Business ethics and behavioral science expert Todd Haugh speaks to FTI Law as part of the Corporate Accountability Leadership Series
As part of our Corporate Accountability Leadership Series, we’ve been speaking to some of the leaders in the field of corporate accountability, finding out what they do and why they do it. As a part of the series, I had the pleasure of interviewing Todd Haugh, Associate Professor of Business Law and Ethics at the Kelley School of Business at Indiana University. Professor Haugh has extensive experience as a white-collar criminal defense attorney, a federal law clerk, and in 2011, he was chosen as one of four Supreme Court Fellows of the Supreme Court of the United States. Prior to joining the Kelley School, Professor Haugh taught at DePaul University College of Law and Chicago-Kent College of Law. His work has appeared in top law and business journals, he is the co-author of two textbooks on white-collar crime and the legal environment of business, and he is regularly quoted in national news publications such as the New York Times, Wall Street Journal, Forbes, Bloomberg News, and USA Today. For business and compliance leaders looking to make positive changes at their organization, this interview is a must read.
Q: Professor Haugh, thank you for joining us. Before we get into your work in the field of corporate accountability, perhaps you could give our readers a sense of how you became an expert in business ethics.
A: Absolutely, and thanks for having me. So first of all, I definitely didn’t consider that I would end up a professor teaching and writing on topics related to corporate accountability when I started out my career. When I started law school, I wanted to be a trial lawyer and so I began my career at a boutique, white-collar criminal defense firm in Chicago. It was a fantastic place to learn. I would be in front of executives who were dealing with corporate crime issues, and these people had very little exposure to the criminal justice system. While it was rewarding helping people through that challenging experience, what really fascinated me was how those executives ended up in that position—the question of why good people do bad things. Many of the people who are caught acting unethically are good people—they’re great parents, great community members, oftentimes great employees. I wanted to understand why those people got caught up in wrongdoing and that question led me into academia.
A very interesting question I’m sure many corporate leaders would like to know more about. But your expertise in ethics has an interesting niche in that you are also an expert in behavioral science as it applies to business ethics. Can you tell us more about that?
Of course. Behavioral compliance is one of my specialties and what that means is really looking at ways to make ethics and compliance programs better and more effective using behavioral science and psychology. Most of my work is aimed at helping companies and compliance leaders think about how we can use a more scientific method to enhance ethics and compliance. And in my opinion that means helping those leaders make more data-driven decisions when it comes to compliance. This includes figuring out how do we test and understand if new policies and procedures are working. It also includes breaking down sometimes vague concepts about values and translating those into actionable and measurable behaviors. When you begin to understand the power of behavioral science, it helps find answers to these questions, because big changes in corporate culture can be achieved by focusing on and changing very small behaviors. And as you aggregate those small changes in ethical behavior over time and across lots of employees, that’s how you build a positive compliance culture as opposed to always looking at compliance as something that needs to be a set of rules ordered from the top down.
This idea of using behavioral science in compliance is something highlighted in Business Ethics Bound. Can you tell us about Business Ethics Bound and what that is?
Of course. Business Ethics Bound is a website that functions as a research portal and library of material related to business ethics and behavioral compliance. I started Business Ethics Bound so people can come together and learn from shared resources and materials around these topics. For example, the site has a Business Ethics Learning Lab that is used by students, lawyers, academics and business professionals. And the project really has its roots in the origins of why I was interested in compliance and ethics in the first place, which is trying to understand this question of why do we have people who are upright members of society, but who sometimes engage in unethical decision making. I believe we can and should get a deeper understanding of that question and Business Ethics Bound is a place where people can find and share resources that help answer that question.
It’s a great resource and I particularly like the “Nudging Ethics” section of the site where you explain how small interventions can influence decision making. On the topic of improving compliance, there is often criticism levelled at western corporations for not doing enough to combat bribery and corruption within their organizations. Do you think that criticism is justified?
That’s a great question. It’s a tough question because companies generally have made strides in what they’re doing and the values they are trying to live by regardless of the jurisdiction they operate in. There is a sense that when you have more regulation and rising standards in a company’s home jurisdiction, generally it filters out from there because it’s difficult for an organization to operate with different values and rules in every jurisdiction. So, it’s important that there is a lifting of ethical standards across the board. I do think there’s a perception that companies aren’t always doing enough and I’m sympathetic to that because what you see in the media and the news is companies repeatedly getting in trouble for ethical violations. However, despite a lot of negative examples of corporate misconduct in the media, I think generally companies are taking ethics and compliance far more seriously now than they were 10 or 15 years ago.
