Corporate scandals: Why good people do bad things and how to stop them

Research suggests that corporate wrongdoing is often due to ‘ethical blind spots’ rather than wilful misconduct, and provides insights on how to prevent it.

From the shocking stories about bankers’ behaviour to the Volkswagen emissions scandal and recent revelations of travel comparison websites prioritising commissions over customers – there’s a long list of corporate scandals that have damaged public trust in respected businesses.

As events have unfolded, some of the world’s most respected business figureheads have come under the spotlight, accused of corporate wrongdoing and cover-ups. In many cases, they have failed to provide answers or even accept any blame.

It raises some intriguing questions: Why do such events keep happening, and why do leaders appear powerless to prevent them? Is it a case of over-paid executives putting profits before people? And why do those in positions of authority ignore ethical concerns even though they are risking their reputation?

According to Dr Michael Collins, a management expert with The University of Queensland (UQ) Business School, putting the blame solely on senior leaders is naïve, as the truth is often more complex.

He explains, “research shows that in a lot of cases, unethical behaviour is unintentional – people simply fail to recognise the nature of their actions."

"This lack of self-awareness is due to ‘ethical blind spots’ or unconscious biases where our self-serving interests override the needs or expectations of others. This deterioration of judgment is the reason many good people end up making bad ethical decisions.”

Both human traits and circumstances can contribute to the development of an ethical blind spot. A number of key factors are at play, according to Dr Collins:

1. High reward sensitivity

Some people are more driven by the prospect of reward and personal gain than others. These ‘reward-sensitive’ individuals are highly motivated types who are bent on achieving their goals, regardless of the consequences. They may be star performers who continuously meet or exceed targets.

However, they tend to focus on short-term rewards rather than the risks or obstacles to achieving them, and largely ignore the threat of punishment.

One example is the downfall of health care company Theranos, founded by Elizabeth Holmes – who was once listed as the youngest self-made female billionaire by Forbes.

Described as ambitious from a young age, Elizabeth founded Theranos with the best intentions of revolutionising blood testing and healthcare. However, a series of regulatory investigations revealed she became blinded by the prize of growing her company, providing exaggerated claims about the accuracy of her companies blood-testing technology.

2. Inability to process conflicting information

Ethical decisions often involve weighing up competing interests, such as making a profit while treating customers fairly. However, some people have low ‘cognitive flexibility’, meaning they have difficulty switching their attention between two competing concepts and processing the information. When combined with reward sensitivity, this trait makes them more vulnerable to ethical blind spots.

Michael explains: “Not only do these types find the prospect of short-term rewards more attractive, it's also harder for them to switch their attention to the longer-term risks. They are more likely to ignore any information that prevents them from achieving these rewards.

“The closer they get to their goal, the more motivated they become and the more frustrated they are by anything that gets in their way. Not surprisingly, these people have problems resisting temptation and make rash, impulsive decisions that can lead to unethical acts.”

Both as a leader of a country and a billion-dollar business owner, Donald Trump has been criticised at times for his ‘black and white’ views that many have highlighted as lacking the ability to balance the needs of multiple stakeholders.

One scholar noted in the The New York Times that Mr Trump deploys a “reality distortion field” — ignoring the truth and creating an alternate set of facts to align with his focus.

3. Competitive cultures

Bonus payments and commissions offer powerful incentives to achieve results, but they also motivate reward-sensitive individuals to focus on short-term gains at the expense of being a team player. The competitive nature of such schemes discourages these individuals from sharing knowledge and co-operating with others, while encouraging cheating.

At the National Australian Bank – CEO Andrew Thorburn was singled out for criticism in the banking royal commission’s final report – the sales-driven culture is thought to have been a key factor behind the ‘fees for no service’ scandal. Staff were offered rewards for increases in mortgage sales and urged to compete against each other and ‘fill the funnel’ of sales.

4. Fatigue and stress

Fatigue and mentally demanding work affect our ability to make good decisions. Difficult performance targets, unrealistic deadlines and demanding workloads can deplete our attentional reserves to the extent that we fail to notice the moral issues in a situation.

After the US bank Wells Fargo was found to have opened millions of fake accounts and credit cards, regulators said “unreasonable sales goals and unreasonable pressure on its employees” had helped to perpetuate “improper and illegal conduct”. The bank’s CEO John Stumpf was recently fined $A25.5m for his role in the scandal.

5. Workplace dictators

Authoritarian leaders who wield considerable power with little oversight are linked to increased risk of ethical breaches. “In these situations, there is a lack of transparency, and it is less about doing the right thing than getting the job done,” adds Michael.

In 2017, Travis Kalanick stepped down as the CEO of Uber amid allegations that the culture had turned toxic, with the ride share giant facing lawsuits from both staff, drivers and regulatory bodies.

While Kalanick was a founding force behind the revolutionary ride share app with the aim to democratise and people-power an entire industry, his autocratic style started to unravel the mission of the company.

"Travis had almost a Rambo-style approach to leadership, which made Uber giant," said Eric Schiffer, a brand management expert and CEO of Reputation Management Consultants. "But with it came a lot of fallout."

Breaking the ethical blind spot cycle

Michael, who spent 15 years in the Australian Defence Force followed by 20 years as a management consultant, says greater awareness of ethical blind spots is key to preventing corporate scandals.

He believes that contemporary research explains why the approach taken by most organisations, of hiring honest people, training them in ethical behaviour and penalising transgressions – is not working. The fact is that ‘honest people’ don’t always live up to their values.

Ethics training incorrectly assumes that people always make conscious decisions, while punishments are not effective deterrents for those focused on short-term rewards as they tend to ignore the risk of getting caught.

Instead, companies would do better to identify employees with high reward sensitivity and low cognitive flexibility, as there are now evidence-based tools to help them do so. “Forewarned is forearmed,” says Michael.

“Companies need to understand the type of people they are hiring or promoting and their appetite for risk. Then, rather than teaching moral values, they can help people improve their ‘ethical intelligence’ by developing self-awareness and learning how to navigate their own ethical dilemmas.”

Other ways to encourage ethical behaviour at the organisation level include establishing open and transparent decision-making processes, having a system of checks and reviews, understanding the pros and cons of incentive schemes and being mindful of how high workload influences unethical behaviour.

What can leaders do?

In many recent cases, authentic leadership could have made a big difference in preventing employees from developing ethical blind spots, according to Michael.

“There are several ways that leaders can help staff develop a better ethical compass – a crucial step is to act ethically themselves – as misjudgement in leadership decisions is often used as an excuse for unethical behaviour by staff,” says Michael.

Leaders need to discuss and debate the ethical dimensions of a problem openly rather than privately, and they need to act swiftly to address unethical behaviour and misconduct instead of ignoring it, or letting it snowball.

“While some misconduct is deliberate, the fact is that most people believe they are ethical even if they don’t always act that way,” says Michael.

“By understanding how unethical behaviour occurs, companies and leaders can help good people avoid bad decisions.”

Corporate scandals: Why good people do bad things – and how to stop them