Shifting perspectives : insights for internal audit professionals based on Hannah Arendt's concept of the social

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Shifting perspectives

Insights for Internal Audit Professionals based on

Hannah Arendt’s Concept of the Social

Scriptie Executive Internal Auditing Programme

Student: H. Singh (10903194)

Thesis coach: Dhr. B. Walrave

Date of submission: 17 August 2017

Program: Executive Internal Auditing Program

Faculty: Amsterdam Business School (UvA)

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Acknowledgements

This thesis is the final step in graduating from the Executive Internal Auditing Programme and obtaining my RO registration with the Institute of Internal Auditors. I am forever grateful to my employer PwC for allowing me to enrol in this program and investing in my development in this way. Furthermore, I want to thank my colleagues in providing feedback and assistance during the programme.

Furthermore, I want to thank my thesis supervisor Björn Walrave. He provided me the practical guidance that was needed to finish this thesis on time and within the requirements set by the Faculty.

Finally, I want to thank my friends and family who I have neglected over the past years by pursuing this program. Mostly I want to thank Sophie van Kruchten for her unquestioned support, patience and advice. I am forever grateful.

Anoep Singh August 2017

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Management summary

This thesis started with the observation that much of the understanding of individual behaviour within the internal audit profession is based upon the study and application of agency theory. The goal of the analysis was to assess how insight into Hannah Arendt’s concept of the Social can enrich the understanding of the internal audit profession in assessing human behaviour within organizations.

In the Human Condition, Arendt described how action produces intangible results through the interaction between individuals. This web of interactions can become so dense that it becomes a factor on its own that can condition the very individuals that created it as well as the individuals affected by it. The Social results in what Arendt refers to as behaviour: an uncritical self‐subjection to unquestioned rules with little incentive or will to take initiative to improve or expand. In order to function with such a mentality, members of ‘society’ deny responsibility for their own conduct as they do not feel that they set the rules. Literature shows two causes that lead to the Social: 1) increasing complexity of society through enlargement, automation and formalization and 2) dominant norms within society and organizations and abiding by those norms facilitate acceptance even if one does not agree with those norms. Four remedies aimed at reducing the impact of the Social are described in the literature: 1) continue to take action, 2) stop and think about what we are doing, 3) apologizing and 4) forgiveness.

Each cause and remedy was conceptualized and operationalized and validated through interviews with heads of internal audit and stakeholders of Dutch system banks. The validation showed that the majority of concepts and operationalisations resonated with the interviewees as relevant for their organization, although they are not often considered by the internal audit profession as themes for audit. The validation of operationalisations is consolidated in a framework for the internal auditor. The framework was validated through three interviews with experienced PwC internal auditors.

The goal of the framework is to provide internal audit professionals with guidelines on how to apply the insights of Hannah Arendt in their own organization. The framework includes considerations for the internal auditor by which the auditor can assess: 1) the extent and method of internal formalization and 2) undesired dominant norms within sections of the organisation. Remedies to lessen the impact of the Social include 1) the facilitation of employees to take initiative by providing channels and creating the right incentives, 2) decreasing abstractions in internal communication and increased use of storytelling as a method of instruction, 3) reconciliation mechanisms internally and externally and 4) assessments whether promises made by or on behalf of the organizations can be upheld with the current risk and performance management incentives.

This analysis showed that context impacts behaviour. Although the Social is invisible, its consequences are not. Inertia, lack of initiative, fear and compliance driven behaviour are just a few examples how the Social can manifest itself. The cost for an organisation can also be considerable. Lack of innovation, high personnel turnover and fear to call out unethical or illegal behaviour can result in significant costs for any organisation. Therefore, the internal audit profession should continue to develop its understanding of human behaviour and culture in organisations. By considering complexity and dominant norms as part of audits, the internal auditor can assist the organisation to create a better working environment for employees. By doing so, the internal auditor can create value for the organization.

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Chapter 1: Introduction

The crisis

The year 2008 was the start of the largest economic crisis since the Second World War. A cocktail was mixed within the global Financial Sector formed of non-transparent financial instruments, pressure from shareholders for ever higher profits and a very interdependent and globalized industry. Resultantly it was not clear to the majority the exact risks that a number of financial institutions represented and thus initiating a financial crisis where hundreds of billions evaporated in a few months’ time (Graafland, 2011; Zandi, 2009). Several of the worlds’ largest banks were kept in business because governments stepped in to bail them out. A number of other banks, however, have disappeared completely. A popular sentiment that was felt by large parts of the population was described by Frank Rich in the New York Times as “the financial sector’s greed, stupidity, hubris and outright corruption – from traders on the ground to the board room” (Rich, 2010). In other words, the crisis was the result of the behaviour of those working in the financial industry. Consequently, the public and government displayed mistrust towards the financial sector and this sentiment has hardly changed since then (Het Financieele Dagblad, 2015).

Understanding behaviour

The aftermath of the financial crisis and the public’s reaction to it provided two interesting insights. First of all, although the discipline of Business Administration places the agency-theory central to controlling or managing the organisation (Lan & Heracleous, 2010), corporate and internal governance based on agency theory could not prevent the fact that a culture had developed in the financial sector that resulted in the financial crisis. According to the literature, there are two factors essential to controlling an agent; the framework in which one operates (corporate and/or internal governance) and the enforcement of that framework (audit and control) (see Davis et al., 1997; Johnson & Droege, 2004; Shankman, 1999; Shapiro, 2005; Soares, 2003). So, whether the CEO has to act in the best interest of the shareholder, sales targets are set for the sales department or a code of conduct is implemented by the organisation by request of stakeholders and regulators. All these instruments are aimed to ensure that individuals operate in accordance with a desired pattern (Lan and Heracleous, 2010). Despite all this effort, the financial crisis still occurred.

Secondly, after the financial crisis, the societal response to deal with the financial crisis was one that strengthened legislation and regulations. The sentiment being the next financial crisis must be avoided. And the instrument to achieve this was additional regulation and strengthened enforcement (Solvency II for insurance companies and Basel III for banks serve as an example of both). In the Netherlands for example, bonuses were limited for employees working in the financial sector and system banks received strengthened requirements on top of the international framework agreement Basel III. The government primarily exacted these authorities, creating laws (governance) and ensuring its enforcement (control) to incentivise desired behaviour. This resulted in the societal response to the agency problem. At the same time, both in society and in politics, there is little questioning whether more legislation and/or enforcement will prevent the next financial crisis or whether there are other instruments to achieve this goal.

