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The Art of Detecting Unethical Behavior in Time

Many scandalous companies have experienced that honorable employees unintentional have contributed to the misery of controversies or unethical behavior.

U.S. researchers have studied the phenomenon and what companies can do about it. Read how management captures unethical behavior in time.

The phenomenon is repeated in almost every scandal where people in a company have committed fraud or other illegal or unethical behavior: Employees who have unintentionally participated in the scandal, or who have not discovered or stopped it, even if it was part of their job.

In English, one speaks of “bounded ethicality”, which means to delimited ethical behavior: In other words: The people in question have an ethic, but in practice it only works under certain conditions.

As stakeholders’ demands for corporate ethics grow, it is something that management has an interest in managing. There is no point in drawing up fine ethical rules if bad eggs inside or outside the company are capable of short-circuiting the control and averting mechanisms.

Four researchers from the American universities of Harvard and Columbia have studied the phenomenon in more detail and they come up with recommendations on what companies can concretely do to not to fall short on unethical behavior.

Overlooked scams

In the experiment, participants were instructed to act as investment advisors. They were given the choice of recommending one of four investment funds to their clients. Two of the four foundations had historically outperformed the others. In the simplest part of the experiment, 68 percent chose to recommend the fund – called Fortunite – that had performed second best.

It immediately made sense, because this had probably given a slightly lower, but in return stable annual return.

In a slightly more advanced experiment, participants were instructed to also indicate the fund they had the greatest mistrust of. Now there were only 51 percent of those who recommended Fortunite. from a footnote it appeared, among other things, that it had had some trouble with the financial reporting.

In fact, Fortunite was chalked up over Bernard L. Madoff Investment Securities, which in 2008 went down as the world’s largest so-called Ponzi scam so far, disguising new deposits as returns, so of course it could only run and look good as long as it succeeds.

Both in the real world and in the experiment, advisors should have seen the danger signs – in addition to the controversy over the accounts, that the fund consistently overperformed the stock market and that the percentage return was largely the same from year to year, regardless of how the financial markets performed.

In the experiment, the reminder to be careful meant far from everyone opting out of the Fortunite/Madoff Foundation. However, a significant proportion of customers did so.

Translated into the reality of a business, it may be precisely this proportion for whom the reminder of diligence helps that makes the difference so that a scandal is averted in the bud.

The researchers’ conclusion is that it helps to examine processes that otherwise run well, but where there seems to be a need to show critical sense. Based on this, they make five recommendations to the companies:


Ask questions: Studies have shown that people tend to be premature in concluding that they have been given all the relevant information. It can e.g. be the case after reading a prospectus of several hundred pages. But it is a good idea to look for the gaps in the explanations, and then ask them.

Ask into several angles: One question does not necessarily give the right answer, and certainly not if the question is asked to a dishonest person or company. If you ask e.g. a potential subcontractor, if he uses child labor, it will be easy for him to answer no. Elaborating questions can e.g. be how big a part of the employees are full time, how much they can produce in a day and what the labor cost is in relation to the cost of materials.

Assess the credibility of the answers: When an offer is almost too good to be true, it is often because it is not true. Again with the case of child labor: If a low wage is masked through a postulate that the hourly consumption is low, one can research whether it is possible to complete the process in the specified time.

Pay attention to evasive answers: In short, if the subcontractor avoids answering the question of remuneration and employees clearly, and would rather talk about the quality of the service, it is a warning signal.

Set aside more time: Studies have shown that time pressure is one of the factors that can cause people to make strange and dangerous choices. Therefore, the more danger an election situation entails, the more one must pay attention to devoting the necessary time to examining it thoroughly.

Previous Corporate scandals – what investors can do to avoid them
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