A very fair point. For those organizations who are looking to do more, is there any practical advice you would have for compliance leaders on how to improve business ethics in their organization?
Compliance departments often see their function as being to stop things, stop violations. That’s why compliance is sometimes known as the ‘department of no’. There are behavioral reasons why compliance and the business teams often separate into different camps, but what you want to think about is risk. How can we help someone in the business unit do their job and do it in a way that reduces compliance risk. Both groups have a common goal in helping the business succeed, so it’s important that compliance knows exactly where the business people are coming from. One strategy that I think compliance leaders need to explore is to deeply understand the business units they are overseeing, in particular the pressures and incentives that the company has created for those business units.
Once you understand those incentives, you then have to take the high-level values and principles you want to promote, and translate those into specific behaviors. Importantly, the company’s stated values are not always the values that are the strongest influencers in the company. It could be unstated values that are expressed through incentive plans that we need to be looking at. Once we identify those values, the challenge becomes translating them into specific behaviors that we want to encourage or discourage.
Another issue to be mindful of is that people are unaware of the influences on their own decision making which is why it’s so important for compliance personnel to look beyond what people say they are affected by and measure behavior and collect data. Compliance personnel are often focused on high level values and business people often just want to be told exactly what they can and cannot do, which is why sometimes we see a disconnect between those two groups. The way to bridge that gap is to find the specific behaviors that we want to encourage and discourage, and then focus on doing exactly that.
Yet many times in compliance we treat ethics in terms of making rules, training people on the rules and expecting people to follow them just because they’ve been exposed to them. Compliance has to be a lot more grounded in behavior. It has to be timelier. It has to give people incentives that are aligned with their lives. For example, things like deferred compensation can have a lot of impact because when a person joins an organization knowing their compensation is deferred, the company is signaling and the employee is opting into an understanding that their compensation is contingent on them following the rules for quite a long time. That to me is a more behaviorally cognizant way of thinking about an incentive as opposed to just assuming everyone will be a rational actor and follow the rules.
That’s a fantastic point about assuming that people will be rational actors, because often people who make unethical decisions have found a way to rationalize it.
Yes, there is a quote that says to have an ethical decision you just need time and the lack of rationalizations. To me that is spot on because a lot of my work draws from criminological theory which demonstrates that rationalizations are the linchpin of ethical violations in business and white-collar crime. It’s an instinct that’s been around for thousands of years, which is that we want to get what’s best for us, but we also want to be seen as someone who’s ethical. Rationalizations are the bridge that allows us those two things to operate at the same time and potentially engage in unethical behavior that benefits us.
For our final question, we mentioned earlier that there are plenty examples of companies who have fallen short in corporate accountability, but have you encountered a company or organization that was setting a particularly good example in terms of their corporate accountability or compliance program?
I’ll avoid talking about specific companies, but I can address some traits of companies who I believe are taking the right approach. But before I get to that, I’ll admit I get a little frustrated with people’s focus on the bad actor when it comes to ethics and compliance. If you think about the total number of transactions that occur in a day across the world, it would most likely be in the trillions. I would estimate that 99.99% of those transactions are done in an ethical way without any problem. Even though there’s wrongdoing and we should be cognizant of it and do our best to stop it, most of the time companies actually do a pretty darn good job from an ethical standpoint.
So having said that, the companies that are thinking about compliance in the right way follow similar steps. They are talking about values and ethics and compliance all the time so that it’s baked into their day-to-day. It’s not a yearly speech from the CEO, it’s something that they really have embedded into the vernacular of their company. The other thing companies who are taking the right approach are doing is they’ve done the work of translating their high-level values into specific behaviors. They get a lot more specific when it comes to compliance than just generic value statements that we often see. The companies who are doing it right are able to articulate the behaviors they want to see in granular form. Another thing these companies are doing is measuring those behaviors and rewarding the behavior they want to encourage. That can be through compensation but it could also include performance evaluations or professional progression in the organization into a leadership position.
And then the final one, which is overlooked a lot, is being accountable for misconduct. Every large organization with enough employees is going to have an ethical breakdown or violation at some moment. It’s the company’s job to deal with that. To me, strongest companies ethically are ones that talk about and own their ethical failures. They don’t try to hide them, they don’t run from them. They don’t try to cover them up and hope for the best. In fact, they use them to educate new employees and build a culture that says we’re a company who’s going to talk about this stuff. We want people to speak up. We want people to own this because we want to be a good company and we want to deal with whatever problems there are as opposed to pretending it doesn’t happen.
That is fantastic advice and thank you so much for joining us and I’m sure our audience will appreciate your insights on these topics. Are there any way readers can keep up to date with the work you’re doing?