Corporate crime includes secretly dumping hazardous waste, illegally agreeing to fix prices, and knowingly selling unacceptably dangerous products. These offenses, like other corporate crimes, are deviant outcomes of actions by people working in usually nondeviant corporations.
Identifying true rates of corporate crime is problematic because victims and their victimization are difficult to establish. Toxic dumping, for instance, does not leave maimed or dead bodies at dump sites, and victims of price fixing seldom know they were illegally overcharged. Knowingly selling hazardous pharmaceuticals is particularly difficult to determine because often the harms are insidious—they kill only a tiny fraction of consumers, and harms do not appear until decades after exposure.
Motives for such crimes are equally difficult to predict or identify. Thus, some ordinary employees of one ordinary corporation, Goodrich, on multiple occasions knowingly produced and sold faulty aircraft brakes, although nothing in their biographies would have led observers to predict that they would do so. Likewise, some Enron and Equity Funding Corporation employees violated laws and personal morality by misleading investors into thinking that their failing corporations were profitable.
The structures, cultures, and incentives of their large organizations encouraged these people to commit such anti-social acts. People in these organizations know they are replaceable, and so they are surprisingly malleable. Most of them are average (and sometimes well-intentioned) people committing their crimes in the course of meeting their everyday occupational responsibilities. No data suggest that, as they started their careers, these people were less law-abiding than their peers. And, like other criminals, most devote only a small part of their total time and effort to criminality.
Corporate-generated beliefs, motives, and incentives can help explain their criminal behaviors (just as life experience can help explain street crimes), but these explanations do not absolve participants of their moral or legal violations. They merely explain why participants participated. Research over the past 50 years offers some convincing explanations for the corporation-generated environments that allow or encourage employee participation in corporate crime. It also offers some insights into the social responses that label and penalize some corporate actions as criminal, while ignoring others.
Corporate-Generated Employee Beliefs, Motives, and Incentives
Beliefs, motives, and incentives that employees acquire over many years working in criminogenic occupations greatly increase the chances that they will become criminal participants. Philips Petroleum’s chief executive officer, for example, learned the skills and beliefs needed to make illegal $100,000 Watergate-era political contributions as he ascended the corporate ladder over decades in the company.
Employees learn corporate criminal (and noncriminal) beliefs from people like themselves with whom they work and socialize, a pattern known as “differential association.” Through differential association, employees create and acquire excuses and justifications for their behaviors. They can attempt to excuse their crimes by emphasizing—even exaggerating— their personal powerlessness in large organizations. Like all employees of large corporations, they know they are replaceable cogs filling assigned positions until they retire or are terminated, so they can emphasize their replaceability to justify participating in schemes they consider unsavory. Excuses permit them to participate while believing that their participation is not their fault.
They also learn justifications from coworkers. These crime-facilitative rationalizations may be wholly or partly accurate. Thus, price fixers frequently justify their actions as stabilizing unstable markets and protecting employee jobs, which may be true. Nonetheless, their acts are illegal and harm the economy. Justifications facilitate participation because they help participants believe that extenuating circumstances make their actions permissible.
These beliefs do not cause criminal participation— they only provide suitable conditions that make participation more likely. They allow employees to respond reflexively to supervisor authority, standard operating procedures, corporate culture, and patterns that their predecessors established. A learned or innate tendency to obey authority encourages them to participate without serious reflection. Furthermore, the homogeneity, cohesiveness, and differential association of their work worlds can produce “groupthink,” a striving for unanimity so strong that it can override recognition that behaviors are criminal. Finally, each of the involved employees, none of whom individually plays a major part or has full knowledge of the crime, might correctly (but immorally or illegally) believe that the crime would occur regardless of his or her personal decisions. And each might conclude that personal interests would be served best by participating, because of perceived rewards for participating or penalties for refusing. This applies even when (as in the cases of Enron and the Dalkon Shield) the crime they didn’t expose caused the bankruptcy of their employers and the loss of their own jobs.
