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Ethics

Don’t Overemphasize Hitting Financial Targets

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Research shows placing too much focus on hitting financial targets can have negative effects on employee morale. It can even lead to unethical behavior, such as cutting corners or falsifying data, which can ultimately harm the company’s reputation and financial performance.

When conversations constantly revolve around financial metrics, employees may feel like they’re reduced to mere cogs in the company machine, solely responsible for driving up profits to satisfy shareholders. Instead, foster a connection between employees and the organization’s purpose. Emphasize the intrinsic value of their work and remind them that it’s not just about monetary rewards. Personal growth, meaningful experiences, and recognition are equally important.

Let one message resonate throughout the organization: Your work holds significance beyond financial targets.

Wondering what to read next?

  1. Numbers Games: Summary of The Tyranny of Metrics by Jerry Muller
  2. People Do What You Inspect, Not What You Expect
  3. When Work Becomes a Metric, Metrics Risk Becoming the Work: A Case Study of the Stakhanovite Movement
  4. Be Careful What You Count: The Perils of Measuring the Wrong Thing
  5. Why Incentives Backfire and How to Make Them Work: Summary of Uri Gneezy’s Mixed Signals

The Enron Scandal: A Lesson on Motivated Blindness

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The fallout from the Enron fiasco had far-reaching effects on the economy and the public’s trust in corporations. It serves as a powerful lesson in the dangers of motivated blindness—when individuals have a personal stake in unethical actions, they often look the other way or find ways to rationalize their behavior.

The folks at Arthur Andersen, serving as Enron’s external auditor, found themselves in a precarious situation. On the one hand, they were supposed to ensure financial integrity, but on the other hand, they acted as consultants, aiding Enron in manipulating financial transactions to deceive investors and manipulate earnings. Enron generously poured hefty fees their way, with auditing fees exceeding $25 million and consulting fees reaching $27 million in 2001. So, why would they want to put an end to this lucrative gravy train? To complicate matters further, many auditors from Andersen were eagerly vying for coveted positions at Enron, just like their fortunate colleagues.

To combat motivated blindness, it’s crucial to reflect on our biases, hold ourselves accountable, and actively seek out diverse perspectives to gain a broader understanding of any given issue. Max Bazerman, a professor at Harvard Business School and author of The Power of Noticing: What the Best Leaders See (2014,) asserts that individuals can overcome their inclination to overlook vital clues by fostering a “noticing mindset.” This involves consistently asking oneself and others, both within and outside the organization, the question: “Which critical threats and challenges might we be neglecting?”

Wondering what to read next?

  1. Power Inspires Hypocrisy
  2. Why Groups Cheat: Complicity and Collusion
  3. The Poolguard Effect: A Little Power, A Big Ego!
  4. Power Corrupts, and Power Attracts the Corruptible
  5. Virtue Deferred: Marcial Maciel, The Catholic Church, and How Institutions Learn to Look Away

Beware of the Leadership Trap: Losing Moral Bearings

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Some leaders fall into a dangerous trap, succumbing to temptations along their paths. These leaders deviate from their ethical responsibilities and shield themselves from fair criticism, considering themselves exempt from the rules. Such behavior can stem from an inflated ego or narcissism, a lack of self-awareness, a fear of vulnerability, or an intense emotional attachment to their ideas or beliefs.

These leaders often operate within a culture of flattery, where disagreement is seen as disloyalty, and no one dares to challenge or bring attention to issues within the organization. The leader’s circle of enablers grows as time passes, making honest dialogue impossible.

Idea for Impact: Steer clear of these pitfalls by establishing a clear “inner compass”—your values and priorities that revolve around serving a purpose. Live by these values, advocate for them, and ensure they are deeply ingrained in the fabric of your team.

Wondering what to read next?

