Rational Versus Rationalized Risk Taking

Devdutt Pattanaik in his Economic Times article “Malady of Interpretation” narrated an interesting story from Mahabharata. Bhisma, leading the battle in Kurekshetra on behalf of Kauravas had the boon of death by wish. As he couldn’t be killed, Pandavas couldn’t win the battle. Then Krishna devised a ploy to trick Bhisma into lowering his bow. Pandavas knew Bhisma would not fight a woman, hence asked Shikandi, a transgender, to participate in the war. Shikandi was born a woman, hence Bhisma interpreted that he cannot shoot at a  woman, whereas Pandavas considered him a man. If Bhisma had rationalized that Shikandi was a man, Pandavas may not have won the battle.

Rational or Rationalized Risk Taking?

This is thought provoking; do we do rational risk taking or rationalize risk taking? Risk analysis is significantly subjective, and a whole lot depends on the judgment of the decision maker. The financial crises occurred as most financial institutions rationalized the risks of selling the CDOs as minimal. With hindsight, most question the decisions and fail to comprehend the rational for taking these risks.  Therefore, let us look at the situations that prompt us to rationalize risk taking.

1. Boss’s view

If the boss says so, most juniors will agree, even if the business decisions tantamount to jumping in a well. Depending on the organization culture and boss’s authoritative tendencies, juniors will rationalize risk taking decisions. Juniors show higher tendency to rationalize when they believe that their voice is not going to be heard, will be penalized for giving contradictory viewpoint or  rewarded for blindly agreeing to boss’s ideas.

2. Group think

When group think sets in, then tendency for rationalization increases tremendously. Group members agree for getting along and not rocking the boat. The attribute of looking at one’s own plans objectively and skeptically is completely missing among the group members. A voice shouting at the top of his/her lungs is also not going to be heard. On the other hand, anyone who gives a rational view may get attacked by the group members.

3. Self-interest

When we fall in love, we fail to see the negative attributes of our object of adoration. Our overwhelming pride in our ideas can make us believe our own hyperbole. There are many mountaineers who attempt to climb Mount Everest without adequate preparation and training, as they consider themselves unbeatable.  While passion and commitment is good, if a person is not open to debating their ideas, then it can become their waterloo.

Taking into account the extent to which social context, individual psychology and organization culture play a role in business decisions, it isn’t surprising that organizations are failing to manage risks. The devil is in the detail and management ideally should form decisions backed by data. But, quite often management takes decisions based arrogance, optimism and gut feel. Hence, rational thinking is compromised for rationalized thinking.

Therefore, other obstacle for rational risk taking is that it requires a whole lot of information. Usually, decisions are based on inadequate information and research. As Sun Pin says that to win a  war, the general should know strengths and weaknesses of his own army, the opponent’s army and the terrain. A general should draw the battle plan after taking all risks into account and get into battle only when victory is assured. However, in business this wisdom is ignored and business managers tend to rationalize while preparing corporate strategies.

Closing thoughts

The human psychology works on the premise that when we say “Mirror, mirror on the wall, who is the most beautiful of all?”, the mirror responds “You”. Dissenting and uncomplimentary views are hard to accept. The first reaction many a times is a desire to stuff something down the other person’s throat to stop their criticism and negative feedback. However, for rational risk taking the dissenting thoughts and critical feedback are worth gold. These prompt executives and risk managers to view strategies, business decisions and implementation plans dispassionately and objectively. Rather than deny the possibility of risks occurring by saying “this is not going to happen”, executives must ask – “how is this going to work?”.

One question for the readers – Can rational and rationalized risk taking co-exist?

References:

Devdutt Pattanaik in his Economic Times article – Malady of Interpretation

Impact of Political Will and Cornism on Risks

The Indian government is doing an about-face in respect to its stance on aviation industry. The government is looking at a proposal to allow 49% investment in Indian airline companies by foreign carriers. This proposal, if approved, will give a recourse to Kingfisher Airlines and Air India. A few years back, it had disallowed Tata group to do a joint venture with Singapore Airlines to block the move to acquire Air India. Now government may be looking for a buyer for Air India and has approved a financial restructuring plan of Rs. 30,000 crore. That means, though both the companies didn’t manage risks or business plans well, the government is bailing them out. They will be flying high; can we say because of Mr. Mallya’s political clout?

