Bad leaders? Increased fraud

Do you want to make sure you have more fraud in your organization? Then hire bad leaders and poorly train them with outdated methods. Here’s how to avoid employee disengagement by changing attitudes and behaviors.

Rebecca is frustrated. She’s been a fraud examiner and internal auditor in a large corporation for four years. Rebecca enjoys every aspect of the evidence hunt, including working with sources, response teams and counsel; interviews; analyzing documents; data analysis and digital forensics. She abhors only one part of her job: collaborating with her boss, Jennifer, the vice president of accounting. Jennifer can be — alternatively — overcautious, obstinate, dismissive and overbearing. Rebecca feels that Jennifer often inappropriately puts the brakes on Rebecca’s fraud examinations, which often wastes her time and occasionally allows fraud to accelerate unabated. Rebecca is losing interest and creeping toward job disengagement. The corporation is losing out because of Jennifer’s poor leadership skills.

Forget about lost job productivity because of solar eclipse day, Super Bowl Monday, March Madness, Black Friday or the World Cup. Worry instead about the daily revenue leakage from disengagement and lost productivity that’s costing U.S. companies $350 billion annually in lost revenue because of ongoing ineffective leadership (See “2018 Gallup State of the American Workplace Report.”)

We’ve all worked for people with differing leadership styles: from the autocrat (“do it my way”) or the bureaucrat (“this is the policy”) to the laissez-faire proponent (“let them do it”) and every other style in between. Regardless of the dominant leadership style, ineffective leaders — those who are abusive or incompetent on several levels — are a financial and intellectual capital drain for companies everywhere. That can translate into botched fraud examinations and more opportunities to commit fraud.

Employee disengagement is widespread and costly

Far too many organizations suffer from poor or ineffective leadership, which the Gallup organization cites as a major contributor of employee disengagement and lost productivity. Gallup, through extensive research documented in its “State of the American Workplace Report,” found that, on average, 17.2% of an organization’s workforce is actively disengaged — they’ve unplugged and checked out. Gallup also found that an actively disengaged employee costs an organization $3,400 for every $10,000 of salary, or 34% of pay.

According to that Gallup report:

• Two-thirds of U.S. employees admit to not being engaged in their work and workplace, whereas 18% are “actively disengaged,” and could be impeding not only their own performance but also the work of colleagues.
• Only one-fifth state that their performance is managed in a way that motivates them to do outstanding work.
• 78% of employees strongly do not agree with the statement: “Leadership has a clear direction for the organization.”
• 85% of employees strongly do not agree with the statement: “Leadership of the organization makes them enthusiastic about the future.”
• 87% of employees strongly do not agree with the statement: “Leadership of their organization communicates effectively with the rest of the organization.”

What does employee disengagement look like?

Disengaged employees (doing just about anything other than real work) are those whose performance, attitudes and perhaps behavior have decreased to levels less than acceptable for success. They might lack challenging work, suffer from boredom, work long hours or just lack any personal initiative. When left unchecked, these elements can cascade through the workforce like an epidemic. It becomes difficult to shield those not yet influenced by such widespread detachment.

Let’s take employee disengagement one step further. This workplace detachment can reveal itself in more costly issues over months and years, leading to:

• Lost market share (competitors gaining market share).
• Revenue loss.
• Higher overall employee turnover.
• Higher incidence of on-the-job safety problems.
• Lost shareholder value (lower stock price, lower analyst expectations/forecasts).
• Loss of key employees.
• Quality and customer service issues.
• Internal fraud and abuse
• Higher absenteeism (legitimate and otherwise; poor leadership affects workplace stress and can lead to depression and cardiovascular health issues for employees. See “Workplace bullying and the risk of cardiovascular disease and depression,” by M. Kivimaki et. al., Sept. 22, 2003).

In extreme cases of disengagement, employees can sabotage financial records and capital equipment or even become violent. These dangerous scenarios are bigger issues than poor leadership; they now become a corporate culture problem.

Losses from employee disengagement tempt organizations to implement programs for boosting employee morale, motivation, communication, team building, etc. Such programs designed to correct disengagement and productivity issues focus on strategies, tactics and analytical approaches for employees. But disengaged employees are a symptom of poor, ineffective leadership. That’s focusing on the wrong end of the problem! To quote a line from the movie, “Indiana Jones and the Raiders of the Lost Ark”: “They’re digging in the wrong place.” To work on the cause, we must look further upstream.

Two subtle but significant consequences of ineffective leadership

Organizations need to change attitudes, behaviors and — sometimes — people in leadership positions well before they contribute to the creation of a toxic work environment. These interventions require an understanding of two subtle — and rarely addressed — influential psychological factors: how poor leadership contributes to the psychological depletion of “shared resources” (financial resources, inventory, human skills, production resources, and information technology and natural resources) and how it destroys workplace “psychological empowerment” (emotional belief that leaders fully empower their workforces to apply their talents and experience to accomplish the objectives of the organization).

