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Module 5-Ethical Leadership

5,374 viewsNov 1, 2016, 06:00am

The Wells Fargo Debacle: How Proper Reward Practices Can Remedy A Toxic Culture

Edward E. Lawler III

Former Contributor 


I am all about sustainable organizational effectiveness.

This piece was cowritten with Benjamin Schneider, an affiliated research scientist at the Center for Effective Organizations at USC Marshall School of Business.



John Stumpf has stepped down as CEO and chairman of Wells Fargo amid public pressure. Rarely is someone at the top of an organization held accountable for the sins perpetrated by those below – even if they directly or implicitly encouraged them. Will a change at the top be enough to salvage the bank’s reputation and customer relations?  More importantly, will the change in leadership to another insider – Timothy J. Sloan, its previous president and chief operating officer steps into the role vacated by Stumpf put an end to the corporate culture that ran amok at Wells Fargo? Congress, for one, doesn’t have much faith that it will. Within hours of the bank’s anointment of Sloan, who held a senior post at Wells Fargo throughout the scandal, Rep. Maxine Waters, a California Democrat, issued an official statement declaring her concern that Sloan was also culpable in the recent scandal. To think about this question, let’s take a look at how and why the unethical culture Mr. Sloan will inherit actually happened.

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What we know is that what is incented will happen whether it is advisable or not.  If you want cross-selling to happen, then powerfully incent cross-selling and people will cross-sell at all costs. Set explicit goals for cross-selling, Wells Fargo instructed “every customer should have eight relationships with ‘us’” and promote those who meet cross-sell goals and cross-selling will happen. Firing those who do not meet impossible cross-selling goals will definitely reinforce meeting them. People need their jobs. Firing those who report cross-selling misconduct will result in people meeting cross-selling goals at all costs.

In fact, the recent cross-selling fraud at Wells Fargo was completely predictable because of the way it was incented by those higher up, perhaps at the very top of the bank. And there is suspicion Mr. Sloan may also have been responsible. Many employees cross-sold Wells Fargo products no matter what they had to do to accomplish it because doing so was rewarded and not doing so was punished. Under intense unrealistic sales pressure, thousands – at least the 5,000 who were caught doing it – of employees went so far as opening millions of sham accounts using the names and sometimes the actual money of their customers.

It has been said that the Wells Fargo culture Mr. Sloan is inheriting is  the wrong kind of culture. However, if you look at all the verbiage produced by the company on who they are and what they stand for, it comes off sounding like a wonderful culture, dominated by courtesy and customer care. “Everything we do is built on trust. It doesn’t happen with one transaction, in one day on the job or in one quarter. It’s earned relationship by relationship,” John Stumpf – who spent 34 years of his career at the bank – wrote in Wells Fargo’s Vison and Values Statement.

But carefully-crafted mission statements don’t tell what the real culture is. What we know about culture is that it is determined by top management and supervisory behavior, not words. And clearly one of the key corporate behaviors that determines culture is what people see being rewarded and what they see being punished.  What management says is much less important than what management rewards – and when what is said conflicts with what is rewarded, what is rewarded tells everyone what management genuinely believes, values, and wants.

We have spent our careers studying financial rewards in organizations and how they and other management practices affect employees and their organizations. Here is some of what we have learned about using financial rewards as an incentive:

When excessively high or difficult goals are set, individuals either do not try to reach them or try to achieve them by beating the system.

When how the goals are achieved is not measured and tracked, as in the Wells Fargo case, some individuals will use unacceptable means (e.g., unethical, illegal, and dysfunctional behaviors) to reach the goals set for them.

Financial rewards can be powerful motivators of behavior, but should only be used in situations where management has created a culture and a goal-setting process that leads to reasonable goals and there is comprehensive measurement of all of the behaviors that people can use to accomplish the goals.