A fundamental question results. Do our conventional instruments such as variations on the agency dilemma provide us with adequate instruments to solve dilemmas such as the one described above? A typical exponent of the agency dilemma paradigm is the internal audit profession who serve as a key

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aspect of control and enforcement of governance and regulations within organisations. To ensure that the internal audit profession does indeed maintain an adequate toolkit, the toolkit needs to be constantly developed through fresh insights to assess and explain (aspects of) culture and behaviour within organisations. Insights that show culture and behaviour in a fundamentally different light then the agency dilemma allows.

Hannah Arendt and the analysis of complexity

The Jewish-German philosopher Hannah Arendt introduced the concept of the Social in 1958 (Arendt, 1998). Arendt used the Social to describe the phenomenon where individuals are less capable of overseeing, predicting and controlling the consequences of their actions due to the increasing complexity of human interaction. As a result of this complexity, individuals feel increasingly less involved with or responsible for any consequences that results from their action. Examples of phenomena that increases complexity include dominant norms within organisations, bureaucracy and invisible but omnipresent phenomena such as ‘the market’. Thompson (1980) described a comparable phenomenon within governmental departments where, through the contribution of so many individuals, it was impossible to point out any particular person to hold responsible for any (negative) outcomes and consequences. Thompson called this dilemma the problem of many hands.

The work of Hannah Arendt received considerable attention within the Political Sciences (Canovan, 1998; Pitkin, 1998). However, her work had a limited impact within Business Administration in terms of studying and explaining phenomena within companies and industries. Despite this, the work produced and ideas developed by Arendt have interesting aspects for the field of Business Administration. She lived in modern times (twentieth century) and focused her work and analysis on human behaviour. More specifically, she studied the interaction between the individual and complex society/organisation in order to distinguish the impact of this interaction on the individual (ibid).

The concept of the Social provides an unorthodox perspective on behaviour in complex contexts (Canovan, 1998) as many (globalised) organisations and industries nowadays are within. The Social can also help to assess the impact this has on the individual (ibid). The question is whether insights into the concept of the Social can facilitate the internal audit profession to assess and explain behaviour from a different perspective. And can the concept of the Social be beneficial to formulate a different type of recommendation that would be provided when assessing human behaviour from agency theory. Furthermore, can the insights of Hannah Arendt on the behaviour of individuals be used as a foundation on which organisations can develop different methods to stimulate desired behaviour and to detect (sources of) detrimental behaviour?

Problem statement and research questions

The goal of this analysis is to operationalise the concept of the Social into a framework that can be used by the internal audit profession. The framework can be used to assess and explain demonstrated behaviour within organisations by assessing complexity, in particular those organisations (the majority) that can be considered large and complex or operate in a very complex environment. The theoretical and societal relevance of this analysis is to propose an additional perspective, based on the concepts that Hannah Arendt developed, to the internal audit profession to lay a basis to assess behaviour within organisations next to the agency theory perspective. Agency theory explains behaviour within organisations on the basis of controlling the agent. Internal Audit is an obvious exponent of the agency theory perspective. The goal of the activity of internal audit is to assess the control mechanisms within the organisation (for which agents are responsible) on behalf of management and owners (principal). To do this, the internal audit focuses on (internal) governance, risk management and controls, themes that

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are also exponents from agency theory thinking. Behaviour is approached from a similar perspective. However, the internal audit profession wishes to understand individual behaviour then the profession has to expand its perspectives and continuously develop its instruments based on fresh insights. This includes perspectives from other disciplines.

The research question can be defined as followed:

To what extent and in what way can insight into, and a framework on the basis of, Hannah Arendt’s concept of the Social enrich the understanding and ability of the internal audit profession to assess human behaviour within organisations and detect (sources of) undesired behaviour?

The research question has the following supporting research questions:

1. How does the concept of the Social result in human (mis)behaviour within organisations and what can be done to mitigate its impact?

a. What is the Social?

b. How does the Social impact human behaviour?

c. In what context does the Social impact human behaviour?

d. What mitigating solutions to counter the Social are available in the literature?

2. How can the mitigating solutions be practically used by the internal audit profession?

a. How can the concept of the Social and mitigating solutions to counter the Social be assessed or measured?

b. What is the practical presentation of the framework?

3. Are the impacts of the Social and its mitigating solutions recognised within the internal audit and its main stakeholders?

Research methodology

The goal of the analysis is to design a framework that the internal auditor can use to assess the IST and the SOLL position within organisations regarding the impact of the Social, its causes and the remedies to counter the Social. The analysis consists of three phases; the literature review that aims to conceptualise the Social, the operationalisation of the causes and remedies to the Social and the creation and validation of the framework.

Research question one is primarily answered on the basis of the literature review, which begins with the conceptualisation of the Social and the framework in which Hannah Arendt has coined the phrase. The literature review mainly uses the primary work of Hannah Arendt where she addresses the Social and secondary literature of Arendt scholars who further their analysis on the Social. The second section of the literature review describes the measures that can mitigate the impact that the Social has on individuals. Also for this section, the analysis will mostly rely on work by Hannah Arendt, complemented by secondary literature. An important consideration in answering research question one is that conceptualisations are described in such a way that they can be operationalised for further analysis and research (Verschuren and Doorewaard, 2010: 137). The aim of the literature review is to provide

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conceptualisations of the Social, especially its causes and consequences, which can be properly operationalised in relevant ways for the internal audit profession.

Research question two continues by operationalising the concept of the Social and its causes and remedies. Babbie (2004, 132) states that operationalisation is the development of research procedures that can result in empirical observations in the real world. Arendt describes her theories and concepts based on her observation of the world and insights, however this conceptualisation is hard to translate in further empirical research. Research question two addresses this challenge by operationalising the causes and remedies to the Social. These will serve as a basis for the framework for internal audit professionals. The operationalisation of the causes and remedies of the Social is performed through literature review. The outcome of research question two are operationalised concepts (causes and remedies to the Social).

