Eugene Soltes,associate professor at Harvard Business School, studies white-collar crime and has even interviewed convicts behind bars. While most people think of high-profile scandals like Enron, he says every sizable organization has lapses in integrity. He shares practical tools for managers to identify pockets of ethical violations to prevent them from ballooning into serious reputational and financial damage. Soltes is the author of the HBR article “Where Is Your Company Most Prone to Lapses in Integrity?”
Download this podcast
CURT NICKISCH: Welcome to theHBR IdeaCastfrom Harvard Business Review. I’m Curt Nickisch.
Some cases of bad corporate behavior that are now so infamous, just saying the company’s name evokes the costly scandal: Enron…Wells Fargo…Volkswagen.
But there are also all kinds of smaller white-collar crimes that happen every day. The truth is every sizable organization has pockets where things like offensive language, overly aggressive sales practices, or conflicts of interest are overlooked or even silently approved of. If those lapses are not caught, they can grow into real threats to the company.
Today’s guest researches these so-called “integrity gaps”. And he has practical tools for managers to flag potential issues quickly and prevent them from becoming big problems.
Eugene Soltes is an associate professor at Harvard Business School and he’s the author of the HBR article “Where is Your Company Most Prone to Lapses in Integrity?” He also wrote the bookWhy They Do It: Inside the Mind of the White-Collar Criminal.
Eugene, thanks for being here.
EUGENE SOLTES: It’s a pleasure.
CURT NICKISCH: So I have here in my notes that you went to prison for white collar crime. Is that right?
EUGENE SOLTES: Oh that’s almost correct. But there’s an important distinction. I went there to visit people who engage in white collar crime.
CURT NICKISCH: Okay. You researched white collar criminals and the place to go find them as basically in prison.
EUGENE SOLTES: That’s the easiest place to look for known offenders.
CURT NICKISCH: Yeah. What’s that like going into these places?
EUGENE SOLTES: It was pretty intimidating the first time. It’s exactly what I think the stereotype is. It’s cold, it’s dark, it’s noisy and it’s dirty. It’s really unpleasant. Even in the minimum and medium security prisons, which I know oftentimes get characterized as these kind of Club Fed. They’re really not pleasant.
I left after two hours and I also wasn’t comfortable “ attorney’s room”, which I can assure you is anything but comfortable.
CURT NICKISCH: Yeah. So, who did you talk to and what did you find out?
EUGENE SOLTES: So I spoke to, for the book, nearly 50 people who engaged in white-collar crime from people whose cases are a front page headlines, people from Enron, WorldCom, Bernie Madoff. To other people’s cases from well-respected firms like McKinsey, KPMG, who’s maybe their cases are not quite as well-known, but were really extraordinary leaders. Extraordinary people writing the firm hat made a series of mistakes that had these remarkable consequences.
CURT NICKISCH: Yeah. Those first ones are known because they brought down companies, right? And the later ones hurt reputation, they hurt finances. Companies pay huge fines, but, maybe lesser known because they didn’t lead to calamitous collapse of a company.
EUGENE SOLTES: Right? I mean, in many ways the question that fascinates me, haunts me in some ways is how pretty remarkable people who are otherwise smart, thoughtful, intelligent, great dads, and engaging in this behavior after a decade or two decades of successfully running a firm, being a leader within an organization.
By and large, when I’m talking about these, these high-profile individuals, senior leaders who engage in white-collar crime, we’re talking about otherwise, I would say normal leaders that, you know, type A personalities that want to be successful. They want to be so successful in fact – and that’s not just because they want to make money, but they want to see their firms and their colleagues succeed – they end up engaging in these harmful acts.
CURT NICKISCH: Yeah. That kind of defeats the notion of bad apples, right? That they’re bad people from the start bad people through and through and that companies can’t do anything about it. Maybe this is too simplistic, but is it more the tree than the apple?
EUGENE SOLTES: Psychologists for decades have really studied the difference between the individual and their surrounding circumstances. The circumstances are incredibly, incredibly important. When we start thinking about the pressure, I focus a lot on the distance of the consequences to the manager, him or herself.
