Transcript What Behavioral Ethics Means For Ethics and Compliance …

What “Behavioral Ethics” Can Mean
For Ethics and Compliance Programs
Jeff Kaplan/Kaplan & Walker LLP
SCCE Compliance & Ethics Institute
October 2012, Las Vegas, NV
Behavioral economics
 Studies effects of social, cognitive and emotional factors on
economic decision making
 Shows the limits of traditional notions of rationality
 Very much part of mainstream business thinking
 E.g., behavioral finance
 Embraced as a matter of public policy in the UK
 Nobel prize awarded to pioneer in this area 2002
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Behaviorists’ view of human reasoning
 Per Daniel Kahneman, it is often:
 mediocre
 fallible
 beset by inconsistent reasoning
 not trustworthy/vindictive
 Reasons are:
 “attentional” (in considering vast quantities of information, people
have a tendency to focus on that which confirms expectations)
 motivational (a need/desire to appear confident to self and others)
 But the weaknesses in decision making aren’t sufficiently
appreciated – and we suffer from overconfidence
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Behavioral ethics
 Research showing how seemingly irrational factors can lead
increase/decrease likelihood of unethical conduct
 Antecedents
 Philosophy rediscovering the role of psychology (Appiah)
 “The economist may attempt to ignore psychology but it is
sheer impossibility to ignore human nature.” If the economist
does ignore psychology, “he will force himself to make his own,
and it will be bad psychology” (JM Clark 1918)
 Princeton Theological Seminary experiment
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Overview of connection to C&E
 Two levels of relevance to work of C&E professionals
 Why C&E programs matter
 A policy argument – on both public and private levels
 How to optimize C&E programs
 Both in identifying and mitigating risks
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Why the “why” matters
 Two key constituencies don’t fully appreciate the need for strong
C&E programs
 Business leaders
 Government officials
 Both often think that good intentions alone are largely enough
 Business leaders’ views can undercut key program support
 Government officials’ views can undercut key incentive policies
 Why there aren’t more “Morgan Stanley” cases
 Behavioral ethics (“BE”) shows that achieving ethicality is hard
work
 C&E is not a machine that can run by itself
 Requires considerable knowledge, resources, effort
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An important historical footnote
 From the history of the creation of the Federal Sentencing
Guidelines for Organizations more than 20 years ago:
 Early drafts had less on C&E and more on “optimal penalties”
 This was based on a view of human nature as hyper-rational
(homo economicus)
 Final draft rejected this approach – in favor of providing C&E
guidance and incentives
 The basic assumption of the FSGO (and subsequent related
legal standards): businesses and people need help in staying
honest
 That is one of the lessons of BE, too
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Why the “how” matters
 Many E&C programs don’t seem sufficiently impactful
 A field largely “out of energy and out of ideas”
 Without something new and helpful this malaise could get
worse
 BE can help in two ways
 Make programs operationally stronger – by better tying
program measures to how humans actually operate
 Give programs credibility – by tying them to science
 Note that many BE research findings confirm what is known
anecdotally. (But some findings are very surprising)
 However, being able to prove such knowledge can be
invaluable
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Where the how matters
 BE most likely to help
 Risk assessment/culture
 Conflicts of interest
 Training/communications/certifications
 Investigations/discipline
 But other possibilities as well
 It is up to C&E professionals to find the connections, as BE
academics may not have enough information to do so
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Risks: unknown victims
 Research findings: in decision making, it is easier to disregard
interests of unidentified individuals than known ones
 The charitable giving experiment
 Could help explain the relative ease with which so many
individuals engage in offenses where the victims are not
identifiable, e.g.,
 Insider trading
 Government contracting or tax fraud
 Ben Franklin (proto behaviorist?): “There is no kind of
dishonesty into which otherwise good people more easily and
more frequently fall than that of defrauding the government”
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Unknown victims (cont.)
 The specialty pipe case
 Larger point: moral restraints as a form of “inner controls”
 C&E program point:
 Identify areas where inner controls likely to be weak
 Fortify those with extra measures
 General ones, and/or
 Those addressed to the source of weakness itself
 But this one area is tricky as long-term relationships don’t
inhibit wrongdoing – just the opposite
 The dentist study
 The general counsel study
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Risks: indirect actions
 Research findings: acting indirectly can blind individuals to
ethically problematic behavior more than direct action does
 The pharma company experiment
 Somewhat similar to unknown victims, but not the same
 Suggests that companies should:
 Recognize limits of inner controls in their dealings with third
parties – suppliers, agents, distributors, joint-venture partners
and others
 Undertake supplemental targeted C&E measures to make up
for the shortfall (e.g., communications, auditing)
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Risks: too much work/pressure
 Research finding: individuals with depleted resources tend to
have greater risks of engaging in unethical conduct than do
others
 Mitigation perspective:
 Either reduce pressure (often difficult to do to any meaningful
degree, since many sources may be external), or
 Focus extra C&E mitigation efforts on parts of an organization
where employees are subject to greater-than-ordinary stress
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The risk of good intentions
 Research findings
 Being cognizant of one’s ethical failings increases the likelihood
of subsequently doing good
 The converse is true, too
 Examples
 Gender equality acts “licenses” discriminatory ones
 Being reminded of one’s humanitarian traits causes reductions
in charitable donations
 Purchasing “green” products licenses ethically questionable
behavior
 Uses in risk assessment
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Just-in-time communications
 Research findings: being asked to read (and in one case, sign) an
honor code shortly before being presented with the opportunity
and motivation to cheat significantly decreased the incidence of
such cheating
 Possible use in various compliance areas:
 anti-corruption – before interactions with government officials and
third-party intermediaries
 competition law – before meetings with competitors (e.g., at trade
association events)
 insider trading/Reg FD – during key transactions, before preparing
earnings reports
 protection of confidential information – when receiving such
information from third parties pursuant to an NDA
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Communications (cont.)
