The Hidden Costs of
Organizational Dishonesty
A
brief scanning of The Wall Street Journal — or, tellingly, almost any
other newspaper in the country — reveals the alarming prevalence and
far-reaching impact of organizational dishonesty. Reports of malfeasance or
criminal conduct in corporate governance, accounting practices, regulatory
evasions, securities transactions, advertising misrepresentations and so on
have become all too commonplace. It’s no wonder that business schools across
the country have been rushing to design and introduce courses that emphasize a
subject traditionally given short shrift: ethics.1
This
is not to say that, as a group, business people are inherently unethical. All
other things being equal, most executives would unhesitatingly choose the high
road. Except in hypothetical situations, however, all other things are never
equal. In any organization, people are motivated by myriad factors — sales
quotas, corporate economic health and survival, competitive concerns, career
advancement and so forth — which can easily override their moral compasses.
Indeed, in spite of the assortment of arguments contending that “ethics pays,”2 the number and extent of the recent
transgressions suggest that a significant portion of the business world has yet
to be persuaded.
Of
course, companies should always adhere to universal ethical principles because,
after all, that’s the right thing to do. But one additional reason for
businesses to engage in honest practices is that the consequences of failing to
do so may be much more harmful to the bottom line than has traditionally been
recognized. Companies that deploy dishonest tactics typically do so as a means
of increasing their short-term profits, and in that regard they might succeed.
But the misconduct is likely to fuel a set of social psychological processes
with the potential for ruinous fiscal outcomes that can easily outweigh any
short-term gains. In other words, organizations that behave unethically will
find themselves heading down a slippery and dangerous fiscal path.
In
this article we chart that path, providing details of the extent of the damage
and its insidious nature. Our formulation begins with a fundamental assertion:
An organization that regularly teaches, encourages, condones or allows the use
of dishonest tactics in its external dealings (that is, toward customers,
clients, stockholders, suppliers, distributors, regulators and so on) will
experience a set of internal consequences. These outcomes, which we call
malignancies, are likely to be surprisingly costly and particularly damaging
for two reasons. First, they will be like tumors — growing, spreading and
eating progressively at the organization’s health and vigor. Second, they will
be difficult to trace and identify via typical accounting methods as the true
causes of poor productivity and profitability. Thus, they might easily lead to
expensive misguided efforts that fail to target the genuine culprits of the
dysfunction. The malignancies can be categorized into three types, according to
the processes involved (see “The Consequences of Organizational Dishonesty”).
The Consequences Of Organizational Dishonesty
The Consequences of Organizational Dishonesty
A company with dishonest business practices toward
customers, vendors, distributors and other outsiders might achieve higher
short-term profits, but it would incur various costs from three types of
malignancy.
Malignancy #1: Reputation
Degradation
Perhaps
the most obvious consequence of systematic organizational dishonesty is that a
company will develop a poor reputation among current and prospective clients
and business partners. To be clear, we are not referring to small-scale,
localized or infrequent ethical infractions but rather to an organizational
culture in which employees are socialized into an environment that either
implicitly condones or, worse, explicitly teaches dishonest business practices.