So if we think about the, the consequences for most white-collar misconduct, it’s psychologically and physically distant from the manager. So, at the time he’s engaging in some type of corporate malfeasance, it doesn’t actually feel so harmful. It’s only quarters or years down the road that it might become evident. And that makes it much easier to proceed with these consequential actions without necessarily appreciating those ramifications at the time.
CURT NICKISCH: Yeah. And it’s also not just those actions down the road, but if you have a culture that allows that kind of stuff to happen, it can be collective damage from a group of individuals or many individuals?
EUGENE SOLTES: Exactly. And also things are changing over time. So, in the U.S. let’s think of some big things that are often prosecuted. A Foreign Corrupt Practices Act – bribery – but bribery in Germany was not only legal but actually tax deductible up until 1999.
So I mean this is a new, in some sense, rule or institution that’s been created. Or another case that’s particularly pertinent right now in the United States. I mean if you do business with that, with Iran as an American firm, there’s some very, very serious consequences both for individuals and the organization. But in other parts of the world, both in Europe and in Asia, Iran’s a perfectly fine country to do business with. And if anything, it’s trying to find loopholes to continue doing business with them are under the current sanctions.
And so part of these things represent changes in the regulatory environment. Some of this might even be political. And that’s what makes it really challenging for, for business leaders.
CURT NICKISCH: Yeah. That was one thing I found really interesting in your recent research and some of the studies that are going on in the field is this understanding that even in one company you can have a lot of a variation in application of ethics or how ethical people are depending on your geography and your, the function you’re in?
EUGENE SOLTES: I think every leader likes to think of their firms having one homogenous culture, and certainly there’s good reasons to try to be aiming toward that. But when you start running an organization that is in not just dozens of states but dozens of countries and you have 100,000 plus employees, you’re going to have heterogeneity. And the question is how do you understand what those differences in the culture are and how could they contribute to or potentially detract from integrity-related issues that expose the firm to reputational and regulatory risk?
CURT NICKISCH: Is there an example you’re thinking of from one of those prison visits where you see the geography or the function like a sales unit, being so different from the culture of, you know, a different part of the company that it kind of flew under the radar?
EUGENE SOLTES: I think if we take one of the prominent examples relate to actually Enron. Arthur Andersen, one of the, you know, major professional services and accounting firms. There was clearly some, I think challenges with how they’re their branch in Texas worked with Enron, but that didn’t characterize, I don’t think the whole firm or all its employees, and it’s actually one of the reasons why it was so, I think heavily criticized when the government actually prosecuted the firm or actually even just start with an indictment that ended up leading to the breakup of the firm.
That didn’t characterize it wasn’t, and I think the hard part is anytime a firm is criminally prosecuted, which is now happening with increasing frequency, it’s not saying that the 10 or 50,000 employees are criminals. It’s saying that that entity is actually what engaged in a criminal enterprise.
And I think that’s challenging because that actually creates a lot of costs both on the employees themselves, but also the shareholders. There’s a lot of externalities associated with these resolutions.
CURT NICKISCH: And so if you’re running these companies and you have offices in lots of different cities, in lots of different parts of the globe and you’re in a lot of different jurisdictions, you kind of need to be on top of it?
EUGENE SOLTES: Absolutely. And also the world’s becoming even more complicated because the regulation in one country is increasingly affecting businesses in others. GDPR and privacy, for example, in Europe’s a really good example where people in Europe have become very, very sensitive to the privacy, but how we in the U.S. and for example, China, which have radically different views about how we would use client data, images of employees.
I think have not only different kind of moral views on this, but also just different views about how we’d handle that data. And so it’s very easy for a firm that maybe has a branch in the U.S. in Europe and in China and you just normally are sharing client data or user data and historically that was perfectly fine, could actually lead to reputational consequences in the U.S. and a huge fine in Europe.