Our research on and knowledge of corporate reward practice reveals that financial incentive plans for the accomplishment of specific goals rarely take into account the unintended ripple effects such specific incentives produce. We are reminded of a company distribution center that wanted to reduce the mailing and delivery costs associated with sending parts to automobile dealerships. The solution: financially reward distribution center employees for reducing such costs. The result: costs went down but there were predictable unintended results. Employees waited to fulfill orders until an auto dealer had at least two parts ordered. Dealers were furious because they had to wait for parts to repair customer cars, while customers were furious because they had to wait for their repairs.

On a wider scale, think back to the Texas savings and loan crisis in the 1980s and the recession caused by banks focusing on financial incentives for mortgage lending in the mid-1990s through 2006. Countrywide Financial made loans for 20 percent of all mortgages in the United States in 2006, at a value of about 3.5 percent of United States GDP, a proportion greater than any other single mortgage lender. By January 2008, it was near bankruptcy and was sold to Bank of America. Why? Because of its employees’ unethical practices – lend to anyone, falsify salary information of those seeking loans, and fail to even check to see if people actually had the jobs they claimed they had. For what? For the financial incentives tied to making such loans, packaging them and selling them internationally. Of course Countrywide was not alone. For the same reasons, the largest mortgage lender in the United States, Washington Mutual, was declared insolvent in 2008, as were Wachovia, Sun Trust, and many others.

What can a company to do to motivate performance if it does not incent the accomplishment of stretch production goals? It can turn to a philosophy of meeting customer needs and not management’s immediate goals; it can turn to a philosophy of customer service.

With regard to customer service, here is what we know from our and others’ research:

Customer satisfaction with service quality is directly linked to the type of service culture that employees say is created for them by management.  Service culture is a direct function of what management rewards, supports and expects – and measures – with regard to service quality.

When service quality is emphasized by deeds, employees experience higher levels of engagement and are less likely to leave the company because the company is an attractive place to work.

Service quality is not free, but it pays off in many ways. Companies that deliver superior service quality have higher customer loyalty, more relationships with their customers, improved cash flow, and higher market value. Just look at Southwest Airlines, which has a culture that values and rewards service quality–and monitors the customer service behavior of all of its employees. It rotates people to different jobs so they understand the pressures of their colleagues. It uses both people and technology to meet customer demands for speedy, pleasant, comfortable and less-costly flights.

In short, improving service quality might have been the best route for Wells Fargo to take in order to achieve the broader relationships it wished to have with its customers. If Mr. Sloan is to alter the culture at Wells Fargo – if he wants to turn it back to what it was during the financial crisis – he might put a focus on winning customers through service as a goal. Financial incentives can be a terrific motivator of performance, but if the negative unintended ripple consequences of extreme targeted goals are ignored, they will yield predictable disasters.

Edward E. Lawler III is director of the Center for Effective Organizations and Distinguished Professor of Business at the USC Marshall School of Business.

Edward E. Lawler III

Edward E. Lawler III

I am a distinguished professor of business and director of the Center for Effective Organizations in the Marshall School of Business, University of Southern California. …

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Module 5-Ethical Leadership

Module 5 Assignment (100 possible points)

Name: ______________________________________________________

All assignments are to be completed individually without the assistance of classmates or anyone else. If you have questions, contact the professor who will be glad to help you. By turning in this assignment, you are stating that this work is yours alone.

I believe this section of material is a very valuable part of Business Ethics. As a manager, team leader, worker at a company, these are the things that can be controlled and manipulated by the company to get “good” behavior or lead to “bad” behavior regardless of the type of people working for you. Much of this boils down to psychology and human behavior. I want you to see if you can find the take away – the thing that a leader/manager needs to understand – to get the behavior he or she wants from people within the organization. We will assume the leader/manager wants to get ethical behavior.

DISCUSSING EACH ORGANIZATIONAL FACTOR (The discussion of each factor is worth 7 points with one factor worth 8 points for a total of 64 points)

You need to work on this assignment as we cover the material.

1. Review the posted Organizational Factors Powerpoint Slides.

2. Watch the posted clips or look at the posted material for each Organizational Factor.

3. Then for each factor — tell me what your observations from that material and tell me what a manager can do to use this information to get ETHICAL behavior from employees.

