Bias

Two very different types of bias topics will be examined in the blog: A) Under what situations involving business organizations should bias be treated like a traditional COI. B) How often-unrecognized biases can inhibit ethical decision making, which is one of the principal teachings from behavioral ethics (i.e., “cognitive biases.”)

Conflicts of interest and “the social nature of humans”

Private supply chain auditing continues to serve an increasingly important role in compliance and ethics efforts worldwide.  A recent working paper from the Harvard Business School  – “Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors,” by  Jodi Short, Professor of Law at the University of California Hastings College of the Law; Michael Toffel of the Technology and Operations Management Unit at the Harvard Business School; and Andrea Hugill of the Strategy Unit at the Harvard Business School – examines various factors that impact the efficacy of such audits.  The paper can be downloaded from SSRN and a summary of it can be found on the Harvard Corporate Governance web site.

For this study, the authors conducted a review of “data for thousands of code-of-conduct audits conducted in over 60 countries between 2004 and 2009 by one of the world’s largest social auditing companies, …”  They found that “auditors’ decisions are shaped not only by the financial conflicts of interest that have been the focus of research to date, but also by social factors, including auditors’ experience, professional training, and gender; the gender diversity of their teams; and their repeated interactions with those whom they audit.”  The authors state that this  “finer-grained picture suggests that audit designers should moderate potential bias and increase audit reliability by considering the auditors’ characteristics and relationships that we found significantly influencing their decisions,” and also that these findings “should likewise inform the broader literature on private gatekeepers such as accountants and credit rating agencies.”

Indeed, and beyond the scope of the paper, a focus on social – and not just economic – ties may be key to assessing various  independence issues regarding boards of directors.  In an important decision from 2003 involving a derivative action brought by shareholders of Oracle Corp., then Vice Chancellor Leo Strine noted: “Delaware law should not be based on a reductionist view of human nature that simplifies human motivations on the lines of the least sophisticated notions of the law and economics movement.  Homo sapiens is not merely homo economicus.  We may be thankful that an array of other motivations exist that influence human behavior; not all are any better than greed or avarice, think of envy, to name just one.  But also think of motives like love, friendship, and collegiality, think of those among us who direct their behavior as best they can on a guiding creed or set of moral values,” adding, “[n]or should our law ignore the social nature of humans.”

Finally, thanks to friend of the blog Scott Killingsworth for recently reminding me of the Oracle decision;  here’s an earlier post about the Oracle case, albeit with a different focus; and here is a post briefly discussing (and linking to) a paper by Jon Haidt and colleagues about business ethics implications of a model of human nature called “Homo Duplex,”  a term coined by the sociologist/psychologist/philosopher Emile Durkheim, which posits that we operate on (or shift between) two levels: a lower one – which he deemed “the profane,” in which we largely pursue individual interests; and a higher – more group-focused – level, which he called “the sacred.”

Friendship – and the ties that blind (directors to conflicts of interest)

King Herod the Great had something of a problem: he had backed the losing side in the contest between Marc Antony and Octavian to rule Rome,  and now fully expected to lose his life for it.  But, as described in Jerusalem: the  Biography, by Simon Sebag Montefiore,  when they met he cleverly asked Octavian “not to consider whose friend he had been but ‘what sort of friend I am.’”  Octavian was evidently persuaded by this, for not only was Herod’s life spared but the size of his kingdom was increased.

Loyalty is, of course, fundamental to friendship.  But, while potentially more physically dangerous in the Roman Empire than it is today, friendship in our world can be ethically treacherous.

In “Will Disclosure of Friendship Ties between Directors and CEOs Yield Perverse Effects?”  (to be published in the July 2014 issue of the Accounting Review), Jacob M. Rose, Anna M. Rose, Carolyn Strand Norman and Cheri R. Mazza  describe how they conducted thought experiments involving both actual corporate directors and MBA students to determine  whether “directors who have  friendship ties with the CEO [are more likely that are directors without such friendships] to manage earnings to benefit the CEO in the short term while potentially sacrificing the welfare of the company in the long term” and also whether “public disclosure of friendship ties mitigate or exacerbate such behavior, and will disclosure of friendship ties influence investors’ perceptions of director decisions.”

Sadly but not surprisingly, their research  found “that friendship ties caused directors to be more willing to approve reductions to research and development (R&D) expenses that cause earnings to rise enough to meet the CEO’s minimum bonus target more often than  when the directors and CEO were not friends.” Seemingly more of a surprise, they also found that “disclosing friendship ties resulted in even greater reductions in R&D expenses and higher CEO bonuses than not disclosing friendship ties.”

