Moral disengagement mechanisms as an obstacle to company sustainability

Abstract: Companies, as the main organizational form used for business, have a central role in the global economy, the environment and the working and living conditions of multiple stakeholders. Companies need to play a central part in tackling climate change and the protection of human rights and it is essential to understand and consider how organizational settings create additional opportunities for moral disengagement in relation to such issues, especially through moral justification and displacement or diffusion of responsibility. Moral disengagement mechanisms operating in company settings should be considered as an obstacle to the implementation of behavioral change.

Keywords: Moral disengagement; sustainability; company; moral justification; displacement and diffusion of responsibility

1. Introduction

Companies are the main organizational form used for business¹ and play a crucial role in the global economic activity with an extremely significant impact in society overall. The role of companies in society, their purpose and the criteria that should be used to manage them have been debated for more than a century.

The climate emergency, together with an added awareness of the impact that companies, especially multinational global companies, have on the environment and on the living and working conditions of individuals, have placed these topics at the center of the debate. This debate has assumed an existential significance considering the perils to the future of the planet and humanity arising from the adverse impacts of human-caused climate change and the urgent need to tackle climate change.²

This has also been accompanied by an increased focus on the impact of companies’ activities on human rights, not only as a result of their impact on the causes of climate change but also more generally in respect of working and living conditions for the different stakeholders.

The international survey conducted by the Yale Program on Climate Change Communication shows that the majority of respondents worldwide think that climate change is happening and also shows that a majority in nearly every area surveyed is worried about climate change.³ A majority of respondents in about three-quarters of the surveyed areas say the issue of climate change is either ‘extremely’ or ‘very’ important to them personally, while a majority of respondents in most of the surveyed areas say climate change should be a high priority for their government.⁴ Climate change is seen as the top threat to the respondents in the 19 countries surveyed on the Pew Spring 2022 Global Attitudes Survey.⁵

Governmental commitments are also aligned with these concerns as set out in the Paris Agreement adopted by 196 parties at the United Nations Climate Change Conference (COP21) in Paris, France, on 12 December 2015, and the several Conferences of the Parties (COP) summits organized under the framework of the United Nations Framework Convention on Climate Change (UNFCCC).

The impact of businesses on human rights has also been the focus of legislative attention in several countries,⁶ culminating in Europe with the eventual approval of the European Union Corporate Sustainability Due Diligence Directive.

There appears to be a majority opinion that there is a climate emergency that must be tackled and that the impact business activities have in stakeholders must, at the very least, be considered. Translating this position into actual behavior change is probably one of the greatest challenges of the current generation, a truly existential challenge. Understanding how people actually behave and the psychological mechanisms that are in operation when they make decisions is essential to understand how the transition from opinion to action can occur.

2. Understanding human behavior

Addressing the issues that are currently front and center on peoples’ concerns requires understanding how people behave in view of their convictions and how this behavior can change, whether they are acting within households, governments or businesses. Considering the urgency, importance, and size of the challenges it is essential to fully consider and understand what the best mechanisms are to achieve such behavior change and what are the constraints that could be faced by such mechanisms.

There are various mechanisms that address behavioral change.⁷ One of the law’s functions is to guide behavior and law can be said to be the ‘single most important institutional mechanism that our societies have to influence human conduct’.⁸ However, traditional doctrinal legal scholarship has tended not to use conclusions and research from other fields, even when they underpin arguments related to reality. This is particularly relevant in relation to its behavior influencing function as legal scholarship has tended not to consider the immense research on human conduct, and this has numerous implications. It means that lawyers are generally not aware of the actual impact that law has on human behavior and legal assumptions might be misaligned with scientific data about human behavior, resulting in a need to question basic premises about behavior in our laws in circumstances ‘when people do not know the law, when legal incentives do not work as often assumed, and when there are alternatives to steer behavior through law that are seldom considered in the law itself’⁹. This gap can have tremendous impact because the objective of the legal rules plays a significant role in their interpretation.¹⁰ Actual behavior is therefore very relevant from both a positive and descriptive perspective and from a normative and prescriptive perspective.

