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IDENTIFYING RISKY BEHAVIORS PREDICTIVE OF ETHICAL MISCONDUCT

“Spotting the Warning Signs”

COMPLIANCE & ETHICS INSTITUTEChicago, Illinois September 15, 2014

Carolyn S. Egbert

Creative Solutions for Executives

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INTRODUCTIONIdentifying/addressing errant behaviors early minimizes damages

Red Alert - Behaviors with the potential for misconduct and ethical lapses most always emit detectable warning signals

Spotting red flags – focus on drivers and the false justifications

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FIRST – THE GOOD NEWSAccording to the National Business Ethics Survey* (“NBES”):

• Observed misconduct decreased by 14% since 2007;• Fewer employees felt pressure to compromise their

standards – down by 4%;

Why? • Strong ethics and compliance programs bearing fruit? • or, employees take fewer risks when the economy is

weak or uncertain, given the economic state since 2008?

*Ethics Resource Center, 2013 survey of 6420 employees.

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SECOND, THE NOT-SO-GOOD NEWSAccording to the NBES:*• A relatively high percentage of misconduct is

committed by managers (60% of reports involved supervisors to top management);

• 26% of reported misconduct ongoing at time of survey;

• Reporting misconduct has stalled;• Retaliation continues as a widespread problem.

*Ethics Resource Center, 2013 survey of 6420 employees.

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THE COST OF MISCONDUCTDirect Costs:

Regulatory fines: In 2013, the DOJ levied $8B in fines for civil and criminal actions; the SEC levied a record $3.4B in enforcement sanctions.Other penalties, including imprisonment.

Indirect costs:

•Loss of customers•Loss of competitive standing•Loss of investor confidence•Lack of trust in management•Loss of top quality talent

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ROOT CAUSE OF ETHICAL LAPSESAn ethical lapse occurs

• when a compelling force or driver exists that causes an employee to strive for a specific goal, reach an end result or attain a reward,

• the cultural environment/means exist, and

• false justifications or rationalizations disguise what he/she knows is inherently wrong.

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RED FLAG RATIONALIZATIONSWhy good people do bad things!

Most employees want to do the right thing, but they either do not know what or how to do it or rationalize behavior to justify doing wrong conduct.

Driver - a desire for personal and/or professional gain that overrides the conscious, which prescribes the moral/ethical behavior.

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RED FLAG RATIONALIZATIONSThe most frequently-used rationalizations* earning top red flag alerts are:

1. The Compliance Dodge.

• committing an unethical act without breaking the rules• depends on employees’ desire to avoid punishment• punishment must be great enough to trump the desire

*See Slide 28 for attribution and further reference.

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RED FLAG RATIONALIZATIONS

2. “If it isn’t illegal, it’s ethical.”

• Laws vs. Ethics • True or False: people only behave ethically if there is an

enforced penalty for not doing so. • Rationale ignores concepts of ethics and ethical behavior. • Ethical issues always precede the law and many unethical

behaviors are not illegal.

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RED FLAG RATIONALIZATIONS3. The Golden Rationalization (“Everybody Does It.”)

• Rationale: the ethical nature of an act is somehow improved by the number of people who do it.

• Actor aware that conduct is wrong; motivation - desire to not be singled out for condemnation.

• Disguised admission of misconduct. • More unethical behavior - more harm results. • Individually responsible for behavior/moral choices.

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RED FLAG RATIONALIZATIONS

4. The Trivial Trap or “The Slippery Slope.”

• Rationale - if no tangible harm results, it cannot be “wrong.”

• Totally disregards unethical nature of act.• Focuses only on the results of the action. • Dangerously morphs into “the ends justify

the means” as an ethical system (aka the “terrorist standard”).

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RED FLAG RATIONALIZATIONS

5. The Reverse Slippery Slope.

• Rationale: make legitimate behavior seem unreasonable.

• Projecting criticism of harmful conduct into a ridiculously broad application of principles at issue.

• “Conscience con” - creates related but absurd, unreasonable variations.

• “The company makes us use protective, insulated cups so that we don’t spill hot coffee on us. What next? They bring in robots to hold the little cups to our lips while we drink?”

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RED FLAG RATIONALIZATIONS6. The King’s Pass.

