Conflicted Self-Interest Causes Business Irresponsibility

rkg-crop--sales-marketing-newIf you closely examine corporate disasters—so often in the news these days—such as products or accidents that injure or kill people, environmental messes, and public relations nightmares, you will usually find a common culprit: bad decision-making caused by conflicted self-interest. Even short of all-out disasters, conflicted self-interest is responsible for many awful business decisions.

Very simply, conflicted self-interest causes business irresponsibility.

What is conflicted self-interest? It is a situation where the expected outcome of a decision puts the decision maker in a different position than significant stakeholders in the decision, and where the decision maker has a duty or obligation to those stakeholders.

An example: A company based in Minnesota is planning to move headquarters to be closer to one of its two main factories. One factory is in California, and the other is in Florida. The California location is close to the CEO’s vacation home, a place he likes to spend a lot of time at. But a move to California is far more expensive for the company than a move to Florida.

If the CEO is the decision maker in the move-to-California or move-to- Florida decision, he is in a position of conflicted self-interest. Selection of the California location for the new headquarters will have a positive outcome for the CEO (the new location is close to his vacation home,) but a negative result for the shareholders (more expense than the California location.)

The CEO in this example has a duty to serve the best interests of the stockholders. But his natural bias will be to favor his own interests, and natural biases are often very hard to overcome.

Favoring one’s self-interest is essential to survival, well-being, and comfort. We are all hard-wired with the instincts—derived from our cavemen ancestors—to place our interests above the interests of others.

Actions and decisions based on self-interest are natural and pervasive in all aspects of life and commerce. That is not necessarily a bad thing. Self interest is the fuel that feeds the engine of free enterprise. Innovations, invention, and discovery in large measure result from activity motivated by advancement of one’s interests.

Adam Smith, the eighteenth century philosopher-economist, recognized this when he wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” More recently, Stanford School of Business Professor Jeffrey Pfeffer, in his new book, Leadership BS, put it more bluntly. He counsels us that since bosses generally make decisions based on their self-interests, we should too.

Most of the time balance is achieved among competing interests. The plumber who unclogs your kitchen sink at double time rates on a Sunday night has his interests served by the rate he has set. Your interests are served by having him fix your sink so you can have a long-planned dinner party that evening. There is harmony because there is an alignment of interests.

Things break down when decision making involves conflicted self-interest, with good outcomes for decision makers and bad outcomes for stakeholders. Under those circumstances, bad decisions are inevitable, often causing corporate irresponsibility and even disasters.

Conflicted self-interest is insidious because it robs decision makers of objectivity, and blinds them to this impairment. Studies have demonstrated, for example, that physicians receiving perks from drug companies prescribe those drugs more than drugs from competing brands, even while the physicians claim that their professional judgment is unaffected by receipt of the perks.

Responsible decision-making requires recognition of conflict situations, and recusal of conflicted decision-makers from decisions. If the decision-maker is unable or unwilling to recognize the conflict, the organization’s decision-making culture must allow others in the decision-making process to speak up and step in to inject unconflicted objectivity.

A culture of responsible decision-making is one which has an awareness of conflicted self-interest, and its impact on decisions.

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About the author: Bob Greisman is a business growth adviser and coach, and speaks and writes on business decision-making. He may be reached at bob@rkgconsultinginc.com.

 

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