Some of the most impressive examples that should make us question the standard assumptions about human behavior relate to the fact that it has empirically been show that, in certain occasions, the salience of a law where such law is clearly and consistently being broken might reduce its power and its enforcement, as it serves as a reminder that it is powerless and ineffective and that others are also not complying with such rule.¹¹

There are several external and internal mechanisms in operation in actions or omissions that are characterized as transgressive (in breach of legal rules or moral principles). In addition to external sanctions (for example legal and social sanctions) there are also internal sanctions that can be considered relevant to regulate such behavior.¹² Alongside external legal and social sanctions, self-evaluative internal sanctions operate based on the anticipation of consequences:

‘In the legal form, people refrain from behaving transgressively for fear that they will get caught and suffer legal penalties. In the social form, people refrain from transgressive behavior for fear of social censure and other aversive social consequences. In self-regulation based on self-sanctions, self-censure deters people from behaving transgressively. Legal and social systems of control, which are rooted in external sanctions, are called fear controls. The control rooted in self-sanctions is called guilt control. Self-regulation via self-sanctions is manifested in two ways. The first involves the exercise of restraint over behavior that violates one’s standards, even when it is unlikely to be detected. The second is experienced as guilt, remorse, self-criticism, and attempts at restitution for having behaved transgressively.’¹³

Such deterrence mechanisms operate differently in respect of different types of transgressive behaviors, might operate in concert and can change over time (for example as values change).¹⁴ Given the limitations faced by legal and social sanctions, Bandura concluded that self-sanctions would be the most powerful deterrent for example in respect of criminal conduct .¹⁵

Behavioral ethics and behavioral law and economics have meanwhile amassed vast research in respect of how people actually behave in relation to, and as a result of, moral and legal rules.¹⁶ For example, deterrence (how risk of penalty impacts behavior) has now been shown to have substantial limits.¹⁷

3. Moral disengagement in organizational settings

Management and control of companies involves making multiple decisions in organizational settings. These decisions can result in transgressive behavior that entails non-compliance with legal or moral norms and that might have a negative impact in a company’s stakeholders and in society more generally.

Regulation of such transgressive behavior can only be effective with a complete understanding of the decision-making processes from a psychological and social perspective.

The influential social psychologist Albert Bandura researched extensively on transgressive decision-making within his social cognitive theory, which is a comprehensive framework for understanding persons and their capacity for agency.¹⁸

Social cognitive theory adopts an agentic perspective in which people are not mere passive observers of their behavior and development, they are ‘self-organizing, proactive, self-reflecting, and self-regulating agents who contribute causally to their life circumstances and personal growth’.¹⁹ The agentic aspects of psychosocial functioning are manifested in three psychological properties: forethought (forming intentions that include action plans and strategies, setting goals for personal achievement and visualizing the likely outcomes of their goal-oriented actions; behavior is governed by visualized goals and anticipated outcomes); self-reactiveness (adopting behavioral standards against which individuals evaluate their performance, especially relevant in the moral domain where self-regard and self-contempt are roused by actions that adhere or violate moral standards); self-reflection (reflecting on their efficacy for action, on the soundness of their thoughts, on the rightness of their values, and on the meaning and morality of their pursuits).²⁰

The causal processes that are present in human functioning result from the reciprocal interplay among three classes of influence: intrapersonal factors (values, aspirations, competencies, etc.); the behaviors in which individuals engage; and the environmental forces that impinge on them.²¹

An individual’s values and the outcome of its decisions are therefore one of the causal factors of such decisions, as a result of a complex and reciprocal interplay.

