Companies with rigorous compliance programs hope such
programs will curtail employee wrongdoing

The Trouble With
Corporate
Compliance
Programs
Companies with rigorous compliance programs hope such
programs will curtail employee wrongdoing. But to prevent
employee misconduct, companies also have to understand
how employees reach unethical decisions — and what affects
their decision-making processes.
Vol. 59, No. 1 • Reprint #59110 • http://mitsmr.com/2gNaJjs
The Trouble With Corporate
Compliance Programs
Todd Haugh
Companies with rigorous compliance programs hope such programs will
curtail employee wrongdoing. But to prevent employee misconduct,
companies also have to understand how employees reach unethical
decisions — and what affects their decision-making processes.
Multinational corporations spend millions of dollars per
year on compliance. In highly regulated industries such as
health care and finance, large companies spend much more,
sometimes hiring hundreds or even thousands of
compliance officers at a time.
1
Siemens AG reportedly
spent more than $1 billion on an internal investigation
related to a government inquiry into the company’s payment
of foreign bribes. 2 But the costs are not just financial.
Compliance programs are aimed at eliminating the timeconsuming and distracting regulatory and legal processes
that accompany ethical failures.
There is a belief on the part of corporate leaders that when
rigorous compliance programs are in place, employee
wrongdoing will largely disappear. If something does go
wrong, the hope is that having a comprehensive program
will help convince regulators that the company’s compliance
and ethics initiatives were “effective” (the standard set by U.S
sentencing guidelines). 3
Companies strive to make their programs as “bulletproof ”
as possible. Unfortunately, even the most comprehensive
programs won’t curtail corporate wrongdoing or the
government intervention that follows. For instance,
Volkswagen AG’s compliance program didn’t stop employees
from installing “defeat device” software to cheat emissions
tests, nor did Wells Fargo & Co.’s policies prevent its
employees from opening new customer accounts without
customers’ authorization. More than 15 years after the Enron
scandal, most companies know very little about how
employees make ethical decisions or the psychological
mechanisms that cause them to perform unethical and
illegal acts. Even fewer companies have compliance
strategies aimed at curbing such behaviors.
The goal of this article is to pull together the burgeoning
field of behavioral ethics, which provides insight into how
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individuals make ethical decisions, with the work of
criminologists who study individual and corporate
criminality. My aim is to help business leaders see why their
corporate compliance efforts are falling short and how those
efforts can be improved. In addition, I will offer some
practical and cost-effective steps for improving compliance
programs that focus on employee behavior — the best way
to make compliance truly effective.
Dual Systems of Thinking
Corporate compliance depends on the behavior of
individual employees. If employees, officers, and managers
always acted in a law-abiding and ethical manner,
compliance failures would rarely occur. Of course, that is
not realistic. That is why companies need to be aware of
how and why employees act the way they do. This starts
with understanding how people make decisions generally
and how that translates into ethical decision-making.
Contrary to traditional economic theory, people don’t make
strictly rational decisions. Instead, as the work of
psychologists Daniel Kahneman and Amos Tversky
revealed, most decisions are influenced by dual cognitive
processes: intuitive and reasoning.
4 The intuitive process
(which Kahneman and Tversky refer to as System 1) is “fast,
automatic, effortless, associative, and often emotionally
charged.”
5
It operates by associative memory and habit,
which makes it difficult to control or modify. A lot happens
at once through System 1 — the mind offers associations
rapidly, one idea after another, all linked effortlessly. The
speed and ease by which System 1 operates means that “most
of the work of associative thinking is silent, hidden from our
conscious selves.”
6
The reasoning process (referred to as System 2) is more
serial and deliberate. It is engaged when we use thought
in an organized manner. We use it to solve complex math
problems, write a paragraph, or contemplate multifaceted
decisions when there aren’t easy associations to make.
System 2 thinking gives us the “experience of agency,
autonomy, and volition.”
7 Not surprisingly, the reasoning
process requires much more mental effort than using
intuition. Reasoning isn’t necessarily better than intuitive
thinking — you wouldn’t want to reason your way through
every one of your day-to-day tasks — but for the most
important decisions, it’s critical. Yet, because System 2
thinking takes more effort, our minds have developed to
rely primarily on System 1, reserving System 2 either for
the most challenging mental tasks or to correct errors in
our automatic thinking. This may seem fine, but research
shows that people often use System 2 to justify their System 1
conclusions. 8
Instead of correcting errors, sometimes our
reasoning process reinforces our often flawed intuitions.
