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Lies, lies and more lies

Themes: Corporate governance and ethics

Lies, lies and more liesDeception in organisations can start with a few ‘bad apples’ but the rot often spreads much wider and deeper. New research from Dr Stelios C. Zyglidopoulos reveals how apparently good people – churchgoers in Enron’s case – can gradually become corrupt, sometimes as a result of social pressures within the organisation.

Deception in organisations can start with a few ‘bad apples’ but the rot often spreads much wider and deeper. New research from Dr Stelios C. Zyglidopoulos, University Lecturer in Strategy at Cambridge Judge Business School, reveals how apparently good people – churchgoers in Enron’s case – can gradually become corrupt, sometimes as a result of social pressures within the organisation.

A few corrupt individuals destroyed Enron: true or false? Well, the statement is both true and false, according to Judge Business School’s Dr Stelios C. Zyglidopoulos who has conducted new research on the subject of financial corruption with Peter Fleming of Queen Mary, London.

In most cases of corruption, a few individuals cannot do everything on their own. They need help. And it is the process by which seemingly decent people get pulled into the darkness that interested Zyglidopoulos and Fleming.

In their study of deception, they chose to focus on lies of commission (giving false information), particularly in regard to financial reporting. In doing so, they wanted to look beyond individuals, the so-called “bad apples” such as Enron’s Jeffrey Skilling and Kenneth Lay, in order to understand how an organisation can become corrupt and how this in turn can turn good people to bad.

They concluded that people can be sucked into corruption on a gradual basis by the social pressures that develop within a particular organisation, a theory that has attracted flak from some critics who claim that their model fails to take enough account of individual agency.

Zyglidopoulos, on the other hand, says they are looking at both individuals and organisations. To ignore one over the other could hide some important lessons. “What was interesting to us from a research point of view was that we could see how some of the social pressures within an organisation pulled in a lot of people who would not be considered evil in any way. But they became evil because there were a lot of mechanisms that made them so.”

Other studies have described a banality of evil in which seemingly decent people become torturers or sadistic prison guards gradually over a period of time. They are drawn in bit by bit until they have become fully involved. Zyglidopoulos and Fleming stress that the same process can occur in cases of corporate corruption. Decent people – churchgoers in Enron’s case – can become corrupt.

Incentives and rationalisation help to spread this corruption further, according to Zyglidopoulos and Fleming. In the first case, a lie will beget a lie. This can be seen in the case of deception about financial results.

The heads of a company such as Enron lie to impress shareholders and the public. But the problem does not go away: the company continues to perform badly relative to the statements being made to the public. Then, there is a clear incentive to continue lying. Enron was caught in just such a ‘tangled web’ of deceit.

In the second example, people find ways to justify their corrupt behaviour. ‘Everyone is doing it’ is one common form of rationalisation. This process can happen so often that it becomes “routinised”, a point captured by one former Enron executive who said: “You did it once, it smelled bad…You did it again, it didn’t smell bad.”

Zyglidopoulos points to the case of the Ford Pinto, in which managers kept the car on the road in spite of the fact that they knew that it was prone to explosion following even modest impact. Says Zyglidopoulos: “They made their decision based on a cost-benefit analysis and they didn’t make any connection between their decision and the fact that people could be burned to death as a result of their decision.” Instead of thinking about people in danger, they thought about numbers and figures.

Zyglidopoulos and Fleming have created an analytical model by which people pass through four stages along a ‘continuum of destructiveness’ from good to evil: innocent bystanders (not corrupt at all), innocent participants (contribute to wrong-doing but believe the corrupt act to be “morally neutral”), active rationalisers (prompted into corrupt action and then rationalise it) and guilty perpetrators (thoroughly bad apples who could be convicted in court).

There is no inevitability about whether anyone will move from one to the other. But Zyglidopoulos and Fleming argue that there is a ‘socialisation’ process that can take place and which might push people from one stage to the next such as peer pressure or an authority figure who condones the action. Indeed, in some organisations people might feel deviant and abnormal if they don’t lie, say Zyglidopoulos and Fleming.

They have further pointed out that people will have a greater propensity to be corrupt the more distanced they are from the consequences of their action. They call this “ethical distance” and have identified two types: structural and temporal. In the former, for example, people cannot see the consequences of their actions clearly because they are hidden from them by bureaucratic layers inside an organisation or by complex financial mechanisms.

Temporal ethical distance makes it easy to dismiss the act because the consequences are a long way off into the future. For example, Enron’s traders might have found it easier to manipulate cash flow projections on long-term contracts than short-term ones.

There are ways to prevent the spread of rot from within, termed ‘moderators’ by Zyglidopoulos and Fleming. One such moderator is for firms to have a robust ethical code.

It is also helpful to have an open and transparent culture, says Zyglidopoulos. “It is obviously a good thing because when things are openly discussed it is hard to have this kind of [corrupt] sub-culture or any kind of rationalisation [justifying bad practice].”

The other point to remember is that there are two types of control, says Zyglidopoulos. There are controls to make sure a company performs as it should and there are controls to make sure no-one is cheating to achieve that performance. The problem is often that the need to show that you are performing well takes precedence.

So, managers should make sure there is an open discussion about their ethical codes and where possible that they are ingrained in the system: “You need to discuss them openly and not penalise people. You shouldn’t let managers be rewarded if they have crossed the line. Ingrain it in the reward system if possible, but more than that create a discourse in the organisation so that everyone is on the same page.”

Further Reading

Fleming, P.J. and Zyglidopoulos, S.C. (2008) “Ethical distance in corrupt firms: how do innocent bystanders become guilty perpetrators?” Journal of Business Ethics, 78(1/2): 265-274

Fleming, P.J. and Zyglidopoulos, S.C. (2008) “The escalation of deception in organisations.” Journal of Business Ethics (available online / forthcoming in print)

– Research article produced by Morice Mendoza