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LEADERSHIP SERIES
How to Build Responsible Business Leaders?
It’s not just character. We also need to avoid ‘moral overconfidence.’ (Coordinated by A. Sandeep)
Issue Date - 27/10/2011
 
Neither the Good Samaritan nor the Milgram experiments dealt with business situations, but in fact managers put employees in pressured situations like this all the time. If you give people powerful economic incentives to behave in a certain way – and if they can make a lot of money in the short-run – it can be very hard to resist that temptation. Over the last generation, many organizations have begun to utilize very large “pay for performance” incentive compensation plans, and they can push people to act in ways that may go against their normal sense of morality.

It’s not just CEOs with multimillion dollar pay packages who face these temptations. In the early 1990s, Sears Auto Centers decided to pay commissions to mechanics and service advisors based on the number of specific repairs – such as brake jobs – they performed in a given month. It was a cliff-type incentive – either you hit a certain number and you received the bonus, or you didn’t hit the number and received nothing. Guess what happened? By the last week of the month, every customer who brought a car to Sears was told they needed a brake job. Since it’s hard for consumers to know if this is true – they’re not experts – the mechanics reached their targets and received their bonuses. Sears made millions of dollars of unnecessary repairs (which it then lost in fines when regulators eventually caught on).

As a researcher, it’s interesting to me how well-developed the literature is on how people behave poorly when presented with complex moral problems, but how underdeveloped the research is on creating experiments in which people behave virtuously. The Good Samaritan and Milgram experiments are relatively well-known even among people who don’t study social science, and I could give you seven or eight examples of similar types of experiments. It’s harder to find examples of research highlighting how to create environments that incentivize the right kinds of responsible behavior.

 
One of my colleagues at Harvard, professor Amy Edmondson, has done work that touches on this. She studied surgical teams, and discovered that higher-performing teams had a higher rate of reported errors than lower-performing teams. That’s counterintuitive: why would high-performing teams make more mistakes? In fact, she learned, the reason the teams were higher-performing is they’d created an atmosphere of “psychological safety” where people could report mistakes without fearing punishment, and this error reporting led to greater opportunities for learning. This psychological safety was vital to teams’ performance improvements, and over time, teams that created that kind of culture out-performed.

Many leaders fail to create an environment of psychological safety – and in some cases, they engender a culture more akin to the Milgram experiments, where people are scared to speak up even when something is obviously wrong.

There’s a video that gives a great example of this. It features Frank Gorman, the CEO of Eastern Airlines, and was shot in 1983, when the airline industry was in crisis. Continental had just filed for bankruptcy, and Eastern was asking its employees to vote to cut their pay to help keep the airline in operation. The night before the vote, Gorman shot a video that would be viewed by all employees the next day. It’s an unbelievable five minutes. He sneers. He threatens. He offers instance after instance of “I told you so,” highlighting how he’d foreseen the industry’s troubles. It almost looks like a “Saturday Night Live” parody of CEO behavior. When we teach this case, we ask students: Why didn’t any of his staff tell him he was making a mistake by saying these things? Why hadn’t any of his advisors stood up and said: “Don’t do this. It’s wrong”? Indeed, at Harvard Business School, part of what we aim to teach our MBA students during their two years on our campus is that they should not be afraid to speak up. We want them to ask obvious questions and to challenge authority. We do this primarily through case studies, which try to project students into the role of managers facing difficult choice, and by facilitating vigorous classroom discussion. Students are given a relatively safe environment (they spend the entire first year in a section with the same 90 students) and incentivized (by our grading system) to challenge conventional wisdom, offer provocative viewpoints, and gain practice in standing up to authority figures (such as their professors). We also try to help them understand how managers have to answer to multiple constituencies – customers, shareholders, employees, the community – and how they have real responsibilities to each of them, even when their needs conflict. My hope is that in the future, if a CEO like Gorman were to do a video like the one we play in class, a member of his staff would have the courage to stop him.

          

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