Anyone who wants to avoid unethical behaviour in their own organisation, can take a lesson from the run-up to the financial crisis in Iceland.

BI RESEARCH: Ethics in management

Iceland was hit hard in the global financial crisis ten years ago. The country’s banks collapsed. People lost their savings and their expenses doubled, without warning, all because of reckless investments in foreign currency loans. Overnight, the financial circumstances of both individuals and organisations took a dramatic downturn.

What caused the crisis?

In the aftermath, the Icelanders have placed the blame on a handful of people from the finance industry. These are people who presumably suffer from bad character and dubious personal moral standards, since they were so greedy and cynical prior to the collapse. Some of them ended up in prison. My Icelandic friends can name around ten people who they say can never again walk the streets of Reykjavik in peace, not even after they have served their sentences.

The impression of bad character has been reinforced by the fact that these people apparently managed to sequester large amounts of money in tax havens before the bubble burst, and they have consistently and categorically denied any wrongdoing.

Questionable morals or some other explanation?

Over the last few years I have been working on a study of the financial crisis in Iceland, together with Icelandic philosopher Salvör Nordal. We have been explored the question of whether questionable personal morals on the part of key individuals was the main cause of the crisis. Or are there other credible explanations?

In the aftermath of the crisis, the Icelandic authorities set up a commission tasked with determining the causes of why everything went wrong. Key public and private parties were interviewed about their roles in the course of events. The commission’s nine-volume report is part of the material we have studied to examine the ethical dimensions of the crisis.

Whitewashing dubious behaviour

We have applied so-called neutralisation theory on the Icelandic material. The theory discusses how people who initially feel moral discomfort regarding specific choices and behaviours can convince themselves that it is acceptable to do it anyway. This process is called neutralisation.

The stage that may follow a process of moral neutralisation is one we have called normalisation of questionable behaviour. When people have gotten used to doing things in a specific way, the last remnants of moral discomfort may simply vanish.
Neutralisation can occur on both a small or larger scale. I might be tempted to travel on the metro without buying a ticket, and find this problematic, since I believe that paying one’s way is the right thing to do. Then I might tell myself that it makes such a minimal difference whether or not I buy a ticket. Nobody gets hurt. A lot of people travel without paying. Besides, public transportation in Oslo is expensive. If it were cheaper, I would pay. When I have gotten into the habit of ticket-dodging, the moral discomfort disappears.

Neutralisation on Iceland

We have approached the financial crisis in Iceland with a hypothesis that neutralisation has occurred there also, and that the financial experts basically also thought that it was wrong to sell expensive, risky products to their customers, but gradually neutralised this discomfort.

This hypothesis has been reinforced after our review of the data from the period before the crisis. We find signs of moral dissonance prior to the crisis. The Icelandic financial sector, overall, managed to neutralise this dissonance out of the picture.

This laid the foundation for normalisation of extremely questionable behaviour. The customers were advised to take out large loans in foreign currency, and to take excessive risks with their money. One important neutralisation technique was to say to oneself and to others that this behaviour did not violate any rules or regulations. Loophole ethics prevailed.

Breeding ground for a risky game

We conclude that the financial crisis in Iceland was not primarily the result of lax morals on the part of a few individuals, but rather that it was triggered by large-scale neutralisation. There was no climate for dissent against neutralisation in an immature financial sector. This led to a breeding ground for playing a risky game with the finances of society, companies and individuals at stake.

When ethical crises are explained by lax morals, the easy solution is often to dismiss the scoundrels, and replace them with new individuals. This leads to a major risk of reoccurrence. Systemic changes are essential in order to prevent new cases of neutralisation.

The climate of self-expression which allows one to be critical of questionable explanations and justifications must be strengthened. It must be acceptable to protest and offer resistance when a leader or a colleague attempts to neutralise away moral discomfort.

Øyvind Kvalnes and Salvör Nordal (2018): Normalization of Questionable Behavior: An Ethical Root of the Financial Crisis in Iceland. Journal of Business Ethics.

This information article was published as a commentary on management in Dagens Næringsliv <newspaper> on 26 March 2018 (published online the day before).

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