“The Epic Ethical Failure” – an interview with Guido Palazzo

Guido Palazzo is a professor of business ethics at the University of Lausanne in Switzerland. His research analyzes the conditions and causes of corporate scandal. With his colleague Ulrich Hoffrage, he is currently finalizing a book on ethical failures in organizations. Each scandal comes with thousands of pages of court documents, whistle blower reports, articles, and reports of investigative journalists. Sifting through all these documents and speaking with people involved in the scandals as victims, perpetrators or bystanders, Palazzo and Hoffrage found a disturbing, repeating pattern that explains moral failure in organizations. As we await what promises to be a seminal book in the field of business ethics, we conducted this interview.

You’re writing about Epic Ethical Failures (EFF). What is an EEF and why does it seem like there are so many?

Every day we find another big corporate scandal in the news. Companies such as Arthur Andersen, Enron, Theranos, FTX or Lehman Brothers have collapsed under the weight of their moral failure and do not exist anymore. Others such as Wells Fargo, Boeing or Volkswagen have paid billions in fines and struggled for years to get back on track. Scandals are usually narrated in the news like Hollywood movies: There are villains and heroes. The villains are often once celebrated leaders (the Economist called the former CEO of Enron the “Messiah” and Elizabeth Holmes was “the next Steve Jobs”). Somehow, they moved to the dark side and are stopped by the heroes – the (very few) employees who stand up against them and blow the whistle. Netflix is full of such versions of recent scandals.

The analysis is always very simple: The big doping scandal at the Tour de France? It happened because of the unscrupulous cyclist Lance Armstrong who would have done anything to win. Volkswagen and Theranos? Things went wrong because of the terror regime, CEOs Elizabeth Holmes and Martin Winterkorn respectively created inside the companies. And Purdue Pharma, the company that created the biggest man-made epidemic in recent history? Explained by the greed of the Sackler family. Wells Fargo, the biggest American retail bank? Morally crashed because of the cold and cruel leadership of John Stumpf who wanted that big bonus. Of course, there is some truth in all this. There have been toxic people at the top of all these organizations.

And yet, we will never understand any scandals if we just zoom into the character deficiencies of their evil leaders. Virtually all professional cyclists in the era of Armstrong used drugs to enhance their performance. About 100.000 (!) salespeople at Wells Fargo committed fraud. Thousands of salespeople, doctors and strategy consultants kept the opioid business going at Purdue and dozens of engineers at Volkswagen and Theranos engaged in bending reality towards the expectations of their CEOs. In virtually all big scandals, many people are involved actively or as bystanders. Most of them are normal people, good people, people with the best intentions. People like the readers of this interview.

So it’s not about just individual lapses, but institutional failure. What are the causes of this?

Contexts can be stronger than reason, stronger than ethics and good intentions. Inside organizations, powerful psychological dynamics can unfold slowly and distort perceptions of decision makers to the point that good people will do bad things and not even realize that what they do is wrong. Many years ago, my colleagues Ulrich Hoffrage, Franciska Krings and I wrote a paper with the title “Ethical Blindness”. We argue that under certain circumstances, the ethical awareness of decision makers can simply fade away. They do not see the ethical or legal dimension of their decision anymore and become, what we call, ethically blind. Very often, managers who get arrested for their illegal decisions are shocked by their own behavior and wonder, how they could ever end up doing those things that were so alien to how they feel inside. And yet, they did it and while they were doing it, they could not see it. My own approach to the understanding of epic moral failure is therefore focused on the institutional conditions under which such distortions can occur.

Can you talk about some of these institutions – are certain industries likely to be more shady?

While we see more scandals happening in some industries such as banking or pharma/med tech, no industry is safe. In fact, you find the same problems in UN organizations, NGOs, governmental organizations. Think about the Abu Ghraib torture scandal, the Oxfam child abuse case, doping in professional cycling or the famous Karolinska hospital scandal. It’s everywhere and the pattern that my colleague Ulrich Hoffrage and I found holds across all kind of organizations. We call it the DARK PATTERN and currently are about to finalize a book with the same title, in which we examine ten of the biggest scandals of the last two decades along this pattern.

