Whether it’s the Volkswagen emissions scandal or Wells Fargo creating fake customer accounts, every day a new organization makes headlines for its misconduct. Students at the Ivey Business School have heard from former leaders, such as Andy Fastow of Enron, or derivatives trader Nick Leeson, whose unauthorized high-risk trading caused the collapse of Barings, about the lessons learned from their misdeeds.
All of these actions have come in spite of protective regulations and watchful enforcement. Apparently, getting people to do the right thing is not as easy as you think.
Assistant Professor Matthew Sooy, who recently came to Ivey after earning his PhD from the University of Kentucky, investigates how offering ‘no-fault settlements’ influences managers’ willingness to comply with regulations. In his dissertation, Sooy compares the actions taken by managers who face ‘no fault’ sanctions, where managers accept fines without admitting or denying fault, to those who must admit fault if caught violating. Under both settings, the size of fines is constant – the only difference is whether or not managers expect to admit fault if caught violating regulations.
The study employed two scenarios, one from the financial sector and the other from the manufacturing sector. In the financial case, a financial services manager must choose whether or not – and how (using transparent or intentionally-complex language) – to disclose some bad news relating to an investment he or she is underwriting. In the manufacturing case, the manager of a manufacturing plant must decide whether or not to limit pollution that is harmful to health and the environment. In both cases, regulations exist to protect the public.
What Sooy found was that the group having to admit fault were more likely to see their compliance choice as an ethical dilemma – and more often they chose not only to do the right thing by complying with the ‘letter of the law’, but to also go beyond by complying with the full ‘spirit of the law’ by fully eliminating pollution or by fully and transparently disclosing bad news.
Managers who faced ‘no-fault’ settlements were more likely to see their situation as ‘just business’ and were more likely to opt only for ‘letter of the law’ compliance…or simply violate regulations.
“So, fault changes how we perceive our compliance,” Sooy says “it enables us to perceive our compliance as being an ethical choice that impacts others. That awareness is very important because it influences whether or not we choose to comply and how thoroughly we do so.”
A bigger “stick”
The study also examines how managers respond to stronger financial penalties, finding that larger fines increase minimal ‘letter of the law’ compliance – but do not lead managers to see their compliance as being ethical in nature or compel more desirable ‘spirit of the law’ compliance.
“This really speaks to the fact that fault is fundamentally different than fines,” says Sooy. “We really must be careful when comparing fault admissions to steeper fines – they work differently.”
Sooy hopes that the research, done with participants with a wide range of experience and from many different sectors across North America, will apply broadly to all settings where you have requirements for compliance.
“What the regulators care about is, can we just get people to do the right thing. And having the ‘stick’ is about encouraging people to do the right thing,” he says. “What my research shows is that, when fault is on the table, people are more likely to perceive their decision as an ethical choice that impacts others and are then more likely to do the right thing.”
For his work, Matt received the 2016 Outstanding Emerging Scholar Award from the Accounting, Behavior and Organizations (ABO) Section of the American Accounting Association. The award is given out once per year, to a researcher who earned his/her PhD within the last three years.
And the work continues
Sooy and Ivey Assistant Professor Kun Huo are investigating the compliance consequences of targeting firms versus managers in regulatory sanctions. Their preliminary findings suggest that many managers perceive greater accountability when sanctions target firms even though individual managers may be financially responsible for smaller (or no) fines.
Matt is excited about coming to Ivey and being part of the Managerial Accounting and Control Group, which specializes in both behavioural and qualitative/historical research.
“I’ve been here since July, and I just feel I can dream a little bigger here. All success is team success, and with such experienced colleagues, talented support, and Ivey’s resources, I’m not just dreaming it, but I’m able to go out and do it. There is no better feeling.”