Psychological depletion of shared resources by poor leadership

In 1968, evolutionary biologist Garrett Hardin coined the phrase, “tragedy of the commons,” to explain various types of environmental over-exploitation. Examples include the ocean garbage “gyres” (See “The Great Pacific Garbage Patch,” by the Ocean Cleanup Group), overfishing of cod in the Grand Banks (see “Cod: A Biography of the Fish that Changed the World,” by Mark Kurlansky), demise of passenger pigeons (see “Why the Passenger Pigeon Went Extinct,” by Barry Yeoman, Audubon magazine, May/June 2014) and the Gulf of Mexico dead zone (see “ Gulf of Mexico Dead Zone is Largest Ever Measured,” in NOAA blog post, Aug. 2, 2017).

Any shared resource in a population is subject to the same pressures of self-interest, unconstrained consumption and exploitation that ultimately lead to scarcity, depletion, destruction or extinction — even with shared values and corporate culture attitudes within company walls.

Poor leadership is a contaminant originating upstream in the work environment. Its effects can quickly pollute downstream in hallways, break rooms and conference rooms. It can create a type of psychological depletion of shared resources, such as the adoption of common corporate values, culture and mission, which eventually leads to a “tragedy of the corporate commons.” Poor or ineffective leadership creates these and other hidden consequences that erode the shared workforce bonds that company values (integrity) and company cultures create.

Don’t discount the value a culture of integrity provides to shareholders and employees. Corporate culture integrity has a positive correlation with financial performance and appeal of job openings. (See “The Value of Corporate Culture” by Luigi Guiso et. al, September 2013.)

The end result manifests as employee disengagement and lost productivity, in which the needs of the one or the few become a higher priority over the needs of the many — to paraphrase and flip a quote attributed to Charles Dickens. It’s a loss of that collective, unified commitment to company goals and objectives and to the tasks at hand that’s replaced with individual self-interest.

Poor leadership destroys workplace psychological empowerment

When we think about our jobs, they’re more than positions that deliver a specific function; they also provide emotional, social and political currency — the invisible capital — that we exchange in workplaces everywhere. Because of these different value aspects that jobs provide, employees are more than job titles, job descriptions or promoters of products and services.

We can further explain this invisible capital that leaders and employees exchange, or workplace psychological empowerment, via four related dimensions: competence (or, as I say, aptitude), meaning (or value), impact (or influence) and self-determination (or autonomy).

[See sidebar: “Four dimensions of workplace psychological empowerment”.]

Early signs of ineffective leadership often appear as fractures in any of these four dimensions because workplace psychological empowerment is at its fullest when employees believe that their leaders have given them complete freedom to do their jobs. Of course, I’m not saying that means that employees aren’t accountable, but they have the autonomy to use and grow their skills to meet and exceed their work goals.

When people believe they no longer have the freedom to engage these four psychological empowerment components, they might feel threatened and begin disengaging. Often negative changes in a manager’s dominant leadership style (embracing a more autocratic style, for example) or even abruptly switching senior executives can cause employees’ disengagement and corresponding productivity losses as they adjust to uncertainty.

Because work relationships and processes are complex, effective leaders know that merely following defined roles or procedures can produce frustrated employees. Indefatigable leaders also embrace initiative, risk assessment and working with uncertainty. (See “Psychological Empowerment in the Workplace: Dimensions, Measurement, and Validation,” by Gretchen M. Spreitzer, The Academy of Management Journal, October 1995.)

Leadership programs fail because they focus on the wrong part of the brain

According to the Harvard Business Review:

“American companies spend enormous amounts of money on employee training and education — $160 billion in the United States and close to $356 billion globally in 2015 alone — but they are not getting a good return on their investment. For the most part, the learning doesn’t lead to better organizational performance, because people soon revert to their old ways of doing things.” (From “Why Leadership Training Fails – and What to Do About It,” by Michael Beer et. al, paid subscription, Harvard Business Review, October 2016.)

Organizations often unwittingly prevent leadership training from taking root by thinking that employee events, such as one-day workshops or seminars, will suffice instead of slowly building long-term, continuous-reinforcement processes. And there’s another major problem. 

“Unfortunately, far too many training programs that intend to build leadership skills – including emotional intelligence – are a waste of time and money,” writes Daniel Goleman, who co-directs the Consortium for Research on Emotional Intelligence in Organizations at Rutgers University. “The problem is simple: They focus on the wrong part of the brain.” (See “What Makes a Leader,” in Harvard Business Review, January 2004, by Daniel Goleman.)

According to Goleman, most of these failed, wrong-part-of-the-brain leadership programs teach techniques that appeal to the neocortex where logic, reasoning, analytics and concepts thrive. However, emotional intelligence (the ability to be aware of, control, and express one’s emotions, and to address interpersonal relationships thoughtfully and compassionately) arises in the neurotransmitters of the brain’s limbic system, which directs feelings, impulses and emotions. (See the sidebar above for details.)

