Findings mentioned in the introduction provide first evidence that some organizational factors affect individual behaviour, but not to the point of whatsoever denying individual moral conscience, freedom and corresponding responsibility. Conversely, acknowledging that individuals bear certain responsibility does not conflict the possibility that external factors affect individual decision-making and behaviour too.
If so, certain responsibility can also be attributed to the modern corporation as a whole; even though the latter is ultimately managed by personal moral agents. The reason for ascribing some moral responsibility also to the company is that there are “collective actions” done when individuals cooperate, which is a form of responsibility. Even the common language recognizes the existence of collective actions, for instance when people say that “a paper mill pollutes the air” or “a carmaker produces goods cars”. The results of a collective action, and even the collective action itself, can be evaluated in moral terms: one contemplates whether a collective action contributes to human good or whether it is right or wrong from the ethical principles perspective. However, when conducting a moral evaluation of a collective action and ascribing responsibility to a collective, we cannot forget that such actions consist of individual actions, and a respective individual responsibility. In other words, collective responsibility in an organization is shared by different agents, although the degree of responsibility might differ. In most collective actions, top managers will most likely bear greater responsibility than floor-shop employees.
Having said that, we acknowledge individual responsibility within the organizational context, but we also recognize it is being influenced by external factors. Upon an exploratory literature analysis and our own reflection on some recent business scandals, we identify seven groups of organizational factors that affect individual behaviour within an organization.
Factors Related to Leader’s Values and Character
First, Bandura (1977) suggests that through so-called modelling processes, leaders influence their followers as this is how values, attitudes, and behaviours are transmitted within an organization. In particular, modelling means that in the process of observing leaders’ behaviour and the subsequent consequences thereof, employees learn what is accepted and what is not, and are likely to imitate the behaviour of those with authority. Then, consecutive studies acknowledged that, through their behaviour, leaders serve as role models to employees (see e.g., Bass 1985; Kouzes and Posner 1987). Importantly, Kemper argues that leaders who engage in misbehaviour create circumstances that legitimate misbehaviour at lower levels: “if the boss (read the organization) can do it, so can I” (Kemper 1966 p. 295). As aggregated individual misbehaviour often leads to big corporate scandals, Soltani (2014) notices that the lack of a sound ethical tone at the top increases the propensity of scandals and misbehaviour.
Serving as a role model, managers can influence lower level employees to act ethically or unethically (Treviño and Brown 2005). Therefore, it is important what type of ethical tone is sent from the top. This, in turn, relates to leaders’ moral character and values. Character is generally understood as stable moral qualities of an individual, shaped by virtues (positive) or vices (negative) while values express preferences that drive actions. Both values and virtues are relevant to ethical behaviour, and consequently to misbehaviours of any individual. Hambrick and Mason (1984) argue that organizational outcomes are strongly determined by top executives’ cognitive frameworks and value commitments. When analysing cases of scandals and misconduct, value commitments play a pivotal role because it is the top management who have the formal status and practical capacity to influence organizational decisions and actions (Finkelstein and Hambrick 1990). We conclude that top managers, through their values and virtues, or lack thereof, become role models in an organization. In doing so, they set the tone for other peoples’ actions, which is a critical element in giving rise to corporate scandals.
Moreover, when individuals consecutively mimic the behaviour of managers, in time they are also likely to absorb values fostered by the top. Goodpaster (2007) argues that individuals within an organizational context tend to abandon personal values in favour of corporate-practiced values. Decision-makers at various levels need to act on corporate projects and operations in a manner that is expected of them by those at the top. Often, when there is no alignment of personal and corporate-practiced values people within organizations must give up something: either financial success or ethical values (Mostovicz et al. 2011). In the pursuit of corporate goals, they may sacrifice the latter. This happens in a situation when a choice or an action puts values and ethical principles, with which an individual closely identifies, at risk (Goodstein 2000). Hereto, one needs to explain that the corporate values mentioned are not those that organizations announce officially in their corporate websites; rather those that are truly practiced and fostered from the top. The former may be what is formally stated in the corporate statements of values, but the latter are what is often actually practiced in the course of everyday decisions, operations and interactions among specific individuals and that originate in those who execute power in the company. We observe that in the Enron scandal, in theory, the company’s management preached four corporate values (integrity, respect, communication, and excellence). In practice, personal behaviour was actually fuelled by informal values promoted by top executives: greed, arrogance, ruthlessness, corruption and chasing targets at any cost (the bottom line being the supreme value) (Windsor 2018). There were indirect personal aims involved—top executives sought to keep their positions and earn bonuses that depended on the bottom line. Therefore, in practice, management promoted values other than the official ones. In a bigger picture, Abid and Ahmed (2014), after reviewing 55 corporate collapses, conclude that greed and overambition of top executives are among the crucial causes of wrongdoing, followed by manager’s ambitions for an aggressive company’s growth and expansion and poor internal controls. Conversely, values that foster respect for human dignity, justice, truthfulness, sense of responsibility, care, benevolence and concern for the common good beyond individual interests can promote and develop integrity within the organization. Organizational leaders play a critical role in establishing a “values based climate” (Grojean et al. 2004).