  1. The Poolguard Effect: A Little Power, A Big Ego!
  2. Power Corrupts, and Power Attracts the Corruptible
  3. Power Inspires Hypocrisy
  4. Why Groups Cheat: Complicity and Collusion
  5. Ethics Lessons From Akira Kurosawa’s ‘High and Low’

Why Incentives Backfire and How to Make Them Work: Summary of Uri Gneezy’s Mixed Signals

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Misguided Motivations: The Folly of Incentives in the Great Hanoi Rat Massacre

In the late 18th century, Governor Paul Doumer of the French colonial government had a vision to modernize Hanoi. His plan included the introduction of toilets, which unfortunately attracted disease-spreading rats. As time passed, the rat population became a growing concern. In a desperate attempt to control the vermin invasion, the government launched a program that rewarded citizens for every rat tail they brought in, hoping to reduce the rat numbers. However, this seemingly brilliant solution turned into a catastrophic event.

Unbeknownst to the government, the citizens of Hanoi discovered a loophole in the system. Instead of exterminating the rats, they started amputating the rats’ tails without killing them. This allowed the rats to continue to breed more rats with tails, as these would become a future source of income.

The situation quickly descended into utter madness. Driven by insatiable greed, some individuals established rat-breeding farms to maximize their rewards, while others resorted to importing rat tails from distant regions. The unintended consequence of this perverse incentive scheme was a massive explosion in the rat population, exacerbating the very problem it was meant to solve.

This ill-fated event, known as the “Great Hanoi Rat Massacre,” is a notorious example of the dangers of perverse incentives.

The Unintended Consequences of Incentive-driven Actions

'Uri Gneezy' by Mixed Signals (ISBN 0300255535) In his insightful book, Mixed Signals: How Incentives Really Work (2023,) Uri Gneezy, a distinguished behavioral economist from the University of California-San Diego, masterfully presents compelling examples that highlight the profound disparity between the intended behaviors incentives aim to promote and the unforeseen behaviors they unintentionally trigger. Gneezy’s astute analysis illuminates the perplexing nature of these gaps, offering invaluable insights into the actual workings of incentive systems. Another example of this point is the situation with many doctors operating under Fee for Service (FFS) payment models. In these models, doctors are incentivized to perform additional tests and procedures to increase their own payment. As a result, their focus may shift from promoting overall health to simply recommending more procedures.

To avoid sending confusing messages through incentives, Gneezy emphasizes the importance of carefully considering such initiatives’ potential outcomes and unintended effects. Gneezy strongly advocates for the use of prototype incentive programs.

Consider the case of the Wells Fargo cross-selling scandal, which was caused by aggressive sales practices. To increase the number of accounts held by existing customers, the company decided to motivate bank employees to promote additional services, like credit cards and savings accounts, to customers with checking accounts. However, due to a lack of proper oversight, employees resorted to fraudulent practices by creating over three million unauthorized credit card accounts without customers’ knowledge or consent. These unethical practices harmed customers who ended up with unwanted and unnecessary accounts, violated their trust, and exposed them to fees and penalties. In order to prevent such a scandal, Wells Fargo could have implemented prototype techniques and established an auditing system to verify the legitimacy of accounts randomly.

The Irony of Fines as Deterrents in Action

Gneezy brilliantly dissects the flawed notion that imposing fines is a universal remedy. He highlights how fines, often intended as deterrents, can backfire by diverting people’s focus from deterring behavior to merely avoiding punishment. For instance, when drivers are warned about the perils of texting while driving, they may genuinely reflect on the risks involved and the value of their own lives. However, the introduction of a $500 fine shifts their mindset. Now, their attention shifts from personal safety to the likelihood of encountering law enforcement. If they perceive a lack of police presence, the thought process changes to “No police around, no risk of getting caught—time to text!” In this way, the imposition of fines skews individuals’ attention from contemplating potential hazards to the probability of facing the consequences.

Recommendation: Fast-read Mixed Signals: How Incentives Really Work (2023.) Greezly’s work serves as a resounding reminder that designing an incentive system to encourage desired behavior while minimizing unintended consequences is no easy feat. Greezly’s advice on balancing multiple metrics to avoid the pitfalls of fixating on a single metric at the expense of others and the importance of regularly reviewing and updating the system while keeping a vigilant eye on unintended consequences is undeniably accurate.

Wondering what to read next?

