairment as COIs  and that both diminish the “fidelity of employees to their employers’ interests…”    the COI Blog certainly supports a more morality-focused approach to the phenomenon of moral hazard through the law enforcement process.

Additionally, another strategy for promoting a more morality-based approach to addressing moral hazard risks is by using moral hazard ideas and information in connection with compliance and ethics programs, including:

–         through risk assessments and attention to incentives, as described in this earlier  post;

–         by greater focus by boards of directors to moral hazard related risks involving executives, as previously discussed here;

–         through implementing claw-back policies, as described here;  and

–         by including C&E officers in decisions in involving new products/services/strategies where moral hazard risks maybe high, as discussed here.

Finally, a more moral approach to moral hazard includes sufficient attention to “organizational justice.” As described in this earlier post:  “According to research conducted by the Corporate Executive Board (the ‘CEB’) of about 600,000 employees of more than 140 companies, one of the most important steps to promoting compliance is maintaining ‘organizational justice.’  The CEB notes: ‘A firm’s culture has organizational justice when employees agree that 1) their firm responds quickly and consistently to proven unethical behavior and 2) that unethical behavior is not tolerated in their department.’ ”

And, to tie this back to where we began, a company that fails to ensure “organizational justice” through sufficient enforcement of its internal rules can lose moral authority in the same way that governments do when they fail to hold individuals accountable for violations of law.

(Note: I’m on vacation through the 16th, but will respond to any comments when I return.)

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