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Markkula Center for Applied Ethics

The Role of Middle Managers in Ethical Culture

Ethics in corporate culture

Ann Skeet

Ann Skeet is the Director of Leadership Ethics at the Markkula Center for Applied Ethics at Santa Clara University. Views expressed here are her own.

This article was originally published as, "What Badly Behaving Employees Really Need from their Bosses" in MarketWatch on October 29, 2017. 

Why don’t people always do the right thing? Behavioral ethics has been making inroads into this question.  

A favorite recent entry to this discussion is from the well-regarded ethicist Linda Trevino of Penn State University, whose research was recapped in a Penn State News article headlined, "Middle managers may turn to unethical behavior to face unrealistic expectations.”

Trevino acknowledges that as a researcher, the middle management role is one that “you just don’t get to very often.” But anyone who has done their time in the ranks of corporate America’s middle management has seen regular examples confirming the study’s finding that managers use tactics to fudge results and pressure subordinates to go along.

"It became clear to middle managers that there was no way their people could meet these goals," Trevino said. "They got really creative because their bonuses are tied to what their people do, or because they didn't want to lose their jobs. Middle managers exploited vulnerabilities they identified in the organization to come up with ways to make it look like their workers were achieving goals when they weren't."

Such research dovetails with scholarly work examining investor behavior and ethics. University of Chicago professor Richard Thaler won this year’s Nobel Prize for Economics, largely for creating the field of behavioral economics, where psychology and economics meet. He debunked the notion that people behave rationally, as economists have contended, when it comes to personal financial decisions. His work is widely seen as akin to telling the emperor he has no clothes.

Similarly, Trevino’s study confirms that people follow perverse incentives — motivations to behave badly. The driver for these flawed incentives is management expectations. In essence, senior management has no clothes. 

Now that we have some research from Trevino and others to confirm what many practitioners have long known, what can be done about it?

It seems elementary to tell senior executives that the people working for them are, well, people. Or that rewards are powerful, systemic motivators for employees. Or that people with little to gain from long-term loyal, responsible behavior will behave in such ways.  

Both corporate boards and financial markets have responded negatively to the mismanagement that has plagued Wells Fargo & Co., Volkswagen, Uber, and the Weinstein Company. How did senior management at these companies allow perverse incentives to thrive? Like the first step in a recovery program, the perverse incentives must be acknowledged. What managers must do first is admit they need help identifying such incentives. Here are three all-too-familiar contributors to poor performance management that contribute to bad outcomes:

1. Senior managers who have never worked in middle management  

It seems obvious: people who come up through the ranks learn something along the way and the most effective ones use that knowledge when they land in the C-suite. At the first company I worked at, before I was permitted to supervise a team of people I followed the entire lifecycle of one customer order and observed all the people involved and all the end-runs that were done around internal systems in the name of customer service.  I was fresh out of college with no line experience. It may not have been a perfect solution to counter my inexperience, but it was effective indoctrination to the systemic problems that perverse incentives cause.

Later, I was hired following business school into more senior, though still squarely middle-management, positions, and the company I worked for took a similar rotational approach to my work assignments during the first few years.  Both companies stand out in my professional experience for fostering ethical cultures and creating useful, rather than perverse, incentives.

2. Over-reliance on people who are not employees in the value-creation chain

The New York Times ran a great story recently on the lives of two janitors — one who started as an employee of a company and another who worked for a company contracted to clean businesses. The first made it to the C-suite. The other is still a janitor.  

As corporate leaders work to resist the rise of activist shareholders and short-term thinking, they should look close to home for solutions.  The use of contract employment as a cost containment has risen, yet is a short-term solution itself. Hidden costs of contracting are easily identified by anyone who has managed contractors — high turnover; low loyalty; shaky intellectual property protection. Does lack of a career path and healthy incentives make up for reduced overtime and health-care costs? Doubtful. Moreover, ethics and compliance officers know that contractors contribute to a disproportionate amount of fraud.

New systems to support members of the “gig economy”, should be pursued to balance these effects. Pay that moves with the cost of living, portable benefits, including healthcare and retirement savings, opportunities for vacation and renewal, and some means of having a voice about work are suggestions made to support a 21st Century social contract with workers, according to Libby Reder, a fellow at the Aspen Institute’s Future of Work Initiative.

3. Fraud that isn’t seen as fraud  

As Trevino’s study demonstrates, many middle-managers participate in deception to secure unfair (and often unlawful gain).  I suspect few of them see this as engaging in fraud, but rather view it as just the way business is done.

Framing decisions as business decisions, in terms of dollars, instead of moral principles of right and wrong, is known as “ethical fading.”  This is what has happened to ethics in business. We do now have ethics and compliance officers and an entire industry of conferences and consultants that support them, but as the profession has grown, ethics have shrunk.  

The work in many such departments is largely compliance-related. People who strive to be ethical corporate leaders must emphasize ethics regularly in their work and corporate culture. That helps people faced with motivations to behave badly for personal gain or job security make ethical decisions.

Leaders also must recognize that changing employees’ motivation is their responsibility. More people working in companies are middle managers than C-suite executives. To secure long-term value creation that markets will reward, middle managers need to be treated as valuable, long-term assets themselves.

Oct 30, 2017

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