• A pass for bad behavior. • Excusing unethical conduct/asking everyone to look the other

way – just this once.• Person is so important, so accomplished and has done so many

great things for so many people or organizations.• Dangerous mindset - actor behaving unethically relies on it;

behaves on a more lenient ethical standard. • The more respectable/accomplished the actor is, the more

damage he/she can do because he/she engenders great trust. • Deeply corrupting influence on others. • When caught, and the King’s Pass actor indignantly asks, “With

all that I’ve done and all the good I’ve accomplished for others, you would hold this against me?” - your answer is?

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RED FLAG RATIONALIZATIONS

7. The Dissonance Drag.

• The corrupting influence of The King’s Pass leads to cognitive dissonance,

• Muddles one’s ethical values without realizing it. • When a person whose held in high regard behaves in a manner

he/she deplores –• Moral reconciliation - either lower opinion of the person or

rationalize the behavior (illness, stress, confusion)• Or reduce approval of the behavior. • Essentially validates unethical behavior. • Explains why misconduct by leaders and admired role models

is potentially very harmful. • Tortured or inexplicable defenses are tip-offs.

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RED FLAG RATIONALIZATIONS8. The Tit-for-Tat Excuse.

• Rationale - bad or unethical behavior justifies, or makes ethical, an unethical response.

• Abandons all ethical standards. • Spurred by false belief that people who don’t play by the rules have

an apparent advantage over those who do.• “If you can’t beat them, join them!” • Ethics assumes that winning isn’t the only thing, it’s how you win. • Simple response to the Tit-for-Tat Excuse is: “two wrongs don’t

make a right.”

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RED FLAG RATIONALIZATIONS9. The Futility Illusion: “If I don’t do it, somebody

else will”.

• Rationale - no point in doing the right thing because the wrong thing will occur anyway.

• Justifies going along with corporate shenanigans.• Self-deluded thinking - refusal will only hurt them;

unwilling to prevent the damage they are asked to cause. • Faulty rationale - sometimes one person will refuse to go

along.• Even if the refusal doesn’t result in good, the

determination to do right is always laudable. • Rationale always trumped by moral courage - the driving

force for reporting misconduct.

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RED FLAG RATIONALIZATIONS10. Hamm’s Excuse: “It wasn’t my fault”.

• Rationale - only responsible for alleviating problems that one is personally responsible for.

• Complete abrogation of personal/ethical responsibility.• Ignores heroes or successful teams. • Ethical obligation to do the right thing arises with the

opportunity to do so.• Not with responsibility for causing the problem. • Passes responsibility to someone else who has the

opportunity to make things right or better. • Ethical counter: If there is a wrong and you are in a position

to fix it, fix it!

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RED FLAG RATIONALIZATIONS

11. Ethical Vigilantism.

• Rationale – addressing a real or imagined inequity with an unethical act.

• Reflects poor character qualities.• Example – employee is denied a raise, he/she surreptitiously

charges personal expenses to a company credit card because “the company owes me.”

• Results in personal corruption, harm to innocent parties, loss of moral high ground.

• Roots in many of these fallacies: Tit For Tat; the Golden Rationalization.

• No one ever “owed” the right to lie, cheat, steal or injure others.

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RED FLAG RATIONALIZATIONS12. The Management Shrug – “Don’t Sweat The Small

Stuff.”

• Rationale used by “big thinkers.” • Small lies going down a slippery slope are never alone. • Fellow travelers are unethical short cuts, lazy mistakes,

careless inattention, routine sloppiness. • Willingness to make tiny concessions – involving harm to

others and needless risk – to pursue a grand design. • Accumulation of small wrongs, ineptitudes and transgressions

erodes values, culture and efficiency; undermines strategy, mission and goals.

• Hallmark of bad managers, leaders who encourage and foster bad management.

• Provides built-in excuses for failures; assumes that a thousand little failures won’t add up to one big one.

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RED FLAG RATIONALIZATIONS13. Success Immunity: “They Must Be Doing Something Right.”

• Rationale – assumes that wrongful, irresponsible aspects of conduct is part of the magic formula for success.

• Not a serious flaw that can and should be removed. • Assumes that what is clearly broken should not be fixed.• Rejects concept that a successful practice can be altered.• Related to the King’s Pass, but more illogical.• Rationale avoids admitting that obviously unethical conduct is what

it is: WRONG!

