Compliance & Ethics

November/December 2013 Professional

a publication of the society of corporate compliance and ethics www.corporatecompliance.org

Compliance as a significant strategic function in the investment community

an interview with Erica Salmon Byrne and Jean-Marc Levy Executive Vice President, Compliance & Governance Solutions Head of Global Issuer at NYSE Governance Services Services at NYSE Euronext See page 14

25 31 37 45 How to build a New European Social media: The deep-fried compliance and ethics law will change Establishing and compliance lessons program by applying everything you enforcing a social from the fall of ISO-like practices do with data media policy Paula Deen Todd Tilk Kristy Grant-Hart Stephen Marsh Theodore Banks

This article, published in Compliance & Ethics Professional, appears here with permission from the Society of Corporate Compliance & Ethics. Call SCCE at +1 952 933 4977 or 888 277 4977 with reprint requests. by Scott Killingsworth Schooled in Fraud: Compliance lessons from the “Lying Dutchman”

»»Fraud is not logical: talent and legitimate success are no guarantees against cheating for greater success. »»Success begets excess: the of how small beginnings escalate into vast operations is the key to understanding and preventing fraud. »»Power and status can encourage misconduct while simultaneously impeding careful observation and whistleblowing by others. »»Controls should apply to everyone and should target small beginnings. »»Cultural cues can either furnish easy rationalizations for misconduct or serve as the first line of defense against it.

ower Increases Hypocrisy.” This it begins, how it grows, and how it can go provocative title headlines a 2010 undetected and unreported despite a parade’s “Pstudy1 showing that power makes worth of red flags. His story can also remind people more likely to misbehave and more us of important truths about power, status, forgiving of their own misconduct, but less trust, and manipulation, and about controls tolerant of other people’s failings – a combi- and culture—truths as pertinent to business nation that defines hypocrisy. One and government as they are to academia. of the study’s co-authors was Dutch Stapel’s fraud unraveled in 2011, when social psychologist Diederik Stapel, three of his graduate students noticed anoma- the brilliant, charismatic Dean of lies in his experimental data, such as identical the School of Social and Behavioral rows in data tables from unrelated studies. Sciences at , teacher After comparing notes and patiently gathering of its Scientific Ethics course, magnet evidence, they reported it to their department Killingsworth for prizes and grants – and the sole head and soon a comprehensive investigation

perpetrator of one of the most spec- was underway. Stapel gave up the pretense 2013 November/December

tacular and longest-running academic frauds and confessed. In the end, the investigators of all time. Exposed and disgraced within announced that Stapel had been altering and a year after publication of “Power Increases later, completely fabricating experimental data Hypocrisy,” the once-powerful Stapel now for at least 15 years at three universities and serves as its poster boy—ironic proof of his in as many as 65 published works, including own hypothesis. three that contributed to his doctoral dis- Embedded in the story of Stapel’s rise and sertation. Stripped of his position and his fall are universal lessons about fraud—how reputation, he surrendered his PhD, withdrew Compliance & Ethics Professional

+1 952 933 4977 or 888 277 4977 www.corporatecompliance.org 85 from public life, and wrote a memoir, appro- Small beginnings, motivations, and priately entitled Derailment. rationalizations Stapel’s career was nothing if not mete- Motivation to cheat is not hard to find. Stapel oric. His 1997 doctoral thesis won the Best was known to be single-minded and intensely Dissertation Prize from the ambitious. Publication drives academic professional association, ASPO; five years careers, and journals crave research results later he was ASPO’s president. He received that are positive and, above all, clear. Stapel an Early Career Award in 1999. By 2000 he was also obsessed with elegance, order, and was a full professor, and in 2006 he became logic, which dovetailed nicely with what the dean of an entire journals were looking division of his uni- for. This confluence of versity, in charge of Stapel’s career was his personal predilec- nine departments tion for order with a including his own. nothing if not meteoric. recipe for professional Enormously pro- His 1997 doctoral thesis success may have fur- lific, he published nished Stapel with a over 100 papers won the Best Dissertation double rationalization and edited several Prize from the social for embellishing his books. A second research: he could give Early Career Award psychology professional the journals what they in 2007 from a dif- association, ASPO; five wanted and reap the ferent professional career rewards, while organization seemed years later he was finding the underlying belated at best, and ASPO’s president. beauty that he assumed his 2009 Career was lurking in imperfect Trajectory Award data. He had actually almost anticlimactic. stated in an early paper, “…when an experi- To be sure, this success was fueled in part ment does not give us what we are looking by fraud. But there is also no doubt that Stapel for, we blame the experiment, not the theory had everything it takes to succeed on merit. (at least that is the way I work).”3 His talent for generating a steady stream of Given temptation, people will often cheat, intriguing hypotheses and designing experi- but for most people, the extent of the cheating ments to test them was legendary. According is constrained by the need to maintain a posi- to the committee that investigated the fraud, tive self-image as a basically honest person.4 colleagues described him as brilliant, inspi- Taking home a pen is psychologically (if

