Honesty, the Small Cheat, and Reputation

By: Donald L Swanson

Business people value their reputations because they take pride in their good names, and “not for some nebulous financial gain.” They:

• are guided “by their consciences”; and
• avoid cheating and “keep promises” because they “believe it is right to do so, not because it is good business.” [Fn. 1]

The internal drive to be honest is not new. Seventeenth-century court documents, for example, describe cheaters as people who are “without all feare of god or regard of Conscyence.” Such people make “no conscience of an oath,” “nor regard[] the punishment of [his] Majesties Lawes.” [Fn. 2]

Actions based on a concern for reputation are focused on the external (what do others think of me?). Fearing God and the law and minding one’s conscience are focused on the internal (is what I do right?).

But a small cheat, aka the small fudge, is different from a big one. Here’s how:

• Studies show that small cheating is common, even among people guided by their conscience who want to do the right thing.
• People will fudge to get a small benefit, but they won’t fudge so much that they think badly of themselves or consider themselves immoral or doing something wrong.

Because of the desire to do the right thing, simple moral reminders can reduce cheating, even small cheating. Studies show, for example:

• When people sign a tax return or an insurance form before filling it out, they cheat less.
• When students sign an honor code before taking an exam, they don’t cheat at all.
• When people are asked to think about the Ten Commandments before facing an opportunity for dishonesty, they don’t cheat at all.

Francis Newton

This article is about small cheating, based on the litigation record of a London-area grocer, Francis Newton, who plied his trade in the early 1600s. [See Fn. 2]

–An Honest Cheater?

Francis Newton saw himself as an honest person. Yet he cheated his customers and suppliers often, starting at the beginning of his career and continuing for the rest of his life. He even continued cheating after getting caught and prosecuted and convicted and fined.

Newton saw himself as honest, despite the cheats, because he kept his cheating to small fudges. And so, when caught, he could give the plausible excuse of a “mistake.” That excuse was usually accepted by the cheated party (especially when accompanied by restitution). And the “mistake” excuse undoubtedly assuaged Newton’s own conscience and allowed him to maintain a sense of personal honesty.

–Reputation

Even when Newton got caught and others gossiped about it, the news did not cause Newton harm. Had Newton not made enemies that pursued charges against him, Newton might have continued his cheating indefinitely without ramification.

Newton’s business and reputation survived, in part, because he dealt honestly with those who could and would verify his performance. This meant that accusers often found an unreceptive audience among many of Newton’s customers and suppliers, who insisted (accurately) that Newton behaved honestly with them. And these people were doing a counter-gossip about the false accusations against Newton.

This enabled Newton to continue his trade, remain in good standing as a grocer, and ultimately die a man of property.

–Cheating Didn’t Matter

The reality is that Newton cheated, got caught, and nothing happened. Then, he got caught again, and gossip circulated for years.

Even those who thought Newton might be dishonest continued doing business with him anyway. That’s because, apparently, “he did have awfully good prices.” This old adage may apply here: “[i]n the eyes of people blinded by greed, the most tarnished reputations shine brightly.”

Controlling the Small Cheat

Small cheating is not sexy and may not make the front page of the newspaper, but it is rampant and expensive. Four hundred years after Newton’s trial, businesses are still overcharging customers on weight, and the small cheat abounds.

Modern day examples include:

• Whole Foods stores in California in 2014 and New York in 2015 were caught with “overcharges [that] ranged from [80 cents] for a package of pecan panko to $14.84 for a package of coconut shrimp.”
• L.L. Bean had to end its no-questions-asked return policy because of people taking advantage by doing such things as returning goods they picked up at thrift stores.
• Airlines struggle to distinguish between flyers needing genuine service-animal support and those trying to bring pets on airplanes with counterfeit service-animal papers.
• Lumber Liquidators sold goods falsely labeled as meeting government emissions standards.
• Individuals cheat on taxes and take items from the company supply closet for personal use.

Each act of cheating may cause minimal harm, but collectively, low-level cheating is a drain on the economy. For instance:

• The fraudulent return of pre-worn clothing cost retailers billions each year.
• Tax cheating is estimated to cost the U.S. government over $450 billion per year.

The most effective public check on low-level cheating comes from verification of performance. Back in the 1800s, for example, rampant cheating occurred in the U.S. on quality of goods. In response, various States required inspection and testing of bulk commodities like grain, fertilizer, milk, and margarine. The resulting assurance of quality expanded markets and boosted confidence.

Privately, firms with bargaining power can impose direct monitoring on suppliers, such as observing manufacturing processes. Contracts can include fines and liquidated damages to punish small breaches. And scorecards can keep track of performance, providing a record to identify patterns of impropriety.

Implication for Litigation and Mediation

In the realm of litigation and mediation, the best protection against being cheated is preparation.  Knowing the facts of a case and knowing the law, and being well-prepared on all the details, is the surest way to guard against a cheat, both large and small, from the other side.

Summary

Businesspeople want to be honest and view themselves as moral. But even these people can engage in small cheating, while maintaining a sense of honesty and morality.

As a result, small cheats abound and can go undetected and unpunished. That’s because verification is difficult or absent, plausible deniability is always available when caught, and self-deception on the small cheat is a problem.

Editorial Conclusions

In both the worlds of bankruptcy and mediation, honesty and candor and disclosure are essential. But even in these worlds, the small cheat can be a problem, be disruptive, and lead to injustice.

Preventing the small cheat and adequately dealing with it when discovered is essential in both those worlds.

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Footnote 1. See Amir Bhide & Howard H. Stevenson, Why Be Honest if Honesty Doesn’t Pay, Harv. Bus. Rev., Sept.-Oct. 1990.

Footnote 2. This article is based on an essay by Emily Kadens, Professor of Law, Northwestern Pritzker School of Law, Northwestern University. Her essay is titled, “Cheating Pays,” and is published at 119 Columbia Law Review 527 (2019). Unless otherwise noted, all information in my article is from this essay by Prof. Kadens. Other publications by Prof. Kadens bear such fascinating titles as, “The Last Bankrupt Hanged” and “The Pitkin Affair: A Study of Fraud in Early English Bankruptcy.”

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