How to Increase Ethical Behaviour in Organizations

Encouraging people to develop a vigilant mindset can go a long way towards reducing unethical behaviour in organizations.

Developing a vigilant mindset and embracing four behavioural tools can go a long way in reducing unethical behaviour in organizations.

FOLLOWING THE COLLAPSE of the world’s largest Ponzi scheme in 2008, clients of Bernard Madoff Investment Securities lost an estimated $65 billion in unrealized gains. In hindsight, investors detected major alarm bells that signaled Madoff’s returns were too good to be true: They were impossibly steady and high, at 11 per cent per year, never experiencing a down year, and were consistently higher than those of the S&P 500 index, with surprisingly little volatility.

Madoff employed a small, three-person auditing firm that had only one active principal accountant; the other principal was an 80-year-old retired accountant living in Florida. He was extremely secretive about his investment strategy and selective about who could invest in his funds. Despite these telltale signs of fraudulent behaviour, Madoff’s Ponzi scheme was not uncovered for more than a decade — a fact that surprised even Madoff himself. Although a few investors suspected something was up, many — including those with extensive knowledge of finance — were either completely blindsided or failed to act on their suspicions.

Behind this scandal were two groups of individuals who contributed to the growth of the Ponzi scheme:

1. The perpetrators, who knowingly committed unethical acts, including those at Madoff Investment Securities who created fraudulent records of non-existent transactions; and

2. The investors, advisers and regulators who had the expertise and fiduciary responsibility to detect fraudulent behaviour — but failed to do so.

This article will focus on the latter group, in an effort to understand the factors that can help people notice unethical behaviour — and act on their suspicions.

Ethics at Work: Key Findings to Date

Large-scale scandals including Madoff, Enron and Worldcom typically have a few ‘bad apples’ at the core, but are enabled by a larger group of individuals who fail to notice and act — even when there are strong hints of wrongdoing. This has motivated

scholars to shift their focus from examining acts committed with the intention to do harm to investigations of how individuals who intend to do good are ultimately tempted to act unethically.

This latter subset of unethical acts can be categorized as either intentional (when individuals are cognizant of their ethical violations) or unintentional (when they are unaware that their actions cross ethical boundaries). In the domain of intentional unethical behaviour, the study of ‘behavioural ethics’ — the systematic and predictable ways in which individuals fail to act ethically — demonstrates that although there are individual differences in people’s moral identity and ethical values, morality within an individual is also malleable. Mordechai Nisan’s moral balance model shows that people have a ‘moral bank account’, wherein good deeds ‘raise the balance’ and bad deeds lower it. Perceptions of a ‘surplus’ in one’s account might lead a person to cheat, whereas perceptions of a ‘low balance’ might lead one to act more ethically.

Elsewhere, psychologist James Rest’s model of unethical behaviour suggests that once an issue has been identified as having moral dimensions, individuals engage in a moral judgment (i.e., they decide whether something is ethical or unethical), which triggers moral intention (they plan to act either ethically or unethically) and moral behaviour (they act, either ethically or unethically). Behavioural ethics research has also shown that peoples’ judgments, intentions and behaviour depend on the situational and social forces in the environment. For example, individuals are more prone to cheat when they feel cognitively depleted and can easily justify their behaviour; and because people often look to others to determine acceptable norms, people are also more likely to cheat when they see others cheating.

Alongside the research on intentional acts of cheating is another body of research that studies how individuals engage in

unintentional acts of cheating. These behaviours fall under the broader category of bounded awareness — a state in which we systematically fail to notice relevant information that falls outside of our attention at the time of making a decision.

Individuals can also exhibit bounded ethicality, making unethical decisions that are outside of their own awareness and inconsistent with their consciously-held values. Both bounded awareness and bounded ethicality operate at an unconscious level: Individuals are not aware of how the biases that arise from their limited capacity to notice key information influence their judgments.

Examples of bounded ethicality include implicit prejudice and conflicts of interest. Even individuals who espouse equality and diversity might discriminate based on gender or race without their awareness. Such implicit biases stem from stereotypical associations that even individuals who consciously strive to be unbiased have difficulty overcoming. Furthermore, conflicts of interest can operate outside of an individual’s awareness. Auditors, for instance, may exhibit bounded ethicality when they fail to recognize how the promise of becoming a future employer for the audited firm precludes them from making impartial audits.

Because these biases operate at an implicit level, interventions that would be aimed at addressing intentional acts of cheating do not necessarily apply. Therefore, scholars are developing interventions aimed at mitigating them. For example, recent research has demonstrated that employers evaluating candidates separately exhibited a gender bias: They were more prone to hiring men for math-related tasks and women for verbal-oriented tasks, even when gender did not predict performance on these tasks. In contrast, behavioural economist Iris Bohnet et al. found that evaluating male and female candidates jointly rather than separately eliminated reliance on gender stereotypes in hiring decisions.

Whereas past research has aimed to reduce bounded ethicality that manifests as implicit biases, we recently set out to investigate factors that may help individuals notice when options that appear attractive are in fact ‘too good to be true’.

Research on inattentional blindness suggests that preparing peoples’ attention for a certain type of information or data significantly increases their chance of noticing that information. For example, when signs warning drivers about the presence of cyclists on the road are present, drivers become more likely to notice cyclists, which improves the safety of everyone on the road. We wondered, would preparing individuals with a similar mindset of vigilance prior to making a decision lead them to attend to more information that challenges the viability of seemingly-attractive options?

