Research Companion to Corruption in Organizations (New Horizons in Management)

RESEARCH COMPANION TO CORRUPTION IN ORGANIZATIONS

NEW HORIZONS IN MANAGEMENT Series Editor: Cary L. Cooper, CBE, Distinguished Professor of Organizational Psychology and Health, Lancaster University, UK. This important series makes a significant contribution to the development of management thought. This field has expanded dramatically in recent years and the series provides an invaluable forum for the publication of high quality work in management science, human resource management, organizational behaviour, marketing, management information systems, operations management, business ethics, strategic management and international management. The main emphasis of the series is on the development and application of new original ideas. International in its approach, it will include some of the best theoretical and empirical work from both well-established researchers and the new generation of scholars. Titles in the series include: Research Companion to Working Time and Work Addiction Edited by Ronald J. Burke Happy-Performing Managers The Impact of Affective Wellbeing and Intrinsic Job Satisfaction in the Workplace Peter J. Hosie, Peter P. Sevastos and Cary L. Cooper Women in Leadership and Management Edited by Duncan McTavish and Karen Miller Appreciative Inquiry and Knowledge Management A Social Constructionist Perspective Tojo Thatchenkery and Dilpreet Chowdhry Research Companion to the Dysfunctional Workplace Management Challenges and Symptoms Edited by Janice Langan-Fox, Cary L. Cooper and Richard J. Klimoski Research Companion to Emotion in Organizations Edited by Neal M. Ashkanasy and Cary L. Cooper International Terrorism and Threats to Security Managerial and Organizational Challenges Edited by Ronald J. Burke and Cary L. Cooper Women on Corporate Boards of Directors International Research and Practice Edited by Susan Vinnicombe, Val Singh, Ronald J. Burke, Diana Bilimoria and Morten Huse Handbook of Managerial Behavior and Occupational Health Edited by Alexander-Stamatios G. Antoniou, Cary L. Cooper, George P. Chrousos, Charles D. Spielberger and Michael William Eysenck Workplace Psychological Health Current Research and Practice Paula Brough, Michael O’Driscoll, Thomas Kalliath, Cary L. Cooper and Steven A.Y. Poelmans Research Companion to Corruption in Organizations Edited by Ronald J. Burke and Cary L. Cooper

Research Companion to Corruption in Organizations

Edited by

Ronald J. Burke Professor of Organizational Behavior, Schulich School of Business, York University, Canada

Cary L. Cooper, CBE Distinguished Professor of Organizational Psychology and Health, Lancaster University, UK

NEW HORIZONS IN MANAGEMENT

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Ronald J. Burke and Cary L. Cooper 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009936219

ISBN 978 1 84720 892 7 Printed and bound by MPG Books Group, UK

Contents List of contributors Acknowledgements

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Introduction Corruption in organizations: causes, consequences and choices Ronald J. Burke PART I 1 2

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8 9 10

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CONSEQUENCES OF CORRUPTION

Labour relations and ethical dilemmas of extractive MNEs in Nigeria, South Africa and Zambia Gabriel Eweje On the corruption of scientists: the influence of field, environment, and personality Michael D. Mumford, Alison L. Antes, Cheryl Beeler and Jay J. Caughron

PART III 7

CAUSES OF CORRUPTION

Greed Ronald J. Burke Individual and organizational antecedents of misconduct in organizations: what do we (believe that we) know, and on what bases do we (believe that we) know it? Joel Lefkowitz Research on corruption and unethical behavior in organizations: the use of conjoint analysis Robert Folger, Robert Pritchard, Rebecca L. Greenbaum and Deborah DiazGranados The escalation of corruption in organizations Stelios C. Zyglidopoulos and Peter Fleming

PART II

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INDIVIDUAL AND ORGANIZATIONAL CHOICES

A comparative perspective on corruption: Kantian, utilitarian or virtue? Rosa Chun Ethical leadership R. Edward Freeman, Brian Moriarty and Lisa A. Stewart Corruption, outrage and whistleblowing Brian Martin Organizational responses to allegations of corporate corruption Vikas Anand, Alan Ellstrand, Aparna Rajagopalan and Mahendra Joshi

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Reducing employee theft: weighing the evidence on intervention effectiveness Edward C. Tomlinson Corporate ethical codes as a vehicle of reducing corruption in organizations Betsy Stevens Transparency International: global franchising and the war of information against corruption Luís de Sousa and Peter Larmour Canadian corporate corruption L.S. Rosen

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Index

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Contributors Vikas Anand Sam M. Walton College of Business, University of Arkansas, USA. Alison L. Antes Department of Psychology, University of Oklahoma, USA. Cheryl Beeler Department of Psychology, University of Oklahoma, USA. Ronald J. Burke Schulich School of Business, York University, Canada. Jay J. Caughron Department of Psychology, University of Oklahoma, USA. Rosa Chun Manchester Business School, Manchester, UK. Cary L. Cooper Lancaster University Management School, Lancaster, UK. Luís de Sousa Robert Schuman Center for Advanced Studies (RSCAS) European University Institute, Florence, Italy. Deborah DiazGranados College of Business, University of Central Florida, USA. Alan Ellstrand Sam M. Walton College of Business, University of Arkansas, USA. Gabriel Eweje College of Business, Massey University, New Zealand. Peter Fleming School of Business and Management, Queen Mary, University of London, UK. Robert Folger College of Business, University of Central Florida, USA. R. Edward Freeman Darden School of Business Administration, University of Virginia, USA. Rebecca L. Greenbaum Oklahoma State University, USA. Mahendra Joshi Seidman College of Business, Grand Valley State University, USA. Peter Larmour Crawford School of Economics and Government, The Australian National University, Australia. Joel Lefkowitz Baruch College, City University of New York, USA. Brian Martin Faculty of Arts, University of Wollongong, Australia. vii

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Brian Moriarty The Business Roundtable Institute for Corporate Ethics, Charlottesville, USA. Michael D. Mumford Department of Psychology, University of Oklahoma, USA. Robert Pritchard College of Business, University of Central Florida, USA. Aparna Rajagopalan Sam M. Walton College of Business, University of Arkansas, USA. L.S. Rosen Rosen & Associates Limited, Toronto, Canada. Betsy Stevens College of Business, Elon University, USA. Lisa A. Stewart The Business Roundtable Institute for Corporate Ethics, Charlottesville, USA. Edward C. Tomlinson Boler School of Business, John Carroll University, USA. Stelios C. Zyglidopoulos Judge Business School, University of Cambridge, UK.

Acknowledgements Anyone with even a passing acquaintance with business coverage in the popular media, and in the more academic writing over the past 10 years, has become aware of an increasing number of corporate scandals. These scandals have involved corrupt individuals as well as corrupt organizations. These events extract huge financial and psychic costs. Working on this collection exposed me to a deeper sense of the magnitude of corruption, why it occurs, who is hurt by corruption, and what steps might be taken to reduce levels of corruption worldwide. Corruption must be tackled at several levels simultaneously if we are to have any success in reducing it. This is a daunting challenge but one that we must embrace. I have worked with Cary Cooper on other projects of mutual interest and have enjoyed our collaboration. Thanks again Cary. In addition, Gerry Wood, at Lancaster, did her usual magnificent job in coordinating with our contributors and the publishers. I thank our international cast of authors for their latest thinking on this important topic. Ben Booth deserves special mention for his sensing early that corruption in organizations was a serious emerging concern and encouraging us in this venture. My contributions were supported in part by York University. Finally, I acknowledge the generosity and affection of my family. It is always a joy to spend time with them; they keep me young. Thanks Susan, Sharon, Jeff, Liane, Rachel, Michael, Jay and Christie. Ronald Burke Toronto, Canada

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Introduction Introduction

Corruption in organizations: causes, consequences and choices Ronald J. Burke*

This introduction serves as a primer for the analysis of the causes and consequences of corruption in organizations, and the choices facing individuals, organizations and societies in their efforts to reduce corruption. It identifies central themes in this area and serves as an introduction to the more intensive chapters that make up the remainder of the volume. What do we mean by corruption? Ashforth et al. (2007) define corruption as ‘the illicit use of one’s position or power for perceived personal or collective gain’ (p. 671). The following paragraphs identify some of the main theses relevant to understanding corruption in organizations. The Ethics Resource Center in the US, in a survey of about 2000 employees, found that 56 percent had seen ethical failures, and 42 percent of those who saw these did not report them. Companies with weak ethical cultures had more misconduct; thus 98 percent of employees saw misconduct in organizations with weak ethical cultures versus only 24 percent of employees in companies with strong ethical cultures. An ethical culture, in their view, comprised four factors: ethical leadership, supervisory reinforcement of ethical conduct, co-worker commitment to ethics, and having ethical values embedded in the organization’s culture. Individuals are likely to participate in corrupt behavior or turn a blind eye towards it in order to fit into or belong to the organization, and if they strongly identify with the organization. Organizations with a short-term financial emphasis were more likely to exhibit corrupt behaviors, and in particular, pay and incentive systems were more likely to foster corrupt practices. Corruption includes terms such as ‘corporate wrongdoing’, ‘management fraud’ and ‘illegal corporate behavior’ (Zahra et al., 2005). When the individual benefits, the organization is typically the victim; when the organization benefits, society is typically the victim; and when both benefit, society is typically the victim. Examples of the first include embezzlement, and the padding of one’s expenses; the second, paying a bribe to get a contract, altering a financial document; and the third might involve individuals’ getting money or promotion for altering a financial document. Individuals can be active participants in the wrongdoing or passive observers – they know what illegal activities are going on but are unwilling to take action. Zahra et al. analyze top management fraud by its nature, scope, antecedents and consequences. They define fraud as ‘the deliberate actions taken by management at any level to deceive, con, swindle or cheat investors or other key stakeholders’ (p. 804). Fraud can take a variety of forms such as ‘embezzlement, insider trading, self-dealing, lying about facts, failure to disclose facts, corruption, and cover-ups’ (p. 804). Fraud can vary in scope and is also likely to vary by industry. Fraud is also likely to take place in some organizations and not in others. Top management fraud is a white-collar crime. It

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typically has a financial motivation, involves respected citizens, and does not entail physical violence. Zahra et al. develop a framework for understanding management fraud. It includes antecedents, individual-level factors, and effects. Antecedents fall into societal, organizational and individual categories. Individual factors include personal demographics such as age. Effects include impacts on employees, managers, shareholders and society at large. Costs of corruption Corruption has immense costs that affect individuals, organizations, society, and countries. Some individuals engaging in corrupt acts may feel pangs of guilt. Individuals convicted of taking part in corruption face penalties of varying degrees of harshness, including making financial restitution, serving a prison sentence, loss of reputation, loss of means of earning a living, and in some cases loss of family through divorce. Organizations lose money, reputation, and the chance of long-term survival (Clarke et al., 2003). Societies lose trust in their institutions (police, lawyers) and in their elected officials; fewer young women and men become interested in a career in these occupations. Cynicism is heightened. Finally, countries lose opportunities for growth, respect in the broader international community, and their influence in making the world a better place – the moral high ground. All of these contribute to a crisis of confidence in corporations (Child, 2002; Gioia, 2002; Kochan, 2002; Child and Rodrigues, 2003). A recent PricewaterhouseCoopers Global Economic Crime Survey, focusing on Canadian data from 126 companies, reported that crime and corruption cost companies, on average, Can$3.6 million in 2007, an increase from Can$587,000 in 2005. During these two years, 62 percent of Canadian firms surveyed said that they had strengthened existing controls or put new measures in place to combat crime and corruption. Yet fraud has not decreased. Based on their international data from 40 countries, more than half the companies in insurance, retail and consumer, government and public sectors reported fraud. In 2004, a Leger poll conducted in Canada found that only 44 percent of respondents trusted lawyers, down from 54 percent two years earlier; politicians were at 14 percent. A 2006 Harris poll in the US reported that only 18 percent of Americans trusted lawyers and 6 percent trusted stockbrokers completely. The Federation of Law Societies of Canada receive about one complaint about lawyers for every five lawyers in Canada. The most common complaint is that lawyers are greedy. Firms guilty of corruption also risk a loss of reputation, greater scrutiny and diminished future performance, including dissolution in some cases (for example, the auditing firm Arthur Andersen). Sullivan et al. (2007) report, based on a sample of 200 large US firms, that the quality of a firm’s network partners declined after a firm commits an unethical act, and this deterioration is greater for acts of greater illegitimacy. Declines in network prominence and cohesion were also observed for firms committing an unethical act. There are also more dramatic costs of fraud and corruption. Rene-Thierry Magon de la Villehuchet, an investor with Madoff, committed suicide a few days after the Ponzi scheme collapsed. He had lost millions of dollars of his own money in the scheme as well as having friends and colleagues connected with Madoff.

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Bad apples, bad barrels, and bad orchards Individuals engaging in corrupt acts might be termed ‘bad apples’. Some may lack the moral development to understand the nature of corruption, others may be seduced to perform corrupt acts – the slippery slope – leading to wrongdoing. Organizations taking part in corruption have been termed ‘bad barrels’; several people work together to perpetrate the fraud. Toffler and Reingold’s (2003) depiction of Arthur Andersen before and during the Enron débâcle illustrates a ‘bad barrel’. Finally, when much of an industry participates in shady ways of operating one might term that sector a ‘bad orchard’. Exposés of the financial services industry in the late 1990s and early 2000s indicated an industry culture in which deception, lies and withholding of facts was widespread. Pinto et al. (2007) make a distinction between corrupt organizations (COs) and organizations of corrupt individuals (OCIs) based on (i) who benefits from the corruption, and (ii) whether the corrupt behavior was undertaken by one or more than one individual. In COs, a group of employees carry out corrupt behavior on the part of the organization; the victims are outside the organization. In OCIs, individuals in the organization benefit and the organization is the victim. Ethical work climates Victor and Cullen (1988) were among the first to empirically study ethical work cultures. They collected survey data on ethical climates from 872 employees of four firms in the US. Ethical climates were found to be multidimensional and multidetermined. Five climate dimensions were noted: law and code, caring, instrumentalism, independence, and rules. Significant differences in ethical climates existed across and within organizations. Ethical climate perceptions also differed by position, tenure and work unit. Employees rating their work climate higher on ethics not surprisingly also reported observing fewer ethical lapses. An ethical work climate rests on employee perceptions of the organization’s practices and procedures that relate to ethical issues. What is the correct response for an individual to make in a situation having ethical dimensions? Aspects of a work climate that spell out ethical behaviors at work, procedures that one should employ in these situations, and one’s professional and occupational ethics obtained from training and education come together in creating an ethical work climate. Building on these findings, many organizations have introduced ethics training into their professional and leadership development offerings. Show me the money Before moving to a consideration of specific aspects of corruption, its consequences and how we fight control or reduce it, let us consider why corruption occurs. There is one theme that seems to run through the countless examples of individual and organizational corruption that I have examined – greed – that is, in the vast majority of cases of corruption, money was involved. Individuals and/or organizations engage in corruption for financial benefits, either directly or indirectly. Depending on the station of the individual engaged in corruption (hence opportunity), the financial gains ranged from relatively small (a few thousand dollars) to large (hundreds of millions of dollars). The accumulation of wealth in an increasing number of capitalist and materialist societies (new club members now include Russia, China, and India) is a sign that one has made it. And as the

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Enron case showed, everyone was at the trough – executives, bankers, auditors, lawyers, security analysts, and credit rating agencies. But suggesting that greed lies at the heart of most corruption does not qualify as a theory of why corruption occurs. Agency theory, however, has been offered to address the ‘why’ question. Agency theory suggests that top managers act as agents of the organization but their personal interests may not match the interests of the organization and shareholders. Top managers may instead be motivated by self-interest and self-preservation. Davis et al. (1997), for example, reported that executives committed fraud because fraudulent behavior was in their own short-term interests. Moral development and moral disengagement Individuals are obviously not all created equal as far as engaging in unethical behavior is concerned. Two stable individual difference factors have been found to be associated with ethical decision making: levels of moral development and moral disengagement. Kohlberg (1984) proposed and validated a five-stage theory of increasingly complex moral development. Individuals are more likely to make unethical decisions when moral disengagement occurs (Bandura, 1986). Moral disengagement frees individuals from self-sanctions and accompanying guilt from engaging in behavior that violates their internal ethical standards. Bandura identified eight interrelated moral disengagement mechanisms. Levels of empathy and moral identity were negatively correlated with moral disengagement; trait cynicism and a chance locus of control were positively correlated with levels of moral disengagement. Moral disengagement was also positively correlated with unethical decision making. Detert et al. (2008) report findings from three studies of moral disengagement in ethical decision making. Six individual differences were considered, four having significant relationships with moral disengagement: empathy and moral identity were negatively related to moral disengagement; cynicism and chance locus of control were positively related to moral disengagement. Moral disengagement was again related to unethical decision making. A betrayal of trust There are some professions and occupations in which citizens willingly put their faith and trust. These include auditors, politicians, judges, and police officers. Consider the following. Tehran’s police chief, General Reza Zarei, in charge of fighting vice, is under investigation after being caught in a brothel with six naked women and was forced to resign. Zarei was responsible for cleaning up corruption and had previously arrested young men and women for illicit relationships or not respecting the Islamic dress code. This sounds like Iran’s version of Eliot Spitzer, former New York State governor who resigned after it became public that he used the services of a prostitute. Several politicians throughout the world have recently been investigated for corruption or have been successfully prosecuted. These include Ehud Olmert in Israel, Brian Mulroney in Canada, Bertie Ahern in Ireland, Jacob Zuma in South Africa, and many in the US. Slayton (2007) chronicled the bad behavior of a small number of Canadian lawyers who engaged in theft and fraud, abused financial relationships, helped clients steal

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money, and engaged in drug use and sexual relations with their clients. The stories that he provided offered a glimpse inside the legal profession and legal practice with its obsession with billable hours, how lawyers are trained in university law schools, how lawyers through their legal association govern themselves, and ways in which the laws themselves can fail. Slayton tells the story of a Toronto immigration lawyer, Martin Pilz, who committed suicide when faced with charges of theft, fraud, forgery and conspiracy. Pilz had a chauffered Rolls Royce and wore a Can$20,000 fur coat and desperately wanted to be a ‘big wheel’ in the legal community. Overbilling, cheating on hours worked and billed to clients, is the most common complaint against lawyers. Furthermore, there is an endless litany of corruption in police forces throughout the world. Toronto charged and has been prosecuting a six-man drug squad for almost the past decade. Lawyers for criminals reported to authorities in the justice system that the drug squad officers planted evidence, stole money from alleged criminals, undertook illegal search and seizures, and physically abused their clients. One of the more notorious examples of police corruption involved the Los Angeles Police Department’s Rampart Division in 1999. Rafael Perez, an officer in this unit, was arrested for stealing 3 kilos of cocaine that was obtained as evidence in a drug raid. In a plea bargain, Perez admitted to shooting a person in 1996 and planting a gun on him to support a claim that he was being attacked, and helping cover up two other unjustified shootings. His testimony implicated more than 70 officers in misconduct such as drug dealing, planting evidence, making false arrests, and covering up crimes that they had committed. Perez stated that 90 percent of the officers in his unit falsified information. Based on this information, the Los Angeles District Attorney’s office reexamined thousands of cases in which these officers were involved. More than 100 convictions were overturned and Los Angeles paid out millions of dollars to settle lawsuits brought against the city. Investigations as to why this unit became so corrupt offered several reasons: the pressure to produce arrests, mediocre performance of police officers, good officers seeing that ‘bad apples’ were not dealt with, inadequate screening of new recruits, failure to supervise officers in the field, ‘bad apples’, and the code of silence that exists among police officers. The justice system itself becomes suspect when police officers sworn to uphold the law break it and use their authority to convict innocent people. Police corruption on a smaller scale is common in both Mexico and Russia. In Tijuana, Mexico, for example, it is typical for a police officer to stop a driver of a rental car from outside the area and accuse the driver of an infraction (for example, speeding, making an illegal turn). The police officer indicates that he will have to take the infraction to a judge, which will likely result in a $600 fine – but for US$50 the officer would ‘take care of it’. Some police officers can stop 10 cars a day, making $500. In Russia, a vocal critic of similar police action was severely beaten by officers. The now defunct auditing firm, Arthur Andersen, was not only complicit in the Enron scandal, but also collected huge fees from corporate and government clients for providing a range of ‘professional services’. Andersen received US$25 million from Enron for auditing services and US$27 million for other services, the latter raising potential conflicts of interest. In addition, Andersen asked its employees to shred documents that might implicate the firm in illegal or unethical activities. Andersen, in 2001, paid US$110

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million to settle a class action suit filed by shareholders of Sunbeam over grossly misstated corporate financial statements in the 1990s – without admitting legal responsibility – and paid US$7 million in June 2002 to settle fraud allegations arising from an audit it conducted of Waste Management Inc. The best science that money can buy Recent lawsuits against Merck, the makers of Vioxx, have indicated the inner workings of the pharmaceutical industry. They have highlighted the manipulation of research findings, conflicts of interest, and serious concerns about confidence in the medical system and trust in medical research. Merck played down or misrepresented the risks of dying for patients taking its Vioxx medication. In 2007, Merck agreed to pay US$4.85 billion to settle claims against them. In addition, Merck employees ‘ghost authored’ trial results and academic papers promoting the drug according to studies published recently (April 2008) in the Journal of the American Medical Association (JAMA). Merck looked for academics and physicians willing to put their names on manuscripts before they were submitted to journals for publication. Ghost writers were paid honorariums by Merck – described as a form of prostitution by various writers of the JAMA articles, with one editor using the word ‘whore’ to describe this behavior. Most studies of the effects of drugs – termed ‘drug trials’ – are funded by the drug companies; negative results are typically never reported. Results of drug trials can be distorted in favor of a particular drug. Medical journals have become arms of marketing efforts. Drug companies will purchase thousands of copies of articles favorable to their products and distribute them to doctors who are too busy to undertake their own reading of the literature. Physicians and clinical scientists should have just said NO! An act that sadly is easier said than done by too many of us. Pachter et al. (2007) report findings from the American Psychological Association (APA) task force on external funding. An increasing number of professional associations (including the APA) have become concerned about ways in which corporate funding can influence their activities. Corporate funding has the potential to reduce personal and professional integrity. Their report makes interesting reading but space constraints prevent me from reviewing some of their most scandalous reporting. However, I shall provide one such example. The pharmaceutical industry has come under scrutiny because of its wealth and efforts to fund various activities and projects. The pharmaceutical industry spent over US$19 billion on marketing in 2001, in addition to US$35 billion spent on ‘marketing masquerading as education’ and ‘marketing masquerading as research’ (Antonuccio et al., 2003; Angell, 2004). Tens of thousands of dollars are spent by pharmaceutical companies for booths at psychiatric conventions. Two professors from York University (Toronto) estimate that the US pharmaceutical industry spends almost twice as much on advertising and promotion than it does on research and development. Marc-Andre Gagnon and Joel Lexchin’s work, published in PLoS Medicine in early 2008, found that pharmaceutical firms in the US spent US$6,000 per physician in 2004. In addition, the number of meetings for promotional purposes increased from 120,000 in 1998 to 371,000 in 2004. The Canadian Medical Association [CMA] Journal (March 25, 2008) called for a stop to the practice of drug companies giving doctors ‘perks’ to attend their lectures. The CMA believes that these sessions are really marketing efforts not continuing education.

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Doctors have come to believe that they are entitled to these benefits (for example, family cruises, golf outings). Critics of this system, however, blame doctors – the medical profession – for accepting this way of doing business; doctors have the ethical problem in this case. In the US in 2006, US$2.6 billion was spent on continuing medical education of which US$1.4 billion came from drug manufacturers or device makers. Would you be more likely to recommend a product made by a company that sent you and your family on a cruise? Is nothing sacred? In December 2008 a corruption probe was launched over the awarding of the Nobel Prize to Harald zur Hausen. It is investigating whether pharmaceutical manufacturer AstraZeneca influenced the awarding of the 2008 prize in medicine. AstraZeneca sponsored two of the Nobel promotional companies. At another level, there are institutions (universities) in some parts of the world that sell diplomas. For a few thousand dollars one can obtain almost any university degree. The names of recipients of bogus degrees from one such institution were obtained by authorities. This resulted in a woman who had gained entrance to a leading law school based on a phony undergraduate degree being removed from her academic program and not given the job that a law firm had offered her. It is likely that this act will tarnish her reputation for a while. Making the numbers An increasing number of organizations, across all sectors, are today being managed in ways that focus on meeting objectives and holding managers at all levels responsible for achieving these targets. Executives of public companies particularly face pressure from the stock market, shareholders and their competitors. CEOs may then place pressure on their managers for short-term results. When these financial gains prove difficult to achieve, managers may resort to aggressive or illegal accounting practices. Harris and Bromiley (2007), using a sample of financial restatements based on accounting irregularities, found that both top management compensation and poor organizational performance related to aspirations, increased the likelihood of financial misrepresentation. When companies fail to meet their quarterly earnings forecasts, CEOs attempt to explain what went wrong, how it will be corrected, and what to expect in the upcoming months. It is widely acknowledged that companies fiddle with their numbers; sometimes those numbers are at best guesses, and at other times outright lies. Shiva Rajgopal, a professor at the University of Washington, and colleagues, in a US study (Rajgopal et al. 2008), found that between 1992 and 2004, CEOs missing two consecutive forecasts in a year had their bonuses reduced by 12 percent and their stock options by 26 percent; they also had a 28 percent higher than average firing rate. Companies that decided to voluntarily eliminate reporting of quarterly forecasts and results were more likely to have underperformed in the preceding year. Apparently not having a financial target seemed a better option than having a financial target but failing to meet it. Thus these data show that failing to make the numbers results in senior managers increasing the pressure to ‘fudge the numbers’. It should come as no surprise that there has also been a corresponding increase in the number of organizations worldwide that have had to restate their earnings when ‘errors’ are discovered.

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A drug company kept Leparin in the Canadian market though it knew its supplier was involved in a scandal in the US for using tainted ingredients linked to both illness and death. It took a month or more of testing before the product was recalled in Canada. The company obviously made profits from the continued sale of the product during this period. Another striking example of this pressure is the Ford Pinto affair (Strobel, 1980; Gioia, 1992). Ford continued to manufacture the Pinto even though it was aware of fires that sometimes resulted in injury and death to drivers and their passengers from rearend collisions, rather than redesign and retool the gas tank. Their cost–benefit analyses indicated that it was cheaper for Ford to settle claims and lawsuits against the Pinto than to invest in retooling the gas tank. Hill et al. (1992), in a study of 174 US Fortune 1000 manufacturing firms, reported that top management’s emphasis on rate of return was related to Environmental Protection Agency and Occupational Safety and Health Association violations between 1985 and 1988, as was company size. Financial statement fraud Financial statement fraud has become commonplace: Enron, WorldCom, Waste Management, Fannie Mae, Quest, Xerox, Tyco, Adelphia, Vivendi, Parmalat, and Royal Ahold, are only a few of a much larger group. Albrecht et al. (2007) address the question of why fraud occurs. They suggest that three elements must be involved: perceived opportunity, perceived pressure, and rationalization: ●

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Perceived opportunity – individuals feel that they can commit the fraud without getting caught, there is limited internal and external monitoring and control, the system is complex and not well understood by others, or if they are caught, the penalty is small. Conrad Black, former CEO of Hollinger, is currently serving a six and a half year sentence in a Florida prison for fraud. The members of Hollinger’s board of directors lacked the information and knowledge to understand complex financial transactions, were overworked, and one director (James Thompson, a former governor of Illinois) said that he only ‘skimmed’ the documents sent to him before board meetings. Perceived pressure – individuals have financial needs, they may feel pressure to report better results than actual performance, their responsibility as CEOs, their organization’s compensation plans, external expectations, state of the balance sheet, and job insecurity (O’Connor et al., 2006; Zhang et al.,2008). Rationalization – individuals can justify their actions by various rationalizations such as ‘good for the organization’, ‘had no other choice’, ‘not hurting anyone’, ‘for a good cause’ and ‘only a temporary move’.

In Canada, concerns have been raised about the efficacy of the regulatory environment and the justice system when charges of fraud and corruption are made. Some experts have described enforcement in Ontario as ‘third world’. First, many of these cases are complex; it requires considerable manpower to get all the facts. As cases proceed, investigators and prosecutors change, causing gaps in case knowledge and delays. Second, the

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regulatory agencies lack the manpower to do their job efficiently and adequately. Third, it sometimes takes several years to bring these cases to the courts, given the delaying tactics of defense lawyers and the complexity of the cases themselves. In Canada, it has taken up to 10 years to process and settle large and complex fraud cases (for example, Bre-X Minerals, Nortel Networks, Livent, Inc.). Fourth, in cases of guilt, the punishment seems to be so lenient that it does not serve as a deterrent to others. A study conducted by Utpal Bhattacharya (2006) of the University of Indiana’s Kelley School of Business compared enforcement records of the Ontario Securities Commission (OSC) and the US Securities and Exchange commission (SEC). He reported, after adjusting for market size, that the SEC prosecuted 10 times more cases between 1995 and 2005, in cases involving insider trading, 20 times more cases than did the OSC. The SEC fines for insider trading were 17 times more than the OSC fines during this period. Punishment in the US also appears to be more severe. Consider the following: Bernard Ebbers (WorldCom), 25 years; Dennis Kozlowski (Tyco), 12 years; Samuel Waksal (Imclone), 7 years and 23 months; Jeffrey Skilling (Enron), 24 years and 4 months; Andrew Fastow (Enron), 10 years; Martin Grass (Rite Aid Corp), 8 years; Jamie Olis (Dynergy), 24 years; Michael Milken (Drexel Burnham Lanbert Inc.), 10 years; and John and Timothy Rigas (Adelphia), 15 years and 20 years, respectively. These sentences will certainly get one’s attention. Government fraud and corruption The Government Accountability Project (GAP) released a 10-page investigative report dealing with corruption at the World Bank (March 27, 2006) which was also reported in US News & World Report (April 3, 2006). This report identified extensive problems at the World Bank showing how kickbacks, payoffs, bribery, embezzlement, and collusive bidding were widespread on their international projects. The report estimated that more than 20 percent of World Bank loans, $US4 billion annually, were linked to corrupt practices. World Bank staff are rewarded for getting projects through as planned, not for reporting corrupt practices. Whistleblowers reporting corrupt practices are typically punished. The World Bank does not have enough staff to investigate their backlog of corruption complaints. Professionals at the World Bank are sometimes unable to travel to other countries to undertake investigations because of a lack of funds. And it often takes years before the World Bank begins an investigation of corruption allegations. Finally, political sensitivities discourage the World Bank from undertaking investigations of those holding political office or senior positions with non-governmental organizations (NGOs) or the UN. The World Bank Institute has estimated that the total amount of bribes paid per year may be US$1 trillion (Rose-Ackerman, 2007) and that this corruption costs US$80 billion per year. The costs of corruption include less organizational and country growth, lower levels of public spending on education and healthcare, lower taxes collected, greater political instability, and lower levels of direct foreign investment. Transparency International (2006) reported a strong correlation between corruption and poverty. Fisman and Svensson (2007), using survey data collected in Uganda by the World Bank from 176 firms in 14 different industries from five different locations, reported that

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increases in bribery payments were associated with lower annual growth rates among these organizations. Increases in taxes had a smaller but still negative effect on annual growth rates of these firms. Rodriguez et al. (2005) consider ways in which government corruption impacts the entry strategy of multinational firms. Corruption affects the nature of business transactions; it rewards unproductive behavior by awarding contracts and privileges to firms in return for bribes, thus punishing efficient firms. The specific nature of corruption, while everywhere, varies across countries. Firms therefore need to understand and adapt to the type of corruption they encounter. Rodriguez et al. develop a two-dimensional model of corruption based on its pervasiveness and its arbitrariness. Pervasiveness refers to the likelihood of encountering corruption in normal interactions with state officials; the more common the corruption, the stronger the need to deal with it. Arbitrariness refers to the ambiguity – various interpretations of laws and approvals necessary to obtain via bribery or the number of bureaucrats in the situation – associated with corrupt transactions with state officials. Rodriguez et al. provide country examples to illustrate the usefulness of their framework: India is high on both, Indonesia is high on pervasiveness and low on arbitrariness, Russia is high on arbitrariness and low on pervasiveness, and China is low on both. Rodriguez et al. do not condone bribery and corruption but illustrate the implications of country differences on the entry strategies of multinational firms. They do note that corruption has been shown to reduce investments into a country and is negatively associated with both economic and social well-being growth. Every country in the world views bribery as a criminal act, yet bribery, though varying across countries, is commonplace. Bribery has both a supply and a demand side: individuals demand bribes and firms provide bribes. Some firms are more likely to offer or pay bribes than are others. Some firms seek a competitive advantage and are more willing to offer passive or active bribes. Passive bribes are used to avoid sanctions or punishments; active bribes are used to obtain influence (for example, to get contracts, favorable regulations decisions, and favorable government policies). Firm-level bribery is affected by the context of a firm’s home country and pressures faced by the firm. Martin et al. (2007), using anomie theory, examined the effects of cultural values and firm characteristics on bribery activities of local firms. Anomie theory proposes that cultural and social factors create the conditions in which pressures to reach goals using any means available override norms and values against illegitimate behaviors. Martin et al. considered data from 376 firms from 38 countries in examining the role of cultural factors, social institutions, and a firm’s local financial constraints as predictors of propensity of a firm to offer bribes. They found that more individualistic countries were associated with higher levels of bribery, more social welfare-oriented countries were associated with less bribery, and that countries having stronger political constraints were associated with lower levels of bribery. Ip (2008) lists the increase in corporate scandals in Taiwan over the past six years involving senior executives and the president and his family. The latter were accused of insider trading and accepting bribes. Business and government officials colluded in corrupt practices, Taiwan having a history of ‘crony capitalism’, which is a major feature within Taiwan. Taiwan has underdeveloped institutions (legal, political, authoritarian) which make it easier for corrupt practices to endure. A few families in Taiwan benefit

Introduction

11

from crony capitalism (favors, special privileges). Ip paints a picture of corruption at all levels of Taiwan society, a function of Confucian familism, in which the family comes first. Crony capitalism may also be alive and well in Canada. Finance Minister Jim Flaherty is currently under scrutiny (May 2008) for apparently awarding several untendered contracts totaling Can$300,000 for consulting services to a man who worked on an earlier election campaign of his. In his defense, Flaherty indicated that he was not made aware of the rules. Afghanistan is a country that has seen violence and strife for decades. In a recent report (Saturday, May 10, AA1, AA2) in the Toronto Star (2008), the Attorney General, Abdul Jabar Sabet, was asked how many top-echelon Afghan officials he had charged with corruption (the answer was 300) and how many were in jail (the answer was none). Not a single person in the Afghan government has the power to oppose others that are a law unto themselves. Billions of dollars in international aid have gone to warlords, ministers, parliamentarians, the military, police, tribal elders and entrepreneurs. Sabet admitted that even his own justice department had corrupt prosecutors in it. In the US, Illinois governor Rod Blagojevich is under investigation for attempting to sell the vacant senate seat of President-elect Barack Obama. And New Mexico governor Bill Richardson withdrew his name as a nominee for Commerce Secretary in the Obama administration as he is being investigated for awarding a lucrative contract to a firm that donated heavily to his campaign funds. Apparently ‘pay to play’ is alive and well in the US – and elsewhere. But some countries are taking action to combat corruption, sometimes in extreme ways. Captain Moussa Camara, leader of Guinea’s 2008 coup, apparently said ‘for the person who embezzles money, there won’t be a trial. They’ll be killed’. In 2008, China sentenced 11 individuals to jail for violating Microsoft copyright restrictions, and charged Tian Wenhua, chairwoman of one of the country’s largest dairy producers, with selling fake and substandard milk products. She faces a life sentence or even the death penalty. Conflicts of interest Conflicts of interest abound. Consider the following: ● ●

● ● ● ●

scientists/researchers who are paid to conduct drug trials or are paid to ghost write articles for prestigious medical journals by pharmaceutical companies; citizens who also work in marketing for companies that produce products that have been shown to be harmful to users of those products (for example, tobacco firms); citizens who see wrongdoing in their organization but are also concerned with their own career and the future of their employing organization; stock market analysts making a buy recommendation to clients of risky stock known to be ‘junk’ to other clients, to keep current clients happy; physicians referring patients to clinics or pharmacies in which they have an ownership stake; politicians deciding whether or not to pursue an issue raised by donors to their campaigns versus the needs of their constituents;

12 ● ●

Research companion to corruption in organizations executives given stock options for short-term results which may conflict with their organization’s long-term survival; auditors avoiding giving accurate but negative audit opinions to executives who hired and pay them.

Accountants and auditors working for outside firms are expected to provide accurate and honest independent judgments. Yet Moore et al. (2006) argue that the US auditing system faces widespread conflicts of interest and is not truly independent. They list the ‘usual suspects’ of corporate scandals of the early 2000s as having conflicts of interest at their root, suggesting that corrupt management used flawed financial monitoring systems to perpetuate their fraudulent activities. Experts in any field likely face conflicts of interest between their own self-interest (what is good for them) and their professional obligations to provide honest and accurate advice (what is good for their client). Focusing on the auditing profession, Moore et al. identify three threats to the independence of auditors: executives hire and fire auditors, auditors often take positions with client organizations, and auditors today provide more than just auditing services to clients. Clients are more likely to hire and retain auditors who support their actions. Auditors taking jobs with their clients create a common identity. And as auditors provide a wider array of services to their clients, they are more likely to support their own initiatives as satisfactory. These features operate to subtly color the judgment of the supposedly objective outsiders (for example, psychological processes such as selective perception, deniability, escalation of commitment, and inaccurate self-perceptions, are likely to operate). Moore et al. (2006) term these cognitive processes ‘moral seduction’. In addition, they suggest that a political process, which they term ‘issue recycling’, is also operating. When concerns about potential conflicts of interest reach a high level, actions are taken by regulators (for example, the passing of the Sarbanes–Oxley Act in 2002). When attention to conflicts of interest then dies down as it is being/has been addressed, it is back to business as usual. Moore et al. (2006) and Bazerman et al. (2006) believe that conflicts of interest will never be eliminated but they can be reduced. First, they recommend more penalties for organizational corruption and greater punishment for corrupt individuals. And focusing again specifically on auditors, they advocate tighter regulation of them. They propose that auditors provide only auditing and not other services, that organizations change their auditing firm every five years, that auditors be prohibited from taking jobs with their clients, and that auditors make independent assessments of a company’s financial statements rather than ratifying assessments of these made by the client organization, and that auditing firms be chosen by the boards of directors rather than by senior organizational executives. Research by Kevin Weinfurt and his colleagues (Weinfurt et al. 2008) from the Duke Clinical Research Institute in Durham, NC, has shown that published studies on stents, the tiny medical device that keeps blood vessels open and prevents heart attacks, do not indicate whether the researchers have financial ties to stent manufacturers. There are different types of stent in this multi-billion dollar industry Weinfurt et al.’s article, published in the online journal PLoS One, examined 746 articles written by 2,985 authors in 135 journals and found that about 83 percent of these articles did not contain any disclosure of the relationship of authors to stent manufacturers. One author had even founded his own stent-manufacturing company.

Introduction

13

The role of higher education The Aspen Intitute has reported that MBA students change their attitudes and values from the beginning to the end of their studies, becoming much more bottom-line oriented at the end of their studies (making the numbers). The business of business is business! In addition, studies have been carried out in the US on the prevalence of cheating among university students and who does more of it. These studies have shown, first, that cheating by students is relatively common in higher education, and second, that business students cheat more than students in other areas of study. Sheldon and Kruger (2004), in a longitudinal study of law school students in the US, found that law students had higher levels of subjective well-being (SWB) than other undergraduate students at the start of their program, but law students’ SWB fell by the end of their first year. This decrease was associated with decreases in intrinsic motivation, increases in appearance values, and decreases in community service values. Intrinsic motivation was associated with higher grades, which in turn predicted shifts toward higher-paying and higher-stress careers and away from service-oriented and perhaps more satisfying law careers. These declines persisted over the second and third years of law school. University graduates are more likely to occupy positions where they have opportunities to engage in unethical activities. The role of their study programs in fostering such attitudes needs to be better understood. A world of cheaters? There is evidence that corruption is widespread and worldwide. It often involves several people within a single organization. Corruption has been with us for decades – even centuries – in spite of efforts to limit or stop it. In fact one might conclude that corruption is on the increase. Corruption is also much more common in some countries than others. I receive e-mails once a week on average indicating that I have won a huge lottery (typically in Spain or Portugal), or that a person with access to huge sums of money in a foreign country (typically in Africa) would like my help in getting this money out and in return I would be well compensated. Police recently arrested 77 people in a cross-border internet sweep; most (61) were in the Netherlands. The scam letters offered a financial reward for helping someone get money from a foreign country (typically Nigeria) or that you have just won a lottery but have to pay advance fees. These efforts prey on the greed of the victims. I am constantly amazed at the creativity being unleashed by individuals as they search for new scams. Are we becoming a nation (or world) of cheaters? Consider the world of athletics. The Olympic Games are supposed to emphasize the spirit of competition and excellence. Yet consider the following: ●

●

●

In 1976, the East German women’s swimming team won 11 of 13 gold medals. It was later disclosed that hundreds of East German athletes had been using banned steroid for years. In 1988, Canadian sprinter Ben Johnson was stripped of his 100 meter gold medal after testing positive for performance-enhancing drugs. His trainer, Charles Francis, was known as ‘Charlie the chemist’. In 2000, American track star Marion Jones won five medals while taking banned substances, lying about it for seven years; she was found guilty of lying and is

14

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●

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Research companion to corruption in organizations now in prison for perjury. Interestingly, a female Greek sprinter at the center of a doping scandal at the Athens Olympics would get the gold medal that Jones returned. In every Olympic games over the past two decades, a number of weight lifters from various countries have been disqualified for testing positive for use of banned substances. Before the 2002 Winter Olympics in Salt Lake City it was reported that supporters of this bid had bribed officials of the International Olympic Committee for their votes in favor of holding the games there. In addition, one of the judges in the pairs skating competition at the Salt Lake City games admitted that she voted to ensure a victory for the Russian team, denying the Canadian skaters the gold medal. A Norwegian rider had to return his silver medal awarded at the 2008 Beijing Olympics when it was determined that his horse had been ingested with performance-enhancing drugs.

Furthermore, soccer is the world’s most watched sport. Hill (2008) has written that organized crime has influenced players, referees, team officials and soccer sports directors to predetermine the outcome of matches. Every sport seems to have cheaters. Tour de France winners have been found to have taken banned substances. George Mitchell, former US senator, headed up a recent task force that reported use of banned substances by baseball players. Football players in the National Football League have also failed drug tests. Young women and men in high school, or even earlier, have taken steroids to make them more competitive in their sport so they can obtain college scholarships. A 19-year-old hockey player, however, paid the extreme price in late 2008. Alexei Cherepanov died following a period of taking performance-enhancing drugs. The medical team associated with his hockey club is under investigation for their role in supporting this drug taking. Sports are supposed to represent the pursuit of excellence among amateur athletes, in the case of the Olympics, and among high school or college players. This high ideal seems to have fallen short as more and more individuals and their families use any advantage at their disposal – illegal or not – in their pursuit of fame and money. The spread of corruption within an organization Although a corrupt act generally begins with one individual, it is commonly spread to other participants. We are beginning to understand how and why this happens. Anand et al. (2005) tackle the question of how a group of upstanding citizens and members of their community cooperate in corrupt acts over a period of time, identifying rationalization tactics they commonly use. Rationalizations are mental strategies that allow individuals to see their corrupt actions as justified, while also reducing feelings of regret and guilt from these corrupt acts. Both rationalization and socialization practices allow individuals to take part in corruption while still seeing themselves as ethical people. Anand et al. identify six rationalization strategies: denial of responsibility, denial of injury, denial of victim, social weighting, appeal to higher loyalties and balancing the ledger. In addition, they also label three socialization processes that lead one down ‘a slippery slope’: cooptation, incrementalism, and compromise. Finally they

Introduction

15

identify some external facilitating factors: group attractiveness and a social cocoon, the mutual support of rationalization and socialization, and the use of euphemistic language. Albrecht et al. (2007) offer a model describing the process by which organizational members are recruited to take part in financial statement frauds. They apply French and Raven’s (1960) five bases of power to dyads: one person influences another to take part, then this dyad effect is extended to others in the organization, leading to general acceptance of other illegal or unethical activities. Nearly all financial statement frauds involve many individuals in preparing fraudulent financial statements. How do individuals persuade others to participate? Albrecht et al. suggest that individuals use various types of power to get others on board. The individual can use reward, coercive, legitimate, expert and referent power to involve another in the fraud. The person being recruited also has needs that can be met by the perpetrator, to get him or her involved. As more individuals join the fraud, the organization’s culture becomes increasingly unethical. Zyglidopoulos and Fleming (2008) propose a ‘continuum of destructiveness’ related to organizational corruption, a slippery slope of engaging in increasingly questionable activities. They identify four types of individuals: innocent bystanders, innocent participants, active rationalizers, and guilty perpetrators. Socialization, organizational rewards and expectations, and ethical distance – the distance between an act and its ethical consequences – are offered as explanations for movement along this continuum. It is unlikely that Bernard Madoff acted alone. Attention is now being directed at the activities of his key lieutenant, Frank DiPascali. See no evil Corruption would be less likely to spread or to exist at all if managers and co-workers had taken note of the unethical behavior rather than overlooking it. Gino et al. (2008a, b) identify some of the mechanisms that allow this to continue. First they identify ‘motivational blindness’, a tendency to overlook the unethical behavior of colleagues if it might cause us harm. There are pressures and rewards (or little punishment) from overlooking the unethical behavior of one’s manager. They are similar pressures on consultants, for example, in terms of assessing the behavior of a firm that is paying one for services. Individuals have a tendency to selectively see information that fits the conclusion they would like to see, and ignore information that goes against their preferences. Second, they report that firms that delegate unethical behavior to others face less negative reactions. Thus Merck sold some of its cancer drugs to smaller companies that then raised the price of the drugs dramatically. These smaller companies, not Merck, received negative press. Third, individuals tend to focus more on outcomes than on process. If a manufacturer manipulates some of its research findings to downplay possible negative effects and consumers are injured or killed, the firm would be severely criticized. But if the defective product is merely a nuisance, the manipulation of the research evidence becomes less of an issue. Recovering from publicly known acts of corruption Can organizations recover when their corrupt or unethical behavior becomes public knowledge? Some organizations have been unable to survive this situation (for example,

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Research companion to corruption in organizations

Enron, Arthur Andersen). But organizational death is not inevitable. Pfarrer et al. (2008) propose a four-stage model for increasing the speed and likelihood that an organization will recover following a publicly known corrupt or unethical act that places stakeholders at risk. Their model has the following stages: 1. 2.

3. 4.

discovering the facts of the corruption (conducting an internal investigation, undertaking due diligence, offering voluntary disclosure, engaging in public cooperation); providing an appropriate explanation for the corruption (acknowledging the wrongdoing, expressing regret, accepting responsibility, offering amends, making an apology); doing penance and accepting and serving a fair punishment (accepting the verdict, serving time, acknowledging the equitable punishment); and making internal and external rehabilitative changes (changing people and reward structures, portraying a new image externally, developing a new mission statement).

Organizations can rebound from widely known acts of corruption if they then act responsibly. Reducing corruption What individuals can do Individuals can do certain things to reduce corruption in their workplace. They might first share their concerns with a trusted co-worker about anything that they think might be inappropriate. They can then discuss their concerns with their supervisor. They might then become whistleblowers, using the company’s hot line to report their concerns. And as a last resort, they might get legal or other advice from outside if there is no internal reporting system in their organization. MBA education Given the popularity of the MBA-type educational programs, business schools may have an important role to play in raising ethical concerns and impacting on future levels of corruption (Adler, 2002; Gioia, 2003). It is likely that every business school today offers either a course or a module with a course on business ethics. In addition, business students in some institutions are being ‘scared straight’. The Ivey School of Business at the University of Western Ontario recently (May 8, 2008) had Nick Leeson give a talk to their business students. Leeson was a trader at Baring’s Singapore operation who accumulated US$1.3 billion in trading losses before being discovered. His employer, Barings PLC, one of the UK’s oldest banks, never recovered from this and went into bankruptcy in 1995. Leeson spent four and a half years in a Singapore prison for his activities. Although Leeson now appears to be leading a successful life, he discourages business students from undertaking the risks that he took. He says that if he had asked for help when the first losses began, he would not have continued on the path that he did. Leeson’s talk took place a few hours before students took part in the business school’s Ring Tradition Ceremony, where they pledged to act ethically and honestly in their career.

Introduction

17

Other Canadian business schools are also addressing ethics in interesting ways. Queen’s University (Kingston, Ontario) takes MBA students to visit a minimum security institution where white-collar criminals live with other types of criminals, showing the consequences of making unethical decisions. The Ivey School of Business, besides having Nick Leeson address the students, has also brought in an engineer involved in the Columbia space shuttle disaster, and student visits to the Walkerton Clean Water Center, in Walkerton, Ontario, where water known to be tainted continued to be served to the citizens of Walkerton, are used to teach ethical decision making. Joanne Gualtieri, a lawyer who blew the whistle on the lavish spending of the Department of Foreign Affairs (her former employer) has also addressed the Ivey MBA students. Changing a culture of corruption Misangyi et al. (2008) tackle the reduction of corruption by integrating economic and organizational behavior approaches into a larger institutional framework. Their approach emphasizes three elements: institutional logics or meanings, resources, and social actors or social entrepreneurs. Social actors or entrepreneurs use a variety of resources (for example, economic, cultural, social, symbolic) to create a new anticorruption institutional logic (for example, new identities, schemas or shared meanings, practices), a new culture for the organization. Controlling corruption A popular view on controlling corruption is the imposition of organizational controls. However, one would wonder about the adequacy of internal controls in many organizations if Jerome Kerviel, a former trader at the French bank Société Générale, could run up US$7.14 billion in losses while making unauthorized trades of more than US$73 billion. Lange (2008) offers a multidimensional view of organizational corruption control. Organizational leaders obviously can use a variety of control mechanisms to limit corruption. Lange identifies four types of corruption control based on (i) a focus on process or outcomes (targets) and (ii) an emphasis on administrative or social/cultural factors (transmission channels): ● ●

Targets process: individual behaviors are emphasized; outcomes: rewards or punishments based on behaviors are emphasized. Transmission channels administrative: formal rules, routines and structures are emphasized (coercive, rewards and punishments); social/cultural: beliefs and norms are emphasized.

He then adds a third dimension – the functionality of corruption control types – to the two dimensions mentioned above. Four functions of controls are incorporated: autonomy reduction of employees, consequence systems such as formal organizational rewards and punishments, environmental sanctioning such as the communication to employees of external pressures for legal and regulatory compliance and social conformity, and intrinsically oriented controls such as the organization developing and supporting in employees their inclination to avoid corrupt behaviors.

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Research companion to corruption in organizations

This produced eight distinct corruption controls, divided into four quadrants: 1. 2. 3. 4.

autonomy reduction; bureaucratic controls, consequence controls; environmental sanctions – legal/regulatory sanctions, social sanctions; and intrinsically oriented controls – vigilance, self-controls.

This framework links corruption control with the broader treatment of organizational control systems. Organizations have various approaches at their disposal to control corruption, and are likely to use each of their corruption control types. The work of Albrecht and his colleagues (2004) suggests that there are three broad strategies for reducing corruption following from their corruption triangle. First one can reduce the opportunities for corruption through better oversight, monitoring and controls. Corporate board members will be selected for their knowledge of financial instruments and their willingness to make the time available for becoming thoroughly familiar with these. Second, one can reduce the pressures that the individuals feel they are under through increasing job security, putting less reliance on only making the numbers at all costs, using a balance score card for evaluating contributions, and changing the compensation arrangements. The application of agency theory here suggests that making the CEO’s and the organization’s interests one and the same would go some way to minimizing top management fraud. Third, one can hire ethical people who will not rationalize fraud as ‘business as usual’ and articulate and inculcate a culture of ethical behavior. Anand et al. (2005) suggest that there are ways to prevent corruption-related rationalization and socialization and reduce these if they already exist. In terms of prevention, they propose fostering awareness of these processes among employees through discussion, training sessions, and the encouragement of introspection into the ways employees go about their job on a daily basis – are there any ethical implications that emerge from this analysis? They also advocate that performance evaluations consider more than just ‘the numbers’. In addition, organizations would benefit if they created an ethical organizational environment. Finally, it is vital that top management serve as an ethical role model. In terms of reducing rationalization and socialization forces if they already exist, Anand et al. suggest first uncovering these forces and making their reversal a critical need. Moving quickly to address these without denying of them, and using external change agents that can bring outside eyes and ears and represent a new way of doing business, can reverse both rationalization and socialization. A PricewaterhouseCoopers Global Economic Crime survey conducted in mid-2007, again focusing on data from 126 Canadian organizations, reported that 36 percent did not have a whistleblower committee, 35 percent did not have an audit committee, 50 percent lacked adequate fraud risk management techniques, and 67 percent did not have specific fraud-related training or expertise. Whistleblowing Dr David Kelley, a UK government expert on weapons of mass destruction, told a UK journalist that Prime Minister Tony Blair’s office had ‘glamorized’ information to provide a reason to go to war with Iraq. Kelley’s name was leaked and his career within the public service came to an end.

