How One Bad Employee Can Corrupt a Whole Team

A study shows an individual’s behavior is affected by the actions of co-workers, and it appears easier to learn disruptive behavior than good.

One bad apple, the saying goes, can ruin the bunch. Our research on the contagiousness of employee fraud tells us that even your most honest employees become more likely to commit misconduct if they work alongside a dishonest individual.

And while it would be nice to think that the honest employees would prompt the dishonest employees to better choices, that’s rarely the case. Among co-workers, it appears easier to learn bad behavior than good.

For managers, it is important to realize that the costs of a problematic employee go beyond the direct effects of that employee’s actions.

For managers, it is important to realize that the costs of a problematic employee go beyond the direct effects of the misconduct.

In our study (Is Fraud Contagious? Co-Worker Influence on Misconduct by Financial Advisors), we wanted to understand just how contagious bad behavior is. To do so, we examined peer effects in misconduct by financial advisers, focusing on mergers between financial advisory firms that each have multiple branches. In these mergers, financial advisers meet new co-workers from one of the branches of the other firm, exposing them to new ideas and behaviors.

We collected an extensive data set using the detailed regulatory filings available for financial advisers. We defined misconduct as customer complaints for which the financial adviser either paid a settlement of at least $10,000 or lost an arbitration decision. We observed when complaints occurred for each financial adviser, as well as for the adviser’s co-workers.

We found that financial advisers are 37 percent more likely to commit misconduct if they encounter a new co-worker with a history of misconduct. On average, each case of misconduct results in an additional 0.59 cases of misconduct through peer effects.

Co-workers could behave similarly because of peer effects — in which workers learn behaviors or social norms from each other. But similar behavior could also arise because co-workers face the same incentives or because individuals prone to making similar choices naturally choose to work together.

RELATED: An Effective Approach to Addressing Disruptive Behavior

In our research, we wanted to understand how peer effects contribute to the spread of misconduct. We compared financial advisers across different branches of the same firm, because this allowed us to control for the effect of the incentive structure faced by all advisers in the firm. We also focused on changes in co-workers caused by mergers, because this allowed us to remove the effect of advisers choosing their co-workers.

These results show that, independent of any effects from managers, employee behavior is affected by the actions of peer co-workers.

Understanding why co-workers make similar choices about whether to commit misconduct can guide managers in preventing it. More generally, it has important implications for understanding how corporate culture arises and how managers can shape it.

Stephen Dimmock is an associate professor of finance at the Nanyang Business School at Nanyang Technological University in Singapore. William C. Gerken is an assistant professor at the Gatton College of Business and Economics at the University of Kentucky.

Copyright 2018 Harvard Business School Publishing Corp. Distributed by The New York Times Syndicate. 

Topics: Management

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