The Hidden Costs of Organizational Dishonesty

brief scanning of The Wall Street Journal — or, tellingly, almost any other newspaper in the country — reveals the alarming prevalence and far-reaching impact of organizational dishonesty. Reports of malfeasance or criminal conduct in corporate governance, accounting practices, regulatory evasions, securities transactions, advertising misrepresentations and so on have become all too commonplace. It’s no wonder that business schools across the country have been rushing to design and introduce courses that emphasize a subject traditionally given short shrift: ethics. 1 This is not to say that, as a group, business people are inherently unethical. All other things being equal, most executives would unhesitatingly choose the high road. Except in hypothetical situations, however, all other things are never equal. In any organization, people are motivated by myriad factors — sales quotas, corporate economic health and survival, competitive concerns, career advancement and so forth — which can easily override their moral compasses. Indeed, in spite of the assortment of arguments contending that “ethics pays,” 2 the number and extent of the recent transgressions suggest that a significant portion of the business world has yet to be persuaded. Of course, companies should always adhere to universal ethical principles because, after all, that’s the right thing to do. But one additional reason for businesses to engage in honest practices is that the consequences of failing to do so may be much more harmful to the bottom line than has traditionally been recognized. Companies that deploy dishonest tactics typically do so as a means of increasing their short-term profits, and in that regard they might succeed. But the misconduct is likely to fuel a set of social psychological processes with the potential for ruinous fiscal outcomes that can easily outweigh any short-term gains. In other words, organizations that behave unethically will find themselves heading down a slippery and dangerous fiscal path. In this article we chart that path, providing details of the extent of the damage and its insidious nature. Our formulation begins with a fundamental assertion: An organization that regularly teaches, encourages, condones or allows the use of dishonest tactics in its external dealings (that is, toward customers, clients, stockholders, suppliers, distributors, regulators and so on) will experience a set of internal consequences. These outcomes, which we call malignan