The last research question aims to validate the operationalised concepts and guidelines through interviews. Two sets of interviews are conducted. The first set of interviews is with internal audit professionals and stakeholders to validate the operationalised concepts. Based on these interviews, the operationalised concepts are adjusted where deemed necessary. To ensure that the interviewees address the concepts from a similar perspective, the first round of interviews focuses on the banking industry in the Netherlands. The Dutch banking industry is a sizable industry with well-developed regulations and regulators, expectations regarding the conduct of individuals in that industry and well-staffed and professional exhibiting second and third lines of defence. The interviews are held with the heads of internal audits of the system banks in the Netherlands in addition to stakeholders. The outcome is a concept framework that includes considerations for the internal audit professional that wishes to perform an audit based on these concepts. The second round of interviews is aimed to validate the considerations that are included in the concept framework. These interviews are held with experienced internal audit professionals (each with more than 10 years of experience in internal audit) from PwC Internal Audit Services. The outcome of the second round of interviews is a validated framework which also presents the final product of this thesis.

Figure 1 - Research steps

Based on these steps, the conclusion reflects to what extent the framework and usage of the concept of the Social provides added value for the internal audit profession to recognise, understand and assess human (mis)behaviour within their organisations and to propose corrective measures if necessary. Furthermore, it will reflect on the limitations of this analysis and prospects for further research.

Validity of research methodology

The research objective is best defined as a combination between theory developing and theory validation research (Verschuren & Doorewaard, 2007: 43-46). Theory developing because the concept of the Social (a concept of political theory) is being considered in a research field (internal audit) where it has not been considered before, filling a void in our understanding of both the concept of the Social and

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of (internal) audit. Therefore, the first necessary step is to assess how the concept of the Social is best explained within the context of (internal) audit. Theory validation is how the developed theory is validated through the collection of data (ibid). Because this research considers the concept of the Social is a new field, understanding how the concept of the Social manifests itself in the field of (internal) audit is the logical first step in theory validation.

The consideration for the research objective and aim of this research is consistent with Creswell’s (2014: 37-38) description of a constructivist worldview. Creswell (ibid) states that (social) constructivists address the processes of interaction amongst individuals. Social Constructivists believe that individuals seek to understand the world in which they live and work and develop subjective meanings due to their experiences. As a result of that, researchers should look for the complexity of views rather than only a few categories of ideas. This view is consistent with the research question, namely to perceive behaviour in organisations through a different perspective, the social construct of the Social and how that affects the behaviour of individuals in their (work) environment. The main difference between social constructivists and current research is that the current research uses a theory, or rather a concept as a starting point instead of inductively developing a theory during the research.

Directly related to the constructivist worldview is that data collection relies as much as possible on the participants’ view of the situation that is being studied (Creswell, 2014: 37-38). This is performed through qualitative methods; open-ended questioning that’s broad and general to ensure individual interviewees provide meanings2 of a situation or context.

Validity and reliability of data

As stated above, qualitative methods are effective approaches for exploring and understanding the meaning individuals or groups ascribe to a social or human problem (Creswell, 2014: 32). It involves questions and procedures, data collected in the participant’s setting and inductive data analysis ranging from particulars to general themes. It is the researcher’s responsibility to make interpretations of the meaning of the data (ibid). A known pitfall for researchers that rely solely on interviews to provide meaning, is that their own background can shape their interpretation of those interviews (Cresswell, 2014:31, Babbie, 2004: 308-309). Therefore, sufficient safeguards are required to ensure the validity of the data collected by the researcher and the reliability of the research conducted.

Cresswell (2014, 241-244) recommends to use an interview protocol, to record all interviews and use transcriptions for analysis. This research follows this practice by using an interview protocol during all interviews as a reference point. The protocol contains a short introduction regarding the goal and structure of the interview. Furthermore, the protocol states a short summary of each cause and remedy to the concept of the Social and operationalisations that are to be discussed in the interviews. Additionally, interviews are recorded and then transcribed. Based on the transcriptions a manual analysis of the data is performed to assess patterns. To ensure that the interviews provide an open point of view from the interviewee, all interviews are held on the basis of confidentiality. Quotations are used in this report, but sources are described by function and not by name. The full transcriptions of all interviews are available with the researcher for inspection purposes.

Verschuren and Doorewaard (2007, 184-185) recommends to select a strategic sample of interviewees over a random selection due to the qualitative nature of the research. Strategic samples fit with the research object and share a resemblance amongst each other (minimal variance). If the samples differ considerably from each other, then it is harder for the researcher to make general applicable

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conclusions and identify valid links between observed phenomena. The interviewees for this research are selected due to the professional sector in which they are employed, the Dutch banking sector. Furthermore, to strengthen validity, a number of interviews are planned with professionals that do not work for a bank, but instead work closely with the banking sector.

Outline

The outline of the analysis follows the three phases of the analysis. The literature review will describe the concept of the Social (chapter 2) and its impact on human behaviour (chapter 3). Chapter 4 will focus on the exploration of mitigating measures. Operationalisation of the Social is described in chapter 5 which focuses on the IST and remedies (SOLL) that are validated through interviews. The outcomes of the interviews and any adjustments to the operationalisations are presented in chapter 6. The concept framework for internal audit professionals and validation through interviews with PwC internal audit experts is presented in chapter 7. The final framework is also presented in chapter 7. The conclusion describes the discussion, limitations and further research.

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Chapter 2: Hannah Arendt and the Social

The introduction presented the research question and methodology. The goal of this chapter is to introduce Hannah Arendt and her concept of the Social which was introduced in one of Arendt’s most notable works, The Human Condition (Canovan, 1998, Pitkin, 1998). The chapter starts with the context in which the book was written. The second part of this chapter discusses the crucial concept, action and its character, as a process that leads to the concept of the Social. Chapter 3 continues to analyse the Social by focusing on forces that contribute to the Social and the impact that the Social can have on human behaviour.

