Do We Give Startups A Free Pass On Ethical Behavior?

In The Techlash, Nirit Weiss-Blatt chronicles the change in the nature of media coverage of the tech industry, from fawning admiration to a more critical stance that is slightly more capable of seeing the warts in the sector.

Despite this, research from the Kellogg School argues that startups still tend to get an easier ride than other forms of organization when it comes to their ethical conduct. The researchers suggest that we tend to view startups as more prosocial in their strategies, with any failings they have viewed more charitably.

The benefit of the doubt

The researchers recruited a few hundred volunteers to complete a survey that asked them to rate their familiarity with various companies, half of which were large Fortune 500 firms and half of which were startup unicorns. 

The survey also asked them to answer various questions about 10 randomly selected companies about which the volunteers said they were familiar. They rated things like the motives of the company, how ethical they perceived them to be, and how customer-focused they were. They were also asked to rate the products or services of each company and their financial success.

Last, but not least, each volunteer was asked to say how acceptable it would be for the firm to engage in morally questionable activities, such as hurting the environment, misusing customer data, adopting poor financial practices, or treating workers poorly.

A halo effect

The results revealed that startups tended to benefit from a kind of halo effect, where their transgressions were viewed more charitably than those of the larger firms.

This pattern held true even when the age and size of the firm were accounted for, which suggests that startups continue to benefit even as they grow. This is clearly important for unicorns, whose very stature highlights that they’re a significant concern and not a company that is still wet behind the ears.

The only time it didn’t occur was when the transgression was so bad that it couldn’t really be explained away by any apparent callowness.

“People are lenient with startups only when they engage in immoral behavior that’s ambiguous—not when it’s really severe,” the authors explain. “It’s only transgressions where there’s still room for people to rationalize.”

Favorable treatment

To understand why we seem to give startups an easier time, participants were presented with another survey whereby they were given a choice between answering questions about the business performance of the company or its ethical performance.

When the company in question was a startup, people seemed far less interested in the ethical side of their business, with people seemingly less concerned about scrutinizing such fledgling businesses in terms of their moral behavior.

The authors argue that this may be in part because of the cultural narrative society constructs around startups and entrepreneurs as a primarily positive one, with entrepreneurs and entrepreneurship typically portrayed in an overwhelmingly positive light.

The dark side of entrepreneurship

Of course, such a narrative is inherently simplistic and betrays the darker side of entrepreneurship. This is clearly illustrated in research from the University of Notre Dame, which highlights how when entrepreneurship goes badly it can hurt not only the entrepreneurs themselves, but also their colleagues and loved ones. The authors broke these consequences down into three types:

• Dark side – This is when the entrepreneur experiences various negative psychological and emotional reactions.
• Downside – Which is when the entrepreneur suffers from financial loss and/or social stigma.
• Destructive side – This is when the startup actually hurts those around it.

“I call for the need for more research on the dark, down-, and destructive side of entrepreneurship—what are their dimensions, why do they generate suffering, and how we can reduce them and speed recovery? Such a stream of research holds the potential to make an important, compassionate contribution,” the author says. “I started my scholarly journey into the dark side of entrepreneurship after my father’s business failure caused him to suffer greatly. I was interested in understanding this darkness to help people like my father anticipate negative outcomes of entrepreneurship and reduce their suffering.”

When entrepreneurship goes wrong

The paper highlights the impact grief can have on us and on those around us, and argues that with the failure rate of startups incredibly high, the grief that comes with a failed business is quite likely. What’s more, this grief can come with a number of negative consequences, including depression and anxiety.

The author hopes that by shedding light on some of the negative consequences of entrepreneurship it can help entrepreneurs better manage any anxiety and stress they may be feeling due to the inherent uncertainty of startup life.

It also opens the door to further study that may examine why some entrepreneurs are more prone to suffer from these dark traits than others so that support institutions can better support them.

“Entrepreneurship involves uncertainty. Uncertainty means that we’re going to have failures. We need to recognize that we will likely have failures, so we can manage failure better as part of the entrepreneurial process,” the author concludes. “We can help entrepreneurs set their expectations better, they can learn from failures more quickly, hopefully feel less grief, know how to better deal with their grief, and be able to move on.”