Introduction

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Whistleblowing has been viewed as one way to control corruption and fraud in organizations (Mesmer-Magnus and Viswesvaran, 2005). Many government jurisdictions had created laws that support whistleblowing and protect the whistleblower. Organizations have also followed the same path, both encouraging whistleblowing and protecting whistleblowers. Whistleblowers want to bring about change, bringing attention to potential problems. Some whistleblowers have purely altruistic motives. Others may seek personal advantage (revenge, publicity). Some jobs require incumbents to identify unethical conduct by others (for example, accountants, auditors). It has been suggested that individuals with integrity and individuals having higher levels of moral judgment or moral reasoning in the Kohlberg sense (1984) are more likely to be whistleblowers. Whistleblowers can report their observations of misconduct internally or externally, or both. Whistleblowing challenges an organization’s authority structure and functioning but may also help the organization stop activities that may hurt employees, customers, investors and the organization itself. Whistleblowing may also have negative consequences for organizations (for example, damaged reputations, loss of client trust, loss of revenues, increased scrutiny by others). Whistleblowers can face a moral conflict between doing what they believe is the right thing and harming others and their organization. Miceli and Near (1992) suggest that whistleblowers should consider these potential destructive sideeffects of their actions. Interestingly, not all wrongdoing ends up harming organizations. It is also common for whistleblowers to experience retaliation from their employer. Near and Miceli (1985, p. 679) define whistleblowers as ‘organizational members . . . who disclose illegal, immoral, or illegitimate practices under the control of the employer to persons or organizations who may be able to effect action’. Glazer and Glazer (1999) highlight the courage of whistleblowers, individuals who take risks for the well-being of others. Fewer people report wrongdoing to others than those aware of wrongdoing, and most whistleblowers face negative repercussions. Although whistleblowing is generally approved of, it is rarely undertaken. The central questions then become ‘What motivates whistleblowers to jeopardize their career and reputation?’, and ‘Why will some individuals who see organizational wrongdoing blow the whistle on the wrongdoer while others ignore it?’. Dozier and Miceli (1985) see whistleblowing as a form of prosocial behavior involving both selfish (egoistic) and unselfish (altruistic) motives. They propose that certain personality variables interact with perceptions of workplace situations, leading to whistleblowing. They develop a six stage framework to understand whistleblowing decisions: awareness of the wrongdoing; belief that the wrongdoing deserves action; a consideration of possible responses for taking action; whether possible actions are really available; whether whistleblowing is appropriate in light of other possible actions; and considering the costs and benefits of whistleblowing. Gundlach et al. (2003) more recently developed a social information processing framework that also addresses the whistleblowing decision. It includes attributions of the wrongdoing (that is, intentional or unintentional), judgment of responsibility, credibility of the wrongdoer’s explanation, impression management by the wrong-doer, emotional responses by the observer of the wrongdoing (for example, anger, resentment, fear), relative power of wrongdoer and observer, and a cost–benefit analysis of blowing the whistle.

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Research companion to corruption in organizations

Near and Miceli (1985) offer a model of effective whistleblowing; whistleblowing only has benefits when the complaint is valid, effectively handled and results in positive change. That is, the whistleblower wants the wrongdoing to stop. Whistleblowing is effective to the extent that the wrongdoing stops within a reasonable period as a direct result of the whistleblowing. Their model includes predictor variables such as characteristics of the whistleblower (credibility, power, anonymity), the complaint recipient (credibility, power), and the wrongdoer (credibility, power). Support for the whistleblower versus the wrongdoer is suggested to moderate characteristics of the complaint recipient and the organization’s willingness to change. The three sets of predictor characteristics are suggested to have direct effects on the organization’s willingness to change. Near and Miceli also develop a model of situational variables that affect the outcome of whistleblowing. Predictor variables here include characteristics of the wrongdoing (the organization’s dependence on the wrongdoing, convincing evidence of the wrongdoing, legal bases for the complaint) and characteristics of the organization (appropriateness of whistleblowing, bureaucratic structure, the organization’s power in its environment), all suggested to be related to the organization’s willingness to change. The whistleblower’s use of external channels is proposed as a moderator of these two blocks of predictors and the organization’s willingness to change. Miceli and Near (1988) reported that whistleblowing was more likely when whistleblowers held professional positions, were more work satisfied, had longer tenure, were good performers, were male, worked in larger units, and worked for organizations seen by others as responsive to complaints. Miceli et al. (1991) found that males, individuals having lower levels of moral judgment development, and the presence of more observers of a wrongdoing were associated with a greater likelihood of blowing the whistle. Near and Miceli (1996) reviewed the literature on whistleblowers and concluded that whistleblowers were generally not different from others in their organizations (were not ‘crackpots’), and that while retaliation does occur, the incidence of retaliation was relatively low. Some writers use the phrase ‘the banality of corruption’ to refer to the fact that individuals taking part in corrupt and fraudulent acts were otherwise solid churchgoing citizens, not very different from the average citizen. Miceli et al. (1991), in a study of US directors of internal auditing, reported that the directors were less likely to report incidents of wrongdoing if they were not compelled morally, it was not part of their job to do so, they rated their job performance below average, or they were employed in highly bureaucratic organizations. They were more likely to report the wrongdoing to external rather than internal sources if they felt the public or co-workers were harmed by the wrongdoing, the wrongdoing involved theft by lower-level employees, there were few observers of the wrongdoing, or their organization was highly regulated. Who faces retaliation? Although little data are available, what there is suggests no consistent characteristics of the reporter of the wrongdoing (the whistleblower) but some consistent situational factors (for example, merit of the allegation, top and middle management support, use of external channels to report the wrongdoing). In addition, the magnitude of the retaliation was found to vary. Interestingly, whistleblowers claim that retaliation has not deterred them, nor will it. Near and Miceli (1986), in a study of employees in US federal agencies, reported that whistleblowers were more likely to suffer retaliation if they lacked the support of supervisors and managers. Retaliation was also more severe if the wrongdoing was serious and if

Introduction

21

the whistleblowers used external channels. Whistleblowers were more likely to file occupational complaints about the retaliation and to be fired following severe retaliation. Alford (1999) and Martin (2003) offer a more cynical view on the punishment of whistleblowers, seeing it as a way in which organizations can prevent an outbreak of ethical and moral responsibility that flies in the face of how organizations typically conduct their business in an increasingly competitive world. The case of Joanna Gualtieri supports their view. Joanna Gualtieri, in 1998, blew the whistle on lavish waste and extreme spending in the Department of Foreign Affairs. She left this department and sued it for harassment. Ten years later her case drags on. She is on paid medical leave, being diagnosed with post-traumatic stress disorder (PTSD) and depression. Government lawyers have asked her over 10,500 questions and she has submitted to 31 hours of examination in court. Gaultieri has lost her career, her health, a good deal of money and over 10 years of her life. Ironically, millions of taxpayers’ dollars are being wasted to silence an individual who wanted to stop the wasting of public money. James MacDonald, a former investment advisor at BMO Nesbitt Burns, discovered evidence of what he believed to be illegal activity by a senior person in the industry, and reported his concerns in a voice-mail to the Investment Dealers Association (IDA), a self-regulatory agency accountable to the Ontario Securities Commission. Within hours of leaving his message, he received an e-mail message from his branch manager asking MacDonald why he contacted the IDA. Other whistleblowers have reported that it is common to drag out legal proceedings until the whistleblower is emotionally and financially exhausted and then to offer a small settlement including a gag-order so that the whistleblower is prevented from telling the truth at several steps in this process. As mentioned above, more jurisdictions and organizations are embracing legal approaches to whistleblowing. Are these efforts having their intended effects? Near et al. (1993), in three related studies, found that legal sanctions for whistleblowing did not encourage whistleblowing, but legalistic organizational responses did. Some jurisdictions have enacted legislation in which whistleblowers receive a certain percentage of the dollar value of savings resulting from the actions of the whistleblowers. This legislation has been the center of controversy as critics believe it might cause some whistleblowers to themselves commit unethical acts in their pursuit of monetary rewards. Carson et al. (2006) concluded that the benefits of the False Claims Act, amended in 1986, offering financial rewards for disclosing fraud committed against the US government, outweighed the costs. Critics have suggested that offering money to whistleblowers is itself a morally corrupting influence. The US public is increasingly looking to whistleblowers to reduce corporate corruption. The Sarbanes–Oxley Act passed in 2002 provides new protection for whistle-blowers. Corporate codes of ethics Organizations increasingly concerned about corruption have undertaken many efforts to reduce or eliminate it. One such effort is to make the elimination of corruption an organizational priority by placing this goal in a written code of ethics. Schwartz (2004, p. 324) defines a code of ethics as ‘a written, distinct, and formal document which

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Research companion to corruption in organizations

consists of moral standards used to guide employee and/or corporate behavior’. Codes of ethics spell out the values of an organization: what is acceptable and what is not, the standards and values that should guide all employee’s behavior. Behaviors such as conflict of interest, compliance with federal laws, illegal activities, employee misconduct, the receipt of gifts, and misuse of confidential information are typically spelled out. More organizations are now developing written codes of ethics statements; 58 percent of the world’s largest 100 firms have ethical codes (Kaptein, 2004). Interestingly, Enron had a code of ethics, the July 2000 version running to almost 65 pages. It began with a letter from Enron CEO Kenneth Lay assuring employees that Enron conducts business in line with all relevant laws and ‘in a moral and honest manner’. It went on to claim that ‘Enron depends on its people, you and me. Let’s keep that reputation high’. It then went on say that the ethics code was based on several values such as respect, integrity and communication – each defined in a few lines. Clearly having a written code of ethics is not enough. Stevens (2008) reviewed studies of corporate ethical codes published since 2000 and concluded that such codes can influence ethical behavior and employee decision making. Cultures and communication were critical to a code’s success. The corporate ethics code had to be a real feature of the corporate culture and embraced by senior management (Treviño et al. 1999). Communication of the ethics code was vital in discussions between management and employees. Stevens shows that the early evaluations of corporate codes of ethics indicated that they had little value in impacting employee and organizational behavior; they did, however, highlight best practices likely to increase their success and reasons for failure. The later evaluations seem to be showing a more favorable impact of corporate codes of ethics. Although more organizations are developing codes of ethics, having a written code of ethics by itself is never enough. Stevens offers a five-step program to help managers develop ethical codes that impact attitudes and behavior (p. 607): 1. 2. 3. 4. 5.

Engage in a collaborative process to create the code and incorporate revision. Discuss the topics in the code frequently with everyone and debate the organization’s trouble spots. Use the code to resolve ethical issues. It belongs in the boardroom and should be part of corporate strategy meetings. Communicate ethical decisions to all members of the organization by explaining the rationale and how the code was used to arrive at the decision. Reward people who behave consistently with the code.

We are aware of more than one global business organization that indicates in its newsletter occasions when employees have been fired for ethical breaches (without revealing their names), specifying the transgression. Corruption in international transactions is considered to be a major problem in international business operations. Various levels of government, and various countries coming together, have passed legislation to reduce bribery, fraud and corruption in international business. But legislation by itself will not solve this type of corruption. As a result, organizations have increasingly relied on written codes of ethics to influence the attitudes and behaviors of managers as they conduct international business transactions.

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McKinney and Moore (2008), in a nationwide survey of US business professionals, found, using a short case study, that respondents from firms having a written code of ethics were significantly less likely to find international bribery acceptable. In addition, firms that generated revenues from international operations were significantly more likely to have a written code of ethics. But McKinney and Moore did find that 47 percent of their sample of business professionals believed that offering a bribe was acceptable, though the Foreign Corrupt Practices Act passed over 30 years earlier made this a criminal act. Thirty-five percent of respondents declared that offering a bribe was never acceptable. Codes of ethics serve several purposes. At one level, they provide firms with selfdefense by making it clear to employees what behaviors are not acceptable. At another level, they indicate higher values that govern individual actions within a firm. Under the right conditions, codes of ethics are likely to have value in reducing corruption. These conditions include ethical leadership, awareness via constant communication, clear standards, consequences for violating ethical guidelines, open discussion of the code in both formal and informal settings, understanding the code of ethics, and embedding the code of ethics in the living system of the firm (Weaver et al., 2005). Government regulations Governments at various levels – national and local – have passed regulations and laws designed to reduce corrupt business practices. These seem to be having some effect. Since the passing of Sarbanes–Oxley in the US, more organizations that are headquartered there have devoted considerably more resources to working within this set of laws. For government regulation to work, however, these laws must be consistently and stringently enforced, there must be leadership at the top of these enforcement agencies committed to the task, their agencies must have an up-beat, can-do mentality that stimulates and is based on past successes, the existence of clear accountabilities and focus, adequate financial and talent resources, and a seamless operation across various jurisdictions. Monitoring national and international corruption Transparency International (TI), currently headquartered in Germany, publishes an annual survey and ranking of levels of corruption in the public sector in over 150 countries. Given their focus on only the public sector, they define corruption as ‘the abuse of public office for private gain (2006)’ (for example, bribery of public officials, kickbacks in public bidding and procurement, embezzlement of public funds) more likely to be associated with weak anti-corruption policies. These data serve several useful purposes in the reduction of national and international corruption. First, without metrics there is little likelihood for change. These data serve as a benchmark, permitting comparisons across countries. They also make it possible to assess country improvements over time. In addition, they hold various countries’ ‘feet to the fire’, in the sense of publicizing those countries that have high levels of corruption. TI’s Corruption Perceptions Index (CPI) is a composite measure that includes multiple expert opinion surveys from at least three sources that poll perceptions of public sector corruption in various countries. It scores countries on a scale from 0 to 10, 0 indicating high levels of perceived corruption and 10 low levels of perceived corruption. TI’s 2006 report includes data from 163 countries. About three-quarters of the

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countries score below 5, and 71 countries – about half – score below 3, indicating that corruption in these countries is rampant. The most corrupt countries include Haiti, Guinea, Iraq and Myanmar; Finland, Iceland, New Zealand and Denmark are the least corrupt countries. Canada ranked 14 out of 163; the US ranked 20 out of 163. Corruption has worsened in Brazil, Cuba, Israel, Jordan, Laos and the US among others; corruption has lessened in Algeria, the Czech Republic, India, Japan, Turkey and Uruguay, among others. But changes in scores are problematic given the measures used. A country’s score is more important than its rank as ranks change as countries are added or dropped depending on the availability of data. TI recommends a number of actions to reduce corruption, including: ● ● ● ●

promoting, and if needed, adopting corruption specific codes of conduct by professional associations; legal or professional sanctions for legal, financial and accounting professionals that foster corruption; improved training to guarantee that individuals understand their roles and responsibilities; and greater scrutiny and oversight of insufficiently transparent financial centers that may foster corrupt transactions.

In addition, several developed countries (for example, the US, the UK, Canada) have invested tens of millions of dollars helping developing countries create the policy and institutional framework associated with less corruption. Such initiatives are currently being carried out in China and Russia, for example. Are we making progress? Hannah and Zatzick (2008) content analyzed 180 articles in Business Week, Fortune and Forbes magazines, 90 from the five years before the landmark scandals in the early 2000s and 90 in the five years following these scandals. There was no evidence that these scandals had any impact on the use of ethics in the portrayal of organizational leaders. Organizational leaders apparently still must deliver profits above anything else. Working on this volume has been an eye-opening experience for me. I have come to realize the magnitude of the corruption challenge, the difficulties in reducing corruption, and why so little headway has been made to date. But there are some signs of progress being made. These include more media coverage devoted to issues of crime and corruption in organizations, the costs of these activities, more ethics education for students and managers, more organizations developing ‘real’ codes of ethical conduct, and efforts to help developing countries create the policies and institutional infrastructure likely to reduce bribery and corruption. We hope this collection lays out clearly what needs to be done and why acting now is so critical. Overview of the contents Following this introduction, the volume is divided into three parts. In the Introduction, Ronald Burke has provided an overview of the most important issues and questions related to understanding and addressing corruption in organizations. Part I examines the causes of corruption in organizations. Why do individuals engage

Introduction

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in fraud and corruption? Burke (Chapter 1) suggests that a common denominator across most instances of corruption is financial gain fueled by individual greed. Individuals obtain direct financial gain from corruption or indirect financial gain from having their organization appear successful, so they are financially rewarded for their contributions. Depending on the role and organizational level of the perpetrators, financial gains can range from a few thousand dollars to billions of dollars. Not surprisingly, perpetrators often use their fraudulent gains to pursue lavish lifestyles. Money has several symbolic meanings. In an increasingly materialistic world, money signals that the individual is a success. Individuals, supported by widespread and never-ending marketing efforts that encourage consumption, have an almost limitless amount of ‘stuff ’ that they can acquire. Burke suggests that changes at the individual, family, organizational and societal levels will be needed to reduce the importance of greed, and money, in people’s priorities. Joel Lefkowitz (Chapter 2) provides a comprehensive review of the individual and organizational antecedents of misconduct in organizations. He addresses issues of definition, the use of various measures of misconduct – few of which assess actual conduct or behavior – theories of ethical misconduct, the gap between theory and research practice, research design and analysis, and issues of causality. His chapter lays out what we think we know and why we think we know it. It appears that both individual and situational/ organizational antecedents influence misconduct. Lefkowitz concludes with a summary of what we know about ethical misconduct, its antecedents and consequences, and with a cautionary note on the effectives of corporate codes of misconduct. Corruption in business can include high-profile examples as well as milder or lesser forms. Robert Folger, Robert Pritchard, Rebecca Greenbaum and Deborah DiazGranados (Chapter 3) describe a method – conjoint analysis – for measuring perceptions of the seriousness of white-collar crime and corruption in business. They first review the literature on crime seriousness and unethical judgments. Conjoint analysis is then described and applied to an analysis of unethical behaviors. This approach seems to be a promising advance in the measurement of criminal activities. Stelios Zyglidopoulos and Peter Fleming (Chapter 4) address the question of how corruption within business organizations escalates. Is it the result of ‘bad apples’ – corrupt individuals – or ‘bad barrels’ – a corrupt environment? They advocate a middle ground. Corruption in organizations escalates when elements of individual agency interact with an organizational context. ‘Bad apples’ factors include agency, rationalization and individual characteristics (for example, ambition, moral development). ‘Bad barrels’ factors include conformity, rationalization at the system level, ethical distance and organizational complexity. The interaction of these factors makes corruption easy, increasingly severe, and pervasive. But does this ‘perfect storm’ of factors make corruption seemingly unavoidable? They argue not necessarily and suggest potential moderators likely to halt the spread of corruption (for example, catching and punishing ‘bad apples’ early, financial and ethical controls). Part II examines some of the consequences of corruption. Gabriel Eweje (Chapter 5) examines the ethical characteristics of multinational enterprises’ (MNEs’) employee relations in developing countries. Specifically, he addresses various ethical issues relating to labor relations and trade unions in extractive industries in Nigeria, South Africa and Zambia between 1950 and 2000. Data collected in these countries indicate that criticisms against MNEs relating to labor issues and labor practices in developing countries are not

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Research companion to corruption in organizations

lessening. His discussion is lent focus and direction through the analysis of critical incidents from the perspectives of various stakeholders: government, oil and mining companies and leaders of trade unions. Tensions over pay, expatriate employments as against the locals, negotiation rights and employees’ well-being are evident. The argument advanced is that the MNEs operating in the extractive industries of Africa will have to improve their relations with their local employees in order to bridge the legitimacy gaps that exist. Eweje suggests that improved mutual understanding between the MNEs and trade unions is required in order for both actors to have smooth working relationship. Michael Mumford, Alison Antes, Cheryl Beeler and Jay Caughron (Chapter 6) consider the corruption of scientists. They develop and test a model of ethical behavior in scientists that considers three predictors of misconduct: field socialization, practices in the scientists working environment, and scientist personality. They first describe the unique work of scientists, then develop a sensemaking model to understand ethical decision making among scientists. They collected data from doctoral students in various disciplines. Among their findings were the following. First, a work environment characterized by conflict, competitive pressures, and poor coping also increased unethical decision making. Second, some fields of science are at higher risk of unethical decision making. Third, some personality characteristics, particularly superiority/arrogance, exploitative/indifferent, and cynicism were also associated with unethical decision making. Their findings suggest that scientific-based researchers need to monitor both individual scientists and their work environments for sources of potential ethical lapses. Part III considers the nature of choices facing individuals, organizations and societies as they grapple with the challenging task of reducing theft, crime and corruption in organizations. Rosa Chun (Chapter 7) examines the usefulness of three perspectives on ethics – Kantian, utilitarian and virtue – and finds that while all three perspectives have influenced the ethics field, the Kantian perspective dominates. She starts with a consideration of the meaning and types of corruption, moving then to a consideration of antecedents of corruption (for example, political systems, culture). Using the Corruption Perceptions Index from Transparency International, she uses three country case studies that highlight different approaches to corruption and various degrees of success in reducing it. In combating corruption, both government regulations and self-regulation are important. Companies need policies and statements of conduct indicating their ethical values and expectations of how employees should behave. An emphasis on the negative impact that corruption has on the reputation of a country and its businesses will affect the economic prospects for individuals and organizations alike. Ed Freeman, Brian Moriarty and Lisa Stewart (Chapter 8) tackle the thorny question of ethical leadership, which is typically raised following ethical crises. Based on discussions and observations of executives over 25 years, they identify 10 facets of ethical leaders and offer these from the perspective of the leaders themselves. They believe that becoming an ethical leader is relatively simple. It begins with an examination of one’s own behavior and values and taking responsibility for the effects of one’s actions on various stakeholders. The authors provide examples of the kinds of question leaders need to address. They then move to a consideration of developing the next generation of ethical leaders. Organizations need to begin by having discussions on how they benefit their stakeholders and understanding their organization’s values. Individuals should be encouraged to challenge whether or not their organizaiton is living up to its values.

Introduction

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Brian Martin (Chapter 9) then uses a public hearing on the relationship between members of the local government of Wollongong and property developers to tell an engrossing tale of corruption, outrage and whistleblowing. The tale involves sex, money, bribes, threats, criminals, and misconduct. Individuals engaged in corruption use various tactics to limit scrutiny and reduce public outrage. These include: cover-up, attacking critics, reinterpreting the facts (for example, bribes become gifts), use of official channels to make the actions look legal and acceptable, and intimidation or bribing of opponents. Individuals interested in preventing acts of corruption need to respond in ways that address these five tactics. Responses by such individuals include exposure, validation, interpreting actions and behaviors as inappropriate, discrediting ineffectual official channels, and resistance. Martin then applies these tactics in what he terms the ‘backfire model’ to whistleblowers, offering specific recommendations to them. A whistleblower is an individual who speaks out in the public interest. Almost all whistleblowers suffer abuse yet most would speak up again. Whistleblowers are likely to face the tactics of corruption mentioned above and have to respond using counter-tactics as they pursue their outrage. Vikas Anand, Alan Ellstrand, Arpana Rajagopalan and Mahendra Joshi (Chapter 10) consider organizational responses to allegations of corporate corruption. They identify factors (for example, legal, credibility of accusations) that likely influence use of particular responses. The nature of an organization’s response has critical implications for various stakeholders. Five responses are discussed in detail: denial, reframing, deflection, buying time, and acceptance. Organizations can also use several variations of each response. The work is made ‘real’ by the use of actual company examples. The authors conclude with possible antecedents in determining which response is undertaken, and likely consequences of its use. Employee theft is a common and costly problem with up to 75 percent of employees having stolen from their employers at least once. Ed Tomlinson (Chapter 11) considers the evidence for the effectiveness of various interventions aimed at reducing employee theft. Three common approaches have been proposed: a security orientation – reducing opportunities to steal via detection mechanisms (monitoring, surveillance), an individual difference orientation – identifying individuals most prone to theft; and a social orientation – managing social norms and justice perceptions that make theft acceptable. Tomlinson reviews research evidence in each approach, finding that some support is provided for each of the three. Betsy Stevens (Chapter 12) focuses on the role of ethical codes as a vehicle for reducing corruption in organizations. She positions corruption as a historical and international problem. She attributes the continuing and widespread corruption to the fact ‘that companies have been allowed to act recklessly and with abandon’. A corporate crime pays – fines and restitution fall way short of the realized financial gains. She proposes that companies develop and live by an ethical code. Over half of the largest worldwide companies have such ethical codes. The presence of codes both makes companies more attractive to outsiders and communicates to insiders and outsiders that it cares about ethics. Codes spell out the values embraced by the corporation. Stevens identifies conditions associated with effective and ineffective codes. Effective codes become part of an organization’s culture. They convey to employees what actions are appropriate and what are not. Violating the ethical codes has consequences. Communicating these to insiders and outsiders is fundamental for codes of conduct to be effective.

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Research companion to corruption in organizations

Luís de Sousa and Peter Larmour (Chapter 13) review the past, present and future role of Transparency International (TI), an international corruption fighting organization. TI has a challenging mission – ‘a world free of corruption’. It has created national chapters among its initiatives and has successfully pressed the Organization for Economic Cooperation and the United Nations to adopt two international conventions against corruption. TI was formally launched in 1993 and de Sousa and Larmour describe its birth in an engaging and personal way. They identify four stages in the developmental history and evolution of TI. The linking of TI and its national chapters has proved to be a win–win for both. The mandate of TI has broadened over the past few years. TI’s Corruption Perceptions Index is its best-known product. The CPI uses perceptions of various parties to rank countries on a 10 point scale from ‘highly clean’ (10) to ‘highly corrupt’ (1). The CPI, though perhaps imperfect as all global rating systems are, is still the best country corruption metric available. It is transparent, and permits comparisons of country performance over time. Without such a metric there is likely to be little movement; the CPI holds the feet of countries to the fire, a necessary element in creating movement. In the final chapter, Al Rosen (Chapter 14) takes a critical look at corruption in the Canadian financial sector. Although investors may see Canada as a relatively safe place for investments, Rosen sees it differently. He believes that Canada has weak corporate laws, fragmented securities laws, limited monitoring of pyramid scheme financing activities, timid court decisions and almost non-existent prosecution of criminals. In Canada, the fox seems to be guarding the hen house. Rosen provides vivid examples of Canadian financial failures and wrongdoing. He concludes with suggestions for the essential reform of Canada’s financial system. These include politicians openly admitting the problems facing Canada’s financial regulation systems, the creation of a Canadian national securities watchdog and prosecution agency, and the training of effective securities monitors. Note *

Preparation of this chapter was supported in part by York University.

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PART I CAUSES OF CORRUPTION

1

Greed Ronald J. Burke*

The point is, ladies and gentlemen, that: Greed, for lack of a better word is good. Greed is right; greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms, greed for life, for money, for love, knowledge – has marked the upward surge of mankind and greed, you mark my words – will not only save Teldar Paper but that other malfunctioning corporation called the USA. Words spoken by Gordon Gecko in the movie Wall Street (1987), written and directed by Oliver Stone

Introduction Greed – noun – avarice, insatiable desire or covetousness Cassell, 1997

Greed, in layman’s terms, is the selfish desire for or pursuit of money wealth, food or other possessions. It is generally considered a vice and one of the seven deadly sins in Catholicism. A simple desire to increase one’s wealth is generally acceptable in all societies and is not considered to be greed. Greed is the extreme form of this desire. This chapter is about greed. One might ask why a chapter on greed starts a collection dealing with crime and corruption in organizations. I believe that greed underlies all acts of crime and corruption in organizations. A famous American bank robber was arrested once again following a bank robbery. When asked why he continued to rob banks he replied, ‘That’s where the money is’. Crime and corruption seem to be flourishing today in organizations because ‘that’s where the money is’. Consider the following examples. In early 2008, a physician in Hagarsville Ontario was charged with billing the Ontario Health Insurance Plan for Can$2.5 million for services that were never provided. The false billings were submitted to Ontario Hospital Insurance Plan (OHIP) between January 2003 and June 2007. Anthony Marshall, the son of philanthropist Brooke Astor, and his former lawyer have been indicted on charges of mishandling the late socialite’s Can$198 million estate. Marshall’s son accused his father of misappropriating cash, real estate, securities and other property belonging to the socialite. In 2004, the Toronto police force faced its worst scandal in its history. Six officers on a drug squad were charged with 40 counts of corruption ranging from perjury and theft to extortion and assault. Their case came to light when lawyers of criminals complained to the justice system about the treatment of their clients. A Canadian police sergeant who influenced police views about the use of tasers in Canada had received payments from Taser International for taking part in their training courses, and the sergeant and his wife owned a private company that designed and sold holsters for tasers, and received stock shares valued at about Can$5,000. The police sergeant had earlier written an evaluation report on the use of tasers which 33

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concluded that their use was safe and effective. The officer also held stock in Taser International. Five men in the UK were convicted of stealing £53 million (Can$106 million) in Britain’s largest ever cash robbery of a security company depot. The prosecutor told the jury that the group was motivated by dreams of ‘luxury, ease and idleness’. The largest heist, however, was the theft of US$900 million and €100 million from the Iraq central bank in 2003. On the same day, and on the same page (Toronto Star, Saturday, February 28, 2008, B4) there were three stories on white-collar crime: three British bankers were convicted for their part in the Enron fraud; two former directors at Marsh Inc. were found guilty of bid-rigging; and a former labor leader and a former manager at Volkswagen were convicted of bribery. The union leader accepted €2.7 million (Can $4 million) in return for favors to management. The former VW manager offered bribes (jewellery, prostitutes, luxury vacations) to workers’ representatives that cost VW €1.26 million. Vincent Lacroix, founder of Norbourg Asset Management, was sentenced to 12 years less one day and fined Can$255,000, convicting him of 51 charges of fraud by a Quebec court (January 28, 2008). Over 9,000 Quebec investors lost Can$130 million. Lacroix took Can$121 million and made 137 transfers to accounts he controlled. Part of the money was used to pay for a lavish lifestyle: Can$12.4 million was used for 14 properties held in his or his wife’s name, Can$650,000 for a private box at Montreal Canadien’s games, Can$800,000 for luxury vehicles, a boat and air tickets, Can$26,000 for jewellery, and a Can$29,000 credit card total at a Montreal strip club, and at a club in Switzerland. Five executives of AIG Insurance company went on trial for manipulating the firm’s financial statements. They cooked the books to reverse a declining stock price. Lawyers for those charged stated that their clients did not themselves benefit financially. They were charged with conspiracy, securities and mail fraud and making false statements. Their fraud inflated the firm’s financial resources by US$500 million in 2000 and 2001, deceiving investors about the firm’s ability to deal with losses. In Russia, former atomic energy minister Yevgeny Adamac was sentenced to five and half years in prison for abuse of his office and stealing more than US$30 million from the budget. It was estimated that Adamac’s actions caused US$1 billion in damages to the Russian economy. Former Indonesian president Suharto was believed to have stolen billions – between US$15 billion and US$35 billion according to Transparency International. When he left power in 1998, Forbes Magazine estimated his personal wealth at US$16 billion and his family worth at US$81 billion. During this time the International Monetary Fund invested US$43 billion to help the Indonesian economy. Suharto took a portion out of every major business deal under a system of institutionalized bribery and graft, insider contracts and government protected monopolies. His son, Hutomo ‘Tommy’ Suharto, was convicted of corruption in a US$11 million land scam. He later hired two criminals to kill the judge that sentenced him to 18 months in prison. Convicted of murder, he served four years in prison. The elder Suharto was never charged with anything, however. In addition to Indonesia, Japan, South Korea, Taiwan, Thailand and China have all had crises due to ‘crony capitalism’. Macao’s highest-level official ever convicted of corruption was sentenced to 27 years in prison on January 3, 2008, for taking contract kickbacks in the construction industry. He

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was found guilty of taking millions of dollars in bribes, laundering money and abusing his power to help developers get construction contracts. His properties and US$31 million of his assets were seized. The South African National Police Commissioner resigned as president of the Francebased International Police Agency (Interpol) in early January 2008 facing corruption charges in his homeland. Bishop Desmond Tutu, one of South Africa’s most respected citizens, called South Africa’s current leaders ‘corrupt, arrogant and cut off from those they lead’ (March 2008). The Russians pay bribes to pass college or university exams, avoid long lines at passport renewal offices, obtain drivers licences, get children into top universities, and keep children out of the army. One must pay bribes of US$2,000 to US$14,000 to start a new company. Motorists pay to obtain a driver’s licence, inspectors are paid for passing annual auto safety checks, and students pay to receive their academic credentials. Paying bribes is commonplace in Russia. Transparency International ranked Russia 141 out of 180 countries in 2007 in terms of corruption. Only one-third of Russians believe that corruption can be stopped. Hill et al.(1992), in a study of 174 US Fortune 1000 manufacturing firms, reported top management’s emphasis on rate of return was related to Environmental Protection Agency and Occupational Safety and Health Association violations between 1985 and l988. Merck agreed to pay US$671 million to settle claims it overcharged government health programs for four popular drugs and gave doctors fees and gifts so they would prescribe its products (February 2008). Merck said, however, that the settlement did not constitute an admission of any liability or wrongdoing. Angell (2004) observed that the marketing of particular drugs (for example, Vioxx) by Merck without adequate advance research and testing could be explained by pure greed and the inability of company directors to resist this temptation. Drug companies spend US$54 billion on advertising, termed ‘education’ by the industry, to avoid legal constraints on its marketing activities. Kickbacks to doctors – money, goods and services, entertainment – so that they would prescribe a company’s products are common. In addition, drug companies often pay doctors to become consultants, teachers and authors. The Ford Pinto represents the classic case of corporate greed (Strobel, 1992; Gioia, 1980). The Pinto was rushed into production to compete with Volkswagen for the small car market. Ford engineers discovered in pre-production crash tests that rear-end collisions ruptured the Pinto fuel system very easily. Since the assembly-line machinery was already in place, Ford decided to proceed to manufacture the car anyway, although they owned the patent on a much safer gas tank. Over the next decade, Pintos were involved in burning crashes, some resulting in deaths. Ford concluded, on the basis of cost–benefit analyses, that it was cheaper for them to pay death benefits and settle any lawsuits than to retool the production process. Chocolate makers in North America (Hershey, Mars, Nestlé, Cadbury) have been charged with collusion and price fixing from 2002 to 2007, and preventing retailers from offering discounts to customers. Senior executives from these firms met secretly in coffee shops, restaurants and conventions to set prices. They also shared pricing information with one another. The greed of the US banking system is now costing taxpayers heavily. Banks in the

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US lent billions of dollars to individuals who would have great difficulty in paying it back, sometimes misrepresenting the conditions involved, in order to continue to sell their products and services. Managers and individual professionals achieved higher performance and received bonuses based on these suspect transactions. This created the sub-prime mortgage crisis which has devastated the US economy and had lesser effects in several other countries. When these individuals defaulted on their loans, the housing market collapsed, the risk of an economic recession increased and the central banking system (the US government) decided to bail out these institutions to avoid further economic meltdown. Greed can be reflected in small amounts of money being obtained through corruption as well as large amounts of money, as the vignettes above reflect. Greed can also result in some creative and sometimes abhorrent activities. Some examples of the latter would include removing organs from patients without their consent and later selling them to those needing transplants, selling babies from poor mothers to buyers from wealthy countries, and salespeople preying on the elderly, selling them dubious and risky products. Greed can also foster some unique and creative efforts such as when two New York men were arrested on Tuesday, January 8, 2008, after pushing a corpse seated on an office chair along the sidewalk to a check cashing store to cash the dead man’s US$355 social security check. The man had died of natural causes and the two pushing the chair pretended that he was still alive. And Hungarian police arrested 11 people, including two prison directors, on charges of selling special prison treatment and VIP jail cells often for thousands of dollars each. Those paying for special treatment received more visits, special outings, and more comfortable cells. Corruption is fueled by greed. Greed-fueled corruption can benefit the individual; the financial gains from corrupt actions go directly to the individual (Mars, 1994). Greedfueled corruption can also benefit the organization and the individual simultaneously (Braithwaite, 1984). In the former case, the corruption is against the organization and in the latter case, corruption is undertaken on behalf of the organization. The organization benefits since it appears to be more effective and the individual benefits financially as a result of his or her contributions to the success of their organization (Berenson, 2003). When I began thinking about the contents of this chapter I started clipping stories from various media that dealt with crime and corruption in organizations. I stopped doing this after a few weeks since I was becoming overwhelmed by the number of stories that deal with this topic. Crime and corruption has taken on epidemic proportions in all countries of the world. In addition, no group seems to be immune from participating in these illegal activities; in some cases, men and women entrusted with upholding the law (for example, police officers, lawyers, judges, politicians) are as guilty as others. In this regard, Slayton (2007) chronicles the role of greed in fraudulent acts committed by lawyers; Punch (2003), the corruption in police forces. The cost of corporate crime and corruption continues to rise. More than half of Canadian companies reported being victims of crime and corruptions with an average cost of Can$3.6 million per company. There are both obvious and more subtle costs of corruption fueled by greed. Financial costs are borne by organizations that are victims of corruption undertaken by one or more of their employees or by their competitors (Crane, 2005), added costs are then passed on to consumers by organizations, government corruption that results in benefits not being received by tax-paying citizens or by donor countries, and there are costs of

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monitoring and prosecuting individuals charged with corrupt acts. Corruption is the enemy of economic development, particularly in the third world (Doig and McIvor, 1999). Money is lost, and cynicism about development efforts is increased. Corruption is a major factor in the political and economic failures in developing countries. Corruption slows the development of markets, drives away investment, increases the cost of doing business and undermines the rule of law (Elliott, 1997). Corrupt organizations fueled by greed sometimes fail as well – witness the row defunct auditing firm, Arthur Andersen (Toffler and Reingold, 2003). There are also psychological costs to friends and family members of individuals charged with and convicted of fraud and corruption. In addition, there are widespread societal costs in terms of increased cynicism and lack of trust among the general public towards categories of individuals engaging in fraudulent and corrupt activities. Individuals feel betrayed when those held in high regard let them down (Gioia, 2002; Child and Rodrigues, 2003). In the last 10 years, pictures of executives being led out of their offices in handcuffs – the ‘perp’ walk – have become common in the media. Executive fraud and corruption – Enron, Tyco, WorldCom, Adelphia Cable, and Parmalat – seemed to be widespread. Executives took home hundreds of millions of dollars in salaries and bonuses while their companies failed. Shareholders, employees and retirees lost considerable sums of money while Dennis Kozlowski of Tyco bought a US$6,000 shower curtain and threw a lavish toga party for his wife’s birthday. Between 1992 and 2000, the top five executives of the 1,500 largest companies received US$67 billion in stock option profits as their employees were given paycuts, were laid off and saw their pensions reduced (Sisodia et al., 2007). These examples of fraud and corruption reflect organizational cultures that value money above everything else. And sadly, these organizations mirror the larger society. An ethos of consumption, excess and competition is deeply embedded in the American culture and this encourages individuals to bend the rules to achieve their dreams. Sisodia et al. cite a Roper Poll conducted in July and August, 2005 which showed that only 2 percent of investors believed that the CEOs of large companies were very trustworthy, and 72 percent believed that wrongdoing was common in companies. In a different survey undertaken by Harris, also conducted in 2005, 90 percent of Americans believed that large companies have too much influence with government (Birnbaum, 1992). An earlier 2004 survey conducted by Yankelovich (cited in Smith et al. 2004) reported that 80 percent of respondents believed that business was too concerned about making a profit and not enough with responsibilities to employees, customers and the environment, 70 percent thought that, given the opportunity, most businesses would take advantage of the public if they could do so without being found out, and 60 percent believed that well-known established companies could not be trusted to make safe and longlasting products without government standards. A Toronto Star on-line poll asked whether people believed the claims of ‘socially responsible advertisers’ and 91 percent said ‘no’ (Toronto Star, Thursday, November 29, 2007, AA8). Business leaders now are rated lower than politicians and lawyers! Business leaders, to some, represent bad apples, in bad barrels, in bad forests (Colvin, 2004). Have we become a cheating society? Individuals cheat so that they can have an advantage. One of my daughters was taking a university degree in law. The professor asked the students to read a particular case in a book

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held on reserve in the library. When she obtained the book, one of her law student classmates had cut out this document. This may have given this student an advantage. These ill-gotten advantages may in the short run make the individual feel superior and in the long run lead to greater success that ultimately will increase fame and fortune (Callahan, 2004). In the past few years there have been scandals involving use of banned substances in many major sports (cycling, baseball). Baseball players take banned substances so that they can land jobs in the major leagues and make more money, perform better so that they can make more money, and play longer so that they can make more money. Marion Jones admitted to illegal use of banned substances after winning five medals at the Sydney Olympics, medals she parlayed into financial success on the speaker circuit. Winners of the Tour de France can parlay their victory into lucrative product endorsements. Teenage boys take steroids so that they can better compete with their peers in athletics and garner university scholarships. Cheating is commonplace among university students. Interestingly, business school students may cheat more than students in other academic disciplines. Business students have also been shown to be more bottom-line oriented at the end of their educational programs than they were when they entered these programs. Individuals pad their résumés so that they can get better, more high-paying jobs. Individuals pad their expenses to increase financial reimbursement claims. Individuals often cut off the tags of goods and clothing they have bought in another country on a trip away and pretend that they always owned them to avoid paying duty. It has also been suggested that individuals are likely to cheat on the reporting of income for tax purposes if they can get away with it. The Internal Revenue Service in the US estimates that the gap between what people should pay and what they actually pay is between US$312 billion and US$355 billion annually, with about 15 percent not complying with the tax code. Even multi-millionaires have cheated on their taxes – witness the case of New York hotelier Leona Helmsley. In addition, an endless list of companies seem to be restating their company financial reports as they come under the scrutiny of auditors (Albrecht et al., 2007). In a survey conducted by Accenture on insurance fraud, 25 percent of American adults approved of overestimating the value of claims to insurance companies, and 10 percent admitted to submitting claims for items not lost or damaged. This insurance survey provided an estimate of the costs of fraud in the US property and casualty industry of about 10 percent of total claims payments or about US$24 billion annually. Cheating thus appears to be widespread as individuals strive for any advantage that they can turn to short- and long-term benefits, in some cases financial. Cheating may be seen as critical to success in a winner-take-all society (Frank and Cook, 1995). We are mad as hell and aren’t going to take it any more More than 100 countries gathered in Bali on January 28, 2008, for a UN anti-corruption conference seeking ways to recover billions of dollars in assets stolen by corrupt leaders. The head of the UN’s Office on Drugs and Crime that oversees the UN’s Convention against Corruption, Antonio Maria Castor, believes that in some places, corruption is out of control. One hundred and seven countries ratified the UN’s Convention against Corruption which came into effect in 2005. The Convention made corruption a criminal offense and required members to cooperate with one another in cases of graft and to return stolen assets. The UN and the World Bank indicated that between US$1 trillion to US$1.6 trillion

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is lost to criminal activities, corruption and tax evasion. The UN and the World Bank created the Stolen Asset Recovery Initiative to help poor countries recover assets that were taken to richer countries. A billion here, a billion there – soon it begins to add up There was a time when being a millionaire made one a member of an exclusive club. Not any more. For example, a new breed of super-rich has thrived under Vladimir Putin in Russia. Russia now has over 100 billionaires – the US still has the most billionaires estimated at 415, followed by Russia (over 100), and Germany (about 60). The richest man in Russia has estimated assets of US$40 billion. Russian billionaires increased from 61 to 101 in the last year (2007). It did not take long for a decades-old communist country to convert to capitalism in a major way. It has been estimated that the world will have a billion millionaires by 2025 according to Scripps Howard News. The Toronto Star (Wednesday, December 6, 2008) had a story on the super-rich, people with household wealth exceeding US$3 million and how these numbers were projected to grow in 10 years (by 2016). The following increases were projected: Japan, 298 percent; the UK, 276 percent; Canada, 255 percent; Germany, 205 percent; the US, 175 percent; France; 161 percent; and Italy, 118 percent. The richest 2 percent of adults now own more than half the global household wealth according to data accumulated by the Economist Intelligence Unit. The richest 1 percent owned 40 percent of the global assets in 2000. Half the world has a net worth per adult below US$2,200. The US remains the world’s richest nation. In addition, apparently the super-rich are always on the look-out for ways to keep their money. German investigators believe that hundreds of rich individuals hide their wealth in Liechtenstein banks to avoid paying taxes. The German government was said to have paid an informant US$6.17 million for a compact disc containing relevant data from a Liechtenstein bank; the bank claimed that the data had been stolen earlier from one of its units. Some of the richest people in China now want the government to lower their tax rates and change laws favorable to their employees. Marketing to the rich – and the wanna-bes The biggest increase in auto sales in 2007was recorded by the makers of BMWs. Although the Canadian economy is slowing down, as is the case in several other parts of the world, designers at Fashion Week in Toronto in mid-March 2008 were targeting their new styles for the rich. A Millionaire Fair was held for the third year in Moscow (‘From Russia with big bucks’, Toronto Star, Monday, November 26, 2007, AA3); the fair, now five years old, offers those with money the opportunity to go on a gigantic shopping spree for luxury goods and services. Last year Russians spent more that US$600 million buying such things as the world’s most expensive cell phone, a helicopter, top-of-the-range cars, full-length leopard skin coats and the world’s biggest outdoor TV screen. The founder of the Millionaire Fair was quoted as saying, ‘Russians spend their money like Arab sheiks’, the Russian market being in the top three for luxury producing companies, in a country where the average monthly income was below $400.

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Belk and his colleagues (Belk, 1995, 2001, 2008; Belk et al., 2003) propose the existence of a global consumer culture that rests on envy. Given the anonymity that exists in most urban settings, individuals can only envy what people have since they know nothing about the traits and abilities, or family and friends of others. In addition, marketing processes contribute to the creation of envy by constantly promoting products and services, or lifestyle features, that we associate with people we envy. As a result we come to desire anything that others have that we do not. Belk (2008) believes that global marketing increasingly focuses the world on consumer goods that others have and that we do not. Most consumer envy is seen as benign; it emphasizes a product itself and possible ways for us to get it (more striving, saving and sacrifice). Marketers use promotion to create consumer envy and these promotions appear in a variety of media. Viewers of these promotions then compare themselves with others – beautiful people, beautiful products and beautiful places. If we buy these products we will be like them. We buy something because we think that others are enjoying it; the mass media show us lives that we believe are more attractive than ours. And buying these products may serve to lessen our envy of others. Chadha and Husband (2006) show how these forces have infected Asia, creating a love affair with luxury. Blame Adam Smith Adam Smith, in The Wealth of Nations (1776), proposed that the motivational force for progress and growth was ‘selfishness’ – the desire to make more money benefited everyone because this extra money produced more jobs and sales. The ‘Greed is good’ speech that began this chapter might be seen as related to Smith’s conclusions about human nature. He believed that, in general, honest people able to freely pursue their own interests would fare better than they would if someone dictated what was good. Individuals pursuing their own interests would reduce inefficiencies and allocate resources where they would most benefit the larger society. Some interpreted his work to suggest that greed was good and that unlimited greed was even better. But Smith also thought that such ‘selfishness’ was self-regulating or at least had some limits. Smith’s earlier book, The Theory of Moral Sentiments (1759), is less well known, but in it he stated that individuals would also be interested in the well-being of others. The American Dream One hundred years ago, Americans believed that with hard work they could better themselves – the betterment usually couched in economic terms. In addition, they were personally responsible for whatever success occurred. The phrase ‘American Dream’ first appeared in 1931 (Rifkin, 2004, p. 13). Enthusiasm, optimism and hope are important qualities among Americans. They embrace the notion that through one’s efforts, consistent improvement can take place; they can go from rags to riches as reflected in the Horatio Alger story. The work ethic was highly valued, discipline and hard work being extolled. Sayings such as ‘Idle hands are the Devil’s workshop’, ‘A stitch in time saves nine’, and ‘Never put off till tomorrow what can be done today’ reflect these values. But the American Dream may have lost some of its lustre, no longer being admired as much as it was previously. Young Americans are convinced by the media to seek instant gratification (Lasch, 1979). They are now less interested in working hard and postponing gratification for later rewards. As a result, more Americans buy now and

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pay later; more are in debt (Schor, 1998, 2004). More buy lottery tickets; more gamble. Most Americans under 30 believe that they will become rich but by luck not the result of hard work. Putnam (2000) observed a decline in the rate of American participation in voluntary activities. He attributed this to increased time and money pressures and the pursuit of personal pleasure, and less interest in giving time to others. Americans seem to be increasingly looking out for Number One (Frank, 1999). Two hundred years ago, America was seen as the land of opportunity. Upward mobility was central to the American Dream. But upward mobility in the US has slowed considerably over the past 30 years (Rifkin, 2004). America has among the highest levels of income inequality in the world (Milanovic, 2005). Income growth in terms of compensation ranks the US near the bottom of the industrialized world. Rifkin believes that they are not pursuing the American Dream but the American Daydream. The American Dream – daydream or nightmare? America has among the highest levels of poverty among the developed nations. The US also spends a smaller proportion of its GDP to redistribute income through transfers and other social benefits than almost any other developed country. The US minimum wage is a smaller percentage of the average country wage than in almost all other developed countries. The US is one of only a few countries that does not legally require maternity and paternity benefits. Finally, the productively gap between the US and other developed countries has shrunk considerably (Rifkin, 2004). Although Americans and Europeans are similar in terms of productivity, per capita income in Europe is about three-quarters of that in the US. A significant factor in explaining this difference is that workers in Europe work fewer hours. Europeans have chosen more leisure rather than longer work hours and higher incomes (Hayden, 2003). France has legislated a 35-hour work week. The average vacation time in Europe is six weeks. US employers are not required by law to provide vacation time, but a two-week vacation has become the norm in most sectors. What is the point of making more money if you do not have the time to enjoy it? Americans are now working more hours as workers in other countries work fewer hours (Rifkin, 2004). American parents complain that they do not have time with their children, always feel rushed, and rarely have any free time. A survey of 5,000 UK workers in 2005 showed that 60 percent would not use their full vacation time. Americans do not use 20 percent of their paid time off. American executives do not take all their vacation time (Robinson, 2003). Does 25 percent more income bring greater happiness to compensate for giving up time for family and leisure? The American Dream is based too much on personal material advancement and too little on concern with more universal human welfare. The European Dream, though newly emerging, values quality of life ahead of accumulating wealth, and sustainable development over unfettered growth. Let’s get rich quick The millionaire mania, a get rich quick version, has struck in North America. It is premised on the belief that everyone wants to be wealthy, to go from rags to riches, to achieve the American Dream. There are a few ways to become rich. One is to work hard and for long hours,

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performing one’s job at a high level and obtaining the career and financial rewards that accompany high levels of performance. A second way is to inherit wealth from rich parents who themselves likely worked hard, saved, and invested over a long period of time. A third, the let’s get rich quick route, is to look for opportunities to ‘strike it rich’. In some countries this route has become increasingly popular. Although not unique to North America, this route has blossomed there. Getting rich quick has different features. One involves casinos and lotteries. Almost every American state and every Canadian province has developed lotteries where for one dollar individuals have a remote chance of becoming a millionaire. Fewer American states and Canadian provinces have built casinos, where individuals can place bets against considerably high odds of winning a larger amount of money. People in Toronto will fly to Las Vegas or Atlantic City for weekend gambling junkets. A second ‘get rich quick path’ involves spending a day or two at a seminar led by a ‘financial guru’ who will promise huge financial gains from a number of initiatives: buying run-down houses, fixing them up and then selling them; buying a condo and when it is finished, selling it for profit. Donald Trump and Tony Robbins have become popular speakers at such events, particularly those focusing on real estate, and Loral Langemeier, like other gurus not only puts on seminars, but has also developed materials that individuals can access on-line – for a price of course. A newspaper advertisement for one such event stated ‘One weekend can make you a millionaire’; others stated: ‘Canada’s real estate “gold rush” triggers investor bonanza in 2008’, ‘Canada’s king of real estate shows you how to own a million dollars in property in the next 60 days’, and ‘Now’s the time to become a millionaire’. There has also been a corresponding increase in ‘do it yourself’, get rich quick investment books. These include: The Automatic Millionaire by David Bach, Secrets of the Millionaire Mind by T. Harv Eker, The Millionaire Next Door by Thomas Stanley and William Darby, Think Like a Billionaire by Donald Trump, The Millionaire Maker: Act, Think and Make Money the Way the Wealthy Do by Loral Langemeier and One Minute Millionaire by M.V. Hansen. A related trend has appeared on North American television over the past few years. This trend involves people giving things to other people; the gifts can be expensive and the recipients can be people in need. The audience at the Oprah Winfrey show often receives small gifts (food, samples of beauty products) and large gifts (cars). In addition, Winfrey launched a new TV show in 2008 in which contestants have to give away money to worthy causes and the winner that does the most good will receive $US1 million. There is also a TV show, Extreme Makeover, that has been on for a few years in which people get together and build a house for a family in need and then give it to them. There has also been an increase in TV programs that show people winning large sums of money, in some cases US$1 million. These include: Deal or No Deal; America’s Got Talent, and Who Wants to Be a Millionaire? Lifestyles of the rich and famous In The Great Gatsby, F. Scott Fitzgerald wrote ‘Let me tell you about the very rich. They are different from you and me’. Ernest Hemingway is said to have responded: ‘Yes. They have more money’. Besides having more money, the rich may really be different or at least be portrayed as being different in the wider culture.