Emotional intelligence (EI) training focuses on developing strategies in five major areas: empathy, self-management, relationship management, social awareness and self-awareness. EI training is not “one and done” but requires frequent reinforcement of key learning components, individual and small-group activities and role playing, and individual coaching over many months. EI training is more about changing old habits and attitudes and replacing them with new ones that enhance employees’ soft-skill inventories.

What of the psychological depletion of shared resources and workplace psychological empowerment? At first glance, they seem to lend themselves to neocortex processing, but it’s the emotion tied to the belief of having the freedom to be fully and completely engaged, contributing and adding value in a work role that directs limbic processing.

Leadership presence, ‘engagementality’ and ‘connectworking’

Organizations want their future C-suite leaders to have presence more than any other soft skill. They want them to have the ability to naturally and comfortably engage others, establish personal connections and build trust, confidently position their leadership expertise as offering value for others, and interject wise influence to gain acceptance or cooperation of ideas and initiatives. The strength of their presence is a catalyst for mentoring others or serving in advocate-protégé arrangements.

If poor, ineffective leadership is a direct cause for employee disengagement and lost productivity, we hear a clarion call for leadership presence that prioritizes the power of emotional intelligence. Organizations can teach and reinforce it through proper training, coaching, and follow-up that’s not just repackaged, repurposed, retitled relics from decades past.

“Engagementality,” the attitude of always being ready to engage others in a manner that demonstrates interest, becomes a mandatory commodity for leaders. Rather than traditional networking, which assumes a strong quid pro quo relationship, leaders engage in “connectworking,” to further build relationships for unifying effort, direction and purpose. People don’t follow leaders without becoming familiar with them, then trust them, and finally believe in their expertise, experience and knowledge that accompanies that authority.

Engagementality and connectworking will help lay the groundwork (through training, coaching and follow-up reinforcement) for making leadership presence in your anti-fraud organization a practice that can turn into a competitive advantage. Presence-driven leadership isn’t just for executives in the corner office because being a “leader with presence” isn’t a job title; it’s a powerful skill set anyone can master.

Ineffective leaders and unproductive practices ultimately lead to revenue leaks through a variety of channels, not the least of which are the psychological depletion of shared corporate resources and the absence of psychological workplace empowerment. In extreme cases, disengagement can devolve into destructive actions or behaviors that can threaten the safety of work environments and enable fraud.

The most effective approaches groom high-potential professionals early in the leadership development process and throughout their advancement into senior and executive positions, which helps prevent “attitudinal sclerosis” — hardening of the attitudes.

Workplace empowerment doesn’t mean overloading employees with additional responsibility and challenges that place them in high-stress mode. Psychological empowerment is the emotional belief that a person has the authority, freedom, support and confidence of leadership to accomplish objectives under their charge. Employees who embrace this type of empowerment from leaders in the work environment have stronger job performance, greater job satisfaction and a deeper commitment to organizations’ objectives.

Donn LeVie Jr., CFE, a Fraud Magazine staff writer, has been a presenter and a positioning/ influence strategist at ACFE Annual Global Fraud Conferences since 2010. LeVie says his corporate programs help companies plug revenue leaks because of poor leadership. Visit his website at donnleviejrstrategies.com. Contact him at: donn@donnleviejrstrategies.com.

Four dimensions of workplace psychological empowerment

The four dimensions of workplace psychological empowerment — competence, self-determination, meaning and impact — help drive employee engagement and productivity, especially when employees believe they have the freedom to fully deploy their expertise and value in the work environment. When poor or ineffective leaders invoke behaviors, attitudes or policies that threaten that employees’ beliefs in any of the empowerment dimensions, they can create an atmosphere that’s ripe for the negative cascading effects of disengagement and productivity issues. (See “Psychological Empowerment in the Workplace: Dimensions, Measurement, and Validation,” by Gretchen M. Spreitzer, The Academy of Management Journal, October 1995.)

Figure 1: Four dimensions of psychological workplace empowerment

Much of the training aimed at leadership development targets the part of the brain (the neocortex) that’s responsible for more “hard skill” expertise, such as logic, analytics, reasoning and technical abilities. Daniel Goleman’s research has shown that when training takes a neocortex approach, it can have a negative impact on job performance. Goleman co-directs the Consortium for Research on Emotional Intelligence in Organizations at Rutgers University.

To effect positive change, Goleman says, old behavioral habits must be exchanged for new ones, which takes more time than conventional training, and that training should be individualized. (See “What Makes a Leader,” Harvard Business Review, January 2004, by Daniel Goleman.) This type of training would include personal individual coaching, periodic hands-on reinforcement and frequent feedback.

Figure 2: Illustration shows the brain’s executive control (neocortex) and the fight-or-flight control center (limbic system). Daniel Golman (“What Makes a Leader,” Harvard Business Review, January 2004) writes that leadership training is misdirected to the neocortex when it should focus on the limbic system for emotional intelligence. (Brain illustration modified from SoulGuru.)