When word surfaced in 2008 that a respected Wall Street investment manager had been running a decades-old Ponzi scheme swindling his clients out of $18 billion, Americans were shocked. How could this trusted businessman and pillar of the New York community have so brazenly ripped off his friends and colleagues? This wasn’t the man they knew, one after another of his victims said. He was prudent and loyal—that’s why they trusted him with their life savings. How could someone who seemed to embody honesty turn out to be the biggest crook in financial history?
One person who wasn’t surprised by the Bernie Madoff scandal was Ann Tenbrunsel, the Rex and Alice A. Martin Professor of Business Ethics and co-director of the Institute for Ethical Business Worldwide at Notre Dame. Tenbrunsel is the co-author, with Max H. Bazerman, of Blind Spots: Why We Fail to Do What’s Right and What to Do About It. She has been thinking about people like Madoff since the early 1990s (coincidentally, just about the time Madoff was starting his Ponzi scheme), when she was studying for a doctorate in organizational behavior at Northwestern University’s Kellogg School of Management. Working with professors Bazerman, now at Harvard Business School, and David Messick, professor emeritus at Kellogg, Tenbrunsel helped pioneer the field of behavioral ethics, which studies the psychology of ethical behavior.
“I first got interested in the subject as a kind of naïve graduate student who wanted to know why good people do bad things,” Tenbrunsel said. “[Behavioral ethics] is a really popular field now, but it wasn’t very popular back then. At that time, most work on ethics took a normative perspective, asking what people should do rather than what they actually do.”
From Tenbrunsel’s point of view, normative ethics—telling people how to behave—was putting the cart before the horse. According to her research, most people don’t even live up to their own ethical standards, much less the standards of some moral philosopher. She conducted a study asking people how ethical they believed themselves to be relative to everyone else, on a scale from 0 (most unethical) to 100 (most ethical). The average response was in the low 80s, meaning that the average person thought they were in the top quartile of ethical people. As in Lake Wobegon, when it comes to ethics, everyone appears to be above average.
Tenbrunsel’s research suggested that attributes related to ethics are subject to “hyperinflation.”
“Most people walk around in a bubble, believing they are more ethical and honest than they actually are,” Tenbrunsel said. “That means we aren’t prepared for ethical dilemmas, because we simply assume that we’ll do the right thing.”
This ignorance of our own moral limitations causes what Tenbrunsel and her co-author Bazerman call “blind spots”—aspects of our psychology that most of us would rather not explore. Instead of maintaining an inflated sense of our own goodness, Blind Spots suggests that we cultivate ethical humility.
“I think the first step to more ethical behavior is breaking down our ethical illusions,” Tenbrunsel said. “We need to recognize that we aren’t as ethical as we think we are. Until we admit that, none of this research will really sink in and the ethics interventions based on that research won’t work.”
Why fines don’t work
Throughout her career, Tenbrunsel has applied her psychological research to the business world. When she was in graduate school, the U.S. government relied almost exclusively on a regulatory model of policing business activity. Like the normative ethical theories she questioned, the regulatory model was prescriptive, heavy-handed and top-down, which “seemed problematic from a psychological perspective,” Tenbrunsel said.
“What regulation does is make us so obsessed with meeting the standard that the reason behind the standard gets lost,” she said. Take public school education for example. Many public schools are rewarded (with higher budgets, better teachers, etc.) or punished (reduced budgets, closures) based on their performance on standardized test scores. This standard is designed to measure learning, which seems to be a reasonable idea and well-intended effort. Yet the focus can become the test scores, leading to learning being replaced by “teaching to the test.” The focus shifts to obtaining high scores, with teachers and school administrators going so far as to alter the tests to ensure the students perform well.
Standards tend to take on a life of their own—thus, we have the compliance industry. “There’s nothing wrong with regulation, but you need to have smart regulation, regulation that takes into consideration the psychology of ethical behavior,” she added.
For instance, a 1999 study by Tenbrunsel and Kellogg’s Messick showed that small fines for unethical behaivor actually led to more unethical behavior than no fines at all. Why? Because the fines changed the type of decision the companies made, making it less likely that the decision was seen as an ethical one. They lost sight of the reason behind the fines, which led to ethical fading. Because of this research, Tenbrunsel is skeptical that government regulation can prevent another Madoff or Lehman Brothers.
What will work
So how can businesses become more ethical? The answer, Tenbrunsel says, is not “Band-Aids” such as adopting an official code of conduct. Instead, it requires hard work and honest self-evaluation.
In Blind Spots, Tenbrunsel and Bazerman recommend taking two essential steps. First, identify the organization’s informal values.
An organization may espouse ethical values, require ethical training, and even have an ethics hotline, yet such symbolic moves may have relatively little impact on ethical behavior. The informal values imparted at work play a much more critical role in employee behavior. Managers need to understand these informal values if they want to see real ethical improvement in their organizations. Doing so requires an understanding of the processes that motivate individual employees’ decisions. What pressures do employees feel, and why? What ethical challenges do they face? What types of decisions does the company actually reward? What qualities characterize those who make it to the top?
One way to get to the heart of these questions is to try to identify who really “runs the company”—which may not necessarily be the CEO. In 1971, Ford introduced a new subcompact car, the Pinto, that critics soon would allege had a design flaw: When it was rear-ended, the fuel tank could rupture, causing the car to explode. Evidence emerged suggesting that Ford was aware of this problem but decided to sell the Pinto anyway.