November/December 2013 November/December rational, congenial, dynamic, energetic, and not morally) quite different from smuggling 2 creative. And there is no reason to believe out a box of pens, or a case. Thus, miscon- Stapel is fundamentally amoral or psycho- duct often begins with small infractions, pathic. How does a person with these gifts supported and excused by rationalization, start down the path of fraud? And, unlike an such as “This won’t hurt anyone.” Given his embezzler who can’t replace the stolen funds, Platonic world view and the positive career Stapel could have stopped faking research at impact of publishable findings, it is no wonder any time. Why did he go on, continually com- that Stapel was able to justify small altera- pounding the risk of exposure? tions of data early in his career. He describes Compliance & Ethics Professional

86 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977 the experience: “I changed an unexpected First, evading detection (and conse- 2 into a 4.…I clicked my mouse to execute quences) makes the risk of misconduct seem the relevant statistical analyses. When I saw miniscule in hindsight, prompting irratio- the new results, the world had returned to nal confidence and ever bolder risk-taking. being logical.”5 Second, in Stapel’s case, success led to increas- ing status and power, and we know that Cultural cues acquisition of power These early data falsi- also induces over- fications differed more Second, in Stapel’s case, confidence, increases in degree than in kind risk-taking7 and raises from “cherry-picking” success led to increasing the potential for practices that were then status and power, and misconduct.8 Finally, common in European we know that acquisition the “cheater’s high” social science research, has been chronicled according to the inves- of power also induces from Willie Sutton tigators. They identified overconfidence, increases to Frank Abagnale a “research culture that and confirmed in was excessively oriented risk-taking and raises the experimental studies: to uncritical confirmation potential for misconduct. even in good people, of one’s own ideas,” rife the thrill of getting with “careless, selective away with it often and uncritical handling of research data,”6 eclipses the guilt, and may be habit-forming.9 such as re-running trials until the desired Predictably, as Stapel’s career flourished, the results were achieved and publishing only cheating escalated. He found he “had become those successful trials. Several colleagues a junkie.” “I don’t think there was going to be defended these methods as commonplace, an end. There was no stop button. My brain modeled by mentors, and accepted in practice, was stuck.”10 if not in the scientific canon. So for Stapel, the If people need to maintain a positive first step onto the slippery slope was a small self-concept, how can minor misconduct one indeed – like fudging an order date so as mushroom as Stapel’s did? One step at a time. to recognize revenue a crucial day earlier. At For example, in the famous Milgram elec- first, he did barely anything unusual enough troshock experiments, the subjects were first to require rationalization. asked to give others a very mild 15-volt shock. By increasing each subsequent shock by only Escalation: Success begets excess another 15 volts, Milgram led every single par-

What makes the slope so slippery? Successful ticipant into administering what they thought 2013 November/December misconduct fuels escalation in more ways was an “intense” 300-volt shock and 65% of than one. Crime does pay if you aren’t caught, them continued through the 450-volt top of and the reinforcing effect of its rewards— the scale.11 So long as each infraction is only whether money, status, power, celebrity, or marginally worse than what has gone before, in Stapel’s case all four—is the most obvious we unconsciously revise our baseline for factor in escalation. Rewarded behavior gets self-assessment. repeated, but more subtle effects are also Stapel’s escalation occurred in three at work. phases, each more audacious than the Compliance & Ethics Professional