Although Kahneman and Tversky did not study ethical
decision-making directly, their findings are critical to
understanding how people make decisions in an ethical
context. Behavioral ethics researchers have taken the
insights of dual system thinking and applied them to ethical
decision-making in business. They have found that while
most people intend to act ethically, good people often do
bad things. 9
Indeed, research has found that self-interest is
associated with intuitive thinking.
10 Despite this, most of
us act ethically most of the time. That is because System 2
is properly functioning as an ethical monitor, jumping in to
control the automatic self-interest each of us possesses. 11
Rationalizing Unethical
Behavior
If System 2 is an ethical monitor, why does it seem to fail so
often? For example, what enabled VW employees to install
the code used to defeat emissions tests? Although behavioral
ethics research helps us understand how the brain works, it
doesn’t explain what allows the brain to take that critical step
toward unethical behavior.
This is where criminology, the study of crime and criminals,
comes in. Criminologists researching white-collar crime
have theorized that three conditions are necessary for a
corporate crime to occur.
12 First, an individual must
possess a problem he or she feels cannot be solved by
revealing it to others. A “non-shareable problem” might be
anything from gambling debts to the prospect of job loss —
anything that the person is deeply concerned about. Second,
the individual must believe that the problem can be solved
in secret by violating a trust. As corporate leaders know,
trust is an essential element in any organization — almost
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every principal-agent relationship is built upon it. Third, the
individual must have an internal dialogue about the problem
and the unethical — even illegal — solution that makes
the trust violation seem acceptable.
13 The classic example
is the banker who tells himself he is only “borrowing” the
embezzled funds and will pay them back later.
The last step, which criminologists call “verbalizations” (and
the rest of us usually refer to as rationalizations or even
excuses), is the crux of white-collar crime. Criminologists
don’t view verbalizations as simple, after-the-fact excuses
that offenders use to relieve their culpability upon being
caught. Instead, they see them as “vocabularies of motive”
— words and phrases offenders use to make bad behavior
seem appropriate.
14 This means that an offender’s
rationalizations are created before acting and actually allow
the bad act to proceed. As the criminologist who developed
rationalization theory puts it, “[t]he rationalization is [the
offender’s] motivation.”
15 Rationalizations, which have
been identified in numerous studies, permit white-collar
offenders to act in ways that they would otherwise deem
unacceptable.
This is consistent with what we know about how people
make unethical decisions. Behavioral ethics research does
not suggest that everyone wants to act ethically but fails to
do so because of cognitive obstacles. Rather, people default
toward acting unethically because they are driven by selfinterest, and then they find ways to convince themselves
— consciously and subconsciously — that they are acting
ethically.
16 This appears to be a case of System 2 justifying
System 1 conclusions. It’s likely this process is a product of
our unique evolution. Although the ability to cooperate with
one another is one of humankind’s greatest advantages, the
best course of action from an individual perspective is often
to act in one’s self-interest. 17 Thus we have developed
mechanisms to deal with the countervailing aspects of living
in our “hypersocial” yet competitive world.
18 One of the
mechanisms is to rationalize our behavior — to reframe
how we look at it in order to align our self-perception as a
“good person” with the unethical or illegal behavior we are
contemplating. There is no better way to act self-interestedly
while simultaneously projecting to others (and ourselves)
that we are good members of a cooperative society.
I believe that rationalization theory, which has greatly
influenced the study of both white-collar crime and business
ethics, explains what happens when an individual’s ethical
monitor is overcome.
19 Essentially, rationalizations trick
the System 2 reflective thinking process that normally
intervenes to contain our unethicality. Once this happens,
there is nothing to stop a person from committing an
unethical or illegal act, regardless of the organizational
norms, business regulations, or criminal laws in place.
What are the most typical rationalizations? And more
importantly, how do we identify them? My research suggests
there are eight rationalizations most commonly used by
those committing unethical and illegal acts within
companies. 20 (See “About the Research.”) As part of an
effective compliance program, corporate leaders need to
understand these rationalizations and be able to identify
their usage.