But this latter finding is not so surprising – given other  behavioral research showing that disclosure can “morally license” individuals  to act inappropriately when faced with a conflict of interest ( as discussed in this   and other prior posts.) As described in a recent piece in the NY Times  by Gretchen Morgenson, one of the study’s authors explained: “When you disclose things, it may make you feel you’ve met your obligations…They’re not all that worried about doing something to help out the C.E.O. because everyone has had a fair warning.”

Morgenson added: “There are two messages in this study. One is for regulators: Simply disclosing a conflict or friendship does not eliminate its potential to create problems. The other,” again quoting one of the study’s authors (but echoing Herod) “is for investors: ‘Shareholders should take a more active role in finding out what kinds of relationships their boards and C.E.O.s have…and recognize the potential traps created by them’.”

For more on conflicts of interest and directors see the posts collected here .

 

Values, structural compliance, behavioral ethics and…Dilbert

Back in the mid-1990’s, the incomparable business ethicist Dilbert asked his boss: “Can you explain how the company’s new ‘Statement of Core Values’ will change my behavior? I was planning to poison the town’s water supply. But wait! It’s against our core values!”

The debate over the value of values is nearly as old as the C&E field itself.  Harvard Business School professor Lynn Sharp Paine argued  twenty years ago that commitment to company values and values-supporting systems could  do more to promote responsible conduct than could what she described as a legal compliance model.  But sounding a note of caution then was Win Swenson, the principal draftsperson of the Federal Sentencing Guidelines for Organizations, who wrote in a compliance treatise that while “[t]he legal vs. integrity-based dichotomy helps us think about different approaches companies can take….there is a danger in seeing the actual choice companies confront as a stark ‘either/or’ one,” and with each approach by itself having significant limitations.

The debate continues to this day, and was most recently joined by two other Harvard Business School professors  (Francesca Gino and Max Bazerman) and a graduate student (Ting Zhang) in a paper that posits a somewhat similar – but  certainly not identical – dichotomy between “(1) values-oriented approaches that broadly appeal to individuals’ preferences to be more moral, and (2) structure-oriented approaches that redesign specific incentives, tasks, and decisions to reduce temptations to cheat in the environment.”

With respect to values-oriented approaches, the authors describe a wealth of recent research findings from the field of behavioral ethics that, among many things, demonstrates the strong potential to impact behavior in desirable ways of “reminding individuals of their personal moral self-concept.”  However, the authors note that values-based approaches can have limitations and undesired consequences too: “[f]or instance, organizations that promote ethical mission statements while failing to adjust unrealistic goals that routinely place employees in ethical dilemmas.”

The authors also describe research showing that “structuring the incentives, task, or set of choices to reduce or even eliminate the temptation to act unethically,” can likewise affect behavior in various desirable ways.  But here, as well, the news is mixed – as behavioral ethics studies also suggest, among other things, that “using incentives to highlight the negative side to unethical behavior could lead to even more wrongdoing as doing so may prevent individuals from perceiving their decisions as ethically-relevant.”

Thus, and “[g]iven the strengths and weaknesses of values- and structure-oriented approaches on their own, [the authors argue] …incorporating both approaches can compensate for each approach’s unique set of limitations and dampen the risk of adverse effects.” Their paper describes strategies for doing this – including checking for incompatibilities in implementing either approach; aligning the timing of values-related reminders with that of potentially risky decisions; “evaluating decisions jointly rather than separately”; “encourag[ing] mental and social contemplation”; and “designing a structure-oriented intervention [that] includes implementing changes in the environment to induce self-awareness and highlight the link between behaviors and the moral self.”

I should emphasize that while some of the recommendations can be applied in the context of C&E programs that is not the case with all of them. However, this isn’t intended as a criticism of the paper, which does not purport to be addressed to C&E officers but, rather, mainly to other organizational scholars.  Moreover, because this is one of the few behavioral ethics papers published to date where the focus is on finding ways to prevent – as opposed merely  to identify the causes of – wrongdoing,  it should be welcomed by C&E practitioners.  (As discussed in an earlier blog post, for various reasons behavioral ethicists and C&E practitioners should work more closely together, and this paper is an important step in that direction.)

