Carol Braun was described as a "dedicated, dependable, competent and conscientious" 27-year employee of Goodwill Industries of North Central Wisconsin. She must have had some pretty good skills at reputation management, because over seven years, she used her position as comptroller to embezzle more than half a million dollars.
Her actions were discovered when auditors found a $77,000 discrepancy and conducted a comprehensive fraud investigation. Braun pleaded no contest to a single charge of embezzlement in 2003, and was sentenced to ﬁve years in prison and another ﬁve years of extended supervision. Braun's actions resulted not only in signiﬁcant ﬁnancial loss to the Wisconsin Goodwill, but also in ﬁnancial loss to her colleagues, whose pay had to be cut to make up the budget shortfall, and reputational damage to the agency.
That's a particularly egregious example, but organizations teem with societal dilemmas. We often don't notice them because we're intuitively adept at dealing with groups of people. We understand hierarchies and authority, and the difference among superiors, colleagues, and subordinates. We're facile at ofﬁce politics because we've evolved to deal with social groups. But the societal dilemmas are still there, and sometimes it only takes a little nudge to bring them to the surface.
Every employee of an organization is faced with a societal dilemma: should he do what he wants, or should he do what the organization wants him to do?
In economics, this is known as the principal–agent problem: the principal (in this case the organization) hires an agent (the employee) to pursue the principal's interests, but because the competing interests of the principal and the agent are different, it can be difﬁcult to get the agent to cooperate.
Defection isn't all-or-nothing, either. Defections can be as diverse as coming in late, not working very hard, venting, whining, passive-aggressive behavior with coworkers, stealing paper clips from the ofﬁce supply closet, or large-scale embezzlement. He can cooperate with the organization and limit his expenses, or he can put his own self-interest ﬁrst and spend wildly—or anything in-between.
We've all had experience with these sorts of defectors. Whether it's company employees, government employees, or members of any type of organization, there are always people who simply don't do the job they're supposed to. There's another kind of defecting employee: someone who doesn't think of his employer's best interest while doing his job. Think of the ofﬁcious employee who cares more about the minutiae of his procedures than the job he's actually supposed to do, or the employee who spends more time on ofﬁce politics than actually working. The comic strip Dilbert is all about the dynamics of defecting employees and their defecting managers.
The fact that organizations almost never stop functioning because of defecting employees is a testament to how well societal pressures work in these situations. Organizations pay their employees, but there's a lot more than just salary keeping people doing their jobs. People feel good about what they do.
They like being part of a team and work to maintain their good reputation at work. They respond to authority and generally do what their superiors want them to do. There's also a self-selection process going on: companies tend to hire and retain people who set aside their personal interests in favor of their employer's interests, and individuals tend to apply to work at companies that share their own balance between corporate and personal interests. And if those incentives aren't enough, corporations regularly ﬁre employees who don't do what they're paid to do—or employees quit when they don't like their working conditions.
There are also other ﬁnancial incentives to cooperation in the workplace: commissions, proﬁt sharing, stock options, efﬁciency wages, and rewards based on performance.
The poorer the job is—the less well-paying, the less personally satisfying, or the more unpleasant—the more restrictive the security measures tend to be.
Minimum-wage employees are often subject to rigorous supervision, and punitive penalties if they defect. Higher-level employees are often given more latitude and autonomy to do their job, which comes with a greater ability to defect.
This means that the ability to defect, and the stakes of defection, generally increase the higher up someone is within an organization. The overall trade-off is probably good for the organization, even though the occasional high-ranking defecting employee can do more damage before being discovered and realigned or ﬁred than some misbehaving staff on the bottom rung.
A senior executive can modify the organizational interest to be more in line with his own. And since he is in charge of implementing societal pressures to ensure that employees act in the organizational group interest, he can design solutions that make employees more likely to cooperate while still leaving him room to defect. He can build in loopholes. Additionally, because he can implement societal pressures to limit defections among the other employees, he can minimize the bad apple effect that would magnify the adverse effects of his defection to the organization.
In extreme cases, a CEO can run the company into bankruptcy for his personal proﬁt, a ploy called "corporate looting" or "control fraud." His power makes it possible for him to impose his personal agenda on top of the organizational agenda, so the organization becomes—at least in part—his personal agent.
This kind of thing doesn't have to be as extreme as fraud. Think of a CEO whose salary depends on the company's stock price on a particular date. That CEO can either cooperate with the group interest by doing what's best for the company or defect in favor of his self-interest, doing whatever is necessary to drive the stock price as high as possible on that date—even if it hurts the company in the long run.
Sambo's restaurants had an odd incentive scheme called "fraction of the action" that let managers buy a 10% interest in individual restaurants: not only the ones they worked at, but others as well. This enabled rapid early expansion for the chain, since it both helped ﬁnance new openings and gave managers a huge incentive to make restaurants prosper. But as the chain grew, people all over the hierarchy had individual ﬁnancial interests that conﬂicted with their loyalty to the chain as a whole. People responsible for getting food to a whole region were able to favor speciﬁc restaurants, for instance.
On the other hand, executives have a lot of societal pressures focused on them that's supposed to limit this sort of behavior. In the U.S., the Sarbanes-Oxley Act was passed precisely for this purpose. And the inherent restraints of their roles prevent most of them from being brazen about it. But there are exceptions, and some of those are what we read about in the newspapers.
From Liars & Outliers: Enabling The Trust That Society Needs To Thrive by Bruce Schneier. Excerpted with permission from John Wiley & Sons, Inc.
[Image: Flickr user Louish Pixel]