Denying Responsibility
Offenders use this rationalization to relieve themselves of
responsibility, thereby mitigating social disapproval and a
personal sense of failure. White-collar offenders deny
responsibility by pleading ignorance, suggesting they were
acting under orders, or contending that larger economic
conditions caused them to act illegally. This may be
considered the catchall rationalization leading to wrongful
conduct.
Denying Injury
This rationalization focuses on the injury or harm caused
by the illegal or unethical act. If an act’s wrongfulness is a
function of the harm it causes, an offender often excuses his
or her behavior if no clear harm exists. Offenders employ
this rationalization when the victim is insured or the harm is
to the public or market as a whole, such as in insider trading
or antitrust cases.
Denying the Victim
Denying the victim takes two forms: when the offender
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argues that the victim’s actions were inappropriate and
therefore the victim deserved the harm; or when the victim
is unknown or not clearly defined. White-collar offenders
often use this rationalization when committing frauds
against the government, such as in false claims or tax evasion
cases.
Condemning the
Condemners
This rationalization shifts attention away from the offender’s
conduct to the motives of others, such as regulators,
prosecutors, and government agencies. It can take various
forms: The offender calls his or her critics hypocrites, argues
that they are compelled by personal spite, asserts they are
motivated by political gain, or complains about selective
enforcement.
Appealing to Higher Loyalties
Individuals use this rationalization when they are willing to
sacrifice societal norms to advance the interests of a group
to which they belong. The actions are needed, the offender
argues, to protect a boss or employee, shore up a failing
business, or maximize shareholder value. For example, if an
employee argues that he or she committed a fraud not for
personal gain but to help the company, he is or she is likely
using this rationalization.
Using a Ledger Metaphor
This rationalization is based on a “behavioral balance sheet”
whereby people balance their negative actions against their
positive accomplishments, thus minimizing their sense of
moral guilt. Senior executives, particularly those active in
philanthropy, are especially prone to this type of
rationalization.
Claiming Entitlement
People involved in employee theft and embezzlement cases
frequently use this rationalization in the belief that they
deserve the fruits of their illegal behavior. This
rationalization is also common in public corruption cases.
Claiming Relative
Acceptability or Normality
This rationalization compares the offender’s bad acts with
those of others to relieve moral guilt. Tax violators and those
involved in real estate, accounting, and trading fraud often
rationalize their actions by citing the behavior of others.
It may be particularly prevalent when a negative
organizational culture is strong and insulated.
How Rationalizations
Undermine Compliance
Programs
There are plenty of practical examples illustrating how
employees rationalize behavior that leads to compliance
issues. The experiences of Intel Corp. and Wells Fargo are
instructive.
In the early 2000s, Intel adopted an aggressive approach to
compliance in order to curb potential antitrust violations by
its sales executives. 21 It devised a program in which the
company’s compliance professionals periodically conducted
random audits in which they searched through papers,
emails, and other electronic records of managers, seizing
anything that might be sought as part of a government
investigation. If the company found irregularities, it
sometimes even held mock depositions of the offending
executives, using outside antitrust lawyers. Intel’s general
counsel explained that these role-playing exercises served
as a wake-up call, giving lax executives the experience of
being in the government’s crosshairs. He boasted that Intel’s
aggressive approach to compliance was “the world’s
best.”
22
Yet Intel was unable to avoid government intervention in its
business. Intel spent years in private antitrust litigation, and
in 2009 the New York attorney general sued the company,
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arguing its compliance program not only was ineffective but
had helped contribute to illegal anticompetitive behavior by
appearing to have communicated to employees that the goal
of the compliance initiatives was to limit mention of illegal
behavior, rather than to eliminate the behavior.
23 Based
on my analysis of employee emails revealed as part of the
lawsuit, the company’s approach may have facilitated a host
of rationalizations, including two mentioned above: denial
of injury and denial of the victim. In addition, employees
more easily denied their responsibility, the catchall
rationalization, because anticompetitive practices were seen
as part of doing business at Intel.