 conflicts of interest – around procurement decisions, hiring
 gifts and entertainment – many occasions
 accuracy of sales/marketing – in connection with developing
advertising, making pitches
 employment law – while interviewing for jobs, conducting
performance reviews, dealing with other terms and conditions
of employment
 Note: some of this already goes on, but not nearly enough
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Training/communications: leaders
 Research findings:
 Those in power were not only more likely to condemn cheating
in others but also more likely to engage in cheating themselves
than were others
 The cookie experiment
 Do executives at your company view ethics as being “for the
little people”?
 Use findings to train senior managers on their need for
“heightened ethical awareness”
 But obviously need to be delicate
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Training: slippery slopes
 Research finding
 “People are more likely to accept others’ unethical behavior
when ethical degradation occurs slowly rather than in one
abrupt shift.” (Francesca Gino and Max Bazerman)
 Based on a “what the hell effect” (Dan Ariely)
 A good focus for training/communications
 Also relevant to investigations and discipline
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Motivated blindness
 Research findings: “We often fail to notice others’ unethical
behavior if it’s in our interest not to notice. This failure of
oversight — called ‘motivated blindness’ — is unconscious
and common.” (Bazerman)
 Underscores the importance of the Sentencing Guidelines
expectation that organizations should impose discipline on
employees not only for engaging in wrongful conduct but
“for failing to take reasonable steps to prevent or detect”
wrongdoing by others
 Relatively few companies do this well (and some don’t do at all)
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Motivated blindness: responses
 Build the notion of supervisory accountability into policies – e.g.,
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in the managers’ duties section of a code of conduct
Speak forcefully to the issue in training and other communications
for managers
Train investigators on the notion of managerial accountability and
address it in the forms they use so that they are required to
determine in all inquiries if a manager’s being asleep at the switch
led to the violation in question
Publicize (in an appropriate way) that managers have in fact been
disciplined for supervisory lapses
Have auditors take these requirements into account in their audits
of investigative and disciplinary records
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Conflicts of interest
 Research findings: disclosure could be a cause of, rather than cure
for, unethical behavior
 “Information providers whose conflicts are not disclosed will feel
morally bound to report accurately to information users, because
they would consider it unfair to lie to someone who is unaware of the
misalignment of incentives. Disclosing conflicts of interest would
have the effect of removing the moral bound and providing a moral
license to misreport.” (Daylian Cain, George Loewenstein, Don
Moore)
 “Disclosure can place inappropriate pressure on the audience to heed
the advice — for example, in order to avoid insinuating that the
[disclosing party’s] advice has been corrupted” (Cain)
 Additional research by Christopher Koch, Carsten Schmidt
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COI responses
 Improve the way in which disclosed COIs are addressed, with
the possibilities including:
 Educate those involved as to the generally under-appreciated
dangers of COIs
 Ensure that decisions about COI waivers and COI management
are made by those who are independent and possess relevant
expertise (e.g., a C&E officer) – not line managers
 Have a sufficiently rigorous COI management process
 Audit the process and report on the audits to senior
management and maybe the board
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Other: the power of social norms
 “People are more likely to comply with a social norm if they
know that most other people comply”
 Associated with Robert Cialdini
 The tax compliance experiment
 Apply to areas of discretionary compliance initiatives
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Implications of BE for ethical reasoning
 The two pre-eminent schools are
 Utilitarianism
 Deontology
 Both are reasoning based
 Third school – virtue ethics – seems to strike more deeply
 Ethics (and other virtues) based on continuous and lifelong
process of pursuing excellence
 Thus, may be more suited for BE, which deals with deeply
engrained behaviors
 However, virtue ethics is also character based – and BE seems to
show that character doesn’t count for much
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A related field: “Moral intuitionism”
 Jonathan Haidt’s six core moral dimensions
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Care/harm
Fairness/cheating
Loyalty/betrayal
Authority/subversion
Sanctity/degradation
Liberty/oppression
 While focus of work is on political morality, research
 is useful to show how deep these reach into our moral selves
 supports values-based C&E effort
 Also suggests need to learn how the values can be risk causing
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References
 Books
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Appiah, Experiments in Ethics
Ariely, The (Honest) Truth About Dishonesty, Predictably Irrational
Bazerman & Tenbrunsel, Blind Spots
Haidt, The Righteous Mind
Kahneman, Thinking Fast and Slow
Thaler & Sunstein, Nudge
 Links to all studies referenced can be found at
www.conflictofinterestblog.com – in posts found in the tab
under “moral hazard and bias”
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