Ethical Failure

Unethical Decisions: When Ordinary People Cross The Line

With so many ethical scandals breaking out in recent years (e.g., Deutsche Bank and money launderingVolkswagen and the manipulation of diesel emissions testingWells Fargo and unethical sales tactics), it leads one to question: What is running through the minds of the people participating in the unethical acts? At the Canadian Centre for Advanced Leadership in Business’s annual year-end celebration on April 11, the former CFO of Enron, Andrew Fastow, provided a glimpse into what his mindset was leading up to the demise of Enron.

How is it possible to be the CFO of the year and commit the greatest corporate fraud in American history for doing the same deals? Every single deal I did was approved...If I had to sum it up in one word, the word I use is ‘loopholes’…You’re technically following the rules, but you’re intentionally going around the principle of those rules.” While Fastow followed then-current accounting rules and guidelines, he also intentionally misrepresented Enron’s financials to appear like they were performing better than they were - in other words, he found a loophole. The problem for him wasn’t choosing between right and wrong – it was knowing the difference between legality and ethicality, the difference between what you’re allowed to do and what is the right thing to do.

We’d like to think that unethical decisions are only made by ‘bad’ people or criminals, but that simply isn’t true – it can happen to an average person who is highly motivated to reach a result and perform. In Warren Buffett’s words, “[w]hat starts as an ‘innocent’ fudge in order to not disappoint ‘the street’ – say, trade-loading at quarter-end, turning a blind eye to rising insurance losses, or drawing down a ‘cookie-jar’ reserve – can become the first step toward full-fledged fraud.” We are all subject to the overconfidence bias, in which we are likely to overestimate our ability or think that we are an exception to the odds. However, there is often a disparity between our intentions and our actions. Research supports this, as a study finds that when asked, 96 percent of people said that they would oppose an unethical request. In contrast, in a subsequent study, only 14 percent actually refused, and nine percent ‘blew the whistle’ and reported the misconduct to authorities.

What influences how likely we are to make unethical decisions? While some personality traits may certainly make you more likely to make unethical decisions or try to get around the rules (e.g., ‘dark-side’ personality traits like Honesty-Humility), there are also psychological processes that can tip the scales. For example, moral disengagement describes how people can mentally distance themselves from their moral standards to avoid feeling guilty about unethical conduct by justifying potential harm to others and linking it to worthy purposes or downplaying the extent of harm through comparisons to worse behaviour.

At this point, you might be wondering what kind of control you have over finding yourself in an ethical dilemma?

Although an organization does have a responsibility to ensure they are defining processes and boundaries to reward for ethical behaviour, as Fastow said, "compliance isn’t the guardrail for ethics – culture is.Research by the University of Calgary finds that when there is a culture of ethics and with supervisors role-modeling ethical leadership, employees were less likely to engage in unethical decision making. In his closing comments of the CCAL event, Mac Van Wielingen, stressed the importance of culture. “It’s not just about wrongdoing; great culture will implicitly embrace learning, commitment, transparency, accountability, trust, and reliability. That creates support and collaboration, and you can all move together towards common goals. And, that creates performance.”


Author

Stephanie Law, Viewpoint Research Team

Is Ethical Culture in Banks an Oxymoron?

Canadian banks have had the bragging rights of not following in their southern neighbors’ footsteps during the financial collapse of ‘08/’09. However, recent allegations from employees of Canada’s five major banks of intense pressure to meet sales goals, even at the unethical expense of misleading clients, sounds eerily similar to the recent Wells Fargo scandal.

The toxic sales culture in Canadian banks was brought to light after “Go Public” (an investigative news segment of the CBC) reported that staff at TD were experiencing intense sales pressure, with the threat of dismissal should they not meet quotas. Over 1,000 emails from employees at the other four major banks(Scotiabank, BMO, CIBC, and RBC) detailing the same issues followed shortly after that initial report.

Even though the Financial Consumer Agency of Canada (FCAC) has started a business practices probe that will look at sales practices and whether guidelines on express consent and fee disclosure are being followed, there is still the question of how it was allowed to get this bad in the first place. 

WHAT’S HAPPENING IN THE STATES

In America, a similar ethical dilemma is being fought in the courts, with Wall Street continuing to fight for brokers’ right to give unregulated advice to retirement investors. Currently, it is legal for financial professionals to recommend higher-cost investment products that provide them with a higher commission but their clients with lower returns. Investors choose these options because they are endorsed by their advisers, believing that they are receiving advice that suits their best interests. 