The Human Condition

The title of the book is directly addressed by Arendt in the prologue as the work was written after the Second World War, a time of great technological and scientific advancement in addition to widespread unrest about fast changing societies and social roles. The prologue starts by mentioning the launch of the first space satellite in 1957 and its impact on the progression of mankind as it suggested at the possibility of leaving the planet. To Arendt, this event was unlike that mankind had ever experienced (Arendt, 1998:1). She concluded this was the first time in history that the Earth itself was seen as a prison for men’s bodies. As Arendt noted, mankind was slowly beginning to challenge the natural limits in order to escape imprisonment of its own condition that is being bound to this planet (ibid: 2). This is resultant of the impact of the world’s reality being seen and felt as a conditioning force to human beings (ibid:9). Leaving this planet would be the most radical change to the human condition imaginable as those individuals will experience completely different conditions compared to those we have grown accustomed to on Earth (ibid: 10).

In The Human Condition, Hannah Arendt analyses three fundamental human activities that define mankind’s’ existence on this planet; labour, work and action. Arendt calls the three conditions together the Vita Activa (1998: 12). She notes that both the terms as well as distinctions between the conditions and corresponding activities have a long tradition in political thinking. Labour is the activity that corresponds to the biological well‐being of the human body. This includes life’s necessities being produced and the body being fed thus, the condition of labour is to sustain life itself. Work is the activity that corresponds with the unnatural aspect of human existence. Work provides an artificial world that’s not directly connected to our survival (every production activity not directly linked to our human metabolism). Therefore, the condition of work is worldliness and materialism. The third activity is action which is the activity that happens between men (plural) without interference or by mediation of anything or matter. The condition of action is the plurality of humans as species, the fact that human beings that are each different live on this planet (Arendt, 1998:7). Action is concerned with the interaction between and among men in the public sphere. To Arendt, the first two conditions are concerns that should be handled in the private sphere of the household. Only action, characterized by plurality, is the condition that individuals should conduct in the public sphere, what Arendt calls politics (ibid: 22) and this realm was one of ‘equals’ (ibid: 32). In the modern world the distinction between the public and the private is less clear and the realm of the household transcends into the realm of politics, the issues of labour and work (from both the perspective of the employee and the household as a production unit) become issues of public debate.

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Action and Agency

Central to the current analysis is Hannah Arendt’s concept of action and the social. Mentioned above, action is the activity that corresponds with the condition of plurality. It is the human ability to produce novel effects by men’s own interaction with and amongst other individuals (Arendt, 1998: 177, Pitkin, 1998: 1). Humans can start novel things and thereby trigger chains of events (Canovan, 1998: xvi). Note that action has nothing to do with tangible objects (they fall in the category work), but with the effects among and by interaction of men and the results of them. Action is also seen as the essential freedom individuals have. Freedom to start something new and unexpected (Arendt, 1998: 9), “it is the nature of beginning that something new is started which cannot be expected from whatever may have happened before” (Arendt, 1998: 177). Men are free to the extent that they can act freely and speak freely because this equips them with the ability to start something new. If this ability to start something new is taken away, an individual can no longer be seen as free but as conditioned thus limited in his autonomy (Canovan, 1998: xvii).

Arendt’s basic premise for human interaction, both for action (initiative) and speech (interaction) is that men are equal and plural. We are equal in the sense that we can understand each other in addition to those that came before us (past generations) and those that will come after us (future generations). Men are plural in the sense that we are not exact copies of each other. All of us are different in preferences and actions. It is through speech and action that an individual can distinguish himself both as a member of humankind but also as an individual amongst other men. Next to our ability to express a situation (for example, needs such as hunger or thirst and emotions such as fear or affection), we can also express ourselves in forms such as wishes, ideas, and motivations, all characteristics that set us apart from the crowd and make our personality unique (ibid: 175‐176). For Arendt, this ability of speech was so valuable because it allowed for individuals to “experience meaningfulness only because they can talk with and make sense to each other and to themselves” (1998:4). Both Arendt and Canovan (1998) see plurality as a fundamental condition of politics. Without plurality, there would be little disagreement or issues of argument left. This logic can be extended from the public (political) sphere to also fit over wider society or specific large groups of individuals working or interacting together and thus essentially forming their own polis.

Thus, speech and action are ways that humans reveal their unique distinctiveness or the plurality that exists among them. Plurality is associated with human agency and includes all the goals, motives, ambitions etc. that a person has reasons to initiate (Sen, 2009: 287). The agent is necessary for the individual to act. The human agent is thus the part of a person that occupies itself with this speech and action. The human being is a biological being whose well‐being depends on the fruits of its labour. The agent is naturally inclined to serve the person’s wellbeing, but this can vary. Sometimes the agent can even go against the individual’s wellbeing due to certain motivations or (higher) goals that the agent pursues (ibid: 289).

Process and Context

As stated in the previous section, action is conditioned by the presence of individuals and their interaction with others and it has the quality to initiate novelty. These two characteristics have fundamental consequences in discussing action. Starting with the latter, initiating something new also means that one cannot know for sure where an action will eventually lead to, because “this character of startling unexpectedness is inherent in all beginnings and in all origins. […] The new always happens against the overwhelming odds of statistical laws and their probability, which for all practical, everyday purposes amounts to uncertainty; the new therefore always appears in the guise of a miracle. The fact

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that man is capable of action means that the unexpected can be expected from him, that he is able to perform what is infinitely improbable” (Arendt, 1998:178). The capacity for starting something new is also what distinguishes action from simple process behaviour that tends to be predictable, regulated and essentially conditioned. Arendt agrees that action can be; unpredictable in its outcome, irreversible in its process and often in hindsight the original author(s) are often unknown (1998: 220) causing it to be a frustrating development. Here Arendt implies that after the initial action, individuals do not control all further effects and consequences that are the result of that action. In other words, an individual cannot predict with any certainty what the outcome of a certain action will be. Once action is initiated there is no way that it can be reversed. There is no way back once started. The strength of the action can potentially grow while its consequences multiply in the continuing process of the action (Arendt, 1998: 233). This process between initiating action and its impact can also cause the intention from the initial action (and actor) and the resulting consequence to go astray and can also distort the direct linkage between the two. Canovan goes as far as to say that the danger of action, initiating new processes beyond the control of the actor, includes the very processes that have given rise to the modern society (1998, xiii). This includes making wealth fluid in the form of liquid capital that can be transferred from one investment to the other relatively easily and quick and the invention of the mill and automation which resulted in the continuation to this day of a migration of the province to the cities (ibid).

