Saturday, April 30, 2011

41/100: Ethical Breakdowns

Max H Bazerman and Ann E Tenbrunsel write about Ethical Breakdowns in organizations. They are concerned about the sort of ethical problems that happen with perfectly good people, who are responsible family men and reasonable neighbours, do wrong things. Indeed, there will be corporate greed, cowboy businesses and an eternal hide-and-seek with regulators, but we are to assume business to be a positive force in the society, which can get us out of the current recession, we need to have our faith back average businesses run by average people: That way, this is an interesting essay to read.

The authors point to five barriers to an ethical organization: Shall we say five excuses. To their credit, the barriers they cite sound remarkably familiar. It is worth recounting them here, therefore:

First, there are Ill-conceived Goals. To quote, "we set goals to promote a desired behaviour, but they encourage a negative one". Edward Demming talked about the role quantitative goal-setting plays in lowering quality standards decades ago, and we all know how counter-productive simplistic sales targets can be. The authors also talk about the pressure to maximize billable hours in accounting, legal or consulting practices, and indeed, Clinton administrations perfectly reasonable goal of increasing home ownership in America (which led to easy mortgages in a way, and this recession, the authors argue).

One possible remedy is to brainstorm such intended consequences while setting the goal. This sounds simple, but I shall agree that most organizations don't even try to do this. I shall argue this is one of consequences of 'Best Practice' thinking, or in other words, the propensity to use a template which worked elsewhere. For example, in the Private Education industry, rewarding sales teams for student recruitment has proved to be problematic, as this leads to less than honest promises made to students, less consideration of academic ability of the students vis-a-vis courses chosen and other unethical behaviour. However, it is very difficult to challenge the practice as this will fly in the face of convention, every college follows the same practice. However, as American For Profit players are finding out, such sales practice is unsustainable and this is the key reason they have landed in regulatory hot water. In Britain, the new, harsh immigration regime has come into force primarily because of the commission driven agencies that British colleges and universities use, though so far the regulators failed to pin down the problems to recruitment practices. The moot point is that changing the goals may need more than just brainstorming, and often regulatory pressures are needed. [I know this sounds cynical and sometimes, industry practices change as a leading player changes the rules of the game, or a fad catches up. In a way, we don't give enough credits to fads.]

Next, there is Motivated Blindness. This is when we overlook other people's unethical behaviour when it pays to remain ignorant. The authors cite Baseball officials who failed to notice widespread steroid use. The same can be said, with caution, about game-fixing in professional sports. Bribery and match fixing may be common in Cricket (and it is easy to do so, given the individual roles in the game), but the officials may just pay no heed as unearthing such practices may undermine the game and drive spectators and sponsorship money away from them.

The solution to this is rooting out conflicts of interest. Businesses are not very good at doing this, and yet again, regulatory pressures may be needed to sort things out. Returning to my familiar territory, For Profit colleges in Britain, I know that many of the college admission departments employ staff who are related to, or have a direct or indirect interest in, the recruitment agencies that the college employ. In a way, this is common sense for the college administrators - they are employing people with best relationships and knowledge of the market - but they are intentionally turning a blind eye to the conflicts of interest and ethical problems this cause.

Third, there is the phenomena of Indirect Blindness, the cases where the unethical practices are carried out through third parties, with our indirect involvement and sanction. The authors cite a case of a drug company which sold the rights to another company, who imposed a price increase, to deflect attention from itself. One can also talk about thousands of mortgage advisors who worked on behalf of banks etc handling the housing loans during the past boom, who encouraged the customers to apply for mortgages beyond their usual paying capacity, and banks turned a blind eye as they did not think they can control the mortgage advisors without rocking the boat and losing business.

Again, employing agents in For Profit Education is an endeavour to allow, but keep a distance at the same time, unethical recruitment practices. The college administrators often fail to accept the responsibility of wrong promises made to the students, though they were fully aware of the possibility and failed to ensure that the students were properly informed in the first place.

A 'pre-mortem' of an outsourcing operation is a good place to start. But, again, institutional blindness and management by templates is likely to come in the way. Regulatory pressure is often the only way to keep things in check. However, I shall argue that the educational institutions, particularly business schools, can and should play a role - indeed, making people feel committed to the broader goal of building a better society ahead of making money and staying safe should be a key goal of any business education.

Then, there is the problem of Slippery Slope. We are less able to detect unethical behaviour if it develops gradually, which it usually does. There is always the small corner-cutting which the problem starts with. This is the problem of 'Let Go' which we do all the time. I shall argue that the problem of plagiarism, which is widespread in higher education these days, grow up in this way, when the assessors let go of small transgressions noted in coursework and regular class assignments. And, catching this early is only a part of the solution; following up and making sure that the practice is stopped is required at the same time.

Finally, the Outcome Centricity, the thinking that 'the end justifies the means' allows unethical behaviour. This is a key point, as ethics is not a end of the year product to be shown in the balance sheet, but a matter of everyday responsibility. Too many organizations approach ethics as an objective to be met to satisfy external parties, regulators, customers and suppliers as the case may be, and intend to do as much as they can get away with. Often, these things end up in disasters, though not in the scale of Deepwater Horizon that BP had to contend with last year. This was one case where incremental negligence and a focus on outcome undermined all sorts of internal and external controls: The manager who let a less than optimal valve remain in its place because the end of year production targets were more important helped to cause the one of the biggest environmental damages in recent history.

This is one area, unlike others, regulatory pressures are ineffective. Outcome centricity is life-blood of business and one can not legislate this out. However, consumer awareness, the need for transparency about the process as much as the product, media scrutiny and a more responsible business education can make an impact here.

The reason why ethics is so important is because we are usually bad at counting the costs when making business decisions. While all of us want to create organizations which last longer and turn profits over a longer period of time, available methods of accounting and decision making are quite limited in scope. We only measure one dimension of business (okay, four, if you have got to Balanced Scorecard) and usually have a narrow view of resources we consume. For a business to function, it consumes many social (people's time, family support, health care, busy traffic situation during the peak hours, holiday rushes are all examples of society paying for a business to work) and natural resources which we don't account for adequately. However, if the give-and-take balance isn't right, the businesses we build are likely to be unsustainable. A constant vigil on ethical practices in the organization helps to keep the business on the ball. A business leader can only ignore this at his/her peril.

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