amp Walker LLP SCCE Compliance amp Ethics Institute October 2012 Las Vegas NV What Behavioral Ethics Can Mean For Ethics and Compliance Programs Behavioral economics wwwkaplanwalkercom ID: 566199
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Slide1
Jeff Kaplan/Kaplan & Walker LLPSCCE Compliance & Ethics InstituteOctober 2012, Las Vegas, NV
What “Behavioral Ethics” Can Mean
For Ethics and Compliance ProgramsSlide2
Behavioral economicswww.kaplanwalker.com
2
Studies effects of social, cognitive and emotional factors on economic decision making
Shows the limits of traditional notions of rationality
Very much part of mainstream business thinking
E.g., behavioral finance
Embraced as a matter of public policy in the UK
Nobel prize awarded to pioneer in this area 2002 Slide3
Behaviorists’ view of human reasoningwww.kaplanwalker.com
3
Per Daniel
Kahneman
,
it
is often
:
mediocre
fallible
beset by inconsistent reasoning
not trustworthy/vindictive
Reasons are:
“
attentional
” (in considering vast quantities of information, people have a tendency to focus on that which confirms expectations)
motivational (a need/desire to appear confident to self and others)
But
the weaknesses in decision making aren’t sufficiently
appreciated – and we suffer from overconfidenceSlide4
Behavioral ethicswww.kaplanwalker.com
4
Research showing how seemingly irrational factors can lead increase/decrease likelihood of unethical conduct
Antecedents
P
hilosophy rediscovering the role of psychology (
Appiah
)
“The
economist may attempt to ignore psychology but it is sheer impossibility to ignore human nature.”
If
the economist does ignore psychology, “he will force himself to make his own, and it will be bad
psychology” (JM Clark 1918)
Princeton Theological Seminary experimentSlide5
Overview of connection to C&E www.kaplanwalker.com
5
Two levels of relevance to work of C&E professionals
Why
C&E programs matter
A policy argument – on both public and private levels
How
to optimize C&E programs
Both in identifying and mitigating risksSlide6
Why the “why” matterswww.kaplanwalker.com
6
Two key constituencies don’t fully appreciate the need for strong C&E programs
Business leaders
Government officials
Both often think that good intentions alone are largely enough
Business leaders’ views can undercut key program support
Government officials’ views can undercut key incentive policies
Why there aren’t more “Morgan Stanley” cases
Behavioral ethics (“BE”) shows that achieving ethicality is hard work
C&E is not a machine that can run by itself
Requires considerable knowledge, resources, effortSlide7
An important historical footnotewww.kaplanwalker.com
7
From the history of the creation of the Federal Sentencing Guidelines for Organizations more than 20 years ago:
Early drafts had less on C&E and more on “optimal penalties”
This was based on a view of human nature as hyper-rational (
homo
economicus
)
Final draft
rejected
this approach – in favor of providing C&E guidance and incentives
The basic assumption of the FSGO (and subsequent related legal standards): businesses and people
need help
in staying honest
That is one of the lessons of BE, tooSlide8
Why the “how” matterswww.kaplanwalker.com
8
Many E&C programs don’t seem sufficiently impactful
A field largely “out of energy and out of ideas”
Without something new and helpful this malaise could get worse
BE can help in two ways
Make programs operationally stronger – by better tying program measures to how humans actually operate
Give programs credibility – by tying them to science
Note that many BE research findings confirm what is known anecdotally. (But some findings are very surprising)
However, being able to
prove
such knowledge can be invaluableSlide9
Where the how matterswww.kaplanwalker.com
9
BE
most likely to help
Risk assessment/culture
Conflicts of interest
Training/communications/certifications
Investigations/discipline
But other possibilities as well
It is up to C&E professionals to find the connections, as BE academics may not have enough information to do soSlide10
Risks: unknown victimswww.kaplanwalker.com
10
Research findings: in decision making, it is easier to disregard interests of unidentified individuals than known ones
The charitable giving experiment
C
ould help explain the relative ease with which so many individuals engage in offenses where the victims are not identifiable, e.g.,
Insider trading
Government contracting or tax fraud
Ben Franklin (proto behaviorist?): “There
is no kind of dishonesty into which otherwise good people more easily and more frequently fall than that of defrauding the
government” Slide11
Unknown victims (cont.)www.kaplanwalker.com
11
The specialty pipe case
Larger point: moral restraints as a form of “inner controls”
C&E program point:
Identify areas where inner controls likely to be weak
Fortify those with extra measures
General ones, and/or
Those addressed to the source of weakness itself
But this one area is tricky as long-term relationships don’t inhibit wrongdoing – just the opposite
The dentist study
The general counsel studySlide12
Risks: indirect actionswww.kaplanwalker.com
12
Research findings: acting
indirectly can blind individuals to ethically problematic behavior more than direct action
does
The pharma company experiment
Somewhat similar to unknown victims, but not the same
Suggests
that
companies should:
Recognize limits of inner controls in their
dealings
with third
parties – suppliers, agents, distributors,
joint-venture
partners and others
Undertake
supplemental targeted
C&E
measures to make up for the
shortfall (e.g., communications, auditing)Slide13
Risks: too much work/pressurewww.kaplanwalker.com
13
Research finding: individuals
with depleted resources tend to
have greater
risks of
engaging in unethical
conduct than do
others
Mitigation perspective:
Either reduce pressure (often difficult to do to any meaningful degree, since many sources may be external), or
Focus
extra C&E
mitigation efforts on
parts of an organization where employees are subject to greater-than-ordinary
stressSlide14
The risk of good intentionswww.kaplanwalker.com
14
Research findings
Being
cognizant of one’s ethical failings increases the likelihood of subsequently doing
good
T
he
converse is true,
too
Examples
G
ender equality acts “licenses” discriminatory ones
Being reminded of one’s humanitarian
traits
causes reductions in charitable donations
P
urchasing
“green” products
licenses ethically
questionable
behavior
U
ses in risk assessmentSlide15
Just-in-time communicationswww.kaplanwalker.com
15
Research findings: being
asked to read (and in one case, sign) an honor code shortly before being presented with the opportunity and motivation to cheat significantly decreased the incidence of such
cheating
Possible use in various compliance areas:
anti-corruption
– before interactions with government officials and third-party
intermediaries
competition
law – before meetings with competitors (e.g., at trade association events
)
insider
trading/
Reg
FD – during key transactions, before preparing earnings
reports
protection
of confidential information – when receiving such information from third parties pursuant to an
NDASlide16
Communications (cont.)www.kaplanwalker.com
16
conflicts of interest – around procurement
decisions, hiring
gifts and entertainment – many occasions
accuracy of sales/marketing – in connection with developing advertising, making
pitches
employment law – while
interviewing for jobs, conducting
performance
reviews, dealing with other terms and conditions of employment
Note: some of this already goes on, but not nearly enoughSlide17
Training/communications: leaderswww.kaplanwalker.com
17
Research findings:
T
hose
in power were not only more likely to condemn cheating in others but also more likely to engage in cheating themselves than were
others
The cookie experiment
Do executives at your company view ethics as being “for the little people”?
