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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 psychology 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 Tilburg University, 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 Ethics Professional 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 +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 social psychology 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 Ethics Professional & 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 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 Ethics Professional factor in escalation.