Enron. Lehman Brothers. WorldCom. These were all huge organisations that collapsed, seemingly overnight, due to unethical – even illegal – business practices. How does that happen? How can a legitimately successful organisation turn into a criminal one? Contrary to how it might seem it doesn’t happen overnight, it happens little by little. One choice at a time.

What is ethical fading?

When we think of unethical decisions, we may imagine them to be willful acts of self-interest or sabotage. But in reality, it’s more complicated. A lot of the time, when we make unethical decisions, we don’t even realise we are doing it.

Ethical fading happens when we ignore the ethical aspects of a decision, because we fail to see the decision as one pertaining to ethics. It is often the result of unconscious bias–causing an ethical blind spot. The benefits to be gained from an unethical decision eclipse its implications. People tend to believe they will act in line with their values. When they don’t, the mind is adept at convincing them that they actually have by rationalising their own actions.

So where does business come into it?

Ethical fading occurs within organisations when business decisions are made without considering that they have an ethical dimension. As Leonard Wong, co-author of Lying to Ourselves: Dishonesty in the Army Profession puts it: “It’s basically setting aside the ethical dilemma because you just say, well, there’s no ethics involved in this. This is just a decision. It’s a business decision.”

Some business cultures make ethical fading more likely. The biggest culprits are a focus on short-term gains and a high level of time pressure. “When we are busy focused on common organizational goals, like quarterly earnings or sales quotas, the ethical implications of important decisions can fade from our minds,” explain Max H. Bazerman and Ann E. Tenbrunsel, authors of Blind Spots: Why We Fail to Do What’s Right and What to Do about It.

“It’s basically setting aside the ethical dilemma because you just say, well, there’s no ethics involved in this. This is just a decision. It’s a business decision.”

Leonard Wong

Predictably, high pressure environments where stress is rife don’t help either. Forbes reports that stress at a leadership level can nudge decision-makers towards detrimental behaviour, leading individuals to “cut corners on quality control, cover up work-incidents, abuse/lie about sick days, and deceive customers.”

Any examples? 

In December 2001, one of the biggest energy, commodities and services company in the US filed for bankruptcy. The corporation held more than $60 million in assets, making it the biggest bankruptcy filings in US history (and the biggest until the WorldCom scandal the following year). It’s collapse also resulted in the dissolution of Arthur Andersen, one the biggest accounting and auditing firms in the world. 

How did it happen? Facing increased competition and pressure from shareholders, a culture of arrogance and poor ethical decision making led to a mark-to-market accounting method, faked profits, hidden losses and deception of shareholders, employees and the public. 

The following year, an internal audit of WorldCom’s operations uncovered $3.8 billion of fraud. For three years, CEO Bernard Ebbers led senior executives in a  scheme to inflate the earnings of the company. Eventually, WorldCom was shown to have claimed $11 billion in false profits. Unethical leadership and a lack of transparency in communication and reporting were blamed for the executives’ descent into fraudulent behaviour. 

Both scandals contributed towards the introduction of new legislation and regulations for public companies – a recognition of the dangers that ethical fading can pose. They also led to an increase in support for whistleblowers. Jordan Thomas, a former US Securities and Exchange Commission lawyer helped to draft a new regulation protecting and incentivising those who don’t engage in the rationalisation of ethical fading: “It took 10 years for law enforcement to understand that the best way to fight financial fraud is to incentivise and protect whistleblowers.” 

How can organisations prevent ethical fading?

• Increase awareness. As with all manifestations of unconscious bias, the first step in overcoming it is accepting it exists.
• Slow down. To avoid falling trap to ethical blindspots, leaders should take time to avoid rash decisions, and make sure to contemplate the potential ethical dimensions.
• Advocate a long-term perspective. When an organisation’s sustainability and long-term reputation are prioritized over short-term gains, individuals are less likely to cut corners and ethical lapses are less likely to happen.
• Highlight ethical behaviour. Research shows that highlighting ethical behaviour within a company is more effective than the threat of sanctions. Indeed, a study in 1999 revealed that individuals actually cheated more, not less, when faced with a sanction, suggesting that framing a decision as an ethical dilemma increases compliance. 
• Make ethics obvious. Professor Ariely and et al. formulated a three-principle framework for defining clear boundaries between right and wrong: reminding, visibility, and self-engagement (REVISE). This includes “subtle cues that increase the salience of morality and decrease people’s ability to justify dishonesty”, as well as restricting anonymity, increasing peer monitoring and motivating individuals to maintain a positive self-image.

Further Reading

• Ethical Fading: The Role of Self-Deception in Unethical Behavior – Ann E. Tenbrunsel and David M. Messick
• Three Principles to REVISE People’s Unethical Behavior – Shahar Ayal, Francesca Gino, Rachel Barkan, and Dan Ariely
• Work From Anywhere Trend Intensifying Ethics, And Compliance Issues – Forbes 
• Home Evasion – The Beautiful Truth
• Blind Spots – Ann E. Tenbrunsel and Max H. Bazerman (2012)
• How do you stop corporate fraud? – The Economist