Ethics: do we only see what we want to see?
“The data seem clear on David Sokol’s conflict of interest in the Berkshire/Lubrizol deal. He bought shares in Lubrizol, and then encouraged Berkshire to buy the company. He claimed that because he didn’t know whether Berkshire would follow his recommendation he didn’t have inside information. But he clearly had information that the public didn’t have — that the probability of the acquisition was elevated. The far more interesting question from our standpoint is why Warren Buffett, known for his embrace of ethical business practices, failed to understand the unethicality of Sokol’s actions when he learned of them, and intervene. Had Buffet suddenly gone over to the dark side? Or, as Berkshire portrayed the story, did Buffett do absolutely nothing wrong?”
Max H. Bazerman and Ann E. Tenbrunsel, blogs.hbr.org (31 May 2011)
Why did Warren Buffet, famed for his promotion of business ethics, fail to see the problem that his key officer David Sokol had caused him recently? Why did he first absolve Sokol in what seemed like an obvious case of conflict of interest, and then belatedly condemn him?
Buffet has clearly done some damage to his otherwise saintly image here. But why did he do it? A person in his exalted position MUST stand for the highest standards of ethics at all times. So why did he waver?
Professors Bazerman and Tenbrunsel offered an insightful perspective recently. They have just written Blind Spots: Why We Fail to Do What’s Right and What to Do About It. They point us to mounting research that shows that we often fail to notice others’ unethical behavior if it’s in our interest not to notice. In other words, we suppress evidence that will cause us a problem. This failure of oversight — called “motivated blindness” — is both unconscious and common, say the professors. “When Sokol told Buffett that he owned stock in Lubrizol,” they contend, “Buffet probably didn’t consciously ignore the warning signs; he didn’t see them at all.”
This is interesting thinking, and explains much of what goes wrong in the business world. Here are some examples. Why are auditing firms so often found to come up short when major frauds are perpetuated in large firms? Because “motivational blindness” kicks in. They want their top clients to keep giving them lucrative accounting and advisory work, and it is in their interest that the clients thrive and grow. When signs emerge that things may not be quite right, human nature kicks in. The people running the account will hope for the best and imagine that what they are seeing are minor issues that will soon blow over. But often they don’t – and an entire professional firm can be brought to ruin, as we saw with Andersen in the Enron debacle.
Ratings agencies provide another example of motivational blindness. Why have they been so lax in assessing the riskiness of the instruments they are supposed to rate? Bazerman and Tenbrunsel tell us it’s a conflict-of-interest problem that leads to blindness, wilful or otherwise: “When we allow financial firms to choose for themselves the agencies that rates their financial products, the agencies have every incentive to be lax.”
Back to Buffet. Why did he not want to face up to the Sokol problem immediately? Possibly because this was his star protege and a potential successor. Evidence of wrongdoing was obviously inconvenient, and would lead Buffet back to his leadership drawing board. It is therefore understandable that he might not believe the evidence of his own eyes, or subconsciously ignore it.
All business leaders have to be aware of motivational blindness, as it afflicts us all. The professors recommend that we must aim for true objectivity by eliminating the conflicts of interest that bias judgments. We must also be ever-watchful of our own biases. If we have great hopes for something, we are likely to turn a blind eye.