When anyone outside the company (such as customers, partners, suppliers,
regulators or the media) uncovers the improper tactics, the fallout can be
swift and devastating. As Edson W. Spencer, the former chairman of Honeywell
Inc., once stated, “The businessman who straddles a fine line between what is
right and what is expedient should remember that it takes years to build a good
business reputation, but one false move can destroy that reputation overnight.”3
For
one thing, the damage to the firm’s opportunities for new and repeat business
can be considerable. According to a recent survey of the general public
conducted by Wirthlin Worldwide of Reston, Virginia, 80% of respondents stated
that their perception of the ethicality of a particular company’s business
practices has had a direct effect on their decisions to purchase goods or
services from that firm.4 And the financial damage could extend
further. According to the Wirthlin survey, 74% of the respondents asserted that
their perceptions of the honesty of a corporation’s behavior had also
influenced their decisions about whether to buy that company’s stock.5
More
importantly, the damage could be irreparable. An organization that has
historically been successful but is currently suffering from inefficient
operations, a lack of creativity or even incompetence still has the ability to
regain people’s confidence by demonstrating the early stages of a turnaround
(for example, by hiring a well-respected consulting group, by developing an
alliance with a highly regarded organization or by impressing industry insiders
with an innovative new product line). But companies that are perceived to be
corrupt will find it much more difficult, if not impossible, to shed themselves
of that stigma. Past research has found that, by nature, people react more
adversely to deceitfulness than to any other attribute.6 And even if only one branch of a
company is caught in the wrongdoing, the whole organization might suffer
because dishonesty is a trait that, when discovered in one domain, is
immediately perceived to be underlying the behaviors across other domains.7
Consequently,
once outsiders perceive that dishonest policies and practices have become
central to the way a company does business, that organization will face a long,
uphill battle. Research suggests that a disreputable company attempting to
recover lost trust needs to demonstrate its newfound integrity consistently on
numerous occasions (many more than the number taken to display its dishonesty
in the first place) to stand even a chance of convincing wary others that it
has changed for the better.8 During the recovery process, which
could easily take years, customers and clients who have defected are likely to
commit themselves to another, more respectable, organization. To speed its
rehabilitation, a company may need to replace top management quickly in an
effort to convince others of its sincerity and eagerness to attack the root
cause of the dishonesty.
Malignancy #2: (Mis)matches
Between Values of Employee and Organization
The
extent to which the values of an organization coincide with those of its
employees is another issue. Whether that match is good or not, companies with
dishonest practices are likely to incur substantial costs.
A Poor
Fit for Organizational Dishonesty
An
organization that encourages deceptive business practices by rewarding the use
of duplicity with outside contacts is likely to be met with moral opposition by
a number of employees whose values do not comport with those espoused by the
company. Many of these individuals will find their moral standards continually
clashing with workplace expectations, leading to constant stress from the
ever-present conflict.9 The resulting costs to the
organization can be considerable: greater instances of illness and absenteeism,10
lower job satisfaction,11 decreased productivity and higher
turnover.
Increased absenteeism.
Corporate
expenditures on illness and absenteeism amount to far more than the costs of
“get well” cards and Mylar balloons. A recent survey on unscheduled absences in
the workplace revealed an all-time high of $789 per employee annually, which
amounts to more than $3.6 million in yearly losses for larger corporations.
This number reflects only the direct payroll costs for the absent employees. It
does not include the cost of lost productivity and the expense of covering for
the absent individuals, including overtime pay for other employees and the
hiring of temporary workers.12
Lower job satisfaction.
An
even greater concern arises when the mismatch between the moral standards of
some employees and the unethical practices of a company leads to lower job satisfaction
among those individuals. From a strictly utilitarian perspective, an
organization should be concerned about worker job satisfaction only to the
extent that it affects employee productivity and turnover. Clear evidence has
existed for the latter (to be discussed shortly) but not for the former until
relatively recently. Specifically, traditional studies on the relationship
between job satisfaction and productivity suggested only a weak connection
between the two.13 But subsequent research has qualified
this finding, revealing that the correlation between job satisfaction and
performance is rather weak only for workers with low skill levels, presumably
because those individuals do not have the capability to produce high-quality
work even when they are quite content with their jobs.14 But for employees who are highly skilled,
job satisfaction actually makes a substantial difference: Those who were
satisfied with their jobs outperformed those who were not by a margin of 25%.
These
findings have serious implications. When moral employees are required to engage
in immoral behaviors, the productivity of the most competent and proficient
workers will suffer most. This outcome should be extremely troubling to many
organizations for two reasons. First, companies generally earn a sizable
portion of their revenues (and enhance their reputations) based on the highest
efforts of their ablest workers. If those individuals aren’t motivated,
revenues (and reputation) could easily suffer. Second, because the most capable
workers are usually the ones better able to find other jobs, dishonest
companies bear a large risk of losing their best employees.
