Why is wrongdoing in and by organizations so common?

By Donald Palmer

Wrongdoing in and by organizations is a common occurrence. Ronald Clement tracked firms listed among the Fortune 100 in 1999 and found that 40% had engaged in misconduct significant enough to be reported in the national media between 2000 and 2005. A less systematic reading of the national media suggests that major instances of organizational wrongdoing have not subsided. In the last few months allegations of significant misconduct have hit Bloomberg LP (client privacy violation), Goldman Sachs (client deception), SAC Capital Advisors (insider trading), and JP Morgan (bribery). Furthermore, these major scandals fail to capture the many less sensational incidents of wrongdoing not reported in the national media. The New York Times article covering the JP Morgan bribery scandal indicated that JPM was at the same time the focus of investigations by at least eight federal agencies, a state regulator, and two foreign nations. It also indicated that since 2010, the SEC had filed 40 bribery cases against other companies and the Justice Department had filed bribery charges against another 60 firms.

Why is wrongdoing in and by organizations so prevalent? The dominant perspective on organizational wrongdoing does not provide a good answer to this question. It views wrongdoing as an abnormal phenomenon. It tends to characterize wrongdoers as extraordinary; as possessing outsized ambitions or bad values (e.g. as being greedy or having a callous disregard for others). It also tends to categorize wrongful behavior as aberrant, as obvious departures from accepted practice. Finally, received theory tends to attribute wrongdoing to a few out of whack structures, most commonly misaligned incentive systems or perverse cultures. If wrongdoers are outliers, if wrongdoing is clearly out of bounds, and if the causes of wrongdoing are few, then wrongdoing should not be so prevalent.

An emerging alternative perspective on wrongdoing offers insight into why wrongdoing is so common: it’s a normal phenomenon. It holds that wrongdoers are typically ordinary, possessing preference structures and values that do not set them apart from the rest of the population. Wrongdoing is often mundane, little different from accepted practice. In a competitive world, employees are forced to operate close to the line separating right from wrong (so as to not surrender competitive advantage). Once one is close, it does not take much to cross it. Finally, the alternative perspective attributes wrongdoing to a wide variety of structures and processes prevalent in organizations and without which organizations could not exist. Specifically, power structures, administrative systems, social influence processes, and technologies are integral to organizational efficiency and effectiveness — and each of these structures or processes can facilitate misconduct in and by organizations.

For example, almost all organizations have administrative systems that help employees figure out how they should react to specific work situations. These systems, which save time and facilitate coordination, include the explicit division of labor into specialized roles, the articulation of rules, and the formulation of standard operating procedures (Perrow 1972). But administrative systems can give rise to wrongdoing.

In the 1970s, Lee Iacocca instituted the “rule of 2000” when launching the Ford Motor Company’s Pinto subcompact car, giving clear direction to the car’s designers about how much it should weigh (no more than 2000 pounds) and cost to manufacture (no more than $2,000). The rule was intended to insure that the firm’s designers created a car that was suited for the market niche it was intended to fill, but it inadvertently led engineers to forego a number of safety measures that could have mitigated a problem that emerged in pre-production tests: the tendency of the car to erupt into flames when struck from behind at relatively low speeds. While these safety measures were relatively inexpensive (one would have entailed installing a rubber bladder in the gas tank at the cost of only about $11), they were sacrificed because they threatened to put the car over the specified $2,000 production cost limit.

More recently, Bloomberg LP instituted a rule stipulating that employees make contact with a client once a quarter to ask how they might serve the client better. The rule, which applied to Bloomberg’s reporters as well as its customer relations staff, was intended to deliver the message that all Bloomberg employees worked for the firm’s clients, regardless of whether their job designation placed them in immediate contact with clients. This rule went hand in hand with a flexible division of labor, manifested in the fact that Bloomberg reporters were trained in the use of the terminals that the firm leased to clients, geared to empower employees to meet a wide range of client needs. These rules made it natural for a reporter to use his training to take note of a client’s recent use of their terminal as a conversation starter in a phone call to solicit feedback from the client on how he might sever them better. The client, however, was aghast that the reporter had access to private information about his use of the terminal, which was contractually protected and if passed on through one of the reporter’s news stories, could compromise his competitive advantage.

If ordinary people can engage in organizational wrongdoing, if wrongful acts are often small deviations from accepted practice, and if the causes of wrongdoing are omnipresent, then it should come as no surprise that organizational wrongdoing is common. This observation holds an important implication for those seeking to curb organizational wrongdoing. Each of us (not just our subordinates, peers, and superiors) is at significant risk of engaging in misconduct. Thus, it is important for each of us to develop a better understanding of the forces that operate on us that can cause us to cross the line separating right from wrong.

Most importantly, MBA curricula should carve out a space in which students can explore this territory in a way that allows them to develop a better understanding of the forces that cause them to engage in misconduct and an appreciation of their susceptibility to those forces. At the present time, MBA curricula only tackle the problem of wrongdoing in and by organizations in the context of ethics courses. Unfortunately, I think these courses lead students to develop the exact opposite sensibility. They lead students to believe that they have elevated their moral character and in so doing become less likely to engage in wrongdoing. Thus, the most basic implication of the normal organizational wrongdoing perspective pertains to the way in which we view ourselves. It suggests that managers would do well to sensitize themselves to the decidedly grey area in which they operate and familiarize themselves with the many forces shaping their navigation of this terrain. If they can do this, they will not eliminate wrongdoing in their organizations, but they will give themselves a fighting chance of staying on the right side of the line.

Donald Palmer is Professor of Organizational Behavior at the Graduate School of Management, University of California, Davis. He is the author of Normal Organizational Wrongdoing: A Critical Analysis of Theories of Misconduct in and by Organizations. He has conducted quantitative empirical studies on corporate strategy, structure, and inter-organizational relations and qualitative studies of organizational wrongdoing.

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Image credit: White collar criminal under arrest. © AlexRaths via iStockphoto.