Another comment from a C&E practitioner’s perspective is that while the two approaches identified in the paper are indeed distinct as a conceptual matter, the perception “on the ground” may be somewhat more of a blend.  That is, regularly seeing one’s company take meaningful steps to promote ethicality and law abidance – through incentives, process controls, discipline for violations and other structure-oriented approaches – may itself serve as a potent reminder to employees of their own moral preferences, and possibly  a more effective one than traditional communications.  Indeed, from my more than twenty years of interviewing employees of client organizations about the perceived ethicality of their respective companies I have been impressed with how much values-oriented individuals appreciate strong compliance/structural approaches.  Like Dilbert (as well as Zhang and her colleagues), they seem to know the difference between preaching and practicing.

___

Some related readings:

Another best-of-both-worlds approach to values and compliance –specifically on how compliance can bring “body” to ethics and ethics can bring “soul” to compliance.   

– Scott Killingsworth’s paper, ‘C’ is for Crucible: Behavioral Ethics, Culture, and the Board’s Role in C-Suite Compliance.

– An index of posts of what behavioral ethics could mean for C&E programs.  

An exchange with Steve Priest on C&E “checking,”which includes a discussion of embedding C&E into everyday business operations – an emerging form of structural compliance  which could, I believe, play a powerful  role in reminding employees of their moral preferences on a timely basis.

Behavioral ethics and compliance: an index

The COI Blog was launched two and a-half years ago today – and since then has been devoted primarily to examining conflicts of interest. But it has also run a number of posts on what behavioral ethics might mean for corporate compliance programs and, because of the ever increasing interest in this area,  I thought that having  a topical  index to these latter posts could be useful – particularly for those new to either behavioral ethics or corporate compliance, with the topics in question being principally compliance tools and risk areas. Note, however, that to keep this list to a reasonable length I’ve put each post under only one topic, but many in fact relate to multiple topics (particularly the risk assessment ones).

INTRODUCTION 

Overview of the need for behavioral ethics and compliance

BEHAVIORAL ETHICS AND COMPLIANCE PROGRAM COMPONENTS

Risk assessment

“Inner controls”

– Is the Road to Risk Paved with Good Intentions?

Slippery slopes

Senior managers

Long-term relationships

– How does your compliance and ethics program deal with “conformity bias”? 

– Money and morals: Can behavioral ethics help “Mister Green” behave himself? 

Communications and training

Behavioral ethics and just-in-time communications

Values, culture and effective compliance communications

Behavioral ethics teaching and training

Moral intuitionism and ethics training

Accountability

– Behavioral Ethics and Management Accountability for Compliance and Ethics Failures

– Redrawing corporate fault lines using behavioral ethics

Whistleblowing

– Include me out: whistleblowing and a “larger loyalty”

Incentives/personnel measures

– Hiring, promotions and other personnel measures for ethical organizations

Board oversight of compliance

Behavioral ethics and C-Suite behavior

– Behavioral ethics and compliance: what the board of directors should ask

Corporate culture

– Too close to the line: a convergence of culture, law and behavioral ethics

Appropriate responses to violations

Exemplary ethical recoveries

BEHAVIORAL ETHICS AND SUBSTANTIVE AREAS OF COMPLIANCE RISK

Conflicts of interest/corruption

– Does disclosure really mitigate conflicts of interest?

Disclosure and COIs (Part Two)

Other people’s COI standards

Gifts, entertainment and “soft-core” corruption

– The science of disclosure gets more interesting – and useful for C&E programs

Gamblers, strippers, loss aversion and conflicts of interest

Insider trading

– Insider trading, behavioral ethics and effective “inner controls” 

Insider trading, private corruption and behavioral ethics

Legal ethics

Using behavioral ethics to reduce legal ethics risks

OTHER POSTS ABOUT BEHAVIORAL ETHICS AND COMPLIANCE

An ethical duty of open-mindedness?

How many ways can behavioral ethics improve compliance?

– Meet “Homo Duplex” – a new ethics super-hero?

 

Hiring, promotions and other personnel measures for ethical organizations

Years ago, two young lawyers at a firm sat in the office of a senior partner who was on the phone conducting a reference check for a potential hire, waiting for the call to end so they could begin the meeting they had planned with him. They listened silently as the partner went down the list of the questions that one asks in these calls – Is the candidate hard working?  Is he smart?  Does he have the potential to attract business?  – but when he  inquired whether the candidate was honest, one of the young attorneys turned to the other and cynically asked in a whisper: “What’s the right answer?”

Today, when business ethics has become part of the corporate mainstream, it is more difficult (though not impossible) to imagine a conversation like this happening.  Indeed, organizations of all kinds routinely proclaim that ethics matters in the context of hiring – and the related settings of deciding promotions and compensation.  But what does that actually mean?

