Yale School of Management

Center for Customer Insights

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The Benefit of Broken Rules

When do rules and standards help, and when do they inhibit, an organization in the achievement of its goals?

April 9, 2014

But rules are imperfect. A credit score is not a failsafe indicator of financial responsibility, just as SATs are not ideal predictors of academic aptitude. This inexactness gives life to a fundamental tension: when do rules and standards help, and when do they inhibit, an organization in the achievement of its goals?

In a 2010 article for Regulation & Governance, Associate Professor at the Yale School of Management Rodrigo Canales explores this question through the study of microfinance institutions in Mexico. He interviewed managers who make rules as well as employees deeply embedded in the nature of the work and knowledgeable about client needs. What Canales found is that employees working on the ground are often put in situations where the only way they can do the right thing, for the sake of the organization, is by bending or breaking a rule. This “norm entrepreneurship,” Canales writes, is an essential component of organizational success; it provides invaluable insight into where policies are misguided or ill fit.

Microfinance institutions (MFIs) give business loans to the world’s poor. They work in regions, and with populations, mired in uncertainty. To reduce the uncertainty of any particular loan being repaid, managers at MFIs establish rubrics for client eligibility. And while some loan officers hew assiduously to these rules while in the field, Canales found that other officers think policies “can and should be interpreted with discretion. They often choose to bend policies or apply them partially.” This articulation between officers who follow the letter versus the spirit of the law lends essential nuance to organizational operation.

“Rule deviation is performed specifically as an attempt to narrow existing gaps between procedures and desired outcomes; between the organization that is and the organization that could be,” writes Canales. In this regard, loan officers become “deviant not because they disagreed with the motives, goals, or self-conceptions of their organization, but precisely because they agreed with them fully.”

Take the case of MFIs: the goal of these institutions is to lift people from poverty using an unsubsidized and sustainable system of revolving loans. Rules about who can and cannot receive loans are designed to assure solvency so that the MFI can efficiently continue fulfilling its mission. But sometimes the borders of a rule are too narrow for the facts on the ground. How, for instance, might internal policy comprehensively gauge the moral character of a client with no financial record? In cases like this—when rules fall short of reality—loan officers must exercise personal discretion. Canales underscores that studying, rather than reflexively punishing, employees who interpret rules to fit a given situation can ultimately inform an organization’s operation and reveal overlooked opportunity. (An added benefit of employee discretion, he notes, is that employees learn about assumptions behind a given policy, and therefore develop a broader understanding of the entire organization.)

There are of course problems with the breach of rules. For managers, employee deviance, especially if it produces desirable results, can undermine the legitimacy of a rule; and every additional exception makes a given rule harder to enforce. For employees, the consequence of breaking with policy is predictable: during his fieldwork in Mexico, Canales witnessed several instances of top-performing loan officers who were terminated for being too disruptive or loose with policies. Institutions must thus strike an important balance. “Those who have focused blindly on the power of actuarial judgment and have sought to eliminate agent discretion may have thrown out the baby with the bath water,” admonishes Canales. “What this calls for therefore is a renewed effort to clarify the deep interdependence that exists between organizational policies, the nature of work, and individual discretion.”