Use findings to train senior managers on their need for “heightened ethical awareness”
But obviously need to be delicateSlide18
Training: slippery slopeswww.kaplanwalker.com
18
Research finding
“People
are more likely to accept others’ unethical behavior when ethical degradation occurs slowly rather than in one abrupt shift
.”
(Francesca Gino and Max Bazerman)
Based
on a “what the hell
effect” (Dan
Ariely
)
A good focus for training/communications
Also relevant to investigations and disciplineSlide19
Motivated blindnesswww.kaplanwalker.com
19
Research findings: “We
often fail to notice others’ unethical behavior if it’s in our interest not to notice. This failure of oversight — called ‘motivated blindness’ — is unconscious and common.”
(Bazerman)
Underscores
the importance of the Sentencing Guidelines expectation that organizations should impose discipline on employees not only for engaging in wrongful conduct but
“for
failing to take reasonable steps to prevent or
detect” wrongdoing
by others
R
elatively
few companies do
this well
(and some don’t do at all
)Slide20
Motivated blindness: responses www.kaplanwalker.com
20
Build
the notion of supervisory accountability into
policies
– e.g., in the managers’ duties section of a code of
conduct
S
peak
forcefully to the issue in
training
and other communications for
managers
T
rain
investigators on the notion of managerial accountability and address it in the forms they use so that they are required to determine in all inquiries if a manager’s being asleep at the switch led to the violation in
question
Publicize
(in an appropriate way) that managers have in fact been disciplined for supervisory
lapses
H
ave
auditors take these requirements into account in their audits of investigative and disciplinary
recordsSlide21
Conflicts of interestwww.kaplanwalker.com
21
Research findings: disclosure
could be a cause of, rather than cure for, unethical
behavior
“Information providers
whose conflicts are not disclosed will feel morally bound to report accurately to information users, because they would consider it unfair to lie to someone who is unaware of the misalignment of incentives.
Disclosing
conflicts of interest would have the effect of removing the moral bound and providing a moral license to misreport
.”
(
Daylian
Cain, George
Loewenstein
, Don Moore)
“Disclosure
can place inappropriate pressure on the audience to heed the advice — for example, in order to avoid insinuating that the [disclosing party’s] advice has been
corrupted” (Cain)
Additional research by Christopher Koch,
Carsten
Schmidt Slide22
COI responseswww.kaplanwalker.com
22
I
mprove
the way in which disclosed COIs are addressed, with the possibilities including:
Educate those
involved as to the generally under-appreciated dangers of
COIs
Ensure
that decisions about COI waivers and COI management are made by those who are independent and possess relevant expertise (e.g., a C&E officer) – not line
managers
Have
a sufficiently rigorous COI management
process
Audit the process and report on the audits to senior management and maybe the boardSlide23
Other: the power of social normswww.kaplanwalker.com
23
“People
are more likely to comply with a social norm if they know that most other people comply
”
Associated with Robert
Cialdini
The tax compliance experiment
Apply to areas of discretionary compliance initiatives Slide24
Implications of BE for ethical reasoningwww.kaplanwalker.com
24
The two pre-eminent schools are
Utilitarianism
Deontology
Both are reasoning based
Third school – virtue ethics – seems to strike more deeply
Ethics (and other virtues) based on continuous and lifelong process of pursuing excellence
Thus, may be more suited for BE, which deals with deeply engrained behaviors
However, virtue ethics is also character based – and BE seems to show that character doesn’t count for muchSlide25
A related field: “Moral intuitionism”www.kaplanwalker.com
25
Jonathan
Haidt’s
six core moral dimensions
Care/harm
Fairness/cheating
Loyalty/betrayal
Authority/subversion
Sanctity/degradation
Liberty/oppression
While focus of work is on political morality, research
is useful to show how deep these reach into our moral selves
s
upports values-based C&E effort
Also suggests need to learn how the values can be risk
causingSlide26
References www.kaplanwalker.com
26
Books
Appiah
,
Experiments in Ethics
Ariely
,
The (Honest) Truth About Dishonesty
,
Predictably Irrational
Bazerman & Tenbrunsel,
Blind Spots
Haidt,
The Righteous Mind
Kahneman
,
Thinking Fast and Slow
Thaler
&
Sunstein
,
Nudge
Links to all studies referenced can be found at
www.conflictofinterestblog.com
– in posts found in the tab under “moral
hazard and bias
”