Although sometimes impossible to isolate from, the context in which an action takes place is another crucial cause of frustration. Action is conditioned on the presence of others between whom the individual moves and interacts with. Because action requires plurality, it can therefore never be taken in isolation from others (Arendt, 1998: 188‐190). Because we live in a ‘web of human relationships’ and therefore each new beginning by action is always set into an existing web of relationships of which the immediate consequences can be felt (ibid: 184). The interesting outcome of this dynamic is that, as all actors act, all will both be initiators (of their own actions) or ‘doers’ as well as sufferers of the actions initiated by themselves (previously) and by that of others (past and present). To do and to suffer are in this case two sides of the same coin since starting a process also imply suffering the consequences of that process (ibid:190). The consequences of this dynamic are as Arendt terms it ‘boundless’ (1998: 190) because action ‘acts’ in a context where every action sets off new reactions and where every new process can trigger further processes and result in unpredictable and unintended outcomes.

Therefore, next to creating new processes by action, humans are also conditioned by those processes that were created by (past) human activity. Activities that were initiated in the past continue to create processes in the present, form part of our world and still affect us (ibid: 9). This web of context of human relationships consist of numerous individual wills and intentions that can conflict all initiating actions in that same public web where these processes meet each other, conflict and interact. Because different actions interact within this web, often actions don’t achieve its purpose because of the context in which it operates. In other words, results of action can be very different from the original intentions of the actor. The unpredictability leads to a lack of control over outcomes; the more complex the context is in which people makes initiatives, the less individuals can foresee the effects of their own initiatives (Canovan, 1998: xviii). On the other hand, identifying a certain outcome as the end of a complex story or chain of events, it is very difficult to identify the initiator. At best one can perhaps isolate a number of agents who set the process in motion, but we cannot possibly praise or blame him as the sole author of any eventual outcome (Arendt, 1998: 185).

Introducing the ‘Social’

As explored above, context matters. It has impact on our world as well as the actions that we can take. It gets even more complicated if one looks at our current world. The paradox is that through the advanced

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and still advancing state of technology, science and humanistic inquiry, the individual has more capabilities than ever before. We live longer, healthier and we can bypass natural limits by medical interventions if needed (labour). Furthermore, we continue to expand our horizons and produce our goods faster and relatively cheaper and we can circle the globe in less than 48 hours (work). All great achievements but at the same time, all these advances makes our world increasingly complex and interdependent to such an extent that understanding or predicting the outcome of any action becomes even less possible than it was ever before. In fact, it created a paradoxical situation where human action initiated radical economic processes with very far reaching consequences for themselves and others. However, those who were concerned with it increasingly thought of themselves as bystanders who were drifting on the current of socioeconomic forces (Canovan, 1998: xvi). With this, a contradiction is reached. There are human beings that take action and thus initiate processes. The combination of the individual actions has created a common social fabric. This social fabric becomes denser as it is fed by every new action that humans initiate and its resulting consequences. But the combination of all these actions by many different actors in past, present and future result in a web of human relationships that individuals themselves cannot predict or control. The fabric in its turns then conditions the realm of human affairs. It affects all and seems to entangle its producers (humans) to such an extent that we appear much more the victim and sufferer than the author and initiator of what we have started. Ironically, it is in the realm that exists only because of men that men appear to be least free (Arendt, 1998: 234) and all of that by men’s own collective doing. It is also practically impossible for individuals to escape this trap because the plurality of men is a basic condition of our existence on this planet; we are practically bound to interact with other humans.

The terminology that Arendt uses in this context is very illuminating. Society is seen by Arendt as the rise of the household along with its activities, problems and organizational devices from the interior of the household and the private sphere into the public sphere. This has blurred the old distinction between private and political or public (ibid: 38). Because society is nothing else then the household enlarged, it also expects its members to behave as like one family who has only one opinion and one interest. Society on all its levels excludes the possibility of action, which was already excluded in the household, but expected in the political. Mass society indicates that various social groups suffered from the same absorption into one society. Here the term society changes into the Social where the Social has finally a point where it now embraces and controls all members of a given community (ibid: 40‐41). This is the phenomenon that Arendt termed ‘the Social’ and a negative view of it can be formulated as “a living, autonomous agent determined to dominate human beings, absorb them, and render them helpless” (Pitkin, 1998: 3). In other words, this ‘fabric’, although created by men, grew out of hand to such an extent that it can no longer be controlled by men. In fact, it is imposed upon them and they are conditioned and controlled by it. The more power and capabilities of men grow, the more the result of their actions confront them as if they are hostile and alien forces that are beyond their control, rendering men powerless (Pitkin, 1998:8).

An illustrative business application of the logic of the Social is speculation on the value of stocks or currencies. Everyone who trades in these goods is a part of the market, but at the same time everyone feels a victim to that same market. If a bank run happens at the bank where we have our savings, this has consequences for our actions even if we were not part of the initial panic. As soon as the bank runs hits, the most logical course of action is to run for the exits yourself, reinforcing the cycle in the process. In other words, a bank run or a loss of confidence can in theory happen based on a simple scare (action) and not on anything fundamentally wrong with a company or country. Yet, the initial result of that scare (people fleeing to the exits) will justify that initial scare, creating a self‐fulfilling prophecy (Krugman, 2008:11).

