Views on improving the integrity of global capital markets
27 July 2017

Role of External Factors in Ethical Behavior: Openness and Enforcement

This post is the last in my series focusing on the paper Why Good People Sometime Do Bad Things: 52 Reflections on Ethics at Work by Muel Kaptein, professor in business ethics at the Rotterdam School of Management of Erasmus University Rotterdam. Kaptein reviews the results of numerous “classic and recent experiments” looking at human behavior and allocates the results under seven factors.

The first post covered the factor clarity, the second covered role-modeling and achievability, and the third covered commitment and transparency. In this post, I will highlight key takeaways from the paper on the following two factors:

  1. Openness to discussion of viewpoints, emotions, dilemmas, and transgressions: The more room people within the organization have to talk about moral issues, the more they do this, and the more they learn from one another.
  2. Enforcement of behavior, such as appreciation or even reward for desirable behavior, sanctioning of undesirable behavior, and the extent to which people learn from mistakes, near misses, incidents, and accidents: The better the enforcement, the more people tend towards what will be rewarded and avoid what will be punished.

 The Closed Door of Conformity

Chapter 44 discusses how conformity is the bane of openness. In a study by Solomon Asch, he found that people are often inclined to go along with a group rather than state what they are actually seeing.

In the study, Asch formed groups of seven people, with each participant comparing two cards. The first card had one line and the second card had three lines. Each person in the group was to state which of the three lines was the same length as the single line on the first card.

The experiment used one test subject and six that were given instructions on what to select. The instructions included giving incorrect responses in rounds 13–24 of the test. Rounds 1–12 were used as the control results. The results of the later rounds showed that the test subjects would conform to the others even when the obvious answer was visible.

Number of Wrong Answers

% of Occurrence

One 75
Six or more 50
All twelve 5

Such conformity may negatively affect the workplace. The experiment included strangers, whereas colleagues often face additional social pressure to fit in. Firms face the challenge of creating a culture that embraces the freedom of expression. Employees value having their unique voices being heard during the decision-making process.

Lending Assistance

The discussion on openness concludes in chapter 46 with research on how larger groups can reduce an individual’s desire to step forward when assistance is needed. Kaptein discusses “pluralist ignorance” that forms when we apply one of three reasons for not acting when a dilemma exists.

  1. In larger groups, there is uncertainty as to one’s responsibility to take actions. People can tell themselves that someone else will intervene.
  2. The social effect occurs when we observe the actions of others and apply that as the situational norm. Thus, no action creates inactions from others.
  3. Concern about condemnation by the group for misreading the situation constrains the desire to intervene.

Whistleblowing regulations and firm hotlines are steps toward overcoming these concerns. Establishing a culture in a firm that acknowledge the responsibility of everyone to act when unethical practices are witnessed or suspected is the end goal. In such environments, employees strive toward communal goals in a safe and open atmosphere of respect.

Watch Your Words

The discussion on enforcement goes beyond simple processes for getting people to follow rules or expectations. In chapter 47, Kaptein presents a study by Robert Kraut in which he researched how individuals responded to requests for charitable donations.

The study began with a door-to-door solicitation for donations to the American Heart Association. Half of those that donated were provided words of appreciation for their generosity beyond a simple thank you. Additionally, half of those that declined to donate were politely admonished for their normally uncharitable practices.

The next week another organization canvased the same neighborhood. Of the households that donated before, those that received the positive encouragement donated again at a rate of 62%, whereas only 47% of the others donated a second time. Of the households that did not donate the week prior, those that received the negative feedback declined once again at a significantly higher rate.

The appreciation shown to employees that is provided on a personal basis can have a lasting positive impact. Firms should ensure that employees understand they are valued, with an emphasis on what is valued.

Downside Considerations

Subsequent chapters introduce considerations for firms as they seek to develop appropriate punishment levels. Studies conducted highlight some negative consequences of specific types of penalties.

In chapter 49, Kaptein present the “deterrence theory,” which states the role of punishment in maintaining the importance of rules and regulations. Although extreme punishments may be viewed as optimal to the organization, they may also lead to a lowering of the normative bar by those enforcing the rules given the severity of the outcome.

Chapter 50, acknowledges that punishments may lead to increases in the undesired behavior. In a study of late pick-ups of children from a childcare center, the introduction of a cash penalty increased the rate of tardy parents. Arriving late became a financial consideration and removed the moral concerns of not upholding ones promise to the center staff.

CFA Institute Assistance

Biases and external factors that can reduce feelings of openness are incorporated as part of the CFA Institute Ethical Decision-Making Framework. This structure for analyzing ethical dilemmas serves as the basis for our regular webinars and an online course. Members and industry professionals can use these resources to enhance their issue-spotting skills.

CFA Institute takes enforcement of its Code of Ethics and Standards of Professional Conduct and candidate polices very seriously. The CFA Institute Professional Conduct Program consists of professional staff and dedicated volunteers to investigate and adjudicate reported violations. Members are encouraged to inform CFA Institute when they suspect misconduct by another member. Additionally, guidance is available for abiding by the Code and Standards through our email-based Ethics Helpdesk.

If you liked this post, consider subscribing to Market Integrity Insights.

Photo Credit: ©Getty Images/Olivier Le Moal

About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, was a director of professional standards for CFA Institute. His responsibilities included providing member guidance in applying the ethics and standards of practice policies, supporting related educational and public awareness activities, and working with the Standards of Practice Council of CFA Institute on its initiatives. He was a co-host of the free, live, interactive webinars used by CFA Institute to promote ethical decision making and global best practices. Previously, Mr. Doggett, as a member of the CFA Institute Financial Reporting Policy Group, represented membership interests regarding reporting and disclosures initiatives, including XBRL. Prior to joining CFA Institute, he worked in the financial information sector with SNL Financial, where he focused on the real estate and energy industries, directing the development and maintenance of a financial data storage system. Mr. Doggett holds a BA in economics from the University of Virginia. He was awarded the CFA charter in 2006 and is a member of CFA Society Virginia.

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.