Mini-Madoffs: How Our Tiny 'Thefts' Add Up to Madoff-Scale Damage

Bernie Madoff
Bernie Madoff

When Bernie Madoff was busted for a Ponzi scheme that cost investors an estimated $17 billion, many of us wondered how someone could do something so terrible.

It's easy to place the blame for many of our societal problems on newsworthy criminals. But the truth is that most of us engage in minor acts of ethical misconduct that, cumulatively, have a worse effect than any of the crimes that make the news.

Say What?!

Hard to believe, right? Humor me as I start with a small example, followed by some data that show the scale of damage caused by the cumulative effect of small misdeeds.

I used to work at a cafe in which employees were instructed to mark unsalable items on the "waste list." Whenever a cookie broke or a batch of hummus went bad, we had to mark the item on the list and jot down a short explanation of what prevented these materials from contributing to the store's bottom line. This practice was created to help the cafe maintain a tight inventory and to help management determine how to prevent waste and use the store's resources more efficiently.

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Unfortunately, the waste list did not always serve this goal. Many employees found ways to use it to steal free food for themselves and their buddies by taking what they wanted, marking the item on the waste list, and making up a reason that the item was no longer salable.

If you've worked in retail, you've probably also witnessed such misconduct, along with creative ways of ensuring the theft goes undetected.

It's hard to imagine that theft like this can add up to anything close to the money stolen in the corporate scandals reported in the news, but the following data speak volumes.

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A Little 'Shrinkage' Adds Up

A quick review of some key facts and figures will help us understand how crimes like those outlined above can impose high costs on society.

In North American retail stores, losses from employee theft are greater than losses from shoplifters and gangs. Just as striking, employee theft accounts for 44.1% of North American "shrinkage" -- the loss of goods between point of manufacture and point of sale. Employee theft cost businesses nearly $20 billion in 2011.

In addition to the losses occurring through the theft itself, businesses spend a great deal of money on security to prevent such theft. Globally, retail businesses spent an estimated $28.3 billion on loss-prevention security. So businesses aren't paying for just the goods that are stolen, but also for security to prevent even more from being stolen -- and they pass those costs on to consumers in the form of higher prices.

Guess Who Pays

Many employees commit these crimes to punish their employers for what they perceive as unfair compensation or to punish their bosses for perceived unethical treatment. And they often rationalize their behavior by telling themselves that if anyone has to pay for their theft, it will be the company's executives -- and they can afford it. With CEOs pulling in such large salaries these days, it's easy for employees to think that their executive bosses can afford the hit.

%Gallery-156197%But rapidly rising CEO compensation shows that CEOs aren't the ones taking the loss on theft. Most businesses recoup these losses by passing them on to consumers through higher prices -- with one estimate showing that the cost of theft to the average U.S. family in 2011 was $435. Ouch!

None of this excuses the behavior of people like Madoff. They deserve our scorn and punishment. But minimizing the cost of unethical conduct requires finding ways to prevent both the small number of major crimes and a vast number of smaller ones.

Motley Fool contributor M. Joy Hayes, Ph.D., is the principal at ethics consulting firm Courageous Ethics. She doesn't own shares of any of the companies mentioned. Follow @JoyofEthics on Twitter.