THE IRRATIONAL CALCULATOR: Sales at the Crossroads of Compliance

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ethikos coverKillingsworth Vener_20130326-40402 CROPPED HEADSHOTBy Scott Killingsworth
From ethikos magazine

Legend has it that one moonless midnight at a Mississippi crossroads, bluesman Robert Johnson, frustrated with his stalled career, out of money and bitter at the recent death of his wife and unborn child, sold his soul to Satan in exchange for heavenly musical talent. The story is apocryphal but the scenario all too familiar: elsewhere in this issue Richard Bistrong describes how salespersons in high-corruption countries and industries, under pressure and surrounded by evidee that corruption is “the way business is done here,” can find themselves at their own crossroads, making similar Faustian bargains to close a sale.

Bistrong provides a depressing list of factors that conspire to perpetuate a corrupt procurement environment: the push of performance expectations driven by forecasts and quotas; the pull of outsized sales commissions; the “tribal cocoon” of corrupt individuals—colleagues, intermediaries, government decision-makers—who make bribery seem normal and necessary; and the rationalization that says bribery hurts no one, really, and benefits many—including the salesperson, the employer and its shareholders. In the end the combined weight of these influences can tip the scales against compliance: as Bistrong says, “bribery is a crime of behaviors, where at some level, the ‘giver and taker’ have calculated that the benefits of corruption outweigh the risks and consequences of getting caught.”

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In this note I want to focus on the salesperson standing at the crossroads, making that fateful calculation whether to pay, authorize, or cover up a bribe. It’s even worse than Bistrong portrays. There’s more going on at the intersection of commerce and corruption: once the pressures and incentives are in place and the salesperson’s immediate self-interest in closing the deal is front and center, bugs in our mental software—what psychologists call “cognitive biases”—push us to pursue that self-interest despite the potentially disastrous consequences.

As Bistrong points out, the typical salesperson is no stranger to risk-taking, beginning with self-selecting for a job with extremely variable pay and continuing with the appetite for accepting business risk (and sometimes compliance risk) on behalf of the company. Ask any deal lawyer about the perceptual gulf between Sales and Legal when it comes to risk. But it’s not just appetite: At the crossroads, we tend to calculate risk and reward irrationally. Here are some of the ways it happens:

Conflicts of Interest and the Self-Serving Bias. The fundamental issue is that we cannot be objective about a decision when we have a personal interest in the outcome, such as a big commission at stake. My favorite example is a series of experiments conducted by Linda Babcock in which law students were given descriptions of an accident and asked to try to predict the amount of damages a judge would award the plaintiff. Each participant was told that they were either the plaintiff’s lawyer or the defendant’s, but a prize was offered for the best prediction of the neutral, objective judge’s decision. Despite the incentive for objectivity, those assigned the plaintiff’s lawyer role, on average, thought a judge would award 54% more than the defense lawyers predicted. The objectivity of both groups was unconsciously hijacked simply by being assigned a partisan role.

Unlike most of us when we make ordinary business decisions, sales people can calculate precisely the personal reward that is at stake in a sale: the amount of the commission shines out as a clear, objective beacon of motivation, and of temptation. On the other side of the equation we have the not-so-clear risk of getting caught at some indefinite point in an uncertain future, the not-so-clear risk that the crime will be pursued and actually proven, and the uncertain consequences if that should occur. All of these “ifs” and “whens” and “maybes” give a person’s insatiable “want self” a lot to work with against the better instincts of their ethical “should self.” Nobody would bribe if they believed they would get caught, lose their jobs and go to jail, but in the face of an imminent commission and pressure to meet forecast, our “self-serving bias” systematically discounts the likelihood of detection and punishment to near zero.

Besides likelihood, our “want self” can distort other variables of the risk/reward equation, notably whether a violation is occurring at all. Again, any deal lawyer can provide abundant tales of salespersons devising highly creative theories about why a potential course of action might not really be a legal violation. In the corruption context these theories often begin with the convenient “facilitating payments” exception to the FCPA, under which small bribes for routine performance of non-discretionary duties may not be illegal. This is potent fodder for rationalization about why a given situation may be a mere tip and not a true bribe, especially if done by a third-party intermediary under cloudy circumstances.