 Organizational Factor: CULTURE – WHAT IS REWARDED AND PUNISHED (7 points)

1. Think about the articles about Wells Fargo and the resulting bad behavior and the articles you read about the importance of culture.  What impact does culture have on the behavior of people within the organization?

2. Also consider the readings and understanding that humans do that behavior that is rewarded and avoid behavior that is punished, what can a manager do to use this “factor” to get ethical behavior in the organization?

Organizational Factor: LEADERSHIP (7 points)

1. What impact do leaders have on organizational ethics? Explain.

2. What does a manager need to understand about leadership buy in to help him or her get ethical behavior from the people within the organization?

Organizational Factor: CONFORMITY (7 points)

 1. What do you observe about human’s tendency or need to conform?

 2. How can a manager use this understanding of the need of humans to conform to get ethical behavior from people in his/her company?


Organizational Factor: GROUP THINK (7 points)

The powerpoint slides are the most helpful for understanding group think. Also, focus on the warning signs that it is occurring and why it is bad for an organization if it occurs.

1. Why does group think occur in organizations?

2. How can a manager use this understanding the dangers of group think to put things in place to prevent it. Why would group think lead to unethical behavior from people in his/her company?

Organizational Factor: RELUCTANCE TO GET INVOLVED (8 points)

1. What do you observe about people’s reluctance to get involved?

2. What is the bystander effect?

3. How can a manager use this understanding of people’s reluctance to get involved to get ethical behavior from people in his/her company?

Organizational Factor: OPPORTUNITY FOR UNETHICAL BEHAVIOR (7 points)

1. What does Walter Pavlo and Mark Morze teach us about the need for organizations to limit the opportunity for employees to commit unethical behavior?

2. How can a manager use this understanding of the need to limit the opportunity for unethical behavior?

Organizational Factor: OBEDIENCE TO AUTHORITY (7 points)

1. What do you observe about human’s tendency to obey people in authority?

2. How can a manager use this understanding that many of us follow people in authority (even if a small amount authority) to get ethical behavior from people in his/her company?

Organizational Factor: CORPORATE GOVERNANCE (7 points)

1. How does a company’s approach to Corporate Governance impact how people behave? Explain.

2. How can a manager use this understanding of the importance of strong corporate governance to get ethical behavior from people in his/her company?

Organizational Factor: WHISTLEBLOWING PROTECTIONS (7 points)

1. What are is a whistleblower and what are whistleblower protections?

2. What does a manager need to understand about whistleblowing to help him or her get ethical behavior from the people within the organization?



Your Documentary: ____________________________________________________

Your Chosen Organization: _____________________________________________

Step 1: Using the Factors to EXPLAIN the unethical behavior

Think about your selected Documentary and the organization that you are focusing on for that documentary. Think about the unethical conduct you saw in the documentary by that organization. Explain why the unethical behavior occurred in terms of 3-5 organizational factors. You need no less than 18 total quality sentences of discussion.

Organizational Factors

Pick THREE to FIVE factors that explain why the organization in my Documentary acted unethical. You need no less than 18 total quality sentences of discussion between the 3-5 factors.

Culture overall


Culture what is rewarded or punished






Group Think


Reluctance to Get Involved


Opportunity for Unethical Behavior


Obedience to Authority


Corporate Governance




Step 2: Using the Factors to PREVENT unethical behavior (18 points)

Think about your selected Documentary and the organization that you are focusing on for that documentary. Now, how can organizational factors be used to prevent unethical behavior from happening again? Discussion 3-5 organizational factors that can be used to prevent or stop the unethical behavior from happening again. You need to discuss using no less than 18 total quality sentences between the 3-5 factors.

Organizational Factors

Pick THREE – FIVE organizational factors that could be used by the organization in your Documentary to prevent unethical behavior for stopping or preventing the unethical conduct from occurring again. You need to discuss using no less than 18 total quality sentences between the 3-5 factors.