In another controversial decision, government is  passing a provision to tax a past transaction in Vodafone case. The decision is primarily taken in respect to Vodafone acquisition of Hutch Essar from Hong Kong based Hutchison Telecom. The government’s argues that though the deal was finalized in Hong Kong, the underlying asset resides in India, hence taxable in India for an amount of nearly Rs 12,000 crore ( USD 2.3 billion).  This has taken the company by surprise, as now it may have to make a cash payout as tax to Indian government. Although Indian government is entitled to pass laws with retrospective effect, the business sector bears the risks of it. Hence, out of blue regulatory changes can put the company in the red.

Of course last years telecom scam has left many telcos burnt. Supreme court cancelled 122 licenses of telecom companies granted by A.Raja. Norway’s Telenor and Abu Dhabi’s Etisalat questioned the government’s decision of three years back after cancellation of licenses of their joint venture partners.

These issues arise, as India does not have a political lobbying system similar to US and other developed countries. Individual relationships of business promoters with politicians result in out-of-the-way favorable decisions. However, as is clear from the writing on the wall, the decisions can be arbitrarily changed and revised due to new politician’s personal interest, Comptroller Auditor General’s reports and public outcry.

Therefore, leveraging on political relationships by bending the ethical rules is no longer a foolproof business plan. The risks arise unexpectedly and can wipe out the company. Hence, organizations need to focus on building an ethical culture and developing an ethical tone at the top. However, India is significantly lagging behind  in business ethics. The pathetic situation is highlighted by the fact, that today Economic Times ran an article titled “New Hats for the Chiefs”. It discusses the new titles being given to CXOs in India and mentioned Chief Ethics Officer as one of them. This is news in the most widely read financial newspapers of the country! Take a guess at envisaging the number of ethics officers in a country of over one billion people.

Closing Thoughts

While Indian government needs to get its act right to build public, private sector and foreign investors confidence, the private sector also needs to take a deep look at their own operating style and procedures. Political corniness doesn’t take the organization far, and may result in huge legal, reputation and operation risks. Business plans and strategies must be developed on sound ethical practices with complete adherence to regulatory requirements.

References:

Retaliation faced by Risk Managers and Auditors in India

Washington Post article “Maryland parks agency demotes auditor after spending questions, sources say” again brought to the forefront the retaliation auditors and risk managers face while doing their job. According to the article – “Abinet Y. Belachew was placed in a staff auditing position and his $124,000 salary was cut by more than $30,000, according to records from the agency after he questioned spending by top agency officials“. This is nothing new, the Ethics Resource Center survey of 2011 of US companies states that – “Almost one-fourth of those reporting bad behavior said they experienced some form of retaliation, up from 15% in 2009 and only 12% in 2007.”

The most surprising bit is, that there are hardly any such cases reported by Indian media. At most, media reports if a bureaucrat is fired or transferred from a critical position after a damaging disclosure of government wrongdoing. In respect to retaliation on risk managers and auditors in private sector, there is no coverage.

One can presume either that there is no retaliation or Indian auditing institutes haven’t lobbied to protect their members from retaliation. Indian institutes, namely, Institute of Chartered Accountants of India, Institute of Company Secretaries of India, etc. are governed by Ministry of Corporate Affairs. That could be reason for lack of awareness and action in this field. Moreover, India doesn’t have a whistle-blower protection act and a number of activists have been shot dead in broad daylight. Though, the listing agreement has a clause for whistle-blower protection, it is more in name only. Additionally, law and enforcement agencies are not without corruption. Hence, the cumulative affect is that private sector auditors and risk managers are left without recourse when facing retaliation.

1. Nature of Retaliation

Auditors and risk managers in India, therefore, have far tougher choices to make than their counterparts in the Western world. Doing the right thing and reporting against management, can cause more than just a job loss. In India, following methods are employed for retaliation against risk managers, auditors and whistle-blowers. These sometimes continue even after termination of the employee for a number of years :

a) Downgrade or transfer the individual from the position.

b) Isolate the person, turn the team against the person and bosses give threats of job loss.

c) Spread rumors about personal life of the person. For instance – if a person is married they inform the spouse about an affair, or if the person is single, they spread rumors on sex life and sexual orientation. Take photographs in compromising positions to blackmail the individual.

d) Spread rumors in professional circles to destroy the person’s credibility. The person is told that previous employers will be asked to do a negative background verification. After terminating the employee, organizations still do and even inform head hunters not to process the candidates papers.

e) Use detectives to tap phones, including mobile phones;  hack personal systems to monitor correspondence and internet activity. Inform individual’s contacts not to respond to phones and emails, and threaten if they do so.

