Why organizational ethics fails.
Table of Contents
- Another Case of Fraud
- The Unethical Practices at Autonomy
- Organizational Ethics Prove that Firms Corrupt Ethics
- The Culprits in Unethical Organizational Behavior
- How Organizational Function Breeds Bad Organizational Ethics
- Looking Back at Autonomy
Another Case of Fraud
Autonomy Corporation, founded by Dr. Michael Lynch in 1996, was a British software company specializing in enterprise search and information management. Autonomy's technology aimed to analyze and organize vast amounts of unstructured data, such as emails, documents, and multimedia files, which enticed Hewlett-Packard (HP) to acquire the company.
In the wake of Autonomy's acquisition by Hewlett-Packard (HP), one of Autonomy’s leadership team alleged a series of questionable accounting and business practices at Autonomy prior to the acquisition. This revelation, following the departure of Autonomy founder Mike Lynch, shed light on the overvaluation of Autonomy at the time of the acquisition, a result of accounting improprieties.
The controversy led to a legal battle between HP and Autonomy's former management, with lawsuits and counter-lawsuits filed. Shareholders sued the company, claiming they were misled about the Autonomy acquisition, and in 2015, HP reached a settlement with them. However, the legal disputes between HP and Autonomy's former management continued for several years, leading to a victory in court by HP in 2022.
The Autonomy-HP fraud case remains a prominent example of a high-profile corporate scandal, highlighting how organizational ethics fails due to the nature of firms corrupting ethical behavior.
The Unethical Practices at Autonomy
Autonomy was found to have bolstered its revenue, core growth rate, and gross margins in a seemingly willful act to make the company appear more profitable than it was in reality. This ongoing practice revealed a top-down unethical approach in management and leadership that was driven by bottom-line thinking. Autonomy accelerated, miscategorized, and “created” more than $200 million in revenue over a two-year period beginning in 2009, which equated to about 12 percent of Autonomy’s $1.61 billion in revenue for 2009 and 2010 (Drucker, 2012).
Autonomy resorted to various accounting improprieties that inflated its revenues, core growth rate and gross margins. These included:
- Booking hardware sales as software sales, which had higher margins and were more valued by the market.
- Selling software to value-added resellers (VARs) and intermediaries, who then sold it to end-users, creating a circular transaction that boosted revenues but did not reflect actual demand.
- Recognizing revenue upfront from long-term contracts, instead of spreading it over the duration of the contract, as required by the accounting standards.
- Misclassifying some operating expenses as capital expenditures, which reduced costs and increased cash flow.
Organizational Ethics Prove that Firms Corrupt Ethics
Yet another massive failure of ethical accounting practices occurred after implementation of Sarbanes Oxley and the examples of Enron and WorldCom. The inflation of stock prices, misclassification of expenses, and other fraudulent activities that mirrored past cases, along with stiffer legal penalties, failed to deter unethical leadership. More to the point, how could leadership possibly have thought that selling an over-valued company to another company, with HP’s resources, would not be eventually noticed? Part of the answer resided in the nature of firms which seek profit as their primary purpose but another part can be seen in the organizational ethics that academics and industry leaders alike believe lead the organization but are instead fostered by the organization to better facilitate its function.
The Culprits in Unethical Organizational Behavior
Personal and Organizational Ethical Conflicts
Ethics play a crucial role in both personal and organizational contexts. However, conflicts often arise when personal and organizational ethics do not align. This issue is exacerbated when leadership lacks ethics and reinforces poor ethical behavior. In the case of Autonomy, the unethical accounting practices were part of an ongoing practice of misappropriating financial data, leading to a conflict between personal and organizational ethics. Clearly, these conflicts existed, evidenced by members coming forward to report the unethical behavior.
When we consider the conflict between personal and professional ethics, an imbalance must be considered. Personal ethics take a subordinate role to professional ethics within the workplace, these applied ethics are meant to provide fairness, equity, and also to safeguard specific areas of behavior that might be open to debate within personal ethics.
This system, intended to solve ethical dilemmas between professional and personal ethics, for some reason, breaks down in situations of corporate fraud. Organizational ethics become fail and personal ethics fail takeover. The person who doesn’t lie or steal, may go to work and lie and steal by omitting facts to gain financially, such as in a deal to sell a company, by “fudging accounting”.
One might argue, these people are unethical to begin with but for this argument to be true, you would need to believe that sometimes whole divisions of the company or their accounting firms were filled with unethical people. In the case of Autonomy, you would have to believe that all senior management, the board, and likely, most of their accounting personnel were all unethical people. This seems highly unlikely since all these personnel needed to achieve some level of success prior to attaining their positions which, though possible, would mean all of them, with lack of ethics attained their position. Perhaps this is true of a few but not all.
Legal and Ethical Conflicts
The Autonomy case also highlights the conflicts between law and ethics. While many of the practices at Autonomy were legal, they were not ethical as they concealed the true value of the company. Such conflicts are common in business due to the existence of legal loopholes and the absence of laws to govern every behavior and practice. Autonomy's unethical practices ultimately led to an $11 billion fraud, as they were used to overvalue the company, an action that is illegal.
