The Honest Truth About Dishonesty: Implications for Management

"Where does [dishonesty] come from?  What is the human capacity for both honesty and dishonesty?  And, perhaps most importantly, is dishonesty largely restricted to a few bad apples or is it a more widespread problem?"

These are the questions that Dan Ariely has set out to answer in his book, The Honest Truth About Dishonesty: How We Lie to Everyone--Especially Ourselves.  Considering the subject of this book and post, I feel the need to be completely honest with you: I purchased this book primarily because it was available for $2.99 on Amazon at one point.  I had read Predictably Irrational: The Hidden Forces That Shape Our Decisions and The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home, both by Dan Ariely as well.  I really like Dan Ariely (not only because he is a Duke man) and found Predictably Irrational to be enjoyable and informative.  The Upside of Irrationality was, for me, a little repetitive and seemed to be a bit more of a cash-in on the popularity of the first book.  So I wasn't sure what to expect with The Honest Truth About Dishonesty.  I will admit that I have always been amazed at people's ability to justify dishonest or immoral actions and retain an high, and often inflated, image of self-worth.  And at $2.99, why not?

I actually found myself very pleasantly surprised by this book; in fact, I would say I took more away from it than I did from Predictably Irrational.  The first was something that a lot of people probably intuitively know, even if they can't put it into words: people cheat in small enough ways to influence actions that they find desirable, but not big enough to influence their view of themselves as a moral person.  Dan proves this through numerous tests that have clear opportunities for cheating.  When given the chance, people cheated, but not on every question.  And this was only exacerbated when they saw other people cheating, especially when they identified with the person doing the cheating.  At an extreme level, it provides insight into how something like the Holocaust could happen.

Beyond this, as managers in corporate America, what can be learned about the human tendency for dishonesty and how can it be applied in the workplace?

1. Don't overwork your employees.  Dan performs numerous tests in order to determine how fatigue contributes to dishonesty.  The fact is that resisting temptation takes energy and when there are clear incentives to cheat, an exhausted individual is more likely to take those options than a fresh one.
2. Establish a culture of honesty throughout your entire team.  People are much more likely to cheat when they see others cheating, especially if they relate to that individual.  Even one bad apple on a team could quickly spread the disease of dishonesty to other team members, even if the others ordinarily would have very high integrity.
3. Constantly remind your employees that you view them as, and expect them to be, honest.  Individuals reminded of their own morality prior to taking a test are less likely to cheat than individuals reminded after a test.  Every day could bring a potential test for your employees, so make sure that they are aware of the high standards for the team frequently.
4. Address dishonesty and cheating regardless of severity.  Dan discusses the Broken Windows Theory, first explained in a 1982 article in the Atlantic.  Essentially, if some windows on a building are already broken, people are less likely to care about breaking others.  If employees see dishonesty or cheating, even if it is in small doses, they are less likely to be concerned about more severe examples.  Stamp these issues out before they become real problems.

Human psychology has found a way to allow individuals to cheat while still viewing themselves as heroes starring in their own movie.  This is not limited to certain people who are perpetually dishonest, though those certainly exist and should be avoided at all costs.  But by setting an appropriate and consistent culture of honesty and integrity, managers can naturally steer employees towards their honesty tendencies and away from the temptations of dishonesty.

Public Relations and Profit Maximization in the Washington Redskins Trademark Dispute

There are a lot of interesting business questions surrounding the NFL these days.  One is the recent "discovery" that the NFL is organized as a non-profit.  Many were shocked by the fact that the NFL received the same tax treatment as Habitat for Humanity, but there was not a significant movement to revoke this status.

Probably the most interesting recent dilemma has been the reaction to the controversy surrounding the name of the Washington Redskins.  After 80 years of using the name "Redskins", seemingly out of nowhere, there has been a huge groundswell of support for changing the name, citing insensitivity.  Lacking a viable legal option, the government has taken its first step towards forcing a name change: the patent office has cancelled federal trademarks on the name.

So what does this action really mean?  What is the effect of cancelling trademarks for an NFL team?

First of all, it's important to note that the Washington Redskins are ranked by Forbes as the #3 most valuable NFL team, worth over $1.7 billion.  This was even before the recent offers for the LA Clippers of over $2 billion, so that valuation may be out of date.  But what drives this valuation?