Factors Related to Vision and Exercise of Power
Power can be seen as the responsibility of serving the community with justice or as means for personal interests or even as an end in itself. This latter view was theorized by Niccolo Machiavelli 500 years ago. In Renaissance Italy, Machiavelli was giving advice to the ruler (the Prince), arguing that a ruler, who wished to maintain power, should have prudence enough to avoid certain defects and vices, but he should not always be good. This orientation is still widely used by many managers today’s (Calhoon 1969). The Machiavelli’s approach can incentivise or even command fraudulent actions of employees and create dysfunctions in the organization that damage the common good of the firm because such a vision of power entails certain way of its execution.
There are various ways how managers can exercise power that are detrimental to individuals and to the company as a whole. For instance, negligent use of power can result in various inefficiencies. Hereto, incompetent or inefficient managers and boards can negatively influence individual ethical behaviour within the organization that later translates into the whole company’s financial and moral performance. Further, there is a misuse of power due to the lack of wisdom in orders given from the top, which encourages misbehaviours. This could be the case of a dominant and arrogant CEO, who neither listens to nor considers other people’s views, just like Jeffrey Skilling at Enron. The arrogant use of power is another way of misusing the power. Treviño et al. (2014) provide a complex literature review on the leader’s influence, and on just and unjust treatment of other employees by managers. Soltani (2014) claims causality between ineffective boards, dominant CEOs, dysfunctional management behaviour—which we term detrimental use of power by top leaders—and the occurrence of corporate scandals and misbehaviours.
At Enron, Skilling and Fastow (the senior executives) used power to execute their risky and semi-legal strategies in two ways. First, they induced lower-level employees to take certain actions (day-to-day operations). Second, both internal and external audit were subject to Skilling’s supervision, therefore any form of concern about the company’s accounting improprieties or violations was met with rejection. At Siemens, the use of power to induce employees to pay bribes was never proved to have taken place. However, Klaus Kleinfelt, the CEO, set ambitious targets for foreign units and expected others to deliver results. At the same time, he did not use power to prevent meeting the targets through bribes (Crawford and Esterl 2006).
Policies and practices of recruiting top executives are another consequence of the exercise of power, which ultimately affects the whole organization. Specifically, using power may refer to hiring and dismissing certain types of individuals. Albrecht et al. (2015) suggest that fraud perpetrators recruit individuals to participate in financial statement frauds. An illustrative example is the leadership of John Gutfreund, who was the CEO of Salomon Brothers—a company that was found guilty of serious frauds in the 1990s. Gutfreund used to select ambitious, aggressive young people, and tended to give them a chance to create new departments, new products and enjoy the success they could never achieve at other firms (Sims and Brinkman 2002). On the other hand, the criteria by which he dismissed employees were vague and led to ambiguous performance standards. Similar situation took place at Enron, Bear Stearns, and Lehman Brothers and in many other business cases, where already at the hiring stage power was (mis)used to secure execution of ambitious targets without too much hesitation on the employees’ end.
Factors Related to Corporate Control Systems
Management control systems include goal-setting, performance measurement and evaluation, and incentive scheme design. In addition to management control, we point to other two dimensions of oversight: internal audit and corporate governance. These three dimensions should operate independently, but at the same time, internal audit should exercise effective control over management, and the corporate governance should control the internal audit. Many scholars (Hegarty and Sims 1978, 1979; Jacobs et al. 2014; Selvaraj et al. 2016; Trevino 1986; Worrell et al. 1985 among others) agree that corporate control systems have a strong influence on individual behaviour, for good or for bad. These systems are aimed at aligning the interests of individuals with the interests of the organization. Goal congruence assumes that “the actions people are led to take in accordance with their perceived self-interest are also in the best interest of the organization” (Anthony and Govindarajan 2003).