In an excellent post last week in Slaw, which was responding to an article summarizing various studies that showed that “legal employers rank ‘integrity, honesty and trustworthiness’ as a crucial quality in a prospective lawyer hire,…” Professor Alice Woolley of the University of Calgary Law School wrote: “While I  can’t help but be pleased to see this apparent consensus on the importance of ethics and professionalism to legal practice, I think the conversation as framed has the potential to lead us astray… by [among  other things] assuming that it is ethical actors who create ethical behavior…” In fact, she argued:  “the kind of person I am will affect my behaviour in a far less significant way than will the circumstances in which I find myself, ” and she notes further that “there is far greater consistency of behaviour by different people within a single situation than there is from the same person across different situations.”

I completely agree with Professor Woolley’s behaviorist analysis and, as described in a series of earlier posts,  have suggested that behavioral ethics supports the need for strong corporate compliance programs. That is, such programs a) are predicated on the assumption that most individuals are in fact vulnerable to pressures/temptations to engage in wrongdoing – i.e., what Woolley calls situations; and b) can play a crucial role in minimizing the risk causing potential of such situations. Moreover, it is also the case that many of the ways in which compliance programs attempt do this – e.g., propounding standards and procedures, training on these and auditing/ monitoring to ensure they are followed  –  are not directed at hiring the ethically fit and barring others from one’s organization.

However, focusing on ethics in hiring and other personnel decisions – particularly when reinforced by other compliance program efforts –  does have a role to play in mitigating ethics risk, in that these measures can help individuals:

– make the right decisions when faced with a risky situation; or

– better yet, take steps to prevent such situations from occurring in the first instance.

Here are some thoughts (including “practice pointers”) on how to do this.

With respect to hiring, business organizations generally conduct some due diligence on candidates but – while generally necessary – these sorts of efforts serve limited purposes. By contrast, too few companies ask ethics-related questions in employment interviews – e.g., “Describe an ethical challenge you’ve faced and how you dealt with it?”  The point of asking this (or  similar) questions is less about identifying individuals of strong ethical character – something which, as noted above, behavioral ethics teaches us doesn’t matter much in determining how people respond to actual ethical challenges.  Rather, its principal benefit is in conveying that ethics matters in tangible ways (which hiring decisions clearly are) to a company – which can positively impact not only the job candidate but the interviewer as well.  A practice pointer: it can be helpful to reinforce in compliance training for managers the importance of ethics-related job interviewing – as this helps convey the larger message that managers are responsible for the conduct of those who report to them.

Note that this sort of inquiry is most important for more senior-level positions.  In particular, in hiring (or approving the hires of) candidates for senior posts, boards of directors should ask what was the “ethics component” of the process – a question which can reinforce their company’s expectations for the new hire, the other senior executives… and the board itself.  Moreover, this topic should be included in board ethics training.

Turning from hiring to promotion/compensation/recognition, the most common tool for making ethics count in these types of personnel-related matters is the performance evaluation.   In my experience, this is an area of struggle (and under-performance)  for a great many companies.   A practice pointer: the key to success here  can be tailoring ethics-related criteria in performance evaluations to different positions/functions, rather than painting with a broad brush.

Some companies do give direct financial awards for exemplary ethical behavior – amounts which are often, but not always, nominal.   Practices of this sort have been around for a long time – indeed, Bear Stearns had an internal compliance  “bounty” system as far back as the 1990’s, at least for certain types of violations – and they have been the subject of much controversy, with many people taking the position that it is flat-out wrong to pay employees to do what is right. I don’t have such a completely negative view on it, but do think that appealing  to the “pro-social” side of human nature may be more effective than giving cash for ethics.  A practice pointer:  as part of the management training mentioned earlier, managers should be shown how to identify acts of truly exemplary ethical behavior and compliment the employees involved (including when to let other employees know about this).

Finally, most companies have means to weed out genuine bad actors in the promotion process, but too few have a mechanism to identify those who are merely weak when it comes to ethics, e.g., supervisors who convey the message that required ethics training is a “necessary evil.”  A practice pointer: companies should have a requirement for promotions to ranks above a certain (typically high) level that the decision makers must receive the input of the compliance & ethics officer.  Not only can this be a helpful tool for ensuring that promotions reflect company values, but the very act of putting the C&E officer in this position of power can  – like some of the other strategies described in this post – help shape in a positive way the sorts of situations to which Woolley refers.