Wells Fargo’s recent difficulties appear to offer another
example of rationalized corporate wrongdoing. The
company’s fake-account scandal demonstrates how
executives can affect the context in which employees make
decisions regarding ethics. Details of how exactly the bank’s
ethics and compliance program operated are still emerging,
but preliminary reports suggest it allowed an environment
riddled by employee rationalizations. On the heels of the
bank’s $185 million settlement agreement with the
Consumer Financial Protection Bureau, a number of former
employees have reported that despite ethics training and
messages from headquarters to not create fake accounts, the
bank’s aggressive sales culture drowned out any explicit
compliance measures. Essentially, the compliance program
failed to address the systemic problem of managers
pressuring employees to meet unrealistic sales goals. 24
“The reality was that people had to meet their [sales] goals,”
one former employee explained. “They needed a
paycheck.”
25 This suggests that employees, under pressure
to meet unrealistic goals, rationalized their conduct by
denying responsibility and claiming relative normality.
Combating Rationalizations
Behavioral science, coupled with criminological insights,
indicates there are complex, interwoven, and deeply seated
psychological processes at work that can undermine even
the best compliance program. So what are companies to do?
Is there a way to do compliance better — one that solves
some of the problems created by the automaticity of selfinterest we all possess? Yes, but it requires a fundamental
shift in corporate thinking.
The best approaches to compliance focus not on how
government regulators will react to a compliance initiative
but on how employees — the real “customers” of compliance
— will be affected. They consider the behavioral
implications of the compliance program at every turn,
particularly how company policies might foster or defeat
employee rationalizations. While no program will entirely
change our cognitive processes or stop all unethical
behavior, there are three cost-effective steps companies can
take.
Hire a behavioral specialist. Although dual-system thinking,
rationalization, and behavioral ethics theories have been
around for decades, their application to business and
compliance is still in its infancy. Hiring a behavioral
specialist or developing someone internally to stay abreast of
the various fields and their increasing insights into ethical
decision-making is a good first step.
One of the tasks a behavioral specialist can take on is to
educate the organization, particularly the compliance team
and HR staff, on key takeaways from current research in
the fields of behavioral ethics, behavioral economics, moral
psychology, and criminology.
26 Books on decisionmaking and dishonesty by serious researchers, yet aimed
at more general readers, can be a helpful resource.
27 A
company’s behavioral specialist should create a behavioral
compliance curriculum tailored to various groups of
employees, giving all members of the organization insight
into their ethical decision-making processes. Such a
curriculum can become the backbone of a behaviorally
cognizant compliance program.
Use behavioral best practices to eliminate rationalizations.
To create compliance programs that take advantage of
behavioral insights instead of falling prey to them,
companies must start to adopt compliance practices driven
by the behavioral science at the heart of criminology and
behavioral ethics. This will necessarily go beyond the
traditional law-driven compliance practices employed by the
vast majority of Fortune 500 companies.
If rationalizations are the crux of employee wrongdoing,
then compliance programs should be aimed at eliminating
them. One possibility is to ask employees to sign a
certification before they engage in behavior that creates
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compliance risk. A group of researchers working with an
insurance company asked customers to report how many
miles they had driven that year, according to the
odometer.
28 Reporting lower miles meant lower
premiums. But instead of simply asking for the number of
miles, researchers included a certification of honesty at the
top of the form. Customers who certified at the top of the
form, before providing their mileage number, reported
almost 2,500 more miles than those who signed the same
certification at the bottom of the form, despite there being
no difference in driving habits. 29 The certification was
effective in reducing dishonesty because it engaged morality
at the moment of the decision to act ethically or unethically,
just before there was an opportunity to rationalize. By
triggering people’s System 2 ethical monitor at the correct
time, the potential for rationalization was greatly reduced.
Researchers found the same type of results with tax
deduction forms styled like those of the U.S. Internal
Revenue Service.
30
A similar approach can be used by companies for any
expense report, conflict of interest form, or funds
authorization — anything in which an employee is being
asked to engage in behavior that creates compliance risk.
It’s up to companies to decide how high-tech they want to
get. JPMorgan Chase & Co. has been developing software
that monitors the actions of its traders, including emails and
telephone conversations, to ensure they “adhere to ‘personal
trading rules’ and risk limits,” and Credit Suisse Group AG
is also working on technology to monitor traders’
behavior.
31 JPMorgan’s effort is noteworthy in that the
software’s algorithms can generate alerts if it appears that
traders may be headed toward an ethical or legal violation.
Such “predictive monitoring,” like a certification at the top of
a paper form, could be used by companies to intervene with
a prompt before a problematic behavior occurs, forcing the
employee’s System 2 reasoning system to engage — and thus
improving compliance.
