Do You Wonder Why Unethical Practices Persist Despite Increased Public and Regulatory Scrutiny? These 2 underlying forces shape corporate misconduct.

How come, despite so much visibility and surveillance mechanisms, so many large organizations and their managers still manage to sustain unethical conduct? From the massive frauds perpetuated at Wells Fargo, Volkswagen, Theranos, to the sexual abuses exposed by the #MeToo movement, the sexual abuse of children by religious leaders, etc., we seem to barely recover from one crisis before the next one springs up. This question is a difficult one to answer because of the complex and multi-dimensional nature of human behavior and organizational contexts. That said, this article introduces you two HUGE forces driving many forms of corporate misconduct so you can begin to take proper steps to prevent them in your organization. 

The conventional perspective is that issues of misconduct and malpractice are caused by insufficient/inadequate control mechanisms. In some cases, inadequate internal controls contribute to the malaise. But the reality is, most organizations guilty of misconduct had or have some form of a Legal Compliance program, ethics codes, training, etc. At least on paper, they do. That, however, has not deterred many of them from committing ethical violations. Thus, its only partially accurate and remains too superficial. What’s missing with this approach is, it fails to adequately reconcile the effect of the underlying conditions in the organization’s environment that incubated such misconduct. Particularly, the social influences that shapes behaviors in the workplace. Therein lie the root causes – the “real” problems so to speak. Read more about this on “Why Current Approaches Fail.”

So, we dove beneath the surface to explore the underlying forces that shape most systemic unethical practices in organizations. What we learned from helping many client’s address these reputational and business issues was startling. Individual tendencies aside, at the heart of most major corporate misconduct scandals are two significant underlying causes – management cultures of unbridled self-interest caused by our misunderstanding of wealth/profit maximization, and the unprincipled use of authority and power. Notably, regardless of the organization’s size or industry, the systemic and pervasive nature of these malpractices shared these two common themes.

In fact, in the cycle of causation, most unethical business practices and misconduct tend to be direct or indirect manifestation of these underlying forces. And like a chain reaction, once these forces are in motion, they significantly influence the creation of structures and systems that adopt and preserve it. 

Management Cultures of Unbridled Self-interest

The Agency Problem in Management. As agents of companies, managers and by implication their staff, must act responsibly in the interest of all stakeholders while pursuing the company’s objectives – one of which is profit. However, our traditional paradigm of management and business remains strongly anchored in constraining (short-term) perspectives of profit maximization which is widely misinterpreted by managers as pursuing profit-at-all-cost, and viewing the interest of investors as the only “value” or “interest” of concern.

For businesses, this narrow profit paradigm partially explains why performance measures tend to be powerfully oriented to quantitative economic indicators like profitability, growth rate and stock market valuation, etc. And why managerial compensation arrangements are often linked to meeting these business targets. So instead of acting as trustees, the reality is, many managers tend to “forget” their social and societal responsibilities, and often put their personal interest (so that they can earn huge bonuses for meeting business targets like sales goals, share valuations, etc.) above the interests of other stakeholders – particularly when incentive structures reward performance at any cost.

It’s this pursuit of greater profits that sometimes de-humanizes management, and manifests as managerial behaviors and cultures of greed and self-interest. Resulting in the many forms of obnoxious unethical practices ravaging the business world including: employing child labor; unequal wages to employees; purposefully marketing unsafe products; kickbacks masquerading as research/education; bribing officials for favors; setting exorbitant prices for medically-necessary drugs/treatments; exploitative personnel practices in factories that harm the interest of employees and their families; intentional frauds on consumers; and deceptive disclosures to regulators.

Of course, money is necessary for comfortable living. So too is profitability for commercial success and growth. The problem is, in our pursuit of success we’re often trapped by false choices involving means and ends. 

For even well-intentioned managers, the pressures of hyper-competition, growth, huge bonuses, job security, etc., can lead to an obstinate pursuit of goals and/or means that aren’t aligned with the realities and constraints of the environment.

The Unprincipled use of Authority and Power  

Power and authority are indispensable management tools for properly coordinating operational activities to achieve an organization’s goals. Managers use their power and influence, through their decisions and choices, to set up various organizational structures including – policies for decision-making authority, cultures, style of management, practices, as well as systems of control and supervision that ensure compliance and monitor performance.

