Bad systems make companies do bad things

03 October 2016

Polluting industry

Companies are so routinely accused of behaving with ill-intent, you’d assume they must be led and staffed by uniquely awful human beings.

And there are people who believe just that. Nice people go to work for NGOs or for the public sector. Greedy selfish people go to work for the private sector.

The makers of the 2003 film ‘The Corporation’ certainly thought so. Their contention was that corporations behaved like psychopaths and therefore were like mad dogs that must be controlled.

When talking about making the film, Mark Achbar said: “Not that I ever doubted the overall purpose of what we were doing, or the message of the film, but when we started talking to a lot of these people who I thought would be these typical suits... I don't know, whether it's my naivete in some way, but I got a sense of them as real human beings. I could understand their point of view, and to be quite honest, that really surprised me.”

Gee. Imagine that. Real human beings. Whoever would have thought it?

So if we go with the more likely scenario, that people are people and you get just as many good ones in every walk of life, at every level of achievement, then we need an alternative explanation as to why things go wrong.

Because they do go wrong. That’s not a unique phenomenon to companies, of course. It’s just that the consequences can be more highly visible.

Yes, there are some genuinely bad apples. What happened at Enron is a case in point. The people in charge got greedy and arrogant. They broke the law. They went to jail.

But these cases are the exception. Even the best-led progressive companies get it wrong sometimes. And even most of the current or former ‘pariah’ companies are not led by people of ill intent.

I would argue that it comes down to pure and simple system design.

People follow incentives

I already mentioned how one of the books that shaped my thinking was Freakonomics, which showed just how consistently human beings follow the incentives that are created for them.

People chasing a carrot

Any company of a certain size depends on a system of incentives to get its hundreds or thousands or tens of thousands of people to behave in a consistent manner. They reward great performance. They seek to minimise poor performance.

But it turns out that system design is trickier than you think, because so many of the things that make perfect sense to do actually create perverse incentives, or have other unintended consequences.

And when good companies do bad things, usually it’s a system breakdown to blame.

Here are some of the ways that bad systems create corporate social irresponsibility.

1. Rewards are focused on short-term financial performance

Of course, every company needs to achieve a strong financial performance or else it is in trouble. And it may seek to send the signal to employees that it wants to achieve that performance ‘in the right way’. But inevitably, performance measures on finance are measured in hard numbers. ‘In the right way’ measures – adherence to corporate culture, or reducing environmental impact – are usually by their nature softer.

There are usually explicit rewards for meeting the numbers. Promotion. Bonuses. Not so much for the other stuff.

It’s no great revelation of human psychology to know which measures get taken the most seriously, and have the most bearing on the individual’s future career within the company.

2. Incentives are disconnected from outcomes

I’ve seen companies before now where their health and safety performance was measured in the number of training workshops they carried out across the company. On this particular measure, which was completely within their control, they excelled. Unfortunately, the accident rate went up, not down. In that case, people noticed the accident rate, of course. But they spent a long time in denial that this represented concrete evidence that their approach wasn’t achieving the results.

And usually the evidence isn’t even that high profile. It’s only a few people on the ground who see clearly that the policy they’re told to follow isn’t achieving the intended results. But if the culture of the place is that you do as you’re told, and it’s nobody’s job to draw attention to inconvenient outcomes, then the message won’t go back up the chain.

If you want to see an example of this in practice go to the London Underground at peak times and watch the employees on the platform talking through megaphones telling people to “use all available doors”. I don’t believe a single person in the history of the Underground has ever used a different door as a result of that particular initiative. And yet it continues …

3. There is a big disincentive to let the top leadership know bad news

I have always believed that everybody in an organisation owes the leadership the duty of letting them know the bad news early, and that to that end companies should strive to create a ‘no blame culture’.

I experienced for myself just how hard it can be to create such a culture. People naturally watch their backs and seek to avoid the finger of blame pointing at them.

I once took part in a leadership development 5-day workshop where part of the exercise was a full-day role play, which was videoed and then analysed after the event.

When I read my brief, I found that my character had discovered that the company was breaking the law (I don’t remember how). Before the ‘board meeting’ I pulled the ‘CEO’ to one side to give him this key bit of information. To my surprise, he slapped me down. After the day had finished and we were reviewing the videos, a number of the people there expressed outrage that I’d done such a thing – that to do so was betraying the ‘team’ that were reporting to me by telling tales on them.

I was bemused, and only afterwards realised that these were people who came from large companies where watching your back, and protecting the team from criticism from above, was the predominant culture. They weren’t born that way. The system made them that way.

The result was that these were people who were motivated by how to survive in a hostile corporate culture. Not how to make their company more successful. Not what you want, and certainly not leadership behaviour.

4. The corporate culture encourages wilful blindness

When senior managers are not encouraged to expose themselves to a wider range of information, and become too narrowly focused on how their industry currently works, they can become blind to the issues and forces that are changing that industry.

That’s bad enough, but then when you add to that the ‘social proof’ factor – that the people around them will follow their lead in failing to consider certain issues to be relevant – that can lead to institutional blindness.

Good systems go out of their way to expose decision makers to a wider range of perspectives, and information about what is happening on the ground.

5. Tribal instincts give people a distorted view of company behaviour

We are all tribal by instinct. Our family. Our country. Our football team. Our company. We routinely believe our own tribe to be more ethical, more talented, more honest. And when somebody criticises us, we react defensively and instinctively.

The problem is that unless we see clearly exactly how we are doing in the real world, then we won’t know what are the things we need to improve.

If our competitor is doing better than we are in a sustainability index, for instance, we can choose to assume they must have been lying in their responses to the questionnaire (I have heard this argument from two different companies about each other). Or we can take the information as evidence that we may not be perfect, and we have things to learn from others.

Since the top sports people – the ones who the rankings show to be the very best at what they do in the world – still manage to lose to others, and to keep having to learn the lessons from those losses, it would be remarkable if that wasn’t the case in business. But so often, people believe so strongly in their own company they will avoid seeing this if at all possible.

So what does it mean?

The list above represents a few of the ones that I have seen in action numerous times. I doubt that it covers all the instances, and I’m sure you could probably add to the list.

You’ll note that there is a mix of cases where poor system design leads to unintended consequences, along with others where the problem is a more cultural one.

Both of these can be addressed by how companies organise themselves.

Good leaders go to great lengths to break out of the isolation bubble that can surround them, to see how things are really working on the ground, to hear the bad news, and to create a culture that makes people accountable for the culture of the company not just the financial results.

But great leadership is a rarity. And when you get companies that are in denial about something important – like hints of bad things three levels down in their supply chain, or a suspected environmental impact of a process currently key to their product – it’s often a sign of systemic problems rather than because those leaders actually intend those negative consequences.

Of course, the leaders are also susceptible to perverse incentives. Half of leaders in a recent poll said that they might do something mildly unethical to boost performance when they assumed they could get away with it. That just makes them normal, not evil, but it’s unfortunate we can’t hope for a higher percentage of quality leadership in business.

That’s why, when effective campaign groups can make the issues more visible, companies so often respond a lot more quickly than some might assume.

And it’s why you should never allow yourself the laziness of assuming that a company – any company – is simply evil and beyond reach.