What are the patterns you are noticing that these failures have in common?  Can you talk about one or two of them?  

We differentiate between nine elements of the DARK PATTERN. Just to illustrate some elements:

Corrupting goals: Too ambitiously stretched, very narrow and highly incentivized goals will shape the appetite for risk taking, blind actors for particular aspects of their situation, and push them beyond the moral and legal limits.

Destructive incentives. Too narrow incentives create a tunnel vision of reality and if they are embedded in a system of forced distribution or stack ranking models that categorize employees in high and low performers (with the latter often being fired), they create a Darwinist struggle for survival.

Ambiguous rules: Employees know they must follow the rules of the game but at the same time they know they have to achieve their sales quota. What if they cannot do both and must make a decision? In such a situation, it is not clear what the real rules are. People will try to find out which rule violation is punished, tolerated, or even rewarded. And that will become the rule they follow.

Perceived unfairness: If people feel they have been treated unfairly, they may show various reactions, from negative feelings, subtle obstructive behavior in the grey zone, up to extreme and criminal forms of behavior. Paradoxically, when they perceive their situation as unfair, people find moral reasons to engage in illegal practices.

What is the role of the CEO in setting the stage for ethical failures?  How can they be prevented?

In pretty much all the big scandals, organizations struggle with leaders that create a toxic work environment and a climate of fear. Martin Winterkorn at Volkwagen was a yeller who regularly humiliated his people in front of everyone. Lance Armstrong called his colleagues “fuckers” and threatened them if they did not perform. Didier Lombard, the CEO of France Telecom who pressured his managers to force employees out of the company famously announced that he did not care whether they would leave through the door or through the window. More than a hundred of them committed suicide in three years.

Psychopaths are usually very good in making a career. After all, they know how to elbow their colleagues out of the way without any empathy. Once they become leaders, they promote unethical behavior in their subordinates as well, be it through direct order, by serving as a role model, or by using a carrots-and-stick approach, that is, by creating pressure, coupled with rewards and punishments.

What is the role of government?

One of the key elements of those scandals is weak or absent regulation. It is a key element of neoliberal ideology to claim that markets regulate themselves and governments must be weak. We see weak and absent regulation for example in the Boeing scandal – the crash of the two 737Max. The FAA considered Boeing a “client” and more than 90% of the new airplane was certified by Boeing engineers working on the company’s payroll at the regulator. Dieselgate is also a story of a company certifying itself and then you have Purdue Pharma, the company that single handedly created the biggest man-made epidemic with almost one million victims so far.

The person on the side of the regulators who allowed the company to claim that their painkiller was not addictive would afterwards start to work for the company. The revolving door problem. Overall, A too rigid belief in the neoliberal creed can morally distort the decisions of managers in organizations. When leaders are convinced that they are “doing God’s work” and all moral problems will be solved by markets, bad things might follow.

Do you view the climate crisis as an ethical failure?  A market failure?  Are markets unethical?

It is a failure on all levels of society, but for me it is mainly a market failure.

We assume that the ideology that led us into the ecological mess we are in – shareholder value maximization – can also lead us out of it.

We assume that we solve the problem with the same methods we used to create it. I find this amazingly naïve. Betting on ESG and companies like Blackrock, we try to leverage the power of the market. It doesn’t work. And the actors who need to be on board, the fossil fuel industry, obviously has no interest in any ecological transformation. Why would they? They can no longer deny, so they start to delay. The new strategy. And they use the same manipulative tactics, we know from tobacco industry: shift the blame on the consumer. Give them a CO2 footprint calculator and let them feel guilty (it was invented by BP).

If you look inside those companies, you probably find the same DARK PATTERN that is behind any other scandal. Our learning curve is amazingly flat.

Wow. Thanks so much for that!

Follow Guido Palazzo on LinkedIn, and his website.

INTERVIEW by Christian Sarkar