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Although it may have started slowly, there has also been a corresponding increase in TV shows glamorizing wealth. The early ones were Life Styles of the Rich and Famous hosted by Robin Leach; Dallas, featuring the lifestyle of the Ewings; and Dynasty profiling the lifestyle of the Carringtons. More recently we have Donald Trump’s The Apprentice, in which the theme song at the opening begins ‘Money, Money, Money’, accompanied or followed by pictures of limousines, corporate jets, Manhattan skyscrapers, and ‘The Donald’ entering the boardroom from his Trump Tower penthouse. Over the years, shows such as Beverly Hills 90210, The Hills, Sex and the City, Desperate Housewives, and Dirty, Sexy, Money make it very clear how people with money appear to live. The Globe and Mail (Thursday, December 6, 2007, A2) reported results of a survey of how multi-millionaires spend money at Christmas. Gifts included: ● ● ●

a custom-made jewel-encrusted saddle made for a pony; a US$30,000 designer dress for a 4 year old; and a US$200,000 restored classic Camaro.

More than 60 percent said that they would travel by private jet over the holidays, and over one-third give ‘jet cards’ as gifts. The very rich planned to increase their holiday spending by 17 to 67 percent. This sounds closer to Fitzgerald than to Hemingway to me. Ironically, a study conducted in the UK reported that billions of dollars were spent on unwanted Christmas gifts. The British wasted US$4.7 billion on unwanted Christmas presents. These gifts gather dust in closets (39 percent), or were later sold on the internet, (28 percent). More than a quarter of UK respondents could not remember what any one got them for Christmas last year. Half of the men and 43 percent of the women could not remember what their partners got them last year. More than 75 percent of the 1,400 adults surveyed said they wasted up to US$100 on unwanted gifts. But even the rich have to cut back when the economy sours. A story in the National Post (Thursday, March 27, 2008, FP3) noted that wives of two senior investment bankers at Bear Stearns cancelled pricey home decorating projects two days after the firm’s near failure. It was also much easier to get a table at top restaurants at the last minute. Tens of thousands of financial service employees had lost jobs in the first three months of 2008. There have also appeared several publications listing things people should do before they die, spawning a whole publishing segment (Schultz, 2003). Schultz’s 1000 Places to See before You Die has now spawned a publication niche extending to 1000 Places to See in Canada before You Die, and 1000 Things to Do Before you Die. But does seeing things really matter? Izzo (2005) interviewed 235 people 60 years of age and older who were identified as ‘wise elders’ by thousands of people on his e-mail list, as to things they would like to do before they died. He found a few common themes: make love a priority, live in the moment, and understand that happiness comes from inside. Almost none of the ‘wise elders’ mentioned reading a book telling them about places you must see or the things you must do before you die. Instead, most of the secrets one needs to know before you die involved ‘what did I give’ not ‘what did I take’. Is it any wonder then that the US has become the most consumption-focused society in the world? And both Russia and China are gaining ground. There are obvious country

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differences in their approach toward money. Famed Canadian writer Northrop Frye once noted ‘Americans like to make money, Canadians like to count it’. Greed among children – the Britney Spears effect Chaplin and John (2007) conducted a study of materialism and self-esteem among young and teenage children, testing the hypothesis that the weaker the self-esteem of children the greater would be the desire for the material trappings of adolescent popularity. Teenagers today want $500 purses and $250 pairs of jeans. Chaplin and John collected data from 150 young people aged 8–9, 12–14 and 16–18. Youngsters were asked about their self-esteem and items that would make them happy. Low self-esteem individuals would value cars, money, jewelry and sports equipment; high self-esteem individuals would value family, friends, and outdoor activities such as camping. They found that low self-esteem was associated with higher levels of materialism only for the 12–14-yearold group. They also noted that offering children praise in itself was associated with less materialism. Schor (2004) observed that children believed that their clothes and brands described who they were and defined their social status. Pretending that you are rich I am not sure it is good news, but it is possible to look rich even though you aren’t. There is a proliferation of counterfeit goods that has grown into a black market business worth billions of dollars (Phillips, 2005). These include fake or knock-off products such as Louis Vuitton, Nike, Chanel, Gucci, Versace, Armani, Rolex, Microsoft, Pizer and Prada; and countless DVDs and CDs which emerge in some stores and on some street corners even before appearing in legitimate theaters and retail outlets. Producing and distributing these fake or fraudulent products is a crime that harms legitimate businesses through lost sales, governments through lost taxes, and artists through the stealing of intellectual property. Most of the fake goods sold in Canada are manufactured in China. The distribution of these fake products raises an important cultural issue. Do individuals want to live in a society where the sale of fake things is acceptable? Is it more important for some individuals to flash around a logo and appear as though they have money? Or is it more important to have something of quality that is real? But unfortunately most people cannot afford the real thing so it is likely that this black market in fake goods will continue. Money makes the world go around, and around, and around At a meeting of the college faculty, an angel suddenly appears and tells the head of the philosophy department, ‘I will grant you whichever of three blessings you choose: wisdom, beauty, or $10 million.’ Immediately, the professor chooses wisdom. There is a flash of lightning, and the professor appears transformed, but he just sits there, looking down at the table. One of his colleagues whispers, ‘Say something.’ The professor says ‘I should have taken the money.’ Thomas Cathcart and Daniel Klein, Plato and a Platypus Walk into a Bar . . . Understanding Philosophy through Jokes (New York: Abrams Image, 2007)

Why would anyone need or want money? There are a lot of needs that money meets. At the most basic level, money is necessary for survival in that it provides food, water,

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clothing and shelter. Money also provides for one’s family and their well-being. In addition, money allows one to participate in activities that provide pleasure such as eating in restaurants, going to movies and concerts, buying books for personal enjoyment and learning, going on vacations for rest, relaxation, new experiences, learning and adventure. Money can also serve as a reward for investing in education, for outstanding performance and as a benchmark that permits comparisons with others. Money can also be used to help others by giving to those in need. Money can also serve as a vehicle for bolstering one’s self-esteem; to the degree that an individual is conspicuous about his or her money, others will look up to this person as somebody of some status and worth, and in turn the person can value themselves. The work and spend treadmill Schor (1991) believes that employees get trapped in a work and spend cycle; workers work more hours to obtain more income to acquire more possessions in order to feel successful. In addition, organizations fare better when employees work longer hours; as a result, this is expected from employees. Increasing levels of job insecurity also make it difficult for managers and professionals to say no. Keeping up Golden (1998) writes that actual work-hour behavior is a function of three interacting factors: hours desired by the worker, hours demanded by the employing organization and the wider institutional environment in which hours decisions are made (legal constrains, common practice, economic conditions). George (1997) believes that workers are increasingly influenced by marketers of goods and services to choose income over leisure and work longer hours as a result. Employers overvalue long hours, particularly when other objective measures of productivity are not readily available. Employees respond as individuals who prefer working long hours, in order to look good to their managers. Employers respond by demanding even longer hours, creating what Rebitzer and Taylor (1995) term a ‘rat race’. Landers et al. (1996), in a study of two law firms, found that promoted associates worked very hard, their track record of billable hours being very important in promotion decisions. When organizations use willingness to work hours as an indicator of valuable characteristics, it leads to a ‘rat race’ mentality. Materialism America represents what ambition and hard work can create. Over the past 50 years, America has become a country of affluence – the richest country the world has ever seen. Freedom, self-interest and optimism have combined to fuel this material achievement. Whybrow (2005) believes, however, that this compulsive drive for more is now having negative consequences for both health and happiness. There is increasing evidence, which he cites, that increases in material wealth have not increased individual well-being (Csikszentmihalyi, 1999; Diener and Seligman, 2004). Families are falling apart, more Americans are now obese, time is in short supply, more are demand driven and debt burdened, income inequalities have increased between the haves and the have-nots, and increasingly drugs are being used to address stress-related disorders. Americans have come to equate material success with personal satisfaction and to develop an insatiable appetite for more. As indicated above, the ‘good life’ is portrayed on television and in

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magazines, and this life, according to surveys in the late 1980s, would require twice the US mean household income at that time. More people are now buying the American Dream on credit. Marketers define materialism as an individual difference factor related to the belief that income, wealth, and material possessions are important in achieving happiness in life (Sirgy, 1998, p. 244). Materialists have achieving and maintaining a certain standard of living as an important, perhaps the most important, life goal (Belk, 1985). Sirgy (1998) proposes a theory of materialism and overall life satisfaction. Life satisfaction is partly determined by one’s satisfaction with one’s standard of living. Satisfaction with one’s standard of living is determined by one’s actual standard of living compared to a set goal. Materialists place high value on material possessions, wealth and income. Materialists experience a greater dissatisfaction with their standard of living than do non-materialists, which in turn, lowers their satisfaction with life. Materialists experience greater dissatisfaction with their standard of living because their standard of living goals are unrealistically high. These goals are influenced by perceptions of wealth, income and material possessions of others having more (upward social comparisons). Materialists also compare their own standard of living with others based on income and work effort, and conclude that others have more income and work no harder than they do. These comparisons lead to feelings of unfairness, envy, and anger. Materialists may also spend more money than they earn, with debt ensuing as a result. Not surprisingly, there has been a steady increase in materialism as displayed in magazine advertising over the past 80 years surveyed (Belk and Pollay, 1985). Materialism (Sirgy, 1998) is a condition in which the material life domain is given higher priority over other life domains. Several studies have reported a negative correlation between materialism and happiness (Dawson and Bamossy, 1991; Richins and Dawson, 1992; Wright and Larson, 1993). Why should there be a negative relationship between materialism and happiness? Sirgy (1998) suggested that materialists indicate dissatisfaction with their standard of living because they set unrealistically high material goals which they cannot reach. Since they cannot reach these goals, they are dissatisfied with their current standard of living which then spills over to their life in general. Kasser and Kanner (2003), in an edited collection drawing on a diverse body of writing, show that consumerism and its wider culture have both powerful and often negative effects on individuals, families and societies. Advertising, consumerism, materialism and capitalism itself contribute to these wide-ranging effects. Kasser (2002) reviews the scientific evidence relating materialism and happiness. The pursuit of wealth not only does not lead to happiness, it actually makes many people unhappy, even when they are successful in achieving wealth. Kasser believes that materialism does not directly cause unhappiness but instead both reinforce each other. Unhappy people are often the most materialistic. He argues that insecurity leads to materialism and that the pursuit of materialistic goals not only does not increase happiness but also diminishes close relationships, health and the happiness of others in their close relationships. Kasser makes an important distinction between extrinsic and intrinsic aspirations. Extrinsic aspirations include wealth, fame and image; intrinsic aspirations include meaningful relationships, personal growth, and community contributions. Research has

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shown that having strong relative aspirations for extrinsic outcomes was associated with poorer mental health outcomes (Kasser, 2004). Having a stronger preference for intrinsic outcomes was associated with positive mental health. Self-reported attainment of intrinsic aspirations was associated with well-being; attainment of extrinsic aspirations was not. People with strong materialistic values tend to have less close interpersonal relationships and connection with others. They are also less interested in supporting their communities and bettering the world. Instead, they see others as objects to be used. In addition, such individuals feel more pressure and stress in their lives and report a stronger sense of being controlled. Richins and Dawson (1992) developed a measure of materialism with three components: acquisition centrality, acquisition as the pursuit of happiness, and possessionsdefined success. High scores desired a higher level of income, placed greater emphasis on financial security and less on interpersonal relationships, preferred to send more on themselves and less on others, engaged in fewer voluntary simplicity behaviors, and were less satisfied with their lives. While materialism generally has negative connotations, not all aspects of materialism are bad. The desire for goods may cause employees to work harder or for longer, increasing their income and standard of living (a strong motive to succeed and be self-sufficient). High levels of consumption by individuals can increase the profitability of organizations, leading them to invest more heavily in new technology and research and development, which in turn leads to higher levels of productivity and new products and ultimately to higher living standards. Materialists place possessions and obtaining them at the center of their lives. They pursue a lifestyle in which high levels of material consumption become their goal. Materialism provides them meaning in life and activities for their daily living. Materialists worship things. Materialists view possessions and their acquisition as critical to their happiness, satisfaction and well-being. Materialism is the pursuit of happiness through acquisition. Materialists judge their own and others’ success by the number and quality of their possessions, their consuming lifestyles, the money things cost rather than the satisfaction they bring. Material well-being is evidence of success; possessions confer status and project a desired self-image. Richins and Dawson (p.307) define it as a value that guides people’s choices and conduct in a variety of situations including, but not limited to, consumption arenas. With respect to consumption, materialism will influence the type and quantity of goods purchased. Beyond consumption, materialism will influence the allocation of a variety of resources, including time. A materialist, for instance, might choose to work longer hours and earn more money instead of using that time for leisure activities.

They found the following results: 1. 2.

Respondents high on materialism felt that they need more income to satisfy their needs than those low on materialism. Respondents high on materialism rated ‘financial security’ higher, and ‘warm relationships with others’ and ‘a sense of accomplishment’ lower.

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3.

Respondents high on materialism would spend more of an unexpected $20,000 windfall on themselves and less of this windfall on charitable causes, friends and family and on travel than those low on materialism. Those high on materialism scored higher on a non-generosity scale than those low on materialism. Those high on materialism were less likely to support a voluntary simplicity lifestyle. Those high on materialism were less satisfied with their lives (measured by four facets of life satisfaction and a global assessment). Those high on materialism scored lower on a measure of self-esteem.

4. 5. 6. 7.

Individuals high on materialism value possessions that are related to appearance and status more than ones that are more instrumental in nature. Individuals low on materialism value possessions that have a symbolic interpersonal nature. High materialists are bound to be less satisfied with family and friends and have less fun and enjoyment as a consequence (Ryan et al., 1996). Belk (1984, 1985) views it as valuing material possessions and being envious of others who have a material object that you do not. These definitions downplay the spiritual dimensions of human existence (Richins and Dawson, 1992), and non-material values (such as character, friendship and romantic love). Focusing on the material may even reduce the pleasure one might get from making money by diminishing the link between the material and the spiritual or non-material (Needleman, 1991, 1998; Lane, 2000; Myers, 2000, 2003). Money by itself is not harmful; in fact it is beneficial in satisfying a variety of needs and values. Money is harmful if it is used to fill needs it cannot fill. Money cannot buy happiness, love or character. Money cannot reduce self-doubt because a lack of money is not the cause of self-doubt or low self-esteem (Locke et al., 1996). Kasser and Ryan (1993) report the results of three studies showing that placing a higher value and expectancy for wealth and money over other self-relevant values and expectancies was associated with lower levels of adjustment and well-being. Financial success is the core of the American Dream; people come to believe that money leads to happiness and success. But some suggest a dark side to this dream: pursuing wealth comes to be seen as empty or shallow and limiting relationships with family, friends, community and one’s self-actualization (Fromm, 1976). Fromm makes the distinction between ‘having’ – a consumption orientation – and ‘being’ – an experiential orientation to life. Money is an external incentive for behavior that is contingently given; this limits self-actualization, resulting in greater distress. Deci and Ryan (1991) reported that personal strivings for power (desire to control, impress or manipulate others) were associated with more negative affect and greater distress. Kasser and Ryan (1996) replicated and extended their earlier findings (1993) in two other studies. In one, they found that the relative importance and efficacy of extrinsic aspirations (financial success, social recognition, appearance) were associated with lower vitality and self-actualization and more physical health symptoms. The relative importance of intrinsic aspirations (self-acceptance, friendship, sense of community, physical health) were associated with greater vitality and self-actualization and fewer physical health symptoms. In the second, intrinsic aspirations were found to be associated with lower levels of narcissism and greater daily positive affect, whereas extrinsic

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aspirations were associated with higher levels of narcissism and less positive daily affect. They offered three reasons why extrinsic aspirations were negatively related to wellbeing. First, extrinsic aspirations suggest a more general neuroticism and emotional insecurity. Kasser et al.1995) report that students who valued financial success had parents who were less nurturing and more controlling. In addition, students from less advantaged backgrounds placed a higher value on financial success. Thus financial aspirations seem to be a compensation for feelings of insecurity developed early in life, causing one to seek external rewards (praise, recognition, money) to gain a sense of self-worth and approval. Second, extrinsic aspirations lead to activities that distract one from behaviors associated with self-actualization and happiness. Third, people will generally fall short in achieving their extrinsic aspirations, resulting in frustration, stress and psychological distress. Deckop et al. (2007) investigated the relationship between materialistic values and work-related personal well-being in a longitudinal study involving 274 employed men and women. They found that materialistic values were negatively associated with a number of indicators of quality of working life, including affective organizational commitment, intrinsic and extrinsic reward satisfaction, job satisfaction, career satisfaction and job burnout. Affluenza De Graaf et al. (2000) use the term ‘affluenza’ to capture a disease resulting from overconsumption that has reached (to them) epidemic proportions in many developed countries. They define it as follows: ‘Affluenza. n. a painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more’ (p. 2). Afluenza is widespread in North America and is now being spread to other parts of the world. Affluenza influences levels of personal debt, friendships, families, communities and the environment. We become addicted to material possessions, spending and buying much more than we need. We become very materialistic, greedy and selfish – values that diminish family friendships and generosity (Schor, 1998). More North Americans are now filing for bankruptcy. They are working more hours per year than people in any other country. They are building shopping centers at an increasing rate, now having more shopping malls than schools. Solid waste production continues to increase. A majority of workers would like to spend more time with their families. American CEOs now earn 400 times as much as the average worker, a tenfold increase since 1980 (DeGraaf et al., 2000). Symptoms of affluenza include a passion for shopping, best described as a ‘spending binge’; increasing use of credit cards, resulting in increases in both consumer debt and personal bankruptcies; an increase in material possessions coupled with higher material expectations; greed fueled by a ‘keeping up with the Joneses’ mentality compounded by always higher expectations; congestion – both inside and outside the home, possession overload and time famine; sleep deprivation; the undermining of family life and weakened marriages; marketing to children; a decline in citizen and community participation and volunteerism; feelings of emptiness and boredom and a hunger for meaning; increasing gap between rich and poor and stigmatizing of the have-nots; a depletion of the earth’s resources; pollution of the environment; increases in a variety of addictions; and higher levels of dissatisfaction.

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What are the causes of affluenza? De Graaf et al. believe that, while not a new disease, it has been spreading faster than before over the past 50 years following the Second World War. This spawned planned obsolescence, mass consumption, instant and easy access to money through loans and credit cards, expansion of shopping malls and marketing through television spurred by the advertising industry. What can be done to reduce affluenza? There are some signs that millions of people are attempting to simplify their lives through downshifting (Segal, 1999). More people are knowledgeable about environmental damage and the costs of this, and are beginning to share this concern with others. Efforts are underway to increase citizen participation in local and national governance. Recycling efforts have increased, spreading the voluntary simplicity program through marketing and advertising, encouraging government to pass simplicity-friendly legislation (for example, reduced working hours, graduated retirement options), using broader indicators of societal well-being (for example, perceived quality of life, voter participation rates, number of children living in poverty) as well as costs (for example, of crime, air pollution and family breakdown). Can money buy happiness? The psychology of money has been a neglected topic. Money is a taboo subject (Furnham and Argyle, 1998). Yet the dream of becoming rich is surprisingly common. Money brings security, freedom, a sense of power, and is a sign of success. There are two different themes in the writing about money. One is that money is the fruit of one’s labor and should be enjoyed and used to benefit others. The other is that the relentless pursuit of money leaves the pursuer alone and unhappy. Money has many definitions, meanings and uses. Children have money and learn about money at an early age. We need some money for acquiring possessions. Yet many of our most-valued possessions have little monetary value. Some possessions are necessities, in some cases to survive (food, housing), and in other cases to make life more comfortable (telephone, washing machines). Some possessions indicate status (jewelry, paintings). Some possessions are luxuries. Things that were once luxuries (TV sets) can become necessities. Many believe that their possessions will make them happy, but this is often not true (Easterbrook, 2004). Possessions are seen as a way to maintain life, a way to enhance life, and as symbols. Here are some things we know about money (Diener et al., 1999): 1. 2. 3. 4. 5.

People in wealthier nations are happier than people in poorer nations. Increases in national wealth within developed countries have not, over recent decades, been associated with increases in happiness. Within-nation differences in wealth show only small positive correlations with happiness. Increases in personal wealth do not typically result in increased happiness. People who strongly desire wealth and money are less happy than those who do not. Thus, avoiding poverty, living in a rich country and emphasizing goals other than wealth are associated with higher levels of happiness.

There is only a very small correlation, generally around 0.15 to 0.20, between income and satisfaction. Several hypotheses have been offered to explain this low relationship. These include: adaptation – we get used to the income very quickly; comparison – there is

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always someone richer than you are; alternatives – as one gets more money, other things (leisure, family) seem more valuable. There are other important sources of happiness than money – family, friends, leisure, health, and freedom from worry. Once people have money, they can then worry about things other than money. There is, however, a strong relationship between income and happiness among those with lower incomes. For this group, money buys the things they need or want. Why don’t rising incomes make everybody happier? Although standards of living have increased over the past 50 years, people do not report greater satisfaction (Diener and Seligman, 2004). This is somewhat surprising since rich people are generally more satisfied than poor people. One might therefore expect that as a country grows richer, both rich and poor would be happier (Easterlin, 1995). This presents a paradox: an individual who becomes richer becomes happier, but when a country becomes richer no one seems happier. One reason is habituation. People quickly adjust to changes in standard of living; short-term improvements in happiness fade quickly. What was once considered to be a luxury is now seen as essential. A second reason is that people tend to compare their situation with others – a ‘keeping up with (or ahead of) the Joneses’ phenomenon. People like to feel better off than others – their income relative to others, as opposed to their absolute income. Thus efforts by people to become happier by working harder to earn and spend more are self-defeating; people make more money but since others do too, they are not any happier (Diener and Biswas-Diener, 2002). While money may be associated with happiness, if one wants to stay happy it is better to compare oneself with others who are poorer. People tend to compare themselves with others (peers) of the same age. Their happiness depends on the relative success of this group, leading to a ‘keeping up with the Joneses’ mentality, and a need to continually increase one’s income. This suggests that continued income growth in rich countries is irrelevant to how happy people are. Instead, continued income growth is more likely to lead to increases in consumption. In addition, working harder to be able to afford more material goods can even make people unhappy if they do not have enough leisure time. People value their income in comparison to that of others, but value leisure time even more absolutely. In developed countries, people tend to work too hard to consume more material goods, but in the process consume too little leisure. Easterbrook (2004) examines what he terms ‘the happiness gap’; beyond a certain point – when people’s basic needs are met – more money does not increase national happiness. America in 2007 was richer than America was in 1977. Americans are now living longer in bigger houses with more electronic gadgets, but their happiness levels remain the same. Frank (2007) proposes that rising wealth leads to self-defeating consumption contests. People want bigger houses since their friends all have bigger houses, but they get little happiness from them as their friends also have them. And they have added debt to buy this house, making them anxious; they come to regret sacrificing more leisure and other things by working harder in order to buy the house. And moving to the suburbs to get a bigger house may add to commuting congestion and longer commuting time. This also creates more pollution and elevated levels of stress. People compare the past with the present. The past was good; people expect the present to be even better, but it isn’t. Their reality does not match what was promised. Higher levels of income did not buy happiness for them.

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Instead, people get satisfaction from relationships with family and friends, the love they give and receive, the meaning they get from work, service, hobbies and religion. Happiness depends heavily on individual character (some people will always smile while others will always complain), and national culture (Swedes and Danes are happier than Americans, who in turn are happier than the French, the Germans and the Italians). Another way to view money is to consider the gap between the high- and low-income earners within and across countries and over time. Economic theorists have suggested that over time, capitalism would reduce the gap between the rich and the poor. Milanovic (2005), using enormous amounts of data, shows convincingly that the opposite has in fact happened: the income or inequality gap has widened. He shows that in 2001, about 1.1 billion people – almost one-fifth of the world’s population – lived on less than US$2 per day. In 2004, 852 million people faced chronic hunger, up 15 million from the previous year. And in 2004, one billion children – nearly half the children in the world – suffered deprivation. More than 100 million children did not have adequate shelter and 4,000 children died daily as a result of poor sanitation and contaminated water. On the other hand, in 2004, there were 587 billionaires with a combined wealth of US$1.9 trillion, representing about one-fifth of the annual economic output of the US. These individuals could hire the poorest third of the world’s workforce – a billion workers – for one year on this money. Milanovic draws five central conclusions. First, the gap or inequality in incomes in poor countries and in rich countries has widened. Second, there were fewer rich nonWestern countries in 2000 than in 1960. Third, once countries joined the poor group, it was virtually impossible to move out of this group. Fourth, income inequality between individuals has stayed constant and high, tending in fact to increase modestly over the past 20 years. Fifth, the middle class has shrunk dramatically. More than 77 percent of the world’s people are poor; 16 percent rich, leaving only 7 percent in the middle. Globalization has likely made more people feel deprived by raising the reference point upward. The decline of the middle class is particularly worrisome as it suggests the possibility of increased instability in the world order. It would appear that reducing income inequalities should be an important item on the world’s agenda. From rags to riches Stephen Goldbart and Joan DiFuria, two San Francisco-based psychologists who started the Money, Meaning and Choices Institute (www.mmcinstitute.com), have worked with men and women in Silicon Valley who became millionaires, coining the phrase ‘sudden wealth syndrome’. These individuals did not seem to be any happier, however. These suddenly rich people reported feelings of anxiety and guilt over their windfall, concerned about how others saw them, and exhibited signs of an early identity crisis, characterized by denial, shock, and a sense of not deserving their good fortune. Few people are psychologically and emotionally ready for the way large amounts of money would change their life. Some no longer had to work, and this can be a difficult transition to make particularly at a young age. Goldbart and DiFuria identified three stages in the way their clients addressed their new wealth:

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coming to terms with the shock, excitement and confusion at their new wealth; regaining a sense of control over the changes they had experienced; and coming up with revised or new priorities and plans consistent with their new improved situation.

Goldbart and DiFuria see philanthropy, contributing to positive social change, as an important initiative for these newly very rich people. Interestingly, those who inherit a lot of money are generally better prepared for this windfall as they have had some time to prepare for it. Money can buy happiness but only if you give it away Bill Gates and Warren Buffett may be on to something. These billionaires have both decided to give almost all of their money away. Dunn et al. (2008) proposed that how people spend their money may be as important as how much money they earn in contributing to their happiness. More specifically, they suggested that spending money on other people would have a stronger positive impact on happiness than spending money on oneself. Data from three studies supported their hypothesis. First, happiness was more strongly correlated with spending on others than on oneself among respondents in a representative sample. Second, working men and women who received a profit-sharing bonus at work indicated their level of happiness before and after receiving the bonus, and indicated how they planned to spend it. Respondents planning to spend their bonus on others rather than on themselves indicated higher levels of happiness. Third, participants in an experiment indicated their level of happiness before being given either $5 or $20 and told to spend the money on themselves or on others. They then indicated their happiness level later that day. Again, individuals spending the money on others reported greater happiness. Thus what people do – how they choose to spend their money – is as important as how much money they make or have. In a later study, however, people believed that spending money on themselves, and having $20 rather than $5, would make them the happiest. The results of the three studies shows this belief to be false. Inheriting happiness And if money cannot buy happiness, recent evidence suggests that you can inherit happiness. A study of almost 1,000 pairs of identical and non-identical twins conducted in the UK and Australia and published in Psychological Science (Weiss et al., 2008) found that genes control half the personality traits that make people happy. The other half of one’s happiness or well-being comes from relationships, one’s work and career and health. People who were sociable, active, stable, hard working and conscientious were found to be happier. Do motives for money matter? Both what you want and why you want it are important predictors of well-being (Carver and Baird, 1998; Kasseret al., 2004). Srivastava et al. (2001) considered whether people’s reasons for making money affected their psychological well-being. First, they developed a scale to measure people’s motives for making money, identifying 10 such motives: security, family support, market worth, pride, leisure, freedom, satisfying impulses, charity,

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social comparisons and overcoming self-doubt. In two other of their studies of employed professionals and managers and employed entrepreneurs, after controlling for gender and actual income, people who placed a higher importance on money when compared to other goals such as a satisfying family life or doing work one enjoys, were more likely to report lower subjective well-being. Only individuals who valued money but had negative motives for making it (for example, social comparison, overcoming self-doubt) reported lower well-being, however. This was not the case for those wanting to make money for positive reasons (for example, supporting one’s family). The association of materialistic values and reduced well-being have also been documented in two studies of business students (Kasser and Ahuvia, 2002; Vansteenkiste et al., 2006). Malka and Chatman (2003) were intrigued by the finding that income was only weakly associated with both subjective well-being or happiness and job satisfaction in the United States. This seemed surprising given the great importance placed on income in capitalist countries. They examined intrinsic and extrinsic work orientations as potential moderators of the effects of income on happiness and job satisfaction. One hundred and twenty-four MBA students completed measures of work orientation and 4–9 years later indicated their salary, happiness and job satisfaction. Individuals high in extrinsic orientation indicated greater happiness and job satisfaction to the degree that they earned more money, whereas those high in intrinsic orientation were less happy at higher-income levels. Individuals high in intrinsic orientation value intellectual fulfillment, creative selfexpression, and the pleasure they derive from mastery on the job. Individuals high on extrinsic orientation value money and see work as mainly a way to earn money. Income was weakly and positively associated with job satisfaction but not related to happiness. Intrinsic and extrinsic orientations were also weakly and positively related. Intrinsic orientation was positively and significantly related to happiness but uncorrelated with job satisfaction. Extrinsic orientation was uncorrelated with both happiness and job satisfaction. Intrinsic and extrinsic orientations were both uncorrelated with annual income. Finally, happiness and job satisfaction were strongly positively correlated. Why should individuals higher on intrinsic orientation show negative effects of money on happiness? Individuals higher on intrinsic orientation may be more affected by the negative effects of rewards. High income might also imply that the individual has ignored intrinsic factors in choosing his or her job. Highly paid individuals may also think that they are spending more time at work and not enough time at non-work pursuits. Time affluence Kasser and Sheldon (2009) proposed that time affluence was likely to be a more important contributor to happiness or well-being than material affluence. Time, like money, is a limited resource. Time can be saved, spent or wasted. Some people seem to have lots of time while others are always short of it. And people in some countries have more time (that is, they work less) than do people in other countries. Why should time affluence increase happiness or well-being? First, it takes time to undertake and participate in activities and events that are satisfying (Lyubomirsky et al., 2008). Second, time is needed for activities that lead to personal growth, the development of meaningful relationships and contributing to one’s community and

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the wider world (Kasser, 2002). Third, time pressures can reduce the experience of flow (Csikscentmihalyi, 1999) and mindfulness (Brown and Ryan, 2003), both of which have been shown to increase happiness. Kasser and Sheldon (2009) review the results of three studies that support a relationship of time affluence and happiness. Kasser and Brown (2003) found that work hours was negatively correlated with life satisfaction in a sample of adults, while income had no relationship with happiness. Van Boven and Gilovich (2003) reported that people were happier with things or activities they did than with things they had bought, the former taking time to pursue. Finally, Diener et al. (1995) concluded that the happiest countries were those with relatively low work hours. Kasser and Sheldon (2009) developed measures of material and time affluence, then considered the relationship of these with indicators of job and family satisfaction in a series of studies. In their first study, time affluence predicted both job and family satisfaction after controlling for material affluence (income). In a second study, they reported that short-term changes in well-being were related to changes in time affluence (about a month lag), controlling for changes in material affluence. In their two further studies, both mindfulness and need satisfaction (operationalized as autonomy, competence and relatedness) partially mediated the relationship of time affluence and well-being. Time affluence is likely to be related to the quality of one’s social and family relationships, participation in leisure and personal development activities, engaging in lifestyle behaviors likely to contribute to one’s physical health, and contributing to the improvement of one’s wider community. Practical implications This chapter, focusing as it does on greed, emphasizes ‘bad apples’, the behavior of individuals or groups of individuals that participate in acts of crime, corruption and fraud. Greed leads to crooked police officers, crooked politicians, crooked world leaders, and the endless list of corporate scandals that daily appear in our media. Greed is responsible for the dramatic increases in salaries of CEOs, the payment of huge salaries to CEOs of failing companies, the underreporting of company losses, the overreporting of company profits, and the widespread cheating in a winner-take-all culture. Greed wrongly connects material wealth with happiness. If greed is to be reduced, it must be addressed at multiple levels: individual, organizational and societal. It is also important to state that the purpose of this chapter was not to bash the US, developed countries or capitalism. Capitalism has improved the life circumstances of countless millions of people around the world. Unbridled capitalism, however, has sometimes produced negative consequences. Individual change Individuals and their families can begin to take steps to reduce the level of their materialism. At the heart of these efforts is a commitment to live more simply; that is, a choice to focus on what is essential to a good life while ignoring tendencies to acquire possessions that add little but cost a lot (Needleman, 1991). Terms such as ‘downshifting’ and ‘simplicity’ have been used to describe these lifestyles. Following Izzo (2005), making time for friends, family, recreation and spirituality appear to be worthwhile expenditures of

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one’s efforts and energy. Intimacy not materialism enriches one’s life. Since time is finite, individuals need to manage their time expenditures wisely (Needleman, 1998; De Graaf, 2003; Honore, 2004). Ensuring time for physical and social activities is a must. Although technology has been billed as a time saver, it often has the opposite effect. Individuals need to ensure that their latest gadgets nourish rather than deplete their lives. Furthermore, ‘saying no’ to the demands of children is necessary as well. I remember my daughter Rachel being annoyed that she did not have her own phone line or did not receive a car for her 16th birthday as many of her girlfriends did; but we thought both requests to be extravagant. She still grew up to be a responsible and productive adult, close to both her parents. Materialism starts very young in children. Two year olds begin to ask for products by name and 8-year-old girls and boys can identify 200 branded products. The average American teenager watches over three hours of TV every day and watches an estimated 40,000 commercials in a year (Schor, 2004). It makes sense to limit the TV watching of children. Organizational change Organizations can downplay their use of financial rewards; financial rewards should still be used to reinforce excellence but in a lower profile way. In addition, designing work spaces to minimize status or level distinctions would help. Perks should be lined to performance deliverables and space assigned to those who need it rather than those at higher levels in the organization. Societal change It is almost a truism that growth is a natural state in human civilization. But there are certainly better ways of measuring human progress than growth – more, bigger, richer and more powerful. The Club of Rome in 1972 questioned whether exponential growth was possible. Growth was likely sustainable but within limits (Segal, 1999, 2003). Exponential growth would certainly exceed the capacity of the natural environment, widen the gap between the rich and the poor, and create more waste and pollution. The solution would involve a slightly lower standard of living but a higher quality of life (Segal, 2003). The ‘green’ movement now taking hold in many countries encourages the saving rather than the spending of our natural resources. Addressing greed is a complex and difficult task that requires action at several levels. It is worth the effort, however, if we are to reduce the epidemic of crime and corruption in our workplaces and in the wider society. The costs of crime and corruption are high, in both financial and psychic terms. Identifying greed as the heart of crime and corruption in organizations offers potential remedies. Note *

Preparation of this chapter was supported in part by York University.

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Easterbrook, G. (2004), The Progress Paradox: How Life Gets Better While People Feel Worse, New York: Random House. Easterlin, R.A. (1995), ‘Will raising the incomes of all increase the happiness of all?’, Journal of Economic Behavior and Organization, 27, 3–44. Elliott, K.A. (1997), Corruption and the Global Economy, Washington, DC: Institute for International Economics. Frank, R.H. (1999), Luxury Fever: Why Money Fails to Satisfy in an Era of Excess, New York: Free Press. Frank, R.H. (2007), Falling Behind: How Income Inequality Harms the Middle Class, Berkeley, CA: University of California Press. Frank, R.H. and Cook, P.J. (1995), The Winner-take-all Society, New York: Free Press. Fromm, E. (1976), To Have or to Be?, New York: Harper & Row. Furnham, A. and Argyle, M. (1998), The Psychology of Money, London: Routledge. George, D. (1997), ‘Working longer hours: pressure from the boss or pressure from the marketers?’, Review of Social Economy, 60, 33-65. Golden, L. (1998), ‘Work time and the impact of policy institutions: reforming the overtime hours law and regulation’, Review of Social Economy, 55, 33–65. Gioia, D.A. (1992), ‘Pinto fires and personal ethics: a script analysis of missed opportunities’, Journal of Business Ethics, 11, 379–89. Gioia, D.A. (2002), ‘Business education’s role in the crisis of corporate confidence’, Academy of Management Executive, 16, 142–4. Hayden, A. (2003), ‘Europe’s work-time alternatives’, in J. de Grauf (ed.), Take Back Your Time: Fighting Overwork and Time Poverty in America, San Francisco: Berrett-Koehler, pp. 202–10. Hill, C.W.L., Kelley, P.C., Agle, B.R., Hitt, M.A. and Hoskisson, R.E. (1992), ‘An empirical examination of the causes of corporate wrong doing in the United States’, Human Relations, 46, 1055–76. Honore, C. (2004), In Praise of Slow, Toronto: Alfred Knopf. Izzo, J. (2005), The Five Secrets You Must Discover Before You Die, Lions Bay, BC: Fairwinds Press. Kasser, T. (2002), The High Price of Materialism, Cambridge, MA: MIT Press. Kasser, T. (2004), ‘The good life or the goods life? Positive psychology and personal well-being in the culture of consumption’, in P.A. Linley and S. Joseph (eds), Positive Psychology in Practice,’ New York: Wiley, pp. 55–67. Kasser, T. and Ahuvia, A.C. (2002), ‘Materialistic values and well-being in business students’, European Journal of Social Psychology, 32, 137–46. Kasser, T. and Brown, K.W. (2003), ‘On time, happiness, and ecological footprints’, in de Graaf (ed.), pp. 107–12. Kasser, T. and Kanner, A.D. (2003), Psychology and Consumer Culture: The Struggle for a Good Life in a Materialistic World, Washington, DC: APA Books. Kasser, T. and Ryan, R.M. (1993), ‘A dark side of the American dream: correlates of financial success as a central life aspiration’, Journal of Personality and Social Psychology, 65, 410–22. Kasser, T. and Ryan, R.M. (1996), ‘Further examining the American dream: differential correlates of intrinsic and extrinsic goals’, Personality and Social Psychology Bulletin, 22, 280–87. Kasser, T., Ryan, R.M., Zax, M. and Sameroff, A.J. (1995), ‘The relations of maternal and social environments to late adolescents materialistic and prosocial values’, Developmental Psychology, 31, 907–14. Kasser, T. and Sheldon, K.M. (2009), ‘Material and time affluence as predictors of subjective well-being’, Journal of Business Ethics, 84, 243–55. Kasser, T., Sheldon, K.M., Ryan, R.M. and Deci, E.L. (2004), ‘The independent effects of goal contents and motives on well-being: it’s both what you do and why you do it,’ Personality and Social Psychology Bulletin, 30, 475–86. Landers, R.M., Rebitzer, J.B. and Taylor, L.J. (1996), ‘Rat race redux: adverse selection in the determination of work hours in law firms’, American Economic Review, 86, 329–48. Lane, R.E. (2000), The Loss of Happiness in Market Democracies’, New Haven, CT: Yale University Press. Lasch, C. (1979), The Culture of Narcissism: American Life in an Age of Diminishing Expectations, New York: Norton. Locke, E., McCleary, K. and Knight, D. (1996), ‘Self esteem and work’, In C.L. Cooper and I. Robertson (eds), International Review of Industrial and Organizational Psychology, New York: Wiley, pp 1–32. Lyubomirsky, S., Sheldon, K.M. and Schkade, D. (2008), ‘Pursuing happiness: the architecture of sustainable change’, Review of General Psychology, 9, 111–13. Malka, A. and Chatman, J.A. (2003), ‘Intrinsic and extrinsic work orientations as moderators of the effect of current income on subjective well-being: a longitudinal study’, Personality and Social Psychology Bulletin, 29, 737–46. Mars, G. (1994), Cheats at Work: An Anthropology of Workplace Crime, Aldershot, UK: Dartmouth. Milanovic, B. (2005), World’s Apart: Measuring International Global Inequality, Princeton, NJ: Princeton University Press.

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Myers, D.G. (2000), The American Paradox: Spiritual Hunger in an Age of Plenty, New Haven, CT: Yale University Press. Myers, D.G. (2003), ‘The social psychology of sustainability’, World Futures: The Journal of General Evolution, 59, 201–11. Needleman, J. (1991), Money and the Meaning of Life, New York: Doubleday/Currency. Needleman, J. (1998), Time and the Soul: Where Has All the Meaningful Time Gone – and Can We Get It Back?, San Francisco, CA: Berrett-Koehler. Phillips, T. (2005), Knockoff: The Deadly Trade in Counterfeit Goods, London: Kegan-Paul. Punch, M. (2003), ‘Rotten orchards: “pestilence”, police misconduct and system failure’, Policing and Society, 13, 1l71–96. Putnam, R.D. (2000), Bowling Alone: The Collapse and Revival of American Community, New York: Simon & Schuster. Rebitzer, J. and Taylor, L. (1995), ‘Do labor markets provide enough short-hours jobs? An analysis of work hours and work incentives’, Economic Inquiry, 33, 257–73. Richins, M.L. and Dawson, S. (1992), ‘A consumer value orientation for materialism and its measurement: scale development and validation’, Journal of Consumer Research, 19, 303–16. Rifkin, J. (2004), The European Dream, New York: Tarcher/Penguin. Robinson, J. (2003), ‘The incredible shrinking vacation’, in De Graaf (ed.), pp. 20–27. Ryan, R.M., Sheldon, K.M., Kasser, T. and Deci, E.I. (1996), ‘All goals are not created equal: an organismic perspective on the nature of goals and their regulation’, in P.M. Gollwitzer and I.A. Bargh (eds), The Psychology of Action, New York: Guilford Press, pp. 7–26. Schor, J. (1991), The Overworked American: The Unexpected Decline of Leisure, New York: Basic Books. Schor, J. (1998), The Overspent American, New York: Basic Books. Schor, J.B. (2004), Born to Buy: The Commercialized Child and the New Consumer Culture, New York: Simon & Schuster. Schultz, P. (2003), 1,000 Places to See before You Die: A Traveler’s Life List, New York: Workman. Segal, J.M. (1999), Graceful Simplicity: The Philosophy and Politics of the Alternative American Dream, Berkeley, CA: University of California Press. Segal, J. (2003), ‘A policy agenda for taking back time’, in de Graaf (ed.), pp. 211–18. Sirgy, M.J. (1998), ‘Materialism and quality of life’, Social Indicators Research, 43, 227–60. Sisodia, R., Wolfe, D.B. and Sheth, J. (2007), Firms of Endearment: How World Class Companies Profit from Passion and Purpose, Philadelphia, PA: Wharton School Publishing. Slayton, P. (2007), Lawyers Gone Bad: Money, Sex and Madness in Canada’s Legal Profession, Toronto: Viking. Smith, J.W., Wood, G. and Clurrman, A. (2004), Coming to Concurrence: Addressable Attitudes and the New Model for Marketing Productivity, New York: Recom Communications. Srivastava, A., Locke, E.A. and Bartol, K.M. (2001), ‘Money and subjective well-being: it’s not the money, it’s the motives’, Journal of Personality and Social Psychology, 80, 959–71. Strobel, L.P. (1980), Reckless Homicide: Ford’s Pinto Trial, South Bend, IN: Ard Books Toffler, B.L. and Reingold, J. (2003), Final Accounting: Ambition, Greed and the Fall of Arthur Andersen’, New York: Broadway Books. Van Boven, L. and Gilovich, T. (2003), ‘To do or to have? That is the question’. Journal of Personality and Social Psychology, 85, 1193–202. Vansteenkiste, M., Duriez, B., Simons, H.J. and Soenens, B. (2006), ‘Materialistic values and well-being among business students: further evidence of their detrimental effect’, Journal of Applied Social Psychology, 36, 2892–908. Weiss, A., Bates, T.C. and Luciana, M. (2008), ‘Happiness is a personal(ity) thing: the genetics of personality and well-being in a representative sample’, Psychological Science, 19, 205–10 Whybrow, P.C. (2005), American Mania: When More Is Not Enough, New York: W.W. Norton. Wright, N. and Larson, V. (1993), ‘Materialism and life satisfaction: a meta-analysis’, Journal of Consumer Satisfaction, Dissatisfaction, and Complaining Behavior, 6, 15865.

2

Individual and organizational antecedents of misconduct in organizations: what do we (believe that we) know, and on what bases do we (believe that we) know it? Joel Lefkowitz

To explain social behavior it is necessary to represent the structure of the total situation and the distribution of the forces in it. Kurt Lewin, 1939

Introduction Lewin wrote that passage long before he could have enjoyed the pleasures of path analysis, structural equation modeling or hierarchical linear models to implement his design. It is interesting that he failed to note – or perhaps thought it unnecessary to mention the obvious – the need to define the behavior in question before one can hope to explain it. As will be noted shortly, that is probably the most important problem by which one may characterize scholarship in the study of organizational misconduct – that is, agreeing on a definition of the focal construct(s) or dependent variable(s) to be explained. That, along with other meta-issues (both theoretical and methodological), is presented in the next section. The third section reviews and evaluates recent empirical findings. As will be apparent, the material presented in the chapter owes much to the prior scholarly work of others.1 To the extent that the discussion of meta-issues implies some criticisms of the empirical scholarship in this area, they should be kept in mind in drawing conclusions from the research reviewed in the third section. Meta-issues What is the focal construct? Fifteen years ago, a scholar attempting to set an agenda for the improvement of empirical research in business ethics felt compelled to repeat an even earlier admonition that ‘empirical research must state its assumptions about what constitutes ethical and unethical behavior based on normative theory’ and that empirical studies ‘sometimes purport to measure what is ethical without ever defining it’ (Robertson, 1993, pp. 586, 594). Today, there seems to be no dearth of conceptualizations of misconduct in organizations.2 In fact, guiding theory and research in this area are at least two general approaches – with overall, perhaps as many as six discernibly distinct (albeit overlapping) definitions that reflect somewhat different notions of the construct of interest. More important, each of these conceptualizations is represented by its own rather separate body of theoretical and empirical scholarship. The two primary views are (a) the one most in evidence in the business ethics literature, emerging from moral philosophy, 60

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and (b) a deviance perspective that has at least three versions – one in the macrosociological tradition and two more micro-psychological versions focusing on misbehavior or counterproductive behavior.3 The most salient (sub?)domains of misconduct appear to be as follows. Unethical behavior (as generally applied to the study of business ethics) (UB) UB is most frequently defined deontologically as the violation of widely accepted moral principles such as respect for persons, beneficence (an obligation to do good, when appropriate and feasible), nonmaleficence (a more universal obligation to avoid unjustifiably causing harm), fairness or justice, and interpersonal virtues such as fidelity, responsibility, integrity and fulfilling legitimate duties and obligations (Gauthier, 2008). These aspirational principles and the values on which they are based are often formalized in professional codes of ethics that tend to focus on what is impermissible (for example, American Psychological Association, 2002). Alternatively, UB may be defined formally from a consequentialist or utilitarian framework as failing to meet the essential obligation to behave so as to maximize the cumulative good or minimize the aggregate harm of one’s actions on all those affected (see Lefkowitz, 2003 for a review). Among the definitions and constructs considered here, this is the oldest and nomologically richest domain. It emerged from the long history of moral philosophy in (mostly) Western thought, and from the study of moral development in psychology over the past 75 years, to be applied widely to the study of business ethics from the level of the individual to organizational-level functioning (Schumann, 2001), and to even more macro levels such as assessing national indices of corruption. A notable distinction of this perspective is the recognition that UB may be an unintentional or unavoidable consequence of actions on the part of someone who is, in fact, attempting to ‘do the right thing’ but succumbs to self-serving temptation or fails to adequately resolve a situation of role conflict or values conflict (Banaji et al., 2003; Lefkowitz, 2006). Hence, there is an emphasis on understanding ethical problems or dilemmas, and on effective ethical problem-solving or moral reasoning. Incivility, or rude behavior (RB) Moral psychologists have often segmented human behavior into three categories, based on different underlying motives: egoistic, conventional, and principled behavior. (Of course, an action may have mixed motives.) However, they have often had difficulty distinguishing between the last two – that is, differentiating norm-violating behavior that can be clearly thought of as unethical or immoral, from behavior that fails to conform with social expectations and so is unconventional, rude, and perhaps even antisocial or hostile, but that does not sink to the level of being immoral or egregiously harmful. Elsewhere, this has been referred to as ‘nuisance behavior’ (Lewis, 2004). For example, suppose you are standing alone in an elevator about to ascend to your office and, as the doors are closing, you hear the plaintive cry of ‘hold it . . . please hold the doors . . .’. And you do nothing. Have you behaved unethically by virtue of having violated the principles of respect for persons and nonmaleficence, or have you merely been rude, inconsiderate and/or passive–aggressive? Perhaps such forms of RB become UB as a function of the degree of harm caused. But the trouble with that attempted resolution is that consequences are not always foreseen or even known after the fact.

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Organizational deviance (in the sociological tradition) (OD) OD has been defined as ‘an event, activity, or circumstance occurring in and/or produced by a formal organization, that deviates from both formal design goals and normative standards or expectations either in the fact of its occurrence or in its consequences, and produces a suboptimal outcome’ (Vaughn, 1999, p. 272). This is a very broad and consequentialist definition that encompasses deviant behaviors, whether attributed to intentional acts, accidents or unintended mistakes, as long as there are some harmful consequences. Unlike UB, there is no reference to the violation of general moral principles. In keeping with the sociological tradition, the level of theory and measurement is almost entirely at the level of the organization or more macro influences. Organizational corruption (OC) It has been observed that ‘the term corruption is a vague one’ (Everett et al., 2006), and several conceptual definitions have been used widely (Lancaster and Montinola, 1997) including a family of definitions akin to that of OD – that is, as deviation from public norms or moral standards. (However, conceptions of OC differ from OD in that OC is invariably viewed as intentional.) Alternatively, some scholars have cast OC largely in the mold of UB and emphasize the leader attributes of credibility and trust (Pelletier and Bligh, 2007); and, in keeping with that approach, perhaps the most frequent usage of the term refers to governmental or political corruption, in which it is defined as a violation of trust or an abuse of authority by public officials (Blackburn and Sarmah, 2008). Although OC has been ‘consider[ed as a] problem at the individual, organizational, institutional, or societal level’ (Everett et al., 2006, p. 3), it is the one conception among all those considered in this chapter that has most frequently been applied to large macro-level units of analysis such as organizations or entire national economies (for example, Transparency International, 2005). In fact, it is the one perspective that most clearly encompasses the possibility of an entirely corrupt organization. Perhaps the most recent authoritative definitional treatise is that of Ashforth et al. (2008), who note that ‘corruption implies a willful perversion of order, ideals, and, perhaps most important, trust – a “moral deterioration” . . . the illicit use of one’s position or power for perceived personal or collective gain – [and] also the dangerous, viruslike “infection” of a group, organization, or industry’ (p. 671). It seems clear from their treatise that they mean to apply the term widely to include virtually all of the serious negative actions subsumed under the alternative rubrics considered in this chapter. Organizational misbehavior (OMB) OMB is defined as ‘any intentional action by members of organizations that defies and violates the shared organizational norms and expectations and/or core societal values, mores, and standards of proper conduct’ (Vardi and Weitz, 2004, p. 244). Thus, it is highly similar to OC. And it overlaps partially with both UB and OD in so far as UB concerns violations of general normative moral standards, and OD encompasses violation of organizational norms, whereas OMB may entail either. However, OMB differs from both UB and OD in being restricted to intentional actions. It differs further from OD in that the focus is exclusively on norm-violating acts irrespective of the positive or negative nature of the consequences. This leads to the confusing and oxymoronic interpretation that prosocial, clearly moral behavior that violates organization norms (for example, ‘whistleblowing’) is misbehavior. In addition, while the study of UB tries to distinguish it from unconventional acts of mere incivility

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or RB, such behaviors (for example, absenteeism, defacing property, dirty looks, failing to return phone calls) are cited as examples of OMB (ibid., Appendix 2). Deviant workplace behavior or counterproductive work behavior (CWB) CWB (or workplace deviance) is generally defined as ‘voluntary behavior that violates significant organizational norms and in so doing threatens the well-being of an organization, its members, or both’ (Robinson and Bennett, 1995, p. 556). Later, those authors clarify that they view organization norms as consonant with ‘basic moral standards as well as other traditional community standards’ (Bennett and Robinson, 2000), so it is similar in that regard to OC. Despite some similarities, there are two notable distinctions between CWB and OMB. They are similar in that both constructs refer to intentional (or voluntary) actions that violate the organization’s norms or expectations; and, contrary to UB, both include what would generally be considered rather minor events that are not necessarily moral transgressions (for example, making a personal phone call at work; talking with a co-worker instead of working). However, they differ from OMB in that: (a) OMB, like OC, contemplates the possibility of (deviant) organizational norms the violation of which could have positive societal consequences, whereas CWB assumes that organizational norms are consonant with general moral and community standards; therefore, (b) CWB is limited by definition to negative or harmful actions (threatening the well-being of an organization and/or its members), including even violent behavior (Kelloway et al., 2006). Integrity testing (IT) The practice of IT is probably best conceived as an applied subdomain of CWB research, aimed at providing valid measures of honesty, integrity, conscientiousness, dependability, and so on for employers to use as predictors of CWB for purposes of employee selection. As acknowledged by proponents of the practice, ‘the phenomena under investigation [that is, the predictor construct] is ill defined’ (Sackett and Wanek, 1996, p. 787). The practice of IT differs from all of the above-considered research domains in a way that epitomizes most employee selection enterprises – that is, the predominant focus is on the predictor side of the equation, trying to develop the best measures possible of the individual-difference or dispositional variables that may be predictive of meaningful (in this case, counterproductive) work criteria; the criterion to be predicted is given relatively short-shrift. In fact, as a leading expert has noted, ‘rarely, if at all’ are the criteria to be predicted fully understood (Guion, 1998, p. 111). In contrast, the aim of this chapter is to enhance our comprehension of some of the complex behaviors (and their antecedents) that function as the criteria for those test validation studies. For example, the results of a meta-analysis of integrity test validities yielded an acknowledgment that the modest level of validity and the fairly large dispersion of estimated true validities (that is, predictive relationships with CWB criteria) ‘indicated that validities of integrity tests may be affected by other moderators’ (Ones et al., 1993). Based on the research noted later in this chapter, those other moderators that affect the prediction of CWB probably include situational and organizational attributes (for example, ethical climate, formal control mechanisms, reward systems, performance pressures), as well as other individual difference characteristics. In contrast to the scholarship reviewed later in this chapter, ‘research on situational correlates of integrity tests has been sparse . . . like virtually every individual difference construct in psychology, it is likely that both situational and dispositional influences play a part’ (Berry et al., 2007b).

