Identifying and Assessing Behavioral Ethics Risks

The emerging field of “behavioral ethics” examines the effects of various social, cognitive and emotional factors on ethical decision making, and, in numerous experiments, has demonstrated the limited role that traditional notions of rationality play when we are faced with ethics-related choices.  The implications of behavioral ethics– which is part of a larger school of “behavioral economics” -indeed extend across a whole spectrum of contexts, from the decisions made in our private lives to matters of public policy.

While a subject of great interest in academia, so far behavioral ethics is having less of an impact on compliance and ethics programs than it should. But, at least to me, it seem only a matter of time before this new understanding of human nature begins to shape the C&E realm and indeed in the cover story from the February issue of CSj– a leading corporate governance magazine in Hong Kong – I explore the possible ramifications of this field for such areas as managing conflicts of interest, training/communications and holding managers accountable for the wrongdoing of their subordinates. I also examine what can be learned about behavioral-ethics-based C&E risks, sections of which are reprinted below.

“One [behaviorist] experiment showed that acting indirectly – that is through a third party – can blind individuals to ethically problematic behavior more than direct action does. This suggests that companies should recognize the limits of what could be called ‘inner controls’ – meaning personal moral restraints – in their dealings with third parties. So, as a matter of risk assessment, an organization may have to make up the difference with enhanced compliance measures (internal controls) in dealings with suppliers, agents, distributors, joint-venture partners and others.

“Another experiment showed that it is easier to disregard the interests of unknown individuals in making an ethical decision than those of known ones. This finding could help explain the relative ease with which so many individuals engage in offences where the victims are not identifiable, such as insider dealing, government contracting or tax fraud. Here, too, as a matter of risk assessment, an organization may have to make up the difference left by weak ‘inner controls’ with enhanced compliance measures.

Of course, and as is true of a number of [behaviorist] findings, this insight is not a complete surprise. Indeed, Ben Franklin once said, ‘There is no kind of dishonesty into which otherwise good people more easily and more frequently fall than that of defrauding the government’. Still, being able to prove with real data what is otherwise known just anecdotal or intuitively may be useful to compliance professionals in getting the company to devote extra attention to a risk area.

“The same can be said for a [behaviorist] experiment showing that individuals with depleted resources tend to have greater risks of engaging in unethical conduct. When faced with this knowledge it may be difficult for management or a board to ignore a recommendation to either reduce pressure or focus extra compliance and ethics mitigation efforts on parts of an organization where employees are subject to greater-than-ordinary stress.

“A more counterintuitive finding in this field concerns what might be called the risk of good intentions. Several [behaviorist] studies have shown that being cognizant of one’s ethical failings actually increases the likelihood of subsequently doing good, and that the converse is true as well. Examples of this phenomenon are that acts promoting gender equality ‘license’ discriminatory ones, being reminded of one’s humanitarian traits causes reductions in charitable donations, and purchasing ‘green’ products licenses ethically questionable behavior. While unsettling, these findings suggest a need for compliance programs to pay extra attention to risks that could arise from particularly virtuous-feeling activities.”

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About the Author

Jeff Kaplan

Jeffrey Kaplan, a partner in the Princeton, New Jersey office of Kaplan & Walker LLP, has practiced law in the compliance and ethics field since the early 1990's. Mr. Kaplan is also former adjunct professor of business ethics at NYU's Stern School of Business, co-editor (with Joseph Murphy) of Compliance Programs and the Corporate Sentencing Guidelines (West Thomson), former counsel to the Ethics and Compliance Officer Association and co-author of a study by the Conference Board on the use of compliance and ethics program criteria in government enforcement decisions.