Toby groves sentenced

6 Ethical Traps

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Learning Outcomes

After reading this chapter, you should be able to do the following:

• Summarize the characteristics of defective ethical reasoning and evaluate the reasons and rationalizations for employees to engage in misconduct or participate in business decisions with unethical results.

• Examine common external stimuli that compel people to engage in unethical behavior in business.

• Analyze cognitive biases that interfere with ethical decision making.

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Introduction

Introduction

Small Steps to Big Fraud

Toby Groves grew up in Ohio believing that he was a good person with strong ethical values. After his older brother’s conviction of bank fraud in 1986, Toby vowed to conduct business in a transparent and ethical manner. Just over 20 years later, Toby Groves was sentenced to two years in prison for bank fraud, which had begun with small steps to cover financial obliga- tions resulting from poor management of his mortgage lending business.

In 1989, Toby founded Groves Funding Corporation, which would become Greater Cincinnati’s 19th largest home mortgage lender by 2007 (Watkins, 2007). The company had a strong values statement and espoused ethical conduct. Jim Cergol, a loan officer at Groves Funding, said, “Our culture was if you do things right, you know, you’ll be successful and there’s no need to ever be dishonest. You knew you don’t cross those lines” (Joffe-Walt & Spiegel, 2012, 03:48–03:59).

In 2004, Toby realized that his company was not as profitable as he had once believed. Small errors in mortgage loan calculations had accumulated to create a company fund shortfall of $250,000. To cover company financial obligations, Toby mortgaged his own home to gener- ate the necessary funds. In order to secure the loan, he inflated his income on the bank’s application form. It seemed like a small lie, and at that time, inflating income on mortgage applications was common practice, so the risk of detection was small. Toby rationalized that the funds would save his company and his employees’ livelihood. Unfortunately, the need for funds increased after Toby discovered greater losses from risky mortgages. To save his busi- ness, Toby began to secure false mortgages—loans on houses that did not exist. The complex- ity of loan applications meant Toby could not complete the false mortgages alone. He had to include his staff in the fraudulent activities, convincing them that it would be “just this once.” By his arrest in 2007, the mortgage fraud had grown to $5.2 million (Baverman, 2008).

What led Toby to lose sight of his values and engage in unethical business? Why would his employees perpetuate the fraud? Toby’s story illustrates that ethical misconduct is not the result of a few bad people. It can happen to any employee who fails to recognize the ethics of a decision. Pressures to follow orders, make business goals, and ignore bad news can lead to defective ethical reasoning. Signals of defective reasoning include ethical decisions with one or more of the following characteristics:

1. Few ethical alternatives are perceived, all possible alternatives are not considered. 2. Chosen unethical alternative is not reexamined; it is justified as being the only choice. 3. Rejected ethical alternatives are not reexamined—the decision made is final. 4. Rejection of dissenting opinions; stakeholder input is discouraged. 5. Selective bias of new information; research is conducted for data to support the

chosen decision. 6. Win at all costs; meeting company goals overrides ethical alternative (Sims &

Sauser, 2013).

Social psychologist Darley (1992) posits that most unethical actions are not committed by evil actors, but by individuals acting within an organizational context. Most people look for others to guide them in the right behaviors and “do what others around them do or expect them to do” (Treviño & Brown, 2004, p. 72). The study of behavioral ethics explores reasons for individual behaviors that occur in the context of larger societal expectations. Research on

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Section 6.1 Why Do Good People Do Bad Things?

behavioral ethics examines biases on an individual and group level that hinder ethical deci- sion making (Treviño, Weaver, & Reynolds, 2006).

This Chapter focuses on why well-intentioned people sometimes make bad decisions and fail to follow their own ethical standards. Ethical decisions occur amidst organizational pressures and personal biases. Employees who can recognize the traps that provoke or trick people into illegal or unethical transgressions are more likely to avoid ethical lapses in the workplace. The following sections introduce the study of behavioral ethics and present common traps for unethical behavior as well as suggestions for how to avoid them.

6.1 Why Do Good People Do Bad Things? One response to ethical lapses in business is to blame the perpetrator, by saying such state- ments as “That manager was greedy and did not care about who was hurt.” Some people consider criminals such as Toby Groves to be psychopaths, who display superficial charm, grandiosity, deceitfulness, a lack of remorse, lack of empathy, failure to take responsibility, impulsivity, and antisocial behavior (Kluger, 2008). Media reports use the analogy of a bad apple to describe a rogue employee to explain why ethical misconduct occurs in organizations (“Another bad apple in Japan,” 2001; Goldsmith, 2009; O’Boyle, Forsyth, & O’Boyle, 2011). However, not all misconduct is perpetrated by people with psychopathic tendencies or one rogue employee (Andrews & Furniss, 2009). In fact, business ethics scandals involve normally good people who act contrary to their ethical standards. Behavioral ethics psychologists seek to understand why moral people engage in unethical behavior.