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Towards resolution Much of the theoretical literature in this area generalizes about just one or another of the above subdomains (for example, UB, OMB, or CWB, as the case may be); summative measures of deviance are often used in empirical studies, and all exemplars falling in each subdomain may be pooled together in empirical reviews (see Dalal, 2005; Berry et al., 2007b). Such type of review could conclude that a particular set of antecedents is related significantly to, for example, CWB (which nominally includes a panoply of behaviors including violent aggressive acts) yet we would remain ignorant of just which deviant behaviors are putatively implicated. Such pooling also belies the uncertainty regarding the extensiveness of each content domain. For example, Spector and Fox (2005) briefly review seven alternative category definitions of CWBs and five different theoretical positions each of which implies a different set of antecedents; and several years later they can still bemoan the ‘rather disjointed literature’ (Fox and Spector, 2005b) within this one domain. On the other hand, it would be unreasonable to expect an explication of each of the relevant individual behaviors in each area: for example, Fox et al. (2001) used a behavioral checklist of CWBs comprising 64 items (that is, behaviors); Vardi and Weitz (2004) enumerate 116 specific manifestations of OMB. Perhaps a step in the right direction is their nominal classification of three basic categories of OMB – as a function of whether the behavior is intended to benefit the self (OMB-S) or the organization (OMB-O), or to inflict damage on either others or the organization (OMB-D). However, there is no systematic body of evidence indicating that the particular disaggregation is meaningful (for example, that each has a consistently different set of antecedents), nor how they articulate with the five categories of misbehavior they discuss (intrapersonal, interpersonal, production, property and political). Robinson and Bennet (1995; Bennett and Robinson, 2000) deconstructed and measured workplace deviance (CWB) as two separable components differing in the intended target(s): interpersonal deviance (ID) and organizational deviance (OD). Although the two measures are highly correlated, some are sanguine that enough discriminant validity evidence has been noted to support ‘the viability of separate ID and OD scales’ (Berry et al., 2007a, p. 422). Similarly, Pinto et al. (2008) distinguish between OC in which the individual is the beneficiary, from OC in which the organization is the beneficiary. Kidwell and Martin (2005) have explored the ambiguity of ‘deviant’ behavior at work, emphasizing that some deviant acts are positive and beneficial and should be encouraged. Construct clarification is clearly needed within each of these (sub)domains. But even more pressing, perhaps, is an explicit consideration of conceptual and empirical integration of behavior constructs across the partially overlapping but currently segmented domains of UB, RB, OD, OC, OMB and CWB. Table 2.1 contains a comparison of those six constructs, focusing on what I believe to be their most important differentiating attributes: matters of definition, assumed motivational antecedents, and the target of the behavior and the nature of the outcomes. The segmentation of these constructs and associated research literatures may have placed unrecognized limitations on what we know about the underlying focal domain, impeding what Ashforth et al. (2008) refer to as a ‘deep view’ of the field. For example, in the just-noted Berry, et al. (2007a) meta-analysis of the two putative dimensions of workplace deviance, the authors laudably attempted to be exhaustive in their search for which relevant empirical studies to include. Accordingly, they specified 14 different keyword phrases under which the sought-for studies of deviance might be retrieved from the PsycINFO database.

Individual and organizational antecedents of misconduct in organizations Table 2.1

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Overlapping constructs representing misconduct in organizations

Construct

Definitional criteria

Motivational assumptions

Target & outcomes

Unethical behavior

Violation of moral principles

Harm or wrongdoing to others

Incivility or rude Behavior

Violation of conventional social norms Violation of organizational norms

Unintentional failure to meet one’s own standards; or intentional self-serving breach of trust Unintentional or intentional actions Unintentional, intentional or accidental events Intentional breach of trust for personal or collective gain Intentional violations on behalf of one’s self or the organization

Harm to others or to the organization

Organizational deviance Corruption

Violation of public norms or trust

Organizational misbehavior

Violation of organizational (and/ or public) norms

Counterproductive work behavior

Violation of organizational and public norms

Intentional selfserving actions

Minor harm, disrespect or insult to others

Harm to others or to the organization Substantial or minor harm or benefit to others or to the organization, depending on the norms violated Substantial or minor harm to others or to the organization

The segmentation about which I am concerned is indicated by the fact that ‘unethical behavior’ was not included as a keyword, nor was any derivative of such. Similarly, in directing their readers to prior research on the antecedents of OC and of individual-level corruption, Pinto et al. (2008) were compelled to refer to two different literatures: sociology and management for the former, and organizational behavior and business ethics for the latter. Ashforth et al. (2008, p. 677) expressed it extremely well: Part of the reason for our limited understanding has been that various scholars working from their particular disciplines or perspectives have explored various aspects of corruption, accounting relatively little for the related efforts of other scholars working from other disciplines or perspectives. The result has been a profusion of partially overlapping – and at times conflicting – concepts, models, and findings, few of which approach a deep-structure understanding of the phenomenon.

A single, theory-driven taxonomic scheme reflecting an overall conceptualization of misconduct in its variegated forms is necessary in order to assess the amount and nature of differentiation and integration that is appropriate. As suggested in Table 2.2, which summarizes some recently suggested guidelines for the study of misconduct in organizations, Ashforth et al. do go on to discuss this issue in greater depth and apparently believe that a single integrative view of the entire domain is necessary and feasible

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Take a ‘deep’ integrative view focusing on essential features of corruption that underlie diverse bodies of scholarship

Ashforth et al. (2008)b Corruption

Base operational definitions and research on normative theory Test theoretical models Theory-building as the guide to empirical research Systematic research for cumulative understanding Have operationalizations more closely tied to definitions

B. Relationship of theory & research

Use additional methodologies beyond cross-sectional reports (e.g., qualitative approaches) Cross-sectional studies cannot reveal much about corruption as an emergent phenomenon (see Col. E)

Emphasize behavior as the dependent variable (as opposed to attitudes or reasoning) Broaden the methodologies employed (e.g., crossnational, factorial survey, and qualitative research designs)

C. Empirical methods

Study the possible impact of organizational and national culture on CWB Adopt an interactionist view across micro (individual, group), macro (organization, industry, national) and ‘wide’ (societal) levels of analysis

Include other units of analysis beyond the individual

D. Levels issues

Take a ‘long’ view, to understand corruption over time A sophisticated process view is needed to show how corruption emerges

More work is needed on the motives underlying CWB

E. Process issues

Notes: a. Robertson (1993) also included a suggestion regarding building links between research and public policy application. b. Some liberties have been taken with the original organization of suggestions made by Ashforth et al. (2008) in order to better enable comparisons with the other sources.

Investigate the dimensionality of CWB

Spector & Fox (2005) Counterproductive work behavior

Robertson (1993)a Business ethics

A. Primary theoretical issues

Suggested guidelines for the study of misconduct in organizations

Source & focal construct

Table 2.2

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– using the label ‘corruption’ to encompass all (see Column A). On the other hand, what if these are appropriately distinct domains? For example, it is not difficult to understand why anger, frustration and resentment may be observed as precursors to certain CWBs, including acts of violence (Spector et al., 2006), whereas they are very rarely cited as significant antecedents to UB, especially when the dependent variable is some measure of moral reasoning. Is that (and perhaps other distinctions to be demonstrated, as well) sufficient evidence of discriminant validity? The case for a conceptually and empirically meaningful overarching construction remains to be made. In other words, as indicated in Table 2.2 (Column A), although Ashforth et al. (2008) and Spector and Fox (2005) advocate opposite strategies – integrative versus deconstructionist, respectively – at this time, at least, I believe they are both correct. Measuring the dependent variable Some time ago Gatewood and Carroll (1991) artfully expressed the operational consequences of the definitional ambiguities that still concern us when they indicated that the study of organizational ethics ‘has been hampered by the absence of an accepted approach for directly assessing the ethical behavior of organization members. Undoubtedly this deficiency is at least partly attributable to the complexity and difficulty of measuring a construct that has not yet been acceptably defined’ (p. 667). Although the point has been made previously, and frequently – for example, see Table 2.2, Column C for Robertson’s (1993) concern – a large majority of published studies that purport to be investigations of unethical behavior, organizational misbehavior or counterproductive work behavior do not directly assess behavior at all, and many not even indirectly. This may reflect, in part, the relatively low incidence of quantitative research generally in the study of business ethics (Collins, 2000). But also consider the following: (a) successive literature reviews in the domain of business ethics, representing hundreds of studies, reveal that those studies have focused much more on ethical decision making or ethical perceptions as the focal construct, rather than ethical behavior (Ford and Richardson, 1994; Franke et al., 1997; Loe et al., 2000; O’Fallon and Butterfield, 2005); (b) a meta-analysis of the correlates of whistleblowing uncovered largely different antecedents of whistleblowing intent and actually blowing the whistle (Mesmer-Magnus and Viswesvaran, 2005); (c) all of the studies included in a recent review of the correlates of CWB used summative rating measures of CWB, either self-, supervisor-, or peer-report (Berry et al., 2007a), although an earlier similar review did include some (unspecified proportion of) studies that employed behavioral indicators (Dalal, 2005); (d) a meta-analysis of correlates of ethical climate found just 10 studies that included any ‘negative outcomes’, so they were lumped together as indicating ‘dysfunctional behavior’ (Martin and Cullen, 2006); and (e) Helin and Sandström (2007) reviewed 15 studies that purported to investigate the impact on ethical behavior of having implemented a corporate code of ethics, but only two of them (perhaps a third) actually measured behavioral outcomes as opposed to ethical judgments, intentions, values or perceptions. In addition, I reviewed 86 studies having to do with the antecedents of organizational misconduct that were recently published or presented at a refereed professional conference. Only seven employed some measure of actual behavior as the dependent variable. The 79 non-behavioral outcome studies fell into three categories (according to my ad hoc subjective categorization). Forty-two studies employed some

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questionnaire measure, generally self-report, assessing ethical values, judgment or choice, moral reasoning, or willingness to report observed UB or CWB by others. Many of these used hypothetical scenarios by which to elicit responses. Twelve studies assessed self-reported ethical sensitivity or moral awareness, or the extent to which one’s organization is characterized by ethical conflicts. And 25 studies employed some form of self-report assessment of CWB such as an omnibus checklist, or ratings of one’s propensity to lie, cheat or steal; or the extent to which one had been subjected to incivility or aggression oneself. Of the seven studies that used behavioral measures of the dependent variable, three were laboratory experiments with students that used surreptitious measures of lying, cheating or stealing. One study employed detailed case information regarding scientists who had been found guilty of research misconduct by the US Federal Office of Research Integrity. Interestingly, all three of the remaining studies utilized organizational-level data analyses: a macro comparison of two matched organizations, in only one of which auditors had found evidence of extensive theft; overall conviction rates of public employees by state, as a function of size of government; and number of company citations received from the US Occupational Safety and Health Administration or the Environmental Protection Agency (adjusted for size of organization). This is not a wholesale criticism of self-report questionnaire methodology. Such assessments are clearly appropriate and relevant to the assessment of moral values, attitudes, ethical reasoning, perception of historical events (for example, the extent to which particular ethical problems have been encountered in one’s work), psychological climate, or areas of knowledge (for example, one’s degree of familiarity with the company code of ethics) and other constructs. But, given the clear theoretical distinction between values, attitudes, decision processes and intentions as antecedents, versus a dependent variable of actions taken, and the modest correlations usually observed between the former and the latter (for example, Miller and Grush, 1988), it behooves us to admit the limits of what we believe to be our knowledge concerning the causes of ethical behavior. On the other hand, meta-analytic results of studies of deviance did not differ much between studies using self-report measures of deviance and those using other means of assessment (Berry et al., 2007a). The general theoretical explanatory system Lewin’s (1950) admonition that behavior (B) is a function (f) of both the person (P) and the environment (E), B = f (P, E), is probably the most famous dictum in the social and behavioral sciences. It is, however, frequently misunderstood or oversimplified by failing to recognize his emphasis on P and E as interacting, nonindependent constellations, and that the same conceptual scheme is useful for explaining psychological and social development, as well as discrete behavioral events. But within 20 years of Lewin’s work the two constellations were being cast as alternatives, and much doubt was shed on the basic notion of personality as accounting for any cross-situational consistencies in behavior (Mischel, 1968; Mischel and Peake, 1982). More than 20 years of conceptual debate ensued regarding the putative invariance of personality and the variability of behavior across situations. ‘Although the person – situation debate sparked a great deal of theory and research in recent years, it is time to move on to form more integrative accounts of personality and its development that includes traits, situations, and the processes that

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link them’ (Roberts and Pomerantz, 2004, p. 413). Even Mischel came around to the view that ‘individuals are characterized not only by stable individual differences in their overall levels of behavior, but also by distinctive and stable patterns of behavior variability across situations’ (Mischel and Shoda, 1995, p. 246, emphasis added), thus confirming Lewin’s original emphasis on P × E interaction. Or, as they themselves succinctly described, ‘if A then she X, but if B then she Y’ (p. 246, emphases in the original). Similarly, recognition of the theoretical importance of both individual and contextual (interpersonal, group, organizational, societal) components of ethical decision making was also evident (for example, Treviño, 1986; Treviño and Youngblood, 1990; Jones, 1991). More recently, while maintaining the focus on both person and situation, attempts have been made to integrate different theoretical perspectives (Kidder, 2005; Oliveira, 2007) and emphasize the processes that underlie ethical decision making (McDevitt et al., 2007). Both Spector and Fox (2005) and Ashforth et al. (2008) emphasize the need to better understand the developmental processes by which misconduct comes about (see Table 2.2, Col. E). Scholars studying organizational misconduct, especially those working within the business ethics tradition – with its emphasis on the process of ethical decision making – have, indeed, tried to develop testable models that include both individual and situational antecedents. These multivariate models have been enumerated by Jones (1991), Robertson (1993) and Lefkowitz (2003, p. 83), and more recent models are offered by Vardi and Weitz (2004) in the OMB context. Following the Lewinian tradition of inclusiveness and the need to understand process, Lefkowitz (2003) presented a conceptual developmental model of moral action, extending from personality maturation and moral development in childhood through a contemporary adult action sequence. As such, however, in its entirety it is not a testable model. Contrary to the inclusiveness of the theoretical models, much of the empirical research on organizational misconduct is attenuated by the investigation of few antecedents, and often within only one category – either personal (for example, stage of moral reasoning; or locus of control) or situational (for example, perceived ethical climate; role stress; or the existence of a code of ethics). Moreover, some studies have been limited to a consideration of bivariate relationships only. Such truncated investigations not only fail to illuminate antecedents not considered, but may yield distorted conclusions about those that are included by failing to assess their joint effect(s) with other variables that also play an antecedent, mediating, moderating or even suppressing role (see Tzelgov and Henik, 1991). For example, suppose that a statistically significant correlation is found between ethnicity and some criterion of CWB. But if we have failed to include additional study variables, we may fail to learn that ethnicity merely mediates the causal relationship between discriminatory supervisory behavior and employee CWB. The interpretation of the data is likely to be dramatically misleading. Consequently, it is understandable that scholars still feel the need to recommend that research on organizational misconduct be more theory driven (see Table 2.2, Col. B). Levels issues Levels issues have long been a salient topic in organizational studies (Klein et al., 1994, 1999; Klein and Kozlowski, 2000), most recently, as applied to cross-cultural studies (Gelfand et al., 2007). For example, relevant to the current context is the differentiation by James and Jones (1974) between organizational climate, whether measured objectively

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by organizational attributes or subjectively by individual perceptions of such, and psychological climate as an individual information-processing attribute reflecting ‘the interaction between perceived organizational attributes and individual characteristics’ (p. 1110). Despite this long history, just as recent pleas have been made to incorporate multiple-level theory and research in the study of organizational citizenship behavior (Schnake and Dumler, 2003), similar entreaties have been made regarding the study of misconduct in organizations (see Table 2.2, Col. D). Ashforth et al. (2008) point out that the different perspectives represented by the micro (individual and group), macro (organization, industry and national) and wide (societal) views of corruption imply different beliefs about its origins. Klein et al. (1994) offer an illuminating discussion of these issues. First, they distinguish between level of theory (indicating the target to be explained – for example, individuals, groups or organizations); level of measurement (the operational source of the data – frequently individuals, via self-report measures); and level of statistical analysis (how the data are treated – for example, individual source data might be aggregated within groups to use group-level analyses).4 In my opinion the most important paragraph in their presentation begins: When levels of theory, measurement and statistical analysis are not identical, the obtained results may reflect the level of measurement or statistical analysis rather than the level of theory. Moreover, the obtained results may seriously misrepresent the relationships a researcher would have found if he or she had analyzed the data at the same level as the theory. (pp. 198–9)

What accounts for the potential interpretive errors is that specifying the particular level of theory implies that the relationships among constructs are due to: (a) variance among individuals irrespective of their group membership; (b) differences between groups (with little variation within groups); or (c) differences among individuals within groups (that is, variation around the group means). It is evident that the preponderance of studies of misconduct in organizations is operationalized at the individual level of measurement (for example, widely disseminated questionnaires among employees within an organization or several organizations). These surveys typically include measures of individual employee attributes irrespective of their group or organizational membership; moreover, those attribute scores are typically related to other variables of interest. That operation implies that group and/or organization membership play no role in contributing to the between-person variance of those attributes – which is likely to be an appropriate assumption for some variables (for example, the respondents’ locus of control, or stage of moral development), but not for others (respondents’ propensity to report wrongdoing, or likelihood of engaging in CWB), and a somewhat tenuous assumption that ought to be tested for others (for example, respondents’ perceptions of the organization’s ethical culture). These levels issues often are not discussed explicitly in the empirical investigations of misconduct in organizations. For example, it is rarely made clear that individual ratings of organizational ethical climate or of the effectiveness of the company’s ethics code do not necessarily correspond to the organization’s actual ethical climate or the effectiveness of its code – or even that there is necessarily a uniform climate or consistent level of code effectiveness throughout the organization. Moreover, referring to the variables as ‘perceived ethical climate’ or ‘perceived code effectiveness’ while interpreting the findings

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as reflecting an organizational-level attribute does not correct the error. In fact, when tested, individual within-organization perceptions may not show the homogeneity implied by the notion of an organizational culture (Key, 1999). There are, however, instances in which group-level theorizing is matched by appropriate group-level measurement operations (Weber et al., 2003; Mayer et al., 2008). The issue of causality The levels issues just discussed may be considered a particular manifestation of the longstanding issue of causal attribution in nonexperimental social and behavioral science, which is another aspect of the theoretical explanatory system also discussed previously. I believe that is at least in part what Ashforth et al. (2008) are alluding to when they note that the different perspectives represented by micro, macro, and societal views of corruption imply different beliefs about its origins. Although not much will be said here about this issue, given the presumption inherent in the title of this chapter (antecedents of . . .) the topic at least needs to be broached.5 I use the term the way in which it is usually used in the field of learning and behavioral analysis: An antecedent prompts a behavior which is followed by a consequence . . . An antecedent is a person, place, thing, or event preceding a behavior that encourages employees to behave in a certain way . . . However, they do not guarantee that it will occur. The reason why antecedents influence behavior at all is that they are associated with certain consequences which occurred in the past. (Nijhof and Rietdijk, 1999, p. 42, emphases in the original)

Therefore, by ‘antecedents’ I mean to imply some degree of causal effect, as suggested by the words ‘prompts’, ‘encourages’ (but does not ‘guarantee’) and ‘influence’ in the above quotation. When research on the focal construct (for example, UB) as the dependent variable to be explained is limited to the revelation of statistically significant bivariate relationships with hypothesized variables of interest (for example, X), there are only three causal possibilities (Scheines, 2005): (a) X → UB; (b) UB → X; or (c) some other unmeasured variable(s) → X and UB.6 Although X may be accepted as a hypothesized cause of UB if it precedes it temporally and it makes theoretical sense to do so, both (a) and (b) are tenuous options in the absence of consideration of (c), and (c) is only as tenable as the quality of procedural and statistical controls or the inclusion in the study of other potential influences. Moreover, we deal with constructs and measures for which those temporal and theoretical conditions may be indeterminate. Does job satisfaction predate ethical climate perceptions or vice versa? Is an employee’s incidence of minor CWB such as withdrawal (for example, excessive lateness) the cause or the consequence of the quality and fairness of supervision received? And how much more complicated is the latter question when employee lateness is measured by supervisor report, and quality of supervision is measured by employee ratings? With just bivariate correlations to rely on there may be little or no justification for choosing between alternatives (a) and (b) above, or for ruling out alternative (c). That is why, as noted earlier, hypothesizing and testing causal models is imperative. But even less sophisticated multivariate analyses, such as multiple regression, may be invaluable in revealing redundancies and interactions among predictors in variance explained. For example, although attributes from three different taxonomic sets

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of personality constructs had each previously been found related (presumably antecedent) to job satisfaction, only one set (core self-evaluations) was significant when analyzed in combination with the other two (positive and negative affectivity, and the ‘Big Five’ personality traits) (Judge et al., 2008). On the other hand, by including separate measures of both formal organizational compliance practices and ethical climate in the same statistical analyses, each was demonstrated to be an independent predictor of organizational misconduct, and compliance practices also was shown to moderate the relationship between ethical climate and misconduct (Andreoli and Lefkowitz, 2009). Recent empirical findings This section comprises two subsections: (a) 11 published qualitative and quantitative reviews of accumulated empirical literature in six topic areas, supplemented by some additional studies not included in the reviews; and (b) 15 primary studies that I have privileged because they investigated jointly both individual and organizational (situational, contextual) antecedents. Most of the literature reviews are organized around an outcome variable (ethical sensitivity, whistleblowing, ethical decision making, or counterproductive work behavior) and review potential correlates or antecedents; two are organized around putative antecedents of ethical behavior or misconduct (corporate codes of ethics, and ethical climate) and review the evidence regarding the impact of each.7 Prior literature reviews Antecedents of ethical sensitivity and whistleblowing Collins (2000) content analyzed the first 1,500 articles published in the Journal of Business Ethics (1982–99), a large but declining majority of which were nonquantitative essays written primarily by philosophers. By far the most heavily researched topic was ‘ethical sensitivity’, as opposed to ethical behavior, per se; and the most frequent study design consisted of group comparisons. The most frequent comparison was between men and women, in which ‘most research studies reveal that women are more ethically sensitive than men’ (ibid., p. 9). Americans tended to have higher ethical sensitivities than many other national groups, but the possibility of bias in the measures and scoring of the construct was acknowledged. A number of differences were noted as a function of organizational rank, with upperlevel managers seeming to be less tolerant of unethical behavior. Both level of moral development and values and ideology seemed to be associated with ethical sensitivity, but findings were rather inconsistent. Although there were some reports of the effectiveness of codes of conduct in impacting employee behavior, the mere existence of a code seemed not sufficient as many studies reported that corporate codes tended to be vague, not widely understood and/or undermined by conflicting organizational practices. (Also see below.) Ethical sensitivity (‘awareness’) may also be reflective of religiosity (Conroy and Emerson, 2004). Mesmer-Magnus and Viswesvaran (2005) examined the correlates of whistleblowing intent and whistleblowing actions in organizations, as reported in 21 studies.8 Overall, their results indicated that ‘the predictors of the intent to blow the whistle are not the same as those of actual whistleblowing. Further, many of the variables typically measured in studies of whistleblowing are stronger correlates of whistleblowing intent than of whistleblowing action’ (pp. 288–9). (Although this suggests a lack of correlation

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between intention and action, no such direct correlations are reported.) The individual correlates of intent were ethical judgment (morality), approving of whistleblowing, age, job level and having role responsibility to blow the whistle; correlates of action were job satisfaction, sex (women more likely) and tenure. Ethical judgment was not related to actual whistleblowing. Contextual correlates of intent were perceived supervisor support, organizational climate for whistleblowing, and threat of retaliation (inversely). There were no substantial contextual correlates of actual whistleblowing. Closeness to the wrongdoer (interpersonally or in terms of organization structure) was the strongest aspect of the wrongdoing situation itself that was related to intention (no studies were found relating closeness to action). Antecedents of ethical decision making Two very inclusive reviews of ethical decision making were found (Loe et al., 2000; O’Fallon and Butterfield, 2005), covering 124 and 174 studies, respectively, and one review of 61 studies focused on gender differences in ‘ethical perceptions of business practices’ (Franke et al., 1997). Loe et al. (2000) organize their review around studies of 10 individual and five organizational antecedents of ethical decision making, as well as studies focused on ‘moral intensity’, which is an aspect of the situation itself: that is, ‘the extent of issue-related moral imperative in a situation’ (Jones, 1991, p. 372). No differentiation is made in their review among the various operationalizations of ethical decision making as the dependent variable. O’Fallon and Butterfield (2005) organized their review around 18 individual and 13 organizational antecedents that include all those used by Loe et al., as well as moral intensity. Moreover, in a rarely encountered example of thoroughness, they further segmented the studies reviewed according to the nature of the decision-making dependent variable, based on Rest’s (1986) model: moral awareness, moral judgment, moral intentions and moral behavior. The Franke et al. (1997) review of gender differences targeted studies ‘that were based on perceptions of behaviors with ethical implications’ (p. 923), and although they considered nine specific content areas as possible moderators of those perceptions (for example, breaking rules; bribery; conflict of interest), no differentiation is made among alternative outcomes – for example, moral awareness versus moral intent versus moral action. It is not possible to present here an adequate summary of the reviews of these more than 350 individual studies, so I shall point out some highlights and suggest that the reviews be consulted directly. Starting with demographic factors, the most consistent findings have to do with sex differences, and they are in accord with the conclusions reviewed above re ethical sensitivity: ‘There are often no differences found between males and females, but when differences are found, females are more ethical than males’ (O’Fallon and Butterfield, 2005, p. 379). The findings in favor of women are confirmed in some more recent studies as well (Chen and Tang, 2006; Nguyen et al., 2007). One of Franke et al.’s (1997) observations may explain the low incidence of observed sex differences as due to sampling: they report that ‘the gender difference observed in precareer (student) samples declines as the work experience of samples increases’ (p. 920). This suggests that organizational and/or developmental factors play an increasing role in ethical judgments, including the possibility that the salient antecedent is psychological gender identity rather than biological sex (McCabe et al., 2006). It is also commensurate with findings from another domain in which controlling for variables that tend to covary with sex (for example, job and pay levels) washed out apparent sex differences in

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job attitudes (Lefkowitz, 1994). However, the finding of a declining sex difference with increasing work experience needs to be explained in conjunction with the observation that ‘more education, employment or work experience is positively related to ethical decision-making’ (O’Fallon and Butterfield, 2005, p. 387). And that finding, itself, needs to be reconciled with the conclusion that ‘the research on age has produced mixed and inconsistent results’ (ibid., p. 391). To reiterate points made in the first portion of this chapter, it seems clear that the decontextualized examination of the bivariate relationships between sex, age, education level and amount of work experience (each separately) with one’s dependent variable of choice is likely to yield an incorrect and oversimplified representation of the composite demographic antecedents of misconduct. The four most frequently investigated personality factors (value orientation, locus of control, level of cognitive moral development and Machiavellianism) reveal fairly consistent findings. Idealists, those with a principled (deontological) as opposed to economic or utilitarian values perspective, and those scoring higher on cognitive moral development, tend to reveal greater ethical decision making. However, I wonder whether some measurement bias isn’t contributing to that conclusion, as many measures of ethical decision making are reflective of the dominant Kohlberg (1981, 1984) cognitive stage model of moral development, which has been described as philosophically biased in favor of a deontological perspective (see Lefkowitz, 2003, pp. 103–4 for a discussion of the issue). The reviews suggest that having an internal locus of control is positively associated with ethical decision making and that Machiavellianism is related negatively. In addition, other studies have moved away from a strict trait approach and implicated the importance of perceived unfairness (Greenberg, 1993; Schweitzer and Gibson, 2008) and moral disengagement (Detert et al., 2008) in the genesis of unethical decisions. Antecedents of workplace deviance Berry et al. (2007a) reviewed the evidence for the separate constructs of interpersonal deviance and organizational deviance – restricting the review to only studies reporting scores for at least one of those facets of deviance, and considering only variables for which there were at least three independent studies. Their review was conducted within a construct validity framework that reflects some of the definitional and measurement meta-issues presented earlier, here: that is, attempting to draw the appropriate conclusion as to whether these merely represented aspects of a single overall deviance construct, separate and discrete constructs, or separable facets. They argue that their meta-analyses represent an advance over earlier ones due to their consideration of only studies using aggregate measures of deviance (that is, multi-item measures of ID and OD), rather than discrete dependent variables (theft, harassment and so on). However, although it is true that use of discrete outcomes does make more difficult direct comparison among, and potential integration of different literatures, whether there might in fact be sufficient discriminant validity evidence to justify consideration of multiple specific categories of deviance must still be considered an open question. As noted in the previous section, I believe that at this time it would be premature to foreclose on either the integrationist strategy advocated by Ashforth et al. (2008) or the call by Spector and Fox (2005) to further investigate the dimensionality of misconduct (see Table 2.2). Berry et al. (2007a) wisely point out ‘that the level at which deviance is measured affects the relationships that it has with other constructs. Therefore, if organizations wish to realize the greatest potential from deviance-reducing interventions, they

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should be very careful and explicit about exactly what behaviors they want to reduce’ (p. 420). One of the more intriguing aspects of the Berry et al. review is what is absent from it. The only correlates of deviance included are individual-level variables: five dimensions of personality, four measures each of organizational citizenship behavior (OCB) and organizational justice, and five demographic attributes. No organizational attributes are considered (for example, type of industry or organization, organization size, organizational culture, existence of an ethical code, nature of the reward system and so on) – perhaps because fewer than three studies of each were uncovered. The closest one comes to a situational factor are the demographic attributes of length of tenure and work experience. Three of the ‘Big Five’ personality attributes (emotional stability, agreeableness and conscientiousness) were related appreciably inversely to both facets of deviance (range of estimated r from −0.23 to −0.46, as was OCB and three facet measures of OCB (range −0.20 to −0.47). Estimated correlations with organizational justice were more modest (range −0.07 to −0.25). Meta-analytic results for the demographic attributes were lower, with the exception of the relationship between OD and length of full-time work experience (−0.25). But as age and length of time in the organization were also related to OD, one wonders what the results would be if all three associated antecedents had been considered jointly. Considerable attention has also been paid recently to the role of job-related affective reactions in the initiation of CWBs (Spector and Fox, 2005; Spector et al., 2006). Implicated have been role conflict (Grover and Hui, 1994), perceived inequity and unfairness (Greenberg, 1993; Schweitzer and Gibson, 2008), anger and anxiety (Fox and Spector, 1999), jealousy and envy (Ispas and Ilie, 2008), boredom (Bruursema et al., 2008), job satisfaction (inversely) (Andreoli and Lefkowitz, 2009; Ispas and Ilie, 2008) and positive self-regard (inversely) (Ispas and Elie, 2008). Consonant with that line of research is another that emphasizes the role of self-deception or rationalization in the justification of self-serving actions as actually being morally compliant (for example, Tyson, 1992; Bersoff, 1999; Tsang, 2002; Tenbrunsel and Messick, 2004; Zyglidopoulos and Fleming, 2008; and Zyglidopoulos et al., 2008). The impact of corporate codes In recent years no fewer than four reviews concerning corporate codes of ethics (CCEs) have appeared in the Journal of Business Ethics (Schwartz, 2004; Helin and Sandström, 2007; Kaptein and Schwartz, 2008; Stevens, 2008). The reviews have focused primarily on whether CCEs are effective and, secondarily, on what factors might contribute to their effectiveness. The most recent review, by Stevens (2008), of just 12 studies, concludes positively: ‘The corpus of ethical code research has yielded sufficient data that shows codes are effective. Researchers should no longer debate the general question of code effectiveness’ (p. 606). I, unhappily, disagree. At best, we have examples illustrating that a CCE can be effective, given certain putative attributes. But even though the incidence of formal ethics and compliance programs has increased in the US over the past decade, the proportion of employees who report observing misconduct at work more than doubled, from 22 percent in 2003 to 52 percent in 2005 (Ethics Resource Center, 2003, 2005).9 Following is a summary in chronological order of the four reviews of empirical investigations of CCE effectivess.

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Schwartz (2004) summarizes the results of 22 studies that ‘attempt[ed] to verify if codes are in fact a variable which influence behavior’, concluding that ‘the results of the studies are clearly mixed’ (p. 325). Of the 22 studies, he reports that 10 found codes to be effective, 10 found them to be ineffective, and two found only weak evidence. Perhaps just as important, Schwartz notes that these studies did not provide any definition of ‘code effectiveness’ beyond ‘influencing behavior’. Helin and Sandström (2007) reviewed 15 studies of code effectiveness. My characterization of their brief descriptions of study results is that six showed positive findings, six revealed negative findings and three were mixed. Moreover, although almost all of the primary studies are referred to as investigating the impact of CCEs on ‘behavior’, the actual dependent variables were overwhelmingly questionnaire measures of ethical judgments, hypothetical decisions or intentions, perceptions or evaluations of wrongdoing or recollections of code content. Kaptein and Schwartz (2008) reviewed 79 empirical studies the results of which ‘are clearly mixed: 35% of the studies have found that codes are effective, 16% have found that the relationship is weak, 33% have found that there is no significant relationship, and 14% have presented mixed results’ (p. 113). Moreover, no clear descriptions are presented of the criterion of effectiveness used in each study – that is, ‘relationship’ with what? However, Kaptein and Schwartz go on to note that 61 percent of the studies used questionnaire or interview methodology, asking respondents about their ‘perceptions of practice’ (p. 116). Several studies were based on laboratory experiments with students, others on hypothetical vignettes; only ‘four studies used more or less objective data on practice’ (p. 116). Two-thirds of the 12 studies reviewed by Stevens (2008) yielded findings of code effectiveness. Once again, however, the reader will be impressed with the variety of definitions of ‘effectiveness’ (ethical attitudes, willingness to express support for a CCE, workability of a code, perceptions of wrongdoing, self-reported unethical behavior, and usefulness as a decision-making guide), along with studies in which the criterion is an unspecified indicator of ‘behavior’. A few recent studies were not included in any of the four reviews. The National Business Ethics Surveys (Ethics Resource Center, 2003, 2005) reported no lower frequency of observed misconduct by employees in organizations that had many of the elements of a compliance program (for example, written ethical standards, a training program, a means to report misconduct anonymously) in comparison with those in organizations lacking any of those elements. Interestingly, Andreoli and Lefkowitz (2009) found essentially the same measure of compliance practices to be a significant predictor of misconduct (inversely), as well as a moderator of ethical climate. That is, both the adverse effects of low ethical climate and the positive effects of high ethical climate on misconduct were attenuated in organizations with a high level of compliance practices. Of 128 primary studies described in the four review articles, only 52 (41 percent) have reported clearly positive findings regarding code effectiveness.10 Moreover, it appears that a large majority of the studies used extremely varied, sometimes rather equivocal, and occasionally unspecified definitions of ‘effectiveness’. At the very least, the question regarding code effectiveness needs to be refined to specify ‘effective for what?’. And if what is meant is the reduction in overt acts of misconduct (of any sort) in or on behalf of real organizations, it appears we may not have the data at this time to answer the question empirically. In any event, it is evident that the definitional problems discussed in the

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first part of this chapter are reflected clearly in any attempt to document whether CCEs represent significant deterrents to misconduct. Three things (at least) seem called for: (a) the question of CCE effectiveness needs to asked/answered with respect to specific outcomes; (b) the particular attributes and/or circumstances on which effectiveness may be contingent with respect to each outcome need to be uncovered; and (c) as emphasized by Helin and Sandström (2007), the processes by which the attributes and circumstances noted in (b) have their effect need to be explicated. Although she ignores what may be critical distinctions with respect to question (a) above, Stevens (2008) offers some helpful analyses and reflections with respect to (b) and to a lesser extent (c). Answering her own question ‘When are codes effective?’, she infers the following from some of the studies reviewed and other literature: when codes are matched by managers who value ethics and act accordingly; when open discussions of ethical issues take place in the organization; when managers set positive examples; and when employees are actually familiar with code content. In other words, when the CCEs function ‘not as a set of stand-alone rules, but as an integrated, embedded part of a larger part of organizational culture’ (p. 604). A similar conclusion is reached by Rockness and Rockness (2005) regarding the effectiveness of the Sarbanes–Oxley Act. Yet it is interesting to note that in one multi-organizational study that found both compliance practices and ethical climate to be unique contributors (inversely) to the prediction of misconduct, the two were only modestly correlated – despite sharing same-source method variance (r = 0.24, p < 0.01) (Andreoli and Lefkowitz, 2009). This suggests that either, alone, can be effective. The results of additional studies and scholarship suggest that the effectiveness of a CCE may be contingent on: the organization having a formal ethics training program (Valentine and Fleishman, 2004), managers’ degree of familiarity with code content (Wotruba et al., 2001), the nature of the enforcement provisions provided (Lere and Gaumnitz, 2003; Baucus and Beck-Dudley, 2005), whether those who observe code violations report them (Nitsch et al., 2005), and the extent to which it is seen as being administered fairly (Weaver and Treviño, 2001). The impact of ethical climate Martin and Cullen (2006) conceive of work climates as ‘shared perceptions of procedures, policies, and practices, both formal and informal, of the organization’ (p. 177). Ethical climate is a particular type of prescriptive work climate that reflects the organization’s norms regarding policies, practices and decision making with moral consequences. They review the impact of ethical climate on three positive affective outcomes (organizational commitment, job satisfaction and psychological well-being) not directly germane to this chapter, and on dysfunctional behavior. However, because of the relatively few studies investigating negative effects – likely due, in part, to having restricted their review to only studies that used the Ethical Climate Questionnaire (ECQ) (Victor and Cullen, 1988) – they were compelled to group all such studies under the single rubric of dysfunctional behavior. They conducted a meta-analysis of the sample-size weighted correlations (corrected for attenuation) between each of five dimensions of ethical climate measured by the ECQ with a dysfunctional outcome (generally, an example of OMB or CWB as discussed earlier). They report a modest positive mean correlation between having an instrumental ethical climate (self-interest is what guides behavior) and dysfunctional behavior (r = 0.22). The other four dimensions of ethical climate (emphasizing the motivations of caring, personal moral conviction,

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abiding by external laws, and abiding by company rules and codes) yielded smaller and negative mean correlations with the measures of dysfunction: r = −0.14, −0.10, −0.15 and −0.17, respectively. A path analysis based on the mean correlations indicated no direct effects from any of the climate dimensions to dysfunctional behavior; the effects of ethical climate were mediated entirely by organization commitment and job satisfaction. The relative paucity of studies considered (between 6 and 10), the modest quantitative findings, and the indeterminacy of the dependent variables all suggest further exploration. The authors themselves, reflecting points made earlier here, also call for ‘conceptually clarifying the multiple dysfunctional organizational behaviors as they relate to ethical climate for both theory and managerial practice’ (p. 190). Moreover, despite their having defined ethical climate as entailing ‘shared perceptions’ of ‘organizational norms’ (emphases added), they point out that ‘ethical climate research, by and large, has explored mostly the psychological dimensions or individual-level effects’ (p. 188). Other scholars have focused on a somewhat different conceptualization and measurement of ethical climate. These recent works emphasize the salience of managerial leadership in the development, communication and effectiveness of an organization’s goals, policies, practices and expectations regarding morally relevant matters (Treviño et al., 2000; Dickson et al., 2001; Grojean et al., 2004; Brown, 2007; Sama and Shoaf, 2008). And in direct contrast to the multidimensional definition of ethical climate represented by the five dimensions of the ECQ, they generally employ a unidimensional measure of ethical climate that implicitly puts greater emphasis on the quantitative assessment of just how ethical is the organization’s climate for ethics – as indicated by the ethics-related actions of management. Perhaps the best documented of these measures is the Ethical Leadership Scale (Brown et al., 2005) for which the authors report some construct and empirical validity evidence, but more needs to be done. Ad hoc measures of ethical climate, also defined largely in terms of ethical leadership, have been found related significantly (inversely) to the severity of ethical problems reported in the organization and to the organization’s success in resolving them (Bartels et al., 1998), to self-reported misconduct and observed misconduct by others (both inversely) (Ethics Resource Center, 2003, 2005; Andreoli and Lefkowitz, 2008), and at the group level, inversely to the amount of unit unethical behavior and relationship conflict (Mayer et al., 2008). Primary research that considered jointly both individual and organizational antecedents Table 2.3 summarizes 15 recent studies that included at least one individual and one organizational, situational, contextual or work-related variable. Included were only those studies that allowed for an assessment of the unique contribution of each antecedent in conjunction with the others; thus these studies employed multiple regression, hierarchical regression, structural equation modeling (SEM), tests for mediation, or tests of interaction in the ANOVA (analysis of variance) of quasi-experimental data; they implicitly allow comparisons to be made of the relative salience of individual antecedents compared with organizational–situational antecedents.11 Although the spreading use of SEM has been responsive to the call for more theorizing and testing of theoretical models in this field (Robertson, 1993), all of the models tested can be criticized as oversimplified

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because of their failure to consider the potential role of moderator variables. A number of such interaction effects have been noted in studies employing multiple regression (noted below), but such interactions have not been explored by those employing SEM. Techniques are available for doing so (Cortina et al., 2001). These 15 studies may be characterized as follows: (a) a wide assortment of dependent measures of misconduct were employed, albeit all of them via written self-report; (b) a variety of research designs and forms of data analyses were implemented, including hierarchical multiple regression, path analysis and SEM, albeit all data were collected by questionnaires; (c) a considerable variety of populations were surveyed; and (d) a wide range of potential individual antecedents (for example, demographic attributes; personal values; level of moral development; a number of personality traits, including locus of control, Machiavellianism, adjustment and so on; cognitive ability; job reactions such as satisfaction, frustration, well-being, and commitment) and organizational–situational antecedents (organizational values; ethical climate; extent of compliance practices; normative expectations re ethical behavior and reporting unethical behavior; type of industry and organization; job attributes and stressors such as role conflict; method of compensation; perceived extent of misconduct by others; prior company reactions to misconduct; and type of ethical issue) were investigated. In most instances (11 of 15 studies) both individual and organizational–situational antecedents were jointly found to be significantly predictive of misconduct, although not necessarily all those that were investigated. In three instances situational–organizational, but not any individual attributes, were found to be significant (Akaah and Lund, 1994; Weber and Wasieleski, 2001; Andreoli and Lefkowitz, 2009); in only one study were none of the antecedents investigated found to be significantly predictive (Patterson, 2001). It appears, from the few studies in which it was investigated, that the influence of a variety of antecedent effects may be mediated by core affective reactions such as frustration (Fox and Spector, 1999), job-related negative affectivity (Fox et al., 2001) or perceived organizational support (Treviño and Youngblood, 1990). Of the 11 studies that used multiple regression or ANOVA techniques, more than half observed significant interaction effects between an individual and an organizational attribute or between two organizational attributes in the prediction of misconduct, as follows. Andreoli and Lefkowitz (2009): the organization’s ethical compliance practices with ethical climate and with pressure to compromise one’s ethical standards; Fox et al. (2001): job stressors with trait anger and with trait anxiety; Greenberg and Barling (1999): alcohol consumption with procedural justice; Grover and Hui (1994): role conflict with reward contingency; Kisamore et al. (2007): the organization’s integrity culture with personality attributes of prudence and adjustment; and Ross and Robertson (2003): size of commission to be gained by making an unethical choice with Machiavellianism, age, and sex. As indicated in this chapter’s epigram, it would seem clear from the results of these studies that Kurt Lewin (1939) was on the right track. To explain complex social behavior such as organizational misconduct one needs to assess the relative simultaneous contributions of as many of the various individual and contextual antecedents as possible (‘the structure of the total situation’) and the interactions among them, as well as the mediating processes that lead to the outcomes of interest (‘the distribution of the forces’ in the situation).

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Focal variable

Ethical judgment (likelihood of engaging in unethical behavior)

Misconduct (own + observed in others)

Akaah & Lund (1994)

Andreoli & Lefkowitz (2009)

407 marketing professionals

145 employed graduate students from a variety of organizations

Written survey, Structural equation model

Written survey, Hierarchical regression

Personal values of honesty, self-control, intellectualism, religiousness Org.: Perceived organizational values of service, productivity, leadership Ind.: Level of morality, age, sex, ethnicity, employment status, tenure, managerial responsibility, job satisfaction Org.: Perceived extent of org. ethical compliance practices, ethical climate, pressure to compromise standards, org. type, org. size

Ind.:

Sample

Design

Antecedents

Formal organizational compliance practices and ethical climate were independent predictors of misconduct. Compliance practices also moderated the relationship between ethical climate and misconduct as well as between pressure to compromise and misconduct. No individual variables were predictive

Perceived organizational, but not personal values were significantly related to ethical judgments

Results

Recent studies that investigated both individual and organizational (or situational) antecedents of misconduct

Citation

Table 2.3

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Ethical judgment (willingness to report CWB of others)

Ethical judgment (acceptability of misconduct)

Ethical judgment (level of moral development)

Counterproductive work behavior (aggregated checklist)

Arneson, Sackett & Richardson (2006)

Deshpande, Joseph & Prasad (2006)

Forte (2004b)a

Fox & Spector (1999)

Locus of control, management level, age, education, work tenure, sex Org.: Perceived organizational ethical climate type, type of industry Ind.: Work locus of control, trait anger and anxiety, job satisfaction, perceived likelihood of punishment for CWB, frustration Org.: Perceived situational constraints on job effectiveness

Ind.:

Self-efficacy, job satisfaction Org.: Perceived consequences of reporting, existing norms re reporting, perceived severity of CWB Ind.: Ethical optimism, education in ethics, sex, race, nurse Org.: Perceived ethical behavior of coworkers

Ind.:

Written survey, Structural equation model

Written survey, Multiple regression

Written survey, Multiple regression

Written survey – hypothetical scenarios, Multiple regression

185 full-time employees from 8 companies

214 managers and executives from a random selection of Fortune 500 companies

203 hospital employees (half nurses)

97 undergraduate students

Frustration mediated the effects of situational constraints, locus of control and anxiety on CWB (espec. orgdirected CWB). Anger and likelihood of punishment directly impacted CWB

Ethical behavior of co-workers, ethical optimism (perceived link between ethics and success), education in ethics , being female and a nurse were all significant predictors Only sex (F) and industry type significantly predicted ethical judgement

All individual and organizational antecedents were significant

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Focal variable

Counterproductive work behavior (aggregated checklist)

Aggressive workplace behavior (against co-workers, subordinates, supervisor)

Fox, Spector & Miles (2001)

Greenberg & Barling (1999)

(continued)

Citation

Table 2.3

Written survey, Hierarchical regression

Written survey, Multiple regression, Tests for mediation & moderators

Ind.:

Job-related affective well-being (negative), trait anger and anxiety Org.: Job stressors (perceived autonomy, constraints, conflict, distributive and procedural justice) Ind.: Age, education, income, alcohol consumption, history of aggressive behavior, job security Org.: Perceived procedural and organizational justice, workplace surveillance

Design

Antecedents

Demographic factors did not predict aggressive behavior against any target. Alcohol consumption and history of aggression independently predicted aggression against co-worker. Procedural justice and surveillance predicted aggression against supervisor. Alcohol consumption and procedural justice interact to predict subordinate and coworker aggression

Negative emotion mediated the effect of job stressors on CWB. To some extent trait anger and anxiety exacerbate the impact of stressors on personal (but not org.) CWB

292 employees from a variety of companies

136 male nonfaculty college employees

Results

Sample

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Kisamore, Stone & Jawahar (2007)

Academic misconduct

Ind.:

Acknowledged own unethical behavior

Honeycutt, Glassman, Zugelder & Karande (2001)

Sex, age, ACT score, prudent personality, personality adjustment Org.: Perceived integrity culture of the organization

Ind.:

Age, education, ethical values (perception of sales practices as ethical) Org.: Method of compensation

Ind.: Job commitment Org.: Role conflict, reward

Likelihood of lying

Grover & Hui (1994)

Written survey, Hierarchical regression

Written survey, Multiple regression

Written survey, Laboratory experiment, ANOVA

217 undergraduate business students

184 automobile salespeople

248 undergraduate students

Greater likelihood of lying in response to role conflict and when rewarded for doing so. Also significant conflict – reward interaction. Job commitment was significantly inversely related to lying Ethical values was the primary predictor of self-reported unethical behavior. Commissionbased compensation also was a significant predictor Prudence, adjustment and integrity culture (as a group) predicted each of 4 facets of academic misconduct. Age, sex, and ACT score predicted only one of 4 (likelihood of reporting cheating). Integrity culture interacted with prudence and with adjustment in predicting all 4 facets of misconduct

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Ethical judgment (likelihood of complying withpressure to give a bribe)

Ethical sensitivity

Patterson (2001)

Ross & Robertson (2003)

Focal variable

(continued)

Citation

Table 2.3

Locus of control, Machiavellianism, level of moral development, organizational commitment Org.: Perceived extent of industry control mechanisms, extent of misconduct by peers Ind.: Self-monitoring, Machiavellianism Org.: Perceived company’s ethical clarity (climate), adverse consequence of noncompliance on self/ others, % of incentive compensation, size of commission to be gained

Ind.:

Antecedents

252 sales employees in manufacturing, distribution or financial services

137 accountants from the ‘big-6’ public accounting firms

Written survey, Structural equation model

Written survey, Field experiment, ANOVA

Sample

Design

Company’s ethical clarity, % incentive compensation and sex (F) predicted willingness to bribe. Size of possible commission interacted with personal factors of Machiavellianism, age and sex

None of the independent variables was a significant predictor of ethical sensitivity

Results

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Ethical judgment (level of moral development)

Ethical decision making (making an unethical choice)

Ind.: Age, sex Org.: Type of ethical dilemma, type of work (managerial v. technical), type of industry (mfg. v. service)

Level of moral development, locus of control Org.: Company’s prior actions in rewarding/punishing ethical/unethical behavior, perceived organizational support for ethical behavior

Ind.:

Written survey, ANOVA

Written survey, Laboratory simulation, Path analysis

308 full-time employed MBA students

94 MBA students

Perceived organizational support, locus of control and cognitive moral development were all significantly related to ethical decisionmaking. Effect of the company’s prior actions on ethical decision making was mediated by perceived organizational support The situational factors of type of industry, type of dilemma and (to a lesser degree) type of work predicted level of moral development. Personal variables did not

Note: aLargely the same findings, from what appears to be the same survey, have been published five times (Forte, 2003, 2004a, 2004b, 2005, 2008). In order to avoid redundancy and possible misrepresentation of the data domain reflected in Table 2.3, only one study is presented in the table.

