Why Culture, Ethics, and Compliance Are More Important Than Ever Post-COVID

December 21, 2020
Guido Palazzo

Professor Guido Palazzo is Academic Director at Executive Education HEC.

If the COVID-19 crisis represents an unprecedented opportunity for pharma to strengthen its public reputation, it also poses enormous risks if things go wrong, writes Professor Guido Palazzo.

A Harris Poll earlier this year1 found that consumers’ impression of Big Pharma was 40% more positive than before the pandemic as drug companies make a concerted effort to tackle COVID-19. But this has not always been the case. In the US, at least, pharma’s reputational problems stem largely from price-gouging and the opioid crisis, translating into the negative perception of the American public. 

Fundamentally, any highly regulated and capital-intensive industry such as pharma can be a fertile breeding ground for unethical behavior and corporate wrongdoing. In pharma’s case, there is also the tension at the heart of its business model. On the one hand, companies are under constant pressure from investors to boost revenue and share price. On the other, the enormous cost of new drug development and high failure rate — often at a late stage of development — is an ever-present risk.

No matter what the industry or sector, the blame for wrongdoing and ethical lapses is invariably laid at the door of a few “bad apples” or “bad actors” who spoil things for everyone else. The phrase crops up frequently in commentary about pharma’s poor public image. Earlier this year, for example, the head of the US pharma lobbying body PhRMA, told USA Today2 that the furor over drug pricing was due to the behavior of “relatively few bad actors.” Similarly, criticism of pharma “should be focused on a few bad actors, not an entire industry,” the CEO of Cytokinetics wrote in an article published in October. 

The pervasiveness of the ‘bad actor’ explanation for unethical behavior and corporate wrongdoing arises from the fact that most models of ethical decision-making assume that people make rational choices and are able to evaluate their decisions from a moral point of view. And while it might be an appropriate to blame bad actors for some of the most outrageous examples of unethical behavior in the pharma industry (a prime example being Martin Shkreli, who bought the manufacturing license an old anti-parasitic drug and then raised its price by more than 5,000%), it simply doesn’t stack up as a catch-all explanation when we start to examine corporate scandals more broadly.

What’s startling about most corporate rule-breakers and so-called white-collar criminals is how ordinary they are. In fact, if you analyzed their character traits and compared them to the average executive, the similarities would be striking. So what is it that sets them apart? The answer is found in circumstances and culture. What we usually see with corporate scandals is that they begin with ordinary people who start to do bad things in highly stressful circumstances. There might be some sort of internal or external crisis (the current pandemic being a classic example), or pressure from investors to maintain unrealistic rates of expansion or growth despite changes in operating conditions.

The Enron scandal is a classic example of how such a crisis can lead to the emergence of a dysfunctional culture that culminates in a whole company reinforcing an alternative reality in which unethical and dishonest behavior makes total sense. In other words, the inability to discern what is right or wrong is the culmination of a process, the result of leadership behavior and cultural contexts, not something that is symptomatic of innate psychological flaws in certain individuals.

So in order to address the root cause of unethical behavior, the key is to identify the reasons why people start to turn a blind eye to what’s taking place and understand the contexts in which this can happen. And that’s deceptively simple. If you put sufficient pressure on an average person, two things will happen. Firstly, fear will kick in as they realize that they are making decisions or taking actions that are wrong. However, once that emotional wave passes, they will start to rationalize their actions. In other words, they will look at ways to justify what they are doing, often to such a degree that the behavior becomes routine.

This is a phenomenon that Franciska Krings, Ulrich Hoffrage and I christened “ethical blindness”3 in a paper published a few years ago in the Journal of Business Ethics, and it’s also a key driver in the launch of our own certificate in ethics and compliance.

One of the dangers of blaming “bad apples” for fraud and misconduct is that it also provides a very convenient way for us to distance ourselves from their behavior and to rationalize that we could never do anything like that, regardless of the circumstances. This attitude is risky because the whole point about ethical blindness is that it emerges from stressful situations in which the ability to make sound judgement gradually breaks down.

I believe that it’s essential to “de-compartmentalize” what we broadly term “risk and compliance” so that it is not solely owned by a specialized function whose job it is to ensure that the rest of the business follows the correct policies, codes of conduct, processes and procedures. This is especially relevant for life sciences and pharma, because while strong regulatory frameworks may make it easy to see whether or not all the right boxes have been ticked, they don’t take into account the role of human psychology, leadership behavior or organizational culture in mitigating risk.

Nor does the conventional approach to compliance and compliance training pick up the more subtle signs of an erosion in ethical behavior that may seem insignificant viewed in isolation, but combined with other factors, create the backdrop and context from which real wrongdoing can grow. How many large-scale scandals could have been nipped in the bud if these signs had been spotted earlier, not to mention the billions of dollars in fines and penalties that companies would have saved had such scandals not taken place? 

By exploring what can be described as the dark side, executives can see that their own leadership style could be inadvertently be responsible for creating the conditions in which others start to act unethically or illegally. In other words, they come to realize that malpractice isn’t something that only happens to other people.

One of the most potent antidotes to ethical blindness is a culture in which individuals at all levels feel safe and able to voice their concerns about potential problems and ethical issues without fear of retaliation. And that only happens if individuals see that their own bosses are prepared to speak up and feel safe doing so. Ultimately, this means that a ‘speak up culture’ depends largely on the attitude of those at the very top of the organization and on their leadership behavior.

The critical importance of leadership behavior was acknowledged by Novartis CEO, Vas Narasimhan, earlier this year when the company made its $729 million settlement with the US government over claims that it paid illegal kickbacks to doctors and patients to boost drug sales.

“We are a different company today,” Narasimhan said, “with new leadership, a stronger culture, and a more comprehensive commitment to ethics embedded at the heart of our company.” Establishing a Trust & Reputation Committee chaired by Narasimhan seems to be a further sign of that commitment, as is incorporating a metric for building trust with society into the compensation scorecards of senior executives.

But if organizations are serious about moving to a more enlightened approach to compliance that embraces a knowledge of ethics, sociology and psychology, it will demand a wholesale, top-down review of the entire corporate culture, with the explicit backing of the organization’s leadership. That’s exactly what is happening at another biopharma company I have worked with, where a number of working groups have been set up across the business to monitor and discuss key ethical and compliance themes such as ethical decision-making, trust in teams, etc. Each of these groups is led by a senior manager, which puts out a pretty clear message that the company takes these issues very seriously.

I also believe that a multi-disciplinary approach greatly contributes to a deeper understanding of the organizational contexts that can push good people towards unethical decisions. This is why our free Coursera course on unethical decision making in organizations draws from various disciplines such as management, psychology, sociology, philosophy, and literature, in order to learn what these disciplines can contribute to a better understanding of unethical behavior.

Clearly, ethical behavior is more important now than ever, because if the COVID-19 crisis represents an unprecedented opportunity for pharma to strengthen its public reputation, it also poses enormous risks if things go wrong. It’s no coincidence that the CEOs of nine companies developing vaccines against COVID-19 have publicly pledged to “uphold the integrity of the scientific process” in developing and testing vaccines. They are well aware of the importance of trust for the entire industry. So, with public expectations matched only by the intensity of public scrutiny, the pharmaceutical sector has an important role to play. 

Professor Guido Palazzo is Academic Director at Executive Education HEC Lausanne.

Notes

  1. https://theharrispoll.com/pharmas-reputation-has-soared-during-covid-19-pandemic-poll-finds
  2. https://eu.usatoday.com/story/money/2020/07/08/coronavirus-vaccine-covid-19-pharmaceutical-industry/5354630002/
  3. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2212617

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