Saturday, December 20, 2003

Unethical management behaviour - business as usual?

It is hard avoid noticing the scandals based on unethical (and sometimes illegal) management behaviour these last years. In Sweden we are currently unravelling the Skandia scandal which havent been settled when this is being written. Today's it seems likely that at least one of the daughter companies have been showing the same kind of behaviour.

Why does these things happen and why now? I have a theory based on three factors

  1. company maturity
  2. stock option focus
  3. the aftermath following an imploding stock market

When a company (and it's industry) becomes sufficiently stable the character of company changes. The external focus decreases and the mental models of the internal structure is getting more and more stable in the minds of the managers. The power positions are becoming fix points in the organization. The stage is then set for the chess-like power game to take place. Since the structure have stabilized the power players enters the arena. In the beginning these players are smart individuals, but after a while pack behaviour takes place. Axelrod's theory about collaboration arguably suggests that collaboration is a natural consequence of prolonged conflict and so it seems in companies. These smart individuals are falling in favor of more group oriented position players who actually collaborate and build power structures. After a few years all important positions are taken by people from basically the same (small?) group. These are closed groups of relatively few peopla who effectively picks right minded individuals for new members. These groups are of course becoming more and more closed when it comes to worldview and values (e.g. ethical values).

If we add the nature of these emerging collaborating groups in maturing industries and markets to the idea of avoid hard cash by rewarding management groups with stock options and inflated valuation it is easy to see where it is going. During a stock bubble there are always appearing some wonder kids whose businesses are valuated to enormous numbers. These numbers changes the frames of thinking. If he or she is worth that much, why shouldn't we? When things goes up nobody cares since most people are running in the game themselves.

The interesting part happens when the bubble bursts. Most of the involved people who don't have secure positions usually follows the stock market down to the new low levels. Many are losing money and a different mindset emerges. That doesn't seem to reach these closed management groups. Since they are basically closed to the world around them they can still maintain their levels of management compensation not understanding what the fuzz is all about.

Values and ethics are socially constructed properties. Groups which are able to shield themselves from the world will then be able to maintain values and truths even if the world is changing.

A lot of people have opinions about these issues and at Wharton they have talked to a number of different scholars about the reasons. Read it in the article by the name Business Ethics.