Higher turnover.
Because
of the high direct costs of recruiting and training new employees, any
organization should be concerned if it has trouble retaining people. Dishonest
companies should take particular note, though, because their turnover will be
selective in nature. Research has shown that workers who do not share the
values of their organizations tend to be less satisfied with their jobs, less
committed to their organizations and significantly more likely to quit.15 Thus, over time, an unethical
corporation is likely to have employees who are disproportionately dishonest.
Moreover, policies that promote dishonest business practices are likely to
drive the most productive workers into the offices of more honest competitors,
where those individuals can find greater job satisfaction and be more at ease
with their work environments. In other words, once a dishonest organization has
unwittingly thrown out the baby, all that will be left is the dirty bath water.
A Good
Fit for Organizational Dishonesty
We
have already discussed how honest workers select themselves out of dishonest
firms by leaving to work for companies with values more consistent with their
own. It should be noted that this “moral dilution” also occurs at an earlier
point in the employment process. Specifically, job seekers tend to be attracted
to organizations with attributes that are congruent with their own personality
profiles.16 For example, in a recent survey, 76%
of respondents said that their perceptions of a company’s integrity would
influence their decision about accepting a job there.17 Of course, selection through the
filter of value congruency also occurs on the employer’s side. That is,
companies that regularly require their workers to engage in unethical practices
tend to seek people who are willing (if not eager) to play ball in that system.
As these various forces attract unethical prospects and repel ethical
employees, the low standards of a dishonest organization can be self-reinforced
in perpetuity.
Unethical
corporations do not merely select and retain dishonest employees; they create
them as well. Honest employees can be converted into wrongdoers in various
ways, but the process often begins with peer pressure or a supervisor’s direct
request.18 After transgressors have had the
opportunity to reflect on their recent misconduct, the incongruity between
their values and behavior will strongly motivate them to rationalize their
actions. (Otherwise, they would need to change their views of themselves in
light of what they’ve just done.) Counterintuitive as it may sound, many of
these individuals will continue to engage in dishonest business practices in an
attempt to bring a sense of legitimacy to their original offenses. These
workers are likely to find further comfort in the vast system of justifications
embedded in the corrupt ideology of the organizational culture.19 As the practice of rationalizing their
misdeeds becomes routine, the employees gradually adopt that ideology for
themselves.20
Regardless
of whether a company’s dishonest workforce comes primarily from turnover,
recruitment or conversion, an organization that consists of dishonest workers
is certain to suffer from various internal consequences, such as employee
theft, fraud and delinquency. After all, if workers are cheating customers and
others outside the company, why shouldn’t they also be bilking their employer?
Consider
the experiences of a former employee of a consulting firm whose manager
suggested that she withhold information from a client. “I was constantly on
guard to what I was ‘supposed’ to tell them,” says the former employee. “I felt
dishonest.” Later, the employee found herself regularly cheating on her travel
expenses. “We were allotted a set amount of money per day that was the maximum
we would be reimbursed for,” she recalls. “I began charging this amount to my
expenses each day, regardless of my actual expenses. This was the accepted
practice for most people on the project, but it was unethical.” Since leaving
the firm, the employee has had some time to reflect on her actions. “Looking back,”
she says, “I have to wonder if the dishonesty that I felt at the client site as
a firm representative had anything to do with the ease with which I was able to
be dishonest with the firm in another way.”
