Company directors, who play with consumers’ lives, are thought to be depraved individuals who lack ethical principles. This is untrue according to professors Guido Palazzo and Ulrich Hoffrage. In reality, the context conditions any move towards such behaviour on the part of leaders who otherwise possess normal moral values.
With the onset of the oil crisis in the 1970s, demand for small vehicles went through the roof. Not wishing to leave the market to Japanese or European manufacturers, Ford asked its engineers to launch a car aimed at this sector in half the time normally required to produce a new model. Prepared in haste, the Pinto suffered as a result. A design fault, revealed in factory crash tests, emerged even before the car came on the market: there was a high risk of the petrol tank placed at the back of the vehicle exploding in the event of a rear impact during an accident.
A 137-million-dollar mistake
This Ford model even ended up being nicknamed the “4-seater grill”. Minimising the fault and making the car less dangerous would have cost 11 dollars for each of the 12,500,000 Pinto cars produced, equivalent to 137 million dollars. But the engineers and directors decided that it was not worth it. By a simple calculation, Ford estimated that there would undoubtedly be around 180 deaths caused by the badly positioned tank, and that the families would have to be compensated a total of 200,000 dollars per death. Ford then added on the same number of serious burns at 67,000 dollars per victim. The manufacturer also factored in some loose change for the burned out cars. So, in short, leaving the Pinto to drive around with its defects would cost roughly 50 million dollars, a lot less expensive than recalling the vehicles for repair.
Fully aware of the risks, the engineers and directors therefore chose to sell the Pinto as it was, basically telling themselves that saving one hundred million dollars was worth 180 deaths and 180 serious injuries. Was this decision immoral? Yes.
“The dark side of the force”
It is this type of concrete example drawn from the business world that Guido Palazzo and his colleague Ulrich Hoffrage use to explain how employees and managers with normal moral values arrive at decisions whose consequences breach ethics and their own codes of conduct.
Both academics teach at the Faculty of Business and Economics (HEC) in Lausanne, the former lecturing in ethics in the world of business and the latter in the theory of decision-making. They offer a course entitled Immoral decision-making in organisations: a seminar on the dark side of the force to Master’s students and, for the first time this year, as part of a MOOC.
As Guido Palazzo has observed, “the generally acknowledged explanation, when talking of immoral decisions made in the world of work, is that there is a rotten apple in the basket, that it has sometimes managed to contaminate the rest somewhat, but that basically the fruit is sound. Such cases may of course arise but in the vast majority of situations that we have studied, this is not at all what happens. The employees and managers were not ‘wicked’ but were perfectly normal. It is the context which leads to unethical decisions. Moreover, in large organisations, a decision is rarely taken by one person alone. If it comes about, it is because everyone subscribes or consents to it.”
Is it society’s fault then? “No, I am not saying that we should absolve the individual who acts improperly: there is an undeniable individual responsibility. But we underestimate the power of the context. If we concentrate on the psychological level, without paying attention to the organisation, we miss the major reason that explains why immoral decisions are taken – and we will never put a stop to it.”
This is all very well but what actually is context in a private company or public administration? The researchers distinguish three elements: the situation in which the manager takes his decision (the time he has available and peer pressure), the modus operandi of the organisation (the type of incentives and evaluations it puts in place and the criteria on which remunerations are based), and lastly the company ideology and culture to which the organisation is committed. There is not one single element – for example insufficient time to evaluate the consequences of his actions – which would automatically push a decision-maker towards a more or less ethical choice, but an array of parameters which, depending on their conjunction, may create a propitious atmosphere.
The case of Enron
The case of Enron clearly demonstrates how the last two elements, namely modus operandi and ideology, can come together to ultimately end in disaster. Enron, originally operating in the energy sector, was one of the biggest US companies in terms of market capitalisation. But sensational bankruptcy led to the collapse of this empire in 2001. It then emerged that massive losses had been removed from the balance sheet by sleight of hand, enabling the final results to be considerably enhanced. The CEO of Enron was unquestionably swayed by the lure of profits and clearly committed fraud. But he obviously could not have put together such a system on his own and without his employees’ knowledge. Many played their part and knew that they were working on an illegal and morally reprehensible project.
