Business leaders are more likely to overlook unethical behaviour if their company operates in a competitive market, according to new research

Research from Rotterdam School of Management, Erasmus University (RSM) and the Erasmus of School of Law reveals that managers who believe their company operates in strongly in competitive markets might more readily see unethical decisions simply as ‘acceptable business practices’.

In their experiment the researchers asked volunteer participants for opinions about purposefully over-insuring clients, which is clearly unethical behaviour. Half of the participants were made to believe their imaginary insurance firm was operating in a stable market. The other half was told the firm was operating in a highly competitive market. The results show that the last group was more likely to condone unethical behaviour when it was profitable to the company.

RSM assistant professor Dr Niek Hoogervorst and his co-author, assistant professor at ESL, Pieter Desmet, found that in highly competitive markets, such as finance, media, or car manufacturing, unethical behaviour is often only punished if it does not result in profit.

The researchers, whose study examined 673 managers, concluded that a competitive market environment encourages a propensity towards practical business solutions, rather than one which focuses on moral value. A manager can grow to assess malpractice, such as purposefully over-insuring clients, for its functional or institutional merits and whilst doing so lose sight of ethical procedure.

Hoogervorst comments: “Strong market competition can undermine leaders’ ethical decision-making. Specifically, it diminishes their responses to ethical transgressions to mere instrumental actions, solely focused on the organisation’s profit and loss. We hope that our findings inspire scholars to further explore how these contextual processes can reshape our understanding of leadership and unethical behaviour within organisations.”

‘Smashing targets’ may have consequences

The findings also imply that the use of expressions such as ‘targets’, ‘cut-throat competition’ and ‘budget cuts’ can serve as cues about the operating environment for business leaders, indicating that instrumental concerns are more important than moral considerations.

The ‘profit is king’ ethos rules in strongly competitive markets, and as a result, employees are less likely to be disciplined when their ethical transgression results in profit for the company. 

An expensive problem for enforcers

Imposing stricter regulations and higher fines may help to address this, but would be challenging and expensive for enforcement agencies. The researchers argue that morality should become “part of the vocabulary” in organisations as a way to create more awareness about ethics.

Training leaders in recognising morality is crucial, as is understanding the importance of not only focusing on bottom line outcomes, but also on the manner in which these outcomes are reached.