According
to a recent survey, fraud perpetrated by employees is the most common type of
fraud that afflicts companies. In fact, it is nearly twice as widespread as
consumer fraud, the next most prevalent type.21 The financial burdens of internal
fraud, including employee theft, are mind-boggling. According to the
Association of Certified Fraud Examiners, U.S. companies lose roughly $400
billion dollars a year to internal fraud.22 Years ago, a government legislative
committee noted that nearly one-third of all business losses in the United
States were the result of internal larceny.23 More recently, in 2003 nearly
two-thirds of corporations surveyed reported they had suffered from employee
fraud, and the trends suggest that the situation is likely to worsen.24 For example, compared with data from
half a decade ago, theft of company assets has more than doubled,
expense-account abuse has nearly tripled and fraud through collusion between
employees and third-parties is also on the rise.25
In
response to this growing problem, many organizations have overlooked any role
that their own dishonest policies and practices might have played. Instead,
they have focused on the symptoms of the problem, implementing a host of
specific preemptive and reactive measures. Of these, the use of stronger
internal controls, such as increased security and more sophisticated
surveillance systems, is growing at the fastest pace.26 But the unintended consequences of
such countermeasures can sometimes be nearly as deleterious as the problems
they are aimed at solving in the first place.
Malignancy #3: Increased
Surveillance
The
direct expenses associated with the installation of surveillance systems are
staggering. Between 1990 and 1992, for example, more than 70,000 U.S.
corporations spent over half a billion dollars on surveillance software.27 But the indirect costs —degradation of
the work environment that leads to adversarial relations between employer and
workers, diminished productivity and other dysfunctions — can also be
considerable.
Health
Consequences
Employee
monitoring is associated with a host of mental health problems,28
including high levels of tension, severe anxiety and depression.29 Employees are also more likely to experience
physical disorders, such as carpal tunnel syndrome, when they perceive their
organization’s surveillance system as encroaching on their privacy.30 These types of psychological and
physical ailments are linked directly to increased absenteeism and diminished
productivity.
Lack of
Trust in Employees
Workers
often perceive the installation of surveillance software and other devices as
clear indications that their organization doesn’t trust them. This perception
eventually harms any existing companywide esprit de corps, often creating an
atmosphere of antagonism between employees and management.31 In addition, workers who feel insulted
that their integrity is being questioned are more likely to quit or retaliate
with a variety of counterproductive behaviors, ranging from the simple
withholding of voluntary support to outright acts of revenge and sabotage.32 This type of dysfunctional environment
has been described by a former manager of a company that was trying to curtail
inventory shrinkage due to employee theft: “Senior management brainstormed the
best way to solve the issue and came up with the use of expensive video
surveillance equipment in the stockrooms to monitor employees leaving and also
the process of opening new shipments. This implementation did not decrease
shrinkage, but did have a negative impact on employee turnover.”
Backlash
to Perceived Restrictions of Control
People
who feel that their sense of freedom is being threatened will often try to
reassert some control over their environment.33 In the workplace, employees might
attempt to empower themselves through both corrective and retributive means —
that is, by trying to regain the control that was previously taken away and by
committing deliberately hostile actions to retaliate.34 Consequently, in an organization with
excessive control systems, some employees might be more motivated to steal from
the company.35 Of course, employee theft and other
dishonest behaviors are only likely to motivate management to procure even
higher levels of surveillance technology, further perpetuating the vicious
cycle.
Undermining
of Positive Behavior
Another
potential consequence of surveillance equipment is that many employees might
come to believe that the systems are warranted even when they’re not. That is,
honest and dishonest workers alike might assume that the monitoring must
reflect both the corrupt dispositions of fellow employees and the large rewards
of cheating. Unfortunately for the company, actions that convey expectations of
wrongdoing (either implicitly or explicitly) may in fact lead to a rise in
misconduct for both honest and dishonest workers by creating self-fulfilling
prophesies for the former36 and self-perpetuating ones for the
latter.37
Surveillance
technology can also undermine employee behavior in subtler ways. Specifically,
when individuals are being monitored closely, they might begin to attribute any
of their honest behavior not to their own natural predisposition but rather to
the coercive forces of the controls. Eventually, they might view their actions
as being directed less by their own moral standards and more by the prying eyes
of management.38 When that happens, they might lower
their ethical standards and be more inclined to try to outwit or elude the
surveillance system and engage in misconduct when they aren’t being monitored.39 This, too, will spur supervisors to
find more effective (and more expensive) control systems.