(Thanks to the recently launched Behavioral Legal Ethics Blog  for alerting me to Woolley’s post.)

Behavioral ethics and compliance: what the board of directors should ask

In “Behavioral Ethics: Can It Help Lawyers (and Others) Be Their Best Selves?” – a preliminary draft of a paper which has been accepted for publication by the Notre Dame Journal of Law, Ethics & Public Policy –  Robert A. Prentice  of the University of Texas at Austin’s McCombs School of Business reviews various findings of behavioral ethics research and presents ideas for how individuals and businesses can help address the challenges posed by these findings, including:

– the use of communications strategies to counter “ethical fading”;

– the importance of punishing even minor instances of bad behavior to mitigate the danger of “incrementalism”;

– rigorous enforcement of conflict of interest polices and “setting reasonable rather than extravagant incentive structures for their employees” – both to  limit the harm cause by the “self serving bias”;

– monitoring the use of euphemisms by employees to address the often  pernicious impact of rationalizations;

– a number of measures to mitigate the powerful contextual factors that can serve as a breeding ground for unethical conduct – e.g., treating employees well, given that behavioral ethics studies have shown that “[e]mployees are more likely to act unethically if they are exhausted, time-crunched, or feel they have been mistreated”; and

– use of  a company’s “organizational reward and control systems [to] boost moral ownership…[and] create feelings of [moral] efficacy.”

For those considering how to apply behavioral ethics to strengthen compliance programs, Prentice’s piece is a very good place to start.  I also recommend Scott Killingsworth’s paper on C-suite behavior and note that over the years the COI Blog has discussed various ways of using compliance program mechanisms – such as risk assessment –  as a device for delivering behavioral ethics thinking into business organizations.

But separate from the issue of how behavioral ethics can be deployed in companies is the threshold question of how to get companies to move in this direction, i.e. persuading them of the “why to” as opposed to the “how to.”   In this connection note that:

– while some of the experiments in this field are fairly recent, the core learning of behavioral ethics – that context, as opposed to character, plays a greatly underestimated role in dictating how ethically we act – is more than forty years old; but

– notwithstanding this, it appears (from a wide range of sources) that relatively few companies consider behavioral ethics as much more than a subject of curiosity  – or what one colleague recently referred to as “parlor games.”  Another colleague recently wrote to me that people in the C&E field “just do not accept behavioral science as real” – although he added the hopeful word “yet” at the end of his e-mail. And from a review of the agenda of the many C&E conferences that have been held over the past few years behavioral ethics seems much more like an extracurricular activity than it does part of the “core curriculum” of the field.

In a way this is not a surprise.  Those managing compliance and ethics programs often struggle just to accomplish the basic goals of their jobs on a daily basis – e.g., trying to get all the sales people to take the code of conduct training or completing the due diligence of a new distributor on a rush basis – and simply may not have the bandwidth to grapple with the implications for their programs of a new view of human nature.  In addition, compliance managers are rarely challenged by senior management to be innovative to the degree that traditional business functions (e.g., R&D, sales and marketing) are.

This is where the board of directors can play a key role.  Although they cannot be expected to immerse themselves in all the research on this subject, they can and should ask management a simple question:  What are we doing about behavioral ethics in our company?  

Based on my experience, the right question from a board member can often make things happen – and happen quickly – in a company’s C&E program.  An inquiry from the board can be the catalyst for strategic thinking in a field dominated by tactical considerations.  And, in this case, if enough boards ask this question, it could be what is necessary for behavioral ethics to begin to live up to its full promise in improving behavior by businesses.

(For more on the importance of boards asking C&E questions, see this piece from the FCPA Blog.)

 

Meet “Homo Duplex” – a new ethics super-hero?

In “Behavioral Ethics for Homo Economicus, Homo Heuristicus and Homo Duplex” – which is published in the March 2004 issue of Organizational Behavior and Human Decision Processes   –  Jesse Kluver, Rebecca Frazier and Jonathan Haidt describe three views of human nature and consider the implications of each for the field of business ethics:

–          The traditionally dominant “Homo economicus” model, which sees human nature as based  on “rational self-interested actors within systems of economic or social exchange” and which views incentive alignment as the key motivator for human behavior.

–          A more recently emerged “Homo heuristicus” approach, which posits that heuristics (ingrained mental short cuts) and biases “drive decision making behavior, including ethical decision and behavior.” The authors view this model as more psychologically realistic than the Homo economicus approach and believe it offers a variety of insights that can be useful for shaping “ethical systems” (including, presumably, C&E programs).