As mentioned above, psychological processes and mechanisms are an integral part of the internal sanctions that regulate behavior.²²

However, self-sanctions are frequently neutralized by selective disengagement allowing people to transgress and still retain their self-respect and feel good about themselves. Through moral disengagement individuals selectively disengage moral self-regulation from their harmful conduct. Albert Bandura identified eight psychosocial mechanisms that fall within the concept of moral disengagement that operate in four loci: at the behavior locus, where people sanctify harmful means by investing them with worthy social and moral purposes (social and moral justification), make the harmful conduct appear benign through advantageous comparison (palliative comparison) and sanitize the conduct with euphemistic language (euphemistic labeling); at the agency locus by displacing responsibility to others (displacement of responsibility) or dispersing it so that no one bears responsibility (diffusion of responsibility); at the outcome locus where perpetrators disregard, minimize, distort or dispute the effect (minimizing, ignoring or misconstruing consequences); at the victim locus where perpetrators dehumanize the victims or blame them (dehumanization and attribution of blame).²³

In Albert Bandura’s words moral disengagement ‘provides the means for those who morally disengage to circumvent moral standards in ways that strip morality from harmful behavior and their responsibility for it. However, in other aspects of their lives, they adhere to their moral standards. It is the selective suspension of morality for harmful activities that enables people to retain their positive self-regard while doing harm.’²⁴ Moral identity is an important variable in explaining moral conduct²⁵ especially considering that existence of an illusion of moral superiority.²⁶

Moral disengagement mechanisms operate in various contexts. Understanding their occurrence in corporate settings in essential to understanding how and why certain decisions are made and how to regulate undesired outcomes.

Research has shown that there are differences between individual behavior and behavior in corporate settings.²⁷ It has also been shown that the propensity to morally disengage is a powerful predictor of multiple types of unethical organizational behavior and consistently explains variance in unethical decisions²⁸. Moral disengagement has been increasingly used as an explanation as to why individuals engage in unethical behavior at work, including how antecedents at the individual, group and organizational levels may predict moral disengagement, having found for example that there is a positive association between moral disengagement and undesirable behaviors in the workplace²⁹.

There are numerous examples of moral disengagement in organizational settings: justifying predatory practices with making markets more efficient or recasting of inappropriate behavior such as unfair treatment as appropriate to protect an organization (moral justification),³⁰ disputing the negative effects resulting from the development and marketing of commercial products that impair human health (minimizing or misconstruing consequences) or blaming users of such products for the negative effects (victim blaming)³¹, the use of workplace production methods that are injurious to the health of workers and describing stealing from a large, profitable organization as a ‘victimless crime’ (minimizing or misconstruing consequences),³² labelling colluders as ‘team players’³³ (euphemistic labelling), misrepresenting small lies on expense reports as more acceptable when compared with more egregious expense report violations (palliative comparison).^34-35

It is, however, necessary to consider if these organizational settings can be considered to be more prone to this type of transgressive behavior compared to, for example, the behavior of individual businesspersons? I.e. do organizational settings increase moral disengagement?

Research results are mixed in relation to the effect that group and organizational settings have on behavioral biases, which may remain unchanged when compared to individual behavior or can be mitigated and even exacerbated³⁶.

In relation to moral disengagement, at the very least, companies and their organizational structure can be considered to present additional occasions for these mechanisms to occur. In addition, the size of the company should have an impact as it creates more opportunities for top management to invoke not being aware of the wrongdoing and not assuming responsibility as the ‘distance’ from the employees to the top management is greater³⁷. Larger companies also have a larger budget that can be devoted to sponsoring or promoting research that discredits the effects of the activities (even if, on the other hand, they can also spend more money in compliance mechanisms and internal culture programs).

In addition, globalization and the resulting expansion of business groups to multiple countries should also be relevant insofar as it creates additional ‘distance’ in relation to the effects of a product or activity.³⁸ In fact, it has been noted that the overall assessment of decisions made within the company context is faced with significant obstacles given the time that decisions may take to produce effects and the difficulties around determining causality as a result of the complexity of the business environment³⁹ and the organizational structure.

In a way, globalization can serve to ‘launder’ the legal and moral requirements that exist in a certain context. For example, a company that has its suppliers, operations and clients in a single country that has a certain level of more demanding legal rules around environmental protection and labor conditions that are actually enforced (the compliance with which plays a significant role on why the clients choose those products) can decide to choose suppliers or locate its operations in a country that does not have the same legal standards or that does not enforce them. In a way companies can structure their business to evade a given jurisdiction’s regulatory power⁴⁰ and moral principles: ‘fragmentation of responsibility and accountability through the organization of business in corporate groups and through global value chains, obscuring control relationships and modes of production while defying territorially limited national regulation’⁴¹.