According to Tenbrunsel and Bazerman, the problem was encapsulated by one Ford engineer at the time. “This company is run by salesmen, not engineers, so the priority is styling, not safety,” the engineer said. If salesmen are running an auto manufacturer, whose voices are silenced?
In universities, it’s widely known which divisions have the president’s ear. In companies, employees tend to know which are the best departments for rapid promotion and which are graveyards of ambition.
“Each organization has to figure out what they’re rewarding and what they aren’t rewarding,” Tenbrunsel said. “What conflicts of interest exist? What groups and people have so much power that they’re basically untouchable? Whenever you have a powerful person or group, they become sort of removed from the organization’s norms. So systems need to be put into place to allow people to challenge these untouchables.”
Paying attention to water-cooler talk also can shed light on the informal values at work. Noticing what’s talked about—and what isn’t—can expose the values employees believe are rewarded, as well as those that aren’t. What slogans and stories do employees repeat over and over? What values do these stories emphasize? Is there company lore about someone who stood up to leadership on an ethical issue? Or is the story one of being rebuffed by a leader for mentioning ethical concerns?
One Fortune 50 corporation, Tenbrunsel and Bazerman write, produced a video telling the story of four employees who went above their bosses’ heads to keep the corporation from acting unethically. The video was widely shown in the organization. At the end of the video, we learn that all four whistleblowers now hold senior positions in the organization. The video had a lasting, powerful effect because the stories were then repeated through informal channels.
The second essential step for an organization seeking to become more ethical, the authors say, is to identify what they call ethical “sinkholes.” Managers should pay attention to areas characterized by uncertainty, time pressure and isolation. These are the places where what Tenbrusel calls "ethical fading"—our tendency to forget about our ethical values under pressure— often occur.
The more uncertainty there is in the environment, the more likely it is that unethical behavior will occur. In environments characterized by high uncertainty, individuals may be able to downplay the ethical implications of a decision and, in doing so, become more likely to see the decision as a business choice rather than an ethical one.
The busier and more rushed people are, the fewer cognitive resources they have to think through the ethical implications of a decision. In a study examining consumer choice, individuals who were asked to memorize a seven-digit number were more likely to choose chocolate cake over fruit salad, whereas those who only had to memorize a two-digit number were more likely to choose the fruit. The fewer cognitive resources we have, the more impulsively we act.
Isolated individuals and groups also tend to develop norms that diverge from the stated norms of the organization. For instance, in 1992, GE was forced to pay $69 million in government fines after one of its marketing employees, in partnership with an Israeli Air Force general, diverted Pentagon funding into their personal bank accounts. In response, GE took steps to prevent groups from becoming isolated from the rest of the corporation.
Beware of bad barrels
Despite all the crooks, liars and frauds Tenbrunsel has studied in her career, she retains a surprisingly optimistic view of human nature.
“People want to do the right thing, and they want their organization to do the right thing,” Tenbrunsel said. “They just struggle with how to do it.”
Even Madoff, who Tenbrunsel admits was a “bad apple,” was surrounded by “good apples” who nevertheless turned a blind eye to his deceptions. Quoting scholar Linda Treviño, Tenbrunsel notes that “there aren’t just bad apples, there are bad barrels.” In other words, the environment of the organization can tip employees toward or away from unethical behavior.
“It’s human nature to want to blame everything on a bad person like Madoff and say that we just need to get rid of that person,” Tenbrunsel said. “It would be great if that worked, but it doesn’t. We need to understand why good people allow these situations to occur.”
That need is greater than ever today, when newspapers regularly seem to expose another ethical lapse in a supposedly trustworthy person. Whether it’s former New York Governor Eliot Spitzer’s use of prostitutes or “Daffodil Day” pledge donors failing to follow through to pay up on their commitment, the lesson seems to be that no one is immune from ethical fading.
One of Blind Spots’ reviewers wrote, tongue in cheek, that if what Tenbrunsel and Bazerman say is true, then no one will buy the book because no one will think they need it.
“That hasn’t turned out to be the case, but maybe people are buying it for their friends,” Tenbrunsel said, laughing. “I’ve actually been very pleased with the interest in the book.”
She should be. Since the book came out, she has appeared on MSNBC and NPR, and her research has been covered by Forbes, Investor’s Business Daily, the UK’s The Guardian and the Freakonomics blog. David Brooks devoted most of his November 14, 2011, column in The New York Times to her book, and Tenbrunsel has been asked to speak at the United Nations. Not bad for a former naïve graduate student who wanted to know why good people do bad things.
Tenbrunsel remembered the resistance she faced at one academic presentation in the 1990s when she first started presenting her research on behavioral ethics.
“Someone said, ‘Oh, this is very interesting, but what are you going to study when this is no longer a fad?’” Tenbrunsel said. “It was so new that people just did not know how to process it.”
Then came Enron, and WorldCom, and Bernie Madoff. A few years back, Tenbrunsel received a letter from prison from an MCI (formerly WorldCom) executive who was jailed for his role in the corporation’s collapse. He told Tenbrunsel that her research had helped him understand why he did what he did. Tenbrunsel wrote back.
“I said that I was glad he understood his behavior better, but that he still bore responsibility for his crimes,” Tenbrunsel said. “An explanation is not an excuse.”