To help us understand how creating a vigilant mindset affects the ability to notice elements of unethical behaviour and act on critical information, participants in our study played the role of a financial advisor in an investment game. ‘Advisors’ were asked to select one fund to recommend to a hypothetical client from a pool of four funds. Unbeknownst to participants, the fund with the most attractive risk-return profile — ‘Fortitude Investments’ — was based on Madoff’s feeder fund.

In addition to charts and graphs, individuals could also read the fine print that contained important information about each fund. For the disguised Madoff feeder fund, the additional facts informed advisors that the fund was exclusive to investors with strong relations to the fund, opaque on disclosing its investment strategy, and maintained unconventional auditing practices. Participants who ignored this information and selected Fortitude Investments lost all of their clients’ money at the end of the hypothetical four-year investment period.

So, what percentage of individuals selected Madoff’s feeder fund — despite having access to critical information about the fraudulent nature of the fund?

The answer depended on whether the ‘advisor’ selected the fund that appeared ‘most suspicious’ to them before or after they made their decision for the client. Those who made an investment decision for their client before contemplating their suspicions selected Madoff’s feeder fund 68 per cent of the time; whereas those who made their decision after determining which fund was the most suspicious selected the fund 51 per cent of the time.

In other words, instilling a vigilant mindset — by merely asking participants to identify the fund that ‘seemed most suspicious’ to them prior to making a decision — reduced the propensity of selecting Madoff’s fund by 17 percentage points. The timing of instilling vigilance is critical to helping individuals notice fraudulent behaviour and act on their suspicions: Once individuals have already made a decision, they will be less likely to consider disconfirming evidence and notice critical information.

Implications for Management

Failure to notice unethical behaviour is a significant problem in modern organizations — and in society, more broadly. Given the prevalence of both bounded awareness and bounded ethicality across organizational contexts, our findings highlight the value of proactively raising vigilance in helping individuals consider reasons not to take a particular course of action.

Although increasing vigilance prior to making a decision decreased individuals’ propensity to select Madoff’s fund, as indicated, more than half of the individuals still recommended it. Clearly, vigilance is not enough. Following are some other proven tools that can complement a vigilant mindset.

1. ASK LOTS OF QUESTIONS Although this might seem obvious, many people fail to recognize that they can obtain more information than what is in front of them. Imagine that you are concerned that a supplier you are considering for your company is using child labour. Directly asking, ‘Do you use child labour?’ is unlikely to be effective, but asking multiple related questions can help you determine whether the supplier is violating laws. Questions like, Can you break down the cost of materials and labour for me? How long does it take each worker to produce the product? Can you provide demographics of your workers?, and Can you tell me how you manufacture these products? may indicate whether suspicion is warranted. You may realize, for instance, that it is impossible for the number of workers provided in their figures to produce all of products manufactured, suggesting under-reporting of the number of employees.

2. ‘TRIANGULATE’ ON THE FOCAL ISSUE WITH MULTIPLE SOURCES Sometimes, investigating one source is not enough. ‘Triangulation’ is a powerful technique that consists of verification from

People have a ‘moral bank account’ wherein good deeds ‘raise the balance’ and bad deeds lower it.

two or more sources. The idea is that one can be more confident with a result if different methods lead to the same result.

When asking multiple sources the same question, are the answers congruent with one another, or do they conflict? For example, consider the scenario that you are concerned a supplier is using child labour. If multiple sources reveal conflicting numbers about the number of employees working at the company, you have reason to be more suspicious. Inconsistency is often a sign that suspicion is warranted.

3. ATTEND TO ‘ARTFUL DODGES’ When people are asked questions that could reveal the unethical nature of a situation, they often give ‘non-answers’ in order to deflect attention away from the issue of concern. Such ‘dodges’ are signs that suspicions are warranted. For example, an individual who does not want others to know about the use of child labour may direct discussion to the quality of products or materials when asked about the low cost of labour. Research shows that individuals tend to not notice when others are answering a slightly different question from the one that was asked. One way to detect artful dodges is to remember the original question and to think critically about whether the answer provided truly addresses the focal question.

4. LEAVE MORE TIME TO DECIDE After gathering all relevant information, leaving time to decide can prevent you from overlooking critical information. In a famous experiment, theological seminary students were asked to give a lecture. Some of the priests were told that they needed to hurry in order to arrive at the building on time, whereas others were told they had plenty of time. On their way over to the lecture, all of the priests passed by a man slumped over, who appeared to be in need of medical attention. The priests who were not in a rush were more likely to help the man; while those in a rush were more likely to pass by without even noticing him. Time constraints proved to be an even bigger deterrent of helping behaviour than the content of the talk: Some of these seminary students were on their way to give a talk on being a Good Samaritan. As this study indicates, when people are in a rush, they a) do not have enough time to do any additional investigative work, and b) fail to notice even when obvious information is in front of them.

In closing

By embracing a vigilant mindset as a ‘default state’, managers in any industry can develop a keen ability to notice unethical behaviour. In our view, this is a critical step towards reducing both bounded ethicality and bounded awareness in modern organizations.

Most people don’t notice when someone answers a slightly different question from the one that was asked.