This is happening at an expedited rate, given that the fiduciary rule set into motion by the Obama Administration that would require the protection of investors welfare, was supposed to be implemented earlier this month. However, on April 5, the Department of Labor delayed implementation of the rule until at least June 9. 

This process was first started in 2010, but action was delayed so that stakeholders could be consulted, the current version of the rule was proposed in 2015. A press release from the Economic Policy Institute states that, “Every seven days that the rule’s implementation is delayed will cost retirement savers $431 million over the next 30 years. All told, the proposed 60-day delay will cost workers saving for retirement $3.7 billion.”

IT ALL BOILS DOWN TO CULTURE

Culture and ethics need to be an ingrained and put into practice, instead of having policies in place that tick off all the right boxes, but are only reviewed during training or predetermined reviews. This matters in banking just as much as it does in other industries. 

“the risk management failures at so many leading global financial institutions were not merely isolated events—a rogue trader here and a deviant employer there—but rather reflections of systematic breakdowns in corporate culture.”
— Anjan Thakor (2016) 

Other major events such as the financial crisis did bring culture to the forefront of important topics for bank executives and regulators, it doesn’t seem to have made a lasting impact. How a company explicitly outlines their culture, versus how it is embodied in the day-to-day can often be two very different things. It is a driving force behind how an organization operates, and needs to be distributed top down, rather than just a statement in the employee handbook to become pervasive. 

A successful culture supports how a business executes its growth strategy, and positively influences all aspects of decision-making. Additionally, when an employee feels engaged with, and a part of the business in a positive way, there is less of a need to rely on incentives, or job security, to bring about a desired behavior or outcome.

So even though the intention behind selling more products to clients may have started out as an innocent way to increase revenue, it certainly didn’t remain so. And while Canada’s banks haven’t reached the level of scandal that Wells Fargo did, they appear to have been on their way. Enabling employees and consumers to hold institutions accountable to their promises and policies of an ethical way of doing business can go a long way towards achieving long-term success.


Author

Viewpoint Research Team


Sources used for this post:

Bradshaw, J. (2017). Federal watchdog to review banks’ sales tacticsThe Globe and Mail. Retrieved 17 April 2017, from http://www.theglobeandmail.com/report-on-business/canadian-watchdog-to-review-banks-sales-tactics/article34309072/

Burne, K. (2016). Bankers, Regulators Find No Easy Answers at Bank Culture WorkshopWSJ. Retrieved 22 April 2017, from https://www.wsj.com/articles/bankers-regulators-find-no-easy-answers-at-bank-culture-workshop-1476998844

Edwards, B., & Lazaro, C. (2017). Investors Pay If Wall Street Wins a Fiduciary-Rule DelayBloomberg View. Retrieved 20 April 2017, from https://www.bloomberg.com/view/articles/2017-03-28/investors-pay-if-wall-street-wins-a-fiduciary-rule-delay

Ernst & Young. (2014). Shifting Focus: Risk Culture at the Forefront of Banking. Ernst & Young. Retrieved from https://webforms.ey.com/Publication/vwLUAssets/ey-shifting-focus-risk-culture-at-the-forefront-of-banking/$File/ey-shifting-focus-risk-culture-at-the-forefront-of-banking.pdf

Johnson, E. (2017). Bank call centre staff reveal pressure to turn customer inquiries into salesCBC News. Retrieved 11 April 2017, from http://www.cbc.ca/news/business/banks-sales-tactics-call-centres-go-public-1.4030981

Ligaya, A. (2017). Watchdog reports surge in bank complaints in wake of high-pressure sales tactics allegationsFinancial Post. Retrieved 10 April 2017, from http://business.financialpost.com/news/watchdog-reports-surge-in-bank-complaints-in-wake-of-high-pressure-sales-tactics-allegations

Linnane, C. (2017). Are Canadian banks headed toward a Wells Fargo–style scandal over sales tactics?MarketWatch. Retrieved 27 March 2017, from http://www.marketwatch.com/story/is-there-a-wells-fargo-like-bank-selling-scandal-breaking-in-canada-2017-03-15

McGee, S. (2016). Wells Fargo's toxic culture reveals big banks' eight deadly sinsthe Guardian. Retrieved 13 April 2017, from https://www.theguardian.com/business/us-money-blog/2016/sep/22/wells-fargo-scandal-john-stumpf-elizabeth-warren-senate

Salinger, T. (2017). Fiduciary rule to spawn thousands of low-fee mutual fund shares: Morningstar. Financial Planning. Retrieved 21 April 2017, from https://www.financial-planning.com/news/morningstar-fiduciary-rule-boosts-offerings-of-low-fee-mutual-funds