–          “Homo duplex,” a term coined by the sociologist/psychologist/philosopher Emile Durkheim, which posits that we operate on (or shift between) two levels: a lower one – which he deemed “the profane,” in which we largely pursue individual interests; and a higher – more group-focused – level, which he called “the sacred.”  The authors see this view as an extension – not as a contradiction – of Homo heuristicus.

This last model has considerable potential, the authors believe, for promoting ethical behavior.  That is because various studies have shown that “some of the neurobiological adaptations humans have developed for moral behavior work explicitly at the group level rather than the individual level,” “above and beyond what might be expected under the Homo economicus or Homo heuristicus models.”   Yet, the authors argue, Homo duplex has received far too little attention to date, and the paper offers  ways in which this model of human behavior could be used to promote ethical conduct in businesses and also suggests avenues for further research.

There is much more to this paper  – concerning, among other things,  lessons for organizations seeking to build what Haidt calls “moral capital,” as well as  the importance of designing “ethical systems” to bring employees of an organization  to the above-described higher state, and I wholeheartedly commend the piece to readers of the COI Blog.  Indeed, I hope to explore some of these possibilities in future posts.

Having said all this, I should note that there may be limits to how far this thinking can take a company in promoting ethical and compliant behavior, given that so many major business crimes emanate from the “C-Suite,” the inhabitants  of which may be both less likely to act ethically as a  general matter (as discussed in this post ) and less inclined to participate in what the authors call “ego-dissolving activities” – i.e., the basis for Homo duplex’s  higher level – than are the rank-and-file.  Indeed, the most famous corporate example involving an attempt to build team spirit is, the authors note, “Wal-Mart, where each day employees participate in the Wal-Mart chant…”  While presumably effective in reducing the rate of petty theft by store employees, based on various press accounts, this doesn’t appear to have done much to deter massive bribery by the company, which on some level seems to have involved some of its senior managers.

In a related vein, while I am a big fan of Homo heuristicus (as reflected in my many earlier posts on “behavioral ethics and compliance”), and (based partly on my deep admiration of Haidt’s landmark book, The Righteous Mind), while I embrace the authors’ agenda of conducting more research into how a Homo duplex view can be used to promote ethical behavior, I think it important to continue to work with the central insight of the much-maligned Homo economicus framework too (and believe that the authors – who note that we do not need to rely solely on an one view of human nature – would agree with this). That is, while the incentive-based approach to promoting ethical behavior is as old as the Code of Hammurabi, at least in the modern corporate crime setting it has been hobbled by moral-hazard-related infirmities – i.e., it has not , in my view, had a real chance to live up to its  own potential to be an ethical super-hero.

For further reading see:

Scott Killingsworth’s excellent paper, on C-Suite behavior, discussed and linked to in this earlier post

My recent “Ethics Exchange” with Steve Priest about “Ethics, Compliance and Human Nature” on ECOA Connects.

 

 

Exemplary ethical recoveries

F. Scott Fitzgerald famously said, “There are no second acts in American lives,” but in the C&E world the second act may count for more than the first – for better or worse.

Instances of the latter – tragic second acts – include various cases where a company engaged in criminal conduct but failed to either fully “come clean” when it was prosecuted or do what was necessary to prevent future violations.  Prominent examples of this sort of failure  go as far back as cases involving the first massive penalties under the Federal Sentencing Guidelines for Organizations – the $340 million fine against Daiwa Bank for banking-related offenses in 1996 and the $500 million against Hoffman-LaRoche for antitrust crimes in 1999 –  and have occurred as recently as last month, when a $425 million criminal fine was imposed on Bridgestone  for antitrust offenses in part because the Company had failed to disclose those offenses at the time of an earlier plea. (The logic of severe punishment for a company that fails a second time is fairly obvious, and, although he doubtless would have been mortified to be quoted in a compliance blog, is perhaps best expressed by these words of  Oscar Wilde: “To lose one parent may be regarded as a misfortune; to lose both looks like carelessness.”)

But while the cases of failure such as these make the headlines, a second act need not be tragic.  For the good news, we turn from law to psychology, and a just-published paper “Better than ever? Employee reactions to ethical failures in organizations, and the ethical recovery paradox” by Marshall Schminke, James Caldwell, Maureen L. Ambrose and Sean R. McMahon.  In it, the authors review the results of a laboratory study and a field study showing “an ethical recovery paradox, in which exemplary organizational efforts to recover internally from ethical failure may enhance employee perceptions of the organization to a more positive level than if no ethical failure had occurred.”