Motives and Incentives
More immediate forces also encourage criminal participation, such as pressure to provide a product on time despite unforeseen problems that undermine its safety. Hoping that problems will not be detected or can be corrected before they are detected, employees faced with deadlines conclude that corporate crime is their best available option. Production pressures to meet demand and keep costs low for the disastrous Dalkon Shield, a poorly designed and manufactured intrauterine contraceptive device for which testing was woefully inadequate, thus led to killing at least 33 women, injuring 235,000 others, and bankrupting the device’s producer.
“Bounded rationality” limits employees’ ability to collect all needed information, foresee consequences of their actions, or act rationally in light of what they believe. Few employees can make individual criminal decisions that would substantially increase their employers’ stock prices, and few own so much stock that they would benefit greatly even if their crimes did increase stock prices. Furthermore, employees’ rational self-interests seldom favor stockholder interests. Employees at all but the highest ranks have little incentive to risk fines, their jobs, or even prison sentences, by committing crimes altruistically for the benefit of the company’s stockholders. Though profit-seeking to maximize shareholder income undoubtedly encourages some corporate crimes, its importance in today’s large corporations is easily overstated.
Thus, the job incentives of involved Dalkon Shield and Dow Corning breast implant employees encouraged them to please immediate supervisors by making small cost-reducing choices for products contributing relatively minor profits. Lawful incentives encouraged these employees to produce outcomes harmful to stockholders and customers alike. Ultimately, lawsuits caused unforeseen bankruptcy of their employers, making stockholders’ investments in the companies worthless.
In corporate crime cases, incentives are usually indirect. Employees believe their participation may ingratiate them to their supervisors, and their refusal might result in them being passed over for promotion. Rarely is a promotion or raise explicitly conditional on participation in a specific crime. In sum, corporate crimes may be directly, indirectly, or unknowingly encouraged by situations, supervisors, and coworkers.
Separation of corporate ownership from corporate control provides additional incentives for crime. In theory, corporate employees act only as agents for corporate owners (i.e., stockholders), maximizing, whenever possible, the profits that go to those owners. In practice, however, an “agency problem” exists, because employees cannot be counted on to act as agents of their stockholders. Employees’ interests generally conflict with stockholder interests; stockholders do not make management decisions, and increased employee incomes can readily reduce stockholders’ profits. Employees’ personal interests may be best served by participating in crimes, even if the end result of exposure might be the demise of the firm, because the perceived likelihood of rewards for participating exceeds penalties for not participating. Employees thus may run corporations in their own self-interests and against the interests of distant and uninvolved stockholders.
Enron employees thus knowingly “cooked the books” with encouragement from their bosses, receiving large bonuses while deceiving stockholders into thinking that the company was so successful that it had become the seventh largest U.S. company. These employees were concealing disastrous failures that ultimately cost Enron’s stockholders $60 billion in savings and most of its 21,000 employees their jobs. Similarly, hundreds of corporations recently were investigated for back-dating stock options, a procedure that illegally and secretly showers on corporate elites millions of dollars each at stockholder expense.
Corporate crime motives frequently are defensive attempts to solve intractable problems. Companies in declining industries face extraordinary pressures to solve problems beyond their immediate control, so they are more likely than others to fix prices. Participants in such cases feel they lack noncriminal options, and they often believe that their illegal acts are temporary. Similarly, executives at companies dependent on federal government rulings (e.g., airlines, pharmaceutical companies, and petroleum producers) acquiesced to illegal political contribution solicitations in the Watergate scandal. They feared unspecified future harm to their firms by President Nixon’s administration if they did not make requested large cash payments. Executives at firms with less to fear because they were in industries less dependent on the federal government (e.g., retailers) were less likely to acquiesce.
When reasonable decisions produce unexpected failures, managers often gamble by making corporate criminal decisions because they already are deeply committed to a course of action. Escalating commitment encourages participants who have so much ego or time invested in the product that they don’t feel free to quit. In fact, almost all known cases of corporate bodily harm crimes are best described as the product of escalating commitment. The many pharmaceutical company decision makers at Merck and elsewhere who concealed adverse drug reactions did not expect those drug reactions when they began marketing their products.