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Pitkin attempts to define Arendt’s Social as a collective of people who conduct themselves in such a way that they cannot control or even intentionally influence the large‐scale consequences of their activities (Pitkin, 1998: 10‐16). This characteristic of the Social, as Arendt sees it, has to do with the development of a complex economy and economic issues coming into the public (political) sphere. An extensive network of production and exchange in which people are interdependent, yet there is not a single entity in charge as the outcome is left to bargaining in the uncontrollable and abstract notion of ‘the market’. An attempt to control all these flows thus becomes part of the political discourse in a society, regardless of the political or economic system. Bringing these issues to the public sphere is a break with classical times (Arendt herself refers to classical Greece) where economic activity was placed in the private sphere of the family. A second characteristic is the modern forms in which we organize society and government such as the bureaucracy where, while it runs the economy, no one is responsible for the overall direction that emerges. This organizational form has different dynamics from the traditional forms of organizations which were family based and often led by a single overseeing patriarch responsible for the well‐being of the family. As more individuals are involved in more complex organizational structures more complex relationships and interdependencies are created. These characteristics will be elaborated on fully in the next chapter. Arendt’s observations regarding action focuses mainly on the public sphere. This is the sphere that contains the public discourse such as politics which is outside of the private spheres of homes and families. Arendt did not directly refer to action and its consequences in the industrial or professional sphere. In fact, she opposed that action can happen in society (Pitkin, 1998: 14).

However, the logic she observes should still hold and is confirmed by Pitkin’s definition of the social. Many firms and industries currently go beyond simply ‘creating’ things as Arendt describes Homo Faber. Companies in certain Industries such as the financial industry are very public institutions in the sense that they operate in the middle of society, therefore their actions can affect countless lives and most importantly, individuals make up the corporation or industry and it is their actions and decisions with incomplete information that determine the course of the company or industry. In fact, organizations owe their existence to the man’s capacity to act and to act together in concert (Pitkin, 1998: 179). Furthermore, the industry’s size and complexity make it at least as complex and interdependent as the public sphere that Arendt refers to.

Conclusion

This chapter aims to provide an introduction to “The Human Condition” and the main concepts that Hannah Arendt introduces in it. In “The Human Condition”, Arendt describes the three basic human conditions and corresponding activities, namely labour, work and action. Action procedures intangible results through the interaction between men resulting in a web of interactions that can become so dense it becomes a force of its own and can condition the very humans that created it. Arendt named this phenomenon society. The concept of the Social is society running out of hand and refers to such a dense web of interactions that is so dominating and pervasive that it conditions entire societies and all its members into conforming to the ‘will’ of the Social, leaving individuals perceiving themselves as helpless. The next chapter will continue the analysis on this concept of the Social by particularly looking at how the Social developed throughout the work of Hannah Arendt.

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Chapter 3: Dissecting the Social

In her book The Attack of the Blob (1998), Hanna Pitkin analyses the concept of the Social as described by Hanna Arendt in her work and publications and what it actually implies. Recognising the Social is one thing, but knowing when and how the Social develops can help identify the phenomenon and address it before it fully develops. If one compares the Social to an epidemic resulting from a virus, it is widely preferred to identify the virus beforehand and deal with it during the early stages then to be confronted with a fully developed and highly contagious virus.

Pitkin identified two influences in Arendt’s work that would eventually be developed into the concept of the Social. The first is Arendt’s description of the Parvenu, where she analyses how individuals aspire to be recognised as worthy members of society by operating under norms that are not necessarily their own. This was a personal issue for Arendt who was Jewish, a minority that has traditionally been second class citizens for long periods of history. The second influence that Pitkin describes is that of an alienated individual who is trying to exist in a world in flux with increasingly less certainties. These two influences combined can alter human action into behaviour; human beings conditioned into not acting but behaving thoughtlessly. The first section of this chapter analyses the Parvenu and his striving to become a worthy member of society. The second section elaborates on the alienated individual. The third section will describe the human response to these influences, primarily conformity through behaviour. The last section will look at the implications of such behaviour for society.

The individual as a parvenu: dominant social norms and structures

One of the main influences of Arendt’s Social is traced back by Pitkin to Arendt’s early work concerning Rahel Varnhagen; a Jewish woman who lived in Berlin in the eighteenth century. This work was likely intended as an exploration of Arendt’s own history since she was of Jewish descent. According to the biography written by Arendt, Rahel Varnhagen attempted to assimilate in and win acceptance from Berlin’s high society. Acceptance was problematic due to her modest family origins and the fact that she was Jewish. By attempting to assimilate to the then dominant norms of high society Varnhagen, amongst others, frequented certain salons in order to change her name and religion. Arendt emphasized that Varnhagen adopted the dominant society while, exactly like high society, dismissing her personal heritage and history that made her a pariah in society in the first place (Pitkin, 1998:19‐21). A pariah is a status that befalls on an individual simply because of whom one’s parents were. To escape this pariah status, Rahel Varnhagen became a Parvenu. Arendt describes a Parvenu as someone who attempts to climb by fraud into a society or rank which is not considered as that individual’s ‘birth right’ (ibid). More generally, a Parvenu is defined as an individual who strives to be accepted within a social circle (and succeeds) by assimilating that circles’ norms and values that are not naturally the individual’s ones. This is a quite common phenomenon in the modern world for e.g. refugees making the norms of their new home country their own (Pitkin, 1998: 53‐54). An experience akin to Arendt’s journey after her exile from Nazi Germany, to the United States, via France. Other examples include students being put through a period of hazing in order to join a fraternity or individuals trying to make a career by making the norms of the company or industry they work in their own. All these people have in common that their striving for acceptance changes how the individual identifies himself and is identified by others, from being unaccepted to an (fully) accepted member by ways of Parvenu. So the way of the Parvenu to achieve social mobility lies in the fact that the Parvenu will hide their origin of birth in order to be accepted instead of recognising their heritage by birth.

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As described in the previous chapter, action requires humans to act, to distinguish themselves as individuals, making each individual unique and identified as such. Yet Arendt observed that democratic society has a tendency to perceive (and thereby treat) all individuals as equals, thereby implying being ‘normal’ as the norm. This stance is not necessarily a bad thing, however, instead of recognizing inequalities and attempting to facilitate those by creating human arrangements equality tends to be confused with sameness and outliers are seen as pariahs. There is a conflict in this arrangement. On the one hand, equality makes people independent and therefore confident to act. At the same time, independence from the existing dominant social norm can result in the unbearable isolation of those outliers (Pitkin, 1998: 116‐127). Human nature is to strive for the company and acceptance of others. If this acceptance is only found through conformity, then humans tend to conform to the dominant norm instead of fostering initiatives (starting something new), autonomy (plurality) and action (articulation and initiation of plurality) by individuals.