Companies should also encourage employees to openly
discuss rationalizations and how they affect ethical decisionmaking. This can be accomplished through storytelling by
employees and the company. Employees should be
encouraged, even required, to meet periodically in small
groups to explore the potential effects of compliance
violations and white-collar crimes. The idea is for
employees, guided by compliance professionals (or, better
yet, senior managers), to discuss topics such as what
regulations are relevant to the business, common
compliance pitfalls, and how some business practices
produce externalities that negatively impact stakeholders.
When rationalizing statements pop up, as they inevitably
will, they should be identified and flagged. Only after
patterns of self-exculpatory rationalization are openly
discussed and labeled as problematic will employees be able
to internalize that knowledge and use it when presented with
an opportunity to act unethically.
32
The company also should share stories of genuine
compliance successes. Compliance messaging is most
effective when it conveys that positive behaviors are widely
engaged in and approved of within a company.
33 The
reason is related to the claim of relative normality
rationalization, which allows individuals to favorably
compare their potential unethical act to the unethical acts
of others. Positive compliance messaging combats this
rationalization by demonstrating that while there may be
isolated compliance lapses, the majority of the company is
committed to making ethical decisions.
One company that has used storytelling and discussions
effectively in its ethics program is Parsons Corp., an
international engineering and construction company based
in Pasadena, California. The company hosts an internal
website where it has posed hypothetical ethical problems
and asked employees to vote on how they should be resolved.
It then has published the narrative comments anonymously
and followed up with a detailed analysis by the company’s
ethics committee. Such practices serve to unite employees
around the company’s values as applied to real-life scenarios.
Through the narratives, employees themselves identify
common ethical traps and rationalizations. 34 Periodically
posing ethics challenges and quizzes to employees is one of
a number of techniques Parsons uses in its award-winning
ethics and compliance program. 35
Use incentives to influence behavior in the right direction.
Behavioral ethics research has shown that even seemingly
inconsequential factors can greatly influence ethical
decision-making. This is especially true when considering
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how rationalizations can be drawn from a company’s
internal culture, a large part of which depends on incentive
structures. This is one of the early lessons from Wells Fargo,
where the social and monetary incentives to cross-sell
products swamped the company’s compliance protocols.
What’s more, Wells Fargo is not an isolated example; prior
research has found that when major corporate trust
violations occur, the root cause often has less to do with
a rogue employee than with elements of the organization
that are “dysfunctional, conflicting, or incongruent.”
36 As
a result, executives need to be aware of the common forms
of rationalization described earlier in this article — and
examine where in their organizations conflicting incentives
could foster rationalization and wrongdoing.
To that end, business leaders can tap nonmonetary
incentives to aid in compliance. According to research,
praise and expressions of gratitude motivate more than
money, and social group interactions motivate individual
behavior more than almost anything.
37 That means the
most effective compliance likely comes from something
other than salary and bonus. Research also shows that
compliance is most effective when employees perceive it not
as a constraint but as “the governing ethos of an
organization.”
38 The goal, then, is for companies to build
a corporate culture that incentivizes the rejection of
rationalizations through the creation of shared values.
No compliance program will entirely eliminate bad
employee conduct. But behaviorally cognizant programs,
ones that seek to understand employee decision-making and
target the cognitive mechanisms that foster unethicality,
hold the promise of achieving the primary goals of
compliance: reducing unethical and illegal behavior within
the company.
About The Author
Todd Haugh is an assistant professor of business law and
ethics at Indiana University’s Kelley School of Business in
Bloomington, Indiana, as well as a Jesse Fine Fellow at the
Poynter Center for the Study of Ethics and American
Institutions at Indiana University.
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    MIT SLOAN MANAGEMENT REVIEW
    Copyright © Massachusetts Institute of Technology, 2017. All rights reserved. • Reprint #59110 • http://mitsmr.com/2gNaJjs
  14. Ibid.
  15. D.R. Cressey, “Other People’s Money: A Study in the Social Psychology
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  18. Mercier and Sperber, “The Enigma of Reason.”
