Ethical Blind Spots: A Lesson from Warren Buffet

The data seem clear on David Sokol’s conflict of interest in the
Berkshire/Lubrizol deal. He bought shares in Lubrizol, and then encouraged
Berkshire to buy the company. He claimed that because he didn’t know whether
Berskhire would follow his recommendation he didn’t have inside information.
But he clearly had information that the public didn’t have: that the
probability of the acquisition was elevated. The far more interesting question
from our standpoint is why Warren Buffett, known for his embrace of ethical
business practices, failed to understand the unethicality of Sokol’s actions
when he learned of them, and intervene. Had Buffet suddenly gone over to the
dark side? Or, as Berkshire portrayed the story, did Buffett do absolutely
nothing wrong?

We think that neither of these conclusions is correct. As we discuss in our
April 2011 HBR article “Ethical Breakdowns,” mounting research shows
that we often fail to notice others’ unethical behavior if it’s in our interest
not to notice. This failure of oversight, called “motivated
blindness,” is unconscious and common. When Sokol told Buffett that he
owned stock in Lubrizol, Buffet probably didn’t consciously ignore the warning
signs; he didn’t see them at all.

Motivational blindness contributed not only to Buffett’s action, but to the
failure of major accounting firms to see the corruption in the books of the
firms that they audit. It also accounts in part for the failure of security
rating agencies to accurately gauge the riskiness of the instruments they rate.
Auditors who want to be rehired, who want to sell consulting services to their
clients, and who may even consider job offers from those same clients, are
motivated to overlook the corruption of these parties. Auditors are expected to
be independent, but their desire to please their client makes such independence
impossible. And, when we allow financial firms to choose for themselves the agencies
that rates their financial products, the agencies have every incentive to be
lax.

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