Culture overall


Culture what is rewarded or punished






Group Think


Reluctance to Get Involved


Opportunity for Unethical Behavior


Obedience to Authority


Corporate Governance





Module 5-Ethical Leadership

Organizational Factors Impacting
Ethical Decision Making

What you do “inside the box” impacts decision making.
Understanding what happens to people when working in the box.

What the organization (box) does that
impacts decision making

• Stated Rules or Beliefs about Ethics

• Creates a culture
– Rules

– Rewards/Punishment

• Leaders

• Relationships within the box

• Group Dynamics

• Opportunity

Corporate Culture

— the GLUE

Organizational Culture is

a system of shared meanings and common beliefs

held by organizational members that determines

(in a large degree)

how organizational members act towards each other

Culture is reflected in the values, rituals,

symbols, myths, and practices

of the organization.

“The way we do things around here”

More on Culture

It is perceived.
It is shared.
It is descriptive.

We describe the attributes of culture, by looking
at dimensions. We can pick the ones we want to

We talk about culture in terms of its strength.

Strong v. weak cultures.
Super Glue Glue Stick

Strong v. Weak Cultures

 The “key” parts of the culture are
held deeply by members.

 Culture has a strong influence
over members.

 Benefits from Strong Culture:
 Employees are committed to the

 People are drawn to the

organization (want to work

 Easier to socialize new members
to the organization

 Can result in higher
organizational performance

 Drawbacks from Strong Culture:
 Resistant to change
 If culture is counter to

organizational goals, then
getting undesired outcomes

 Hard to identify “key” parts of
culture – when you identify
them, they not held deeply by

 Culture does not have a strong
hold on members.


How do the following impact the
strength of culture?

-Large v. Small Organizations?
-Age of organization?
-Rate of employee turnover?
-Strength of culture at birth?
-How clear are the cultural values &

Birth, Growth, Death of Culture
Where does culture come from?

-Organization’s founder (vision & mission)

-Past practices of organization

-Top Management (behavior/rewards)

Through the years how does it continue or grow?

– hire like minded people who “fit” into the culture

– socialization of new employees to help them adapt to

the culture


Stories – Narratives of significant events or actions of

people that convey the spirit of the organization

Rituals – Repetitive sequences of activities

that express and reinforce the values of the


Material Symbols –

Physical assets distinguishing the organization

Acronyms and jargon of terms,

phrases, and word meanings

specific to an organization

What weakens or kills a culture?

-High employee turnover

-Change in leadership

-Slow, steady weakening overtime

-Poor job with socialization of new employees

-Major change to the organization

-Mergers/Acquisitions (Pixar & Disney)

Want an Ethical Culture?

• Manager should be a visible role model
• Communicate ethical expectations
• Provide ethics training
• Reward ethical acts and punish unethical ones
• Make it safe for employees to discuss ethical

dilemmas and report unethical behavior without

• Culture needs to tolerate risk taking
• Focus on the means as well as the outcomes
• Hard to be ethical if culture is highly agressive

Obedience to Authority

• We differ in how much we follow what a
person in authority says. Some of us are very

• 1960s Milgram experiment explored this issue.

• Watch the video clip in the Video links folder
showing the experiment as repeated in 2000.

What does this mean for organizations?
What should they do if they want ethical decisions by their


Relationships within the Box

How people work together within the box greatly impacts
their behavior and the decisions they make.

Companies are responsible for the conduct of their
employees including the decisions they make.

Companies must understand the interpersonal dynamics
within the organization in an effort to get the
desired behavior.

• Socialization (how people learn behavior)
• Roles
• Differential Association (Significant Others)
• Group Think & Reluctance to Act
• Obedience to Authority

Socialization & Roles

• Socialization is one way people learn values,
practices, behavior in an organization. It occurs
from watching how others behave.

• Role are a set of expectations and responsibilities
that come with a particular position.

