Ethics by Design

A review of the Kelley-ECGI Lecture “Positive Friction: Strategies to Support Compliance and Ethical Behaviors” by Professor Ruth Schmidt on 5th February 2026.

Why do organisations struggle to change behaviour, even when leadership makes expectations explicit? In her lecture at the Institute for Corporate Governance and Ethics, Professor Ruth Schmidt began not with ethics, but with innovation. Firms routinely tell employees to “be innovative,” yet behaviour rarely shifts simply because it is encouraged. The reason lies not in individual intent but in the systems organisations build.

From there, the argument broadened. Ethical conduct is not merely a matter of rules or moral exhortation. It is a design challenge. And one of the most underused tools in meeting that challenge is what she calls “positive friction”: deliberately introducing moments of pause, visibility, or reflection to interrupt harmful patterns and reinforce better ones.

From Rational Actors to Real Humans

Classical economic theory assumes that individuals are rational, well-informed, and motivated to act in their own best interests. Behavioural science emerged precisely because those assumptions so often fail in practice. Humans rely on heuristics, misinterpret data, shift preferences depending on context, and rationalise short-term gains even when long-term costs loom.

These tendencies do not disappear inside firms. On the contrary, organisations can amplify them. Performance pressures, reward systems, and narrow metrics can normalise small deviations that gradually become major misconduct. Even well-trained experts are not immune: ethical lapses in behavioural science itself illustrate how wrongdoing can become normalised, rationalised, or justified incrementally.

The implication for compliance and governance systems is clear. Regulation remains essential, but rules alone do not guarantee ethical outcomes. If decision-making is shaped by cognitive shortcuts and social context, then interventions must address those behavioural realities.

Positive Friction in Action: The New Mexico Case

A concrete illustration came from a case involving unemployment benefits in New Mexico. The system was paying out billions in improper claims. Rather than relying solely on enforcement or harsher penalties, behavioural designers examined how small design changes might interrupt problematic behaviour.

Three interventions proved effective.First, applicants who misclassified their reason for unemployment were shown the letter that would be sent to their former employer. That moment of visibility — knowing a specific person would read the claim — introduced hesitation.

Second, reminders that most claimants accurately reported earnings leveraged social norms. Being told that “people like you” comply makes non-compliance psychologically harder.

Third, requiring individuals to specify their job-search plans increased follow-through by invoking commitment.

The result was a 40% reduction in fraud without additional resources. Crucially, the intervention did not depend on heavier sanctions. It introduced small, targeted frictions that disrupted autopilot behaviour and made consequences salient.

The broader lesson is not that friction is punitive. It is that behaviour can often be redirected through carefully designed interruptions.

When Friction Is Absent — or Excessive

Positive friction is not synonymous with “more process.” Too little friction can be destabilising. The 2008 financial crisis reflected in part a system in which lending and securitisation processes lacked effective stopping points. When oversight and review mechanisms are stripped away, harmful behaviours scale rapidly.

Yet friction can also backfire. Excessive monitoring or overbearing surveillance may generate what behavioural scientists call “reactance” — resistance triggered by perceived control. Remote keystroke monitoring, for example, may signal distrust and undermine organisational cohesion.

Positive friction must therefore be proportionate, transparent, and aligned with shared goals. Businesses often prize speed and efficiency. How can governance justify slowing down? The answer reframes the question: efficiency for what purpose? A faster process that erodes customer trust, misses risk signals, or damages culture may be efficient in the short term but ineffective over time.

Slowing down at the right moment can prevent larger breakdowns later.

Design Begins with Diagnosis

Importantly, behavioural design does not begin with adding friction. It begins with diagnosis Designers are trained to reframe problems, to step back and ask whether the organisation is even solving the right issue. If employees are “not innovative,” is the problem capability — or is it incentives, language, metrics, or culture? Effective interventions require understanding behavioural drivers before prescribing solutions.

Testing and prototyping are central. Positive friction is not one-size-fits-all; it must be trialled, evaluated, and refined. Poorly calibrated friction can create unnecessary burdens — what Cass Sunstein has termed “sludge.” The task is not simply to add process, but to distinguish between productive friction and obstructive bureaucracy.

Transparency also plays a role in maintaining trust. When individuals understand why an intervention exists and how it functions, it is more likely to reinforce shared norms rather than undermine them.

Culture as Behavioural Infrastructure

The lecture ultimately broadened beyond individual nudges to organisational culture. The example of Alcoa under CEO Paul O’Neill illustrates how behavioural systems operate at scale. By making workplace safety a central organising principle — embedded consistently in reporting, communication, and performance expectations — O’Neill reshaped behaviour across the organisation. The emphasis on safety did not weaken financial performance; it strengthened it.

By contrast, the cultural clash following Amazon’s acquisition of Whole Foods exposed the risks of misaligned norms. Hyper-efficiency collided with a more discretionary, customer-oriented ethos. Where transparency was limited and expectations unclear, morale and trust suffered.

Ethical behaviour, in this view, is not a series of isolated decisions. It is embedded in norms, narratives, and infrastructures that shape what people see as acceptable or expected over time.

Friction as Inclusion and Foresight

Positive friction can also interrupt bias. Blind auditions in symphony orchestras — placing a screen between candidate and evaluator — dramatically increased the selection of women musicians. The friction disrupted automatic assumptions and redirected attention to performance.

Similarly, product design failures — such as motion-activated devices that failed to recognise darker skin tones — demonstrate how the absence of diverse perspectives can entrench exclusion. Introducing diversity into testing processes complicates consensus, but that complication is productive.

Even innovation policies such as Google’s “20% time” or 3M’s structured experimentation operate as intentional inefficiencies. They create space away from immediate output pressures, expanding organisational imagination beyond narrow efficiency metrics.

Designing for Ethical Resilience

What emerges is a layered view of ethics and compliance. Rules and enforcement matter. But behaviour is shaped by cognitive shortcuts, social norms, incentives, and culture.

Positive friction, when thoughtfully designed, can:

• Interrupt autopilot misconduct
• Make consequences salient
• Reinforce social norms
• Support commitment and follow-through
• Broaden awareness and inclusion

It is not a universal remedy. Poorly designed friction can erode trust or create sludge. But when interventions are transparent, proportionate, and tested, they can reshape behaviour at both individual and institutional levels.

Designing ethical organisations therefore requires more than exhortation. It requires curiosity about behavioural drivers, willingness to reframe problems, and attention to the systems that shape everyday decisions.

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This lecture is part of the Indiana University - ECGI Online Series, a public lecture series on corporate governance. The Kelley School of Business Institute for Corporate Governance (ICG+E), in partnership with Ethical Systems, collaborates with ECGI to deliver this ongoing initiative. As part of this public lecture series, distinguished speakers share insights on the evolving landscape of governance, finance, and market regulation.