Professor Guido Palazzo addresses systemic corruption and the importance of compliance across the board.
If you ask most people in businesses what compliance is for, they are likely to say that it’s about meeting legal and regulatory obligations and ensuring that all the correct policies, codes of conduct and formal processes are in place to protect a business against dishonest or criminal behaviour.
The mindset that compliance is a ring-fenced, specialist technical and legal function also plays out in the traditional approach to training in compliance and ethics.
The fundamental problem with this approach is that the training ignores the importance of leadership behaviour and human psychology. In other areas of L&D it has long been normal to explore ‘softer’ issues such as cultural and psychological factors, but not in compliance.
Traditional compliance and ethics training is essentially legalistic – it is based on the idea of ensuring everyone knows the rules and punishing those who break them. And this is underpinned by a widely-held assumption that fraud, unethical behaviour and corporate wrongdoing is caused by a few ‘bad apples’ who need to be identified and removed, after which everything will be fine.
The trouble with this approach is that it completely ignores the cultural and psychological context in which unethical behaviour develops.
Most models of ethical decision-making assume that people make rational choices and are able to make judgements from a moral point of view. However, if you made a list of the character traits of a rule breaker in an organisation and then compared it to the average manager or executive, you would find a huge amount of overlap. In other words, in most cases they’re just like anyone else in the organisation.
This point is critical, because if we want more effective compliance regimes, we need to understand why otherwise ‘good’ people start to do bad things.
If you made a list of the character traits of a rule breaker in an organisation and then compared it to the average manager or executive, you would find a huge amount of overlap. In most cases they’re just like anyone else in the organisation.
And the answer to that simple question lies in the contexts, cultures and leadership styles that exist in organisations where people turn a blind eye to unethical behaviour – a phenomenon that my HEC Lausanne colleagues, Franciska Krings and Ulrich Hoffrage, and I have termed ‘ethical blindness’.
The psychology behind ethical blindness also explains why corporate scandals emerge during periods of internal or external crisis, such as the one we are in at the moment with Covid-19. When an organisation or an individual is under enormous pressure, they might start to make small and seemingly harmless transgressions.
At first they may feel uncomfortable but once that emotional wave passes, they will start to rationalise their actions and this sort of behaviour can become routine.
Where this gets really dangerous is an Enron-type situation where you have a whole company systematically going in the wrong direction and creating a mutually reinforcing alternative reality in which unethical and dishonest behaviour makes total sense.
The danger of blaming ‘bad apples’ for fraud and misconduct is that it also provides a very convenient way for us to detach from them and tell ourselves ‘it could never happen here or I could never behave like that’. This attitude is risky because the whole point about ethical blindness is that it emerges from stressful situations in which sound judgement no longer prevails.
If you focus on the legal aspects of compliance alone, you only see that things are going wrong very late in the process.
But with a more holistic understanding of human risk, you can spot the early warning signals, the small details, behaviours and cultural factors that might seem insignificant in isolation, but are evidence of a step-by-step erosion of an ethical culture and emergence of contexts from which real wrongdoing can emerge.
We also need to ‘de-compartmentalise’ risk and compliance and understand that it can be valuable to build it into training for executives across a range of functions. Everyone in a leadership role faces ethical dilemmas and would benefit from understanding the impact of their behaviour from a cultural and ethical perspective.
Moreover, the responsibility for avoiding and pre-empting wrongdoings and corporate scandals is naturally one that should be shared by everyone in the business, not just assigned to the compliance function. Approaching this as an exercise to better understand behavioural psychology is a game changer, because it elevates compliance training from a tick-box exercise to something more strategic.
A critical element in this approach as far as senior executives are concerned is to encourage them to develop greater self-awareness about the way their behaviour impacts others.
I want them to ask themselves, “Does my leadership style create the conditions for ethical blindness? Am I creating the circumstances in which fraud could flourish through the unrealistic pressure I put on people? Am I so different from the people involved in the scandals at Volkswagen or Enron or Wells Fargo?”
By ensuring that training goes beyond a tick-box compliance-led approach the psychological background of the dark side can be explored, and people can see that their leadership style could also be inadvertently responsible for creating the conditions in which others start to act unethically or illegally.
This also means that training and development professionals have an important role in highlighting the importance of a ‘speak-up culture’ – one where people feel they can call out and stop bad practices without fear of retribution. Because the cure for ethical blindness is creating an environment where it isn’t tolerated.
The point about compliance shouldn’t be to remove bad apples from the barrel, it should be to make sure the barrel is somewhere in which the apples can never rot and turn bad in the first place.
About the author
Professor Guido Palazzo is academic director at Executive Education HEC Lausanne and director of the centre’s new Ethics & Compliance Certificate of Advanced Studies