How can we explain the fact that graduates of Harvard, embarking a priori on a great career in a perfectly moral sphere of activities, found themselves in this mess? In the first instance, the 1990s saw an explosion in the new economy; start-ups were being launched and fortunes made in a matter of months. The prevailing ideology was dismissive of traditional values. In this environment of shifting points of reference, ultimately believing oneself to be above the law is just one small adjustment which happens of its own accord. A phenomenal hike in the share price helped create the feeling among managers and employees that they were rulers of the world.
Furthermore, an evaluation system had instilled a climate that, without exaggeration, could be termed Darwinian: 15% of the least productive employees were systematically fired. The result was that, in order to survive, the numbers had to be made no matter how and, above all, company superiors never questioned. This example illustrates how a context, created both by the ideology of the times and the culture of a company, can lead a whole organisation to adopt immoral and illegal behaviour. Why this suspension of judgement? Guido Palazzo talks about “moral blindness” to define this state. “When you are in a context such as the one at Enron, you are of course free to signal disapproval about what is happening and to resign. If very few people do so, it is because they are unable to distance themselves sufficiently from what they are experiencing. You have worked hard at college to get to Harvard; you come out with a degree and are taken on by one of the most prestigious companies in the United States. If you resign after two months, you know that it will seriously disadvantage your career. You also have colleagues and are under pressure from peers: everyone is united and, when you are the last one in, it is very difficult to break ranks and to criticise what is happening.”
A Hans Andersen fairytale
As a way of illustrating this moral blindness, Guido Palazzo uses a fairytale by Hans Andersen, The Emperor’s New Clothes. This is the story of a ruler who, above all, loves to be well dressed. This fashion victim changes outfit every hour. Two swindlers arrive in his kingdom and pretend to sew him clothes made from an extraordinary fabric that is invisible to idiots. When the ruler comes to check how the work is progressing, he sees nothing (as of course there is nothing to see), but does not dare to say so for fear of appearing to be an idiot. The same thing happens with all his advisers. The emperor finally decides to put on his new finery to parade before his stunned people who do not dare to react either. Only a small child shouts out, “The emperor is naked!” Here we can clearly see that the fear of displeasing a despotic ruler is combined with the constructing of a collective lie, reinforced by the threat of appearing to be an idiot. Only a child, who is free from peer pressure and collective blindness, dares to speak the truth.
“Leadership style also influences the atmosphere in an organisation,” explains Guido Palazzo. An authoritarian manager, or one without the intelligence to surround himself with close colleagues who challenge and contradict him, will create a context in which moral blindness and thus immoral decisions can flourish.” Similar situations arise in periods of crisis when profit becomes the only goal and when management’s vocabulary is borrowed from the military. As soon as it is a question of “fighting for survival whatever the cost”, “giving no quarter”, “zapping the enemy” and “forming a united front against him”, then it is bad for ethics.
Government is not immune to moral drift
It should be noted that government bodies, while they are less subject to the pressures of turning a profit, are organisations equally at risk. “Routine is a factor which encourages moral blindness. Few questions are asked about the ultimate aim of what one is doing; one does not question the processes and the rules and so, here too, we have a form of ‘company culture’ which can promote collective practices that are unethical.” Finally, in the case of employers with a brand for which all young graduates want to work – Google, Apple and others – it is peer pressure in particular that poses the threat: “It’s about being cool and having the same vision of the world as the rest and, moreover, these companies encourage shared activities outside work. It’s difficult in this environment to take on the role of ugly duckling who thinks differently: one is quickly excluded.”
Is nowhere safe? “Anyone can find himself taking immoral decisions that go against ethics. No one is exempt, not even those who are committed to a church. We have observed that the habit of believing in a dogma, without asking questions and setting aside critical thinking, increases the risk of embarking on unethical decision-making, and this is despite strong personal and moral values.”
Does this mean that Guido Palazzo and Ulrich Hoffrage can only enlighten their students regarding the past and cannot offer hope of prevention in the future? “The best prevention is to explain the mechanisms which lead to moral blindness and to describe and analyse the contexts which encourage a move towards unethical action. This enables the student to recognise risk situations. The most important thing is to teach our students never to work on automatic pilot: always maintain critical thinking and take time to keep in touch with one’s conscience in order to make informed choices.”
Read the original research paper: “Values Against Violence: Institutional Change In Societies Dominated By Organized Crime” by Antonino Vaccaro, IESE Business School, and Guido Palazzo, Faculty of Business and Economics of the University of Lausanne (HEC Lausanne). Forthcoming in the Academy of Management Journal.