+1 952 933 4977 or 888 277 4977 www.corporatecompliance.org 87 one before. Initially, working alone, he reinforcement, acclimation to risk, “addiction,” “beautified” his own genuine data in private. and a final “in for a penny, in for a pound” As his seniority grew, working with others rationalization. on research was unavoidable, but he turned it into an opportunity to leverage his specious Missing standards and controls scholarship through co-authors. In this As any compliance professional would notice, second phase, Stapel would collaborate with all three escalation phases had a classic badge a colleague to develop a hypothesis and an of fraud in common: one person had exclu- experimental design. The experiment would sive or largely unsupervised dominion over be run and raw data legitimately collected. a tempting resource, such as cash, accounts, Stapel then would customer or supplier rela- employ a graduate tionships—or in this case, assistant to run As Stapel data. As Stapel described statistical analyses on it, “Nobody ever checked the data. When finished, described it, “Nobody my work. They trusted the assistant would ever checked my work. me…I did everything send the analyses to myself, and next to me Stapel alone, who would They trusted me…I did was a big jar of cook- improve the results everything myself, and ies…no lock, not even a before passing them on lid…All I had to do was to be written up by the next to me was a big jar take it.”12 unwitting colleague. of cookies…no lock, not No hard or soft con- To collaborators, this trols existed to prevent looked like a routine even a lid…All I had to Stapel from exploiting division of labor. do was take it.”. his co-workers’ trust And except for the and keeping them in involvement of these the dark about the data. innocent dupes, Stapel’s academic crime was His fraud had actually been underway for no different than before. years before the adopted any In the final phase, Stapel would simply formal code of scientific research integrity. fabricate entire data sets for joint papers, At the , where his claiming they were gathered experimentally career (and transgressions) began, there by paid research assistants at another school. was no formal structure at all for enforc- Sometimes, if a colleague posed a particularly ing scientific standards and “no culture in intriguing research question, Stapel would which scientific integrity was given a high

November/December 2013 November/December pretend to remember that he had once run priority through explicit attention, detailed

a relevant experiment, but had never gotten monitoring, …[or] a collective responsibil- around to analyzing the results. Then he ity within research groups.”13 Solo research would go off and create the needed data for was common. Thus at this formative early use in a jointly-authored paper. By the begin- stage of his career, there would have been ning of this phase, Stapel had a long history little or no risk that data falsifications would of serial fraud behind him. We can speculate be detected at their inception. This lack of that this final, qualitative escalation may explicit standards and controls, and the low have been the combined product of ambition, risk of detection, undoubtedly influenced Compliance & Ethics Professional

88 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977 other scholars’ behavior as well, contributing Why controls and reporting failed to the development of the lax research culture The story of the failure of controls and report- mentioned earlier. ing involves tensions between trust and skepticism and between self-interest and Failure of existing controls and of reporting integrity – tensions made from friendship, Beyond the immediate university research group ties, fear, power, and manipulation. environment, the peer review sieve for pub- Trust is the basis of all scientific collabo- lication is the primary guardian of scientific ration, but paradoxically skepticism is the integrity. In practice, this “control” was lifeblood of science. When these principles an utter flop. Stapel’s fraudulent publica- came into conflict in Stapel’s case, trust won. tions were replete with Those in the best posi- red flags – experimental tion to detect Stapel’s effects much larger than Beyond the misconduct were his usual, inexplicable (and close collaborators and in some cases impossible) immediate university students, and they statistical correlations, a research environment, trusted him. Besides conspicuous absence of the purely professional the usual “noise” in the the peer review sieve ties, Stapel built strong data. Statistics experts had for publication is the bonds of friendship a field day dismembering with his graduate stu- his data tables and analy- primary guardian of dents, often socializing ses, yet none of the peer scientific integrity. with them. In the end reviewers had noticed any- his colleagues were no thing odd. match for his ruthless Likewise, inquisitiveness seemed to be abuse of trust, or for the manipulations and in short supply among the university col- cover stories designed to deflect skepticism leagues and doctoral students involved in and forestall unwelcome inquiries. writing up Stapel’s beautiful data, as well as In addition to these personal and profes- faculty peers who served as co-advisors on sional ties, Stapel’s success directly benefitted tainted doctoral dissertations. They tended those around him. In an analogous context, not to notice or comment on the statistical Stapel once observed that children his daugh- anomalies, or the mysterious, vague origins ter’s age knew that St. Nick wasn’t really going of Stapel’s later data sets, or the way data to visit at Christmas, “But they like to believe sometimes appeared out of nowhere when it anyway, because it assures them of pres- the need arose. ents.”14 So it may have been with university