Weber & Wasieleski (2001)

Treviño & Youngblood (1990)

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Research conclusions Any attempt to summarize all of the research in such a vast field of enquiry is bound to be inadequate. But these seem to be warranted generalizations at this time: 1.

2.

3.

4.

5.

6.

7.

Very little empirical research has been conducted on presumed group- or organization-level influences on misconduct. Most of the reported research has been conducted at the individual level of measurement and statistical analysis; nevertheless, some of those results are interpreted mistakenly at the organizational level of theory. Ethics-related attitudes, values, beliefs and intentions (for example, ethical sensitivity, ethical judgment, anticipated likelihood of misbehaving) constitute the most frequent dependent variables investigated, rather than (un)ethical behavior or misconduct, per se. However, self-report composite measures of a variety of forms of admitted past misconduct are also used frequently. When both attitudes and behavior are investigated (for example, whistleblowing intentions and whistleblowing acts), attitudes and intentions tend to be predicted better and by different antecedents than is actual behavior. The bivariate relationships between demographic attributes (age, sex, ethnicity, education level, work tenure) and various outcomes are inconsistent, perhaps because each is generally assessed in isolation from the others and from other possible moderators, and because of population-specific effects. Also implicated may be the limited psychological information value imparted by demographic marker variables (Lawrence, 1997). The empirical literature is highly equivocal with respect to the effectiveness of corporate codes of ethics, and summary conclusions are hampered by the use of multiple and often questionable indicators of ‘effectiveness’. Individual perceptions of ethical climate and some individual personality attributes (for example, locus of control) appear to be related to organizational misconduct, with some evidence that their effects are mediated by affective constructs such as job satisfaction, frustration and organizational commitment. Little is known, however, about ethical climate and other aspects of organizational culture measured as organizational-level attributes. Both individual and situational–organizational antecedents are implicated in the appearance of organizational misconduct. Not enough research incorporating both sources has been reported to begin to approximate the relative contribution of each; the proportions are likely to vary as a function of the particular outcome variable considered. The developmental processes by which misconduct comes about almost certainly include interaction (moderator) effects and causal sequences with mediating variables that must be explained. Although Lewin’s interactionist perspective was recognized and applied theoretically to this domain more than 20 years ago (Treviño, 1986), theory-guided multivariate research has only begun to accommodate this complex view.

Notes 1.

Fair disclosure. In the midst of my struggling during the spring of 2008 to organize and synthesize this large, heterogeneous and somewhat confusing literature, and to develop some sensible suggestions, I was

Individual and organizational antecedents of misconduct in organizations

2.

3.

4. 5.

6. 7. 8. 9. 10. 11.

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taken aback to receive in the mail the July issue of the Academy of Management Review. It contained a ‘Special Topic Forum on Corruption in Organizations’, from which one could obviously tell that Ashforth et al. (2008) had secretly broken into my home, pirated my notes and used them to present a high-quality explication of many of the same issues about which I was currently writing! I use the term ‘misconduct’ very generally and somewhat colloquially to refer to any behavior that is ‘improper’ – purposely leaving unspecified whose behavior is referred to (for example, individual or organization), the motivation for the behavior (for example, volitional or unintended), the nature of other possible causes (for example, situational pressures) and the bases or standards by which it is judged to be improper (for example, morality or social convention). A case could be made for including yet another distinct, yet related literature, concerned with the manifestation and treatment of psychopathology in the workplace (see Thomas and Hersen, 2004). For example, that field acknowledges the role of work stressors in the etiology of such pathology, as well as a role for managerial and organizational interventions in accommodating its manifestations. But the field is more clinical in nature than is the focus of this chapter. Regarding level of theory, there may of course be mixed-level theories incorporating constructs from more than one level. In that case, one profitably thinks in terms of the theoretical level of each construct. When certain logical conditions are met, the term ‘antecedent’ is sometimes used strongly as a virtual synonym for ‘cause’. It is sometimes used weakly to mean ‘likely cause’ or ‘possible cause’ when the causal inference is less certain. The distinction is usually not made clear. In this chapter I tend to use the term weakly as much of the research is correlational. Each of the causal possibilities can be considered as an exemplar of a set elaborated by mediating variables and/or moderators of the causal relationship represented. And the possibility of reciprocal influence is simply a special instance of each. Martin and Cullen’s (2006) review of the ethical climate literature considers antecedents as well as consequences of ethical climate. However, as they point out, the former is rather sparse compared with the latter. They also analyzed the correlates of retaliation against whistleblowers, not reviewed here. Although there had been a sharp decline from 31 percent in 2000. The summary statistics are only approximate. I have not culled studies that inevitably were included in more than one review. The comparisons are obviously limited in each instance by the particular variables, and number of variables of each type, chosen for inclusion.

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Research on corruption and unethical behavior in organizations: the use of conjoint analysis Robert Folger, Robert Pritchard, Rebecca L. Greenbaum and Deborah DiazGranados

Introduction Hardly any writing on the subject of corruption in business can conclude its first paragraph without the mention of one or more high-profile scandals. In addition to cases of such broad scope, however, there are instances of corruption, white-collar crime, and ethical lapses in business practices that often fly under the radar. These lesser offenses, or milder forms of corruption, can go unreported as a result. In all likelihood they may not see the light of day without actions such as whistleblowing, which in turn probably will not occur unless someone is concerned enough about the offense in the first place. In this chapter we address a methodology – conjoint analysis – for assessing the perceived seriousness of various acts of corruption (which we assume should relate to the odds that such acts will be reported). The measurement of seriousness perceptions can, of course, extend from ratings of minor acts to those of the most scandalous in nature. The point we wish to make is readily illustrated in terms of one of the most recent compilations of articles on corruption in business. A special issue of the Academy of Management Review (Ashforth et al., 2008) addressed business corruption and included four articles. Although their discussion of numerous issues was wide-ranging, none included discussion of methods for measuring perceptions of the seriousness of whitecollar crimes and corruption in business. It is just such a measurement methodology that we review. In particular, we draw attention to conjoint analysis as one promising direction for future research. There are, of course, a variety of definitions of business corruption, and at least one author claims that no one has produced a definition that is short yet also satisfactorily complete (Philp, 1987). One approach is to focus on ‘the pursuit of individual interests by one or more organizational actors through the intentional misdirection of organizational resources or perversion of organizational routines’ (Lange, 2008, p. 710). The measurement approach that we explore is adaptable for assessing attitudes toward corrupt acts by individuals, or ‘the illicit use of one’s position or power for perceived personal or collective gain’, but is also equally well-suited for studying reactions to ‘the dangerous, viruslike “infection” of a group, organization, or industry’ (Ashforth et al., 2008, p. 671) – in other words, the perceptions of such events as those in which an organization wrongfully harms members of the public (for example, collusion, pollution). Our approach to the topic of organizational corruption is, as noted, one directed toward the topic of measurement. At the individual level that would involve assessing reactions to such acts as theft, embezzlement, bribery, overreporting hours or expenses, and the like (Ashforth et al., 2008; Pinto et al., 2008). For convenience we shall use a single example throughout, which could in principle be a systematic corporate practice 92

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or the act of a single individual: a situation in which customers and/or vendors are regularly overbilled. The organization of our material proceeds as follows. After reviewing the literature on crime seriousness and ethical judgments, we present conjoint analysis. In our discussion, we provide the reader with examples of the application of conjoint analysis and information for interpreting the results. Moreover, we provide a concrete example of a conjoint analysis study that is currently in process. A comparison between a conjoint analysis and survey methodology is also provided. In conclusion, we conclude this chapter with a brief discussion of limitations associated with conjoint analysis design, and future research. In our discussion of a conjoint analysis approach to assessing the perceptions of corrupt acts, we draw on two research traditions in particular: (a) the literature on perceived crime seriousness, and (b) the literature on ethical judgments. We discuss these separately below. We devote a large amount of attention to the ethics literature, however, because of its special relevance to the topic of corruption as we frame it (namely, as a function of how perceptions of corruption will influence the likelihood of it being reported). Crime seriousness research Sellin and Wolfgang (1964) initiated the study of crime seriousness as we use that phrase, namely where the dependent variable is a measure of the perceived seriousness of a given crime. Our conjoint analysis approach applies a similar logic to the study of corruption perceptions, so the rich literature on crime seriousness provides a useful context. Many methodological issues have been raised in the 60 years that have passed since Sellin and Wolfgang’s pioneering work. Some have involved referring back to landmark studies and critiquing them (or on occasion re-analyzing the original data). Other commentaries have focused on the variety of kinds of typologies that have been generated. Given our interest in a unique measurement method, we shall restrict our remarks to that topic alone. The interested reader should consult Stylianou (2003) for a thorough review of the field from a criminal justice perspective. As noted by Stylianou, the methods used to study crime-seriousness perceptions fall largely into three major categories. The first is the method of ranking. Respondents might be asked, for example, to rank a variety of criminal acts by differentiating the least from the most serious. The second method asks participants to rate such acts rather than to rank them. Commonly, those ratings take place in the context of a given offense used as a standard for comparison. In the case of the original work by Sellin and Wolfgang (1964), for example, participants were told to assign a value of 10 to the crime of automobile theft and then to rate all other crime stimuli vis-à-vis that reference crime. That is, the participants were to assign a number to a given criminal act according to how much more – or less – serious it was in comparison to automobile theft. The third measurement approach has its historical origin in the work of the psychometrician L.L. Thurstone (for example, Thurstone and Chave, 1929) and is called the method of paired comparisons. Edwards (1957) provides a useful analogy by illustrating how such a method would work if we had to estimate the weight of some objects without access to a scale: Instead of weighing the objects, we present them to individuals and ask them to make judgments about the respective weights of the objects. We could, for example, ask each individual to

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Research companion to corruption in organizations arrange the objects from the lightest to the heaviest. Or we could present the objects in all possible pairs and ask each individual to judge which member of each pair was heavier. Regardless of the particular method of obtaining the judgments, we could also order the objects from the lightest to the heaviest upon the basis of the average judgments of a large group of individuals. (p. 19)

The first of those procedures, which asks for an arrangement from light to heavy, corresponds to the ranking method. The second illustrates the method of paired comparisons – except, of course, that respondents would be asked to compare two types of criminal act against one another and say which one is worse than the other (where research sometimes allows for the response that the two crimes are equally serious; for example, Holtfreter, 2008). The above description makes such direct comparisons seem relatively straightforward, but that is not quite accurate. Edwards (1957) takes about 30 pages to detail the kinds of analyses necessary, and much of that discussion is at a fairly technical level. Perhaps not surprisingly, then, paired comparisons have not been conducted with any degree of frequency. For example, one commentator (Stylianou, 2003) reviewed over 50 studies and found that only two (Walker, 1978; Kwan et al., 2000) had used paired comparisons. An alternative approach is to obtain judgments by using scenarios whose features can be varied factorially. Here each participant responds to a particular combination of those features (for example, one experimental condition out of the 16 possible from a 2 × 2 × 4 design). Such an approach is one of the most popular in the ethics literature, to which we now turn. Conjoint analysis For decades, many studies have investigated the effects of corruption and the unethical acts of government and big business. People around the world, in small and large countries alike, have been exposed to a barrage of examples of corruption and unethical acts. Research has attempted to understand these acts by examining such topics as ethical decision making and by considering possible antecedents of corruption. Here we address related issues by way of a dual focus: (a) by considering ethics perceptions as a key antecedent of corruption (namely, because corruption can spread if unethical acts come to be perceived as acceptable), and (b) by presenting a statistically efficient way of investigating perceptions of ethical misbehaviors. Ethics-related decision making is often studied by conducting between-subject experimental designs. Researchers present participants with vignette manipulations and then measure their reactions. For example, Pierce et al. (2004) used a scenario-based study to manipulate various aspects of sexual harassment complaints on individuals’ decisionmaking standards. Although vignette-based studies can have some value, disadvantages include the extensive sampling required when a large number of case characteristics need to be tested (Brocke et al., 2004), which creates inefficiencies for data collection. Furthermore, between-subject designs only provide indirect conclusions (that is, based on inter-individual responses) regarding the predictors’ effects on the dependent variables (ibid.). Conjoint analysis, on the other hand, provides an efficient, within-subjects design that produces estimates of intra-individual weights even for complex stimuli. The sensitive nature of ethics research causes a number of methodological concerns. First, when ethics research is conducted via questionnaires, the order in which items

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appear may influence participants’ judgments (Stylianou, 2003). With adaptive conjoint analysis (where the participants’ early responses determine the stimuli to be presented subsequently), the first item presented to a given participant is determined randomly, and the subsequent presentation of the items depends on the participants’ previous judgments. This process provides an indication of how acts that vary in seriousness (for example, sexual harassment, or overbilling customers) can influence the dependent variable (for example, the level of immorality; Brocke et al., 2004). Second, self-report measures for ethics research can be subject to social desirability biases (Fernandes and Randall, 1992), whereby individuals present themselves in a manner consistent with culturally derived norms and standards (Zerbe and Paulhus, 1987). Individuals may be inclined to rate ethics-related items more strongly because of society’s expectations regarding such issues. Conjoint analysis extracts purer ratings of unethical behaviors by presenting them in a paired-comparison fashion. Respondents must choose between two items or sets of items and rate the strength of their preference. This process produces differential weightings for the items, which traditional survey methodologies may mask by social desirability. For example, participants may rate both scenarios where companies overbill customers and scenarios that involve acts of bribery as equally unethical on a Likert-type scale. More accurate ethicality judgments, however, come from choosing between two behaviors and rating how much worse (how much more unethical) one item is relative to the other. Using conjoint analysis Why do individuals consider certain moral behaviors to be right (or wrong) more often than others? This question motivated Folger et al. (2005) to test individuals’ perceptions of unethical behaviors based on different characteristics of moral intensity (namely, magnitude of harm and social consensus). Folger et al.’s research suggests that individuals perceive unethical behaviors differently; however, the survey methodology used to draw this conclusion may mask the true variation in participants’ judgments. Conjoint analysis experimental designs can extend Folger et al.’s research by demonstrating the strength of judgments based on certain levels of unethical behaviors. That is, when participants are asked to make judgments on the relative importance of attributes, the response may be that they are all important. Moreover, individual attributes in isolation can be perceived differently from when they are combined with other attributes. Furthermore, it is more difficult for an individual to visualize the combinations and make judgments. Rather, by using a conjoint analysis design, the participant is presented with pairs of attributes and asked to make judgments. Cooper and Richardson (1986) warned against concluding that one variable is stronger than another when this could be an artifact of the procedures, manipulations, or measures used. As with Folger et al.’s (2006) study, individuals may have a hard time judging single-phrase items of unethical behaviors. These items may be too vague for respondents to formulate accurate assessments, and therefore participants may incorporate their own background information into their judgments (Rosenmerkel, 2001). To address this concern, conjoint analysis incorporates different levels of unethical behaviors and collects data on each. For example, participants might rate the ethicality of overbilling customers or vendors using different levels of overbilling: (a) 5 percent; (b) 10 percent; (c)

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33 percent; and (d) 75 percent. With conjoint analysis, each level of overbilling customers or vendors is compared against different levels of a different behavior, such as employee theft or events of bribery. This ability to measure the ethicality of different levels of a behavior also has another advantage: it allows for the detection of non-linearity. It could well be that people see little difference between drug and alcohol use that is not noticeable or is not detrimental to performance, but once performance is impaired there is a large increase in the perceived unethicality. This produces a non-linear relationship between severity of the behavior and perceived unethicality. Pritchard and his colleagues (Pritchard, 1990; Pritchard et al., 2008) have argued that these non-linearities are important to measure and are quite common in many measures. Typical ratings of the unethicality of overall use of alcohol and drugs cannot identify these non-linearities. In contrast, because conjoint analysis yields perceptions at each level of the behavior, these non-linearities can be identified. Other applications of conjoint analysis Conjoint analysis is commonly used in consumer-behavior research (for example, Hair et al., 2006) because it allows researchers to decompose an individual’s overall preference for a given stimulus. The flexibility of conjoint analysis also allows it to be used for a variety of situations that require decision making. For that reason, the benefits of conjoint analysis are starting to be recognized by other disciplines (for example, Ryan and Hughes, 1997; Francis et al., 2001; Brocke et al., 2004). Conjoint analysis has been used in the health sciences to determine women’s preferences for miscarriage management (Ryan and Hughes, 1997). Criminology studies have used conjoint analysis to identify the seriousness of criminal offenses (Francis et al., 2001), and individuals’ attitudes towards the severity of punishments (Brocke et al., 2004). Along these lines, conjoint analysis is appropriate for studying individuals’ perceptions of unethical behaviors. Indeed, a number of business ethics studies that use conjoint analysis have begun to appear in the literature. Roozen et al. (2001), for example, employed a conjoint methodology and found that ‘ethical’ employees tended to be young, to have limited experience and authority, and to be of lower income. Conjoint analysis has also been used to investigate contingency models of ethics (Ferrell and Gresham, 1985). Tsalikis et al. (2001) found that the dollar magnitude of transgressions, and the hierarchical status of perpetrators, affect observers’ ethical judgments. Conjoint analysis has also been used to examine ethical perceptions in cross-cultural contexts (Shepherd, 2002; Tsalikis et al., 2002). By way of an approach similar to conjoint analysis, Luce et al. (2000) used a matching-choice methodology to try to separate emotion-focused factors from cognitive factors that operate during decision making. In particular, Luce et al. were interested in understanding how decision makers cope with the trade-off between higher-quality and lower-price alternatives. Luce et al. found that alternatives offering unfavorable quality were accompanied by negative emotions and thus emotion-focused coping behavior, whereas alternatives characterized by higher levels of quality were associated with cognitive coping mechanisms. These findings were generally supported even when controlling for cognitive factors. Although this study did not focus on ethics per se, it provides credence to the idea that conjoint analysis can be used to separate emotional

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Example: factors, factor levels, and group-level part-worths

Factors

Factor levels

Overbilling customers/ vendors

5% 10% 33% 75% Annoying but no debilitating symptoms Non-permanent injury Permanent injury without job loss Injury leading to job loss Ask for dates despite no for an answer Offensive sexual stories and jokes Unwanted attempts to stroke or kiss Threats for not being sexually cooperative Annoyed for a few minutes Performance affected for a single day Permanent fear, performance suffers Permanent fear, quits job

Safety risk

Sexual harassment by supervisors

Abusive supervisors

Part-worths −0.20 −0.05 0.04 0.22 −0.20 –0.08 0.14 0.20 −0.15 −0.11 0.12 0.16 −0.28 −0.14 0.20 0.24

and cognitive factors associated with moral issues, especially considering the parallels between matching-choice methods and conjoint analysis. A concrete example To illustrate a conjoint analysis design, consider the list of unethical behaviors shown in Table 3.1. This is an abbreviated example of a research study we are currently conducting. We are interested in determining the perceived ethicality of these behaviors. For this particular example, the conjoint design consists of four unethical-behavior attributes, with four levels of severity for each attribute (see Table 3.1). Participants provide preference judgments for a number of paired comparisons. To determine the order of the relevant stimuli for these judgments, we use the computer program, developed by Holling et al. (2000), which presents on the computer screen pairs of behaviors with varying levels of severity (see Figure 3.1). For example, the panel on the left might show the following pair of behaviors: (a) overbilling customers/vendors by 33 percent and (b) abusive supervision where the victim is annoyed for only a few minutes. The right side of the computer screen might show a different pair, such as the following: (a) overbilling customers/vendors by 10 percent, and (b) sexual harassment by supervisors whereby the supervisor tells offensive sexual stories and jokes. The participant then indicates the relative unethicality of these two pairs of behaviors on a scale ranging from –100, indicating that the behaviors on the left side are much more unethical, through 0, indicating that they are equally unethical, to +100, which would indicate that the behaviors on the right are much more unethical. The program randomly generates the initial pairs, and subsequent pairs are presented in an adaptive fashion depending on the participant’s responses. If the participant believes that the right side of the screen (for example, overbilling customers/vendors by 10 percent and sexual harassment by supervisors whereby the supervisor tells sexual stories and jokes) is about 10 percent worse than the left side

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Figure 3.1

Screen shot of paired comparison from the AlascA program

of the screen, then he or she moves the cursor to about the 10 percent mark on the 100point continuum. Interpreting conjoint analysis results The overall goal of conjoint analysis is to estimate the relative preference of different levels of the different attributes. In the case of unethical behavior, we are looking for the perceived unethicality of different levels of questionable behaviors across different types of behavior (for example, overbilling, safety risk, abusive supervision, sexual harassment). Interpreting the data from the analysis begins with examining the estimated ‘partworths’ for the attribute levels. These are a type of raw preference measure comparing the relative preference or unethicality of each level of the unethical behavior to the other levels of that behavior. They are in the form of deviations from the mean preference for that behavior. For example, in Table 3.1 the first behavior is ‘Safety Risk’. The partworths are shown in the last column, indicating that the first two levels of this behavior have negative values, showing relatively lower unethicality, and the last two have positive values, showing relatively more unethicality. In other words, part-worths are the extent to which an attribute level is unethical relative to the alternative attribute levels. The weights for the part-worths are estimated by ordinary least squares regression. Prior to interpreting results, each participant’s part-worths are standardized in order to obtain inter-individual comparability. That is, it is possible to compare participant

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0.25 0.2 0.15 0.1 0.05 0 –0.05

1

2

3

4

–0.1 –0.15 –0.2 –0.25

Figure 3.2

Plotted part-worths for safety risk

preferences for levels across attributes. Thereafter, the individual-level part-worths can be analyzed using hierarchical cluster analysis to determine whether groups of individuals tend to rate ethical judgments differently (Hair et al., 2006). If only one subgroup is produced, this suggests that the participants have homogeneous views regarding the conjoint stimuli. If a homogeneous sample is confirmed, then the individual-level part-worths can be aggregated to the group level. Part-worths are provided in Table 3.1 for illustrative purposes only. These sample part-worths are consistent with a priori expectations regarding the severity of the factor levels. The part-worth for tolerating a safety risk that is annoying to the victim, but does not cause debilitating symptoms (–0.20), is less than the part-worth for tolerating a safety risk that causes a non-permanent injury for the victim (–0.08), a permanent injury without job loss (0.14), and an injury leading to job loss (0.20). The ascending part-worths represent the participants’ judgments, such that the severity of the unethical behavior (for example, tolerating a safety risk) increases with each attribute level. The difference between the part-worths for each level of severity represents the strength of the participants’ judgments. Figure 3.2 shows the plotted part-worths for the ‘safety risk’ attribute. The greatest difference between part-worths is reflected by the steepest slope from severity level 2 to 3 (that is, the difference between a non-permanent and a permanent injury). The participants thus judge the difference in severity between these two levels as stronger than the difference between levels 1 and 3, and levels 3 and 4. The relative importance of each behavior can also be calculated. Relative importance scores represent the categories’ influence on the participants’ overall judgments. These scores are analogous to proportion of variance accounted for in multiple regression. In the case of conjoint analysis, they indicate how much of the overall variance in preference/unethicality is accounted for by the variations in each behavior. This value is determined by the difference between the highest and lowest standardized part-worths

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Table 3.2

Example: relative importance scores

Factor

Factor importance*

Overbilling customers/vendors Safety risk Sexual harassment by supervisors Abusive supervisors

25% 24% 19% 32%

Note: * Factor importance is equal to the difference between the highest and lowest part-worths for a given factor, divided by the sum of the differences for all factors, and multiplied by 100%

for a given category, divided by the sum of the differences for all factors. Table 3.2 provides relative importance scores for the example we provided earlier. For simplicity of interpretation, these sample relative importance scores are converted to percentages (see Brocke et al., 2004; Hair et al., 2006). Abusive supervisors, with a relative importance score of 32 percent, is the most influential behavior for participants’ judgments of ethicality, whereas sexual harassment – with a score of 19 percent – is the least. These results from conjoint analysis can be used to indicate the extent to which unethical behaviors are perceived as more dysfunctional (unacceptable) as a function of how the stimuli presented for judgments differ in (a priori) severity levels established on the basis of the investigators’ judgments. In other words, researchers order stimuli based on their own a priori judgments about presumed severity, but then the conjoint analyses show how the participants’ responses map onto – or do not map onto – those a priori judgments. For example, if we were determining the unethicality of two attributes (that is, overbilling of customers and bribery of lobbyists), the results from conjoint analysis tell us, when these two attributes are rated ‘conjointly’ by participants, how each combination of the attribute levels relate to one another; this information is represented by utilities or part-worths. Moreover, these part-worths can be compared to a researcher’s a priori beliefs of each attribute-level ranking. That is, researchers can determine, from the part-worths, trade-offs made by participants, and value systems of groups of people based on the levels of the attributes. Furthermore, calculating relative importance scores allows researchers to determine whether certain independent variables influence perceptions of dysfunctional outcomes more than others. A potentially stronger contribution of using conjoint analysis experimental designs is the capacity to provide comparisons among attribute levels. In the example provided, the attribute levels generate differences in perceived dysfunctional outcomes that are often overlooked in field studies, or inefficiently examined in between-subject experimental designs. Since a conjoint analysis design presents a participant with paired comparisons of attributes at different levels, the participant is faced with a decision to rate the comparisons on the scale provided (for example, ethicality). The participants’ ratings then allow the researcher to evaluate the ratings across the levels of attributes in order to determine the preferences of a participant or group, if the data are aggregated. Comparing conjoint analysis with traditional survey methodology To ascertain that conjoint analysis provides information beyond what is normally found in survey research, we conducted a preliminary study to compare individuals’ judgments

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of ethical behaviors using a conjoint analysis experimental design and a traditional survey methodology. Participants were asked to rate the severity of a set of unethical behaviors similar to those in Table 3.1. One group of participants used the conjoint analysis approach described above with its paired-comparison format. Another group responded to the same behaviors and levels, but were asked to judge the level of severity using a Likert-type scale. Results indicated that the variation in participants’ responses using conjoint analysis was much greater than the variation found when judgments were made using a Likert-type scale. This suggests that conjoint analysis may provide information beyond what is normally obtained with traditional survey research. Although these data are preliminary at this point, they are consistent with the argument that conjoint analysis may provide richer insights into how people make ethical judgments. Limitations of conjoint analysis Despite several desirable features of conjoint analysis, there are some notable limitations. First, because the stimuli that participants are exposed to are compared comparisons between attributes and their levels, as you increase the number of attributes and the levels, the length of the survey increases exponentially. Second, as the length of the survey increases, so does the time requested from the participant. Thus, exposing a participant to a large number of comparisons over a period of time could result in cognitive fatigue. This fatigue could impact data such that participants respond inconsistently. Given this, another impact on participants is via their motivation. By asking participants to answer a considerable number of questions, we are requiring them to maintain a level of motivation to answer as accurately as possible. Lastly, common feedback from participants is that they believe that they are being asked to rate the same items repeatedly. However, given the method of rating using paired comparisons, there is variation in each comparison but the variation is slight and may not be noticeable to the participants. Future research with conjoint analysis We see conjoint analysis experimental designs as particularly effective for understanding individuals’ judgments of unethical behaviors. In particular, we believe this methodology can be applied to Jones’s issue-contingent model of ethical decision making and behavior. Jones (1991) theorized that the characteristics of moral issues affect ethical decision making and behavior. We argue that conjoint analysis is an effective median for testing Jones’s model. A conjoint analysis experimental design can be created whereby each component of moral intensity serves as an attribute (that is, magnitude of the consequences, social consensus, probability of effect, temporal immediacy, proximity, and concentration of effect), with each attribute having various levels of severity. Future ethics research would further benefit from conjoint analysis studies with manipulated factors such as the motives of the perpetrator. Additional effects on judgments about unethical behaviors might also appear from variations in factors involving distinct levels of economic, physical, or psychological harm, as well as the relationships between the source and target of the behavior (see Folger et al., 2006, for a field study that examined source-target combinations and perceptions of unethical behaviors). Future research would also gain from examining whether fear, as a potential victim, affects unethical behavior judgments (Rosenmerkel, 2001).

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Conclusions Our goal for this chapter was to introduce a methodology that is infrequently used, but may nevertheless provide valuable insights into how people reason about research conducted on corruption and ethical issues. We believe that conjoint analysis can be usefully applied to the behavioral ethics and corruption literatures. One gap that conjoint analysis can fill is that of cross-cultural comparisons of ethicality of ratings. Little research has reported the differences between cultures when it comes to the ethicality assessment of behaviors. Moreover, studies that have considered culture usually limit it to a comparison between only two cultures. Furthermore, by gaining more detailed knowledge of ethical judgments, we can better inform organizations with the hope that greater awareness will cause managers to reconsider before behaving unethically, or deter others from behaving unethically, perhaps through prevention programs. We see this as an effort to enhance knowledge in the business ethics and corruption fields, and to indicate the need for further investigations on why unethical behaviors within organizations can vary in the extent to which they garner interest and attention (that is, what makes some seem of greater concern than others). References Ashforth, B.E., Gioia, D.A., Robinson, S.L. and Treviño, L.K. (2008), ‘Reviewing organizational corruption’, Academy of Management Review, 33, 670–84 Brocke, M., Göldenitz, C., Holling, H. and Bilsky Y.W. (2004), ‘Attitudes towards severity of punishment: a conjoint analytic approach’, Psychology, Crime & Law, 10, 205–19. Cooper, W.H. and Richardson, A.J. (1986), ‘Unfair comparisons’, Journal of Applied Psychology, 71, 179–84. Edwards, A.L. (1957), The Social Desirability Variable in Personality Assessment and Research, New York: Holt, Rhinehart & Winston. Fernandes, M.F. & Randall, D.M. (1992), ‘The nature of social desirability response effects in ethics research’, Business Ethics Quarterly, 2, 183–205. Ferrell, O.C. and Gresham, L.G. (1985), ‘A contingency framework for understanding ethical decision making in marketing’, Journal of Marketing, 49, 87–96. Folger,R., Markova,G., Kuenzi, M. and Gray, R. (2006), ‘Consequences, consensus, and moral intensity: behaviors rated in source-target categories’, paper presented at the annual meeting of the Academy of Management, Atlanta, GA, August. Francis, B., Soothill, K. and Dittrich, R. (2001), ‘A new approach for ranking “serious” offences: the use of paired-comparisons methodology’, British Journal of Criminology, 41, 726–37. Hair, J.F., Black, W.C., Babin, B.J., Anderson, R.E. and Tatham, R.L. (2006), Multivariate Analysis, 6th edn, Upper Saddle River, NJ: Pearson Prentice-Hall. Holling, H., Jütting, A. and Grossmann, H. (2000), Alasca: A Universal Program System for Decision and Utility Analysis, Güttingen: Hogrefe. Holtfreter, K. (2008), ‘The effects of legal and extra-legal characteristics on organizational victim decisionmaking’, Crime, Law and Social Change, 50, 307–30. Jones, T.M. (1991), ‘Ethical decision making by individuals in organizations: an issue-contingent model’, Academy of Management Review, 16, 366–95. Kwan, Y.K., Ip, W.C. and Kwan, P. (2000), ‘A crime index with Thurstone’s scaling of crime severity’, Journal of Criminal Justice, 28, 237–44. Lange, D. (2008), ‘A multidimensional conceptualization of organizational corruption control’, Academy of Management Review, 33, 710–29. Luce, M.F., Payne, J.W. and Bettman, J.R. (2000), ‘Coping with unfavourable attribute values in choice’, Organizational Behavior and Human Decision Processes, 81, 274–99. Philip, M. (1997), ‘Defining political corruption’, in P. Heywood (ed.), Political Corruption, Oxford: Blackwell. Pierce, C.A., Broberg, B.J., McClure, J.R. and Aquinis, H. (2004), ‘Responding to sexual harassment complaints: effects of a dissolved workplace romance on decision-making standards’, Organizational Behavior and Human Decision Processes, 95, 66–82. Pinto, J., Leana, C.R. and Pil, F.K. (2008), ‘Corrupt organizations or organizations of corrupt individuals? Two types of organization-level corruption’, Academy of Management Review, 33(3), 685–709.

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Pritchard, R.D. (1990), Measuring and Improving Organizational Productivity: A Practical Guide, New York: Praeger. Pritchard, R.D., Harrell, M.M., DiazGranados, D. and Guzman, M. J. (2008), ‘The productivity measurement and enhancement system: a meta-analysis’, Journal of Applied Psychology, 93, 540–67. Roozen, I., De Pelsmacker, P. and Bostyn, F. (2001), ‘The ethical dimensions of decision processes of employees’, Journal of Business Ethics, 33, 87–99. Rosenmerkel, S. P. (2001), ‘Wrongfulness and harmfulness as components of seriousness of white-collar offenses’, Journal of Contemporary Criminal Justice, 17, 308–27. Ryan, M. and Hughes, J. (1997), ‘Using conjoint analysis to assess women’s preferences for miscarriage management’, Health Economics, 6, 261–73. Sellin, T. and Wolfgang, M.E. (1964), Measurement of Delinquency, New York: John Wiley. Shepherd, P.L., Tsalikis, J. and Seaton, B. (2002), ‘An inquiry into the ethical perceptions of subcultural groups in the US: Hispanics versus Anglos’, Journal of Consumer Marketing 19, 130–48. Stylianou, S. (2002), ‘Measuring crime seriousness perceptions: what have we learned and what else do we want to know’, Journal of Criminal Justice, 31, 37–56. Thurstone, L.L. and Chave, E.J. (1929), The Measurement of Attitude: A Psychophysical Method and Some Experiments with a Scale of Measuring Attitude Towards the Church, Chicago, IL: American Psychological Association. Tsalikis, J., Seaton, B. and Shepherd, P.L. (2001), ‘Relativism in ethical research: A proposed model and mode of inquiry’, Journal of Business Ethics, 32, 231–46. Tsalikis, J., Seaton, B. and Tomaras, P. (2002), ‘A new perspective on cross-cultural ethical evaluations: the use of conjoint analysis’, Journal of Business Ethics, 35, 281–92. Walker, M.A. (1978), ‘Measuring the seriousness of crimes’, British Journal of Criminology, 18, 348–64 Zerbe, W.J. and Paulhus, D.L. (1987), ‘Social desirability responding in organizational behavior: A reconception’, Academy of Management Review, 12, 250–65.

4

The escalation of corruption in organizations Stelios C. Zyglidopoulos and Peter Fleming

‘And once Nicky got used to boosting stuff and seeing money, what do you think he was gonna do? Turn straight all of a sudden and give it up? No Frank. Once you gave him a taste on the house, just . . .’ ‘That was never . . . I mean, he knew. He knew. Everything I did, the cans I let through, the money we got went to keeping what we had.’ The Wire, Season 2, episode 11 . . . there are not many very good or very bad people, but the great majority are something between the two Plato’s Phaedo, 90a

Introduction The term ‘the post-Enron era’ has become a part of our language that connotes not only the period after 2002, but also a period where cynicism and mistrust towards public corporations reached new heights because of the harm they caused to the public. The scandals of Enron, Arthur Andersen, WorldCom, and many more shocked the world not only because of the amount of money involved, but also because corruption had been growing within these corporations for such a long time before the final crisis brought them down. Just as a gigantic, seemingly invulnerable tree eaten inside by termites collapses one day all of a sudden, these corporations also collapsed from an underlying invisible process of corruption, which escalated to the point of no return and brought them down seemingly out of nowhere. How did this happen? As Ashforth et al. (2008: 673) ask: ‘How do organizations, as entities, descend into corruption?’. Or, in other words, how did the corruption within these business organizations escalate to the point that it did? In this chapter, we endeavour to address this question by explaining the processes through which corruption can escalate within organizations. In answering this question, two paths can be discerned in the broader literature dealing with corruption and its causes. These two paths are usually referred to as ‘the bad apples’ approach, and ‘the bad barrels’ approach, and reflect the old dichotomy in explaining human behaviour as the result of free will or social determinism. The bad barrels approach basically says that the corruption we saw in these business organizations in the beginning of the millennium was nothing more than the result of the actions of a few corrupt individuals, who happened to occupy positions of power. As Bass et al. (1998: 14) state, ‘according to the bad apples argument, one can attribute organizational unethical behaviour to the personal characteristics of individuals’. And, it is a very reassuring explanation because it basically says that a few individuals are ‘bad’ and if we catch them and punish them, all is well in the world. The second approach deals with the social systems within which individuals become corrupt, and brings in disturbing experiments in social psychology that show random individuals within the appropriate setting as being capable of the cruellest acts. For example, Milgram’s (1974) famous obedience experiments showed that randomly chosen individuals, when assured by white-robed scientists that their acts were meant 104

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to benefit scientific progress, were more than willing to inflict obviously lethal electric shocks to others. Or, as Zimbardo (2007) reports on his famous Stanford experiments, he was able to turn ordinary college students into sadistic guards in less than a week, simply by asking them to play the role of guards in a hypothetical jail setting. Zimbardo reports that the students became so cruel towards their fellow students, who had been randomly assigned the role of prisoners, that he had to stop the experiment after only a couple of days, even though it was supposed to run for a week. This explanation of the escalation of corruption within organizations is much more disturbing because it basically implies that anyone under the ‘right’ conditions and in the ‘right’ situation can become corrupt. Drawing on both these approaches, in addressing the escalation of corruption within business organizations we follow what could be seen as a middle path, which argues that corruption escalates within an organization as a result of the positive feedbacks between person and circumstance. In other words, we see the escalation of corruption as the result of interactions between agency and structure. We identify the environmental systemic pressures, at the organizational level of analysis, and argue that combined with individual choice, various personality attributes and beliefs, along with a propensity for rationalization, contribute towards the escalation of corruption within organizations. Moreover, we identify two ways through which the interaction between the above elements of agency and structure can drive the escalation of corruption within organizations. We argue that their interaction consists of positive feedback loops that push corruption beyond what each element could have done on its own. And, that these combinations of the various elements of structure and agency tend to dampen the various moderating mechanisms that under normal conditions would have caught corruption before it escalated. Our argument is ordered as follows. We begin by discussing how we define the term ‘corruption’, how it has been used in the literature and how we are going to use it to approach the notion of escalation. Then, in the subsequent sections we discuss corruption in organizations as seen from a ‘bad apples’ and a ‘bad barrels’ perspective, and present some case studies from the, unfortunately, many instances that have made the news in recent decades. Following this we draw on the concepts of agency and structure to develop our argument about how corruption in business organizations escalates through the interactions between elements of agency and structure and use Enron, a case where corruption escalated beyond anyone’s expectations, to illustrate our point. We conclude with a discussion of the implications that our analysis has for the prevention of corruption in business organizations and a call for the development of codes of ethics as counterbalancing mechanisms to the financial performance pressures that all organizations face. Corruption and its escalation ‘What is corruption?’ is not an easy question to answer. One of the main problems in doing so is the fact that it is always surrounded by a great deal of complexity and is often embedded in a particular cultural appreciation. Of course, one could say about corruption what the US Supreme Court Justice Potter Stewart said in 1964 about obscenity, that ‘I know it when I see it’. But given that for our purposes we need something more concrete, we are going to follow Bratsis (2003), who argues that at the heart of our Western notion of corruption lays the misuse or abuse of the office, emphasizing the subversion of the public good by private interest. Examples of corrupt activities in this

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sense would include a manager using his power to feather his own nest, or a corporation selling what it knows to be harmful products in order to make a profit. And, along those lines, in a recent article, Pinto et al. (2008) identified two kinds of corrupt organizations, which they labelled ‘organizations of corrupt individuals (OCI)’ and ‘corrupt organizations (CO)’. In the first case ‘a significant proportion of an organization’s members act in a corrupt manner primarily for their personal benefit’ (p. 688), whereas in the case of corrupt organizations a ‘group collectively acts in a corrupt manner for the benefit of the organization’ (p. 688). As they say, OCI is a bottom-up phenomenon that could mostly manifest itself in the periphery of the organization, whereas CO is a top-down phenomenon manifesting itself mostly in the organization’s top management core. Given that these two kinds of corruption can coexist within the same business organization, Pinto et al. (2008) propose a 2 × 2 typology, where organizations could be not corrupt, OCI or CO, or both CO and OCI. But, how does this typology of corrupt organizations fit with the processes underlying the escalation of corruption? In brief, we can say that these three types of corrupt organizations (OCI, CO, or both) can be seen as the end states of the process of escalation of corruption which can take place in business organizations through the interaction of ‘bad apple’ and ‘bad barrel’ factors. In a sense, the process of escalation discussed here can help explain the transition from an organizational state of non-corruption to the above states of corruption. And, given that there are three possible end states, one could have expected that we identify and discuss three escalation processes that can lead to those states, something we are not doing for the following reason. We think that the underlying motivation that drives corruption in both cases of OCI and CO (and of course when they coexist) is the same, self-interest. Pinto et al. say that in the case of CO, business leaders perform corrupt acts that benefit the organization, but this is almost always not the reason why they do it. They simply exploit the organization to ‘feather their own nest’ and rationalize it by convincing themselves and others that what they do is for the benefit of the corporation. As proof, one can offer all the recent Enron-type scandals where this took place. In other words, to have a pure CO phenomenon would be like a team of top executives using the organization for corrupt activities, but who do not benefit personally from that activity. And, although such a case is theoretically possible, it almost never takes place in reality. Therefore, while OCI and CO might differ with respect to their primary beneficiaries and possibly their scale, given their common motivational base, we expect that similar factors will drive them and cause them to escalate. So, in the following sections, we do not differentiate between OCI and CO but discuss the bad apple and bad barrel factors whose interaction might lead to an escalation of corruption in organizations.1 However, before we proceed to discuss the factors that contribute to the escalation of corruption, we must address the issue of what we mean by escalation. Acording to Wikipedia, ‘escalation is the phenomenon of something getting more intense step by step’ (Wikipedia, 2008), and as examples, the same entry refers to the escalation of a fight or the ‘military presence and nuclear armament during the Cold War’. Here, we use the term in a similar manner to refer to the dramatic or exponential increase in corrupt activities within the corporation. But which aspects of corruption are the ones whose eventual predominance differentiates the above corrupt types of organizations (OCI, CO, OCI + CO) from the not particularly corrupt type? We suggest that ‘the escalation of corruption

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consists in an increase in the ease (of engaging in corrupt practices), severity of its consequences and the pervasiveness of the illegality’ (Fleming and Zyglidopoulos, 2009). And, accordingly, in the subsequent sections we show how the interaction between certain ‘bad apple’ and ‘bad barrel’ factors contributes to the increase of the ease, severity, and pervasiveness of corruption. The bad apples approach Popular consciousness is rife with the images of individuals who appear to be inherently bad, and range from those known for their financial crimes, such as Andy Fastow of Enron, to people known for violent crimes and even genocide, such as Charles Manson and Adolf Hitler. And, in the popular media, and the law for that matter, this is the most often used way of explaining corporate corruption. Although it now appears to be widespread within society, this explanation, that ‘bad people do bad things’, was not always the case. As Foucault (1977) has observed, it was with the emergence of modern society that the individual agent of the deed was targeted by authorities and punished; until then, the focus was on the criminal deed itself, whereas individuals were often seen as victims of bad luck, fate, or trickery by some evil demon. In other words, it was in the modern era that the view of people as innately bad came to pervade society, and, therefore according to the bad apples approach, ‘one can attribute organizational unethical behaviour to the personal characteristics of individuals’ (Bass et al., 1998: 14). However, this approach also has a rather reassuring aspect to it, which could to some extent also contribute to its popularity, as it implicitly assumes that most people (in societies, organizations and so on) are good, with only a few ‘bad apples’. And, this bad apples approach, applied at a higher level of analysis, has recently allowed the media and the US government to basically argue in the wake of the Enron wave of scandals that it was only a few business organizations that were corrupt and that the financial system was fundamentally sound. Of course this view is a partial one, ignoring what Arendt (1963) famously referred to as ‘the banality of evil’ and what Zimbardo (2007) documented by showing how systemic factors can turn normal individuals to corrupt or even criminal activities. But even if it is a partial view of reality, the bad apples approach highlights a few factors that do play a significant role in corruption within organizations, no matter what other systemic factors come to add to them. These factors are: agency, rationalization, and individual characteristics. Agency In her influential book Eichmann in Jerusalem (1963), Arendt reported on the trial of the infamous Nazi Adolf Eichmann, and made some very powerful and controversially uncomfortable observations about how ‘normal’ Eichmann, who was on trial for crimes against humanity, was. As she reports, Eichmann was repeatedly tested by psychiatrists, to decide whether he was insane, with the tests showing that he was actually quite normal, and with some doctors even reporting that he seemed to be a very nice personable man. However, even if Arendt in a sense opened the door to the critics of the bad apples approach through her coining of the phrase ‘banality of evil’, she refused to go all the way in and forget one of the most important factors of corruption: agency. As she writes:

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Under conditions of terror most people will comply but some will not, just as the lesson of countries to which the Final Solution was proposed is that ‘it could happen’ in most places but it did not happen everywhere. Humanly speaking, no more is required, and no more can reasonably be asked, for this planet to remain a place fit for human habitation. (p. 233)

In other words, even if she acknowledges the role that some other factors, which we discuss in the following, play in criminal and corrupt activity, she refuses to give up agency’s crucial role, a role that becomes most visible through a bad apples perspective. In the end even if the choice were made easier, and softened up by other factors, it was still individual choice leading to moral responsibility. For example, in the 1996 case of Barings Bank, where one man, Nick Leeson, managed on his own to bankrupt his firm, the importance of agency cannot be in doubt. Leeson was a Barings securities’ derivatives trading manager at the Singapore stock exchange from 1992 to 1995. During this period, he lost more than £800 million of his bank’s money and in 1995 went on the run to avoid prosecution, a story that was eventually made into a movie staring Ewan McGregor. Leeson himself wrote a book of his story, Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World (1996). Rationalization As Anand et al. (2004: 40) say, ‘corrupt individuals tend not to view themselves as corrupt’. But how is this possible? Cressey (1953) answers that in the case of trust violators, ‘by using the rationalization that they are borrowing, trust violators are able to remain in full contact with the values and ideals of former and present associates who condemn crime’ (1953: 121). In one case of a trust violator described by Cressey, the individual ‘borrowed’ thousands of dollars from the bank he was working for, while keeping track of exactly how much he ‘owed’ on the back of an envelope in which he kept the titles of some property he owned and was planning to eventually sell and repay his debt to the bank. In a sense one can say that in his mind he had somewhat ‘mortgaged’ his property for ‘the loan’ he took. So, when he was caught he saw it not as fraud, but just as bad timing. Rationalizations have a long history in social psychology going back to Festinger (1937) and Freud (1957). For our purposes here, what matters is that as in the above case of the trust violator, corrupt individuals in organizations use a number of rationalizations to ‘deceive’ themselves into thinking that what they are doing is justified. Anand et al. (2004), in the context of business organizations, define rationalizations as ‘mental strategies that allow employees (and others around them) to view their corrupt activities as justified’ (p. 39). They proceed to identify a number of such mental strategies that individuals tend to use to avoid blaming themselves while engaging in corrupt activities. Some of these rationalizations identified by Anand et al. are: denial of responsibility, where someone denies control and therefore responsibility over the situation (‘this is the way things are done here, and if I was not doing it then someone else would’), denial of injury (‘nobody gets hurt’), denial of victim, which demeans those who bear the brunt of the corruption (‘they were asking for it or deserved it’), social weighting, where the act is justified by arguing that the law prohibiting it is wrong, appeal to higher loyalties, where agents justify their behaviour by appealing to higher values (‘It was God’s will’), and balancing the ledger, where the act is deemed justifiable given the benefits that the agent creates for the company (‘they owe me that much’). Most of these rationalizations can

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easily be seen in the Enron wave of scandals that we all witnessed a few years back. For example, in the Enron case, one could even say that Jeff Skilling really believed that he was acting in a way that would save his firm from failure, while at the same time he was digging himself and his firm into a bigger hole. The notion of rationalization allows us to see how agency in a sense manipulates itself into doing what it might not have done otherwise, and adds to our understanding of how quite often otherwise honest and law-abiding citizens can engage in remarkable acts of unlawfulness (Audi, 1988; Williams, 1998; Tenbrunsel and Messick, 2004; Zyglidopoulos and Fleming, 2008). Moreover, rationalization clearly shows the limitations of the bad apples approach, because some of these rationalizations are indeed ‘pushed’ on the individual by his/her environment, weakening in a sense the role of agency, which means that although the blame cannot and should not be removed from the level of the individual, if we are to better understand the phenomenon of organizational corruption, we have to look at the system level through a bad barrels perspective. Individual characteristics A problem in discussing the matter of how individuals act in corrupt or even evil ways is that often this discussion degenerates into what Darley (1992) calls a kind of ‘naive psychology’, meaning rather simplistically that bad people cannot help themselves and will do bad things no matter what. And while this approach might indeed be a simplistic one, research in social psychology has identified a number of characteristics that people prone to corruption tend to have. For example, Haines and Leonard (2007) have claimed to have identified significant features of an individual’s character, which make one more likely to commit corrupt acts, such as fraud, bribery and falsification, within a corporate context. In addition, Jackall (1988), while studying the effects of individual ambition on organizational behaviour in large banking firms, found that individuals with exceedingly high levels of ambition were more likely to transgress moral codes, stab colleagues in the back, and so on. Therefore, we could say, ambitious individuals are more likely to get involved in corrupt activities. The example of Jeff Skilling of Enron comes easily to mind. Moreover, Treviño (1986) investigated two issues with respect to the moral personality of the individual: first, whether one actually perceives an event as a moral problem and second, how one decides to act in relation to it. With regard to the first issue, Treviño suggests that particular traits reflect the ethical maturity of individuals, as ethical agents, and can help predict whether one will see a given issue in a moral light or simply as neutral. Furthermore, in their model of cognitive moral development, Kohlberg and Turiel (1973) argue that a person passes through three stages of ethical development as one advances from childhood to adulthood. These three stages of moral development are: ‘preconventional’ where an individual follows the rules for fear of punishment, ‘conventional’ where one follows social norms and expectations because they have been internalized as guidelines for behaviour with others and ‘principled’ where one is aware of differing moral positions, and freely chooses to endorse certain ethical ideals. Kohlberg and Turiel found that only about 20 per cent of American adults reach the final stage of moral development, and according to subsequent measures, most find themselves somewhere in level two (Treviño, 1986). Finally, in addition to these dispositional traits, other researchers have argued and

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found evidence that demographic categories might predict the moral rectitude of individuals. Ford and Richardson (1994) provide a useful summary of such characteristics. Among others, they report that strength of religious beliefs is linked to ethical standards, that women are more likely to act ethically, that the educational background of an individual might play a role – with business students more likely to engage in corrupt behaviours (see Hawkins and Cocanougher, 1972) – and that both older and younger employees are more ethically oriented. Therefore, we may conclude this section by saying that while the bad apples approach has its limitations, it does make us see more clearly certain individual-level factors that could influence the corrupt behaviour of people within organizations, such as agency, rationalizations, and individual characteristics. The bad barrels approach The bad barrels view to organizational corruption can be illustrated by an ancient Greek play, ‘Oedipus Rex’ that won its author, Sophocles, much praise over the centuries. It is a story of a basically good man, who is led into performing the vilest of crimes, according to ancient Greek morals, by fate. The story goes that when Oedipus, the son of Laius and Jocasta, king and queen of Thebes, was born, the Oracle of Delphi predicted that the child was doomed to kill his father. Laius and Jocasta decide to expose the child in the mountains, and sent it off with a shepherd to the mountain of Cithaeron. However, the shepherd feels sorry for the child and gives it to another shepherd, who was on his way to Corinth, and Oedipus is eventually raised in the court of the King of Corinth, believing himself to be the King’s natural son. When he grows up, Oedipus, given that some suspicions about his origins had emerged one night when a lot of drinking was involved, decides to consult the Oracle about his real parents. The Oracle, instead of answering the question and resolving the matter, tells him that he was destined to mate with his own mother and kill his father. Believing the King and Queen of Corinth to be his real parents, and fearful that the prophecy of the Oracle will be fulfilled, Oedipus leaves Corinth and wanders towards Thebes. On his way he meets Laius, has an argument with him and kills him; then he goes on to solve the Sphinx’s riddle, ‘What creature walks on four legs in the morning, two legs at noon and three legs in the evening?’. Oedipus provides the right answer (man), frees Thebes from the curse of the Sphinx, and is rewarded by being offered the hand of the queen, who had recently lost her husband, in marriage along with the kingship of Thebes. When the play actually begins, many years later, we witness King Oedipus searching for the one responsible for the unclean act that had caused the plague that is devastating Thebes, and in the process discovering the truth. In remorse, he blinds himself and leaves Thebes in exile, in obedience to his own earlier decree that he would exile whoever was responsible for performing the unclean act that had offended the gods and caused the plague. He wanders around Greece, blind, with a small boy as his guide, and eventually, as we find out from another play of Sophocles, he finds a resting place in Athens, where King Theseus allows him to die in peace. Oedipus committed two very serious crimes in his life, but was he guilty of them? Some might say no, because he did not know what he was doing or could not have done otherwise. Therefore, according to the principle of alternate possibilities, which states ‘that a person is morally responsible for what he has done only if he could have done otherwise’ (Frankfurt, 1969: 829) he was not really guilty. The moral of the story is that nobody is safe from becoming evil; under the right conditions anybody can turn to evil. And this is the disturbing idea

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behind the bad barrels perspective, an idea that has received some empirical support from studies in social psychology (Milgram, 1974; Zimbardo, 2007), war crimes (Arendt, 1969; Bauman, 1991; Zimbardo, 2007) and instances of corruption within business organizations (Gioia, 1992; Birsch and Fielder, 1994). As Keane (1993: 233) says: Just over forty years ago, ground-breaking work by Sutherland (1949) focused attention on corporate crime. His research informed us that corporate offences cannot be explained by individual pathology, and that any search for the causes of corporate crime should begin with an examination of the context wherein most corporate crimes occur – the organization.