These results are very encouraging even if, while perhaps paradoxical in the way the authors describe, they do not seem totally surprising. After all, a C&E failure can also be seen as presenting a test – and ethical standards at a company that have fared well on a test could seem more meaningful to employees than those that haven’t been tested at all. Of course, the same could be said of nearly any attribute of an organization – but it would be hard to find another area where the gap between what is proclaimed and what is practiced is as wide as, generally speaking, it is in the field of business ethics. So, there is every reason for much weight to be placed on the results of the sort of test that ethical failures offer.

Still, and beyond the important headline finding about the possibilities of ethical recovery, the paper should be useful to the C&E practitioners for a variety of reasons:

–          It has an extensive review of relevant literature, such as research showing that “ethics-based failures may have a more generalized impact [on employee perceptions of an organization] than other types of failures” – in part because of the strong negative emotions often triggered by the former.  This information should be helpful for briefing directors and senior managers on the importance of strong C&E measures generally (i.e., not just in the wake of failures).

–          The authors note that the results “raise a host of possibilities for considering additional implications of ethical repair, those even further downstream from the unethical event.”  I agree that this is an important area to explore.  Indeed, a company I know that has succeeded as well as any in maintaining an exemplary corporate culture has done so in part by staying mindful of a scandal that had occurred literally decades earlier, i.e., very “downstream.”  But, too many companies take the opposite approach – burying, rather than learning from, their failures.

–          The authors identify other implications for practitioners, including the need to have “systems, structures, processes, controls and policies…in place to stage a successful recovery in the event an ethical failure happens.” I agree with this as well, but note that perhaps more helpful than planning for true ethical crises is having systems for making the most of the small-scale ethics failures that occur on a routine basis – such as by publicizing the extent to which the company conducts rigorous investigations of employee reports of suspected C&E transgressions and imposes meaningful discipline for violations.

Indeed in this sense, exemplary ethical recovery should  not be viewed as a once- (or twice) in-a-lifetime event for a company, but an active ingredient of its very culture.

Finally, note that the research did not look closely at the issue of what made an ethical recovery exemplary; rather, it was based broadly on reported degrees of satisfaction by the study’s subjects.  “We know little about the attributes of an effective recovery,” the authors write.  One hopes that other researchers (or perhaps even these ones) will build upon this study to develop knowledge in that key area.

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Too close to the line: a convergence of culture, law and behavioral ethics

To “walk the line” means something very different to  those who prosecute business crime cases than it did  to Johnny Cash. For instance, in a speech given last year,  Steven L. Cohen,  Associate Director for Enforcement at the Securities and Exchange Commission, said:  “Where we find fraud, there are often early warning signs that may have suggested a corporate compliance culture that is not meeting appropriate standards…..  Risk-taking in the area of legal and ethical obligations invariably leads to bad outcomes.  Any company or person prepared to come close to the line when it comes to legal and ethical standards is already on dangerous ground.  Tolerating close-to-the-line behavior sends a terrible message throughout an organization that pushing the envelope is acceptable.” Similarly, and also in a speech last year, New York federal prosecutor Preet Bharaha said:  “A single-minded focus on remaining an inch away from the legal line is just asking for trouble. It’s a dangerous thing to walk the line – and to train others to do it. Walking the line is like a driver constantly trying to game just how close to the legal alcohol limit he can come without getting a DUI. Now, one can do that. But how long do you think before that driver gets pulled over? How long before that driver blows the legal limit? And how long before that driver hurts someone on the highway?”

Keeping employees and agents from getting too close to the line has long been a focus of – and particular challenge for – C&E programs.  Part of the difficulty here comes from the fact that – at least in the U.S.-  the lines separating criminal from lawful conduct are often not clearly drawn.  These lines can also be subject to change without notice.  Additionally, under doctrines of conspiracy and accessorial liability, those who pay a brief visit to the other side of the line – or indeed are pulled over it by a colleague – can be punished as if they were a major offender.  (For more information on this aspect of U.S. law see the Ethical Systems web site.)

Added to this challenge are the various lessons of behavioral ethics research suggesting that individuals may have real – but unappreciated – difficulty identifying and steering clear of law- and ethics-related lines.   Discussions of some of these studies are collected here, and include the following posts:

–          How “conformity bias” adversely impacts our ability to see the wrongfulness of our behavior.