And it’s hard for people to maybe stay on top of all these different changes because they, they really are changing quite rapidly in this kind of space. As we, I think all know are the last couple of years, there are areas like, harassment, discrimination, which may not actually tend to get into the criminal realm for most firms, but I think the reputational damage is as, or even greater than many of the civil and criminal sanctions available to regulators.
CURT NICKISCH: Wow. When you have such a disparate firm like that and you have a lot of variation in how employees meet standards, you’re trying to reach a single standard, I think for ethics.
EUGENE SOLTES: Ideally, that’s the goal at least. That’s hard. I mean, I think so many firms and leaders want to think that what they say at the, you know, the annual retreat or what’s in the code of ethics or code of conduct is what every employee is doing. But everyone comes from different backgrounds. That is from different firms, which have different levels of what’s considered okay around here, and different geographies and different parts of the world, what’s considered acceptable conduct varies dramatically.
CURT NICKISCH: So everybody reads that statement differently.
EUGENE SOLTES: EY has actually done some interesting work where they’ve actually interviewed managers about different kinds of aggressive conduct. For example, paying to win a contract. And if you look at some of their work, you’ll see certain countries where, you know, 20 or 30 percent of managers will say, you know, paying cash to win a contract, if this helps my company avoid a void, a big miss, of course I would do it.
In other countries, Switzerland, the United States, most managers at least will say no out loud. Some will of course do that, but very few would actually say I would actually do that because we know the consequences.
CURT NICKISCH: So all of these companies have like compliance departments, right? They have legal departments, they have systems in place, processes in place to try to, you know, keep an eye on all of this, identify, you know, illicit activity or questionable activity and route it out and minimize their exposure. Is that not working or why isn’t that enough?
EUGENE SOLTES: The problem is measurement. You can’t manage a process if you don’t measure it. And so what my work has shown is that organizations need to spend time and resources figuring out what are they getting in return for the investment. Whether it’s a training exercise, whether it’s investigations process, which is, or senior management spending time with people in the field conveying what the firm is supposed to be doing. What’s that time actually generating?
CURT NICKISCH: You’ve identified a very simple survey that companies can implement to basically find out and get a sense of what might be going on and where problem areas are. And I like it because it’s just very, very simple. It essentially asks three questions of managers or people around the company. Number one, have you seen anything that’s questionable? Essentially did you report it? And if you didn’t report it, why not? What do you learn by asking those questions?
EUGENE SOLTES: It’s a hotspot identifier would be the simplest way to put it. Some firms still have an investigation, they’ll have a whistle blowing hotline, but they don’t see a lot of movement there. They might have a call here, a call there. The question is what’s below that iceberg that they’re not seeing? And what you’re trying to do with the survey, say where are there areas where there might be emerging issues occurring and we just don’t know about it?
And this is not saying that the firm is not a great firm or there’s even concerns necessarily about like retaliation, but it’s the fact that I’ve actually found in some of these results that people don’t want to see their colleagues get fired. And so they’re not speaking up, not because they can’t identify it and that because they’re not really willing to because they’re concerned about it, but because they’re concerned about the outcome.
And so this is a way of trying to get ahead of those issues before they ideally hit or unideally hit the headlines.
CURT NICKISCH: The statistics in here were pretty interesting – workers are more likely to report a theft of company property or accounting irregularities. The number goes down for people reporting things like inappropriate gift giving or conflicts of interest. But even, you know, theft, like less than half the people would report something like that. So in a way this data is showing you that, you know, it’s normal that not everybody’s going to report everything. But if it’s higher than some standards, I mean you get a sense from these numbers then like where, where problems are or people are under over reporting something.
EUGENE SOLTES: Exactly. And what you want to do is run this across, not to every employee necessarily, but a random group in different areas, different geographic, different divisions to see where are these numbers higher or lower.
Because a lot of firms right now approach their integrity, ethics, compliance programs as kind of a one size fit all. We give everyone in the organization, same kinds of training, the same kind of leadership by example. But really in practice there are going to be certain areas that are hotspots and wouldn’t it be nice to identify those and then place more resources there? It’s whatever we do in every other operation of the firm, every other part of the firm. But oddly enough, we haven’t started really doing this in the integrity and compliance space.