Thakor, A. (2016). Corporate Culture in Banking: Why It MattersOxford Law Faculty. Retrieved 15 April 2017, from https://www.law.ox.ac.uk/business-law-blog/blog/2016/10/corporate-culture-banking-why-it-matters

Trump delay of the ‘fiduciary rule’ will cost retirement savers $3.7 billion. (2017). Economic Policy Institute. Retrieved 27 March 2017, from http://www.epi.org/press/trump-delay-of-the-fiduciary-rule-will-cost-retirement-savers-3-7-billion/

Wursthorn, M. (2017). Billions Gush Into Merrill’s Fee Accounts as Obama-Era Rule LoomsWSJ. Retrieved 20 April 2017, from https://www.wsj.com/articles/billions-gush-into-merrills-fee-accounts-as-obama-era-rule-looms-1492531169?tesla=y

Decision rights: Who has the authority?

Our previous blog post discussed the pros and cons that are associated with distributed leadership. One of the facets of distributed leadership promotes, initiative and leadership responsibilities at all levels of a firm. In order to do this, everyone from front-line workers to upper management must have a clear understanding of what decisions they do, and do not have authority over.

This post delves more deeply into understanding why this concept of so called “decision rights” is important, and examines the methods and practices behind successfully establishing, and implementing the authority behind a person’s decision rights.

Job titles and the ladder of corporate hierarchy have been traditionally linked with decision rights, with the assumption being that the higher the pay grade, the more empowered a person is to make decisions. However, even if your organization does not subscribe to the idea of distributed leadership, there are still going to be instances in which your employees will need to make decisions.

They need to have a clear understanding of which decisions and actions to take the lead on themselves, and which to bring to the attention of their superiors. 

Decision rights is a difficult practice to get right. Michael C. Jensen and William H. Meckling (1992) state,“allocating decision rights in ways that maximize organizational performance is an extraordinarily difficult and controversial management task.” Often leaders either do not want to relinquish decision-making power because they see it as theirs. Or, it is their own cognitive bias that distorts their judgments and knowledge as being superior to others. However, it is important to overcome these barriers, because the benefits of doing so have been linked to profound improvements in employee satisfaction, the everyday operations of the business, and the bottom line.

One of the most important benefits of decision rights is encountered in its absence and a decision is moved away from the frontlines of an organization, resulting in the unnecessary time that is added to how long it takes to execute the answer. Because of this, in order to be effective and efficient in executing business strategies, accomplishing goals, and mitigating risks, decision authority needs to be put in the hands of the person who possesses the most relevant information.

When this is not implemented correctly, and upper-management or executive level leaders are involved in decisions that are not aligned with their knowledge base, a huge amount of wasted time, money and resources are incurred. Not every problem or judgment is appropriate to bring to the attention of the CEO.

“Decision rights are closely related to governance… [but] go beyond the standard approach to governance, cataloguing critical decisions that must be made, identifying who is closest to the relevant information that will help them make these decisions, and documenting who will ultimately be accountable for the decisions that are made.” 

-Deloitte (2011)

Another benefit to distributed leadership is that an employee’s satisfaction increases when they have higher levels of purpose through understanding what is expected of them, these expectations can then be worked towards and delivered on a regular basis.

CREATING A FRAMEWORK FOR DECISION RIGHTS ALLOCATION

  • Have a comprehensive inventory of the key decisions that are made most commonly by your firm

  • Clearly define the weight of the cost that each decision carries

  • Plainly establish the procedures of the decision-making process (e.g. problem and tracking tools, escalation processes etc.)

  • State explicitly the ownership of each decision

  • Outline the hierarchy of decision makers or decision-making groups

  • Have a set review schedule and update the distribution of decision authority accordingly should there be any changes

  • Don’t mix up the outcome with the decision process (if the decisions authority has been well allocated then changing it based on a less favourable outcome will make the problem worse next time)

Decision rights are important in companies of all sizes, but even more so as the size and complexity of an organization increases. Peter Jacobs (2005) argues that “how effective an organization is at making high-quality decisions consistent with its mission and objectives… is a prime determinant of its ability to compete in the marketplace.” Finding the right balance between standardization and agility is critical.

Decision making authority is a constantly changing aspect of a firm. Below are examples of when a company should examine and potentially change their framework and policies.