Soltani (2014) points to three factors related to corporate control systems as the main causes of corporate wrongdoing: inefficient corporate governance and control mechanisms, distorted incentive schemes and ineffective boards. Treviño and Youngblood (1990) suggest that the locus of control and rewards, which results from certain control systems and incentives plans, tends to indirectly influence the individual’s decision making process. When the goal-setting is limited to economic objectives and there are strong incentives to meet these objectives without any concern for ethical values, the influence of control systems on individual behaviour is limited (Rosanas and Velilla 2005). The process of control is particularly imperfect when “the organizational goal is difficult to measure, possibly somewhat ambiguous, or even fuzzy” (Rosanas and Velilla 2005). In consequence, the complexity of goals depends on the type of organizational unit or job. Abid and Ahmed (2014) stress the importance of the control system, suggesting that poor internal controls are among the prominent causes of corporate collapses.
Lack of reasonable controls leads to the situations like the well-known Enron scandal: the freedom of Fastow (the CFO) to make independent decisions to engage in fraudulent accounting without any efficient control. At Enron, the management style, evaluation and remuneration system, and the direction of the operational decisions taken by top management created a certain informal Decalogue for all employees (Weiss 2014, 28–29). The company boasted a 64-page Code of Ethics underpinning a formal control system that laid out accepted behaviours. It was very generic however, with no clear instructions on activities after closing the deals, and there was no effective internal audit that would regulate individual employees’ actions (Healy and Palepu 2003).
Rewards and punishment should also be discussed in conjunction with control. The perceived opportunity—one of the three reasons for committing a fraud in the W.S. Albrecht’s (2014) “Fraud Triangle”—is related to the ‘carrot’ element of the control systems: rewards. Yet, it does not encompass the ‘stick’ element: compliance measures and the subsequent punishment. Abid and Ahmed (2014) address the latter component, pointing to poor controls as one of the empirically verified causes of corporate wrongdoing. An example of a clearly defective incentives and compliance system is the ‘carrot-and-stick’ approach used at Enron. On the carrot side, Enron’s employees were evaluated based on how much value they created for the company (with the risk of being made redundant for those ranked in the bottom 20%). Their remuneration was predominantly based on a bonus, which fostered internal pressures. The compensation plan consisted of the regular salary ($150–200 thousand on average), and bonuses as handsome as $1 million. They were awarded based on the trading profits generated by specific individuals. An incentive plan with strong emphasis on meeting the targets led to high personnel turnover. Employees pursued short term financial (personal) gains to get rich and after 2–3 years tended to leave the company (Sims and Brinkmann 2003).
Factors Related to Internal Network of Influences
In any corporate setting there are links, interdependences and interactions among individuals and groups. Some networks are formally established, some are rather informal. Within groups of people above a certain size, and when responsibility is not explicitly assigned, there is a tendency for diffusion of responsibility—a socio-psychological phenomenon whereby a person is less likely to take responsibility for action or inaction when others are present (Darley and Latane 1968). Diffusion rarely occurs in pairs, but drastically increases within groups of three and more (Leary and Forsyth 1987). Thus, even though individual moral agency is unquestionable, it is often difficult to blame specific persons when they remain in a complex network of interrelations. Additionally, the stronger the fragmentation of decision-making and action and the diffusion of knowledge are in a corporate setup, the more difficult it is to ascribe responsibility to particular individuals (Boatright 2004). And again, strong fragmentation and diffusion tend to occur in more intricate interrelations. Therefore, deliberation on moral responsibility requires consideration of interactive, mutually influential exchange between the organization (group) and individuals (its constituent elements) (Yates 1997).
Individuals tend to take specific decisions because they are in a complex network of interrelations. At the same time, individuals are the creators of the organizational links, interdependences and interactions, and so they initiate the formal and informal structures they later operate within. Interrelations within these structures condition personal behaviour for good or for bad. Painter-Morland (2007) describes such structures of relationships as “a complex adaptive system”, pointing to the fact that individuals tend to adapt to the expectations of others (internally and externally). The characteristics and intensity of links, interdependences and interactions among individuals and groups differ across organizations and specific situations—and probably, the degree of intensity of these elements—determines whether the influence of the network on personal behaviour is weaker or stronger.