Routinization and Incrementalism. In high-risk regions, government corruption tends to occur at all levels, as sand in the gears of commerce requiring constant lubrication via bribes. This is why the “facilitating payments” exception exists, and as just indicated, the line between such a payment and an illegal bribe can be debatable. Worse, though, is that when habituated to petty corruption, one can literally forget to ask where the line is. Tenbrunsel and Messick describe two ways this can happen. First, habituation can lead to “ethical numbing,” where the corrupt behavior comes to seem so routine that one’s sense of its wrongness, illegality or risk fades and is simply not in the picture at the crossroads of decision. Second is our tendency not to make a fresh judgment of the ethical (or legal) aspects of a situation if it is only a little different from a previous situation that was deemed acceptable. The problem comes when the “facilitation” or “courtesy” payments one becomes accustomed to making gradually morph, step by small step, into something larger. Each successive step is judged acceptable, and the next step is compared only to the preceding one, not to the starting point. Pretty soon, without realizing it, one may have completed the proverbial “journey of a thousand miles.”

Loss Aversion. We have all heard the definition of a gambler as someone who loves winning more than they hate losing. But paradoxically, most people, including gamblers, will irrationally take more risk to avoid a loss than they will take in pursuit of an equivalent gain. This is the Nobel Prize-winning “prospect theory” of Daniel Kahneman and Amos Tversky. The effect is so strong that it’s measurable even when an identical fact situation is simply framed in loss terms versus in terms of a potential gain. In the corruption context this bias comes up in at least two ways. For the mild form, imagine a large procurement in which six months or a year of intense effort has been invested in making a sale—countless meetings, complex proposals revised over and over, best-and-final offers, maybe even engineering and product-development work—all to go for naught, or be “lost,” if the sale doesn’t go through. Sunk-cost fallacy aside, in this situation the failure to win the contract will be framed as a loss (“That’s six months of my life I’ll never get back!”) and will tempt one to risk bribery to avoid it.

Corrupt governmental officials can be very skillful at manipulating vendors and their sales people, especially by invoking loss aversion in a more concentrated form. As Bistrong points out, it is not uncommon for corrupt officials to set the hook with a contract award, or finalist status, so the seller has something very concrete to lose, before setting the bribery machinery in motion. At that point, when the salesperson has raised expectations at headquarters and is already counting on the resulting bonus, there arise inexplicable delays, a potential re-consideration of the award, or “political problems,” that can be solved with a little grease, or a lot. Under these conditions the salesperson’s focus on the risk of losing the deal can easily eclipse the risk of breaking the law.

This is by no means an exhaustive catalogue of the cognitive biases that make us “irrational calculators” of risk and reward, of sure immediate benefits versus debatable future costs. Motivated blindness can keep us from recognizing red flags if we would have something to lose by noticing them; time pressure can narrow our decision frames disastrously; and when we are tired or sleep-deprived, or maybe jet-lagged, “ego depletion” can prompt us to “just get it over with” via the simple, quick solution rather than the right one.

The situational pressures and temptations Bistrong describes are bad enough, but when we factor in the effects of our psychological quirks and mental bugs, it’s easy to see why the problem of embedded corruption is so intractable.

None of this, of course, is an excuse for unethical or illegal conduct. Individuals who bribe are responsible for their actions, whether the result of cynical premeditation or buggy brainware and self-deception. But ethics and compliance professionals cannot hope to be effective in eradicating corruption if we lack a clear understanding, not only of the pressures and temptations involved, but also of what actually happens inside the head of the salesperson at the crossroads when the fateful bargain is offered and a decision must be made on the spot.

Scott Killingsworth is a compliance lawyer with Bryan Cave LLP in Atlanta.

3 COMMENTS

  1. Thanks for this very good article! But one comment, we have the “facilitation payment”-exception inside the FCPA. But according to the UKBA and most local laws, a facilitation payment is a normal bribe. For this such a payment maybe okay for the FCPA, but the employee is violating the ruling local law, with all legal consequences. As we know about the cost of corruption, a facilitation payment in most of the cases means automatically a violation of the company’s code of conduct and its core values. According to this, most companies forbid facilitation payments in the Compliance programs.

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