Unfortunately, the NFL and the Washington Redskins do not release detailed financial numbers.  However, economists and market researchers have estimated the magnitude of NFL revenue from various sources:

1. Ticket and concession sales.  This should be obvious enough.  In the past, this was probably the majority of the revenue.  Today, it is very small compared to other sources.
2. Media and television rights.  With the creation of the NFL Network and the gradual transition to internet streaming video, this could become even larger than it already is.  Soon, there will be no barrier to watching every one of your team's games no matter where you are.
3. Sponsorships and advertising.  From banners in the stadium to the name of the stadium itself, the NFL is not short on opportunities for advertisers.  The cost of Super Bowl commercials is legendary and ever-increasing.
4. Licensing and merchandising.  The NFL is notoriously litigious on this.  This is the reason that so many Super Bowl parties refer to "The Big Game" rather than the Super Bowl, due to fear of being sued.  It is also the revenue stream that the government would no longer protect for the Redskins.

While broadcasting rights appear to be the lion's share of revenue, the value of the brand for the Washington Redskins (on which all merchandising is based) is believed to be around 8.4% of the total valuation of the team.  Assuming the Redskins lose protection for their name, it would open the doors for third-party merchandise to flood the market with Redskins hats, shirts, jerseys, glasses, bumper stickers, etc.  Without having to pay licensing fees for the name, producers of these products would have extremely low costs and therefore be able to offer them for significantly cheaper than licensed merchandise.  When consumers are faced with an abundance of inexpensive merchandise, the demand for official Redskins products would decline drastically.  This could be particularly damaging to the Redskins, as they have the fourth highest merchandise sales of any NFL team.  Combine this with the fact that, should the team continue with the name "Redskins", there will be extreme pressure on politicians to not attend games or support the team.  For a team in Washington D.C. (technically in Maryland, but close enough), this could further exacerbate the lost revenue from merchandise.  In essence, Dan Snyder now has to accept drastically lower returns on his investment or change the name of the team.  If he decides the former, the NFL may intervene or the government may take more forceful action.

Personally, I think that Dan Snyder will eventually have no choice but to change the name.  As an organization, the NFL is in the middle of a firestorm of negative media attention.  Whether it is the non-profit status, the increasing reports of playing football leading to long-term health problems, or this issue with the Redskins name, the NFL is hanging on for its life as America's most popular sport.  I think that the NFL commissioner will eventually force Snyder to change the name, which Snyder will do.  In the short term, this will, ironically, create a huge windfall for the Redskins, as every fan with Redskins gear will have to go out and buy gear with the new brand (the Washington Filibusters?  Just a thought).  It will be interesting to see what the repercussions are for other teams with controversial names or logos and what will be determined to be controversial in the future.

Mozilla and the New Political Executives

Recently appointed CEO of Mozilla, Brendan Eich, resigned this past week.  His resignation was under significant pressure due to his support of California Prop 8 in 2008, which sought to amend California's constitution to ban gay marriage.  It seems strange now, but Prop 8 actually passed at the time with 52% of the vote.  So why is something that a majority of Californians supported 6 years ago now so offensive that support of it disqualifies you from leading a technology company?

Well, part of the answer is California demographics.  Even though 52% of California voted for Prop 8, suffice to say that very few of these voters were in San Francisco, where Mozilla is located.  Also, public sentiment on gay marriage has shifted pretty drastically in recent years.  But let's ignore these issues.  What does it say that a CEO's political donation is enough to be pressured to step down?

On the face of it, support or lack of support for gay marriage doesn't say much about an executive's ability to lead a technology company.  We have always thought these issues important for politicians, but politicians (sadly) have the ability to strip away rights.  Under federal anti-discrimination laws, a CEO really has very little ability to discriminate without facing lawsuits, even if he or she wanted to.  As far as coercion, employment is completely voluntary, as is use of a company's products.  If you don't like a CEO's politics, don't work at the company and don't use the products.