The success of high society is valued over the citizen’s sense of responsibility to act (Pitkin, 1998:74) which constitutes a problem for the individual but also for society (or any collection of individuals) as a whole. Groups tend to allow individuals (regardless of sex, ethnicity and such) to join their ranks that they feel have most in common with. Dissenting voices are filtered thereby reinforcing the existing norms as no other views are heard. This leads to individuals being pressured to abide by the norms and derive what they are expected to do from those norms instead of from an independent or normative point of view. This leads to an undesired situation where the individual is pressured to not take action if the action goes against the norm (in fact he is pressured not to act). At the same time we do expect individuals to take responsibility for consequences that happen under their watch. But how can one take responsibility if one is acting and thinking like everyone else, according to norms that are not originally his own. For the Parvenu, the Social acts as a shield for the individual like a parent to a child behind which the individual can simply choose to hide and avoid taking responsibilities that fall outside of the dominant norm. Yet at the same time society denies all responsibility, leaving a painful void and “establishes a world of fatalities in which men find themselves entangled” (Pitkin, 1998:74) where no one feels triggered to alter the situation because they are (or at least feel) not responsible for the consequences of their actions in the first place.

The isolated and alienated individual: size and distance matter

The second influence to the concept of the Social is found in Arendt’s writings about the new ways in which society is organising: in ever larger organisational forms and abstract notions individuals have trouble comprehending or identifying themselves within it. As described in the paragraphs above, not conforming to the dominant norms can lead to isolation or even excommunication from society. Yet modern society’s methods of organising brings with it another risk, that of alienating the individual from society while standing in the middle of society. Societies have organised themselves in such a way that abstract concepts such as ‘the market’ determines the price for (essential) goods and services. Capitalism in modern society as a system is characterized by interdependence of all actors in the system, but at the same time requires mutual exploitation and isolation of those actors, this competition is what drives the system. Although all are influenced by the market, no one is in control of market forces because all players generally try to dominate the other players to gain advantage. Even the biggest and most powerful bureaucracies and companies in a society can at best only sway limited influence of that society, making them constrained by and victim of an abstract and invisible force they (the organisations

and the individuals that make up the organisations) cannot relate to (Pitkin, 1998:187). Globalisation

efforts strengthened this dynamic by enlarging what were local or regional markets and industries into global phenomena. By enlarging both the number of players, transactions and rules of the game the complexity of industries is also increased. These combined forces easily come across as alien to a

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constrained individual. Everything seems to have a price, including the labour of that individual. To that alien force it is irrelevant who the individual is, what matters is what the individual can produce and its value on the market at any given time or place (Pitkin, 1998:143‐144). One could say that the human scale disappeared from the picture.

Combining efforts into large organisations such as bureaucracies (whether public and governmental or private and for profit) carries similar problems for the individuals dealing with them. These organisations, such as the bureaucracy, are generally large and complex. While such organizations run large parts of the economy and society, it is hard to direct anyone who is responsible for the overall direction that emerges. Of course, Directors and CEO’s do steer their vessel, but they have limited influence on what happens below deck. Arendt has generally spoken negatively about the bureaucratic system. According to Arendt, “in every bureaucratic system the shifting of responsibilities is a matter of daily routine, and if one wishes to define bureaucracy […] as a form of government – the rule of offices, as contrasted to the rule of men, of one man, or of the few, or of the many – bureaucracy unhappily is the rule of the nobody and for this very reason perhaps the least human and most cruel form of ruler ship” (Arendt, 2003: 31). Many of these organizations are big and complex with many individuals involved (both inside the bureaucracy and outside but influencing it nevertheless) in many complex organizational structures creating relationships and interdependencies of such complexity that it is impossible even for the leadership of these organizations to fully control its dynamics culminating in a struggle to keep oversight. Ethics scholar Soares (2003) even argued that corporations have such structural complexity, wielding such power and control that they can be considered agents on their own.

A characteristic of a bureaucracy in the Weberian sense of the term is that a bureaucracy involves specialized tasks performed by specialists. In essence, a big business or bureaucracy can be dissected into smaller sections. These sections are then overseen by specialists solely responsible for that specific cog of the machine. The promotion and compensation for these specialists depends on how well they perform that specific task. This can easily lead to the isolation of these specialists from others in the company and society. It can even lead to distancing between their activities and priorities and the overall wellbeing of the company or society. In essence, bureaucracies create a distance between the individual’s action and (long term) consequence(s) that stem from that action. Professor of Philosophy Gregory Mellema (2003: 127) in fact argues those individuals acting as agents on behalf of a formal organization have a greater ethical distance then they otherwise would have if they acted independently from institutional constraints. This is because their freedom to act is limited due to constraining external factors.

The isolation and associated alienation to his environment that the individual is placed in has moral consequences. Both Marx and Arendt worry that this isolation decreases solidarity amongst individuals as they are isolated from each other and therefore have trouble relating or cannot relate at all to each other’s story, situation, interests and motives (Pitkin, 1998: 141). A vivid example of its impact is Milgram’s experiment. Milgram analysed how individuals obey to dominant norms (in this case, the authority of a doctor or professor) when this could potentially conflict with their own conscience (norms) by hurting a third person (Milgram, 1963). Milgram’s experiment showed that the more isolated the subject was from the person receiving the electric shocks; the further the subject would go without protesting. This reluctance to protest was highest when the teacher did not see or hear the learner and simply saw a light indicating the learner’s answer. However, at the same time the reserve logic also holds; the more exposed the agent is, the more they feels the responsibility to act. In the Milgram experiment, the more the learner was exposed to the teacher and therefore exposed to the consequences of their deeds, the more the percentage of subjects that were exposed to deadly voltages

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lowered and the percentage that protested against the experiment increased (ibid). Thus distance from action to eventual consequence works as a shield, protecting individuals from directly facing the consequences of their action and thus of having to take responsibility for it. In other words, the more cogs and wheels between the individual and the eventual consequences; the more one is isolated and protected from responsibility (Pitkin, 1998: 141; Mellema, 2003: 128).

