Business As Usual: How Good Organizations Go Bad

FAYETTEVILLE, Ark. — Bankruptcy, scandal and indictments seem to dominate business reporting as new instances of corporate corruption come to light daily. No only is organizational corruption widespread, but it is far more costly to society than street crime, according to University of Arkansas researcher Vikas Anand.

"In most instances, the behavior creeps up on people. They are not intentionally evil and they don’t start out to be corrupt, but there are processes that take over and make their behavior seem normal," explained Anand, assistant professor of management in the Walton College of Business.

Anand and Blake Ashforth, Chapman Professor in Business Management at Arizona State University, identified three mutually reinforcing processes that underlie the normalization of corrupt practices: institutionalization, rationalization and socialization. Their model uses these processes to explain a variety of behaviors, including how morally upright individuals can routinely engage in corruption without experiencing conflict and how rational organizations can engage in "suicidal corruption." It will appear in the 2004 edition of Research in Organizational Behavior.

Institutionalization is the process by which an initial corrupt decision or act becomes embedded in the normal processes of an organization to the point that it becomes routine. In part, this can be attributed to the complexity of many routine business processes, according to Anand. Each activity may have many steps, and each one may be executed by a different person, making it hard to "put together" what is going on. Thus embedded in the system, the corrupt activities become routine and are passed along to later employees.

Anand cites as an example a major national pharmacy engaged in Medicare fraud. At some point in the distant past, someone had discovered that 10 percent of all Medicare claims were denied due to errors on the part of Medicare, but Medicare did not correct the errors and the pharmacy lost the money. A pharmacy official decided that, rather than fight with Medicare or take the loss, they could simply duplicate every tenth claim.

According to Anand, when such an act is initiated, over time it becomes incorporated into the Medicare processing routine and persists long after the official has gone on to another company. No one person realizes what is happening because the work is divided among employees. The data entry operator, for example, has no idea why she was instructed to duplicate every tenth entry; it is just how the job is done.

This also illustrates the second key process — rationalization. Ritualized stories are used to "explain" a variety of acts and outcomes and make them seem to conform to social norms. In the pharmacy example, the pharmacy official rationalized that they were not taking any more money than was due to them — they were just being "creative" in circumventing the bureaucratic problems at Medicare and ensuring that their stockholders were not penalized for bookkeeping errors by other agencies.

"Rationalizations are common in everyday life. To outsiders they often sound exactly like what they are: patently self-serving attempts to legitimate questionable acts," explained Anand. "But because the rationalizations are intended for internal consumption, the issue is not their objective validity, but whether the group accepts them as valid."

The third component in organizational corruption — socialization — explains how a person becomes a party to corrupt practices either through presocialization or social influence. Without socialization, which encourages newcomers to adopt corrupt practices, the corruption would die out when the instigators left the organization.

Some newcomers are presocialized by prior experience in corrupt occupations, organizations or industries. Since a corrupt group is usually more homogeneous than a typical group, particular attention may be paid to recruiting presocialized individuals. They may focus on recruiting friends or family members or others who are known to be receptive, or at least ambivalent, to corrupt practices.

Social influence is used to encourage newcomers to adopt corrupt practices. Newcomers are encouraged to identify with organization "veterans," who model the corrupt behavior and its acceptance. They are given consistent information and encouraged to attribute their misgivings to their own naiveté, frequently rewarded for displaying corrupt behaviors and discouraged from displaying doubt.

"There is a strong pretend quality to these normalizing techniques," Anand explained. "Peers act as if theft, illegal dumping, false advertising and so on are permissible, if not desirable. Because the goal is to change the attitude toward specific behaviors that would otherwise be repugnant, the group may overlay positive attributes, praising the newcomer by calling the newly learned corrupt behaviors 'aggressive,’ 'with-it’ or 'loyal’."

Newcomers who do not respond to social influence threaten the corrupt subculture. Initially they may be punished in an inclusionary manner, with comments or behaviors meant to encourage them to comply with the corruption. If that fails, the newcomers are subjected to exclusionary tactics, such as derogatory comments or ostracism, intended to induce them to quit.

All three processes — institutionalization, rationalization and socialization — must be present for corruption to become an ongoing, collective undertaking. Absent institutionalization, occasional corrupt acts by individuals would not become embedded in the organizational structures and processes. Without rationalization, it would be difficult to persuade a group to engage in corruption. And by encouraging newcomers to internalize corrupt behaviors and ideologies, socialization enables corruption to continue despite the inevitable turnover of group members.

Ashcroft and Anand agree that organizational corruption is best addressed by prevention. They believe that leaders should institutionalize ethical values and awareness at all levels and hold individuals at all levels accountable for the means as well as the ends. Organizational practices should be made more transparent through practices like ethics audits or confidential hotlines and employees should have access to the confidential advice of ethics officers and non-threatening avenue for reporting corrupt practices, such as an independent ombudsman.

Noting that "organizations tend to get the respect they deserve," Ashcroft and Anand emphasize the role of human resources practices. Practices like electronic surveillance of employees may communicate distrust and actually provoke retaliation against the organization through corruption.

"It is essential that these actions are not just an impression management effort," Anand said. "Unfortunately, some executives formulate ethics codes to control corrupt practices taken by employees against the corporation rather than to control corrupt activities taken on behalf of the organization."