Leaders can be Insider Risks, too: A Cautionary Tale from “The Emperor’s New Clothes”

Insider risk detection is often focused on employee behaviors, sometimes ignoring the risks of toxic leadership. As a result, sometimes the overarching goal of protecting the organization can be missed as we focus on the risks of the general workforce. But, we should also wonder about how often leaders become the insider risk to their organization. And if leadership is causing harm to employees and the organization, what can we do about it?

I explored these questions recently at the Virtual Counter-Insider Threat SBS Summit, where I presented “Speaking Truth to Power – Lessons Learned From ‘The Emperor’s New Clothes.’”

You might recall that in the classic fable, “The Emperor’s New Clothes,” Hans Christian Andersen portrayed a prideful, isolated, and wardrobe-obsessed Emperor who is scammed by two swindlers and their disinformation campaign. The Emperor’s self-absorption prevented him from seeing through the swindlers’ fraud and theft, leaving him parading the streets (literally) naked and humiliated in front of his kingdom.

I examined this story as a cautionary tale for modern organizations and executives. Although leaders are often shielded from exposure by executive protections, their behavior can pose a very real threat to an organization.

Types of Leaders who are Insider Risks

Five different types of leaders can exacerbate the risk of threat to an organization:

  • Corrupt and unethical leaders abuse their power for personal gain and often inspire corruption in their followers. Think of Enron executives, who cost investors $74 billion in losses.
  • Toxic leaders create a culture of fear by setting unrealistic demands; modeling incivility and disrespect; and lashing out, punishing and making an example of those who question their decisions or speak up. Think of Travis Kalanick, co-founder of Uber, who was ousted as CEO in 2017 for sexual harassment, macho “bro” culture, and unethical business practices.
  • Prideful leaders need to maintain a perception of superiority, which manifests as dishonest credit-taking, finger pointing, and hasty and uninformed decision-making that harms stakeholders. Think of Bernie Madoff gaining trust from over 40,000 investors and then defrauding them of billions of dollars.
  • Disengaged leaders rely on top-level assumptions when establishing and approving organizational systems, programs, and policies with no regard for the day-to-day realities of workers and the workplace. Think of a checked-out manager or teacher you had and their corrosive effect on the engagement of employees or students. Disengagement is contagious.
  • Leaders with blinders on put their trust in high performers or confidantes who disguise their unethical or toxic behaviors toward others (what one psychologist referred to as the “Eddie Haskell effect”). Leaders who listen unequivocally to an “Eddie Haskell” confidante will receive bad information and make poor decisions.

Real-world Case Study

We encountered this final type of a “leader with blinders on” in a real-world assignment our team handled. My office was called in to investigate an anonymous report about a second-in-command leader whose employees were terrified of him. This leader had a violent temper, and the employees would hide in their offices to stay out of his path. Furthermore, top leadership believed everything was fine. The office had an exceptional reputation for meeting deadlines with optimum efficiency.

We interviewed the regional director who appeared to be completely disengaged from the office culture. When we advised the regional director about the toxic and dangerous culture of the office caused by the subject, he was shocked. He realized he needed to repair relationships with the employees in that office who had lost trust in the organization and its leadership.

This case was expensive for the organization. The subject received an ample severance package including three months’ pay, extended health benefits, and access to the company’s Employee Assistance Program. In turn, he was forbidden from having contact with the organization or employees. Ironically, the subject had no idea his behavior had harmed so many people who had worked for him. He expressed genuine remorse for his behavior, which we consider a mitigating factor in determining workforce risk.

Like the emperor, the firm’s leadership suffered a loss of both money and people’s trust, plus severe damage to their reputations.

The Importance of Psychological Safety

As these leadership styles and this case study demonstrate, insider risk can start at the top and thrive in the right conditions of quiet acceptance. When employees believe that job security relies on staying silent or telling leaders only what they want to hear, how can we detect, deter, and mitigate leadership-born insider risks?

A powerful counter to insider risk from leaders is to create an organizational culture of psychological safety. A psychologically safe climate means a safe space for everyone in the organization to speak up, make mistakes, and bring their full selves to work without fear of punishment or humiliation.

How can we prevent or mitigate leadership decisions that can potentially pose a danger to people, organizations, and communities? A quote from John Wooden, one of the most successful NCAA basketball coaches in history, sums up our advice:

“Whatever you do in life, surround yourself with smart people who’ll argue with you.”

Let’s look at some other countermeasures to promote psychological safety for everyone in the workplace. Leaders should focus on:

  • Creating a feedback culture: Everyone in the organization is empowered to share feedback with others, no matter what their role.
  • Increasing whistleblower protections: Employees who report problems are safe from retaliation.
  • Showing appreciation when employees speak up: Respond with enthusiasm and action.
  • Modeling open dialogue as a work objective: Train everyone to avoid implicit biases and analyze facts to make decisions.
  • Honoring differing points of view: Cultivate the habit of being open to alternative perspectives and listening to all the voices on the team.
  • Instilling safety culture principles: Originated with high-risk organizations, like the nuclear industry, these principles encourage speaking up for everyone’s safety.

For additional resources, download this digital handout of links and resources about psychological safety, organizational culture, leadership, critical thinking, and safety culture.

Contact us to learn more

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

About the Author