And, while this perspective represents a biased view of reality, by following it, not only do we complement the previously discussed perspective, but we are also able to better examine some environmental, both organizational and economic, related factors that play a significant role in organizational corruption: (i) conformity, (ii) available rationalizations, (iii) ethical distance, and (iv) organizational complexity. Conformity There is a large literature within the field of social psychology that empirically validates the notion of group conformity in individuals within groups. For example, Ash (1951, 1956) found that a large number of individuals were willing to conform to group pressures even though their physical senses were telling them otherwise. As Aronson (2004: 17) puts it, ‘the task was so easy, and physical reality was so clear-cut, that Ash himself firmly believed that there would be little, if any yielding to group pressure’. But this was not the case: 35 per cent of all responses conformed to that of their groups, agreeing with obviously incorrect judgements. Furthermore, similar results were reported when the same experiment was repeated in different cultures and settings (Deutsch and Gerard, 1955; Wolosin et al., 1975). What does this all mean, however, for organizational corruption? One way of looking at it is that if people are so susceptible to peer pressure even when it comes to physical reality, how much more would they be prone to peer pressure when it comes to social reality that is uncertain and socially constructed? Furthermore, peer pressure in organizations can be exaggerated given the hierarchical nature of bureaucracy and the ability of superiors to impose their will to subordinates. Jackall (1989: 109) quotes an ex-vicepresident of a large investment bank, who made this point very clearly when he said that ‘What is right in the corporation is not what is right in a man’s home or in his church. What is right in the corporation is what the guy above you wants from you. That’s what morality is in the corporation’. Therefore, under such conditions, given that humans already have a predisposition for conformity, and where organizational situations are often quite complex, the contribution of conformity to organizational corruption can be seen. For example, in the WorldCom saga, the board of directors agreed to some requests that should have been refused, but went along because according to Haddad (2002), Bernie Ebbers won them over with a number of perks (cited in Zekany et al., 2004). As Simpson (2002: 54) states about the intersection of authority and conformity, with respect to events in General Electric: [O]rganizations can facilitate wrong doing even when officers follow standard organizational practice or, indeed, formalized procedures. In the first case, organizational culture intervenes

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to establish parameters of acceptable and unacceptable conduct. While agents may understand that they are ‘technically’ violating the law, the culture of the organization nullifies the significance of the illegality. Geis’s General Electric price-fixers, for instance, reflected that, although they knew price fixing was wrong, their acts did not – in their minds – constitute a criminal act.

Furthermore, conformity as a factor facilitating organizational corruption can also be seen at a different level of analysis where business organizations compete with one another for profits, but at the same time all conform to this overreaching ideal that they should all outperform each other. The result is that for many firms the earning of quarterly results has become the sole focus of operations, and this obsession with short-term profits takes place in a period where the average profitability of many industries has declined over what it used to be in previous decades (Grant, 2008) due to a great extent to pressures from global competition – and some might say pressures particularly from China (Engardio et al., 2004). Therefore, given the level of dependence that the careers of managers have on short-term financial performance, it is easy to see why some managers decide to engage in corrupt activities, which provide them with such a short-term performance. Available rationalizations We argued earlier that one way in which individuals manage to justify their actions to themselves is rationalization, but the raw material from which they construct such rationalizations is often found in the organizational or institutional environments in which they function. According to Gioia (1992), in building rationalizations and justifications for our actions, we do not start from scratch; instead, we draw on scripts that are available within our environment and already have embedded in them a certain level of legitimacy. Aronson (2004) reports numerous experiments in social psychology which have shown that individuals take clues on how to act from their environment. Therefore, combining this tendency of individuals to take hints about their behaviour from their environment with their ability for rationalization, an organizational environment only needs to provide individuals with a template and a rationale, for corruption to be enacted. Cressey (1953), in a study of trust violators – individuals with no criminal background who violated a position of trust and absconded with funds entrusted to them – found that a major precondition for trust violation was the existence in their organizational environment of some rationalization that they could use as a cover-up, even if only to themselves. As he says, ‘by using the rationalization that they are borrowing, trust violators are able to remain in full contact with the values and ideals of former and present associates who condemn crime’ (p. 121). Such rationalizations that individuals found in their environment and used are best captured in what Bandura (1990: 31) calls ‘euphemistic language’, where a rather neutral/ambiguous term is used to name a reprehensible act that most of the time has a name, but individuals do not want to use because it implies a level of immorality. For example, ‘murder’ becomes ‘collateral damage’, ‘kidnapping’ becomes ‘extraordinary rendition’, and in the case of WorldCom, ‘cost’ becomes ‘capitalizing excess capacity’. Ethical distance As Milgram (1974) documented in his disturbing experiments, the subjects were more likely to follow orders and inflict electroshocks to the ‘learners’, the more concealed/

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distant the victim was: ‘obedience was significantly reduced as the victim was rendered more immediate to the subject’ (pp. 35–6). And, Milgram’s observation that distance can act as a facilitator of unethical and even criminal behaviour has been noticed on many other occasions. Bauman (1991: 1992) captures this when he says: Being inextricably tied to human proximity, morality seems to conform to the law of optical perspective. It looms large and thick close to the eye. With the growth of distance, responsibility for the other shrivels, moral dimensions of the object blur, till both reach the vanishing point and disappear from view.

He continues that because large bureaucratic organizations can create this distance for individuals, bureaucracies can in a sense enable otherwise moral individuals to engage in morally reprehensible acts. To quote Bauman again (p. 10), this happens because ‘once isolated from their distant consequences, most functionally specialized acts either pass moral test easily, or are morally indifferent’. Drawing on these prior works, we have referred elsewhere (Zyglidopoulos and Fleming, 2008) to the distance between an act and its moral consequences as ‘ethical distance’ and argued that within business organizations and with regard to corrupt activities, ethical distance can act as an important facilitator in the gradual transformation of individuals from innocent bystanders to guilty perpetrators. We identified two types of ethical distance that can play a role in organizational corruption: temporal and structural. We defined temporal ethical distance as ‘how far into the future the consequences of one’s acts are’ (p. 269), and structural distance as ‘ways in which complex organizations remove individuals from the dubious end-result of their deeds’ (p. 269), a construct similar to Bauman’s (1991) notion of social distance. As we saw in some of the recent scandals, both temporal and structural distance facilitated the involvement of individuals in the ongoing corrupt activities of the business organization. In the Enron case, for example, by making extremely optimistic price projections for up to 20 years, some traders were able to benefit in the present through a perverted bonus scheme that rewarded them immediately for profits that were, at best, not going to materialize for many years into the future (McLean and Elkind, 2003). This is consistent not only with what we argued about how temporal ethical distance can facilitate organizational corruption, but also with Kramer and Messick (1996: 76): ‘the temporal frames used to evaluate choice in organizational dilemmas are often relatively myopic. Because of discounting the shadow of the near future looms larger than that of the distant future’. Moreover, structural ethical distance facilitated organizational corruption in the recent wave of scandals as, among others, it made it easier for individuals to rationalize their involvement. In the WorldCom case, for example, many of those involved knew that the firm was in trouble, but considered their personal contribution as negligible and therefore were easily able to rationalize it away. Organizational complexity Organizational complexity, as we understand it here, refers to the degrees of organizational differentiation and specialization with respect to profession, task, access to information and so on (Thompson, 1967; Khandwalla, 1977; Perrow, 1984; Dooley and Van de Ven, 1999). Further, while complexity does not directly influence the evolution of corruption in organizations, it can have a significant indirect influence through its impact

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on the previously discussed factors of rationalization, and ethical distance. As became quite evident from the recent wave of scandals, organizational complexity increased the impact and likelihood of rationalization, and created ethical distance. First, organizational complexity increased the credibility of many rationalizations, which sounded a lot more plausible within a complex organizational context. As we mentioned previously, Anand et al. (2004) identified a number of rationalizations, some of which are seen as being a lot more credible within a complex organizational environment. For example, denial or responsibility within such an environment sounds more plausible because the shifting of responsibility to someone else – superior or subordinate – is much easier. Also, given the fact that most organizational acts are broken down in many specialized, but on their own ineffective, individual actions, it is much harder to pinpoint the responsibility on one particular individual. Moreover, denial of injury is a lot more credible within a complex organizational environment, since the routes from actions to consequences are not always clear. Second, organizational complexity can have a significant impact on ethical distance, thus enabling individuals to participate and even perform acts which they would otherwise have considered to be corrupt or even criminal. Elliot and Schroth (2002) call this phenomenon the ‘fog of complexity’, because not only does it provide more hiding places (Vaughn, 1990) that increase the structural distance between action and consequence, but it can also make individual actions ethically neutral or even meaningless by breaking them down into many simple and apparently unrelated activities (Bauman, 1991). In a sense, then, organizational complexity acts as an amplifier of corruption, and this can be seen very well in the Enron case, where its Byzantine off-balance sheet system enabled Enron’s executives to hide the firm’s losses for a long time, since nobody could make any sense out of the financial statements (McLean and Elkind, 2003), and amazingly nobody was willing to admit to this. The escalation of corruption In this section, we argue that it is the mutually reinforcing interactions between the factors we previously identified using the ‘bad apples’ and ‘bad barrels’ perspectives that underscore the escalation of corruption within corporations. In particular, we shall show through examples drawn from the recent Enron scandal how through their interaction some of these factors contribute to the ease, severity, and pervasiveness of corruption. Ease Once a corrupt activity within an organization has started, the existence and interaction of some of the previously discussed factors can make its repetition easier. For example, individuals might find it easier to engage in the particular act again because, provided they do not get caught the first time, now they perceive the risk of the act differently. So, ethics aside they would most likely perceive the risk of getting caught as being less than the first time. But, in addition to agency, rationalization also becomes easier because once a corrupt act has happened on one occasion, people tend to get used to it. As an Enron manager said, ‘You did it once, it smelled bad . . . You did it again, it didn’t smell as bad’ (McLean and Elkind, 2003: 128). Moreover, it is quite likely that a person has to start a trail of deception to cover up and keep covered up his/her original act. Also, deception has a momentum of its own. As Bok (1999: 25) said, ‘it is easy, a wit observed,

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to tell a lie, but hard to tell only one. The first lie must be thatched with another or it will rain through’. In other words, past deceit can be seen as a sunk cost that escalates one’s commitment to a trajectory of deception (Staw, 1981). For example, in the Enron case, pressured by their own promises to Wall Street, the Enron executives found it increasingly easy to artificially inflate the company’s revenues for a number of reasons. First, the incentive to do so in the form of the discrepancy between what they were promising Wall Street and the reality kept increasing, so it was clearly in their interest to keep the illusion of success going. Second, they probably discounted the risk of getting caught the more time went by and their financial manoeuvrings remained ‘successful’. Third, rationalizing their behaviour became easier not only through habituation, as the Enron executive quote above implies, but also because they had invented a euphemistic language to describe unsavoury acts in a favourable light. Severity By performing a corrupt act, individuals within the organization are trying to achieve a goal that they could not have achieved in a legitimate way. But by achieving their goals through corrupt activities, they most importantly neglect to address the underlying issue of why such goals cannot be achieved legitimately. For example, in the case of lying about their firm’s financial performance, they achieve their goals – Wall Street performance, bonuses, prestige and so on – but avoid the underlying fact that their firm cannot achieve such levels of financial performance. Hiding the problem does not make it go away, it just postpones its resolution and makes it bigger, so as time goes by greater and greater acts of deception will be required to achieve the desired results, not only because the underlying cause of the initial underperformance has not been addressed and has grown, but also because one has to cover up old lies. As Messick and Bazerman (1996: 21) put it, ‘one risk often overlooked when practicing deceit is the continual need to maintain deception. Not only are original facts hidden, but the fact of hiding must also be hidden’. Furthermore, pushing the problem into the future is facilitated by the ethical distance which exists through our ‘natural’ discounting of the consequences of future events, because as Kramer and Messick (1996: 76) say: ‘discounting the shadow of the near future looms larger than that of the distant future’. Moreover, according to prospect theory (Kahneman and Tversky, 1979; Levy, 1992), ‘individuals will generally be risk averse when making choices involving gains (i.e., positively framed choices) but will take risks when making choices involving losses (i.e., negatively framed choices)’ (Levy and Whyte, 1997: 794). In other words, as we discuss elsewhere, this can lead into ‘a downward spiral that sees increasing losses reinforce heightened risk-taking, which in turn results in further losses’ (Fleming and Zyglidopoulos, 2008: 841). In the case of Enron, we saw such a downward spiral, where the executives involved started out with unreasonable promises towards Wall Street (personal ambition), were ‘forced’ to lie to cover up their inability to meet such promises (motive – agency), kept on lying and covering up more and more losses (increased motivation, changing attitudes towards risk), and in this way ‘pushed into the future’ (ethical distance) any immediate problems, which in turn along with habituation made it easier for them from an ethical point to keep on lying (rationalization).

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Pervasiveness Another aspect of escalating corruption is pervasiveness, which basically means that an increasing number of individuals in the organization are involved in corrupt activities (Fleming and Zyglidopoulos, 2008). However, given the distinction between corrupt organizations and organizations of corrupt individuals (Pinto et al., 2008), the increase in pervasiveness and the spread of corruption must be differentiated in two kinds of trajectories. In the first case, more and more individuals are recruited towards a common goal, whereas the second case involves the spread of the practice of corruption to many unrelated corrupt activities. Also, while in both cases agency, rationalization, and organizational complexity will play a significant role, the emphasis of each one will differ. In the case of a trajectory leading to a corrupt organization, agency and rationalization will play a significant role in the recruitment of individuals to the common goal because it is most likely that individuals will be brought into the ‘game’ gradually. This process can be seen as one that transforms individuals from innocent bystanders to innocent participants to active rationalizers and eventually guilty perpetrators, as we have argued elsewhere (Zyglidopoulos and Fleming, 2008). In the case of an organization of corrupt individuals, however, the trajectory will probably be a bit different because the spread of corruption has to come mainly from a rationalization of the ‘everybody is doing it’ kind or from a rationalization of the ‘nobody will get hurt’ kind. In a sense what happens is that these rationalizations become part of the organizational culture so that they spread within the organization, turning what starts out as destructive deviance into destructive conformity (Warren, 2003). Moreover, in both trajectories that lead to increased pervasiveness of corruption, organizational complexity can play an amplifying role (Fleming and Zyglidopoulos, 2008) for different reasons. In the case of increasing pervasiveness leading to a corrupt organization, organizational complexity can assist recruitment by ‘hiding’, from the individuals asked to participate, the real nature of their involvement. In a sense it allows for what Cialdini (1996) calls the ‘foot in the door’ principle, where a minor initial commitment positively primes the actor for a more corrupt request, later on. Furthermore, organizational complexity also facilitates the pervasiveness of corruption found in an organization of corrupt individuals because it allows for many hiding places not easily accessible to other parts of the organization. In both cases, organizational complexity helps to ‘push’ individuals along a ‘continuum of destructiveness’ until it is too late to go back (Darley, 1992). Discussion, implications and conclusion Perrow (1984) referred to some industrial disasters as ‘normal accidents’, because as he said they resulted from the very unlikely and unforeseeable situation where a number of systems fail all at once, without enough slack in the system to prevent total ‘meltdown’. In a sense one could also say that scandals like the Enron case resulted from a similar situation, where a great number of factors happened to come together at the wrong place and time all at once to produce an escalation of corrupt behaviour lasting long enough for the firm to eventually collapse. Does this mean that such phenomena, where corruption within organizations escalates to a point of no return, beyond a ‘corruption threshold’ (Pinto et al., 2008), are unavoidable? Unfortunately, the answer has to be ‘yes’, but a ‘yes’ with an important qualification.

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We have to answer such a question in the affirmative because no matter what safety precautions we might take, there could always be an unforeseeable combination of factors that causes such events. But this is not the whole story. Just as in the case of industrial accidents such as chemical spills, nuclear accidents, or space ship disasters, we try to learn from them so that we prevent this particular set of factors from causing similar events in the future; in the case of organizational corruption, we have in a similar way to try to prevent these factors from recreating them in the future. And again, just as in the case of industrial accidents, in the case of organizational corruption we have to start by discussing the moderators, which under normal conditions prevent corruption from escalating to such an extent. Elsewhere, and particularly in relation to corporate deception as the main form of corrupt activity, we have identified a number of moderators that could usually halt corruption from escalating (Fleming and Zyglidopoulos, 2008). For example, the incentives to engage or continue engaging in corruption might not be present, the perpetrators might get caught early on – thus stopping the corruption from spreading, it might be difficult to rationalize away the various corrupt activities, and it might be difficult to enlist new individuals. However, ‘these moderators do not exist in a vacuum [and] we expect that they are influenced by the organization’s control systems (Rosanas and Velila, 2005) and its ethical code (Somers, 2001; Adam and Rachman-Moore, 2004; O’Dwyer and Madden, 2006)’ (Fleming and Zyglidopoulos, 2008: 844). In other words, financial and ethical controls can prevent corruption from escalating and they have to be developed in a balanced way. Given that the main purpose of the financial controls is to align ‘the interests of the individuals with the interests of the organization’ (Rosanas and Velila, 2005: 85), financial controls are much more suitable to prevent an organization from becoming an organization of corrupt individuals than to prevent it from becoming a corrupt organization. In the Enron case, of course financial controls failed, but it was their focus on financial performance that led them into a particular kind of failure. One can feel quite certain that the firm’s financial control systems were quite successful in preventing most firm employees from stealing computers, supplies or other equipment from the firm, or from falsifying their expense accounts. In other words, in order to prevent the escalation of corruption we saw in the recent wave of scandals, we need to focus on the development of ethical or business codes that focus not exclusively on ‘what results we achieve’, but rather on ‘how do we act in order to achieve such results?’. According to Kaptein and Schwartz (2008: 113), a business ‘code is a distinct and formal document containing a set of prescriptions developed by and for a company to guide present and future behaviour on multiple issues of at least its managers and employees toward one another, the company, external stakeholders and/or society in general’. Also, since more often than not business codes deal with ethical issues, they are referred to as ‘ethical codes’ or ‘organizational codes of ethics’ (Cressey and Moore, 1983; Weaver, 1993; Adam and Rachman-Moore, 2004). Such codes, when integrated into the firm’s operations (Adam and Rachman-Moore, 2004; Kaptein and Schwartz, 2008) can prevent the escalation of corruption by strengthening the above presented moderators. Finally, although the main purpose of this chapter has not been the role of ethical codes in the escalation of organizational corruption, we would like to conclude by emphasizing the need for the development of such ethical codes that can act as a

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counterbalance to extreme pressures for financial performance, which can corrupt the financial control systems, as we have witnessed in the Enron-led wave of scandals. Note 1. Of course, given that CO is top down whereas OCI is bottom up, the speed and particular trajectory through which corruption will escalate might differ, but we leave this for further research and discuss here the main factors whose interaction can drive to extremes both CO and OCI.

References Adam, A.M. and Rachman-Moore, D. (2004), ‘The methods used to implement an ethical code of conduct and employee attitudes’, Journal of Business Ethics, 54 (3), 225–44. Anand, V., Ashforth, B.E. and Joshi, M. (2004), ‘Business as usual: the acceptance and perpetuation of corruption in organizations’, Academy of Management Executive, 18 (2): 39–53. Arendt, H. (1963), Eichmann in Jerusalem: A Report on the Banality of Evil, London: Penguin. Aronson, E. (2004), The Social Animal, New York: Worth. Ash, S. (1951), ‘Effects of group pressure upon the modification and distortion of judgment’, in H. Guetzkow (ed.), Groups, Leaderships and Men, Pittsburgh, PA: Carnegie Press, pp. 117–90. Ash, S. (1956), ‘Studies of independence and conformity: a minority of one against a unanimous majority’, Psychological Monographs, 70 (9, Whole No. 416). Ashforth, B.E., Gioia, D.A., Robinson, S.L. and Treviño, L.K., (2008), ‘Re-viewing organizational corruption’, Academy of Management Review, 33 (3), 670–84. Audi, R. (1988), ‘Self-deception, rationalizations and reasons for acting’, in B. McLaughlin and A. Rorty (eds.), Perspectives on Self-Deception, Berkeley, CA: University of California Press, pp. 92–122. Bandura, Albert (1990), ‘Selective activation and disengagement of moral control’, Journal of Social Issues, 46 (1), 27–46. Bass, D., Butterfield, K. and Skaggs, B. (1998), ‘Relationships and unethical behaviour: a social network perspective’, Academy of Management Review, 23 (1): 14–31. Bauman, Z. (1991), Modernity and the Holocaust, London: Polity. Birsch, D. and Fielder, J. (1994), The Ford Pinto Case: A Study in Applied Ethics, Business and Technology, New York: Suny Press. Bok, S. (1999), Lying: Moral Choice in Public and Private Life, 2nd edn, New York: Vintage. Bratsis, P. (2003), ‘The construction of corruption, or rules of separation and illusions of purity in bourgeois societies’, Social Text, 21 (4): 9–33. Cialdini, R. B. (1996), ‘Social influence and the triple tumor structure of organizational dishonesty’, in D.M. Messick and A.E. Tenbrunsel (eds), Codes of Conduct, New York: Russell Sage, pp. 44–58. Cressey, D.R. (1953), Other People’s Money: A Study in the Social Psychology of Embezzlement, New York: Free Press. Cressey, D. and Moore, C., (1983), ‘Managerial values and corporate codes of ethics’, California Management Review, 25, 53–77. Darley, J.M. (1992), ‘Social organization for the production of evil’, Psychological Inquiry, 3 (2), 199–218. Deutsch, M. and Gerard, H. (1955), ‘A study of normative and informational social influence upon individual judgment’, Journal of Abnormal and Social Psychology, 51, 629–36. Dooley, K. and Van de Ven, A. (1999), ‘Explaining complex organizational dynamics’, Organization Science, 10 (3), 358–72. Elliot, A.L. and Schroth, R.J. (2002), How Companies Lie: Why Enron is Just the Tip of the Iceberg, London: Nicholas Brealey. Engardio, P. and Roberts, D. with B. Bremner in Beijing and Bureau Reports (2004), ‘The China Price’, Business Week, New York, Issue 3911, December 6, p. 102 Festinger, L. (1957), A Theory of Cognitive Dissonance, Stanford, CA: Stanford University Press. Fleming, P. and Zyglidopoulos, C.S. (2008), ‘The escalation of deception in organizations’, Journal of Business Ethics, 81 (4): 837–50 Fleming, P. and Zyglidopoulos, C.S. (2009), Charting Corporate Corruption: Agency, Structure and Escalation, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Ford, R. and Richardson, W. (1994), ‘Ethical decision-making: a review of the empirical literature’, Journal of Business Ethics, 13, 205–21. Foucault, M. (1977), Discipline and Punish. Birth of the Prison, London: Penguin. Frankfurt, H.G. (1969), ‘Alternate possibilities and moral responsibility’, Journal of Philosophy, 66 (23): 829–39.

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Freud, A. (1937), The Ego and the Mechanisms of Defence, London: Hogarth Press. Gioia, D.A. (1992), ‘Pinto fires and personal ethics: a script analysis of missed opportunities’, Journal of Business Ethics, 11: 379–89. Grant, R.M. (2008), Cases to Accompany Contemporary Strategy Analysis, Oxford: Blackwell. Haddad, C. (2002), ‘How Ebbers kept the board in his pocket’, Business Week, October 14: 138–40 Haines, R. and Leonard, L. (2007), ‘Individual characteristics and ethical decision-making in an IT context’, Industrial Management and Data Systems, 7 (1): 5–20. Hawkins, D.I. and Cocanougher, A.B. (1972), ‘Student evaluations of the ethics of marketing practices: the role of marketing education’, Journal of Marketing, 36: 61–4. Jackall, R. (1989), Moral Mazes: The World of Corporate Managers, Oxford and New York: Oxford University Press. Kahneman, D. and Tversky, A. (1979), ‘Prospect theory: an analysis of decision under risk’, Econometrica, 47 (2): 263–91. Kaptein, M. and Schwartz, M.S (2008), ‘The effectiveness of business codes: a critical examination of existing studies and the development of an integrated research model’, Journal of Business Ethics, 77, 111–27. Keane, C. (1993), ‘The impact of financial performance on frequency of corporate crime: a latent variable test of strain theory’, Canadian Journal of Criminology, 35: 293–308. Khandwalla, P. (1977), The Design of Organizations, New York: Harcourt Brace Jovanovich. Kohlberg, L. and Turiel, E. (1973), Moralization: The Cognitive Developmental Approach, New York: Holt, Rinehart & Winston. Kramer, R.M. and Messick, D.M. (1996), ‘Ethical cognition and the framing of organizational dilemmas: decision makers as intuitive lawyers’, in D.M. Messick and A.E. Tenbrunsel (eds), Codes of Conduct, New York: Russell Sage Foundation, pp. 59–85. Levy, A.S. and Whyte, G. (1997), ‘A cross-cultural exploration of the reference dependence of crucial group decisions under risk’, Journal of Conflict Resolution, 41: 792–813. Levy, J.S. (1992), ‘An introduction to prospect theory’, Political Psychology, 13: 171–86. McLean, B. and Elkind, P. (2003), The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, New York: Penguin. Messick, D.M. and M.H. Bazerman, (1996), ‘Ethical leadership and the psychology of decision making’, Sloan Management Review, 37 (2): 9–22. Milgram, S. (1974), Obedience and Authority, New York: Harper Perennial. O’Dwyer, B. and Madden, G. (2006), ‘Ethical codes of conduct in Irish companies: a survey of code content and enforcement procedures’, Journal of Business Ethics, 63 (3): 217–36. Perrow, C. (1984), Normal Accidents, New York: Normal Books. Pinto, J., Leana, C.R. and Pil, F.K. (2008), ‘Corrupt organizations or organizations of corrupt individuals? Two types of organization-level corruption’, Academy of Management Review, 33 (3): 685–709. Rosanas, J. M. and Velilla, M. (2005), ‘The ethics of management control systems: developing technical and moral values’, Journal of Business Ethics, 57 (1): 83–96. Simpson, S. (2002), Corporate Crime, Law and Social Control, Cambridge: Cambridge University Press. Somers, M.J. (2001), ‘Ethical codes of conduct and organizational context: a study of the relationship between codes of conduct, employee behaviour and organizational values’, Journal of Business Ethics, 30 (2): 185–95. Staw, B. (1981), ‘The escalation of commitment to a course of action’, Academy of Management Review, 6 (4): 577–87. Sutherland, E.H. (1949), White-Collar Crime, New York: Holt, Reinhart and Winston, Inc. Tenbrunsel, A.E. and Messick, D.M. (2004), ‘Ethical fading: the role of self-deception in unethical behaviour’, Social Justice Research, 17 (2): 223–36. Thompson, J.D. (1967). Organizations in Action: Social Science Bases of Administrative Theory, New York: McGraw-Hill. Treviño, L.K. (1986), ‘Ethical decision-making in organizations: a person–situation interactionist model’, Academy of Management Review, 11: 601–17. Vaughn, D. (1990), ‘Autonomy, interdependence and social control: NASA and the space shuttle Challenger’, Administrative Science Quarterly, 25, 225–58. Vaughn, D. (1996), The Challenger Launch Decision: Risky Technology, Culture and Deviance at NASA, Chicago, IL: University of Chicago Press. Warren, D.E. (2003), ‘Constructive and destructive deviance in organizations’, Academy of Management Review, 28: 622–32. Weaver, G.R. (1993), ‘Corporate codes of ethics: purpose, process and content issues’, Business and Society, 32 (1), 44–67 Wikipedia (2008), wikipedia.org/wiki/Escalation, accessed June 6, 2008. Williams, O.F. (1998), ‘Other people’s money: a study in self deception’ in O.F. Williams (ed.), The Moral

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Imagination: How Literature and Film can Stimulate Ethical Reflection in the Business World, Notre Dame, IN: University of Notre Dame Press, pp. 71–84. Wolosin, R., Sherman, S. and Cann, A. (1975), ‘Predictions of own and other’s conformity’, Journal of Personality, 43: 357–78 Zekany, K.E., Braun, L. and Warder, Z.T. (2004), ‘Behind closed doors at WorldCom: 2001’, Issues in Accounting Education, 19, (1): 101–17. Zimbardo, P. (2007), The Lucifer Effect: How Good People Turn Evil, London: Random House. Zyglidopoulos, C.S. and Fleming, P. (2008), ‘Ethical distance in corrupt firms: how do innocent bystanders become guilty perpetrators?’, Journal of Business Ethics, 78 (1–2): 265–74.

PART II CONSEQUENCES OF CORRUPTION

5

Labour relations and ethical dilemmas of extractive MNEs in Nigeria, South Africa and Zambia Gabriel Eweje

Introduction This chapter examines the criticisms against multinational enterprises (MNEs) relating to labour issues and labour practices in less developed countries (LDCs). The debate over whether MNEs do or do not contribute to development in LDCs has lasted for years, with divergent ramifications drawn for the macro and micro levels of society. Tensions over pay, expatriate employments as against the locals, negotiation rights and employees’ well-being are evident. While MNEs provide jobs and help improve the standard of living of the underdeveloped countries, they are often blamed for paying local workers less than they pay their counterparts in the home country for comparable work, or that they value the safety of foreigners less than the safety of home country residents. It has also been suggested that the basic human and labour rights have been disregarded for as long as human labour has been employed. That said, it should also be mentioned that extractive MNEs have been providing community development projects (such as clinics; drinking water; roads; schools, and paying teachers to work in rural areas; and building market stalls, to mention but a few), in order to establish a cordial relationship in different communities in the case countries. Mining companies are also improving the health and safety issues related to working in the mining industry in South Africa as well as providing education and training for miners who were marginalized during the apartheid era. These are laudable projects; however, the gesture has not improved the relationship with various stakeholders as MNEs have expected. Against this background, it is suggested that with increasing exposure to social practices, cultural norms, and the myriad ways of dealing across national boundaries, MNEs can no longer ignore the importance of ethics in their activities. Thus, globalization and the quest for success by MNEs in foreign markets have had a significant impact on the field of business ethics. Issues in Nigeria, South Africa and Zambia This present study conducted in Africa reveals that labour issues create intense pressure and ethical dilemmas for MNEs by their employees in the oil and mining countries of Nigeria, South Africa and Zambia. An ‘ethical dilemma’ is defined in this chapter as a situation in which there is no obvious ‘right’ or ‘wrong’ decision, but rather a right or right answer (Ghillyer, 2008). Similarly, an ethical dilemma exists when an agent finds him- or herself in a moral situation that is not his or her fault in which all the choices presented are instances of ethically impermissible actions. Thus, in Nigeria, South Africa and Zambia,1 an ethical dilemma occurs when MNE managers believe that they have 123

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applied the ‘right’ strategy in a particular situation but they are perceived to have made an ‘unfair’ decision by their employees. In other words, MNE managers assume that they have adopted the right strategy available; however, their employees perceived their behaviour as questionable or rather unethical. Given the growing importance of local employees for MNEs, especially with regard to staff in culturally and institutionally distant foreign subsidiaries, their retention becomes a crucial success factor for MNE management. The ability of large multinational oil and mining companies to leverage the innovative and entrepreneurial potential of their dispersed assets has been met by trade union resistance. Trade unions in LDCs are demanding from MNEs operating in their countries the same ‘rights’ as their counterparts in developed countries. The dominant theme in prior MNE research – particularly from a theoretical perspective – has been ‘on the exploitation of givens rather than on the creation of novelty’ (Birkinshaw, 1997, p. 207). Therefore, the need for research that explicitly links MNE moral obligations and trade unions in LDCs is pressing. Further, very little research has been done on ethical dilemmas of MNEs regarding employee relations in developing countries. To this end, this chapter2 will examine various ethical issues that relate to labour relations and trade unions in the oil and mineral industries of Nigeria, South Africa and Zambia from 1950 to 2000.3 Specifically, this chapter examines the ethical characteristics of MNE–employee relations. The following questions are addressed: (a) What are the causes of local versus expatriate ethical dilemmas of multinational oil and mining companies in LDCs? (b) How do issues concerning subcontracting and collective bargaining get resolved? The discussion is lent focus and direction through the analysis of critical incidents from the perspectives of various stakeholders: government, oil companies and leaders of trade unions. The research questions raised above are significant to the study of business ethics, corporate social responsibility (CSR) and MNE–labour relations. Indeed, the employment relationship is one of the most important issues in business today facing MNEs. First and foremost, the belief in LDCs that MNEs do not cater for their employees and are only interested in wealth creation needs urgent attention as the issue has become a major moral dilemma for MNEs. This is in stark contrast to the argument that corporations ought to act in keeping with ethical concerns above and beyond making profits. Furthermore, it does not sit comfortably with the belief that the interests of the shareholders are given priority over the interests of other stakeholders. For decades, there have been moral guidelines on labour issues for MNEs in several multilateral compacts adopted by governments, and these regulatory guides comprise a framework for identifying expected moral behaviours. Corporate actions that transgress these principles are understood to be unethical and immoral. One such regulatory framework is the International Labour Organization (ILO) guidelines for multinational corporations which state that ‘MNCs should respect the rights of employees to join trade unions and to bargain collectively . . . should develop non-discriminatory employment policies and promote equal job opportunities . . . should provide equal pay for equal work (International Labour Office, 2006, p. 56)’. Based on these premises, employees primarily want to be treated as persons who are genuine partners in the business enterprise. They want decent salaries and job security, as well as appreciation from managers, a sense of accomplishment, and opportunities to display their talents.

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Moreover, many employees are interested in participating in planning the future direction of the company, defining the public responsibilities of the corporation, evaluating the role and quality of management, and – most especially – helping to set the tasks assigned to their job. These developments in labour relations must be understood in the light of a very different tradition whereby an employee is clearly subordinate to the employer, is legally obligated to obey the employer’s orders, and has few rights other than the right to quit. Unfortunately, the moral dilemmas of MNE–labour relations in LDCs have been neglected in business ethics research. Further, most developing countries lack proper regulation and a sophisticated legal system that protect employees. The issue of labour relations between trade unions and MNEs in developing countries can occasionally be highly contested, as emerged during fieldwork in Africa. Against this background, MNEs have been singled out and encouraged to take the lead in adopting a long-term investment approach to training and development. The study in Africa reveals that multinational oil and mining companies are perceived as ‘exploiters’ of oil and mineral resources, with only wealth creation for shareholders as their primary purpose. This idea is consistent with the contemporary view that foreign interests have dominated petroleum and mining industries to the detriment of LDCs, a view that has found plenty of support in recent times. This belief has also raised questions over the moral responsibilities of MNEs in LDCs. Evidently, in 1980, despite widespread nationalization of petroleum and mining industries in LDCs, 43 per cent of crude oil and mining products were either produced or purchased by multinational oil and mining companies, and 24 per cent were produced by smaller foreign companies. In similar vein, reports by the UN World Report Investment (1998 and 2007)4 also reveal that petroleum and mining were among the largest industries in terms of foreign assets and sales in LDCs. According to the 2007 report, the present boom in mineral and oil prices has brought development issues related to the extraction of natural resources back into focus, and the appropriate use of revenues from exports could enable a number of mineral-rich LDCs to accelerate their development process. The evident prosperity of the oil and mineral industries contrasts starkly with the general pattern of economic development in LDCs. A number of upper-middle and highincome developing countries (such as South Africa) have managed, in varying degrees, to take advantage of their natural wealth in order to advance at least certain aspects of development. On the other hand, in many other resource-rich developing countries, the impact of mineral wealth on development has been disappointing. For example, the pace of economic development is very slow in Nigeria and Zambia, notwithstanding the significant returns from oil and copper earnings. This could be linked partly to the inadequacy of governments’ development policies; corruption by government officials; and the past political instability. Indeed, only in South Africa has a thoroughgoing industrial advance been achieved in Africa. It is not surprising, therefore, that minerals and metals have accounted for a progressively higher proportion of South African exports. It should be noted that all three countries are young democracies and as such their political, social, and economic circumstances will change with time. Extractive MNEs are vital to most of the economies of African countries. These countries rely heavily on mineral and oil extraction for exports and foreign earnings. This is consistent with the UN Investment Report (2007): for many developing countries, minerals are the most

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important export products. The heavy reliance on minerals is particularly pronounced among oil-producing countries in Africa. The trade unions are convinced that the MNEs in LDCs are there as commercial enterprises with profit motives and not for the well-being of their employees.5 However, MNE managers that were interviewed point out that they look after the well-being of all their employees and provide better remuneration and benefits than national companies.6 The response of the companies is embedded in the argument that if firms do not act in a socially responsible and lawful manner, shareholder wealth is not increased. This notion gives empirical weight to an ‘enlightened self-interest’ argument for CSR and shows that corporations do recognize the effect of socially irresponsible and unlawful behaviour on their businesses, and are beginning to focus on the long-term benefits of CSR, such as employee loyalty. In the absence of international codes and ethical standards, national trade unions in Africa have formed relations with their counterparts in both the developed and developing countries to influence the behaviour of MNEs through the creation and strengthening of international regulatory frameworks. International cooperation among unions in different countries is said to have taken place since the infancy of the labour movement (UN World Report, 1994),7 and its focus has been on specific issues and grievances. Cooperation has, in turn, given rise to institutional structures for the coordination and implementation of international activities. Strengthening international structures has been a longstanding concern of trade unions, and more so in recent years, reflecting, among other things, the globalization of economic activities. The main benefit of international cooperation by unions has been exchanging information and relevant publications (such as the relationship between the South African National Union of Mine Workers and the British National Union of Miners during the apartheid era), thereby assisting unions during negotiations with employers. Another example is when the South African Trade Union Congress criticized Shell International for placing an advertisement in South African newspapers in May 1997 inviting applications for jobs in the Nigerian oil industry, targeting refinery workers and offering workers four times their current salary. The reason for this salary inducement according to one source was the strike-breaking character of the work and the dangerous condition of undermaintained refineries. At the time, the Nigerian refinery industry had been retrenching, and had victimized workers who had been active in the unions. Thus, the main purpose of international union organizations is to promote solidarity between organized workers in different countries, predominantly concerning trade union recognition and basic trade union rights, especially in developing countries. Theoretical framework In this chapter, two theoretical frameworks – legitimacy theory and stakeholder theory – will be used to guide the analysis and interpretation. This is because the issues raised in this chapter encompass the two key perspectives, and the empirical study provides a complex real-world test of often-used frameworks. The two theories say something about corporate issues management, with each of them approaching the corporation and its environment from different theoretical directions. As a result, each makes different assumptions about the nature of the corporation and the relationship between corporations and their environment.

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Stakeholder theory Stakeholder theory holds that effective management requires the balanced consideration of and attention to the legitimate interests of all stakeholders. A stakeholder is defined as anyone who has a stake in or claim on the firm. This has been interpreted to include any group or individual who can affect or is affected by the corporation. It is perhaps more familiar in its narrow sense in which the stakeholder groups are limited to shareholders, customers, employees, suppliers, management, and the local community. Thus, stakeholder theory asserts that a business’s financial success can best be achieved by giving the interests of the shareholders, customers, employees, suppliers, management, and local community proper consideration and adopting policies which produce the optimal balance among them. This viewpoint seeks to explain current corporate behaviour rather than to argue for a more moral position. From this inclusive perspective, the corporation exists at the intersection of a range of interests; it is a node in a complex web of social relationships of dependency and expectation. From a managerial point of view, corporate success depends on an ongoing process of stakeholder management in which the interests and demands of stakeholders are identified and dealt with appropriately. In this context, it is not social issues to which corporations respond but rather stakeholder issues. The important task for managers is to identify stakeholder groups (groups that share an interest) and determine the amount of power they, as a group, have. Proposition 1: Managers will respond to the demands of the most powerful stakeholders. As stakeholder groups gain and lose power, managerial activities will change focus. Theory of legitimacy Corporations, as one kind of social arrangement, require legitimacy to maintain functional, long-term relationships with various communities on which they depend. This theory originated with Davis’s iron law of responsibility. It states that business is a social institution that must use its power responsibly. Otherwise, society may revoke it. Davis (1993) wrote that society grants legitimacy and power to business. In the long run, those who do not use power in a manner which society considers responsible will tend to lose it. Legitimacy is defined as a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions. Further, a corporation is said to be legitimate when it is judged to be just and worthy of support. Corporations that lose legitimacy face a variety of difficulties, ranging from punitive legislation to hiring qualified personnel. The benefits associated with legitimacy, combined with social pressures towards conformity, generally lead managers of illegitimate corporations to act to improve the legitimacy of their companies. It is pertinent to stress at this point that society judges the legitimacy of a corporation based on the corporation’s image. However, both the perceptions of, and the expectations for, the corporation can change over time (leading to changes in the legitimacy of the corporation) without there actually being any change in its actual activities. The corporate image (how it is perceived) and societal expectations are the important factors that must be managed. It is also held that if corporations ignore social expectations, they are likely to lose

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control over their internal decision making and external dealings. Hence legitimacy problems occur when societal expectations for corporate behaviour differ from societal perceptions of a corporation’s behaviour. Proposition 2: The issues management activities of a corporation will be driven by the existence of legitimacy gaps. Management will adopt strategies, depending on which strategy has the highest perceived possibility of success and the lowest cost. The two theories are applied to the issues developed in this chapter. This allows conclusions to be drawn about the adequacy of each view and the way the two theories interact. The two perspectives are applied for three reasons. First, this chapter is empirical and provides a complex real-world test, and the theories are helpful in understanding how and when corporations deal with issues such as the environment, diversity in the workplace, and employee working conditions. Second, although the study only examines ethical dilemmas concerning international oil and mining practices, the theories, based on the issues in this chapter, allow us to understand how MNEs respond to ethical issues in LDCs. Finally, each theory makes different assumptions about the nature of the corporation and the relation between corporations and their environment. Locals versus expatriates One of the most controversial moral issues between the oil and mining MNEs, governments and trade unions in developing countries is that of local versus expatriate employment. By their nature, MNEs operate simultaneously in often dissimilar societies around the world where values, standards, and expectations of corporate conduct may differ quite radically. This great diversity in cultures, attitudes, and systems makes it more difficult than in a relatively homogeneous national business setting to determine common standards for desirable corporate conduct. That said, MNEs must make a fundamental staffing decision concerning whether to send expatriate managers to fill the most strategic positions in the host country subsidiary or to hire local managers for these positions. This issue raises the legitimacy of MNEs by their employees, who note that, for decades, training and vocational education have been seen as a key to provision of skills for the sizeable, and to a large extent unskilled, populations of Africa. However, employing expatriates for key positions will not improve the African technical skills needed in the extractive industries. It should be emphasized that labour standards are multifaceted, and vary among the countries on the stage of development, per capita income, and political, social, and cultural conditions and institutions. Based on information received in the case countries, it was found that there has been sharp criticism of MNEs for employing expatriates at the expense of local labour by both governments and trade unions. The ethical question of disparity in wages paid to employees in developing and developed countries by the same MNE also surfaced during the interviews conducted in Africa. However, based on findings from interviews with MNE managers, expatriates who work outside their home countries are expected to have material incentives (including financial reward) to encourage them to work abroad. Is the oil worker in Nigeria justified, when the practice of paying workers two pounds an hour or less is widely accepted, in complaining about a worker in the North Sea

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working for the same oil company being paid ten pounds per hour? What distinguishes these issues from ordinary ones about corporate practices is that they involve a conflict of norms, either moral or legal, between home and host country. What is not taken into consideration by the proponents of ‘equal pay’ is that they do not look at other factors such as differences in the economic situation and GDP in LDCs’ and MNEs’ home countries. As suggested, certain obligations of multinationals do become distinctive where the morality of the host country differs from or contradicts the morality of the home country. Weighing the challenges and benefits of employing local labour versus expatriate employees can be an ethical dilemma for MNEs in the host country. Different strategic objectives dictate when to send expatriates and when to localize the business. These issues question the moral obligations of multinationals and are becoming more pressing as the amount of global trade continues to skyrocket. There are four common reasons to send expatriates rather than employing local talent: (i) establishing a corporate culture which includes communicating and translating the corporate vision; (ii) transferring knowledge (expatriates can transfer technology and train three or four locals at one time, which can be a major cost advantage); (iii) filling a skills gap, providing skills that are not available in the local marketplace; and (iv) developing the individual worker for future assignments. The above factors justify the differences in wages paid to local labour and expatriates. There are also the benefits of hiring local labour: (i) local labour understands the local business environment and how to transact business most effectively; (ii) knowing the local culture and the nuances that are important in that country; (iii) grasping the marketplace from an insider’s perspective and being more in-tune with the quickly changing market; and (iv) providing insight into local marketing, sales and product development. But, using local staff also has its challenges from availability of talent to training so that locals understand the corporate culture of the home office. Local versus expatriate cases from the fieldwork and archival research carried out in Africa The employment of foreign workers is one of the most crucial problems in the domain of work relations; it poses serious questions concerning the moral obligations of MNEs. Since independence, most African countries have been preoccupied with replacing expatriate labour with their own nationals. For the purposes of this discussion, Zambia will be used to argue the issue of locals versus expatriates. This is because it is the only country that had a public policy to replace the expatriates with local labour. It is imperative to look at the history of this case in order to fully understand its importance to this study. The history of ‘Zambianization’ – the process of replacing the expatriate labour force with local personnel in the mining sector – started immediately after independence. The major constraint preventing the immediate localization of expatriate-occupied jobs in most African countries, including Zambia, was the lack of opportunity during the preindependence era when almost all executive, administrative, professional, technical and supervisory functions in both government and private organizations were performed by expatriates. At the time, most local people were consumers rather than producers. They did not take part in policy formulation and administration and therefore had little

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opportunity to gain the necessary experience. For this reason, wide professional gaps exist in a number of independent African states in many fields of employment. The history of the African advancement problem in Zambia goes back to 1940, before independence. The European Northern Rhodesian mineworkers’ union (white miners in pre-independence Zambia, working for the two mining companies Anglo-American Corporation and Roan Selection Trust) negotiated with the companies for protection against the effect of African advancement necessitated by the Second World War. The initial demand of the union was for a clause stating that non-European labour was to be at all times under direct European supervision rather than that of a shift boss. The union’s intention was to ensure that the dilution of European labour with lower-paid African labour should be only temporary for the duration of the war. Under pressure from the UK government to maintain copper supplies for war needs, the two mining companies reached an agreement with the white unions in July 1940. This clearly substantiates the argument that the issue of local and expatriate labour is an ethical one. For a white union to come up with this request and the mining companies to accept it, shows that unethical behaviour has been in place for many years. This evidence also questioned the legitimacy of the mining companies involved. Sympathetic European miners who were opposed to the colour bar played a pivotal role by providing the necessary assistance to African miners. Advocates of the colour bar, mainly poorly educated Europeans, dreaded being displaced by newly educated Africans. They opposed job fragmentation and equal pay for equal work just to frustrate the African miners’ advancement process. This is against the ILO principles stated in the beginning of this chapter. During that time, the minimum European rates exceeded the maximum for Africans by 500 per cent. This action constituted an immoral and unethical behaviour because the mining companies did not respect the rights of all employees. Furthermore, the ILO principles of non-discriminatory employment policies, equal job opportunities and equal pay for equal work were violated. To the African miner, the colour bar was an abomination. It implied subjugation and enduring life. Thus envy, frustration and even bitterness became evident in the mines. According to this source, the political sensitization by freedom fighters and the socio-political fall-out of the Second World War contributed equally to the new wind that pervaded the copperbelt. Former war combatants returned with new ideas and self-confidence and started agitating for change. In early 1955, the stand-off culminated in a well-organized and long strike action by the African miners. It lasted 58 days and, despite that, there was no picketing, no intimidation, no rioting – unlike in 1940 when 13 miners died during a riot protesting against white miners’ behaviour and actions. This action raised concerns among the mining companies and the colonial government about the deterioration in industrial relations. Accordingly, various commissions of inquiry were set up to probe into the unrest and make recommendations. This resulted in the signing of important African advancement agreement in 1955. At last, European miners assented to African advancement thereby officially ending the abhorrent colour-bar system. They also agreed that equal pay need not include housing conditions and fringe benefits. This was the first African advancement agreement, a provisional one, providing that 24 jobs, which until then had been the sole prerogative of the European mineworkers’ union classified as schedule A, should be excised and handed over to create schedule B jobs in which African mine employees

Labour relations and ethical dilemmas: Nigeria, South Africa, Zambia Table 5.1

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Expatriate and local labour in the Zambia copperbelt, 1982–1996

Year

Expatriate labour

Local labour

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

2,151 1,905 1,583 1,484 1,274 1,384 1,086 961 758 723 718 518 288 200 213

55,124 54,003 54,634 54,745 51,561 49,639 51,743 53,816 53,410 53,635 55,017 50,610 49,445 44,119 41,868

could be advanced. In setting up the unified wage scale for employees of all races doing schedule A jobs, it was agreed that the gap between European and general African wage scales must be closed. In Zambia, the approach of the 1970s heralded a new era for the mining industry in that the first phase in the Zambianization of the industry was approaching an end and the second was about to begin. To implement the programmes of Zambianization of the copper industry effectively, in 1972 the government, together with the two mining companies, established a central coordinating body, The Mining Industry Manpower Services Unit (MIMSU). Tangible results were achieved in 1976 when out of 7,800 expatriates, less than 4,200 survived displacement. However, this was mainly as a result of a job fragmentation scheme whereby for every expatriate displaced, several Zambians were promoted. By 1996 the entire mining industry had only 213 expatriates and 41,868 local employees (see Table 5.1). The table demonstrates that the number of expatriate workers decreased significantly after nationalization. As the copper industry was undergoing privatization during the empirical research in Zambia, it was impossible at that time to know if the number of expatriates would increase under the new foreign owners. Early indications are that the number will increase based on information collected from government officials, Zambia Consolidated Copper Mines (ZCCM) managers, and leaders of Mine Workers Union of Zambia (MUZ). The new foreign owners came with their managers with knowledge in the mining industry. It should also be mentioned that the number of local workers has also been fluctuating. The contributing factor is the sharp decrease (this has since increased since 2004) in the world copper price and lack of technological and personnel development in the industry. The copper industry in Zambia was nationalized in 1969 with the aim of achieving economic emancipation through state ownership and control of the copperbelt. The objective was never realized because nationalization imposed an enormous burden on

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a government lacking the managerial expertise and technology needed to operate the mines effectively. From the 1970s to the late 1990s, the copper industry was solely under government control, yet operations were still controlled largely by expatriates working for multinationals or the World Bank. The issue of local and expatriate labour8 was constantly raised and quoted as a barrier to the career progression of Zambian miners. This argument is equally shared by the former ZCCM Director of Corporate Planning and Corporate Affairs, and the former Finance Director, Zambia Ministry of Finance. An example was given of situations whereby Zambians who were sent by the government to study abroad secured employment with ZCCM after graduation. If the Zambian graduate questioned the technical ability of his expatriate boss, he would lose his job. This, they said, happened on many occasions and the Zambians involved left for neighbouring countries. Both the government and the unions confirmed that many qualified Zambian mining engineers are now senior engineers in neighbouring southern African countries. Further, there have been changes of personnel in all the above-mentioned positions due to rapid changes the in the copper industry in Zambia. The trade union further complained that MNEs gave Zambians unfavourable terms of employment and if they refused the contract they would be asked to leave the company. During a study trip to Zambia, union executives were seen negotiating with different mining companies about the terms of employment given to their members, which included differentials between expatriate and local rates. It can also be confirmed that former President Chiluba and government ministers have raised the issue of wages and terms of employment of miners with officials of the new foreign owners9 in order to prevent conflicts between unions and mining companies. Government officials and trade union leaders further raised the question of external pressure from the World Bank and the International Monetary Fund (IMF) linking grants and loans to privatization of the mines, causing the government to sell off the mines without proper scrutiny of buyers. The World Bank and IMF ‘formula’ is an ethical issue throughout developing countries. Africa’s adjustment experience began in the early 1980s, when the majority of countries approached the IMF and the World Bank for loans, which were given only if countries adopted a package of adjustment. The IMF had, of course, provided conditional finance to individual countries prior to that, but the wholesale and extensive participation of international finance institutions (IFIs) in policy making in Africa began then and has continued since. According to Stewart (1997), it is difficult to overstate the role of these institutions in policy making in Africa. Despite talks of the need for local ‘ownership’, the design of policies has taken place in Washington; African governments have sometimes been able to influence the timing and extent of policy change, but never the direction. Hence any assessment of the adjustment experience in Africa must largely turn into an evaluation of the policies of the IFIs and especially the World Bank, which has taken the leading role. The assessment presented by the IMF and the World Bank, which typically present evidence convincing to themselves at least, suggests that the policy design is sound and any weaknesses in outcome are due to failures of implementation and deficiencies in local capacities. Other scholars have criticized the IMF and World Bank ‘formula’ in developing countries. They argue that many projects were launched under the banner of helping the poor,

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but it is hard to see the impacts of such projects. It should be stated that the World Bank is the best institution in the world in terms of the proportion of its loans going to the poorest countries, faring better in this respect than many bilateral aid programmes. The problem in the copper industry is that some mines are performing below their capacity under the new foreign owners, and at the same time some miners have been laid off in favour of foreign workers (in most cases 90 per cent of the management). (Note that since this research was conducted, there have been changes in ownership of the mines sold during the privatization programme and the price of copper has appreciated.) Another ethical issue raised by the leaders of MUZ and senior officials of ZCCM concerns the differences in the wages paid to Zambian miners and expatriates. The miners’ union executive stated: The problem we faced fifty years ago is still what we face today, the expatriates earns more than Zambian employees, and in most cases the Zambians are better experienced and qualified, this issue is forcing Zambian miners to seek employment in other parts of Southern Africa, in fact we are losing better workers to other countries.10

Labour issues in South Africa The moral obligation to protect a person from discrimination falls upon corporations as well as governments. Because employees and prospective employees possess the moral right not to be discriminated against on the basis of race, sex, caste, or family affiliation, it follows that MNEs have an obligation not only to refrain from discrimination, but in some instances to protect the right to non-discriminatory treatment by establishing appropriate procedures. According to Donaldson (1991), this may require giving notice to prospective employees of the company’s policy of non-discriminatory hiring, or educating managers about the need to reward or penalize on the basis of performance rather than irrelevant criteria. Furthermore, ILO principles forbid discriminatory employment policies and encourage equal job opportunities. In similar vein, justice principles require fair treatment of individuals: persons similar to each other on relevant criteria should be treated as equals. Mining companies violated the above moral principles during the apartheid era in that there were officially sanctioned discriminatory employment practices. The ethical challenge in the South African mining industry is different from elsewhere. The past apartheid political and economic policies made the case unique. During the apartheid regime, black miners were not allowed to advance in their career. Training opportunities were very limited. In addition, the wages and benefits given to black miners were lower than those of their white counterparts. One of the mining managers interviewed described the situation as follows: ‘apartheid and capitalism were two sides of the same coin, capitalism was the handmaiden of apartheid, if you had not had successful big businesses you would not have had the national party government and all its apartheid policies’.11 Other senior managers of mining companies interviewed in South Africa share the same viewpoint. They also assert that government apartheid policies prevented them from paying the same wages to black and white miners; if they had, they would have violated the law. An Anglo-American senior manager12 asserts: Life as major business leaders in South Africa in the height of the apartheid regime was not particularly an easy one. There were unjust laws that you had to conform to, particularly

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prescriptive laws of who you could employ and what facilities you could provide. That was interference.