4. Moral disengagement in organizational settings in respect of sustainability issues

It has been argued that while not inherently geared towards unsustainability, the uses to which the company form has been put and the dominant legal-economic theories that have informed much of the mainstream corporate governance discourse ‘certainly has resulted in unsustainable business practices’.⁴²

Research has found that moral disengagement mechanisms are relevant to individuals’ actions in relation to environmental issues and human rights.⁴³

Even though these mechanisms operate in organizational and non-organizational settings, there are several instances where it can be said that acting in an organizational setting creates additional opportunities to morally disengage.

Social and moral justification

Operating in the behavior locus, social and moral justification allows people to sanctify harmful practices by investing them with worthy social and moral purposes⁴⁴. These justifications take a variety of forms and may include economic advantages in the competitive global marketplace, societal benefits, protecting the free enterprise system, etc.⁴⁵

Efficiency is often used as a moral justification, for example in choosing suppliers for auditing in supply chain management that are geographically near each other and near buyers’ purchasing offices⁴⁶ regardless of the risk they pose.

The purpose of the company has been the subject of a debate that goes back for more than a century and that has intensified in recent decades.⁴⁷ The debate has been centered around the importance that should be afforded to the interests of shareholders assuming that their intention is to receive as much value as possible (shareholder primacy) and to other constituencies, such as employees, clients, communities, etc. (stakeholder governance).

In the United States of America, where the debate is more intense and tends to influence other countries,⁴⁸ there have been a growing number of companies taking a more stakeholder friendly public stance⁴⁹ and in academic circles a stakeholder-oriented conception of the company has been growing in popularity.⁵⁰

However, it is difficult to ascertain exactly how much of this shift towards a more stakeholder-centric governance is actually having an impact on how the companies are de facto being managed. Even if companies are more and more taking public positions on ESG topics it is hard to measure if these public positions correspond to an increasing stakeholder friendly stance by executives. If the measure is executive pay, there is in fact a growing number of companies using ESG metrics to determine compensation⁵¹ and this might mean that company leaders would be required to adjust their behavior aligned with such metrics. However, there are justified concerns around the relative importance of ESG metrics in relation to traditional financial performance metrics⁵² and executive pay appears to remain strongly biased in favor of shareholder-oriented incentives and focusing closely on shareholder returns.⁵³

The dominance of the shareholder centric approach does not result from a regulatory imposition as there is no clear and consensual corporate law requirement at a state or federal level in the US that directs board members to maximize shareholder profits and such a position is not enforced by the courts.⁵⁴ Shareholder primacy is, however, a powerful social norm that is reinforced by a number of forces,⁵⁵ in particular by the relevance that financial performance metrics and share price have on the determination of executive compensation, fostered by the operation of the market for corporate control from the 1980s takeover wave that, inter alia, requires share price to remain high as a defense mechanism⁵⁶ and, a certain preponderant position that shareholders have in US corporate law, maxime by getting to elect directors.⁵⁷

In any case, regardless of the direction of travel or the existence of a pendulum or a cyclical pattern,⁵⁸ the fact is that shareholders’ interests are still very much central to how companies are managed, especially larger multinational companies that are extremely impactful when it comes to the environmental emergency and the consideration of the rights of company stakeholders.

Given the increased focus on the environmental emergency, the debate is now centered around the need to maximize shareholder profits and transition into more climate friendly activities. Despite all the discussion around the climate urgency and the growing preponderance of the stakeholder-friendly approaches in the academic debate on corporate purpose, the fact is that the preoccupation with environmental impact is still a plus in respect of profit making and shareholder value maximization.

The need to maximize shareholder value can serve as a justification for not acting in accordance with one’s values in respect of climate change or human rights.

This situation configures an especially powerful mechanism because it also benefits the individuals themselves as executive compensation and employee compensation is largely linked to financial performance metrics and in a certain perspective masks a more selfish self-interest.