Participants, in many cases, are novices unfamiliar with actual industry norms, so they can exaggerate the degree to which crimes occur elsewhere in their industries. They are highly trained in business or science, leading to a “trained incapacity” to consider everyday rules of behavior. Employees with recent graduate business degrees are generally assumed to be ambitious people who favor the short-term, quantitative, and data-manipulating skills they learned, while ignoring long-term, nonquantifiable, and ethical issues they should also consider.
Such participation illustrates the “banality of evil,” where crimes are committed comfortably by a cross-section of normal, malleable, and ambitious individuals who were not recruited for their criminal tendencies or skills. Most of these people would not commit corporate crimes if they were employed in roles that lacked incentives, opportunities, or cultural support for these crimes. Furthermore, their sense of personal responsibility is reduced by “authorization” from their bosses, as they unthinkingly conform to what they think their bosses want.
Whistleblowers are encouraging exceptions to these tendencies. Corporate whistleblowers are employees or former employees who risk being demonized and ostracized, or in a few cases fired, for informing outsiders about their employers’ wrongdoing. They manage to avoid the groupthink, fear, loyalty, escalating commitment, and other banal tendencies to which ordinary employees submit, thereby retaining their independence of action. Dr. Jeffrey Wigand, for example, was a tobacco company vice president for research who braved the anger of seemingly invincible tobacco companies by disclosing that his employer knowingly manipulated and enhanced the addictive power of nicotine.
Emergent Corporate Crimes
Many firm, industry, and societal traits appear to encourage corporate crime. Crimes are more common in unusually hierarchical firms that enhance employees’ fears or need to operate on tight schedules. Crime is further encouraged by having weak controls and lucrative and contradictory incentives. Industries with low profit potentials, only a handful of companies, or undifferentiated products (e.g., business envelopes, where brand loyalty is minimal) are particularly susceptible to price fixing. Also, poor societies with histories of corruption and natural resources needed by large multinational corporations are prone to corporate bribery of local officials.
No person founded a tobacco company intent on selling a dangerous product. Tobacco producers were well-established corporations for 2 centuries before tobacco’s health hazards were recognized by even the harshest critics of smoking. Each employee hired filled a narrowly defined organizational role and could rightly assert that his or her contribution was minor. Even if a person left the company for moral reasons, his or her activity would continue as another person readily filled the vacancy. As a collection of positions, not of persons, the corporation thus has a dynamic all its own.
Social Responses to Corporate Crime
The current American penchant for incarcerating offenders increasingly applies to corporate employees. In 2002, an otherwise divided Congress overwhelmingly approved the Sarbanes-Oxley Act in response to Enron and similar corporate financial frauds. The act mandates that corporate financial reporting safeguards be strengthened, with most attention directed to its felony provisions making corporate elites legally responsible for the accuracy of their firms’ financial statements. And it tries to provide significantly longer jail sentences and stiffer fines for violators. Attention to it has been great—a Google search in early 2007 produced 12.2 million hits—and its future impact on corporate financial criminality may be significant. Such stiffer penalties in response to scandals is not new; similar penalty and prevention changes occurred earlier in response to Dalkon Shield contraceptive device deaths and to preventable coal mine accidents.
Nonetheless, the law remains a limited tool for gaining corporate legal compliance. For punishment to effectively deter, prospective criminals must consider possible discovery and punishment before deciding whether to commit crimes. But much corporate crime results from a “slippery slope” where egos, time investments, or fears encourage participants to gradually escalate the illegality of their actions.
These criminals know that their crimes are likely to go undiscovered and unpunished because, for example, pollution takes time to kill, and price fixing is usually hidden. Limiting enforcement is the imbalance of resources favoring the aggregate of corporations over the government. (But this imbalance can be overstated—the Food and Drug Administration, Securities and Exchange Commission, and other sanctioning bodies have significant resources, dedicated personnel, and strong interests in showing their effectiveness.) Punishment is limited despite survey results showing public outrage toward corporate crime in general, because members of the public who happen to serve on juries are relatively sympathetic toward accused well-spoken middle-class and wealthy executives with no known previous violations and exemplary family, community, and occupational biographies. Jurors view defendants’ transgressions as caused by their jobs because they received no direct or immediate personal financial gain for their criminality.
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