  1. When Work Becomes a Metric, Metrics Risk Becoming the Work: A Case Study of the Stakhanovite Movement
  2. Be Careful What You Count: The Perils of Measuring the Wrong Thing
  3. Numbers Games: Summary of The Tyranny of Metrics by Jerry Muller
  4. Ethics Lessons From Akira Kurosawa’s ‘High and Low’
  5. The Barnum Effect and the Appeal of Vagueness

Numbers Games: Summary of The Tyranny of Metrics by Jerry Muller

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'The Tyranny of Metrics' by Jerry Z. Muller (ISBN 0691174954) The Tyranny of Metrics (2018) by Jerry Muller, a historian at The Catholic University of America, is a poignant reflection on our society’s obsession with measurement. Muller’s eloquent arguments shed light on the dual nature of metrics—they can be valuable diagnostic tools, yet their misuse as the sole measure of success and tied to rewards poses significant problems. Drawing upon many empirical examples across various fields, Muller skillfully reveals the inherent pitfalls of our reliance on metrics.

Consider the initial allure of measuring and publicly disclosing the success rates of surgeons performing specific procedures. At first glance, this transparency appears beneficial, empowering patients to make informed decisions. However, a disheartening trend emerged once these performance scorecards entered the public domain. Surgeons, fearing a decline in their reported success rates, started avoiding the most complex cases. Shockingly, even cardiac surgeons refused to operate on critically ill patients, jeopardizing lives to protect their perceived success.

Muller further elucidates the case of hospital emergency rooms, where the pursuit of improving the metric for timely patient admission became paramount. In a tragic turn of events, the desire for statistical accolades overshadowed the urgent needs of the suffering. Ambulances formed a distressing queue outside the facility as the metric was manipulated, leaving genuine care and compassion languishing in the background.

In 2009, when Medicare implemented public reporting and penalties for hospitals with higher-than-average 30-day readmission rates, hospitals resorted to manipulating the metric. They cleverly distorted the numbers by categorizing many readmitted patients as outpatient services, concealing them and evading penalties.

Education, too, falls victim to the obsession with metrics. The relentless focus on using metrics to influence teacher retention or determine school closures has given rise to a phenomenon known as “teaching to the test.” Educators find themselves trapped, compelled to prioritize teaching subjects aligned with standardized exams, such as math and English while neglecting crucial skills like critical reading or crafting extended essays. Pursuing metric-driven success inadvertently sacrifices holistic education on the altar of narrow measurement.

During the Vietnam War, the US Defense Secretary introduced the “body count” metric. This idea, advocated by US Defense Secretary Robert McNamara, suggested that a higher number of enemy casualties indicated greater success and brought the US closer to victory. However, an unintended consequence emerged when the body count became an informal measure for ranking military units and determining promotions. In this dangerous pursuit of numbers, the metric lost touch with reality, often inflated to fulfill the desire for perceived success. Counting bodies became a precarious military objective in and of itself, overshadowing the true essence of the conflict.

Muller’s perspective does not advocate completely disregarding metrics as a management tool. Instead, he emphasizes the importance of utilizing meaningful and comprehensive metrics that contribute to informed decision-making. He distinguishes between measurable aspects and measurements that hold true significance.

To achieve this, Muller discourages starting with the metric itself. Instead of asking, “What metrics should we use?” he suggests a more practical approach: “What are we trying to accomplish?” This approach involves establishing goals and metrics that evaluate achieving desired outcomes and customer satisfaction (effectiveness) while efficiently utilizing available resources.

In a compelling concluding chapter, Muller encapsulates his central thesis with a resounding declaration: “Measurement is not an alternative to judgment; measurement demands judgment.” This statement emphasizes the need to make informed decisions regarding whether to measure, what to measure, how to interpret the significance of measurements, whether to assign rewards or penalties based on results and who should have access to the measurements.

Recommendation: Skim Tyranny of Metrics. This tome serves as an authoritative guide for comprehending the profound influence of numerical indicators on the very foundation of modern society. It should be considered essential reading for anyone seeking to understand why organizations often operate below their full potential.

Wondering what to read next?