TRIGGERS SIGNALLING THE NEED FOR CHANGE

  • Growth strategies

    • New markets, products, and organizational structures

    • When companies go global, communication lines are stretched and leaders are removed even further from the action


  • New executive team

    • New leaders may have different ideas about decision making

    • Making sure all employees are on the same page regarding decision making authority is crucial


  • Mergers and acquisitions

    • Each company has their own culture and way of doing business

    • If decision making authority does not match once the firms have combined then there will be redundancies, inefficiencies and mistakes


  • Strategy or operating model changes

    • When any aspect of the business changes, decision rights need to be reassessed


  • Quality focus and regulatory changes

    • Global regulations impose new decision making criteria

    • Managing these new requirements and confirming compliance necessitates new processes, procedures, and means of oversight


  • Need for increased speed to market

    • The key is finding quality data, which often requires working across hierarchies and locations to achieve a broader view of opportunities and risks

    • Decision rights can help overcome the tendency towards risk avoidance and subsequent delays in decision making by enabling business leaders to quickly identify and analyze the required information acquired by those on the frontline

In almost any enterprise, in order to achieve effective and fast execution, collaboration and collective decision-making is essential.

Having decision rights that are clearly defined will help drive an organization’s efficiency, accountability, and empower employees at all levels of the firm to make the best decisions possible when necessary.  

When executed correctly, there seems to be no end to the benefits of properly allocated decision rights. A company’s human capital is arguably one of its most valuable assets, and utilizing this competitive advantage to its fullest extent helps enable companies to thrive in the marketplace.


Author

Viewpoint Research Team


Sources used for this post:​​​​

Athey, S., & Roberts, J. (2001). Organizational design: Decision rights and incentive contracts. The American Economic Review91(2), 200-205.

Deloitte, (2011). It's Your Decision. Deloitte.

Jacobs, P. (2005). Decision Rights: Who Gives the Green Light? [online] HBS Working Knowledge. Available at: http://hbswk.hbs.edu/item/decision-rights-who-gives-

the-green-light [Accessed 7 Apr. 2016].

Jensen, M. C., & Meckling, W. H. (1992). Specific and general knowledge and organizational structure

Success: Ethical Failure in Leadership

The topic of success’s dark-side was recently brought up, and the more that it was explored, the more facets it seemed to have. Facets such as, in-fighting among top executives or family members in successful companies, the never ending battle to find the next big talent, and the loss of ethics that lead to scandal, all of which deserve to be explored fully in their own posts.

The recent scandals that have been dominating news feeds this past year, along with the questions of how and why leaders with well-established integrity and leadership track records come to engage in unethical practices.

ETHICS (OR LACK THEREOF) AND LEADERSHIP ACROSS SECTORS

Reports that detail ethical violations by managers and executives continue to occur despite ethics being considered pivotal to organizational success, and receiving increased attention by firms and business schools. Trust in corporations and how they are run has never before been subjected to the level of public scrutiny that it is now. Advances in technology, the internet, and social media make it increasingly easy to check up on businesses and their practices.

Leaders at all levels can talk the talk of ethics all they want, but unless they are also walking that ethics walk it becomes meaningless.

This is not only seen in business, but in other arenas where ethics and honour are held in high esteem such as sports. The scandals surrounding FIFA, the Olympics, and other elite athletic competitions such as the Tour De France, are but a few examples of where the ethics talk certainly does not match up with the walk.

Spectators and athletes who compete fairly are becoming increasingly disillusioned with the competitive culture of sports and how it is getting out of hand. It is more and more common for those who win at any cost through corruption, and monetary advantages to be met with public derision and harsh penalties.

Politics is another area where ethics is ideally a key piece of the foundation on which individual politicians and their platforms run. However as the news so continuously, and delightedly informs us, this is often not the case. This seemingly endless American federal election has provided countless examples of this.

And while America’s larger-than-life presence often dominates, this is a world-wide phenomenon and Canada has had its fair share of ethical failures.

HOW SUCCESS AND ETHICAL FAILURE ARE CONNECTED

Ludwig and Longenecker suggest that competitive pressure can certainly be a factor behind why some leaders abandon their principles and commit ethical violations. This notion that the ethical failure of leaders – in all sectors – is largely due to lack of personal principles, or the state of the climate of the market, is argued to be only half of the story.

“The media, politicians, and the general public frequently characterize these leaders as bad people, even calling them evil. Simplistic notions of good and bad only cloud our understanding of why good leaders lose their way, and how this could happen to any of us.”— George, 2011

Success and lack of preparedness in dealing with personal and organizational success is actually the issue. Our society places a high priority on being successful, yet there is little attention placed on preparing people to deal with the aftermath of success once it is achieved.