Overestimated
Influence of Monitoring
Management,
too, can begin to overestimate the power of surveillance systems. That is,
people who are responsible for the implementation, maintenance and
strengthening of control systems are likely to assume that the desirable
conduct of the monitored workers is primarily a result of the surveillance
equipment even when that behavior would have occurred without the use of such
systems.40 This misconception may help explain
why internal controls continue to rise in popularity in corporate America
despite the dramatic increases in supervisors’ workloads when new systems are
first established.41 After these systems are in place,
management may come to see them as more effective and more vital than they
truly are. And once again such mistaken assumptions might lead to greater
expenditures to purchase even more sophisticated systems.
Toward the Honest
Organization
Beyond
moral grounds, we have discussed sound utilitarian reasons for organizations to
conduct themselves ethically. We focused primarily on what the costs might be
for those businesses otherwise tempted to teach, condone or merely allow the
systematic use of dishonest practices with external contacts.
Although
many of the effects of organizational dishonesty are difficult to trace, the
damage done is no less real. Consider the following account of how the
unprincipled practices of a company helped cost it nearly $1 billion in losses.
According to a former employee, “The CEO … abused ethical principles on a
regular basis. … People believed him in the short run, but as the truth would
leak out, the company’s reputation deteriorated. Few companies are willing to
do business with him now — those that do will only do so on onerous terms.”
Eventually,
that culture of dishonesty had permeated the entire organization. “The
marketing department was coerced to exaggerate the truth,” says the former
employee. “The PR department wrote mostly false press releases, and salespeople
coerced customers.” Moreover, the misconduct was directed internally as well as
externally. “Taking a cue from the executives, employees would steal from the
company whenever they could, usually via travel and expense reports. Some would
cut side deals with suppliers,” recalls the employee.
To
make matters worse, a security force was hired to roam the building routinely,
ostensibly to protect employees, but many workers instead felt that they were
being spied on. That suspicion only intensified when reports of even minor
infractions, such as people taking long smoking breaks, were sent to the CEO.
Not surprisingly, job satisfaction at the company was bad, morale terrible and
turnover high. “People were attracted to the company by high salaries, which
the CEO saw as justification for treating employees poorly, but left as soon as
they could find work elsewhere,” recalls the former employee.
The
various costs of organizational dishonesty — decreased repeat business, low job
satisfaction and performance, high worker turnover, employee theft, expensive
surveillance mechanisms and an atmosphere of distrust — have often been cited
as severe business problems. But many organizations have failed in their
efforts to address those issues, often because they are unaware of a root
cause: their own tendencies to conduct business with customers and others
unscrupulously. So, instead, corporations often launch wrongheaded efforts to
control one fiscal hemorrhage (for example, losses from employee theft) by
creating another (namely, investments in increasingly expensive security systems).
The
more effective solution is to staunch the wound at its self-inflicted site,
with an unblinking examination of corporate dishonesty and a true commitment to
end it. But achieving ethical standards requires more than just implementing
institutional codes of conduct42 or more effective security systems
because increased control often leads only to even more negative outcomes.
Instead, the effort must begin at the top, with senior executives setting the
right example and then implementing policies to encourage the same behavior
from employees in their dealings with clients, customers, vendors and distributors
as well as with other employees. For example, top managers should incorporate
customers’ ratings of the ethicality of specific employees into the incentive
structures of those individuals. Also, the ethical reputation of the
organization as a whole should be measured regularly and included in the annual
assessments of the company’s performance. With such policies in place,
companies can maintain high standards of conduct and attract (and retain)
honest employees, and by doing so they can avoid the various hidden costs of
organizational dishonesty.
References
1. A. Sachdev, “Ethics Moves to Head of Class,” Chicago Tribune,
Friday, Feb. 14, 2003, Business Section, p. 1.
2. For a discussion of the history of “ethics as enlightened
self-interest” arguments, see A. Stark, “What’s the Matter With Business Ethics?”
Harvard Business Review 71 (May–June 1993): 38–48.