On the other hand, the CEO does represent the company to investors, employees, and the public.  In the area with the highest concentration of homosexuals in the entire country, it might be difficult to recruit top talent when none of these people want to work at the company.  In a state where government regulation can be stifling for any company without connections, it's probably bad to have a CEO that no politician would want to be photographed with.  When a lot of the promotion for a CEO comes from speaking engagements (graduations, conferences, etc.) and interviews, missing this opportunity would require a greater marketing budget.  In other words, a CEO needs to be popular.  People don't just buy products that they like; they buy them from people that they like.

So Eich stepping down as CEO was the right move for the company, given the situation.  It is unfortunate that political or religious beliefs could have such an effect on a career in the private sector, but Firefox is absolutely right to realize that retaining Eich as CEO would have been devastating for the company.

Full disclosure: this post was typed on Mozilla Firefox 28.0.

The Smoke and Mirrors of Executive Compensation

Tim Cook, CEO of Apple, recently announced that he received $4.25 million in salary and bonus for the fiscal year ended Sept. 28.  Now, Tim doesn't exactly need to be shopping the discount rack at the Dollar Tree, but the compensation actually does seem a little low given that he is CEO of one of the most visible and valuable companies in the world.  After all, it is reported that Oracle CEO Larry Ellison made $96 million in 2012.  So what gives?

First, most people know that CEOs are not compensated in the same way as most employees.  Whereas the average employee receives most of their money from salary and then possibly a small bonus, the proportions are generally flipped for executives.  The majority of their compensation comes from profit-sharing or bonuses that are based on the stock price or some other metric of performance for the company.  In this way, it's somewhat easy to obfuscate their real earnings by saying that a CEOs salary was fairly low by comparison.

If you look at the fine print, Tim Cook received Apple stock valued at $376 million in 2011 when he signed on as CEO.  $376 million!  Not a bad signing bonus if you ask me (I'll bet they threw in a free iPad too).  It's difficult to say how much that stock is worth now, but as the price has only increased, it is probably worth $450 million or so.  So Tim Cook clearly has a huge interest in making the financial decisions that will guarantee the greatest value to Apple shareholders.  Makes sense, right?

Maybe not.  Apple has been criticized in the past for hoarding cash, being forced to finally issue a dividend in mid-2012 which has continued into 2013.  What does a dividend do to the stock price?  With a price that is the net present value of expected future cash flows (in an efficient market), issuing a dividend means there is less cash to distribute later, which means that the price goes down.  Since Tim actually owns the stock (and presumably receives the dividend along with all other shareholders), he may be personally indifferent.  However, many executives are given a bonus tied to stock price that does not take dividends into account.  In this way, CEOs are incentivized to not distribute dividends even when it is the right move for the business.

What about recent news that Carl Icahn wants Apple to have buy back as much as $150 billion worth of stock?  When stock buybacks occur, there are fewer shares publicly traded.  These shares are still vying for the same overall profit, however, which means the overall pie is bigger.  When the pie is bigger, the share price goes up.  Assume a CEO is compensated based on share price and his or her company is sitting on spare cash.  Instituting a stock buyback immediately increases his or her compensation without actually adding value in any way to the company.  Sounds like a sweet deal for the opportunist executive.

Not only are the incentives for executives skewed towards certain financial decisions that may or may not be in the best interest of the company, but the magnitude of the incentives are nearly impossible to discern.  A very common compensation tool is deferred compensation, whereby an executive is still paid for years after leaving the company.  This can further hide the real compensation of a CEO and provide the executive with a lower tax bill.  Benefits such as use of corporate jets, dinners, etc. make things even more complicated.  Taken as a whole, executive compensation has been made deliberately difficult to comprehend for one simple reason: companies want executives to be attracted to their company due to the high compensation, but don't want the negative publicity that comes from paying these executives so much more than their average employee.  If there was a legal and moral way that Apple could pay Tim Cook $100 million a year and report that paid him $1 million, I'm sure it would do just that (and that's not an Apple-specific criticism; most other companies would do the same).

So next time you see numbers about how much money a CEO made, think twice about it.  Aligning compensation with incentives in a transparent way is much more complicated than it first appears, yet attracting and retaining top executive talent is (arguably) the most important role of the board of directors of a company.  Only companies that do it well will continue to thrive under new leadership.