But some people did notice. Before the officers who saw Stapel attracting prestigious 2013 November/December final whistleblowers came forward, three grants and media attention; research collabo- other graduate students had noted irregulari- rators who received both testable hypotheses ties in Stapel’s data and raised the specter of and the data to prove them; and journal editors fraud with senior faculty. At least two faculty who were getting compelling narratives and members had also discussed suspicions of clear, newsworthy results. They were all get- fraud with colleagues. None of these conver- ting presents too, and they needed to believe sations were pursued or relayed up the chain in Stapel, and so they did, and the fraud had of command. room to grow. Compliance & Ethics Professional

+1 952 933 4977 or 888 277 4977 www.corporatecompliance.org 89 Motivated blindness less subtle ways, including intimidation. He was This is not to say that anyone made a cynical, or known to quickly cut off questions about his even conscious, decision to ignore red flags. To methods, taking offense that a student might the contrary, what psychologists refer to as “moti- call his expertise as a renowned professor into vated blindness” really is blindness; the editing question. He told one student who found suspi- of perception often occurs below the plane of cious patterns in the data, “If you want to be awareness.15 When we get negative information taken on here…just write up the results.”18 about someone we trust, or like, or someone we His status figured heavily on the whistle- depend on, we tend to find ways to justify their blowing front as well. Accusing a prominent behavior, and look for alternate explanations professor and high official of fraud is risky, rather than to revise our opinion of the friend or especially if you fall within his sphere of power. benefactor.16 In Stapel’s case there were always Several private consultations with faculty mem- alternate explanations, often based on a grain of bers about suspected fraud went no further truth. His data were so clean because he was such because of the lack of compelling evidence. a skillful theorist and experimenter (as confirmed One professor who became suspicious while by his position and reputation), an explanation working with Stapel took his concerns to a that also sufficed when other, presumably clum- more senior faculty mentor, who responded by sier, researchers failed to replicate his results. asking, “Do you really believe that someone His abundant grant funding explained the with [Stapel’s] status faked data?” The younger anonymous (and fictional) assistants running professor later told a reporter, “At that moment I the experiments, always in another city. As to the decided that I would not report it to the rector.”19 unnamed schools where experiments were pur- That last remark brings us to a final factor portedly conducted for Stapel, he seemed merely —the reporting channel. The university’s to be treating them the way any parent treats a “Confidential Counselor,” the only person prized babysitter: as a scarce resource that could designated to receive confidential reports of vanish if made available to others. , was its Rector Magnificus For another example of motivated blindness, – the chief academic officer of the university, the recall that the prevalent research culture accepted head of the chain of command, and definitely a certain flexibility in the presentation of data. We not someone you drop in on for a bit of counsel- can speculate that some people who could have ing about unproven suspicions of criminality detected Stapel’s malpractice (e.g., journal editors by one of his deans (and in this case, his tennis and peer reviewers, doctoral boards for his PhD partner as well). candidates, colleagues) may have been reluctant to cast the first stone, and motivated to overlook A wake-up call irregularities, because of the broader prevalence The Stapel episode was a powerful wake-up call

November/December 2013 November/December of cavalier data practices. This would be espe- to the scientific research community, especially

cially true if someone suspected Stapel of only in the Netherlands. Before the scandal broke, it slightly excessive data enhancement – and after had been easy to believe that the prevailing cul- all, who would expect fraud on the scale that ulti- ture of trust in scientific integrity was working mately came to light?17 just fine, and equally easy to ignore the decay of scientific rigor. Afterwards, it was impossible Intimidation to deny that the system had failed miserably When visible cracks did appear in the façade, at every stage, from prevention to detection Stapel’s power and position protected him in to reporting. Compliance & Ethics Professional

90 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977 In the scandal’s wake, the investigating com- the surface, and that given our shared human mittees recommended several simple controls failings, no one should be exempt from designed to prevent data fraud at the outset and organizational standards or oversight. We can to detect fraud that escaped prevention: ask ourselves whether we have articulated ·· Requiring that PhD candidates collect their clear standards of behavior for our colleagues own data; and whether our culture and business ·· Mandatory third-party archiving of practices reinforce or undermine our professed the raw research data supporting any standards. We can identify unhealthy incentives published study; and compliance and ethics risk scenarios in our ·· Certifications of exactly who performed organizations, and ask what practical changes what functions in a research project; might reduce the temptation or make that first ·· Explicit accountability of dissertation advi- misstep harder to take and easier to detect. And sors, doctoral boards, and journal reviewers we can provide reporting channels that people for achieving a deep understanding of the are not terrified to use. If we can put these research they review; and lessons to work, it may turn out that Professor ·· Increased emphasis on replication of prior Stapel is not such a bad ethics teacher after all. ✵