CURT NICKISCH: Yeah, that’s interesting. Like if one of your stores has low sales compared to everybody else, you go there and figure out what’s going on. Or if one is very successful, you go there and figure out what’s going on. And it’s the same thing with, with ethics essentially.
EUGENE SOLTES: It should be. And I would say right now the only time really we see that occurring is after there’s an issue. So after there’s a bribery incident in country x, you see a whole pile of more training, a whole pile of new managers, different incentives put into place. But wouldn’t you like to do that before you pay the huge regulatory fine? You’re on the front page of the news?
And a simple survey like this is trying to help managers get there without having to really invest a whole lot to help identify these issues. And this goes back, we’re not trying to identify bad people, bad managers. We’re going to understand where there may be hotspots because i=of simply the pressures of the business line are different and something we can help figure out how to get ahead of that to help the managers, employees help themselves stay out of the headlines.
CURT NICKISCH: So if you know about or have worked with companies that have used the survey, can you give some examples of things that they found or ways that they took action because they identified something they wouldn’t otherwise have been able to discover?
EUGENE SOLTES: So they find around two dimensions, geographically, especially around different countries in different divisions. So for example, a sales division versus let’s say a more of a back office type function, you’ll see those variations. And generally what I’ve seen firms doing is saying, let’s actually customize the kind of training and also kinds of monitoring slash surveillance that we’re going to apply.
So for example, you know, in-person training is by and large always going to be more effective than kind of the generic online training. And so most firms can’t spend the money to do in person training to everyone across the world.
So what do you do? You basically want to do in person training to your most senior people you do online training for everyone else. Maybe you actually should invest in that in-person training, not just for the senior leadership, but actually throughout the organization, but in very specific parts of the organization, some subdivision within some geographic area, we can help identify that.
Also sometimes a lot of these things like training and codes, preventive things unfortunately are not enough. There are areas where sometimes you need to invest more and thinking in terms of the monitoring for that type of group. So looking at the expense reports, doing additional due diligence.
Again, that’s very costly and as most people say about compliance, that that can be a burden on employees. So you don’t want to roll that out against everyone. But maybe for a subgroup of an area that you see as a hotspot, a high risk area, it’s worth doing that because whatever may be small additional costs that I’ll impose upon that small area will be much, much less than having the entire firm have some regulatory issue because regulatory issues, fines, criminal sanctions aren’t against some sub unit.
The DOJ doesn’t rep say this subdivision within this country is what engaged in fraud. The headline in the Wall Street Journals will be company x engaged in fraud. And that’s what’s so devastating.
CURT NICKISCH: Yeah. Does that mean that investors maybe have the wrong impression of companies when something like this happens? If it is a hotspot or if it is a certain location or a group of people, the company could find it, but it may not be indicative of what’s going on at the rest of the company that the, you know, the headlines and fines maybe indicate. How often is it just a, you know, a part of the company versus, you know, bad, bad leadership, bad stuff happening from the top?
EUGENE SOLTES: So in our recent project, I actually wanted to say what’s different between the public perceptions of how often fraud occurs and what’s reality? So I first took all publicly traded firms. Look how often do they face one of these regulatory sanctions from the Department of Justice or Sec. And what you find is it’s less than on the civil side, less than 5 percent a year. So it’s pretty infrequent.
Jump inside the company. So I took data from three fortune 100 companies, so notably large companies and looked at when they internally found a substantiate violation of fraud, bribery, something that at least for prosecutor was sitting there, could at least theoretically charge the company with criminal conduct. How often did those occur?
I actually found it occurred once every three days on average. And so while the public I think has this perception that there’s kind of good and bad companies, some that engage in fraud and some that don’t. In reality, every company of any size has some amount of misconduct. And what management’s job is, is to make sure that in a large company that misconduct is occurring maybe once every three days and not three times per day. And that the size of the fraud is not tens of thousands, hundreds, thousands, millions of dollars, but ends up being small immaterial amounts that they can manage internally.
