Walters

Directors can play an active role in ensuring the companies they govern maintain the highest ethical standards, writes Kath Walters.

The new science of behavioural ethics

Australia is justly proud of its reputation as one of the least corrupt nations in the world. But our shiny reputation took a hit recently. Australia slipped down a notch in the global Corruption Perception Index, published recently by the anti-corruption body, Transparency International.

It’s the second time in two years that our ranking has fallen. In 2015, Australia ranked number 13, with a score of 79 out of a possible 100. In 2014, we fell out of the top 10 for the first time to rank at number 11, with a score of 80.

That result is all the more disappointing in light of how much we know today about influencing human behaviour. Once, most leaders believed ethics and values were a moral matter. Good people choose to do what is right; bad people choose the wrong path.

But that is not true. Behavioural science has proved we can create a culture in which ethical behaviour flourishes, and criminal behaviour withers, and vice versa.

This has helped spawn a new field of social scientific research known as behavioural ethics. The field seeks to understand how people actually behave when confronted with ethical dilemmas and why we make the decisions we do.

This new science offers substance and structure to a dilemma that has long confronted company directors: how to protect the integrity, and therefore the value, of the brands they are entrusted to govern.

Fast and slow thinking

Nobel Prize-winning psychologist and author Daniel Kahneman introduced the world to the idea of fast (system one) and slow (system two) thinking. Behavioural ethicists believe we make our ethical decisions intuitively with our fast, system-one thinking, and then seek to rationalise our decision with our slow, system-two thinking. The idea of moral dumbfounding – sticking to our moral position even when it is not defensible – supports Kahneman’s proposition. For example, if a leader publicly singles out one person for a mistake made within a company, we might feel it is morally repugnant – even if it’s factually correct.

Organisational dynamics

Attracta Lagan is a business ethics and workplace values consultant who has studied the impact of organisational culture on our morals. She writes: “Behavioural ethicists argue unethical decisions at work have less to do with the character of individual employees and more to do with the context in which employees find themselves when making their decisions. Their research suggests contexts can be stronger than reason, values and good intentions.”

Corporate culture provides a frame through which we see our behaviour; we rationalise behaviour that fits within the frame, even if it is unethical.

We also screen out behaviour that does not fit such as whistleblowing, even if it is ethically correct. It’s called a blind spot. Business ethicists Max Bazerman and Ann Tenbrunsel, in their book Blind Spots: Why We Fail to Do What’s Right and What to Do about It, note we overestimate our ability to do what is right and act unethically, without meaning to.

The director’s role

Every decision in business has an ethical dimension.

In America, regulators introduced tough new corporate laws following the global financial crisis. Their jails hold plenty of CEOs and directors who thought they could get away with breaking the law. Corporate Australia is lucky. It fought long and hard to maintain self-regulation, and won. The corporate law reforms (CLERP 9), enacted in July 2004, maintained this principle.

But it’s a privilege and not a right. From that perspective, the fall of Australia’s standing in the Corruption Perception Index is a red flag.

Our fall in standing is a failure of leadership. At a government level, cutting the budgets of regulatory bodies – the Australian Securities and Investments Commission, the Australian Taxation Office and the Australian Prudential Regulatory Authority – sends a message that we don’t care about corruption.

The good news for directors is that change is possible. American companies are appointing ethics officers. Australian directors could learn from this example.