  1. When Work Becomes a Metric, Metrics Risk Becoming the Work: A Case Study of the Stakhanovite Movement
  2. Be Careful What You Count: The Perils of Measuring the Wrong Thing
  3. Why Incentives Backfire and How to Make Them Work: Summary of Uri Gneezy’s Mixed Signals
  4. People Do What You Inspect, Not What You Expect
  5. Master the Middle: Where Success Sets Sail

And the Theranos Board Walks Away Scot-Free

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Theranos’s Elizabeth Holmes has finally been sentenced to over 11 years in prison. Too bad our corporate law is too narrow to attribute some criminal liability to the company’s board of directors. Such luminaries as former Secretaries of State George Shultz and Henry Kissinger, Marine Corps General James Mattis, and former Secretary of Defense William Perry, once famously portrayed as “the single most accomplished board in U.S. corporate history,” should be partly culpable for Holmes’s malfeasance.

When Holmes explained away her underlying technology as “a chemistry performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel,” all the board had to do was demand, “Show me.” Determining how a device or service works—exists even—as purported, is the essential obligation of a board member. A truly engaged overseer may have preserved $945 million in investors’ capital and kept a naïve, immoral, and feckless entrepreneur from bullying the press, intimidating her employees, and gambling with the patients’ lives. (Read WSJ reporter John Carreyrou’s excellent chronicle, Bad Blood (2018; my summary.))

The board individually and collectively failed in their responsibilities as trustees of investors’ interests. Undoubtedly drafted as trophy directors to reinforce the company’s standing such as it was, not for any knowledge of blood testing, they now walk away with nothing more than a blot on their illustrated careers.

Wondering what to read next?

  1. Let’s Hope She Gets Thrown in the Pokey
  2. The Dramatic Fall of Theranos & Elizabeth Holmes // Book Summary of John Carreyrou’s ‘Bad Blood’
  3. How FedEx and Fred Smith Made Information the Package
  4. What Virgin’s Richard Branson Teaches: The Entrepreneur as Savior, Stuntman, Spectacle
  5. Elon Musk Insults, Michael O’Leary Sells: Ryanair Knows Cheap-Fare Psychology

Books in Brief: ‘Flying Blind’ and the Crisis at Boeing

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'Boeing Flying Blind' by Peter Robison (ISBN 0385546491) Bloomberg investigative journalist Peter Robison’s thoroughly researched Flying Blind: The 737 MAX Tragedy and the Fall of Boeing (2022) offers noteworthy lessons about corporate responsibility and leadership problem-solving.

In a nutshell, starting in the late 1990s, Boeing shifted from a company run by engineers who emphasized product integrity to one run by MBA-types who prized shareholder value over long-term product planning. Inspired by General Electric’s Jack Welch, the company embraced cost-cutting, outsourcing, financial engineering, union-busting, and co-opting regulators. These miscalculated strategies culminated in the 737 MAX disasters and disgraceful corporate responses.

Recommendation: Read Peter Robison’s Flying Blind, but be wary of the author’s broad-brush political biases, which, I found, sidetracked from the storyline. The internal organizational tensions that led to corporate deception and the fateful consequences of federal regulators’ consigning design approvals to Boeing are particularly interesting.

Key Takeaway: Negligent engineering to minimize costs and adhere to a delivery schedule is a symptom of ethical blight.

Wondering what to read next?

  1. Two Leadership Lessons from United Airlines’ CEO, Oscar Munoz
  2. Tylenol Made a Hero of Johnson & Johnson: A Timeless Crisis Management Case Study
  3. Lessons from the US Big 3 Airlines’ Spat with Middle Eastern Carriers: When You Fight From Weak Ground, You Become the Story
  4. This is Not Responsible Leadership: Boeing’s CEO Blames Predecessor
  5. The Inopportune Case of the Airbus A340 Aircraft: When Tomorrow Left Yesterday Behind

When Anonymity Becomes Cowardice

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A variety of psychological factors contribute to people being nasty online. Rider University psychologist John Suler famously argued that online environments unleash aspects of our personality that we usually keep under guard—a phenomenon he called the online disinhibition effect. With names concealed, there’s no pressure to maintain a public facade. Cyberspace becomes a separate dimension where the usual rules don’t apply. Actions no longer carry consequences. There’s no liability for rudeness and inappropriate behavior.

