Corporate scandals are often shocking, but what’s more surprising is that most people involved didn’t set out to cause harm. So why are these scandals so common? Ethics advocate Anna Romberg explores the psychological factors that lead good people to make unethical decisions in corporate environments, shedding light on the systemic issues that allow corruption to take root.
When a corporate scandal hits, the narrative frequently focuses on a few individuals whose bad behavior caused the crisis. It’s tempting to think of the wrongdoing as the result of just a few “bad apples.” Yet this simplistic explanation ignores the larger reality of how organizational environments can strongly influence individual behavior. In fact, corporate scandals often stem from deep-rooted cultural and systemic issues rather than from intentional wrongdoing by one or two people.
The truth is, even well-intentioned people can make poor choices when caught in a corporate culture that promotes ethical blindness, fosters the bystander effect, and allows confirmation bias to obscure warning signs. Understanding these phenomena and the role they play in ethical lapses is key to preventing future scandals and fostering a more responsible business environment.
The Hidden Dangers of Ethical Blindness
Corporate culture is often seen as the bedrock of ethical behavior within a company. In a healthy culture, employees are more likely to make decisions that are not only profitable but also sustainable and ethical. However, when unethical behavior surfaces, the focus typically shifts to identifying the “culprits,” while the culture itself is overlooked or even defended. It’s easier to pin blame on a few individuals than to critically assess whether the company’s culture may have enabled such actions in the first place.
Ethical blindness occurs when individuals, often unconsciously, fail to recognize that their actions are unethical. This blindness is reinforced by a workplace dynamic in which employees don’t feel personally responsible for the outcomes of their decisions. For instance, a supervisor might assure a salesperson that they don’t need to worry about how contracts are handled because the supervisor is in charge. In such cases, ethical responsibility becomes blurred, and questionable actions, such as lavish client entertainment or less-than-transparent deals, may go unquestioned.
Experts studying corporate scandals argue that ethical blindness is often contextual, meaning that even well-meaning individuals can find themselves engaging in unethical practices when influenced by their environment. Decision-makers are encouraged to reflect on their role in fostering a culture where such decisions are possible, asking, “Could I have made this decision? How have I enabled it?”
Ethical blindness can infiltrate every level of a company. Board members may pride themselves on upholding the company’s values, but those values may become diluted as they are passed down the hierarchy, especially in distant markets where the corporate culture is less deeply ingrained. As this disconnection grows, it becomes increasingly difficult for employees on the ground to align their actions with the company’s ethical standards, especially when they are confronted with conflicting objectives, such as aggressive growth targets.
How Responsibility is Dispersed
Even when people are aware of unethical behavior, they may hesitate to speak out, falling prey to what’s known as the bystander effect. In large organizations, where responsibilities are widely dispersed, it’s easy for individuals to assume that someone else will take action. This diffusion of responsibility leads to situations where unethical behavior goes unchallenged for long periods, sometimes until it spirals into a full-blown scandal.
A powerful example of the bystander effect in action is the story of a sales manager who was eventually caught up in a corporate corruption investigation. Although the manager had been trained on anti-corruption laws and knew what was legally and ethically required of him, the pressure to achieve ever-increasing sales targets without acknowledging challenges led him down a path of unethical behavior. His earnings were tied to sales performance, and by not questioning his methods, the rest of the organization benefited from his success. No one intervened, even though many likely suspected something was wrong.
This is where the bystander effect comes into play. In this case, it wasn’t just that the manager made poor choices—it’s that others in the organization chose not to question his extraordinary sales figures. The bystander effect occurs when individuals feel less compelled to act in the presence of others because they assume someone else will take responsibility. The effect is particularly strong in large organizations, where challenging a colleague’s behavior can be seen as confrontational or risky. It’s much easier to accept good results at face value, especially when those results benefit the entire organization.
Ignoring Red Flags
Another psychological factor that contributes to corporate scandals is confirmation bias, the tendency for people to seek out information that confirms their existing beliefs and ignore information that contradicts them. In the context of a corporate scandal, this bias can cause individuals to overlook warning signs, even when they seem obvious in hindsight.
A well-known banking scandal serves as a striking example. A bank’s unit accounted for only a small percentage of its assets but generated a disproportionate amount of its earnings. The unit’s foreign client portfolio achieved an astonishing return on capital. Despite these remarkable figures, few people within the organization raised concerns about how this level of success was being achieved. Those who did raise questions found that their concerns were either ignored or inadequately investigated.
Confirmation bias played a major role in this scandal. It’s human nature to want to believe that things are going well, and once a narrative of success is established, it becomes difficult to challenge it. As a result, unethical behavior became normalized within the unit because the extraordinary returns were seen as evidence of competence rather than cause for concern.
Addressing Ethical Failures in Corporate Culture
If ethical blindness, the bystander effect, and confirmation bias are so pervasive, is it even possible to prevent corporate scandals? While these psychological phenomena are powerful, they can be mitigated by fostering a culture of openness and accountability. The first step is to recognize these biases and understand how they influence decision-making. Leaders should actively challenge their own assumptions and encourage diverse perspectives to be brought into the decision-making process.
Research shows that diverse teams make better decisions, and younger generations are more likely to question unethical practices. The Nordic Business Ethics (NBE) study found that women are also more likely to recognize ethical issues than men, though they may be less inclined to speak up, possibly due to fear of repercussions. Diversity alone isn’t enough to prevent scandals—organizations need to actively cultivate an environment where ethical questions can be raised without fear of negative consequences.
Ultimately, preventing corporate scandals requires ongoing effort and vigilance. Ethical behavior should not be assumed; it needs to be continuously reinforced through education, discussion, and reflection. Businesses that prioritize ethical decision-making are more likely to create sustainable practices that benefit not only their bottom line but also their employees, stakeholders, and society as a whole.
In the complex world of corporate ethics, scandals are rarely caused by outright malice. More often, they result from a combination of systemic issues, psychological biases, and a failure to question the status quo. By acknowledging these factors and fostering a culture of accountability and ethical awareness, businesses can work towards a future where scandals are the exception, not the rule.