This argument speaks for itself when one realizes that the South African National Union of Miners (NUM) is 100 per cent black. During the apartheid era, labour was racially split, with blacks in more lower-paying jobs than whites. The NUM estimates that 80 per cent of its membership is functionally illiterate.13 South Africa is now under a new political and economic order and eradicating the dysfunctional culture of apartheid is one of the tasks and foci of present-day South Africa. In order to improve the lot of black miners in South Africa, the government has promulgated labour legislation which has three aspects: collective bargaining, minimum standards and equal opportunities. Some mining companies have suggested that they did not wait for the government to take the initiative, introducing their own voluntary codes to correct the wrongs of the past. This conforms with stakeholder theory which holds that managers who fail to respond to powerful stakeholder groups (in this case the government and the trade union) risk action against them. The main objectives of the Basic Conditions of Employment Act (BCEA)14 are: ● ● ● ●

extend minimum rights to all workers; improve the rights of workers; improve the flexibility of the labour market; and improve enforcement mechanisms to achieve compliance with the law.

When a senior NUM official was asked if there had been a reduction in wage differentials between black and white miners, there was evident discontent in the answer: ‘we are not happy with the multinational companies because some of them think we are still living under an apartheid regime. They have to do more, pay us better wages and improve our overall benefits, without our members, no mining will be done in this country’.15 Although the disparity in wages between black and white miners still remains wide, this will take time to change because black miners have only just started receiving the training that would enhance their career progression. In response to these concerns, the mining companies argue that differences in wages between black and white miners have been reduced considerably. As one senior executive stated: ‘we have a very good relationship with the NUM and have sorted out our wages differences and benefits for the next year’.16 Another company director further suggests that they campaigned against apartheid and predicted its end: Apartheid was an economically irrational and unsustainable policy . . . apartheid’s downfall would come about through economic growth, through the opportunities created . . . you could not run a modern economy on a political system that says whites will be at the top and blacks will be at the bottom . . .17

The NUM, on the whole, disagreed with this assertion, stating that they are still lobbying the government to do more for them by enforcing the legislation on equal pay. The union also suggested that the companies aided and sustained the apartheid government’s policies by implementing them in the workplace.

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The situation in Nigeria The issue of local versus expatriate labour is different in Nigeria from South Africa in many respects, including the ‘dangerous’ way in which some local staff express their discontent. Petroleum is the backbone of the Nigerian economy. In the 1970s, ‘the oil exploration companies, their major contractors and the service companies had 6,455 Nigerians, and 1,174 non-Nigerians in their employment’.18 Even though the situation changed in the 1990s with the number of expatriates being reduced, the pay differentials between expatriates and locals have remained intact according to the government officials and union leaders. A former Nigerian oil minister stated in 1996: Expatriates are often taken on without the knowledge of the National Pipelines and Marketing Services (NAPIMS), the government joint venture management agency. As a result, the number working within this realm has doubled in the last five years. Moreover, some elements of the industry insist that service companies obtain expatriate quotas to address unemployment problems in countries other than Nigeria.19

The minister went further by accusing the oil companies of denying Nigerians key job opportunities. He also criticized the oil companies for awarding hefty contracts to overseas companies, warning that no expatriate would be engaged without the approval of NAPIMS. Operators who overcome this hurdle successfully must gain the approval of NAPIMS in order to secure wages for their foreign workers. The oil companies denied this allegation. In an interview with a senior Shell executive, it was asserted that ‘the government minister who made that pronouncement also set up a Presidential Monitoring Committee in the oil industry . . . they did not find anything’.20 Furthermore, in March 2000, the Nigerian House of Representatives resolved to investigate Shell and other oil companies on expatriate quota compliance. The House resolution states that ‘we are concerned with expatriate quota violations and joint venture agreement violations . . . the House agreed to look into joint venture agreements between Nigeria and the oil companies’ adherence to their quota allocations’.21 The Nigeria National Union of Petroleum and Natural Gas Workers (NUPENG) also accused the management of multinational oil companies of bringing expatriates to Nigeria when there were many qualified Nigerians who could do the same job. The oil companies, on the other hand, argue that the accusation is incorrect. According to the Shell Nigeria manager: ‘we have a very progressive Nigerianization policy in this country. Out of a workforce of 4,700 Shell work staff, the total expatriate staff is 237. It is very Nigerian and we have various Nigerians at management and supervision in this country’ (see endnote 21). Some members of NUPENG have used various ways to warn the oil companies of their dissatisfaction. Strikes are one of them, and these impact on many sectors of the Nigerian economy. A more violent means of expressing dissatisfaction is kidnapping. There have been recent reports of kidnapping in the oil rigs and platforms where local staff accused the operator of giving expatriates better terms of contract: ‘In EPTM of Paris polaris lay barge, 60 Nigerian workers on an oil storage and offloading barge took 28 expatriates crew members hostage for five days . . . They were demanding wages comparable to foreigners’.22 The impact of this ordeal has caused some expatriates to leave Nigeria, which is widely regarded as an ‘unsafe working area’. The situation in Nigeria has also entered a new dimension. There is some evidence of youths in oil-producing

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communities who have become militant and who take foreign oil workers hostage on a weekly basis. The rationale for this ‘unusual’ behaviour according to them is to inform the international community of their plight. They argue that apart from the fact that their communities are not benefiting from oil revenue which, in part, has increased unemployment among the young people, most of the key positions in the oil industry are taken by foreign workers. The local versus expatriate labour question is a burning issue in many developing countries and the key questions are: why do multinationals not train local staff instead of bringing in expatriates and why is it that they do not build enough training centres to improve the skills of local workers? Trade unions and collective bargaining The ILO has carried out an enormous amount of standard-setting work during the more than 80 years of its existence, in seeking to promote social justice. One of its chief tasks has been to advance collective bargaining throughout the world. This task was already laid down in the Declaration of Philadelphia in 1944, part of the ILO constitution which recognized ‘the solemn obligation of the International Labour Organization to further among the nations of the world programmes which will achieve . . . the effective recognition of collective bargaining’. In June 1998, the ILO took another step forward by adopting the Declaration of Fundamental Principles and Rights at Work. This states: ‘all members, even if they have not ratified the [fundamental] conventions . . . have an obligation, arising from the very fact of membership in the organization, to respect, promote and realize, in good faith and in accordance with the constitution, the principles concerning the fundamental rights which are the subject of international conventions’. These principles include the effective recognition of the right to collective bargaining, along with freedom of association and the elimination of forced or compulsory labour, the effective abolition of child labour and the elimination of discrimination in employment and occupation. The decrease in collective bargaining or the lack of it because of the belief that it will be used to increase union bargaining power or otherwise harass employers has led to ethical debates in developing countries. To this end, in the following section, the issues of contracting out businesses to foreign companies at the expense of local labour and/or indigenous companies are examined. In addition the unions’ collective bargaining as a change agent for conditions of employment will be discussed. Worldwide, trade unions are challenging the use of subcontracted labour on the grounds that it threatens workers and unions. Research suggests that subcontracting in oil and mining is increasing, bringing with it risks to the long-term stability of employment. The South African mining industry will be used as a case study in this section. However, it is pertinent to state here that the multinational mining companies in South Africa see themselves as South African companies and not foreign companies, even though they are MNEs, with their roots in South Africa. In this case, the key issue is that of black versus white labour. Subcontracting in South Africa Over the past years fundamental structural changes have taken place in the global mining market, and in gold mining in particular. The price of gold dropped by almost 50 per cent between 1987 and 1993,23 falling again sharply in 1999 due to the huge sales

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of gold from reserves of some European central banks and the IMF. The outcome of the sales led to thousands of job losses in South Africa’s gold industry (note that the price of gold has been increasing in the past five years). In 1987 the gold mines affiliated to the Chamber of Mines employed 500,000 workers; by March 1994, they employed 300,839 workers and in 1997, another 50,000 jobs were lost. According to information from the Gold Crisis Committee, set up in February 1998 to manage downscaling in the industry, another 14,000 employees lost their job between March and June 1998. Furthermore, the NUM confirmed that over 150,000 mineworkers lost their job between 1997 and 1999.24 Along with retrenchment, the subcontracting of labour has emerged as a growing response to the crisis. Subcontracted employment in the gold mining industry increased from 2 per cent in 1987 to 10 per cent of the total workforce in 1994. By the same year, subcontracted employment accounted for 11 per cent of the total underground workforce. A similar trend can be identified in coal mining. In 1987, 5 per cent of workers in South African coal mines were employed by subcontractors. By 1994 this figure had risen to 16 per cent. The percentage of underground workers employed by subcontractors increased from 1 to 4 per cent of the total over the same period, while workers engaged in surface employment, appointed by contractors, increased from 10 per cent in 1987 to 26 per cent in 1994. Companies cite the drive for higher productivity, as well as labour flexibility and cost cutting to explain the trend towards the increased use of contract labour. Representatives of South African business have argued that nonstandard forms of labour are necessary to compete internationally. It is argued here that subcontracted labour is a competitive advantage because it undercuts the wages and conditions of the unionized labour force. However, it can also be argued that replacing a core labour force with a peripheral one can potentially lead to a loss of productivity in the long run and to social unrest. As business, labour and government all agreed at a gold mining summit in 1998, the interests of the industry would best be met by building a protected, stable and productive labour force. Subcontracting has taken place both at the surface and underground. Traditionally mines have contracted out ‘specialized’ functions such as construction, shaft sinking, and access development. By the 1980s and early 1990s, mines began subcontracting ‘non-core’ functions on the surface. These included functions such as catering, cleaning, security and the maintenance of hostels. Construction work on the surface has also been subcontracted. Before the mid-1920s, the subcontracting of ‘core’ mining work was relatively widespread. However, in an attempt to reduce the number of white mineworkers in 1922, mine managers started to end contracts with white ‘gangers’. So successful were they that the subcontracting of core mining activities seems only to have re-emerged in the 1990s. In research interviews, mineworkers pointed out that subcontracted workers generally worked in areas that other workers refused to enter. They asserted that contract workers are forced to work in the most dangerous places. For instance in August 1999, 500 miners, or ‘71per cent of the 700 strong permanent workforce’25 were fired by Durban Roodepoort Deep, South Africa’s fourth biggest gold mining company. The company claimed that the miners were fired after they blocked a productivity improvement scheme. In contrast, the NUM claimed that the company fired their members because most of the work at the mine could be done by contract workers who worked for less pay. The NUM also pointed out that, even though subcontracted workers worked in the most

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dangerous areas, they did not receive medical attention when they got injured: ‘The mine does nothing if a contract worker has been injured, not even [by providing] bandages. They do not get the attention that they should get when they are injured and are not even taken to the hospital’.26 Evidence has emerged of subcontracted workers with few workplace rights and organizational options. In part, then, subcontracting seems to be implemented to cut labour costs in a context of declining profits. While established mining contractors do take cognisance of existing labour legislation and are even (non-signatory) members of the Chambers of Mines, they argue: Fiercer competition means that they often cannot win tenders because of higher wage costs and, as a result, this leads to a downward spiral of labour cost cutting, where in many cases, highly skilled workers must accept that half a wage is better than no wage at all. (South African Business Report, 1 September, 1999, p. 36)

It is evident that subcontracting in the mining industry is moving into core business. Unions are concerned about the trend to subcontract core underground work. Unions have distinguished between the contracting out of specialized services and the contracting out of core activities performed by mineworkers. They have accepted specialized subcontracting for many years, but have felt that contracting out core activities is a means of cutting costs by lowering wages below bargained wage levels. In other words, the union is not opposed to subcontracting where specialized skills are needed; however, they are opposed to subcontracting directed at lowering standards and employment conditions. As a result of union concerns, the subcontracting of labour was taken up as a collective bargaining issue in 1995 with the Chamber of Mines. At the end of 1995, the NUM and the Chamber of Mines formally agreed that while the practice of outsourcing or subcontracting offers advantages to mining companies and supports the development of small businesses, it might contain a threat for employees and members of trade unions operating in the mining industry. The agreement was meant in part to regulate the contracting of core mining activity in order to protect mining jobs. However, the problem with the agreement is that neither party has undertaken to define ‘core’ business adequately. Hence a situation has arisen, according to the NUM, where more and more jobs are becoming subcontracted. The NUM accused the mining companies of helping the predominantly white subcontractors to get jobs at the expense of their members. However, the miners who work for the subcontractors are predominantly black. The situation is different in Nigeria’s oil industry. Both the government and the unions have criticized the oil companies for contracting out businesses to foreign companies at the expense of local personnel. The oil companies have been criticized for lack of transparency and marginalization of indigenous Nigerian service companies.27 The majority of subcontractors in Nigeria are foreign companies that have established subsidiaries in Nigeria to take advantage of cheap labour. The question of subcontracting becomes an ethical and moral issue if the primary purpose of the employer is to undermine a recognized trade union. This behaviour violates the ILO principles which state that MNEs should develop non-discriminatory employment policies and promote equal job opportunities. Moreover, in a situation whereby individual workers cannot refuse unsafe work and are unable to report health

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and safety hazards because of their subcontracted worker status, then the ILO principles of adequate health and safety standards and the right to know about job-related health hazards have been violated. In this case, the behaviour of the companies involved is immoral and unethical. The conditions for enhancing the welfare of employees and respecting the rights and justice of employees have not been observed. Discussion and implications Based on this empirical work, it is apparent that the two ethical theories – legitimacy and stakeholder – mentioned at the beginning of this chapter are useful in understanding corporate responsiveness to social issues. In this section, I shall explore how the theoretical perspectives discussed above fit with the empirical results. Stakeholder theory (Proposition 1): Managers will respond to the demands of the most powerful stakeholders. As stakeholder groups gain and lose power, managerial activities will change focus. There is strong evidence in support of stakeholder theory. The companies studied were extremely sensitive to their major stakeholders. During the apartheid regime in South Africa, the mining companies obeyed the law and pursued the employment policies of the incumbent government. After apartheid, they apologised to the country as a whole and especially to the black miners who were affected. Moreover, after the majority government came to power in 1994, the companies showed their support for the new regime and criticized the policies of the apartheid government. In addition, all changes in employment policies have been connected to pressure exerted by powerful stakeholder groups. For example, there have been changes in employment laws and pay structures. The companies have supported government efforts to change the laws that will benefit all miners and not just one section of the society. Furthermore, mining companies have been negotiating with the mineworkers’ union, an approach that was virtually nonexistent during the apartheid era. The situation is similar in Nigeria, in particular, since the new political dispensation in 1998. The multinational oil companies blamed the military regime for most of the problems in the oil industry and promised to improve both their relationship with their employees and the working conditions. However, the ongoing restructuring which involves laying off workers since the beginning of 2008 in the oil industry has damaged the relationship between the multinational oil companies, the government and trade union to the extent that the Nigerian National Assembly and the presidency had to intervene and ask the oil companies to stop the restructuring. In Zambia, the case is somewhat the same; mining companies have been responsive to governments and have been pressured to negotiate with unions in order to reduce uncertainty in the industry. Legitimacy theory (Proposition 2): The issues management activities of a corporation will be driven by the existence of legitimacy gaps. Management will adopt strategies, depending on which has the highest possibility of success and lower cost. Legitimacy theory seems to have explanatory validity in terms of explaining why managers are pressed into action. Anglo-American, for example, experienced a significant

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shift in government and employees’ attitude that required some action. The company’s legitimacy has been questioned on account of its role during the apartheid era and the different pay structures of ethnic groups, which not only violates ILO principles but also leads to animosity against the company. The company has been forced to apologise for its behaviour even though at the time it was abiding by the government’s legislation on employment. In order to narrow its legitimacy gap, the company reviewed its pay structure and at the same time introduced training programmes to improve the career opportunities of black miners. This trend is the same in all South African mining companies, including De Beers, Palabora Mining Company and others. They are adopting strategies to improve their standing with the government and trade unions. In Nigeria and Zambia, the MNEs have been compelled to explain the reasons for employing expatriates for some jobs, and South African mining companies have had to give reasons for engaging subcontractors. Each of the companies examined has taken steps to improve its image and relationships with trade unions and governments. However, even though the companies interviewed believe that their relationship with governments and trade unions will improve, the more these countries become entrenched in democracy, reform their institutions and tackle corruption, the more they put pressure on MNEs to improve the working conditions of their employees. As such, MNEs realize that it is only by negotiating with their employees that the working environment will improve. Hence it is not surprising that the oil and mining companies have become flexible in dealing with ethical issues emanating from employee relations. It could be argued that a lack of institutional development contributes to ethical issues relating to labour relations in developing countries. Thus, sustaining democracy supported by good employment regulation will help resolve the issue of labour relations. This is because in the past, due to the absence of sophisticated employment laws, MNEs have had no guidelines to follow and some of their actions have been regarded as unethical. Conclusion, limitations, and direction for future research This chapter has examined the ethical characteristics of MNE–employee relations in LDCs. Based on the findings, it is noted that although there are labour laws and legislation in all the case study countries, Nigeria and Zambia have no adequate measures to enforce the laws. On the other hand, South Africa has sophisticated enforcement mechanisms to enforce regulations. The chapter has provided strong evidence that MNEs’ corporate responsibility and ethical policies in the area of labour relations have come under sharp criticism from employees and occasionally from host governments. A major finding is that companies are actively trying to find a lasting solution to the issue of local versus expatriate labour. However, the companies still uphold the view that the wage rate should reflect local labour market conditions, not arbitrary international standards. Trade unions, on the other hand, have expressed their willingness to negotiate if the companies allow collective bargaining. However, the issue of subcontracting has been a stumbling block in collective bargaining. But, increasingly, unions have come to recognize the issue as a consequence of globalization. The evidence presented in this chapter supports the theoretical position of Frederick (1991) who proposes that ILO principles have served a useful purpose in establishing international standards, even though violations are commonplace. Companies attempt to prevent unionization, and as a result employees find it difficult to seek redress when

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legal rights are violated. The situation discussed in this chapter is also similar to that reported by Sorell and Hendry (1994), who argue that the obligations of a business to its employees are often unclear, and frequently a matter of public controversy. In the cases presented, employees are generally dissatisfied with the employment policies of MNEs and frequently there are tensions between employers and employees. Based on our findings, the issue of employment with foreign companies can be controversial and fiercely contested. MNEs must re-examine their policies if they are to enjoy improved working relationships with employees in developing countries. The governments of poor countries often compete for foreign capital by taking a lax stance towards the imposition of laws and regulations. The view put forward here, however, is that it is irrelevant whether the standards of the host country comply with those of the home country; what is relevant is whether they satisfy a universal, objective minimum standard. What is required of MNEs is that they limit themselves to appeals made in the name of host country laws and morals. It is no excuse to cite lenient host country regulations to justify unethical behaviour. The requirement is for sound ethical policies that are acceptable to all stakeholder groups in the country of operations. This is confirmed by the MNE managers interviewed for this study. They are looking for means of improving their working relationship with employees. Many subscribe to the view that it is the obligation of businesses to protect the well-being and personal growth of all employees. In this sense, the company is morally obliged to provide its employees with benefits such as education and training, or to enable them to pursue their own development through part-time courses at their own choice of educational establishment. The level of discontent and imperfections revealed in this chapter suggests that MNEs operating in the oil and mining sectors of LDCs have a long way to go before they meet the employee relations standards that generally prevail in their country of origin. It is anticipated that this chapter will contribute to the literature on ethical issues in Africa by highlighting some of the most difficult moral issues facing the MNEs’ employment strategies. Furthermore, it is anticipated that with this chapter, MNEs will be able to understand and improve the needs and expectations of their workforce in LDCs, as this should bring a positive response to their activities and improve relationships with their employees in the long term. Thus, the evidence presented gives academic and business communities a ‘picture’ of ethical dilemmas of MNEs and employment issues in developing countries. One of the major limitations of this study is that its design did not allow examination of other MNEs apart from the oil and mining companies. Other foreign-owned companies operating in the countries visited should be investigated and may present a different picture. Therefore, it is not the aim of this chapter to examine the impact of a lack of sophisticated employment regulations and the MNE–employee relations in the countries visited. Future research should examine whether having good employment regulations or laws will improve the MNE–employee relations in LDCs and lessen the accusations of unethical employment practices. A possible limitation of this chapter is that the cases come from extractive industries and their stakeholders and may not be generalizable to other industries. However, there is no reason to believe that issues at stake here will be treated differently in other

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industries. Finally, the issues discussed in this chapter cover the period from 1950 to 2000; future research based on recent developments in this type of inquiry will add value to this chapter. Notes 1.

2. 3.

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

Nigeria, South Africa and Zambia were chosen on the basis of the dependence of their economies on earnings from oil, minerals and metals. The three countries also share a significant bond, namely memberships of the Organization of African Unity (OAU) and the Commonwealth State. They are all Englishspeaking countries of southern and western Africa (Anglophone zone). The three countries are young democracies and are known for the abundance of their mineral resources. In addition, they are among the largest producers of oil and mineral resources and occupy significant positions in the world market. For example, Nigeria earns 90 per cent of its foreign earnings from oil sales; South Africa earns 40 per cent of its foreign earnings from mining, the largest exporting sector in the country; while Zambia earns 95 per cent of its foreign exchange from copper. In terms of power and influence, Nigeria and South Africa are major powers in Africa, both politically and economically. Each of the three countries has experienced problems of economic dependency. For example, the oil boom and bust of the 1970s and 1980s affected Nigeria, and the country benefited from the high price of oil in late 1999 to date. The collapse of the price of copper in international markets in the 1980s impacted on Zambia and the country is now benefiting from the current high price of copper. The fall in the price of gold in 1999 rebounded on South Africa and the country is now benefiting from the current high price. The exploration, exploitation and production of oil and mineral resources are carried out largely by MNEs (the South Africa MNEs see themselves as local companies) in these countries. Part of this chapter was originally presented at the 2007 Academy of Management meeting, Philadelphia, PA, USA. The 1950 to 2000 timeframe is chosen because oil and mineral exploration, exploitation and production had a significant impact on the three countries’ economies during this time and much of the positive and negative socio-economic–political developments occur within this timeframe. In addition, during this period there have also been continuous conflicts between the various stakeholders and the MNEs which operate there. This has led to increased pressure on the MNEs to improve their behaviour and satisfy a wider range of social demands. All in all, oil and minerals have had a significant effect on the economies of these countries since 1950s. UN World Investment Report (1998), Transnational Corporations, Market Structure and Competition Policy, p. 34. and UN World Investment Report (2007), Transnational Corporations, Extractive Industries and Development. Interviews held with leaders of the National Union of Miners (NUM) in South Africa, the Mineworkers’ Union of Zambia (MUZ), and the National Union of Petroleum and Natural Gas Workers (NUPENG) of Nigeria between 1999 and 2001. This assertion was made by the multinational oil and mining company managers interviewed in Nigeria, South Africa and Zambia. UN World Report (1994), TNCs, Employment and the Workplace, p. 343. Interview with Maxwell Kulambi, former Director of Finance, Zambia Ministry of Finance; Pius Maambo, former Director of Planning and Corporate Affairs, Zambia Consolidated Copper Mines (ZCCM); and Charles Muchimba, former General Secretary, MUZ. Information received from Mr Maambo of ZCCM and Mr Kulambi of the Ministry of Finance in Zambia. Interview with Mr Charles B. Muchimba, Secretary General of MUZ, 3 August 1999. Interview with Mrs M.C. Keeton, CEO Tshikululu Social Investments (Anglo-American Corporation), 25 August 1999, South Africa. Ibid. Gold Mining’s Labour Market (1996), ‘Legacies of the Past, Challenges of the Present’, Labour Market Policy Paper, Department of Labour, Republic of South Africa. Legislation on Labour Relations Act: 1997, Department of Labour, South Africa. Interview with Mr Tshikalange Humbulani, Vice President, NUM, South Africa, 31 August 1999. Interview with Dr James Campbell, former De Beers Chairman’s Personal Assistant, South Africa, 23 August 2000. Keeton (see n. 11). Annual Report of Nigeria Department of Petroleum Resources, 1970–71. African Business, November 10, 1996, p. 22.

Labour relations and ethical dilemmas: Nigeria, South Africa, Zambia 20. 21. 22. 23. 24. 25. 26. 27.

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Interview with Mr Precious Omuku, Manager, Corporate External Relations, Shell Nigeria Limited, Lagos, Nigeria, 7 April 2001. T. Eluemunor and A. Abuh, ‘Reps Probe Oil Firms by Expatriates Quota’, The Nigeria Guardian, 9 March 2000, p. 22. The Nigerian Punch, 14 December 1996, p. 12. South African Department of Labour, Annual Publication: 1996. South African Business Report, 21 August 1999, p. 13. South African Business Report, 1 September 1999, p. 1. Ibid. p. 36. A. Adams, ‘Development of Nigeria’s Oil and Gas Resources’, Nigerian Petroleum News, November 1998, p. 13.

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Gernigon, B., A. Odero and H. Guido. (2000), ‘ILO principles concerning collective bargaining’, International Labour Review, 139 (1), 33–5. Geva, A. (1999), ‘Moral problems of employing foreign workers’, Business Ethics Quarterly, 9 (3), 381–403. Ghillyer, A. (2008), Business Ethics: A Real World Approach, McGraw-Hill New York. Grobler, N.J. (1996), ‘Review of the South African mining industry’, Department of Mineral and Energy Affair, Pretoria, South Africa, 1–30. Harvey, C. and P. Taylor (1987), ‘The mineral wealth and economic development: Foreign Direct Investment in Spain, 1851–1913’, Economic History Review, 2nd Series 40, 185–207. Hasnas, J. (1998), ‘The normative theories of business ethics: a guide for the perplexed’, Business Ethics Quarterly, 8 (1), 19–42. Idemudia, U. (2008), ‘Conceptualising the CSR and development debate: bridging existing analytical gaps’, Journal of Corporate Citizenship, 29 (Spring), 9–110. International Labor Office (2006), Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, Geneva: ILO Multinational Enterprises Programme. Iyer, G.R. (2001), ‘International exchange as the basis for conceptualizing ethics in international business’, Journal of Business Ethics, 31, 3–24. Kolk, A. and R. van Tulder. (2002), ‘Child labor and multinational conduct: a comparison of international business and stakeholder codes’, Journal of Business Ethics, 36, 291–301. Kryvoi, Y. (2007), ‘Enforcing labor rights against multinational corporate groups in Europe’, Industrial Relations, 46 (2), 366–86. Nasi, J., S. Nasi, N. Phillips. and S. Zyglidopoulos: (1997), ‘The evolution of corporate social responsiveness’, Business and Society, 36 (3), 296–321. O’Meara, D. (1975), ‘The 1946 African Mine Workers’ Strike in the Political Economy of South Africa’, African Studies Seminar, African Studies Institute, University of the Witwatersrand, South Africa. Reiche, B.S. (2007), ‘The effect of international staffing practices on subsidiary staff retention in multinational corporations’, International Journal of Human Resources Management, 18 (4), 523–36. Sethi, S.P. (1979), ‘A conceptual framework for environmental analysis of social issues and evaluation of business response patterns’, Academy of Management Review, 4, 63–74. Shambweka, F. (1999), ‘Zambianisation in the mines: has it achieved the intended purpose?’, Zambia Mining Mirror, May, p. 8. Silavwe, G. W. (1995), Management of Human Resources in the Copper Mining Industry of Zambia, Zambia: Mission Press. Solomon, C.M. (1999), ‘Expatriates or local labour?’, World Trade, 12 (6), 56–8. Sorell, T. and J. Hendry (1994), Business Ethics, Oxford: Butterworth-Heinemann. Spencer, J.W. 2008, ‘The impact of multinational enterprise strategy on indigenous enterprises: horizontal spillovers and crowding out in developing countries’, Academy of Management Review, 33 (2), 341–61. Spero, J.E. (1993), The Politics of International Economic Relations, 4th edn, London: Routledge. Standing, G., J. Sender and J. Weeks (1996), Restructuring the Labour Market: The South African Challenge, Geneva: International Labour Office. Stewart, F. (1997), ‘Limits of adjustment in Africa’, Journal of Development Studies, 34 (2), 176–78. Streeten, P. (1998), ‘Masters of illusion: the World Bank and the poverty of nations/the World Bank: a Third World view’, Finance and Development, 35 (1), 50–51. Suchman, M. (1995), ‘Managing legitimacy: strategic and institutional approaches’, Academy of Management Review, 20, 571–610. Turner, T.E., and R. Sherman (1997), ‘South African solidarity with oil workers and the democracy in Nigeria’, Earthlife Quarterly Publication, 1–15. Vletter, F. (1997), ‘Foreign labour on the South African gold mines: new insights on an old problem’, International Labour Review, 126 (2), 199–218. Werhane, P.H. (1997), ‘Employee and employer rights in an institutional context’, in T. Donaldson and T.W. Dunfee (eds), Ethics in Business and Economics, vol. 1, Aldershot: Ashgate, pp. 119–38. Wood, D.J. (1994), ‘Essay’, Business and Society, 33 (1), 101–05.

6

On the corruption of scientists: the influence of field, environment, and personality Michael D. Mumford, Alison L. Antes, Cheryl Beeler and Jay J. Caughron*

Introduction It is perhaps unfair to compare fields with respect to members’ ethical conduct. Nonetheless, we shall begin by making such a comparison. Ask any group of people on the street what fields of work are most corrupt. Answers to this question will not be surprising – they will mention politicians, financiers, lawyers, business executives, and police officers. Rarely, however, will people mention scientists and engineers as working in fields subject to corruption. In fact our image of scientists and engineers, as people working in fields where the dispassionate pursuit of truth is critical, seems to mitigate the conception of a corrupt scientist or a corrupt engineer. Unfortunately, the facts at hand suggest that this implicit image of scientists and engineers may be wrong. Salient events, events such as the death of study participants, fabrication of studies, and overt plagiarism (Kochan and Budd, 1992; Marshall, 1996) remind us of the potential for ethical misconduct in the sciences and engineering. While these dramatic ethical breaches may be rare, more mundane but more common ethical breaches do appear with some frequency in the sciences and engineering (Steneck, 2004, 2006). In a study by Martinson et al. (2005), scientists working on National Institutes of Health grants were asked whether they had been exposed to incidents of misconduct in the last year. Even in this relatively elite sample of scientists, nearly 30 percent reported that they had been exposed to significant incidents of misconduct in the last year. Clearly, ethical misconduct, the term used to imply corruption in the sciences and engineering, does occur with some frequency. The question raised by this finding, however, is rather straightforward – why should we care? We argue that understanding the nature and sources of scientific misconduct is of interest for both practical and theoretical reasons. Practically, both general economic growth and the formation of new high-wage firms are driven by science and engineering (Mumford and Simonton, 1997; Dess and Pickens, 2000). Corruption clearly represents a threat to those forces for economic growth. Thus, organizations must attempt to minimize corruption in these fields if economic growth is to be sustained. As important as these practical reasons for being concerned with misconduct in the sciences and engineering may be, the theoretical reasons for interest in this phenomenon may be just as important. Science and engineering as fields have clear unambiguous goals with a known system of professional progression within the field (Zuckerman, 1977). More centrally, science and engineering fields have devoted substantial effort to defining the central issues associated with ethical conduct (for example, National Institute of Medicine, 2002). As a result, the fields of science and engineering present an attractive test bed for studies seeking to examine the factors giving rise to misconduct. 145

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In this chapter, we shall examine three key variables that are commonly used to explain incidents of misconduct. More specifically, we shall examine field socialization practices, the environment in which the scientist works, and the personality of the scientist as potential variables accounting for misconduct. After examining the findings emerging in each of these areas, we shall examine their implications for organizations’ attempts to manage misconduct. Before turning to the findings obtained in those studies, however, we shall examine the nature of work in the sciences and engineering and available models of ethical conduct in carrying out this work. Ethics in science and engineering The work Work in the sciences and engineering is typically concerned with understanding, prediction, and manipulation of phenomena occurring within a certain domain (Cook and Campbell, 1979). For instance, psychologists study how affect and cognition influence human behavior. Micro-biologists seek to understand cell, or sub-cellular, operations in organisms. Physicists study the forces of energy as they operate at macro and micro levels. And, electrical engineers study the generation, flow, and applications of electrical currents. Clearly, each of these fields is concerned with different phenomena. Nonetheless, work in the sciences and engineering is characterized by a shared set of core characteristics. To begin, work in the sciences and engineering is focused on complex, ill-defined phenomena of interest to the field (Feist and Gorman, 1998). The basis for generating solutions to these problems is ultimately a matter of expertise (Weisburg, 2006) in combination with the application of critical and creative thinking skills (Mumford et al., 2005). It is not, however, sufficient for scientists and engineers just to think; they must also provide proof, or evidence, for their solution to a problem. Although the source and nature of proof varies from field to field, it is generally a complex exercise to provide a working proof of postulates with substantial bench, or practical, skills being required for these demonstrations. These observations, while apparently straightforward, have three key implications with respect to the nature and management of work in the sciences and engineering. First, work in the sciences and engineering is collaborative (Dunbar, 1995). The problems that scientists and engineers work to address are often of such complexity that no one mind can fully understand a phenomenon of interest and conduct requisite proofs. Thus, scientists and engineers typically work in teams (ibid.) and maintain a set of collaborators on whom they depend for active exchange of information (Feist and Gorman, 1998). As a result, the development and maintenance of viable collaborators is often critical to the success of scientists and engineers (Mumford et al., 2005). Second, because the work of scientists and engineers is expertise based, non-experts cannot typically provide useful evidence (Mumford et al., 2002). As a result, the management of work in the sciences and engineering is professionalized (Zuckerman, 1977; Damanpour, 1991). The professionalization of such work results in the development of shared norms with respect to relevant problems, applicable theories, and standards of proof (Kuhn, 1970). Professionalization, moreover, results in the establishment of institutions (for example, journals) and professional review committees for appraising and disseminating findings. It also results in a system where those recognized as having

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demonstrated greater expertise are given control over decisions with regard to a particular piece of work. Third, the basis for work in the sciences and engineering lies in validating one’s ideas (Messick, 1995). Validation ultimately involves providing evidence for, or proof of, the correctness of an idea. Proof, however, is difficult to provide for potential solutions to complex problems where multiple explanatory systems apply. As a result, much of the work of scientists and engineers is focused on building a body of evidence for the ideas being proposed with new lines of work and new applications, in turn, arising from the emergent body of evidence (Finke et al., 1992). In fact, the focus of scientific and engineering work on demonstration accounts for the initial focus of ethical theories on fabrication, falsification, and plagiarism. Behavioral theories The first, and still most widely applied, model of ethical conduct in the sciences is based on the principle that misconduct only occurs when the scientific record has been undermined. In this view, the record is undermined by these behaviors: (i) fabrication (for example, study results are made up); (ii) falsification (for example, study results have been changed so as to be misleading); and (iii) plagiarism (for example, misappropriation of others’ ideas or findings). Despite the widespread use of fabrication, falsification, and plagiarism (FFP) in investigations into scientific misconduct (for example, Office of Research Integrity, 1999), FFP has proven problematic as a basis for understanding scientific and engineering ethics for four reasons. First, FFP neglects ethical issues involving how the work was conducted. Thus, FFP does not directly address issues where participants were exposed to undue risk or undue pain in the course of conducting a study. Second, FFP examines only reported outcomes of the work conducted. However, scientific and engineering work, for example the nuclear bomb (Bird and Sherwin, 2006), has other social outcomes that raise ethical concerns. Third, FFP places the responsibility for ethical conduct on the individual, discounting the role of, and implications for, collaborators and the profession of incidents of misconduct. Fourth, and finally, FFP covers only a limited set of behaviors bearing on incidents of misconduct. Recognition of these limitations in the FFP model of scientific and engineering ethics has led professional societies to develop and advocate the application of field-specific models of ethical conduct. Typically, these models are behaviorally based, indicating inappropriate practices in the conduct of the work being conducted. As a result, they may be seen as a field-specific elaboration of an FFP model. For example, the American Psychological Association notes that client or participant confidentiality must be protected. The American Chemical Society provides guidelines for the handling of environmentally sensitive materials, and the American Society of Mechanical Engineers provides guidelines for assessment of risk tolerance. Helton-Fauth et al. (2003) conducted a review of the ethical codes of conduct advocated by professional societies in the social, biological, and health sciences. This review was used to develop a general taxonomy of the key dimensions found in codes of ethical conduct advocated by those professional groups. Based on this review, 17 behavioral dimensions were identified, reflecting ethical conduct across scientific fields, which could be organized into four higher-order dimensions: (1) data management, (2) study conduct,

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(3) professional practices, and (4) business practices. Data management subsumes fabrication, falsification, and plagiarism but includes those behaviors under two broader dimensions: (i) data massaging and (ii) publication practices. Under the area of study conduct, the dimensions identified included (iii) Institutional Review Board, (iv) informed consent, (v) confidentiality protection, (vi) protection of human participants, and (vii) protection of animal subjects. In the professional practices area the dimensions included (viii) objectivity in evaluating work, (ix) recognition of expertise, (x) protection of intellectual property, (xi) adherence to professional commitments, (xii) protection of public welfare and the environment, and (xiii) exploitation of staff or collaborators. Finally, the area of business practices included (xiv) conflicts of interest, (xv) deceptive bid and contract practices, (xvi) inappropriate use of physical resources, and (xvii) inappropriate management practices. Helton-Fauth et al. (2003) provided some initial evidence for the validity of this taxonomy through a review of professional codes of conduct in some 60 fields of sciences and engineering. They found that these dimensions accounted for 82 percent of the behaviors proposed in those codes of conduct. More centrally, attributes of codes of conduct which were not covered (for example, sexism in clinical treatment) were typically field-specific concerns. Hence, while all dimensions might not apply in a given field, it does appear that this taxonomy provides a reasonably comprehensive description of the behavioral dimensions of ethical conduct applying in the sciences. Additional evidence bearing on the validity of this taxonomy has been provided by Kligyte et al. (2008a). In this study, computer scientists, meteorologists, and engineers working in an interdisciplinary center for weather prediction were studied. A grounded theory analysis was used to identify ethical issues encountered by scientists and engineers in conducting their work. It was found that while some dimensions, for example protection of animal subjects, were not relevant in these fields, the remaining dimensions accounted for more than 90 percent of the ethical incidents occurring in the work of scientists and engineers. Thus, it appears that this 17-dimension system provides an adequate description of the major ethical events arising in science and engineering. In fact, at least three other considerations support the appropriateness of this taxonomy in describing the key behavioral events involved in science. First, the study conduct dimensions take into account how the work was conducted. Second, the nature of scientific work in a profession is explicitly recognized in the dimensions subsumed under professional practices. Third, complex business relationships, such as grant and contract management issues, are expressly taken into account by the dimensions subsumed under business practices. Response theories Although this 17-dimension system appears to provide a more comprehensive and accurate description of the key behaviors of concern in assessing science and engineering ethics, the number and complexity of the behavioral dimensions embedded in this taxonomy pose another question. More specifically, how do scientists and engineers make decisions about the expression of a particular behavior? In fact, a variety of models have been proposed that might account for ethical conduct among scientists and engineers including contingency theories (for example, Brown and Treviño, 2006), social appraisal theories (for example, Haidt, 2003), moral identity theory (for example, Reynolds and Ceranic, 2007), and moral development theory (for example, Rest et al., 1999).

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Responsible conduct of research principles

Perceived causes of the situation

Professional and personal goals

Framing

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Perceived requirements for attaining goals

Emotions Forecasting

Prior professional experience

Prior personal Self-reflection

experience

Sensemaking

Decision

Figure 6.1

Ethical sensemaking model

Although all of these theories provide a plausible basis for accounting for certain aspects of decisions about ethical behavior, a sensemaking model (Sonenshein, 2007) appears to provide a more plausible basis for understanding ethical decision making among scientists and engineers for three reasons. First, decisions made with regard to these behaviors occur as scientists and engineers work on complex, ill-defined, realworld tasks where ethical issues may not be recognized. Second, trade-offs exist among the various aspects of ethical conduct – consider, for example, the trade-offs between bid and contract practices and collaborator relationships. Third, these decisions emerge relatively rapidly in real-world settings where the implications of ethical decisions may not be apparent. Accordingly, Mumford et al. (2008) developed a sensemaking model of scientists’ and engineers’ ethical decisions. This model is presented in Figure 6.1. Within this model, it is assumed that work events activate perceptions of causation, relevant goals, perceived requirements for goal attainment, and professional principles. These key elements will provide a basis for framing or understanding the situation based on relevant mental models (Haidt, 2003) while arousing affect based on the potential outcomes of ethical events for the self and others (Haidt, 2003; Connelly al., 2004). This framing of the situation vis-à-vis an activated mental model and affect will, in turn, lead to forecasting the outcomes of various actions with respect to the mental model being applied and affective implications. Reflection on these forecasted outcomes of actions with respect to operative goals and conceptions of the self (Oyserman and Markus, 1990) will give rise to sensemaking (Strange and Mumford, 2005). Ultimately, it is sensemaking of the ethical event that gives rise to decision making by scientists and engineers.

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To test this model of ethical decision making, Mumford et al. (2008) devised an ethical instructional program. This instructional program was devised to provide people with practice in applying seven strategies implied by this ethical decision-making model, including: (i) recognize circumstances of the event, (ii) seek other interpretations, (iii) question one’s judgment, (iv) forecast downstream outcomes, (v) manage emotional reactions, (vi) analyze personal motives, and (vii) consider the effects of actions on others. This strategy-based training occurred over a two-day course following a debunking of ‘naive’ ethical mental models. The sensemaking model was presented, and the associated strategies where participants were asked to apply this model in addressing a series of ethical problems of increasing complexity and realism. In the Mumford et al. (2008) study this training program was used to instruct some 60 doctoral students working in the biological and social sciences. The effectiveness of instruction was assessed with respect to improvements in ethical decision making and improvements in the application of relevant strategies. It was found that this ethical sensemaking instruction resulted in significant changes (p ≤ 0.05) in ethical decision making with pre–post gains yielding an effect size of 0.81. This effect size compares favorably to the 0.40 effect size typically obtained in ethics instructional programs (Antes et al., in press). Moreover, gains of similar magnitude were observed in all seven of the strategies being trained. To confirm these findings, and extend them to other fields in the sciences and engineering, Kligyte et al. (2008b) provided this training to doctoral students working in computer sciences, meteorology, and engineering. Again, the effectiveness of training was assessed through a pre–post administration of ethical decision-making measures and the effectiveness with which strategies were applied in decision making. It was again found that significant changes (p ≤ 0.05) in ethical decision making were observed with an effect size of 1.02 being obtained. Moreover, comparable gains were again observed in strategy application. In a follow-up study, Kligyte et al. (under review) found that field-specific ethics instruction did not result in significant gains in ethical decision making vis-à-vis this general instruction in ethical decision making strategies applied in sensemaking. In a final study examining the effectiveness of this instruction, Brock et al. (2008) obtained think-aloud protocols from trained and untrained meteorology students six months after instruction on a series of ethical problems. These protocols were coded with respect to variables relevant to each major process (for example, framing, forecasting, self-reflection) specified in the sensemaking model. They found not only that the effects of instruction were maintained over time, but also that the mental models evidenced by trained students evidenced active, conscious analysis of ethical issues. Taken as a whole, the findings obtained in these studies led to three key conclusions. First, sensemaking, and sensemaking strategies, appear critical to ethical decision making among scientists and engineers. Second, instruction focused on sensemaking strategies appears to result in improved ethical decision making. Third, the magnitude of the effects obtained suggests that sensemaking may provide a potentially viable model for understanding ethical decision making among scientists and engineers. These conclusions in turn bring to the fore a new set of questions bearing on the factors shaping ethical decision making and their implications for ethical decision making by scientists and engineers in organizations.

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Strategies and ethical decisions Overview The first question that might be posited based on our foregoing findings concerns the relationship between particular decision-making strategies and subsequent ethical decisions by scientists and engineers. This relationship is, of course, of interest for theoretical reasons. However, identification of the strategies contributing to ethical decision making might provide some important clues concerning the kinds of organizational variables contributing to corrupt, or ethical conduct, among scientists and engineers. Accordingly, Mumford et al. (2006) initiated a study to investigate these relationships. Method The sample that provided the basis for this investigation consisted of 102 first-year doctoral students working in the health, biological, and social sciences. These doctoral students were paid $100.00 to participate in a four-hour study. In this study, participants were asked to complete a measure of ethical decision making. Embedded in this measure were measures of sensemaking strategies and social psychological influences on ethical decision making. Additionally, participants were asked to assume the role of a university official awarding penalties for incidents of misconduct. The ethical decision-making measure presented field-relevant work scenarios as a form of low fidelity simulation (Motowidlo et al., 1990). The scenarios were derived from a review of prior incidents of misconduct bearing on the data management, study conduct, professional practices, and business practices dimensions identified by Helton-Fauth et al. (2003). After reading through the scenario, participants were asked to assume the role of principal actor in the scenario. They were then presented with a series of four events where they were required to make a decision – with half the decisions being purely technical and the remaining half having ethical implications. After reading through an event, participants were asked to select their two preferred options, from a list of 8 to 12 potential response options, which represented their preferred ways of addressing the event. These response options were scored for high, medium, or low levels of ethicality. Box 6.1 provides an illustration of these ethical decision-making measures applying to social scientists. The resulting scales measuring data management, study conduct, professional practices, and business practices produced split-half reliabilities in the 0.70s. Moreover, higher scores on these scales were found to be correlated in the mid 0.30s with the punishments awarded for ethical violations on the university review panel task. Thus, these scales appeared to provide a reliable and valid measure of ethical decision making. To identify strategies and social psychological influences, a panel of four psychologists was asked to rate the extent to which each of seven strategies would influence preferences for each response option. In the case of sensemaking strategies, these 7-point extent ratings were to be made based on the psychological processes giving rise to a response. Ratings were made for (1) recognition of circumstances, (2) seeking help, (3) questioning one’s judgment, (4) anticipating consequences, (5) dealing with emotions, (6) analysis of personal motivations, and (7) consideration of others. The average interrater agreement coefficient obtained for the sensemaking dimensions was 0.91. Scores on composite scales derived from these ratings, moreover, evidence adequate construct validity.

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BOX 6.1

EXAMPLE OF ETHICAL DECISION-MAKING QUESTIONS FOR SOCIAL SCIENTISTS

Moss is a researcher in the laboratory of Dr Abrams, a well-known researcher in the field of economics. Moss is trying to develop a model to predict performance of stocks in the technology sector, but she is having difficulty analyzing and selecting trends to include in the model. She enlists the help of Reynolds, another experienced researcher working on a similar topic. With Reynolds’s help, Moss eventually analyzes and identifies some key trends, working them into a testable model. She also discusses some of her other research ideas with Reynolds. Two weeks later, Moss comes across a grant proposal developed by Reynolds and Abrams. She sees that it includes ideas very similar to those she discussed with Reynolds. She takes the matter to Abrams, who declines to get involved, saying that the two researchers should work it out on their own. 1.

Reynolds admits to Abrams that he used slightly modified versions of Moss’s ideas. Abrams is upset with this, but Reynolds is a key person on the proposal team and the grant application deadline is soon. What should Abrams do? Choose two of the following: a. Fire Reynolds from the lab on the grounds of academic misconduct. b. Leave Reynolds as first author on the proposal since he wrote up the ideas. c. Remove Reynolds from the proposal team, and offer Moss the position if she allows her ideas to be used. d. Require Reynolds to write a letter of apology to Moss, including a request to use her ideas and acknowledge her in the proposal. e. Ask Moss to join the grant team, placing her as third author on the proposal if she allows her ideas to be used. f. Acknowledge Moss in the grant proposal because the ideas were hers originally. g. Apologize to Moss and indicate that the proposal must go out as is to meet the deadline. h. Remove Moss’s ideas from the proposal and try to rework it before the deadline.

2.

Moss is upset about Reynolds using her ideas and she decides to do something about it. Given that Moss works very closely with Reynolds and their boss Abrams, evaluate the likely success of the following plans of action Moss can take. Choose two of the following: a. Moss asks Reynolds to give her credit by putting her name on the grant proposal as well. b. Moss asks Reynolds about the incident and tape records his reaction to later show Abrams.

On the corruption of scientists: field, environment, personality c. d. e. f. g. h.

Table 6.1

Moss searches for annotated notes about her ideas that are dated prior to her conversation with Reynolds. Moss appeals for a ‘mock trial’ for Reynolds to testify under oath to his superiors that the information was his. Moss searches for Reynolds’s lack of understanding of the concepts he claims were his own by questioning him in front of other students. Moss attempts to sway other researchers to support her to Abrams. Moss visits Reynolds’s office in hopes of finding evidence that she contributed to the proposal. Moss asks Reynolds to write an account of their conversation on the day in question and shows her comparison account to him as evidence that he is using her ideas.

Correlations of sensemaking strategies with ethical decision-making scales

Sensemaking strategies

Data management

Study conduct

Professional practices

Recognition of circumstances Seeking help Questioning one’s judgment Anticipating consequences Dealing with emotions Analysis of personal motivations 7. Consideration of others

0.46 0.25 0.45 0.41 0.37 0.47

0.52 0.12 0.39 0.45 0.34 0.40

0.52 0.18 0.50 0.44 0.41 0.51

0.48 −0.05 0.21 0.52 0.20 0.23

0.50 0.13 0.38 0.46 0.33 0.40

0.50

0.44

0.52

0.37

0.46

Average correlation

0.42

0.38

0.44

0.28

1. 2. 3. 4. 5. 6.

