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The ugly side of high school basketball recruiting was in view recently when a Manhattan jury convicted Adidas executive James Gatto, head of the firm’s global sports marketing, and two others on fraud charges. The charges related to a scheme that involved making payments to the families of top high school recruits to induce them to attend universities — including the University of Louisville and the University of Kansas — sponsored by Adidas.

The athletes also were asked to sign agreements to be represented by parties involved in the illicit scheme when they joined the National Basketball Association. The payments were a violation of NCAA rules, and prosecutors contended that universities awarded scholarships to student-athletes not knowing they were ineligible under the rules.

This incident raises the question: Is corruption in business a problem of bad apples — or bad barrels?

Bad apples is too easy an explanation. If that were the problem, then all organizations need to do to avoid wrongdoing and associated risks and costs is hire good people.

But the problem is more complex. There are bad apples in business, as in all walks of life, but they are the exception rather than the rule. The vast majority of business students I teach and business people I know are good people who want to do well for themselves and their loved ones but also want to succeed with integrity and do well for others.

Deeper understanding requires recognizing that circumstances often matter as much as scruples. This was demonstrated in the landmark Milgram obedience experiments in social psychology in which naive subjects in the role of teachers were asked to administer increasingly strong and harmful electric shocks to students crying out in pain and pleading to be set free. All of the teachers videotaped in one of the experiments were clearly troubled by what they were doing and wanted to stop — but more than half of them fully heeded the commands of authority rather than the voice of conscience.

The Milgram experiments confirm that moral behavior arises at the intersection of character and context and that as often as not, context trumps character. In Milgram’s words, “often it is not so much the kind of person a man is as the kind of situation in which he finds himself that determines how he will act.”

Organizations that wish to avoid all the costs of employee wrongdoing should consequently pay as much attention to the organizational context they create as to the character of the employees themselves.

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Do leaders emphasize that achieving goals is important but that they must be achieved with integrity? Where are there gaps between the professed standards of the company and the standards most employees follow in practice? Most importantly, does the company’s pay scheme incentivize immoral behavior, as happened in the fake accounts scandal at Wells Fargo when the pay of employees who created millions of unauthorized accounts was linked to selling customers multiple financial products?

As the American writer Upton Sinclair sagely observed, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

It would be surprising if the compensation of those involved in the fraudulent payments scheme at Adidas was not linked to the number of top high school basketball recruits who decided to attend and play for a university sponsored by Adidas.

Businesspeople also are more likely to engage in bad behavior if they assume that their competitors are doing so and that they will be at a competitive disadvantage if they do not.

A 2006 study showed that MBA students in the U.S. and Canada were more likely to cheat than other graduate students. One of the authors of the study, Donald McCabe, explained in an article that the cheating was a result of MBA students’ “succeed-at-all-costs mentality” and the belief that they were acting the way they believed they needed to act to succeed in the corporate world.

Casey Donnelly, Gatto’s attorney, claimed in her opening statement at the trial that “every major apparel company” engaged in the same payment practice and that her client was simply attempting to “level the playing field.”

Federal authorities engaged in a yearslong investigation of shadowy dealings involving shoe companies, sports agents, college coaches and top high school basketball players have reportedly looked into Nike and Under Armour as well as Adidas.

Time will tell whether those companies were involved in similar payment schemes.

But it is already clear that such misbehavior won’t stop if we prosecute bad apples such as Gatto but don’t touch the rotten barrels that produce them.

— Joseph Holt is an ethics professor at the University of Notre Dame’s Mendoza College of Business.

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