Displacement and diffusion of responsibility

At the agency locus moral disengagement can operate by displacing responsibility to others (displacement of responsibility) or dispersing it so that no one bears responsibility (diffusion of responsibility).⁵⁹

Displacement of responsibility is already prevalent in the discourse about the environment and human rights, especially in considering consumers and clients to be responsible for the environmental impact.⁶⁰ But these mechanisms can be said to operate regardless of an organizational setting.

organizational settings. These moral disengagement mechanisms can operate in several ways: dividing labour in which the subdivided activities seem harmless in themselves resulting in personal agency being obscured by diffusing responsibility for detrimental behavior; shifting from individual decisions to group decisions, transferring responsibility from the individual to the group and making one’s contribution seem trivial; structuring information and decision flows to insulate more senior individuals within the organization from responsibility, remaining intentionally uninformed and able to deny knowledge of wrongdoing.⁶¹

Research has shown that these mechanisms are present in individual attitudes for persons integrated in organizations.⁶² These mechanisms are especially problematic given that for example an Australian study, focused specifically on the influence of moral disengagement on responses to climate change, found that researched individuals tended to ‘place greater responsibility on groups and organisations rather than on individuals’.⁶³

Diffusion and displacement of responsibility mechanisms have also been found to operate in supply chain management which is an especially prevalent area for detrimental impacts to human rights. This could also exist in supply management of individual businesspersons (albeit on a smaller scale given the size constraints face by such businesspersons) but is exacerbated by company structure, for example by displacing responsibility towards managers (from individual decision makers) and internal decision making within organizations.⁶⁴

5. Conclusions

Tackling sustainability concerns can only occur if individuals change their behavior, whether they are acting within households, organizations or governments. Given the importance of businesses for the global economy, the environment and the working and living conditions of multiple stakeholders, it is essential to consider the effect that an organizational setting has on decision making when working in a company, which is the main organizational form used for business.

There are several instances where it can be said that acting in an organizational setting creates additional opportunities to morally disengage, i.e. to circumvent moral standards in ways that strip morality from harmful behavior and an individual’s responsibility for it - the selective suspension of morality for certain activities that enables people to retain their positive self-regard.

In respect of sustainability issues, in particular the urgent need to tackle climate change and respect for human rights in companies’ value chain and stakeholders more generally, there are two categories of moral disengagement mechanisms that are relevant for individual decision making: moral justification, insofar as people make decisions that might contradict their values by justifying them with the need to comply their obligation to increase profits and maximize shareholder value; displacement and diffusion of responsibility, where individuals justify their actions by shifting blame to their leaders or to a group decision or minimizing the relevance of their individual decision as a small fragment of a larger process.

These conclusions have no implications for theory because this paper has not conducted additional research and solely endeavored to compile existing findings from several areas of research.

However, the existence of moral disengagement in company settings in respect of sustainability issues has implications for both policy and for positive and normative legal doctrine.

From a policy perspective, promoting awareness of the operation of moral disengagement mechanisms should be tested as an effective means to mitigate their negative impact. It has been suggested that moral disengagement may be receptive to training interventions.⁶⁵ Furthermore, in respect of climate action, it has also been suggested that communication efforts conveying climate action as a moral challenge should ‘do so by appealing to its impacts on the people, places, and things that people value, thus weakening the cognitive availability of displacement and diffusion mechanisms’.⁶⁶

In relation to the debate on corporate purpose, the moral justification mechanisms that can operate to justify not acting in accordance with one’s values so as to comply with the requirement to maximize shareholder value should be considered an additional factor that can be an obstacle to the de facto implementation of the stakeholder friendly positions that focus on combating climate change and protecting human rights.

In addition to the shareholders’ and executives’ self-interest, moral disengagement mechanisms create a moral justification not to act or not to act faster in relation to climate urgency or in relation to the impact suffered by stakeholders.

These mechanisms reveal the importance of discussing who bears the cost of combating climate change and protecting the impacts suffered by stakeholders. Should shareholders bear such cost? Should consumers bear such cost? Should society in general bear such cost?

Legal doctrine should be more aware of actual human behavior and the relevant psychological mechanisms, both in describing existing law and proposing regulatory reform. From a descriptive perspective, a number of arguments used to reach a conclusion on existing law derive from the intent of the legislature and it is very relevant to understand actual human behavior for such purposes.