Does ethics pay?
Ethical decision-makers know a firm’s leadership and culture will support them when a decision is about impact, not profit.
First published in the Mandarin
The Post Office-Horizon scandal is unfolding in the UK as another showcase of public service and corporate failure. As we learn more, the usual suspects surfaced: employee concerns were ignored, implementation failure was concealed, and executive leaders focused on protecting profit and reputation.
Are we becoming habituated to these failures?
Do we all shrug our shoulders and say, ‘Well, that’s just business, isn’t it?’
Quentin Beresford’s book Rogue Corporations is a sobering reminder of how common business leaders pursuing ‘profit at all costs’ fail, with devastating consequences for the community.
Profit and growth come first
The Hayne Royal Commission into Banking seems like a distant memory, but it is worth remembering a central theme of the findings: “… incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards”.
Kenneth Hayne noted that the banks’ culture and conduct were “driven by, and reflected in, their remuneration practices and policies”.
Ziggy Switkowski’s report into PwC called out a culture where ‘revenue is king’. A culture where ‘rainmakers’ who exceed financial targets were described as the ‘untouchables’, or individuals to whom ‘the rules don’t always apply’.
Elizabeth Broderick’s review of EY highlighted a profit over people and purpose approach, “A competitive culture with inconsistent accountability for individuals who ‘perpetrate harmful behaviours”.
Financial targets and the incentives that support them are devilishly difficult to get right. If not positioned and managed carefully and continuously questioned, targets can degrade capability by creating unintended incentives and distorting internal relationships.
The explosive Ford Pinto
The ‘explosive Ford Pinto’ is a well-known example of poor target setting with disastrous consequences.
Ford set the goal of building a car for “under 2,000 pounds and under $2,000” by 1970. The effect was that employees overlooked safety testing and designed a car where the gas tank was vulnerable to explosion from rear-end collisions. Fifty-three people died as a result.
As a recall coordinator at Ford in the early 1970s, Dennis Gioia provides valuable first-hand insights into the important difference between business and moral decisions.
Early on, as problems with the Pinto became evident, based on the numbers, the business decision was that the losses were within acceptable business parameters. Twice, when presented with the numbers, Ford’s business leaders decided not to recall the Pinto despite the danger to consumers.
Gioia’s reflection on his time with Ford is instructive. He was on the “fast track” participating in a “tournament” to be recognised, the “pay was great”, and the “psychic rewards of working and succeeding … proved unexpectedly seductive”.
He recalls how competition and regulation were disrupting the car industry. The feeling inside the company was “beleaguered” and “threatened”. A strong tribal mindset of ‘we vs them’ ran through the company. Ford’s culture, systems and accountabilities shaped individual and collective decisions toward achieving business goals while minimising moral questions.
When the finding is that the company prioritised ‘profit over people’ or pursued ‘profit at all costs’, the conditions for that outcome were set well in advance and not questioned until after the disaster had unfolded.
Money and motivation don’t work the way you think they do
Reward and punishment are two sides of the same coin, and both are focused on compliance, not motivation.
Fifty years of research studies across different domains have shown that incentives do not alter underlying behaviour; they temporarily change what people do. The key takeaways are:
Money is a hygiene factor, not a motivator.
Incentives undermine natural motivation and commitment.
Incentives discourage risk-taking.
Incentives focus attention on ‘what’ rather than ‘why’.
No matter how well crafted, incentives promote individual behaviour over collective performance.
Incentives corrode curiosity.
There is no evidence for the persistent belief in business that lavish financial incentives drive individual or collective performance improvement.
The Big Four consulting firms’ questionable ethical standards are well documented and reach back to Enron’s collapse. The latest missteps continue a theme. However, other examples show us the problem is common to business culture.
Excessive remuneration created a corporate culture of ‘yes men’, which was a significant factor in the downfall of HIH Insurance. A compulsive drive for growth supported by big bonuses for performance contributed to the collapse of Storm Financial. Bupa’s culture of consensus – how we do things around here – elevated profit maximisation, leading to disastrous outcomes in aged care. Rio Tinto’s profit priorities led to the destruction of the Juukan Gorge caves underpinned by a box-ticking approach to corporate social responsibility.
The growth and profit culture emphasises short-term business decisions at the expense of integrity and moral responsibility. The recurring integrity crises in large corporations suggest that business leaders do not believe that repeated failure is an argument for change.
It’s not personal, it’s just business
The recent example of moral and ethical failures suggests that business leaders resist, discount or dismiss ethical and moral questions as ‘academic’ or impractical constraints on performance. Consequently, corporate social responsibility, quality and adherence to standards can be successfully managed through marketing and minimalist box-ticking.
Questions of ethics and moral responsibility are framed in a limited way as ‘business ethics’ or ‘business pay-off’. The Ford Pinto example shows that business decisions and ethical outcomes can be conflicting. It also shows that not one decision makes the difference, but many small decisions are taken over time by people complying with the incentives built into the culture. Consistently, those with concerns don’t feel they can speak up or raise concerns, and those who do are ignored and side-lined.
Does ethics pay?
PwC has suffered the full effect of ethical failure. Extraordinary damage to reputation, forced reorganisation, lost talent, increased scrutiny and lost profit. The fallout has spread across the consulting industry, and trust will be difficult to recover.
Moral and ethical decisions are embedded in social relationships. To make good decisions, leaders must be concerned and care for those impacted by their decisions — the workforce, clients and the community.
The more tenuous the relationship or the more distant the leader is from the impact of decision-making, the more the decision becomes impersonal. It is just another cost-benefit calculus made in the interests of the business. A decision that is often rewarded with money or recognition.
There is a need to change the frame in which business decisions are made, moving away from one where self-interest is incentivised, and business leaders are distant from the impact of their decisions. Decision-making’s ethical and moral dimensions must be better accommodated and not considered an academic pursuit to be ignored. Ethical questions in decision-making are the starting point and trump all other considerations.
People are the foundation of ethical decision-making; the systems and culture are enablers. Decision-makers must have a strong ideal guiding their judgement, and they need to know the firm’s leadership and culture will support them when the decision is about impact, not profit.
