The Misers, by a follower of Marinus van Reymerswaele, c.1490-1567, The Royal Collection Trust
Ideas for Leaders #380

Profits Vs Principles: Market Competition and Moral Transgression

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.

Key Concept

Competition sometimes has undesirable consequences. These could include ‘tolerance’ of moral transgressions that further the economic interests of the organization. New research suggests that in highly competitive markets, where the pressure to outperform is intense, leaders might be less likely to discipline ‘bad’ employees who are ‘good’ for the bottom line.

Idea Summary

Why do unethical practices become ‘normalized’ in some organizations? Why do errant employees sometimes go unpunished for long periods of time? These are questions that many people will have asked in the wake of the phone hacking scandal at News of the World and the recent interest-rate-rigging scandals at major banks.

One explanation is that in highly competitive markets leaders turn a blind eye to unethical behaviours that serve the commercial interests of the business — in other words, that ethical leadership is contingent on the ‘macro-level’ environment and context. The fact that leaders in competitive markets are often under intense pressure to ‘deliver’ lends weight to this theory — and so does recent empirical research.

Three new studies, a survey of organizational leaders, a field experiment, and a controlled laboratory experiment, look at how the broader context in which leaders operate shapes their responses to the moral transgressions of employees. The survey finds a link between increased market competition and an ‘instrumental focus’ in organizations, and the experiments find a causal relationship between increased market competition and unethical leadership.

More precisely, the research shows that fierce market competition makes leaders:

  • more likely to think in terms of results rather than morals and more likely to evaluate wrongdoing on economic criteria — in other words, more likely to adopt an ‘instrumental’ decision-making approach in which the outcome rather than the morality of an action is their primary focus.
  • more likely to punish moral transgressions that result in a loss rather than those that result in a gain for the business — i.e. to adopt an approach to discipline that is inconsistent and selective.

The research, some of the first to investigate the inter-organizational factors influencing leaders’ attitudes to the unethical behaviour of employees, adds to literature that reveals the ‘unhealthy effects’ of competition. (Previous studies have shown a negative relationship between interpersonal rivalry and ethical behaviour — finding, for example, that purchasing agents who face high pressure to perform are more likely to resort to deception.)

It does not mean that inter-organizational rivalry will always lead to less ethical decision-making — but it does provide further fuel for the debate on the morality of unbridled free-market competition.

Business Application

The research suggests that highly competitive markets need close monitoring. Industry regulations and codes of conduct could help create working environments less conducive to ‘instrumental’ decision-making.

There are implications beyond the field of public policy, though. The research also suggests that organizations should:

  • Communicate explicitly what they expect from their leaders, particularly in competitive markets, focusing on the long-term survival of the organization rather than short-term profits.
  • Train current leaders to become ethical role models — and to understand the link between willingness to punish wayward employees and perceptions in the organization of procedural justice and fairness. (There’s nothing more demotivating to a ‘good’ employee than a ‘bad’ one who ‘gets away with it’.)
  • Make conscious efforts to seek out and promote leaders who are likely to stick by their principles in the face of intense market pressures. (In highly competitive environments, which are more likely to attract and retain the kind of employees who focus more on ends than means, this could involve a change in recruitment and selection procedures.)
  • Look for executive education providers that integrate ethics into regular courses and try to teach students the reality of the ethical dilemmas they might face. (Approaches where ethics is perceived to be ‘bolted on’ or marginalized as an ‘extra’ could be bad for the long-term ‘moral health’ of an organization.)
Contact Us

Authors

Institutions

Source

Idea conceived

  • May 2014

Idea posted

  • May 2014

DOI number

10.13007/380

Subject

References

Prophets vs. Profits: How Market Competition Influences Leaders’ Disciplining Behavior of Moral Transgressions. Pieter T. M. Desmet, Niek Hoogervorst & Marius Van Dijke. Academy of Management Proceedings (2013). Online article forthcoming.

Real Time Analytics