–          The blurring impact that the “distance” of victims of wrongdoing has on our ethical vision.

–          The various ways in which we are vulnerable to ethical “slippery slopes.”

–          The considerable difficulty we often have in recognizing wrongful behavior in others when it is in our interest not to do so.

–          The particular challenges that individuals in positions of power have in identifying their behavior as wrongful.

In sum, business people – particularly those in organizations that lack healthy cultures – often face a wicked one-two punch of a treacherous legal landscape and many unappreciated human ethical frailties that make navigating that landscape difficult indeed.

There is no easy way to deal with this.  But, at a minimum, C&E officers should train employees generally and managers in particular on all that they are up against.

More generally, understanding these risks should be seen in business schools and the business world as supporting the  need for a high degree of ethical awareness.  Only when business people view being ethically alert – rather than just relying on what they may see as their innate goodness – as an indispensable  professional skill will companies live up to the high expectations articulated by Messrs. Cohen and Bharara and doubtless shared by many others in the enforcement community.

The science of disclosure gets more interesting – and useful for C&E programs

In “Nothing to Declare: Mandatory and Voluntary Disclosure Leads Advisors to Avoid Conflicts of Interest,” published last month in Psychological Science,    Sunita Sah   and George Loewenstein   note that “[p]rior research documents situations in which advisors— subject to unavoidable COIs—feel morally licensed to give more-biased advice when their conflict is disclosed,” as well other  factors suggesting that disclosure is often less of an effective mitigant than might be imagined.  (For more information on some of this research see this post on moral licensing and this one  on the pressure that individuals to whom disclosure is made might feel to accept the conflict.)  However, the authors argue – and support with the results of several experiments  that they conducted –   “[w]hen COIs are avoidable … the situation can change dramatically because the ability to avoid conflicts brings other motives into play.”

One of these motives is that “disclosure becomes a potential vehicle for demonstrating one’s own ethics …to signal to themselves and to others that they are honest and moral …and that they prioritize others’ interests over their own.”  A second motive is that “in many situations advisors benefit financially when advisees follow their advice… [and] disclosing the absence of conflicts increases the likelihood that the advice will be followed,…”

Sah and Loewenstein also note: “Evidence from the field complements [their] findings. The American Medical Student Association’s PharmFree Scorecards program (which grades COI policies at U.S. academic medical centers…) has been successful in encouraging many centers to implement stronger COI policies.  Similarly, mandatory disclosure of marketing costs for prescription drugs in the District of Columbia produced a downward trend in marketing expenditures by pharmaceutical companies, including gifts to physicians, from 2007 to 2010…”

The authors’ findings make sense to me.  Indeed, in one of the above-noted earlier posts I suggested that the research indicating that disclosure could be harmful in the professional advisor context because it creates pressure to accept the COI  may not apply to the same extent “in the setting of a business organization – with defined and enforced ethical standards regarding COIs, where one might be more concerned about looking bad to one’s colleagues (or bosses) than to the conflicted party.”

That is, the first of the two motivations that Sah and Lowenstein identify as relevant to disclosure – the desire to show one’s trustworthiness – is likely to be a powerful force in many business organizations given the often strong enforcement of COI rules that began with the Sarbanes-Oxley Act and which is also supported  by the general importance of “organizational justice” to C&E program efficacy and the specific relevance of COI enforcement to organizational justice.  (The other motivation, however, is much less applicable outside of the professional advisor context, and indeed the notion of mandatory versus avoidable COIs may also be more relevant to the advisor context than for business organizations.)

So, the results of this study seem like good news.  But is it news that C&E professionals – who operate more in the business organization rather than in the professional advisor context – can use to make their companies’ C&E programs stronger?   Or, is it – as one C&E professional I know recently said of much behavioral ethics – the stuff of “parlor games”? (Note: I don’t agree with this critique, but it is worth noting that C&E practitioners, as a group, don’t seem to be doing much with behavioral ethics findings.)

I think that this knowledge can in fact be put to use for C&E purposes.   That is, it suggests that in policies, training and other C&E communications, companies should emphasize how timely and complete COI disclosure may be important to an employee’s being seen as trustworthy within an organization – as well as by other important parties (e.g., customers or suppliers).

More broadly, C&E professionals should find ways to address this motivation in helping employees understand the business case (in terms of their careers)  not just for full COI disclosure  but for ethical excellence  generally. Of course, this approach already exists to varying  modest degrees in some C&E programs, but there is plenty of room for many organizations to do more in this regard.