There were a number of reasons discussed in the literature that outline why success can lead to ethical failure:

  • Success can lead to complacency and loss of focus

    • Attention is diverted away from the management of their business, and teams are left unchecked

  • Personal and organizational success can lead to privileged access to information, people, or objects

    • Information can be used to the leaders advantage (i.e. insider trading)

  • Success often includes increasing control over organizational resources

    • Resources can be diverted to areas more focused on personal interests rather than to what is best for the organization

  • Success can lead to an inflation of a manager’s belief in their personal ability to manipulate outcomes

    • External factors that may also be influencing the organization’s performance are discounted (See previous post on bias)

  • Leaders who are successful can lose their ability to gain satisfaction from what they have already achieved, and what they have becomes not enough

    • This can translate into greed which can lead to a loss in perspective and unethical behaviours being rationalized

    • Not initially getting caught in this cycle can increase the feeling of invincibility and the likelihood of additional unethical choices being made in the future

  • Personal isolation and a lack of intimacy with family, friends, and colleagues can become an issue

    • Not being able to discuss problems, and long hours spent away from home can cause a loss in a valuable source of personal balance

While none of these reasons should be looked at as excuses for those who experience ethical failure, the issue is not as simple as labelling someone good or bad. Anyone can fall into the trap of success if they are not properly prepared for all of the stresses that are associated with said success.

MITIGATING THIS RISK

There are a number of ways in which you can prepare yourself, your leadership team, and your organization for success.

The first and most obvious should be that ethics must be an ingrained characteristic in those that you hire. Building a team who is ethical helps to inspire those around them to lead by example.

Your company’s board should also be actively aware of your management team’s personal and psychological balance. Before anyone is appointed to a leadership role they need to understand and express why it is that they want to lead, as well as what the purpose of their leadership is, and what it will achieve for the company, and for themselves personally. If the answers to these questions honestly revolve around concepts such as money, power, and prestige, then these candidates run the risk of primarily considering external gratification as their measure of fulfillment, and are most at risk of ethical failure.

While there is nothing wrong with placing value on these visible external symbols of success, they must be “combined with a deeper desire to serve something greater than oneself” (George, 2011) in order to maintain a firm grip on the high standard of ethics that most leaders start out with.

Regularly scheduled audits of critical organizational decisions, processes and resources, clearly established ethical codes of conduct, and a strictly enforced policy that protects employees who report unethical behaviour heighten both awareness and compliance.

In both the VW and Wells Fargo examples that were linked to at the beginning of this post, there was evidence that employees who tried to go against the grain of established unethical practice were fired for either not meeting the excessively unrealistic criteria, or, for bringing unsavoury information to light – to either leaders, or the public.

If we are able to reframe our perception of leaders from hero to servant of the people they lead, the psychological challenges listed above may be easier to mitigate due to fact that these expectations that people often have of what they deserve once success is achieved will not be as prevalent. 

No matter what sector you are looking at – sports, politics, or business – an organization whose leadership team is entirely composed of members who are the physical embodiment of ethics and fully capable of wise decision-making, can still become a victim of the temptations that are offered to – or seen to be deserved by – the powerful and successful.

The dichotomy of good versus bad in our current portrayal of scandals in the media is not representative of the underlying issues. If this continues, and the root of the problem is not addressed, then no matter how much effort, time, and money, business schools and firms put towards ethics education, scandals will continue to happen.

The negative aspects of success are not always obvious, but they are nevertheless present. It is how well we understand ourselves, and are able to see these dangers to effectively diminish them that count.


Author

Viewpoint Research Team


Sources used for this post:

Brimmer, S. (2007). The Role of Ethics in 21st Century Organizations - Leadership Advance Online, School of Business & Leadership, Regent University, Virginia Beach, VirginiaRegent.edu. Retrieved 21 November 2016, fromhttp://www.regent.edu/acad/global/publications/lao/issue_11/brimmer.htm

de Botton, A. (2013). Business and PhilosophyThe Huffington Post. Retrieved 28 October 2016, from http://www.huffingtonpost.com/alain-de-botton/business-and-philosophy_b_4170623.html

George, B. (2011). Why Leaders Lose Their WayHBS Working Knowledge. Retrieved 17 October 2016, from http://hbswk.hbs.edu/item/why-leaders-lose-their-way

Ludwig, D. C., & Longenecker, C. O. (1993). The Bathsheba syndrome: The ethical failure of successful leaders. Journal of Business Ethics12(4), 265-273.

Mellahi, K., Jackson, P., & Sparks, L. (2002). An exploratory study into failure in successful organizations: The case of Marks & Spencer. British Journal of Management13(1), 15-29.

Poulsen, A. (2015). Why Future Business Leaders Need PhilosophyBig Think. Retrieved 26 October 2016, from http://bigthink.com/experts-corner/why-future-business-leaders-need-philosophy