Corporate wrongdoing is all connected

THE PHONE-HACKING trial makes for grim, and yet sensational, reading in the press. Seeing a group of senior managers or leaders on trial alongside their staff, whatever the circumstances, immediately provokes questions.

The trial involving the News International staff is yet to reach a conclusion, but when we see elsewhere other executives and their colleagues found responsible for less than wholesome behaviour, it immediately prompts the question – what went wrong? And this isn’t necessarily a question of specific events – who did what and when? It’s a question of why people do what they do. What are the conditions on the ground that make it possible for unethical or criminal actions?

Academics have pondered these questions and one of their answers is the kind of relationships that develop inside management teams. To put it another way, ethics can get knocked off course because of the bonds and associations that come to dominate leadership groups. People do wrong because others do.

Two bits of work might shed some light on the subject. The first – by US academics, led by professor Vikramaditya Khanna at the University of Michigan Law School – looks at the relationship between what they call “CEO connectedness” and corporate frauds. This statistical study attempts to explore whether strong connections among board members (where executives have been appointed after the arrival of the CEO) correlates with companies becoming embroiled in fraud. The study focused on 315 fraud cases and found that at a business where the top four non-CEO executives arrived in post during a chief executive’s tenure, there was a 26.65% higher incidence of fraud than would otherwise be the case. Where every director was appointed after the CEO arrived, the figure rose even higher – to 36.11%.

“Appointment-based connectedness is significantly associated with not only greater fraud likelihood, but also with lower expected costs of engaging in fraud: it decreases the likelihood of fraud detection, lengthens the time from fraud commission to its detection, reduces the likelihood of forced CEO turnover upon discovery of fraud and lowers the coordination costs needed to carry out illegal activities,” the authors conclude.

That’s an issue to mull over carefully for non-executives, especially those overseeing recruitment and the audit committee whose independence, the authors say, is one of the few things that “counteracts” the effects of connectedness.

Moral compass
And in case you doubt these conclusions, consider the work of Celia Moore at London Business School and Francesca Gino at Harvard Business School, who write that a “moral compass” – the thing that guides us through what’s right and what’s wrong – can be forced off “true north” by the company we keep, or the people we work with. So what makes us do dodgy things? Moore and Gino say social conformity; a shared experience causing a sense of feeling less responsible and the difficulty experienced in resisting the requests of those with power.

“Together, these mechanisms explain why failing to behave ethically can be psychologically and socially easier than making more virtuous choices,” Moore and Gino write.

They list four possible courses of action to counter this problem: increasing self-awareness, increasing one’s sensitivity to moral emotions, expanding the scope of one’s “moral regard” (responsibility to the wider community rather than just oneself) and, lastly, practicing self-control.

In one sense, the Michigan authors, in highlighting the importance of the audit committee, point to strong institutions as the solution, while Moore and Gino point to personal solutions – or improving the mindset of individuals: their psychology.

But there’s no reason why we shouldn’t be thinking of both. In one respect, we should be looking at those audit committees where things went wrong. Why did they fail and can they be strengthened? Do we need to ensure that CEOs have a reduced role in the appointment of other executives? Should we shore up the accountability of those executives to the board, rather than the CEO? Moreover, shouldn’t we be doing something about the cult of the high-flying, seemingly all-powerful CEO?

But then there is the nurturing of CEOs and company leaders. The studies suggest there may be something missing from the mental preparation for executive and leadership responsibility. There’s much attention to management, strategy and even ethics these days. But the psychology required to resist being pulled off the right course is considered a given. These studies suggest it’s anything but, and our development of leaders is a long way from being where it should be.

Gavin Hinks is a freelance journalist