f) Enter employee homes without authorization, install bugs and cameras to watch personal activities. Even steal items to make employee feel more vulnerable.

h) Pay relatives, friends and neighbors to stalk the person – physically, on phone and internet – to cause a psychological breakdown. The person is isolated and humiliated publicly on every occasion to instill fear in others.

i) Threaten the person with murder and rape to ensure that they do not go to law enforcement agencies or media. Bribe law enforcement agencies, attorneys and media to not accept the complaint and report the same.

j) Ensure all other sources of income are stopped as the person becomes financially liable and cannot fight back.

k) Try and make the person physically sick, by food poisoning and other means. Deny medical aid or ask doctors to provide incorrect medicines for treatment.

l) Lastly, in rare cases the person is murdered.

Considering the risks of retaliation and the unwritten rule that reports should be published according to management directives, auditors and risk managers deal with internal conflict at multiple levels. It is at one level, between doing the right thing and progress within the organization. At another level, it is about passion for auditing and risk management versus fear of endangering career and life. Overall, the choice is between following an ethical path for the benefit of society versus the option of compromising them for self-interest. With the high-level corruption in Indian society, it appears to be losing battle as a lone person battles mighty organizations.

2. Some Suggestions

The choices would be simpler if institutes provided mentoring and support in dealing with such cases. The institutes ensure that all members sign of on a code of ethics; however, do not provide the training and support on dealing with ethical dilemmas and protection against retaliation.  In this aspect, Indian institutes would do well to adopt practices of international institutes.

Moreover, international institutes have a stake in developing these practices in India. Not only Indians are members of the institutes, a number of multinationals operate in India. As multinationals are aware that it is easier to break the law and rules in India, due to high-level corruption and limited education on risk management areas, they are more prone to undertake unethical behavior and accounting practices in Indian and other emerging countries. Indian employees of multinationals are unlikely to whistle-blow on international law enforcement agencies websites as most don’t know where to report and the risks of reporting are high. Without support at local level, it is difficult to report at international level.

Closing Thoughts

In the end, the decision each risk manager and auditor needs to take is based on the reason for joining the profession. In India, chartered accountants earn equivalent to doctors, engineers and MBA’s. If they joined the profession to earn well and climb the corporate ladder, they may willingly compromise ethical standards. On the other hand, if they joined because they were passionate about the subject and wished to make a difference, they may compromise their own self interest for the betterment of society.

Overall, retaliation is tough to deal with and a higher level can make many buckle down in fear. Auditors and risk managers have a lot of power in their hands to ensure good practices are adopted by the corporate world, it is best to use it wisely. People need to be educated that by retaliating against risk managers and auditors, they are playing in the hands of people using unethical practices, thereby risking their own investments and well-being. The institutes should build the public awareness about the same.

References:

  1.  Maryland parks agency demotes auditor after spending questions, sources say – Washington Post
  2.  Ethics Resource Center 2011 Survey

Recruitment in Dysfunctional Organizations

Six months back you landed your dream job, the pay was great with an incredible job profile and a company brand name to match. Now you are not sure what you have gotten yourself into. You are perpetually asking yourself – should you continue or quit? You are asked to compromise personal values on a daily basis for showing loyalty to your boss and company. The situation that you are in, is not out of the best practices of human resource management or ethical culture, you have joined a dysfunctional organization. Putting it another way, an organization with a deviant corporate culture.

Employees face incredible personal and professional risks on joining an organization with a deviant culture. On the face of it, initially, everything looks unbelievably good. As the layers are peeled off, the employees feel they are in a sinister environment and are swallowed in quicksand. The walls of silence maintained ensure that employees do not discuss these concerns openly and fear of retaliation forces them to comply. Employees deceive themselves into believing that these unethical activities they are doing are just for a short time, and the situation will improve in a short while. A cold hard look is required in such circumstances, to understand the symptoms and take a decision.

The paper “Organi-cultural Deviance: Socialization of Individuals into Deviant Culture”, describes the process of individual indoctrination into the culture. A new employee goes through five stages of socialization into the workplace according to Wanous research. These are:

a) confront the reality of the new job –newcomers adjust their expectations to the reality of the job;

b) achieve role clarity-newcomers learn and negotiate the expectations and requirements of their roles in the organization;

c) locate oneself in the organization-newcomers learn how their work contributes to the work of the organization;

d) assess success-newcomers assess the value of their contributions to the organization; and

e) during the stages of socialization, the individual learns the language of the organization.

