Why unethical practices go unpunished in competitive markets

Video content: https://www.youtube.com/watch?v=5832E8K-4i4

When do business leaders stand up against ethical transgressions in their company and when do they allow others to get away with it? New research by Niek Hoogervorst from Rotterdam School of Management, Erasmus University (RSM) and Pieter Desmet from sister faculty, the Erasmus of School of Law, suggests that managers who believe their company operates in strongly competitive markets might more readily see unethical decisions simply as ‘acceptable business practices’.

In their experiment the researchers asked volunteer participants for opinions about purposefully over-insuring clients, which is clearly unethical behaviour. Half of the participants were made to believe their imaginary insurance firm was operating in a stable market. The other half was told the firm was operating in a highly competitive market. The results show that the last group was more likely to condone unethical behaviour when it was profitable to the company.

Cut-throat competition

The researchers say the study shows a competitive market environment can activate a ‘decision frame’ geared towards practical business solutions, rather than a decision frame that lets people judge decisions based on a moral value. People are able to use both decision frames, says Niek Hoogervorst, but a firm’s market environment triggers which frame becomes dominant. The use of expressions such as ‘targets’, ‘cut-throat competition’ and ‘budget cuts’ can serve as cues about the operating environment for business leaders, indicating that instrumental concerns are more important than moral considerations.

Disciplinary action

The influence of market environments on ethical behaviour goes beyond just flagging something as unethical, the study shows. In strongly competitive markets, employees are also less likely to be disciplined when their ethical transgression results in profit for the company and the following disciplinary action is less severe. This suggests that when competitive pressure is high, unethical behaviour is more likely to be judged by management on its functional or instrumental merits, the researchers say.

Blind spot

The researchers say their findings imply that managers in sectors known to face strong competition, like financial institutions, media, or car manufacturing are probably most likely to unconsciously develop a blind spot and condone unethical behaviour that benefits the company. Imposing stricter regulations and higher fines may help to address this, but would be challenging and expensive for enforcement agencies. Moreover this approach does not do very much to create more awareness about ethics, they say.

To achieve this awareness, the researchers argue that morality should become part of the vocabulary in organisations, for example by training leaders in recognising morality as an important part of business. They also argue that business schools should educate students about the importance of not only focusing on bottom line outcomes, but also on the manner in which these outcomes are obtained.

Video content: https://www.youtube.com/watch?v=LuAXAb6GSuc

The paper: Desmet, P.T.M., Hoogervorst, N. & Dijke, M.H. van (2015). Prophets vs. profits: How market competition influences leaders' disciplining behavior of ethical transgressions is published in The Leadership Quarterly, 26, 1034-1050. 

Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s leading business schools, and ranked among the top three for research. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who carry their innovative mindset into a sustainable future thanks to a first-class range of bachelor, master, MBA, PhD and executive programmes. RSM also has offices in Chengdu, China, and Taipei, Taiwan. www.rsm.nl

For more information on RSM or on this release, please contact Ramses Singeling, Media Officer for RSM, on +31 10 408 2028, or by e-mail at singeling@rsm.nl.

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