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.

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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.

3. F.W. Steckmest, “Corporate Performance: The Key to Public Trust” (New York: McGraw-Hill, 1982), 73.

4. D.E. Lewis, “Corporate Trust a Matter of Opinion,” Boston Globe, Sunday, Nov. 23, 2003, p. G2.

5. Ibid.

6. N. Anderson, “Likeableness Ratings of 555 Personality-Trait Words,” Journal of Personality and Social Psychology 9, no. 3 (1968): 272–279; and D. Barrett, “The Persistent Undermining Effects of Source Dishonesty on Persuasion” (Ph.D. diss., Arizona State University, 2002).

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17. Lewis, “Corporate Trust a Matter of Opinion,” Boston Globe.

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19. Ibid.

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21. “Fraud Survey 2003,” available at http://www.us.kpmg.com/news/index.asp?cid=1493 (KPMG, 2003).

22. Cf. J. Greenberg, “Who Stole the Money, and When? Individual and Situational Determinants of Employee Theft,” Organizational Behavior and Human Decision Processes 89, no. 1 (2002): 985–1003.

23. B. Young, R. Mountjoy and M. Roos, “Employee Theft” (Sacramento, California: Assembly of the State of California Publications Office, 1981).

24. “Fraud Survey 2003,” available at http://www.us.kpmg.com/news/index.asp?cid=1493 (KPMG, 2003).

25. Ibid.

26. Ibid.

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32. R.J. Bies and T.M. Tripp, “Beyond Distrust: ‘Getting Even’ and the Need for Revenge,” in “Trust and Organizations,” eds. R.M. Kramer and T. Tyler (Thousand Oaks, California: Sage Publications, 1996), 216–245.

33. J.W. Brehm, “A Theory of Psychological Reactance” (New York: Academic Press, 1966).

34. R.J. Bennett, “Perceived Powerlessness as a Cause of Deviant Employee Behavior,” in “Dysfunctional Behavior in Organizations, Vol. 1,” eds. R. Griffin, A. O’Leary-Kelly and J. Collins (Greenwich, Connecticut: JAI Press, 1998), 231–238; and A.W. Kruglanski, “Attributing Trustworthiness in Worker-Supervisor Relations,” Journal of Experimental Social Psychology 6, no. 2 (1970): 214–232.

35. J. Greenberg and K.S. Scott, “Why Do Workers Bite the Hands That Feed Them? Employee Theft as a Social Exchange Process,” in “Research in Organizational Behavior, Vol. 18,” eds. B.M. Staw and L.L. Cummings (Greenwich, Connecticut: JAI Press, 1996), 111–155.

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39. L.M. Van Swol, “The Effects of Regulation on Trust,” Basic and Applied Social Psychology 25, no. 3 (2003): 221–233.

40. A.W. Kruglanski, “Attributing Trustworthiness in Worker-Supervisor Relations,” Journal of Experimental Social Psychology 6, no. 2 (1970): 214–232.

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1 Comment On: The Hidden Costs of Organizational Dishonesty

  • billwelsh | June 3, 2011

    In many cases, organizational dishonesty is going to be proportionately linked to the amount of time in position or with a company. The more people move around, the less they have to face any long term consequences.

    The second element I have seen first hand is that the individual in power places unrealistic demands on their subordinates, expects the subordinates to achieve the desired results, and also expects them to accomplish everything wearing a bright white hat of compliance.

    Being that type “A” individuals are going to avoid failure at all costs, actions get rationalized and the line gets crossed in order to achieve the goals that will lead to promote, pay raise, and failure avoidance.

    Until there is a fundamental change in the human psyche, its going to be difficult to train this type of behavior out of people

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