Factors Related to Organizational Culture
Organizational culture can be understood as shared beliefs, values, and practices, and is built up by leadership and interactions among people within the organization. In other words, it is “a pattern of shared and stable beliefs and values that are developed within the company across time” (Gordon and DiTomaso 1992); or more simply, “the way we do things around here” (Deal and Kennedy 1982). Drawing from Goodpaster’s reasoning on the identifiability of a company’s culture (2007), Gibson (2011) describes organizational culture as “both action-guiding and thought-guiding environment” which consists of procedures, policies, goals, norms and corporate values. Moore and Gino argue that others, through their actions or inaction, help to establish a standard for ethical behaviour of a person (2013 p. 57). This is how the organizational culture—which later shapes the individual’s course of action within an organization—is built. At the same time, Gibson (2011) perceives the existence of two-way interrelation between individuals and organizations: “corporations actively participate in shaping a person’s moral agency, and hence moral outlook, and, reciprocally, the organization may be shaped by its members through a continuing negotiation of values” (Gibson 2011). Therefore, we suggest that corporate culture and individual behaviour are mutually causal in an organizational context. In the Barclays case, submitting untrue interest rates was a common, regular practice that was later qualified as ‘accepted culture’ in most of the banks that took part in the process (these were ‘the rules’ of the Libor submission ‘game’) (“Behind the Libor Scandal” 2012). On the other end, the very same culture was then shaping everyday decisions and actions of particular individuals involved in the submission process.
It is hardly surprising that culture is believed to be the most important factor that crafts ethical decision-making (Sims and Brinkman 2002; Sims and Brinkmann 2003). Pierce and Snyder (2008) find that employees switching job locations almost immediately conform to the local culture, in particular to organizational norms of unethical behaviour. Culture becomes, therefore, inherent to an organization. Numerous scholars who support this position compare culture to corporate identity (French 1984; Ladd 1984), and emphasize that identity is built over time and is not necessarily influenced by people leaving and newcomers entering the community.
Notably, organizational culture tends to evolve in time. It originates, in fact, from the decisions, actions or attitudes of particular individuals who acted in the past as agents of the corporation (Ashman and Winstanley 2007). Hence, psychological constructs that are attributed to corporations, such as values, personality, conscience, and identity, stem from particular individuals.
A good organizational culture promotes morally correct decisions (Chen et al. 1997) and vice-versa. Organizational culture played a paramount role in all of the financial scandals we analysed, such as Enron, Bear Stearns, Lehman Brothers, Barclays or Siemens.
Factors Related to Internal and Competitive Pressures
Individuals can be pushed to certain actions by internal motivation or external stimulus. The latter can in the form of pressure to produce results or certain outcomes either from the top or from the peers. In the W.S. Albrecht’s (2014) “Fraud Triangle” one of the dimensions relates to some kind of perceived pressure. We observe that this perceived pressure was evident in the cases of analysed corporate scandals, and most probably played an important role in individual behaviour.
Internal pressures towards employees to get results generally come primarily from the top. If adequate ethical guideline is not provided, such pressures can lead to pursuing company’s targets “at any cost”, what results in massive corporate scandals. At Enron, for instance, there was heavy internal competition and strong pressure on results, even at the expense of stretching the rules. The subprime crisis serves as an excellent example thereof too. In companies like Bear Stearns or Lehman Brothers there was strong pressure on results, along with a culture of risk-taking that grew from company’s trading operations (Maxey et al. 2008). Corporate policies, shaped by business practice, favoured target-oriented decision at all costs. Whereas the lower-level employees were ‘encouraged’ to take part in massive securitization by the specific incentive systems and by the example of company’s leaders, the higher-level executives faced the whole network of interrelated pressures: lenders wishing to sell more loans, speculative investors eager to suppress rational assessment of the situation for the sake of financial gains, shareholders striving for equity gains, and finally other financial institutions following the same path of profit making.
Quite often top management is also under heavy pressure to increase profits, and indirectly to boost company’s share price that comes from shareholders. Recent Libor manipulation scandal provides empirical evidence on numerous internal pressures at different levels. Barclays bank executives were pressed by shareholders to improve performance, particularly during the 2007–2008 credit crunch, when the best strategy for boosting the bottom line was to understate borrowing costs through manipulating Libor rate (Mollenkamp and Whitehouse 2008). Further internal pressures shaped everyday decisions and actions of individuals—Barclays’ employees (submitters) were again and again pushed by other employees (traders) to report untrue rates, something reported by several journalists (“Behind the Libor Scandal” 2012). Additionally, Barclays’ employees were pressured by the system of other submitting banks to take part in the unfair Libor forming process. On the one hand, they competed with other banks, and on the other hand it was a necessary cooperation to achieve a joint aim. A remark of one RBS trader in Singapore to a Deutsche Bank trader from August 19, 2007, illustrates how entangled the whole system was: “It’s just amazing how Libor fixing can make you that much money or lose if opposite. It’s a cartel now in London.” (Tan et al. 2012).
