Failure and Compliance

The theme of the April edition of the Harvard Business Review is “Failure.” That’s a scary term in the world of compliance. Generally, that means you’ve got government regulators or enforcement personnel sitting in your offices. And they are not happy. Failure and compliance can mean disciplinary action, fines, or jail time.

But you can learn from failures. You can especially learn from others’ failures.

Ethical Breakdowns by Max H. Bazerman and Ann E. Tenbrunsel takes an insightful look at ethical breakdowns and comes up with five barriers to an ethical organization. (Sorry, you need a subscription to read the entire HBR article.)

  • Ill-conceived goals
  • Motivated blindness
  • Indirect blindness
  • Slippery slope
  • Overhauling outcomes

An ill-conceived goal is the classic failure seen in sales targets, revenue projections, and stock price targets. If you give mechanics a sales goal of $147 hour they can very easily lapse into fixing things that were not broken rather than being more efficient. Sears encountered this problem in the 1990s.

The authors lump a few things into the motivated blindness category, but most notably included are conflicts of interest. They use the failure of rating agencies during the financial collapse as one example. Since the rating agencies are paid by the issuer instead of the buyer of securities, they have a misalignment of motivation. They end up serving the one who pays them, leading to lax ratings and competition for business. That means they may have rated something higher than they should have. (That’s a big understatement.)

Indirect blindness is when third parties are involved. What caught my eye was an experiment examining perceptions of an increase in the cost of a pharmaceutical drug. In the first scenario, the drug company raises the price from $3 to $9. In the second scenario, the drug company sells the rights to a smaller company who then increases the price to $15. The first scenario was judged more harshly, even though it resulted in a lesser price.

We’ve all been concerned about the slippery slope. Little lapses lead to a culture of lapses, eventually leading a big failure. The authors present some interesting research showing how this works and that it is a real problem. From a compliance perspective, they focus on auditors and how good accountants can do bad audits.

The final category is the one I found the most intriguing: overvaluing outcomes. The author’s research showed an inclination to judge actions based on outcomes rather than the behavior. One example is a research failure.

In the scenario A, a researcher pulls four subjects back into the results after they were removed for technicalities. However, the researcher thinks their data is appropriate. When adding them back in, the results shift and allows the drug to go to market. Unfortunately, the drug ends up killing six people and is pulled from the shelves.

In scenario B, a researcher makes up four more data points for how he believes subjects are likely to behave. The drug goes to market, becomes profitable and effective.

The participants in the author’s experiment judged the researcher in scenario A much more critically than the researcher in scenario B. The problem is that the person B had the bigger ethical lapse and worse behavior. It’s just that the outcome, largely by luck, was worse in A than B.

They extrapolate the findings to the situation where a manager is overlooking ethical behaviors when outcomes are good and unconsciously helping to undermine the ethical culture of an organization.