The above mentioned process is adopted by employees in a regular organization in the probation period, that varies from 3-6 months in most companies. In a deviant organization culture, the employee starts feeling the social pressure to comply to unethical practices and lose individual identity in this period. The process of indoctrination describes how the individual “self” is socialized into a deviant organization culture. The stages are as follows:

1) Stage I – In normal course of action, an individual has various separate identities, that they maintain to lead a fulfilling life. For instance, the employee has a work identity, a social identity, a family identity etc. In a deviant organization, these identities are slowly stripped away, and the employee is completely dependent on the organization identity. The employee is lured by big rewards to compromise their individual identity for the organization.

Since, the employee is still in probationary period, the fear of job loss makes them succumb to group think. The organization or group attempts to brain wash the individual by giving justification of the behavior for altruistic purposes. For instance, they will ask to humiliate or harass another person or employee, to improve the harassed person’s behavior. The justification given will be that it is for the betterment of the victim, rather than accepting that they are indulging in socially unacceptable behavior. Further on, they are asked to indulge in degrading activity for the sake of fun. In the book “The Wolf of Wall Street” Jordon Belfort describes activities at Stratton. He mentioned that seniors in the company had free for all sex discussion in the morning meetings and to boost morale arranged depraved acts. For example, in one case, they cut hair of female employee with her agreement in the conference room. Women employees especially have a tough time as they are mostly treated as sex objects.

2) Stage II –  In this phase the employee becomes dependent on the organization and the psychological chains tighten. The idea initially sold to the individual is that the group has an altruistic purpose and is for the benefit of the society.  The individual is forced into thinking that the rules of the group must be obeyed at all personal costs and no dissenting views are permitted. Employees are rewarded amply for complete compliance and punished severely for disagreement and disobedience. The individual is encouraged to share vulnerabilities and weaknesses with the group, and these are used to exact compliance to group. Simultaneously, fear and threat are used if an individual wishes to leave the group. The group follows its own code of conduct and uses loaded language and signs to communicate.

In this situation, the individual is indirectly commanded to put his/her personal and family needs over the group or organization. An article of Vanity Fair titled “Lehman’s Desperate Housewives”  narrates the situation from Vicky Ward’s book -“The Devil’s Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers” at Lehman before collapse. It says –

Lehman Brothers C.E.O. Dick Fuld expected his top executives to get married, and stay married. For their wives, the firm was both fishbowl and shark tank, with unwritten rules about the clothes they wore, the charities they supported, and the hikes they took at the company’s Sun Valley retreats.

One of the senior executives wife described her child delivery with these words –

“I was in labor with our daughter and had to lie there without him … but I wouldn’t get mad at him—he had called the entire Hong Kong office in for a meeting. We knew that it would have been used against him. If you made a personal choice that hurt Lehman, it was over for you.

Stage III – In the last stage, the indoctrination is complete. The individual’s motivation, judgments and perceptions are transformed as the person becomes a member. The individual derives his identity from the group or organization and opinions from outside the group are completely discarded. Any information that contradicts  the groups perception is considered harmful for group unity and the sender/ giver of the information is attacked. The individual has no freedom of action and blindly obeys instructions of the group. Unfortunately, the leaders and existing members of the group have so ingrained the thought pattern of socially and psychologically harmful behavior that they lose insight of right versus wrong.

For instance, as in the case of Enron or the more recent “News of the World” phone hacking scandal, seniors knew of the unethical and fraudulent activities being conducted in the organization. Some even know the details but will not take any concrete action to bring change.

Whether this culture sets in large organizations or small social groups, the psychological pattern is established for deviant behavior. The longer the person is a member of the group, the less probability exists of the person being able to see a true reflection of themselves. All inputs from group outsiders of logical, rational and socially acceptable behavior are disregarded and members adopt a posture of willful blindness. The members continue to compromise their morals for financial, physical and social security.

Closing Thoughts

Deviant cultures are set up by leaders in powerful positions with derailment attributes. However, once the culture is established in a social or corporate organization, it is hard to re-establish normal behavior patterns. People have a choice to either comply or be isolated. To avoid the social, physical and financial threats most compromise their morals and show unquestioning alliance to the more powerful people. Either an internal revolution by the members or  intervention from external parties can break the psychic trap established in such organizations. An individual’s best option is not to join such a group or organization, and if they have mistakenly joined it, leave at the earliest possible point. Else, the life course for unethical and criminal behavior is established without a return ticket.
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