Behavioral Ethics, Risk Assessment and “Inner Controls”

In the initial post in this series, we introduced the field of behavioral ethics to the Blog and suggested that it could help both enforcement personnel and corporate leaders better understand the need to support C&E efforts in business organizations.  Subsequent posts examined how behavioral ethics can assist with mitigating COIs, delivering C&E communications and making managers accountable for C&E violations occurring on their watch.  In this fifth posting we begin to explore implications of behavioral ethics for C&E risk assessment.

How do the ethical standards of individuals in an organization impact the organization’s risk?  Simply put, the stronger their ethical standards, the more likely they are to resist pressures or temptations to engage in wrongdoing – and the less the need for traditional compliance measures.  The ethical standards of a company’s employees provide what could be considered “inner controls.”

But behavioral ethics research teaches us that in some circumstances these inner controls may not offer the protection expected of them – as actions can deviate from ethical standards based on various external factors which may not be fully appreciated by organizations.   Understanding those causes can enhance C&E risk assessment by identifying circumstances where extra compliance measures may be necessary to make up for the “ethics shortfall.”

Here are two examples of this phenomenon:

– Individuals with depleted resources tend to face greater risks of unethical conduct than do others, as described in Too tired to tell the truth: Self-control resource depletion and dishonesty.  From a risk assessment perspective, this suggests a need to focus extra C&E efforts on parts of an organization where employees are subject to greater-than-ordinary stress.

Of course, this is a cause of risk that is pretty intuitive – but it is also one which, in my experience, is greatly under-mitigated. Being able to prove the risks here, as behavioral ethics does, may help C&E officers in getting the management attention or resources necessary to effectively addressing high-stress conditions at their companies through additional compliance measures.

– Acting indirectly can blind individuals to ethically problematic behavior more than direct action does.  For instance, in one behavioral ethics study, a hypothetical pharma company that sold a drug at an exorbitant price was judged to be significantly more unethical than a pharma company that sold its rights to market the drug to a smaller company, which in turn sold the drug at an even higher price than the first company did.  This phenomenon suggests that in dealings with a company’s third parties – suppliers, agents, distributors, joint venture partners and others – companies should not count too much on the inner controls of their employees to restrain such parties from acting unethically.  And that, in turn, suggests the need to take supplemental targeted compliance measures to make up for the shortfall.

Again, this is fairly intuitive, but for C&E officers  being able to prove what is otherwise known can be of immense value in risk mitigation.  And, as we will see in coming posts, not all behavioral ethics risks are intuitive.  But before that we’ll discuss:  Ben Franklin: proto behavioral ethicist?