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RED FLAG RATIONALIZATIONS

14. Vin’s Punchline* or “We’ve never had a problem with it.”

• Rationale: Assumes that because there hasn’t been a disaster yet, the conduct is acceptable.

• A form of magical thinking; absurd form of consequentialism. • When warned about irresponsible, reckless, dangerous or clearly

unethical conduct, (e.g., a conflict of interest) the response usually is: • “We’ve never had a problem with it.” • If consequences of bad behavior have not yet arisen – wait, they will. • “So far, so good” is actually “so far, so bad.”

*Vin’s Punchline is named for the scene in “The Magnificent Seven” when Vin (played by Steve McQueen) says, “(r)eminds me of that fella back home who fell off a ten-story building. As he was falling, people on each floor kept hearing him say, “(s)o far, so good. “Heh, so far, so good.”

VinVideo

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SUBTLE RED FLAGSIn a 2002 Ethics Resource Center article, Frank Navran used the mnemonic “saboteurs” to identify the following subtle ethical danger signs in the workplace:• Scapegoating – placing blame where it does not belong• Abdicating – failing to accept responsibility• Budgeteering – falsifying financial information, e.g., budgets• Overpromising – failing to follow through on promises• Turf guarding – being overly controlling• Empire building – hoarding power and authority• Underachieving – failing to meet minimum expectations• Risk avoiding – resorting to a safe (but wrong) position• Sharp penciling – overinflating results

(Which red flag rationales do you think each “saboteur” would use?)

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ADDRESSING RED FLAGS IN THE WORKPLACERecognize and assume that within every workplace cultural environment, factors exist that are conducive to rationalization.

“Right now, we know there are misdeeds going on somewhere in our company.We just hope it is small and we find it.”

Warren Buffett, Business Nightly interview, May 2005

Going down the slippery slope begins with:• small deceptions; “white lies”• cutting corners; fudging facts, numbers – just this once; no one will

know; I’ll make it right later• spinning, shading, omitting details, embellishments

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ADDRESSING RED FLAGS IN THE WORKPLACEDrivers that lead to misconduct:*• Ability to rationalize• Someone benefitting • Others benefitting• Seeing others behave inappropriately• Culture with examples of misconduct

Coupled with:• Amount of gain + probability of being caught + nature

of the consequences

*Ariely, Dan. “The (Honest) Truth About Dishonesty,” 2012.

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ADDRESSING RED FLAGS IN THE WORKPLACEElements of an effective organizational culture:• A shared understanding of how people work together

effectively:• Rules, Policies and procedures• Values and principles• Programs and rewards that motivate behavior• Consequences

• Leadership – shows how things are actually done• Formal (titles and positions)• Informal (drivers of the culture)• Role models (shapers of the culture)

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ADDRESSING RED FLAGS IN THE WORKPLACE

Code of Conduct Checklist:

• Clear rules? (clarity with no exceptions minimize rationalization)

• Based on Values and Principles? Aspirational?• Promote moral courage to do the right thing

(especially when no one is looking?)• Designed to capture the hearts and minds of the

employees?• Willingly embraced and internalized by all?• Well and repeatedly publicized?

Note on Values: are the Values in your organization well articulated, publicized and reaffirmed: known and embraced by employees or are they lost in the background?

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ADDRESSING RED FLAGS IN THE WORKPLACETraining Checklist:

• Educating and increasing employee awareness of the rationalizations and justifications that lead to misconduct?

• Ensuring awareness of the “slippery slope?”• Publicizing acts of misconduct?• Articulating and consistently enforcing consequences?• Employee surveys?• Culture or individual assessments?• Programs that motivate and engage employees?• Rewards that promote ethics, integrity and moral

courage?• Profile and extol moral courage champions?• Frequent communications and messaging?• Promotional opportunities, career development programs,

salary increases linked with positive ethics/integrity/moral courage role modeling?

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ATTRIBUTION

The red flag rationalizations shown on slides 8 through 21 are drawn from the “Ethics Scoreboard” and its companion blog, “Ethics Alarms,” which are the product of ProEthics, Ltd., Alexandria, Virginia. The author invites readers to share and add further examples of false rationalizations and justifications.

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