Why Contagious Misconduct Can Collapse Firms

Contagious misconduct happens when people see others engaging in unethical behaviour and interpret this as permission to do likewise. The unethical behaviour is seen as more acceptable to the observer than they originally thought.

This has two consequences. Firstly, the boundary between ethically acceptable and ethically unacceptable behaviour becomes blurred. And secondly, the longer this blurring is left unaddressed, the more that ‘what is not acceptable’ boundary moves back.

The result is a growing amount of misconduct, but which is still seen as normal within the firm in question. Eventually, the problem spills out of the firm’s control and outside interventions occur with serious consequences for the firm, both financial and reputational.

Insurance does not have a good track record around contagious misconduct taking hold of market practices. Commissions and performance management have historically been big influences of this happening. And I see some aspects of the sector's digital transformation loading in 'not too distant' problems for insurers: for example, in some claims and counter fraud practices.

So how do you guard against contagious misconduct? Some legal scholars want more academic research into this, for some of the options seem to contradict traditional thinking. So for example, one line of thought says that the more serious the misconduct, the more harsh the punishment. Yet another line of thought says that less serious but more contagious misconduct needs to see the inciter clearly being punished. That’s because the overall influence and impact of the latter is usually much greater than the former.

So what can insurers do to address the danger of contagious misconduct? I think these four steps will help a firm to get started:

• work out where your firm’s main exposures to contagious misconduct lie and how wide the gross-net gap could be around current controls.
• bring in training to build knowledge about behavioural patterns like ‘ethical fading’, ‘conformity’ (more here), and rationalisations (excuses people use to justify a poor decision).
• the training then needs to equip people with the skills to recognise and tackle ethical dilemmas. Use simple case studies relevant to the people’s work that show clearly what is acceptable and what is not.
• work with human resource people to find the best way of dealing with ‘inciters’ of contagious misconduct.

I mentioned earlier the slippery slopes that contagious misconduct can set firm on. This happens when that ‘what is not acceptable’ boundary is pushed back too often and too widely. An attitude of almost ‘anything goes’ takes hold. Behavioural patterns embedded in the firm's ethical culture encourage people to turn a blind eye. More and more of the firm’s energy is devoted to sustaining this unreality and defending it against growing voices of concern. In the end, the house of cards collapses and employees, clients, investors and the market overall lose out.

This is why contagious misconduct needs to be taken seriously. It can collapse firms.