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  20. This section is adapted from a series of articles the author has written
    concerning white-collar crime and corporate compliance. See, for
    example, T. Haugh, “The Criminalization of Compliance,” Notre Dame
    Law Review 92, no. 3 (April 2016): 1255-58; T. Haugh,
    “Overcriminalization’s New Harm Paradigm,” Vanderbilt Law Review 68,
    no. 5 (October 2015): 1218-1222; T. Haugh, “Sentencing the Why of White
    Collar Crime,” Fordham Law Review 82, no. 6 (2014): 3165-3169.
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    Antitrust Litigation,” Harvard Business Review 79, no. 6 (June 2001):
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  22. Ibid., 120.
  23. Complaint, New York v. Intel Corp., No. 1:09-cv-00827-UNA (D. Del.
    Nov. 4, 2009): 19-20.
  24. “Independent Directors of the Board of Wells Fargo & Company Sales
    Practices Investigations Report” (April 10, 2017): 37-38.
  25. M. Corkery and S. Cowley, “Wells Fargo Warned Workers Against
    Sham Accounts, but ‘They Needed a Paycheck,’” The New York Times,
    Sept. 16, 2016, www.nytimes.com.
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    Business Ethics: Shaping an Emerging Field” (New York: Routledge,
    2011), 3-10.
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    HarperCollins, 2012); and Kahneman, “Thinking, Fast and Slow.”
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    the Beginning Makes Ethics Salient and Decreases Dishonest Self-Reports
    in Comparison to Signing at the End,” Psychological and Cognitive
    Sciences 109, no. 38 (Sept. 18, 2012): 15198.
  29. Ibid.
  30. Ariely, “The Honest Truth,” 45-48.
  31. P. Crowe, “JP Morgan Is Working on a New Employee Surveillance
    Program,” Business Insider, April 8, 2015, www.businessinsider.com; and
    K. Scannell and H. Kuchler, “Palantir and Credit Suisse Join Forces to
    Target Rogue Traders,” Financial Times, March 22, 2016, www.ft.com.
  32. J. Heath, “Business Ethics and Moral Motivation: A Criminological
    Perspective,” Journal of Business Ethics 83, no. 4 (December 2008): 611.
  33. R.B. Cialdini, L.J. Demaine, B.J. Sagarin, D.W. Barrett, K. Rhoads,
    and P.L. Winter, “Managing Social Norms for Persuasive Impact,” Social
    Influence 1, no.1 (2006): 13; and S. Killingsworth, “Modeling the Message:
    Communicating Compliance through Organizational Values and
    Culture,” Georgetown Journal of Legal Ethics 25, no. 4 (fall 2012): 983.
  34. Killingsworth, “Modeling the Message,” 983.
  35. “Parsons: People. Planet. Progress. 2017 Corporate Social
    Responsibility Report,” www.parsons.com, 51.
  36. R.F. Hurley, N. Gillespie, D.L. Ferrin, and G. Dietz, “Designing
    Trustworthy Organizations,” MIT Sloan Management Review 54, no. 4
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  37. A.M. Grant and F. Gino, “A Little Thanks Goes a Long Way: Explaining
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  38. See L.S. Paine, “Managing for Organizational Integrity,” Harvard
    Business Review 72, no. 2 (March-April 1994): 106-107.
    MIT SLOAN MANAGEMENT REVIEW
    Copyright © Massachusetts Institute of Technology, 2017. All rights reserved. • Reprint #59110 • http://mitsmr.com/2gNaJjs
    About the Research
    This article is part of my long-term study of the causes of white-collar crime and corporate wrongdoing. After approximately a
    decade representing white-collar defendants in state and federal court, advising companies on corporate compliance practices,
    and drafting guidelines to aid federal judges in sentencing fraud offenders, I found that the standard narratives of why
    businesspeople commit bad acts were misguided. This led me to criminological theory and sociologist Donald Cressey’s
    groundbreaking study of embezzlers, which revealed the role rationalizations play in violations of organizational trust. Using
    Cressey’s research as a point of departure, I have undertaken projects analyzing sentencing disparities among economic crime
    defendants, professional athletes who committed and were victim to fraud, defendants convicted of the theft of cultural heritage
    resources, and numerous individual and corporate case studies focused on the behavioral aspects of white-collar and
    organizational crime. Collectively, this research has helped me identify prominent rationalizations used by white-collar offenders
    and confirmed the importance of behavioral insights for effective corporate compliance, white-collar sentencing, and criminal
    legislation.

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