However, the concentration of authority and power in the hands of a few, and inadequate mechanisms to check its abuse, can, and frequently does lead to destructive and irresponsible actions/decisions that favor the interests of those who wield it at the expense of others.

The Unintended Organizational Conditions that Preserve Unethical Conduct and Malpractices 

While profits and power serve legitimate organizational objectives, left unchecked, these institutionalized forms of power fundamentally affect how organizational decisions, relationships, and activities are pursued and managed.

Here are a few of the lessons we’ve learned that can help your understanding as you consider the environment inside your company.

• Authoritarian Management Cultures. While many managers publicly talk of sharing decision-making, openness, trust, and employee involvement, etc., the reality is authoritarian decision-making remains. The need for control over operations leads to a centralized system of authority and control where all discretionary authority is centered at higher levels of management (command and control). And, by controlling what decisions are taken and how decisions are made, managers can manage with total power to compel obedience/compliance.

Thus, although innovations in technology and evolution in culture are significantly disrupting traditional business models, the authoritarian style of management remains the prevalent mode of management in most companies.

• Inadequate Conflict Resolution Procedures. Traditional authoritarian cultures also tend to lack proper controls to adequately prevent the misuse of authority and power by managers. This leads to corporate cultures where lower level managers and employees live in constant fear of being fired, punished, or severely disciplined for airing their concerns and complaints or for deviations of orders of supervisors and managers. In these conditions, employees tend not to speak-up due to fear of reprisal and victimization despite so called ‘open-door policies’ or ‘speak-up’ or ‘whistleblower’ mechanisms.
• Unfair Personnel Management Practices. In addition, through their control over how resources are distributed and their ability to punish, managers control how desirable and noncompliant behaviors are rewarded or punished. This also influences the selection of allies to key leadership functions or positions that are designed to do the bidding of those in power.
• Design and Structure of Management Controls – Management Information Systems (MIS). How information is perceived and/or interpreted is a significant mechanism often prone to abuse. By controlling the flow of information through the design and structure of MIS, managers can control how various conflicts/problems within the organization are perceived and interpreted. This enables the meaning gleaned from this information to be interpreted in ways that favor the interest of those who control it.
• Unrealistic Perceptions and Resolution of Issues/Problems. By overloading corporate boards with representatives from a narrow dominant class of stakeholders (e.g. insiders, investors, men, etc.) than are appropriate for the organization’s context, managers ensure that only the interest of a select few are considered. Similarly, the ability of managers to set up MIS mechanisms like Whistleblower programs, committees, etc., to investigate issues and report only to specific individuals/groups, further limits the awareness of problems to a narrow few. This ensures the meaning of problems to continue to be interpreted in the traditional ways of thinking and behaving – in favor of those with power to the detriment of others interests. Until misconduct becomes public knowledge, complaints can be summarily dismissed, denied, or suppressed. This partially explains why many organizations mishandle sexual misconduct allegations.

There are probably a few of these conditions going in your organization, but are the company’s practices adequate to address them?

Today’s dynamic business environment and ways of working, driven by modern democratic values, are incompatible with the traditional management paradigm. A heightened social conscience and knowledge economy facilitated by communications technology is increasing the public’s awareness of unfair and unethical practices. However, managerial practices and competencies have generally not kept pace with rapidly evolving changes in technology and culture. Therefore, integrated governance and principled practices are indispensable to preserve the integrity of business and prevent abuse of authority and power by managers.

To get there, your organization needs to ensure that its management practices are designed appropriately to yield the congenial conditions for the organization’s circumstances. It needs to shift from reactive to proactive risk management practices, by focusing on processes that facilitate a more holistic and sustainable transformation.

We have helped many organizations transform and modernize their practices by designing contemporary and proactive solutions that facilitate both profit-seeking and ethical behaviors. By offering innovative and cost-effective solutions that deliver better outcomes, our clients benefit from avoiding costly, time-consuming, and unpredictable impairments to its reputation.

By creating the right environment for ethical conduct to flourish organically, organizations like yours can foster greater employee engagement, decrease costs and risk, and meet compliance requirements. Take the first step to get started on your transformation, email: info@localhost or call 785.231.7887.