UC Berkeley Press Release
Professor explores social behavior and business misdeeds
BERKELEY – Corporate misconduct can be the stuff of high drama. But prevailing theory has it that "settling up," the process of meting out consequences for corporate misdeeds, is largely determined by quite rational, unbiased financial markets and often the legal system.
Not necessarily so, according to Jo-Ellen Pozner, an assistant professor of organizational behavior and industrial relations at the University of California, Berkeley's Haas School of Business.
Instead, human social behavior and the fear of organizational and individual stigma by association actually drive the settling up process and outcomes such as firing, loss of appointments to outside corporate boards and diminished job prospects, she says in an article, "Stigma and Settling Up," in the June edition of the Journal of Business Ethics.
Considering the prevalence of corporate misconduct, the attention paid to it in the media and the importance of managing corporate image, it is essential to integrate information about economics and human behavior to better understand the world of business ethics, finance, corporate governance and settling up, according to Pozner.
She said in an interview that a good example of the phenomenon she is trying to highlight is seen in the case of Ralph Cioffi and Matthew Tannin, former hedge fund managers at the failed Bear Stearns investment bank, who were indicted in June for allegedly conspiring to mislead investors and commit securities fraud.
"Linking Cioffi and Tannin's names to the subprime mortgage crisis makes them easily identifiable villains, diverting attention from the problematic practices at individual institutions and the faults within the larger financial system that enabled their behavior," she said. And by using these two managers as scapegoats, the rest of the financial industry can avoid some of the public scrutiny that might damage other banks' reputations.
Similarly, Pozner said that pinning the Bear Stearns demise to Cioffi and Tannin takes some of the heat off Bear Stearns and JPMorgan Chase (which acquired Bear Stearns). "If these two 'bad apples' were responsible for what happened at Bear Stearns - which implies that the rest of Bear Stearns' executives were not - JPMorgan Chase can continue to employ former Bear Stearns executives without damaging its own image."
That desire to take the heat off and avoid being tainted by misconduct is the goal of behaviors such as avoidance, ostracizing, scapegoating and other actions intended to isolate executives and directors who are seen as responsible or easily targeted as such, said Pozner. Organizations can behave much the same as people, she said, and tend to associate with other companies they consider legitimate while avoiding those appearing to be unacceptable.
These exclusionary efforts may also "result from the fundamental desire to separate the pure or the sacred from the dangerous or profane, or may be the result of an evolutionarily-determined desire to create physical distance between oneself and parasites or other contaminants that might drain or damage oneself," Pozner writes in the journal article.
Whatever the root cause, the results can be puzzling and anything but rational or market-induced. As an example, Pozner cited a 1995 study that concluded that managers who are let go after their companies file for Chapter 11 bankruptcy protection are no more responsible for organizational failure than those who aren't let go, and the dismissed managers are not worse decision-makers than those who keep their jobs.
"Such a finding suggests that, following negative organizational outcomes, and particularly following misconduct, somebody must be blamed," she writes. "Taken in light of my integrated approach, it is clear that the parties suffering consequences are not necessarily those that are responsible for organizational misconduct at all."
And some executives seem especially adept at weathering a misconduct storm. In her article, Pozner references in-depth 1987 studies of four bankrupt computer firms that show that some managers lessened the consequences of their companies' fiscal missteps by their own behavioral tactics such as concealing involvement, denying responsibility, explaining the situation based on their own self-advantageous spin and other "impression management" tactics.