Surprise success can be a good thing. But according to new research, it comes with added temptations.
You are a top executive at a high performing company. Your company is exceeding everyone’s expectations. Your profits look great, your shareholders are delighted, and your employees take pride in the fact that their company is among the most respected in the industry. You are not experiencing the strains of disappointing profits nor are you threatened by eroding margins. You would never think of putting it all at risk by breaking the law … Right?
Wrong. A recent study in the Academy of Management Journal finds that top performing companies are actually more likely to break the law than their underperforming peers. The study’s authors—Yuri Mishina (Michigan State), Bernadine Dykes (U. of Delaware), Emily Block (Notre Dame), and Timothy Pollock (Penn State)—analyzed every manufacturing firm in the S&P 500 between 1990 and 1999, collecting information on environmental violations, anticompetitive actions, false claims, and instances of fraud. What they found appears at first to be a paradox: surges in a company’s stock prices and abnormally high profits often led to illegal behaviors. Their findings suggest that the more a company has to lose, the more likely the company is to risk losing it.
Why might this be?
Mishina and colleagues suggest that we turn to psychology and behavioral economics for the answer. Success, they explain, can cause us to stop thinking about our achievements in absolute terms and start thinking about them in relative terms. It drives us not just to maintain our level of success but to continue outperforming our peers and to keep out-doing our own past performances. This pressure can come in any one of the following forms:
Loss aversion
You might think that success would insulate a CEO against the threat of a quarterly loss or two, but it does just the opposite. In times of success, losses hurt more. Positive feedback increases our aspirations along with our fears of disappointing ourselves and others. But as Mishina and colleagues point out, “performance cannot continue to increase at the same rate indefinitely; thus, performance levels are likely to eventually peak and flatten.” If we have not prepared for this inevitable change, even high levels of success will feel like losses.
The House Money Effect
Success makes risk seem less risky. A gambler who has just scored big feels as though he can continue playing, making even larger bets than before because now he is playing with the “house’s” money rather than his own. Similarly, large and unexpected profits lead us to ignore the downsides of taking big financial risks, including committing illegal acts.
Hubris
When we experience success after success, we can come to develop hubris (the belief that we are invincible or invulnerable to failure). Hubris leads us to ignore the downsides of risk, believing we will always be able to avoid negative results.
One or all of these processes may affect us in times of unexpected success. When they do, they intensify the pressure to top past levels of performance, even if that means breaking the law.
You might wonder how a company’s reputation and visibility affects these processes. Prominent, well-respected companies operate under a great deal of public scrutiny. Does all that attention make them less likely to engage in illegal behaviors? The answer, surprisingly, is no. Mishina and colleagues found that a company’s visibility and reputation can serve as a deterrent, but only during times of poorer-than-expected performance. When it comes to periods of high performance, prominent companies are just as vulnerable to the pressures of success as their less prominent peers. In fact, the researchers found that exceptionally high stock prices led prominent companies to commit crimes in even greater numbers than lesser-known companies.
So what can we do to manage the pressures of success? Here are some practical ways you can maintain high ethical standards even during times of unexpectedly high performance.
First, rethink how you define success.
An excessive focus on short-term performance is unhealthy. Instead of evaluating executives’ performance on the basis of quarterly earnings, make long-term high performance your goal. Mishina and colleagues write that doing so will “reduce the likelihood executives will look to stop-gap measures such as corporate illegality to maintain unsustainable levels of short-term performance.”
Second, manage expectations.
If you have been very successful, then unrealistic expectations already exist in the minds of shareholders, potential investors, and analysts. Mishina and colleagues advise that you “actively manage external expectations to try and keep them from becoming too optimistic and unrealistic.” Otherwise, negative news will be disappointing, leading to an increase in harmful effects.
Above all, recognize that good companies can do bad things.
As Mishina and colleagues point out, it is not necessarily true that “only bad firms engage in bad behaviors.” Success and prominence can sometimes be the result of high ethical standards. But these results produce new pressures, often threatening the behaviors that created them.
The bottom line is this: in times of great success, vigilance and strong ethical commitments matter more than ever—not just to help you avoid expensive settlements, penalties, and legal fees, but also to keep your company on the path to sustainable growth.
Originally published by Yuri Mishina, Bernadine Dykes, Emily Block, and Timothy Pollock at ethicalleadership.nd.edu on July 28, 2016.