Behavioral Economics for Leaders

CHAPTER 43Small‐Scale Cheating Can Lead to Major Corruption: Leaders Should Not Tolerate Minor Ethical Violations

Whether it’s “Dieselgate” at VW or the falsification of accounts at Enron—criminal conduct in companies is often recognized after it’s too late. Often the damage has become so great that it can be rectified only with enormous cost or might even lead immediately to bankruptcy. Why is misconduct detected so late so often? One answer can be found in the fundamental psychology of people.

Claire, who graduated from an elite university in business administration, is poring over the accounts of a company to be audited by her accounting firm. She’s proud to have found a job with the renowned law firm in her late 20s, even if her employer expects her not to be too fussy when it comes to working more than 40 hours a week. The path to the top is more likely to be open to employees who work on average 80 hours or more a week. But in light of her above‐average six‐digit salary, it seems a fair exchange of good work for good money to Claire. At the moment, Claire is brooding over a possible problem. She noticed that the company to be audited has posted a steadily growing number of forward transactions over recent years, while competitors in the same industry experienced more ups and downs. Forward transactions mean that a deal agreed on at a present moment will only be executed at a later date. Returns from such transactions look good on the balance sheet. It’s just that Claire ...