The disinhibition effect is also called ‘The Gyges Effect,’ after the Ring of Gyges, a mythical invisibility device in Plato’s Republic. The ring grants its owner the power to become invisible at will. Plato considers whether an intelligent person would be just if one did not have to fear any bad reputation for committing injustices.

When Anonymity Becomes Cowardice - The Psychology of Internet Trolls Social media has a way of magnifying some of the worst facets of human nature. By allowing masked identities, as Professor Suler points out, abusers avoid accountability for their conduct and dissociate their online selves from their real-world selves. In real life, combative behavior triggers a victim’s immediate reaction–a change in tone of voice or a counterargument, even aggression. However, these deterrents are missing or delayed in the online world, and social inhibition is removed. Online abusers see their victims as faceless, abstract cutouts with no feelings and undeserving of fairness, compassion, and honesty.

Idea for Impact: Keep away from being nasty online. Awareness and activism are vital to civic duty, but you should seek out actual human beings who know how to converse intelligently on anything they disagree with.

Wondering what to read next?

  1. Ethics Lessons From Akira Kurosawa’s ‘High and Low’
  2. Cancel Culture has a Condescension Problem
  3. Could Limiting Social Media Reduce Your Anxiety About Work?
  4. The “Empty Vessel” Effect: Why Insecurity Speaks the Loudest
  5. Conscience is A Flawed Compass

Why Investors Keep Backing Unprofitable Business Models

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Investors have heaped billions into Q-Commerce—especially the rapid grocery startups—hoping to hook consumers on the convenience of groceries that would turn up immediately, sometimes in minutes.

I’ve never really fathomed how the small-basket orders of low-margin groceries can endlessly compensate for the labor costs and overheads, even after discontinuing the generous referral bonuses, discount codes, and freebies enticing customers. The prospects may evolve if these startups subsist on ever more funding and develop massive businesses with efficiencies from scale. But then they’re right in Amazon’s wheelhouse.

Idea for Impact: Some business models are never created to be profitable, and investors should be wary of encouraging—and funding—loss-making propositions. The lure of backing an initial entrant, capturing market share, and then selling out to a more determined fool isn’t viable! Who needs goods delivered in such a rush for such charges, anyway?

Wondering what to read next?

  1. The Loss Aversion Mental Model: A Case Study on Why People Think Spirit is a Horrible Airline
  2. Consumer Power Is Shifting and Consumer Packaged Goods Companies Are Struggling
  3. Elon Musk Insults, Michael O’Leary Sells: Ryanair Knows Cheap-Fare Psychology
  4. Your Product May Be Excellent, But Is There A Market For It?
  5. Offering a Chipotle Burrito at a Dollar is Not a Bargain but a Betrayal of Dignity

Why Groups Cheat: Complicity and Collusion

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News broke out that Ernst & Young revealed this week that its employees cheated on ethics exams. The accounting behemoth is being fined $100 million. That’s one of the biggest fines ever levied against an audit firm.

It’s absurd that specialists responsible for keeping things straight and steering moral enterprise cheated on ethics exams! Ernst & Young’s leadership evidently disregarded the internal reports about the cheating. Perhaps because when people identify so strongly with a group, they’re much more swayed to view the group’s actions positively and accept that group’s norms.

Research by Vanderbilt University’s Jessica Kennedy and colleagues suggests that high-flying people are sometimes more inclined than low-ranking people to adopt what their group recommends, even when it represents an ethics breach. Power sometimes provokes people to so strongly want to identify with their group that they’re willing to overlook when the group’s collective actions cross an ethical line. This affinity is, therefore, urged to sustain transgression instead of stopping its spread, especially when the odds of being caught and punished are slim.

Wondering what to read next?

  1. Power Corrupts, and Power Attracts the Corruptible
  2. The Poolguard Effect: A Little Power, A Big Ego!
  3. Shrewd Leaders Sometimes Take Liberties with the Truth to Reach Righteous Goals
  4. The Enron Scandal: A Lesson on Motivated Blindness
  5. Power Inspires Hypocrisy