Behaviour: doing without acting

The previous sections described two separate yet intertwined roots of the Social, that of the conformist Parvenu and that of the economical alien. This section focuses on the question of how these roots result in the Social and how they impact an individual’s behaviour. Ironically, Arendt actually refers to the impact of the Social as ‘behaviour’ (Arendt, 1998; Pitkin, 1998:178) which stands in direct contradiction with action. Within the Social, society (the individuals’ environment) generally excludes the possibility of taking action, and instead expects a defined behaviour from its members. This is imposed by numerous rules and regulations governing the individual, which ‘normalizes’ the members of society, by making them behave predictably by excluding spontaneous action (Arendt, 1998:40). Behaviour is a kind of uncritical self-subjection to unquestioned rules (Pitkin, 1998: 179).

The conformation to artificial norms can therefore be interpreted as a mind-set that individuals pose upon themselves, a Parvenu mentality of thinking, seeing and conducting oneself in a certain manner. Although, the Social is found as much outside of the individual as it is in the web of interactions and human relationships that is seen as alien by the individual, the mind-set is found inside the mind of the individual as a type of uncritical mentality (behaviour). Just as action and politics are related, behaviour and the Social refer to the interaction amongst individuals by producing only intangible results, also called the web of human interaction. The difference is that action refers to something new, starting a novel process, behaviour refers to (uncritically) conforming oneself to (manmade) artificial rules and conventions (Pitkin, 1998:178). In other words, behaviour is the choice not to act when action is required, choosing not to use one’s capacity and responsibility to act (ibid). The result is a kind of thoughtlessness, unquestionable following of rules and conventions. Behaviour denies one’s responsibility for what one is doing in this world and its results as well as for the norms and standards that one is following. In essence, the ‘conditioned’ individual perceives that these Social norms are always forced upon the individual from somewhere or by someone else; forced upon by them (who do not exist) and so they are responsible for those norms and resulting consequences. The norms and rules are simply fact, real because society (they) say that it is real. Furthermore, in the eyes of the ‘conditioned individual’, since someone else is responsible for the norms and any resulting undesired situation, it is the responsibility of someone else to remedy that situation.

The implications of the Social become apparent when the individuals’ behaviour is replicated over larger groups of people who each simply unquestionably behave instead of taking action. Pitkin states that when individuals are “utterly isolated and denying their own capacity for initiative and organization, such individuals cannot act effectively in the world. Instead, they conduct themselves as if they were individuated parts of some undifferentiated, gigantic mass and helpless in its grasp. So no one is in charge” (1998: 186). So when the individuals’ behaviour is replicated over larger groups it results in inactivity or inertia within society to question social norms or change existing situations. Parallels can be observed in the economic market where agents are organized so that they are isolated and in competition against the rest. However this ends up forcing agents to affect each other leading the collective behaviour of all agents to result in large scale consequences that no one can control thus appearing as alien. Individuals are simply confronted by this force as a fatality. If they do not act on those forces, they will be the ones who lose out. Yet collectively combined they are the market and hold

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tremendous potential to adjust issues by joint action (ibid: 187‐196). Although an individual can be fairly easily moved to act, the issue is that this individual will often lose out if he is the only one who decides to act. In this way, the description of the Social is similar to the classic example of a tragedy of the commons (Green and Shapiro, 1994: 72-73) where it is not in the individuals’ interest to act (initiate something new), although it could benefit all. As a result, the collective is worse off because no corrections are made.

This way the description of the Social is back to the previous given definition. The Social is talking about a collective who, though they are interdependent and active – they continue to shape the conditions under which they live – behave individually in ways that preclude coordinated action. This way they cannot or will not take charge of what they are doing in the world, instead feeling helpless by forces alien to them and which they cannot relate to. The collective is unfree, but at the same time they are free to become free. (Pitkin, 1998: 196).

Social implications: the banality of evil

If one thing becomes clear in analysing the Social, it is that the phenomenon draws in ordinary people, it is not about monsters. Arendt gives a clear testimony of this in her report of the trial of Adolf Eichmann in Jerusalem (Pitkin, 1998: 205).

Arendt expected to witness a monster on trial, but instead saw a discrepancy between the horrors of the Nazi regime that Eichmann represented and this normal man sitting in the court room. She classified Adolf Eichmann, responsible for the transportation of Jews to the Nazi concentration camps, as “not even unheimlich’, ‘normal’, with the personality of – as his own attorney said –“a common mailman” (Pitkin, 1998: 205). Pitkin mentions that Eichmann was what the Germans came to call a ‘desk murderer’: a bureaucrat who simply signed the orders for the transport of the Jews to camps. He was simply a bureaucrat, an ambitious careerist (ibid: 206). Arendt mentions that he had no criminal intent. His main motive was to look after his personal career and advancement in society. “He merely, to put the matter colloquially, never realized what he was doing” (ibid). To continue on his ‘crimes’, Arendt also mentions other peculiarities of Eichmann including his “sheer thoughtlessness [,] inability to think, namely, to think from the standpoint of somebody else [or] to look at anything from the other fellow’s point of view” (ibid). Summarizing, Eichmann is a typical Parvenu and was isolated from other people, especially from the consequences of his deeds and of reality as such. There was little that was impressive or evil about him and in fact, Arendt calls him a clown. Arendt signalled that this evil was perpetrated by a thoughtless human being, someone who never thought about what he was doing (Kohn, 2003: xv). He simply worked diligently on his career, admiring his social betters, aspiring for their approval and joining their ranks (Pitkin, 1998: 206).

The main message that Arendt’s reporting implies is that not all evildoers are the devil in disguise. Many of them, as described with the Milgram experiment, are ordinary people caught up in certain context. Already in 1945 and 1946 Arendt mentioned that the real reason for individuals to act as cogs in a

machine was not fanaticism or anything extraordinary, but fears of exclusion from society and

unemployment; of not able to make a living for themselves and for those who depended on them. Those cogs were first and foremost, individuals with a job, family men, concerned only with their private existence by making a living and fulfilling their duties (Pitkin: 209). This description fits for almost all individuals in society and is also true for so many of the individuals working in complex industries and organizations. Jerome Kohn (2003: xiii), a noted scholar on Arendt’s work, states that there is a potential Eichmann in all of us.

Shifting perspectives : insights for internal audit professionals based on Hannah Arendt's concept of the social