experiments as part of advanced degree 1. Joris Lammers, Diederik A. Stapel, and Adam Galinsky: “Power requirements. Increases Hypocrisy: Moralizing in Reasoning, Immorality in Behavior.” Psychological Science, May 2010, Vol. 21 No. 5, pp. 737-744. (Diederik Stapel did not take part in the data collection for this study and it is not tainted by his fraud.) Better training in acceptable scientific 2. Levelt Committee, Noort Committee, and Drenth Committee: Flawed Science: The Fraudulent Research Practices of Social Psychologist Diederik methods, code of conduct awareness, acces- Stapel. November 28, 2012 (hereafter “Flawed Science”). This is the final report of the fraud investigations conducted by committees sible confidential reporting mechanisms, and chartered by the three Dutch universities where Stapel spent his academic career: Tilburg University, the and guaranteed protection of whistleblowers were the University of Amsterdam; the bulk of the factual material in this article is drawn from the report. also recommended. 3. Diederik A. Stapel: “Moving from Fads and Fashion to Integration.” European Bulletin of Social Psychology, vol. 12, pp. 4-27 (2000). 4. Nina Mazar, On Amir, and Dan Ariely: “The Dishonesty of Honest People: A Theory of Self-Concept Maintenance.” Journal of Marketing Smell the coffee Research 45:633-644 (2008). 5. Diederik A. Stapel, Ontsporing (“Derailment”), De Kring Publishers For anyone involved in corporate compliance 2012, p.145 (hereafter “Ontsporing”). 6. Flawed Science, p.47. and ethics programs, this all has a familiar ring. 7. Cameron Anderson and Adam Galinsky: “Power, Optimism and Risk- Taking.” European Journal of Social Psychology, Vol. 36, pp. 511-536 (2006). Many predictable factors contributed to the 8. See Lammers, Stapel and Galinsky: “Power Increases Hypocrisy.” supra note 1. Stapel fraud, and a vast number of things had 9. Nicole Ruedy, Celia Moore, Francesca Gino and Maurice E. Schweitzer: “The Cheater’s High: The Unexpected Affective Benefits of Unethical to go wrong for the fraud to grow so large and Behavior.” July 18, 2012, Available at Social Science Research Network: http://ssrn.com/abstract=2112614 to remain unreported for so long. Several of the 10. Yudhiji Bhattachargee: “The Mind of a Con Man.” New York Times Magazine, April 28, 2013, pp.44-52, at 49. causes are deeply rooted in human nature— 11. Stanley Milgram: “Behavioral Study of Obedience.” J. Abnormal and Social Psychology. 67:371-378 (Oct. 1963). our vulnerability to temptation, our capacity 12. Ontsporing, supra note 5, p. 164. 13. Flawed Science, p. 39. to rationalize and to overlook inconvenient 14. Bhattachargee, supra note 9, at 48. 15. Max H. Bazerman and Ann E. Tenbrunsel: Blind spots: Why We Fail

information, our tendency to take the easy path To Do What’s Right And What To Do About It. Princeton University 2013 November/December Press, 2011. when integrity would be difficult, the effect 16. Francesca Gino and Adam Galinsky: “Vicarious Dishonesty: When Psychological Closeness Creates Distance from One’s Moral Compass.” of power and status on the possessor and on Organizational Behavior and Human Decision Processes, vol. 119, no. 1 (2012), pp. 15–26. those around him. We can’t make these failings 17. Cf. Monty Python’s Flying Circus, Series 2 Episode 2, first broadcast 22 September 1970: “Nobody expects the Spanish Inquisition!” go away. 18. Flawed Science, p. 44. 19. Bhattachargee, supra note 9, at 50. But maybe we can glean useful lessons

from the Stapel episode. It reminds us that the Scott Killingsworth ([email protected]) is an Atlanta, absence of compliance or ethical meltdowns, Georgia-based attorney and partner at Bryan Cave LLP. He assists clients with the development, implementation, and evaluation of ethics and so far, is no guarantee that all is well beneath compliance programs. Compliance & Ethics Professional

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