– A person may have multiple roles

– The expectations and responsibilities that belong to
one role may be in conflict with an other role that
person holds

Differential Association
• One of the greatest influences on a

worker’s ethical decision making is

from his/her interaction with others

in the workplace

• Differential association is “the idea

that people learn ethical or unethical behavior
while interacting with others who are part of
their role-sets or belong to other intimate
personal groups.”

• These around us (work group, coworkers,
subordinates, boss) have more influence on
our daily decisions MORE THAN anything else.

Conformity and Group Think


– Individuals conform in order to be accepted by groups.

– Group pressures can have an effect on an individual
member’s judgment and attitudes.

– The effect of conformity is not as strong as it once was,
although still a powerful force.

Groupthink- The extensive pressure of others in a strongly
cohesive or threatened group that causes individual
members to change their opinions to conform to that of the

Groupthink is a type of thought exhibited by group members who
try to minimize conflict and reach consensus without
critically testing, analyzing, and evaluating ideas. Wikipedia

Symptoms of Groupthink

 Illusions of invulnerability where the group thinks it is
invincible and can do no wrong.

 Collective efforts to rationalize or discount warnings.
 Unquestioned belief in the moral correctness of the group
 Stereotyped views of the out-group, often as too evil, weak

or stupid to be worth bothering with
 Self-censorship as people decide not to rock the boat.
 Pressure to conform
 A shared illusion of unanimity (everyone always agrees with

everyone else)
 Protecting the group from contrary viewpoints, by
 self-appointed ‘mind-guards’

Historical Examples of Group Think

Decision to Launch the Space Shuttle Challenger

Bay of Pigs Crisis


Asch Study

To Limit the Occurrence of Groupthink

• Ensure an open climate for discussion

• Avoid overcontrolling the group’s decision

• Implement a specific decision-making or
problem-solving process

• Actively seek dissenting voices not mistake
silence for consent

• Get feedback from informed outsiders; and

• Provide group members with enough time to
study the problem and solutions

Group Norms

Group Norm is a standard of behavior acceptable to the group.

– norms define acceptable behavior
– foster conformity
– may conflict with the organizational culture
– very powerful


• Is the unethical behavior permitted? Will I be punished or get
caught? Will my good behavior be rewarded?

• Recall the advice from White Collar criminals, now turned lecturers:
Mark Morze (watched video in Module 1)
Walter Pavlo (watched video in Module 1)

– No one ever asked.

– No one ever questioned what Enron said about its earnings.

– No one checked to see if the amount ordered was reasonable.

– Employers have a responsibility to limit the opportunity for unethical
behavior. By not doing so, the employer sends a message of “I don’t
care” or “the behavior doesn’t matter.”

Role of Whistleblowing

Whistleblower – an employee that tells others
outside the organization about an employer’s

– Outsider may include media, government, or
public (You Tube examples)

What makes an employee willing to be a whistleblower?

What happens to the employee who blows the whistle?

Why don’t more of us blow the

• Reluctance to get involved
• Need a connection to the organization or person

to get involved
• If one person acts, then we are more likely to act.
• Fear negative consequences if we get involved.

Efforts to Encourage Whistleblowing
through Laws

Legal provisions of whistle-blowing

The Sarbanes-Oxley Act makes it illegal to discriminate
against a whistle-blower.

Publicly traded companies are required to implement an
anonymous reporting mechanism.

The Federal Sentencing Guidelines for Organizations
provides rewards for companies that systematically
detect and address unethical or illegal activities.

Reluctance to Get Involved

We as humans often do not like to render aid or get involved. In this module, you will
watch some video clips that provide examples of this.

Why do people stand by without doing something about something they know is
wrong or when they know someone needs help?

Part of the answer is provided in the video clip about the Bystander Effect.

This characteristic that many of us are reluctant to get involved works counter to the
principal that we need people to come forward and tell us when something is going

What can we do to overcome this reluctance?

Module 5-Ethical Leadership



Dirty Money – Drug Short – Nexflix Documentary about Big Pharma. Wall street short-sellers expose a scam that regulators overlook: how Big Pharma gouges patients in need of life-saving drugs.