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Why Good Leaders Choose to Do Bad Things

The reasons why good people commit business fraud are difficult to understand. Often, leaders who are honest, trustworthy, and generous in one part of their lives commit serious financial crimes in their businesses.  Enron had been one of the most admired companies in the world and a respected corporate citizen in Houston prior to its downfall from executives lying about financial performance. Bernie Madoff was a generous philanthropist before being convicted of operating the largest Ponzi scheme in U.S. history and ruining the lives of many investors in his wealth management business. Wal-Mart executives in Mexico are alleged to have committed bribery in order to grow the company’s business in that country while the corporation has been working hard to create an image of ethical conduct.  

recent NPR broadcast, tells the story of Toby who, although personally committed to honesty, was convicted of bank fraud related to his mortgage business. He had aspired to be ethical and honest in his MP900321197 business dealings until he realized that he was in serious debt. One bad act led to another and employees and business associates (e.g., title companies) were drawn into the crimes because of their trust in Toby. Lying about his income led to lying about loans which accumulated to seven million dollars before his fraud was discovered by the FBI. A surprising aspect of his tale is that other people willingly conspired with him to defraud lenders.

Why do people who are good in one part of their lives do bad things in business? Ann Tenbrunsel, a Notre Dame University psychologist, found that how we frame a decision makes a difference. People thinking about a decision from a business frame will make a different decision than people who are thinking about the decision from an ethical frame. In business, many people have a cognitive blind spot regarding the ethics of their decisions.

Lamar Pierce, of Washington University in St. Louis, and Francesca Gino of Harvard Business School, found that others are drawn into lying and cheating because of their relationships with the people initiating the fraud. They conclude, “Human beings commit fraud because human beings like each other.” Empathy for others makes us want to help them even if the act is illegal. When we consider the abstract consequences of the fraud in comparison to the needs of the person in front of us, we choose the person we like and trust. This ethical dilemma can be seen in many kinds of interdependent business relationships, such as: long-term auditor contracts; board members and the CEO they hired; lawyers and their clients; consultants and their clients; and employees and their managers.

I’m not excusing unethical and corrupt business practices. I’m just trying to understand why some leaders choose to do bad things in business when they wouldn’t do those things in other parts of their lives and why others choose to be complicit in those fraudulent actions. I’m also trying to understand what we need to do to ensure that corporate leaders apply an ethical frame to their decision-making.