If you know the ultimate result of your unethical behavior, legal or not, is a substantial financial loss for another party, then we find ourselves back again to the idea that not only did the organizational ethics failed but also personal ethics. It would be different in situations where ignorance was involved but knowingly miscategorizing accounting to inflate value is not one of them. Some argue that this situation underscores the need for companies to establish ethical standards that surpass legal limitations to prevent such practices but when dealing with complex accounting and organizational structures it is impossible to create a practical ethical guideline to cover every instance. Again, there is a failing of not personal ethics.
To say that everyone in these situations is unethical is a ridiculous overgeneralization since corporate fraud often involves many people or even departments, rendering the unethical culprit argument unlikely.
How Organizational Function Breeds Bad Organizational Ethics
We often think of organizational ethics as a structure that directs behavior toward proper choices. If this thinking were true, organizations could create ethical statements and guidelines, or implement an ethics oversight system to teach and enforce compliance – just like many companies have already. Yet large corporate fraud continues to occur because ethics is not a structure but an obstacle to behavior.
Corporations breed unethical behavior by design and function. When you start working at a company you are typically inundated with rules and often playing by these rules becomes self-destructive. Because companies are built on competitiveness, meaning not everyone can get the promotion, you are always competing with peers for advancement. In competitive areas, such as sales, you compete with peers and other companies. In these situations, it is easy to see how ethics becomes an obstacle because you need to somehow show you are better, often in a situation where there is little room for price negotiation or where you are the better person for the job. Any edge, often illegal as well as unethical, becomes the tipping point to success:
- Misleading communications: This involves advertising a product or service feature that does not exist, making false claims to clients or suppliers, or omitting facts that change the meaning of a message.
- Fraud: This is the intentional deception or misrepresentation of facts for personal or financial gain. Fraud can include falsifying records, inflating expenses, embezzling funds, engaging in insider trading, and other schemes.
- Bribery and corruption: This is the offering or accepting of money, gifts, favors, or other benefits in exchange for influence or preferential treatment. Bribery and corruption can undermine fair competition, erode public trust, and damage the reputation of the organization.
- Discrimination and harassment: This is the unfair or hostile treatment of employees or customers based on their race, gender, age, religion, disability, sexual orientation, or other protected characteristics. Discrimination and harassment can create a toxic work environment, lower morale, and expose the organization to legal liability.
- Environmental damage: This is the harmful impact of the organization’s activities on the natural environment, such as polluting the air, water, or soil, depleting natural resources, or contributing to climate change. Environmental damage can endanger the health and well-being of current and future generations, as well as harm the organization’s reputation and social license to operate.
- Unfair labor practices: This is the violation of the rights and interests of workers, such as paying below minimum wage, forcing overtime, denying benefits, exploiting child labor, or suppressing unionization. Unfair labor practices can exploit workers, reduce productivity, and trigger legal action or labor unrest.
- Conflicts of interest: This is the situation where an employee’s personal or professional interests interfere with the best interests of the organization or its stakeholders. Conflicts of interest can compromise the employee’s judgment, loyalty, and integrity, and lead to unethical or illegal actions.
- Plagiarism and intellectual property theft: This is the unauthorized use or appropriation of someone else’s ideas, words, or creations without proper acknowledgment or permission. Plagiarism and intellectual property theft can infringe on the rights and credits of the original authors or owners, and expose the organization to legal consequences or reputational damage.
- Whistleblower retaliation: This is the adverse action taken against an employee who reports or exposes wrongdoing, misconduct, or unethical behavior within the organization or to external authorities. Whistleblower retaliation can discourage employees from speaking up, undermine the organization’s accountability and transparency, and violate the law or ethical standards.
- Privacy breaches: This is the unauthorized access, disclosure, or misuse of personal or confidential information of employees, customers, or other parties. Privacy breaches can violate the trust and consent of the data subjects, expose them to identity theft, fraud, or other harms, and damage the organization’s credibility and security.
In competition, when all skill sets and conditions are equal, unethical behavior can provide victory over competitors.
Since the function of the corporation is to make money, then all things that bar this goal become obstacles, including organizational ethics. Profit-seeking defines the structure, and therefore, all members, who are part of that structure, now abide by the organization’s purpose. Organizational and personal ethics exist in dissonance because the person needs to make profit for the organization so they can profit personally. The organization’s primary goal wins out because the person has too much to lose by abiding by the organization’s or their personal ethics. The organization, by purpose, strips the individual of their ability to make proper ethical decisions because they are always at risk.
If you make a mistake and lose a company thousands or millions of dollars, you will probably get fired. If you can hide the mistake, but instead follow organizational and personal ethics and come clean, you will still likely get fired. If you can hide this mistake or push the blame somewhere else, and do so, you won’t get fired.
Looking Back at Autonomy
The Autonomy case serves as a stark reminder of why unethical behavior continues to occur in business. Despite the presence of employees and managers who believed the behavior was unethical, fear prevented them from speaking out, until after the fact. Having reporting processes or open door policies might help with some ethical issues, but these measures are woefully inadequate to solve the problem since upper management, the people controlling the processes and doors, are usually the corporate fraud culprits. In ethical dissonance caused by corporate purpose, organizational ethics will fail, no matter the transparency and integrity espoused.