Additionally, in all of the cases we reflected upon, we see that internal pressures are dependent on the internal network of influences, and vice versa. Submitting untrue interest rates would not have been possible if not for the close informal links, interdependencies and interactions between top executives, traders, treasury managers and bank’s submitters, both within the bank and across all leading banks participating in the Libor formation process.
Factors Related to External Influences
The last factor encompasses influences upon the organization (and thus upon its managers and lower level employees) that arise from the legal, political, social and cultural context. External influences are diverse types of external pressures that affect those who run the organization. They originate from interrelations and interactions of the members of the company with people and institutions constituting a firm’s immediate environment. Those external agents, such as banks or auditors, are often necessary for company’s activity. The legal system and regulatory environment also have a material impact on internal agents (Ekici and Onsel 2013). Failure of the auditor, in addition to accounting irregularities, to appear to be among main causes of corporate frauds studied by Soltani (2014). Additionally, culture and social demands can be treated as external influences, for good or for bad.
Individuals and institutions who interact with a company have their own intentions and goals. In certain situations, these interests or goals can induce specific (also unethical) actions of the company. In each analysed scandal, the fraudulent company remained in a network of interrelations with a number of external entities (e.g., Enron and Arthur Andersen, investment banks and other financial institutions in the subprime crisis, Barclays bank, other banks manipulating Libor and financial supervision bodies). Importantly, we observe that the misbehaviour of individuals within the fraudulent organization is often affected, encouraged, or sanctioned by actions and pressures from external individuals, institutions and frameworks, which jointly comprise the broader business environment of the firm. For instance, in the Bear Stearns and Lehman Brothers case, the whole financial system demonstrated evident pressures and influences. Both investment banks’ collapses would not have happened if there was no bubble of subprime lending, which encompassed a number of institutions within the value chain of issuing the subprime mortgage-backed securities. The government and its policies pushed for home ownership. Careless mortgage clients took on obligations beyond their credit capability. Mortgage brokers, banks and insurers made massive lending possible and pushed for creating high-risk overleveraged financial products for investors, who pursued handsome returns. Last but not least, rating agencies contributed to the system by “rating laundering” (McLean and Nocera 2010 p. 122), and were “essential cogs in the wheel of financial destruction” and “key enablers of the financial meltdown” (Financial Crisis Inquiry Commission 2010). Together, all these institutions created an environment of interdependencies with mutual pressures exerted onto each other.
Some interrelations between an organization and external entities are particularly sensitive and can play a vital role in preparing the ground for scandals and misbehaviours. There are institutions which provide services that should be objective and serve the interests of the society, but in practice they are “aid and abet” institutions, i.e., they assist other companies in committing a crime by words or conduct. Boatright (2004) particularly emphasizes the key role of institutions with the gatekeeper function in preventing corporate wrongdoing. Due to the auditing and monitoring function, the gatekeepers have broader knowledge about company’s operations and performance than shareholders or an average employee (Boatright 2004). Gatekeepers are expected to monitor corporate actions, and hence should also be accountable and responsible for the scandals together with the fraudulent company (Coffee Jr. 2002; Ganuza and Gomez 2007). In Enron and Andersen case, unlike in the subprime crisis, external influences were not in form of external pressures but rather enablers of Enron managers’ misbehaviours. The parity of authority and responsibility that is discussed on corporate level (Stephen et al. 2010) is also problematic when one analyses cases that involve corporations and the government, when duties, deeds and responsibility tend not to go hand in hand.
Probably the biggest challenge regarding this constituent is insuring the independence of both company’s managers and external entities like auditors or rating agencies (Bazerman and Gino 2012). Often, there is a persistent conflict-of-interest situation (Sezer et al. 2015) because such entities have financial incentives to participate in or facilitate client’s misbehaviours. At the same time, they have great direct (bound to their function) and indirect (as an external observer) potential to prevent misconduct (Gino et al. 2009). Thus, although the role of the corporation in changing external factors that facilitate internal wrongdoing may be not too high, external influences should still be analysed in each case.
We conclude that the network of interrelations between the company and external parties can diminish individual responsibility; although in some cases it can be difficult to precisely determine the scope and strength of such influence.