CURT NICKISCH: Yeah, these aren’t big fires, but you’re just, you’re trying to put out, find the coals and the embers and put them out wherever they pop up.
EUGENE SOLTES: And the idea is how can you make sure that they’re still only embers? I mean the survey is trying to say one way to get ahead of that. Unfortunately I think a lot of the world still operates on the ignorance is bliss approach. And this is in part from kind of the legal community that you, you, you don’t want to make a turn something that is embers into a fire yourself.
And so sometimes you think, well, we address this by dealing with it internally and you know, not making a big fuss over it. That gets out publicly. The analogy I often like to make is, is corporate malfeasance is a lot like a, a bug – getting a sore throat, which you can try to ignore. But what will happen is they’ll generally grow and get worse.
Unless you seek treatment, and that’s a little like malfeasance. If you play the ignorance is bliss approached, there’s a chance it might go away on its own accord. You don’t need to quote, go to the doctor, but that’s rare and oftentimes you need to seek the right treatment. And that’s what the surveys trying to do is trying to figure out what kind of treatment do you need? What, what aisle at CVS do you need to go down to figure out how to get rid of that bug as quickly as possible?
CURT NICKISCH: What do you do? I mean, in person training is one thing, right? But if something’s going on that you have to stop and maybe you just didn’t know about it and didn’t discover it before as a company leader and now you know, how do you deal with it? Do you punish it? Do you eradicate it? Do you fire people? Do you retrain them and give them an amnesty? Like what, what are the tools to, to address it once you do find that?
EUGENE SOLTES: So the question is what’s the root cause for this misconduct? And so sometimes there’s intentional people have incentives that they’re trying to get ahead. Sometimes though it’s something as simple as a policy or process wasn’t clear. People thought they were doing their job adequately well and they were bringing in what their prior firm practices where, but it turns out their prior firm practices are either not appropriate anymore or not how we do things around here.
And so you actually need to create that policy and make it clear to people. You need to help them help themselves with creating easy ways to also follow that policy. Almost every from where I start talking with them about their compliance program, will note that they have this elaborate book of firm policies. But really a lot of those are outdated. Some of them that haven’t had a chance to put in because it requires so much coordination between different groups of people that you only really learn after a couple months what the actual policies really are.
And when they mean really are means the ones that you’re punished for breaking in the ones that you’re supposed to implicitly do. It’s as Marvin Bower described culture as “the way we do things around here. And that’s hard in this integrity policy space.
CURT NICKISCH: And in the end, you’re trying to avoid reputational damage. You’re trying to avoid financial damage through fines, from regulatory authorities and you’re also trying to stay out of prison yourself.
EUGENE SOLTES: Exactly. The best way I like to think of this, why do we do all of this stuff is that, and I spent a long time teaching in the classroom working with companies, talking about their compliance programs and I’ve learned that no one where I’m in there in a classroom or working with them on a training exercise or are speaking with their colleagues, do they ever think they would be involved in anything that we would describe as corporate malfeasance.
But the data suggest otherwise that in the long run there are very smart people who are thoughtful, great, great parents, great spouses who are going to engage in conduct, that has these kinds of consequences that are serious, not just paying a fine, but can lead to prison. And so what I hope we can do with tools like this is help people get maybe one step ahead, to not just help their firms, but to really help themselves.
CURT NICKISCH: Eugene, thanks so much for coming on the show to talk about this.
EUGENE SOLTES: It’s a pleasure. Thank you so much.
CURT NICKISCH: That’s Eugene Soltes. He’s an associate professor at Harvard Business School. He’s the author of the article “Where is Your Company Most Prone to Lapses in Integrity?.” It’s in the July-August 2019 issue of Harvard Business Review, and at HBR dot org.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager.
Thanks for listening to theHBR IdeaCast. I’m Curt Nickisch.