Note:

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Business Average practices correlation

r > 0.19 significant at the 0.05 level.

Results Table 6.1 presents the correlations of the ethical decision-making scales examining decisions of health, biological, and social scientists with respect to data management, study conduct, professional practices, and business practices ethical decisions with scores on the seven ethical sensemaking strategies. The average correlations obtained for data management, study conduct, professional practices, and business practices were 0.42, 0.38, 0.44, and 0.28. Thus, the application of these sensemaking strategies was related to all four forms of ethical decision making. In fact, when it is recognized that these are bivariate correlations, and it is borne in mind that the reliability of the decision-making scales was in the low 0.70s, it seems clear that these sensemaking strategies are, in fact, strongly related to ethical decision making among scientists and engineers. In this regard, however, it is important to recognize that central sensemaking dimensions proved to be especially strongly related to ethical decision making. More

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specifically, recognition of circumstances (r = 0.50), anticipating consequences (r = 0.46) and consideration of others (r = 0.46) provided particularly strong relationships across the four types of ethical decision. Apparently, people who forecast outcomes within context, taking into account the effects of their actions on others, are especially likely to make ethical decisions. Organizational implications These findings are noteworthy because they suggest two critical conditions that may lead to corrupt behavior by scientists and engineers. Both the analysis of circumstances (Redmond et al., 1993) and forecasting the consequences of activities (Xiao et al., 1997) are resource-intensive cognitive activities. The cognitive demands made in application of these sensemaking strategies have an important implication. More specifically, prior studies by Fiedler and Garcia (1987) indicate that stress undermines application of complex cognitive processes. These findings, in turn, suggest that unethical conduct by scientists and engineers will be more likely to occur under organizational conditions involving stress, such as time pressure, excessive production demands, or perceived uncertainty about employment. In addition it should be borne in mind that thinking about the implications of actions for others was also found to be strongly, and positively, related to ethical decision making by scientists. Earlier work by O’Connor et al. (1995) has indicated that object beliefs (that is, viewing others as tools) is related to ethical misconduct in organizational settings. As a result, organizational conditions that lead scientists and engineers to discount others can be expected to lead to ethical breaches. What should be recognized here is that central characteristics of the work of scientists and engineers, such as a focus on only technical issues and isolation from others (Cardinal, 2001), may create a greater propensity for ethical misconduct on the part of scientists and engineers. Field, strategies, and ethical decisions Overview Earlier, we noted that work in the sciences and engineering differs from other fields by virtue of the emphasis placed on professionalization (Damanpour, 1991). The importance of professionalization to work in the sciences and engineering, however, brings to the fore another question. How are the application of sensemaking strategies and ethical decision making affected as individuals are socialized into different professional fields? This issue has been examined in a recent study conducted by Mumford et al. (2009) – a study based on the assumption that older, third- and fourth-year doctoral students, would be more socialized into their professional field than first-year doctoral students. Method The method applied by Mumford et al. (ibid.) to address this issue was relatively straightforward. Again, doctoral students were recruited from the health, biological, and social sciences in a wave design. The first wave consisted of 102 first-year doctoral students. The second wave consisted of 124 third- and fourth-year doctoral students. Again, all study participants were paid $100.00 for participation in the study. Comparison of the

On the corruption of scientists: field, environment, personality Table 6.2

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Effects of field and experience on ethical decision making F

df

p

h2p

Health sciences M

Data management Field 5.95 2,186 0.003 Experience 2.21 1,186 0.139 Field by experience 5.36 2,186 0.005 Study conduct Field 42.11 2,186 0.001 Experience 0.28 1,186 0.597 Field by experience 4.76 2,186 0.010 Professional practices Field 6.64 2,186 0.002 Experience 0.18 1,186 0.670 Field by experience 3.15 2,186 0.045 Business practices Field 2.08 2,186 0.127 Experience 0.15 1,186 0.699 Field by experience 0.47 2,186 0.627

SE

Biological sciences M

SE

Social sciences M

SE

0.060 Younger 2.21 0.04 0.012 Older 1.99 0.08 0.054

2.23 2.34

0.04 2.31 0.04 0.04 2.22 0.06

0.312 Younger 2.33 0.04 0.002 Older 2.21 0.08 0.049

1.92 2.11

0.04 2.45 0.04 0.04 2.45 0.06

0.066 Younger 2.21 0.03 0.001 Older 2.07 0.06 0.033

2.26 2.31

0.03 2.22 0.03 0.03 2.26 0.05

0.022 Younger 2.18 0.05 0.001 Older 2.12 0.11 0.005

2.13 2.21

0.05 2.25 0.05 0.05 2.30 0.08

Note: F = f-ratio; df = degrees of freedom; p = significance level; h2p = effect size (partial eta-squared); M = mean; SE = standard error; covariates not tabled.

younger and older students working in these fields with respect to intelligence, divergent thinking, Big Five personality attributes, cynicism, narcissism, and anxiety revealed that they were similar with regard to these characteristics. Thus, there was reason to suspect that the wave one and wave two samples were equivalent. Both the wave one and wave two sample members were asked to complete the measure of ethical decision making described earlier. Based on this measure scores were again obtained on the four dimensions of ethical decision making: (1) data management, (2) study conduct, (3) professional practices, and 4) business practices. Additionally, scores on the seven sensemaking strategies were obtained (that is, (1) recognition of circumstances, (2) seeking help, (3) questioning one’s judgment, (4) anticipating consequences (5) dealing with emotions, (6) analysis of personal motivations, and (7) consideration of others). These measures were treated as dependent variables in a series of multivariate analyses of covariance where field (health, biological, and social sciences) and experience (first year versus third and fourth years) were treated as independent variables. Results Table 6.2 presents the results obtained in the analysis of covariance testing for the effects of field and level of experience in the professional field with respect to ethical decision making. In the case of decisions with respect to data management, the biological and social sciences made more ethical decisions than those working in the health sciences.

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The significant interaction obtained between field and experience indicated that with experience, ethical decision making with respect to data management decreased in the health sciences. With regard to study conduct, ethical decision making was highest in the social and health sciences in comparison to the biological sciences. However, with experience, the decision making of biological scientists improved. For professional practices, poorer ethical decisions were made by health scientists than by biological or social scientists. Moreover, the interaction between field and experience indicated that with experience in the profession, the ethical decisions made by health scientists decreased relative to biological and social scientists. Finally, no significant (p ≤ 0.05) effects were observed in comparing professions with regard to ethical decisions involving business practices. Taken as a whole, these findings indicate that professions do result in different patterns of ethical decision making with health scientists becoming less ethical as a function of expertise. These findings, of course, present a question. Can these changes be accounted for by changes in sensemaking strategies applied by people working in a given field? Table 6.3 presents the results obtained in the analysis of covariance when the sensemaking strategies were treated as the dependent variable of concern. As may be seen, the social and biological sciences obtained significantly (p ≤ 0.05) higher scores than health scientists on recognition of circumstances, seeking help, questioning one’s judgment, dealing with emotions, analysis of personal motivations, and consideration of others. More centrally, significant interactions were obtained between field and experience. Generally, biological and social scientists evidence similar or improving scores with experience in terms of recognition of circumstances, anticipating consequences, dealing with emotions, and consideration of others. More centrally, in the health sciences declines in all these sensemaking strategies were observed as a function of experience. Thus, it appears that declines in sensemaking may account for the decrements in ethical decision making observed among health scientists as they acquire experience. Moreover, the findings presented by Mumford et al. (2009) indicate that these findings cannot be accounted for by either differential work experiences (for example, exposure to unethical behaviors) or social psychological variables (for example, deception). Organizational implications Perhaps the most direct organizational implication of these findings is that the propensity for unethical decision making is not the same across all fields of science and engineering. One implication of this finding is that organizations that rely on scientists and engineers working in high-risk fields such as health sciences should be more concerned about potential misconduct. This implies both the application of more stringent monitoring procedures and more extensive training with regard to scientific ethics (National Institute of Medicine, 2002). Not only do these findings speak to cross-field differences, they also indicate that professionalization into high-risk fields may result in increased incidents of unethical conduct. More centrally, this potential for unethical conduct appears to be linked to more experienced professionals in high-risk fields, such as the health sciences, applying less effective sensemaking strategies as they work through problems with ethical implications. This observation, however, broaches a broader question. Why are declines in sensemaking observed among health scientists as a function of professionalization?

On the corruption of scientists: field, environment, personality Table 6.3

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Effects of field and experience on sensemaking strategies F

df

p

h2p

Health sciences M

Recognition of circumstances Field Experience Field by experience Seeking help Field Experience Field by experience Questioning one’s judgment Field Experience Field by experience Anticipating consequences Field Experience Field by experience Dealing with emotions Field Experience Field by experience Analysis of personal motivations Field Experience Field by experience Consideration of others Field Experience Field by experience

SE

Biological sciences M

SE

Social sciences M

SE

6.62 2,187 0.002 0.53 1,187 0.470 2.96 2,187 0.054

0.066 Younger 3.51 0.05 0.003 Older 3.28 0.13 0.031

3.48 3.62

0.05 3.70 0.05 0.06 3.67 0.10

42.24 2,187 0.001 0.14 1,187 0.711 0.48 2,187 0.620

0.311 Younger 0.60 0.02 0.001 Older 0.59 0.05 0.050

0.90 0.86

0.02 0.91 0.02 0.03 0.96 0.04

49.67 2,187 0.001 0.16 1,187 0.688 1.70 2,187 0.186

0.347 Younger 2.61 0.05 0.001 Older 2.49 0.12 0.018

3.20 3.21

0.05 2.85 0.05 0.05 2.92 0.09

5.84 2,187 0.003 0.17 1,187 0.681 4.12 2,187 0.018

0.059 Younger 3.46 0.05 0.001 Older 3.23 0.13 0.042

3.35 3.54

0.05 3.64 0.05 0.06 3.60 0.10

41.25 2,187 0.001 0.19 1,187 0.660 3.02 2,187 0.051

0.306 Younger 2.80 0.05 0.001 Older 2.61 0.13 0.031

3.22 3.38

0.05 2.87 0.05 0.06 2.79 0.09

46.41 2,187 0.001 0.00 1,187 0.984 2.08 2,187 0.128

0.332 Younger 2.48 0.05 0.000 Older 2.34 0.12 0.022

3.03 3.04

0.05 2.80 0.05 0.05 2.85 0.09

26.00 2,187 0.001 0.14 1,187 0.714 2.80 2,187 0.063

0.218 Younger 2.96 0.05 0.001 Older 2.78 0.12 0.029

3.10 3.25

0.05 3.48 0.05 0.06 3.42 0.09

Note: F = f-ratio; df = degrees of freedom; p = significance level; h2p = effect size (partial eta-squared); covariates not tabled.

Although interpretation of this finding is somewhat speculative, two explanations might apply. First, healthcare is ultimately a field based on treatment procedures in which people become less relevant than the procedure per se. Second, unlike the social and biological sciences, health scientists are exposed to suffering. As a result, they may apply ineffective sensemaking strategies as a form of self-protection.

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These two explanations for the obtained effects are both of importance for organizations. With regard to our first explanation, it appears that reinforcements and compensation structures within the profession may, at times, have the potential to undermine ethical thinking. This observation, of course, implies that organizations should evaluate performance management and compensation programs with regard to their ethical, as well as financial, implications. Careful evaluation of trade-offs between these two concerns may significantly enhance ethical conduct. With regard to self-protection, it should be recognized that work in the sciences and engineering is not always inherently neutral and objective. In some fields, the problems being addressed may be quite threatening at a personal level. As a result, professions will adopt socialization patterns and work procedures that allow people to work under conditions of threat or risk. Health sciences provides one example, but others come to mind, such as nuclear engineering. Under these conditions, a more circumspect analysis of the profession and its practices is required. Organizations, more centrally, must recognize the risk posed by the profession under these conditions, initiating more stringent local ethical guidelines, stronger professional monitoring with regard to ethics, and more intensive training in ethical conduct. Although those kinds of organizational action seem reasonable, it must be remembered that, if the organization itself is embedded in the profession (for example, pharmaceutical companies in health sciences), professional culture may work against effective interventions in this regard. Accordingly, systematic organizational-level interventions may, at times, be required to address this issue (Sims and Keon, 1999). Environment, strategies, and ethical decisions Overview Our foregoing observations about fields should not be taken to imply that scientists and engineers working within a field are not exposed to markedly different work conditions. In studies of scientific and engineering ethics, two key kinds of environmental influences are commonly examined. First, it is argued that ethical decisions are conditioned by people’s perceptions of their work environment or climate perceptions (James et al., 1990; Parker et al., 2003). In fact, studies by Victor and Cullen (1988), Agarwal and Malloy (1999), Peterson (2001), and Schminke et al. (2005) all indicated that perceptions of some aspects of the work environment (for example, egoism concerns of self-interest and company profit) are negatively related to ethical conduct while perceptions of other aspects of the work environment (for example, benevolence, friendship and team interest) are positively related to ethical conduct. The question raised by those findings, however, is – what aspects of climate are central to ethical conduct among scientists and engineers? In studies of science and engineering ethical conduct, however, climate perceptions are often of less concern than events that have occurred to scientists and engineers in the course of their career. For example, Jasanoff (1993) conducted an ‘in-depth’ qualitative analysis of prior cases of ethical misconduct. Analysis of these cases indicated that poor mentoring, production pressure, and commitment to a certain perspective were all involved in incidents of misconduct. Other work indicates that unethical conduct by supervisors (Gelman and Gibelman, 2002), disregard of laboratory procedures (Jansen

On the corruption of scientists: field, environment, personality

159

and Von Glinow, 1985), and peer group conflict (Levenson, 1986) all might also play a role in incidents of ethical misconduct among scientists and engineers. Recently, Mumford et al. (2007) conducted a study examining the impact of climate perceptions and career events on ethical decision making and the sensemaking strategies employed by scientists. Method The sample used as a basis for this investigation was 102 first-year doctoral students working in the health, biological, and social sciences. It is of note that first-year students were studied due to people’s greater sensitivity to environmental conditions as they move into new environments. Again, these doctoral students were paid $100.00 for completing a battery of measures. The critical dependent variables of concern in this investigation were the four ethical decision-making measures examining decisions with respect to data management, study conduct, professional practices, and business practices. In addition, the sensemaking strategies served as a second set of dependent variables with all seven strategies being examined. The predictors examined climate perceptions and career experience. The measure of climate perceptions was developed based on a review of prior studies examining ethical climate (for example, Viader-Cohen, 1998; Argandoña, 1999; Hartman, 1999;) and climate in research and development organizations (for example, Ekvall and Ryhammer, 1999; Witt and Beorkrem, 1999; West, 2002). Based on this review, 14 climate dimensions were identified relevant to performance and ethics in scientific organizations (for example, justice, caring, trust, conflict). Subsequently, five to ten statements (for example, People here do not steal others’ ideas) were developed for each dimension. Participants were asked to rate on a 5-point scale the extent to which these statements described their current work environment. A factor analysis yielded four dimensions – equity, interpersonal conflict, occupational engagement, and work commitment. Scores on these climate scales produced internal consistency coefficients above 0.80. The measure of event exposure was based on earlier work conducted by Mumford et al. (1996). Here, a review of the literature was used to identify career experiences that might contribute to incidents of ethical misconduct (for example, Arlow and Ulrich, 1980; Weaver et al., 1999). Subsequently, a panel of psychologists prepared background data questions, 7 to 18 per experience dimension, to assess the extent to which people had been exposed to these events (for example, How often did you wonder whether your major professor would approve your work? How often was your work slowed because colleagues did not give you material you needed?). Participants were asked to rate on a 5-point scale the frequency, or intensity, of event exposure. When these questions were factored, a five-dimension solution was obtained which included professional leadership, poor coping, lack of rewards, limited competitive pressure, and poor career direction. Dimensional scores produced internal consistency coefficients above 0.70. Results Tables 6.4 and 6.5 present the correlations of the climate and environmental events factors with the ethical decision-making scales and the sensemaking scales. With regard to ethical decision making, two climate dimensions, interpersonal conflict and

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Table 6.4

Correlations of climate perceptions and environmental events with ethical decision making Data management

Climate perceptions Equity Interpersonal conflict Occupational engagement Work commitment Environmental events Professional leadership Poor coping Lack of rewards Limited competitive pressure Poor career direction

Study conduct

Professional practices

Business practices

0.08 −0.16 0.15 0.06

0.15 −0.07 0.10 0.22

0.12 −0.26 0.21 0.12

−0.03 −0.24 −0.09 0.18

0.07 −0.27 −0.21 0.19 −0.01

−0.07 −0.12 −0.04 0.21 0.17

0.11 −0.20 −0.36 0.24 0.06

−0.18 −0.20 0.03 0.22 0.30

Note: r > 0.19 significant at the 0.05 level.

occupational engagement, were found to be related to ethical decisions. Interpersonal conflict was negatively related to ethical decisions with regard to professional practices (r = −0.26) and business practices (r = −0.24) while occupational engagement (r = 0.21) was positively related to ethical decisions with regard to professional practices. Examination of the career events factors indicated that events reflecting poor coping with the work environment were negatively related to ethical decisions with respect to data management (r = −0.27), professional practices (r = −0.20), and business practices (r = −0.20). Additionally, a lack of rewards was negatively related to decisions with regard to data management (r = −0.21) and professional practices (r = −0.36). Finally, in keeping with our earlier observations with regard to stress, an environment characterized by limited competitive pressure was positively related to ethical decisions with respect to data management (r = 0.19), study conduct, (r = 0.21), professional practices (r = 0.24), and business practices (r = 0.22). Additionally, poor career direction was positively related to decisions with regard to business practices (r = 0.30). Although environmental events and climate perceptions were related to ethical decision making, a weaker pattern of relationships emerged in examining relationships with sensemaking. The notable exception in this regard occurred for lack of rewards – a career event variable. Lack of rewards was found to be negatively related to all of the sensemaking strategies producing an average correlation of 0.38. Thus, lack of rewards appears to inhibit application of ethical sensemaking skills. Organizational implications The findings obtained in this study indicate that environmental events and climate perceptions have a rather complex set of effects with regard to ethical decisions. These findings indicate that conflict, competitive pressure, and poor coping all act to undermine ethical decisions. The pattern of relationships suggests that among scientists and engineers ethical breaches are more likely in dysfunctional work environments. Accordingly,

161

Note:

0.11 0.02 −0.34 0.01 −0.35

0.04 −0.04 −0.30 0.11 0.01

r > 0.19 significant at the 0.05 level.

0.10 0.01 −0.09 0.01

Seeking help

0.02 −0.13 −0.12 −0.04

Recognition of circumstances

0.16 0.01 −0.46 0.01 −0.16

0.13 −0.11 −0.16 −0.02

Questioning judgment

0.01 −0.09 −0.27 0.13 0.05

0.01 −0.15 −0.11 0.04

Anticipating consequences

0.16 −0.01 −0.42 0.03 −0.10

0.13 −0.12 −0.15 −0.05

Dealing with emotions

Correlations of climate perceptions and environmental events with sensemaking strategies

Climate perceptions Equity Interpersonal conflict Occupational engagement Work commitment Environmental events Professional leadership Poor coping Lack of rewards Limited competitive pressure Poor career direction

Table 6.5

0.16 −0.01 −0.48 0.01 −0.18

0.10 −0.11 −0.14 0.01

Analysis of motivations

0.09 −0.04 −0.36 0.10 −0.11

0.01 −0.12 −0.14 0.02

Consideration of others

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organizations engaged in attempts to minimize misconduct among scientists and engineers should monitor the work environment and intervene when intense conflict, competition, and poor coping emerge among work teams. Indeed, one of the benefits of climate and environmental assessments is that they provide guidelines for when such interventions are needed (Amabile et al., 1996). What should be recognized in these interventions, however, is that these environmental events do not seem to influence how people think about ethical issues, as these environmental variables had little impact on sensemaking strategies. Rather, it appears that a difficult work environment may provide a justification for incidents of misconduct. The operation of justification mechanisms, in turn, suggests that clear organizational policies with regard to ethical behavior among scientists may prove of value (National Institute of Medicine, 2002). The notable exception to this trend was found in environmental events indicating a lack of rewards. Lack of rewards was negatively related to both ethical decision making, in the case of data management and professional practices, while being negatively related to application of sensemaking strategies. These relationships might reflect poor learning with regard to ethical thinking and a subsequent use of poor thinking as a basis for cutting corners in order to obtain rewards. From an organizational perspective, however, these findings imply that an active program to reward scientists and engineers for their efforts through interventions such as profit sharing, increased autonomy, or increased responsibility, may be critical to ensuring ethical conduct on the part of scientists and engineers. The person, ethical decisions, and sensemaking Overview People, of course, have different expectations about rewards. This observation, in turn, broaches a question about how the differential characteristics of scientists and engineers are related to ethical decision making and sensemaking. In fact, personality, characteristic ways of feeling and behaving (Myers, 2007), has frequently been used to explain ethical misconduct in fields outside the sciences and engineering (Ones et al., 1993; Murphy, 2000). Of the various personality variables that have been linked to incidents of misconduct, two variables, narcissism, grandiose self-expectations (Penney and Spector, 2002), and cynicism, negative perceptions of others (Kanter and Mirvis, 1989), appear especially important given the uncertainty of work in the sciences and engineering and the collaborative nature of this work. Accordingly, Antes et al. (2007) conducted a study to examine the influence of these dispositional characteristics on ethical decision making and sensemaking among scientists. Method The sample used in this study consisted of 226 doctoral students working in the health, biological, and social sciences who were paid $100.00 for study participation. Sample members were asked to complete the measure of ethical decision making described earlier which provide the basis for measuring ethical conduct in four areas as well as the seven sensemaking strategies. Scores on the ethical decision-making and sensemaking scales provide the dependent variables examined in this study. Participants were also asked to complete three personality inventories which provide

On the corruption of scientists: field, environment, personality Table 6.6

Correlations of personality scales with ethical decision making Data management

Study conduct

0.10 0.10 −0.09 0.15 −0.01

0.14 0.10 0.07 −0.03 0.10

0.03 0.09 −0.09 0.08 −0.12

0.00 −0.03 −0.13 −0.02 0.04

−0.03 −0.06 −0.11 −0.20

0.12 −0.03 −0.15 −0.15

0.00 −0.18 −0.15 −0.29

−0.07 −0.10 −0.22 −0.22

−0.02 −0.05

−0.17 0.00

−0.19 −0.14

−0.10 −0.15

Big Five Openness Conscientiousness Extroversion Agreeableness Neuroticism Narcissism Leadership/authority Self-admiration/Self-absorption Superiority/arrogance Exploitiveness/entitlement Philosophies of human nature Cynicism Trustworthiness Note:

163

Professional practices

Business practices

r ≥ 0.15 significant at the 0.05 level.

the principal independent variables of interest. First, participants were asked to complete John et al.’s (1991) Big Five Inventory. This inventory provides scales measuring openness, neuroticism, extroversion, conscientiousness and agreeableness. Second, participants were asked to complete Emmons’s (1984, 1987) narcissism measure. This measure provides scales measuring exploitativeness/entitlement, leadership/authority, superiority/arrogance, and self-absorption/self-admiration. The third measure participants were asked to complete was Wrightsman’s (1964) Philosophies of Human Nature which provides scales measuring cynicism and trustworthiness. The items included in all scales were based on people’s description of how typically they, or others, expressed relevant behaviors (for example, I am never satisfied until I get all that I deserve; or Most people would tell a lie if they could gain by it). All scales yielded internal consistency coefficients above 0.70. Evidence is available (Raskin and Terry, 1988; Wrightsman, 1992; John and Srivastava, 1999) for the construct validity of all these scales. Results Tables 6.6 and 6.7 present the correlations between these personality scales and the measures of ethical decision making and sensemaking. Turning first to ethical decision making, general personality characteristics, such as conscientiousness and extroversion, were not strongly related to ethical decision making among scientists. Rather, three scales appeared to be especially useful in accounting for ethical decision making, specifically: the superiority/arrogance scale (average r = −0.16), the exploitativeness/entitlement scale (average r = −0.22) and the cynicism scale (average r = −0.16), with these scales proving to be related to all types of ethical decisions. With regard to sensemaking strategies, a similar pattern of findings emerged. As might be expected, some relationships, typically readily interpretable relationships, were

164

Note:

−0.07 −0.03 −0.11 −0.16 −0.06 −0.08

−0.01 −0.14 −0.23 −0.35 −0.26 −0.09

r ≥ 0.15 significant at the 0.05 level.

0.04 −0.13 −0.05 0.00 −0.08

Seeking help

0.16 0.09 −0.06 0.11 −0.05

Recognition of circumstances

−0.15 −0.09

−0.09 −0.16 −0.17 −0.30

0.05 0.00 −0.12 0.13 −0.16

Questioning judgment

Correlations of personality scales with sensemaking strategies

Big Five Openness Conscientiousness Extroversion Agreeableness Neuroticism Narcissism Leadership/authority Self-admiration/self-absorption Superiority/arrogance Exploitativeness/entitlement Philosophies of human nature Cynicism Trustworthiness

Table 6.7

−0.26 −0.09

0.00 −0.11 −0.20 −0.33

0.17 0.12 −0.05 0.12 −0.04

Anticipating consequences

−0.15 −0.05

−0.08 −0.15 −0.14 −0.31

0.05 0.06 −0.10 0.17 −0.17

Dealing with emotions

−0.16 −0.11

−0.08 −0.13 −0.16 −0.32

0.07 0.01 −0.11 0.12 −0.17

−0.22 −0.14

−0.01 −0.09 −0.19 −0.31

0.16 0.04 −0.06 0.08 −0.09

Analysis of Consideration motivations of others

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observed between select personality variables and sensemaking. For example, openness was positively related to anticipating consequences (r = 0.17) and recognizing circumstances (r = 0.16). Similarly, neuroticism was negatively related to dealing with emotions (r = −0.17) and analyzing personal motivations (r = −0.17). More centrally, however, it was again found that superiority/arrogance (average r = −0.17), exploitativeness/entitlement (average r = −0.29), and cynicism (average r = −0.18) were strongly negatively related to effective applications of all of the sensemaking strategies. Thus, it appears that arrogant, exploitative, and cynical people apply inappropriate sensemaking strategies in working through ethical problems leading to poor ethical decision making. Organizational implications The negative impact of arrogance, exploitativeness, and cynicism on sensemaking and ethical decision making has a rather straightforward implication for organizations. Organizations should expressly consider these characteristics in selecting scientists and engineers, seeking to screen out individuals displaying these characteristics due to their risk for misconduct. In this regard, however, it is important to bear in mind the observations of Feist (1998), indicating that scientists are often arrogant and cynical – if not exploitative. As a result, overt screening may not always prove feasible given the competition for scientific and engineering talent. Under these conditions it would seem prudent for organizations to identify individuals displaying this pattern of personality characteristics and monitor the activities of these individuals more closely when ethical concerns arise. These findings, however, also have a more subtle, but perhaps more important, implication for organizations in managing ethical risks. Arrogance, exploitativeness, and cynicism can be construed as traits. However, arrogance, exploitativeness, and cynicism may also operate as situationally-based states. Accordingly, organizations may minimize the risk of misconduct by scientists and engineers by creating work conditions where these interpretive states are less likely to arise. For example, fair, objective procedures for making decisions about what projects to pursue may minimize state cynicism. Similarly, exploitativeness may be minimized by managing competition for organizational resources. Finally, arrogance might be minimized by keeping scientists and engineers in contact with relevant user groups and providing objective feedback with regard to performance. Although other work design strategies can be envisioned, the foregoing observations point to the need for, and feasibility of, actively managing the work environment of scientists and engineers to minimize the potential for ethical misconduct. Discussion Before turning to the broader conclusions flowing from the present set of studies, certain limitations should be noted. To begin, all of the research under consideration herein was based on samples of doctoral students. Doctoral students, while in a critical phase of career development are not, typically, experienced professionals. Thus, some caution is called for in generalizing our findings and the derivative organizational implications to more experienced professionals (Ericsson and Charness, 1994). Along related lines, it should be recognized that all of these studies were based on an examination of scientists working in the fields of health sciences, biological sciences, and social sciences. Although the findings of Kligyte et al. (2008a, 2008b) indicate that many

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of these conclusions can be extended to people working in the physical sciences and engineering, caution is still called for in generalizing these findings across fields. Finally, it should be recognized that ethical decision making and sensemaking were measured though one instrument. Of course, evidence is available for the validity of this measure (Mumford et al., 2006), and variations on these measures were developed to tailor scenarios to a particular field; it is also true that we lack confirmatory evidence examining applications of these measure across a number of fields. Even bearing these limitations in mind, however, we believe that the results presented have some important implications for understanding ethics, or corruption, among scientists and engineers. To begin, it seems clear that ethical conduct, ethical behavior, among scientists and engineers can be described in terms of four broad dimensions: (i) data management, (ii) study conduct, (iii) professional practices, and (iv) business practices. Although importance of these dimensions to a particular field may vary, and the specific behavioral dimensions subsumed under an area may vary, it seems clear that ethical conduct among scientists and engineers can be described with reference to these four basic dimensions (Kligyte et al., 2008a). The key issue at hand in the present chapter, however, was more complex. How might we understand the forces giving rise to ethical decisions with regard to these four behavioral areas? A variety of theories might be applied to understand sciences and engineering ethics: contingency theory (Brown and Trevino, 2006), cognitive moral development theory (Kohlberg, 1984), and social norm theory (National Institute of Medicine, 2002) to mention a few. However, the dynamic, complex, and social nature of work in the sciences and engineering led us to argue that scientific and engineering ethics are best understood through a sensemaking model (Sonenshein, 2007). The findings presented in this chapter, along with those obtained in ethics education studies (Kligyte et al., 2008b; Mumford et al., 2008), suggest that sensemaking may provide a viable theoretical system for understanding the ethical conduct of scientists and engineers. In the present set of studies, we developed a model of sensemaking activities in making ethical decisions. This model stresses the importance of framing, emotions, reflections, and forecasting to make ethical decisions. Based on this model, seven strategies that might help people work through ethical problems were identified: (1) recognition of circumstances, (2) seeking help, (3) questioning one’s judgment, (4) anticipating consequences, (5) dealing with emotions, (6) analysis of personal motivations, and (7) consideration of others. Effective execution of these seven strategies was found to be strongly related to all four domains of ethical decision making, indicating that a sensemaking model might, in fact, account for ethical conduct among scientists and engineers. When these findings are considered in light of the effects of strategy instruction on ethical decision making (Kligyte et al., 2008b; Mumford et al., 2008), it seems reasonable to conclude that sensemaking strategies may underlie ethical conduct. This observation, in turn, broaches another question. Specifically, where do effective sensemaking strategies come from? In the present effort, we have examined three plausible explanatory systems: professionalization, career experiences, and the individual’s personality. Clearly, our findings with regard to the study of changes in ethical decision making as a function of professional field indicate that professionalization does not guarantee that people will acquire these sensemaking skills or improve their ethical

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decisions. In fact, professionalization in some fields (for example, health sciences) appears to undermine growth in these capacities. The environmental study indicated that, while the environment influences ethical decision making, environmental factors are not strongly related to sensemaking. In other words, the environment may justify misconduct, but it does not undermine sensemaking. Instead, a pattern of individual characteristics, characteristics such as arrogance, exploitativeness, and cynicism, were found to be related to both sensemaking and ethical decisions among scientists and engineers. These findings suggest that individual-level interventions, such as instruction focused on strategy application (Kligyte et al., 2008b; Mumford et al., 2008) may prove the most effective approach for ensuring ethical conduct among scientists and engineers. Training interventions may, in fact, prove especially valuable because the three strategies most strongly related to ethical decision making, recognition of circumstances, anticipating consequences, and considering effects on others, are all high-demand strategies. These observations about training, of course, bring us to the issue of what organizations can do to minimize potential misconduct by scientists and engineers. Our foregoing observations point to four key actions that might be taken. First, given the complex cognition called for in ethical decision making, scientists and engineers should not be placed under excessive stress due to the debilitating effects of stress on cognition (Fiedler and Garcia, 1987). Second, organizations should employ policies where scientists are fairly and objectively recognized and rewarded for their work. Interventions along these lines may not only remove environmental justifications for misconduct, they may also minimize state-based expression of personality characteristics linked to ethical conduct. These interventions, however, are most likely to prove effective if they recognize the unique characteristics of scientists and engineers and the unique demands made by the work they are pursuing (Mumford et al., 2002). Third, organizations should employ active monitoring programs focused on high-risk individuals and scientists and engineers working under high-risk environmental conditions. Fourth, and finally, organizations should assess the likelihood of misconduct in the professional fields in which they are working – investing more in monitoring and training where there is a high risk for misconduct within these fields. These observations about organizational responses to ethical misconduct on the part of scientists and engineers bring us to a parting comment. Work in the sciences and engineering is unique, and the unique nature of this work has allowed for a clearer definition of misconduct than has proven possible in many other areas. By examining ethical decisions, decisions that may lead to misconduct, or corruption, in this well-defined domain, it becomes possible to attain an understanding of these origins of corruption and devise intervention strategies that might help minimize corruption. Hopefully, the findings emerging from this chapter will provide guidelines for those studying corruption in other fields where it is more difficult to isolate causal mechanisms and potential interventions. Note *

We thank Shane Connelly, Ryan Brown, Lynn Devenport, and Stephen Murphy for their contributions to the present effort. Collection of the data presented in this chapter was supported, in part, by the National Institutes of Health, National Center for Research Resources, General Clinical Research Center Grant M01 RR-14467. Parts of this work were also supported by a Grant, 5R01-NS049535-02, from the National Institutes of Health and the Office of Research Integrity, Michael D. Mumford, Principal Investigator.

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PART III INDIVIDUAL AND ORGANIZATIONAL CHOICES

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A comparative perspective on corruption: Kantian, utilitarian or virtue? Rosa Chun

Introduction The notion of what is socially responsible differs by place and time (Epstein, 1987). Corruption can be a way of life in certain countries while it is a criminal activity in others, depending on how it is construed in difference places, and under different regimes, and at different stages in economic and political development. In other words, ‘what I expect depends on where I come from and the meaning I give to what I experience’ (Trompenaars and Hampden-Turner, 1997, p. 21). Until a few years ago citizens of countries in the northern hemisphere believed that corruption was a problem of ‘the South’ (Kumar and Steinmann, 1998). However, the twenty-first century has seen cases of business corruption in the most developed countries becoming a major concern, particularly in damaging the image and reputation of companies, governments and even whole societies. Nevertheless, not all the corruption seems to have the same effect; certain types of corruption seem to have a less threatening effect than others. The aim of this chapter is to understand the idiosyncratic nature of corruption in different countries and its implication on businesses, using the Corruption Perceptions Index (CPI) from Transparency International. Its focus is to use the three lenses of Kantian, utilitarian and virtue ethics to summarize and critique different approaches to addressing corruption. Utilitarian and Kantian stances share the rationalistic approach in guiding ethical behaviour but adopt different principles. The Kantian approach stresses obeying moral principles for human behaviour such as ‘don’t lie’, or ‘don’t steal’, leaving no place for moral emotions or sentiments. Utilitarianism shares rationalism with Kantianism but pays more attention to businesslike cost–benefit relationships. The approach is illustrated by the view that there is no such thing as a good company that is not profitable (Minow, 1996). There are two distinctive features in virtue ethics which differentiate it from the other approaches: its ability to capture emotion and its concern for the happiness of the self as well as of others. Virtue ethics theory, on the other hand, denies that making moral decisions is a matter of calculation or principle-based duties (Stark, 1993; Hartman, 1998). Instead, virtue ethics looks to motivate aspirational values and seeks to answer the question, ‘what kind of society should we be?’. The meaning and types of corruption One question is where is the fine line that divides what is corrupt from what is not? If this is clear, then a Kantian approach is implied – the ability to define clearly between what is right, and what is wrong. Table 7.1 lists definitions that are examples from both academic and non-academic literatures. The definitions of business corruption vary but the one most commonly used 173

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Table 7.1

Definitions of corruption

Source

Definition

Oxford English Dictionary (1989)

Perversion or destruction of integrity in the discharge of public duties by bribery or favour; the use or existence of corrupt practices, especially in a state, public corporation, etc. The abuse of public office for private gain The misuse of entrusted power for private gain

World Bank (1999) Transparency International (2007) Nye (1967)

Heidenheimer et al. (1989)

Friedrich (1966)

Klitgaard (1988)

Manzetti and Wilson (2007)

Bardhan (1997) Rose-Ackerman (1978), p. 1

Johnston and Hao (1995)

Tarkowski (1989)

Public-office-centred category: Corruption is behaviour which deviates from the formal duties of a public role because of private-regarding (close family, personal, private clique) pecuniary or status gains Market centered: A corrupt civil servant regards his public office as a business, the income of which he will . . . seek to maximize. The office then becomes a ‘maximizing unit’. The size of his income depends . . . upon the market situation and his talents for finding the point of maximal gain on the public’s demand curve Public-interest centered: The pattern of corruption can be said to exist whenever a power holder who is charged with doing certain things, i.e., who is a responsible functionary or officeholder, is by monetary or other rewards not legally provided for, induced to take actions which favour whoever provides the rewards and thereby does damage to the public and its interests The divergence between the principal’s or the public’s interests and those of the agent or civil servant: corruption occurs when an agent betrays the principal’s interest in pursuit of her own An illegal transaction where public officials and private actors exchange goods for their own enrichment at the expense of society at large The use of public office for private gains Illegal or unauthorized transfer of money or an in-kind substitute. If we consider both the supply side and demand side of the phenomenon, from the supply side, the person bribed for any service must necessarily be acting as an agent for another individual or organization since the purpose of the bribe is to induce him to place his own interests ahead of the objectives of the organization for which he works The abuse, according to the legal or social standards constituting a society’s system of public order, of a public role or resource for private benefit Any activity motivated by interest, violating the binding rules of distribution, the application of which is within one’s responsibility. Rules of distribution . . . refer not only to the letter of the law, but also to norms recognized as binding by society and/or to the system’s ‘official’ norms and operational codes. Also ‘corrupt’ are those activities regarded by society as illegitimate or seen by the power elite as contradictory to the logic of the system

A comparative perspective on corruption: Kantian, utilitarian or virtue? Table 7.1

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(continued)

Source

Definition

Argandona (2001)

Non-performance of a duty, mandate, law, regulation, rule, contract or (explicit or implicit) commitment to act always in accordance with the interests of the public office or company in which the corrupt person renders his service Everything from paying bribes to civil servants and simple theft of public purses, to a wide range of dubious economic and political practices in which business people, politicians and bureaucrats enrich themselves Includes the three main elements of the general concept of corruption: a public official gains, a private citizen receives a benefit, and the connection between the gain and the benefit is improper

Amundsen (2002)

Thompson (1993)

comes from the political science literature, referring to the ‘use of one’s official position for personal gain’ or the ‘misuse of public power for private benefit’. The ambiguity in the definition is clarified by Johann Graf Lambsdorff (2008), the author of The Institutional Economics of Corruption and Reform as well as the developer of Transparency International’s CPI. He attempts to clarify each element in the definition: ‘private benefit’ relates to receiving money or valuable assets, increase in power and status, or even receiving promises for future benefits for relatives or friends, commonly referred to as ‘nepotism’ and ‘favouritism’. The term ‘misuse’ can be related to a behaviour that deviates from the formal duties of a public role. Others see corruption as a behaviour that deviates from the formal duties of a public role for group gain, as well as for personal gain (Nye, 1967). Here, group gain can include pecuniary or status gains by close friends and family or a private clique. For two private parties to be said to engage in corruption, their activities should have an influence on the allocation of resources either immediately or in the future, and also involve the use or abuse of public or collective responsibility for private ends (Husted, 1999). According to Thompson (1993), mediated corruption differs from conventional corruption with respect to each of the following three elements: 1. 2. 3.

the gain that the politician receives is political, not personal and is not illegitimate in itself, as in conventional corruption; how the public official provides the benefit is improper, not necessarily the benefit itself, or the fact that the particular citizen receives the benefit; and the connection between the gain and the benefit is improper because it damages the democratic process, not because the public official provides the benefit with a corrupt motive.

In each of these elements, the concept of mediated corruption links the acts of individual officials to qualities of the democratic process. While these various definitions allow us to consider different actors and modes of corruption, it is still very difficult to distinguish what is corrupt from what is not corrupt

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just by looking at the wide-ranging list of definitions. The next section discusses types of corruption as a guide as to which type of behaviour is regarded as being corruptive and others that are not. Types of corruption To categorize a human behaviour as corruption, there should be exchanges of favours between two actors, an agent and client, such as bribery, extortion and embezzlement and fraud (Lambsdorff, 2008). For example, in the case of bribery, the client acts as a briber and makes a payment to the agent, the bribee. In the case of extortion the agent uses his/ her coercive power to extract money from the client. Table 7.2 presents types of corruption and compares their definition using four major dictionaries including two from the United Kingdom and one business dictionary: the Oxford English Dictionary, the Collins Concise English Dictionary, the Merriam–Webster Online Dictionary, and the Longman Dictionary of Business English. In doing so, two English-speaking societies are being considered, British and American. If there is no agreement at this level then there is greater doubt as to our ability, in absolute terms, to distinguish between right and wrong. The definitions of various types of corruption offered by the four dictionaries appear consistent, but notable differences were observed in the areas of legality, intentionality and symmetry of the agents, and inclusion of specific items. The Oxford English Dictionary defines a kickback as (usually) illegal, while others make no comment on the legality of kickbacks. This may be due to the fact that under some legal systems, for example American federal and state law, many kickbacks are prohibited but some are not illegal per se. If a kickback does not specifically violate federal or state laws and such kickbacks are made to clients throughout the industry, the kickback may be normal, legal, and even tax deductible as in the case of the Bertolini Trucking Company (West’s Encyclopedia of American Law, 1998). On counterfeiting, intentionality is an important differentiation point from imitation. Two dictionaries, Merriam–Webster and Longman, include ‘intention to deceive’ as a factor differentiating imitation from counterfeit. On bribes, the Oxford English Dictionary states that both giving and receiving ends are committed to the bribe while the other dictionaries focus on the giving end only. The question ‘whether accepting bribes is justifiable or not’ has attracted interest from members of the public, government bodies and academics. The question of how justifiable is it to accept bribes appears to be subjective and varies by country, with Denmark being the least tolerant and the Philippines the most tolerant according to the World Value Survey.1 In reality there are countries whose laws are already asymmetric in that they penalize, exclusively or to a greater extent, the bribe-giver/payer, rather than the bribe-taker. In China, Xiong Xuanguo, vice-president of the Supreme People’s Court, is quoted as saying: ‘the criminal law should be amended to include the crime of giving bribes to foreign officials, but it is not yet the time to establish the crime of foreign officers accepting bribes’ (China Daily, 2007). In the academic literature, the rationale behind asymmetry in penalties and leniency has already been taken up by Rose-Ackerman (1999: 53): ‘Successful detection of corruption depends on insiders to report wrongdoing’. Lambsdorff and Nell (2007) argue that bribe-givers should be punished for giving bribes, but not for accepting the bribe-takers’ reciprocity.

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To take by fraud for someone’s own use

Act of getting money by violence, threats or misuse of authority

Embezzlement

Extortion

A secret agreement for fraudulent or illegal purpose; conspiracy

Collusion

Made in imitation of something genuine so as to defraud

Anything given or promised to induce a person to do something illegal or wrong

Bribe

Counterfeit

Collins Concise English Dictionary

Types of Corruption

Type of corruption

Table 7.2

The action or practice of extorting or wresting anything, esp. money, from a person by force or by undue exercise of authority or power; an instance of this; an act of illegal exaction

Fraudulent appropriation of entrusted property

Made in imitation of that which is genuine; imitated, forged

The act or practice of giving or accepting money or some other payment with the object of corruptly influencing the judgement or action; the offer or acceptance of bribes Secret agreement or understanding for purposes of trickery or fraud; underhand scheming or working with another; deceit, fraud, trickery

Oxford English Dictionary

The act or practice of extorting especially money or other property

Made in imitation of something else with intent to deceive To appropriate (as property entrusted to one’s care) fraudulently to one’s own use

Secret agreement or cooperation especially for an illegal or deceitful purpose

Money or favor given or promised in order to influence the judgment or conduct of a person in a position of trust

Merriam–Webster Online Dictionary

The practice of several firms coming to a secret understanding when sending in tenders to do work or supply goods, so that the party calling for the tenders is misled into thinking that tenders are in honest competition Made in imitation of the real thing but with the intention to deceive Law – the crime of an employee in a trusted position who dishonestly puts to his own use money intended for his employer. The offence of obtaining something by force or threats from a person. The offence done by a public official who wrongly uses his office to obtain money or other property from a person

A reward of money or goods given secretly to influence a person to do something

Longman Dictionary of Business English

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Reduction of tax liability by illegal methods

Tax evasion

Giving back of part of one’s pay

Kickback

NA

Deceit or an intentional deception or dishonesty

Fraud

Money laundering

Collins Concise English Dictionary

(continued)

Type of corruption

Table 7.2

The using of false representations to obtain an unjust advantage or to injure the rights or interests of another A refund, a rebate; the return of money, goods, etc.; a payment (usu. illegal) made to a person who has made possible or facilitated a transaction, appointment The process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions The reduction of tax payments by misstatement of income or other illegal means

Oxford English Dictionary

NA

To transfer (as illegally obtained money) through an outside party to conceal the true source

A return of a part of a sum received often because of confidential agreement or coercion

Intentional perversion of truth in order to induce another to part with something of value

Merriam–Webster Online Dictionary

Using illegal means of avoiding payment of a tax. The crime of reducing the tax payable by making false tax declarations

Secretly arranging or placing of illegally obtained money in or through foreign bank accounts in order to hide how it was obtained

1) Money that is demanded secretly from a worker by foreman, manager or employer. (2) Any money paid in order to receive a favour

Law: the gaining of some material advantage by dishonest means

Longman Dictionary of Business English

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It is also interesting to see that certain corruption types do not appear in all the dictionaries. ‘Money laundering’ does not appear in Collins, while ‘tax evasion’ does not appear in Merriam–Webster. In Africa, corruption at the broadest level includes nepotism, patronage, conflict of interest, divided loyalty, influence-peddling, moonlighting, misuse or stealing of government property, selling of favours, misappropriation, underor overinvoicing, court tempering, phony travel and administrative documents and use of regulation as bureaucratic capital (AAPAM, 1991). What is the norm in one country is unacceptable in another and there are three main explanations for differing levels of corruption: political, economical and cultural. The next section will discuss these different realities of corruption globally. Summary In summary, while a Kantian approach seems evident in these definitions of corruption, in that it is possible in the main to clearly define what corruption is and by implication what it is not, there is some disagreement between two similar societies (America and the UK) as to where the line can be drawn between the two. However, across countries there are marked differences in what a society defines as right and wrong. The issue of asymmetry is treated very differently in different countries. Antecedents of corruption Political system There are mixed results from research linking the political system of a country and the level of corruption. In the political science literature, little correlation between the size of public office and corruption was found while the correlations between the government budget relative to gross domestic product (GDP) and level of corruption is significant (Elliott, 1997). Other political factors shown to be relevant to the level of corruption are government regulations (Lambsdorff and Cornelius, 2000), the voting system (Perssonet et al., 2003) and the socialist legal tradition (Gerring and Thacker, 2005: 245–6). The history of countries has also been found to be relevant. For example, former British colonies exhibit less corruption than do other countries, controlling for other variables such as the level of income per head and the existence of common law (Treisman, 2000; Swamy et al., 2001). Lambsdorff (2006) provides a useful overview of the political variables which influence corruption. Economic wealth, equality, well-being The most representative economic variables related to corruption are GDP per head and equality of income. Overall, the relationship between these two variables and corruption is significant. A weaker economy drives a higher level of corruption. One explanation is that poorer countries lack the resources to combat corruption effectively (Husted, 1999: 341–2). Scholars have found, on the other hand, that empirical evidence for the relationship between corruption and GDP growth is less convincing (for example, Li et al., 2000). At the individual level, lower salary levels are said to be linked to a higher level of corruption (Van Rijckeghem and Weder, 2001). The positive impact of corruption on income quality was observed in a cross-sectional study of 37 countries (Gupta et al.,

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2001). The relationship is particularly strong in African countries (Gyimah-Brempong, 2002). The causality in the relationship is debatable. A reverse relationship of inequality leading to corruption was found in You and Khagram’s (2005) study, showing that poor countries cannot monitor and hold the rich and powerful accountable, enabling the latter to misuse their power or status for personal gain. Significant correlations were observed between a higher level of corruption and a lower-quality health provision and an inefficient government service (Gupta et al., 2001). Culture In contrast to the economist tradition, sociologists argue that cultural values such as social trust, religion and acceptance of hierarchy play a crucial role in influencing the level of corruption. In general, countries with higher levels of trust tend to be Protestant, have little acceptance of hierarchy and are therefore perceived to be less affected by corruption. La Porta et al. (1997) consider Catholic, Eastern Orthodox and Muslim religions to be particularly hierarchical, and that such hierarchical forms of religion are detrimental to civil engagement, which helps reduce the level of corruption. In his study of 64 countries, Treisman (2000) found that countries with hierarchical forms of religion showed positive correlations with corruption, while Protestants had negative correlations with the level of corruption. The correlations were significant when controlling for other variables such as GDP per head. In other words, the significant role of religion in predicting corruption at the country level will change if GDP is taken into consideration. In a similar vein to La Porta et al.’s notion of hierarchy, Hofstede’s (1991) national cultural variables are often linked to the level of corruption. Power distance and collectivism are popular cultural values to be linked to the different levels of corruption in different countries. Power distance is defined as the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally (ibid.). The 10 countries with the highest scores on the power distance dimensions are Malaysia, Guatemala, Panama, the Philippines, Mexico, Venezuela, China, Egypt, Iraq and Kuwait (ranging from 104 to 80) and these countries are usually also rated high in corruption; the bottom 10 countries are Austria, Israel, Denmark, New Zealand, Ireland, Sweden, Norway, Finland, Switzerland, and the United Kingdom (ranging from 11 to 35), and these tend to be regarded as having the lowest level of corruption. This implies a positive correlation between power distance and the level of corruption. Summary In summary, the literature on the antecedents of corruption reflects a positivistic perspective, that corruption is something that is ‘caused’ by other factors, implying that only by addressing such factors will corruption disappear. This suggests a utilitarian approach as corruption exists to solve problems of income inequality or national economy, for example, the end justifying the means, such that if corruption is endemic and represents the only way to get things done, or it is embedded in society such that the individual would stand out if challenging the norm, then it is neither unethical nor unacceptable to participate.

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The comparative measurement of corruption How a phenomenon is measured can provide insights into its theoretical underpinnings. The CPI compiled by Transparency International (TI) is a prominent measure of corruption at the nation level and is used next to demonstrate how such a comparative approach can highlight differences at the country level in corruption. TI is a non-governmental organization set up to combat corruption. It has produced the CPI, based on a number of (at least three) surveys and sources every year since 1995. The countries are ranked from being perceived as the least corrupt to the most corrupt. The index does not measure the extent of corruption; rather it ranks and rates the level at which corruption is perceived by experts and people working for multinational firms (www.transparency. org). The index calculates a CPI score, measuring and rating the perception of corruption in each country on a scale from 0 (very corrupt) to 10 (very clean), where 10 is the lowest perception of corruption. Table 7.3 summarizes the CPI 2008 by geographical location of the ranked countries. The majority of Western European countries are perceived to be less corrupt than countries from other continents. The following subsections give a breakdown analysis of countries by continent. Europe As far as corruption is concerned, Europe can be split into two, Western and Eastern Europe. In general, Western European countries are seen as the least corrupt in the world, while Eastern European countries rank poorly in the index. The two exceptional cases are Italy and Greece, which lag behind Slovenia and Estonia. Western Europe can be divided further into South and North. Northern states, compared with the southern states, generally have a lower level of corruption (also more trust, low power distance and higher GDP per capita). In particular, the Scandinavian countries have consistently ranked in the top 10 in the CPI over the years, while other Western European countries such as the UK, Ireland and Germany fall into a lower tier, ranked between 11 and 20. The Scandinavian countries seem to have two distinctive characteristics attributed to their lower level of corruption: high-quality welfare programmes such as national health and education, and equality in income distribution. The effects are much more prominent in the Scandinavian countries than elsewhere among the advanced industrial countries where the weakest are the UK and the United States (Osberg and Smeeding, 2008). Corruption in Eastern European countries is mainly political, and is closely linked to a very high level of organized crime. It appears in public procurement and strategic concession deals, a judiciary paralysed by corrupt structures and the misuse of EU funds dedicated to each country’s development. In Slovakia, bribery, nepotism and such are not viewed as corruption as much as a way of living; they are seen as the only way for people to get ahead (Miklos, 1995). A number of explanations can be given for the high level of corruption in Eastern Europe, but the most direct causes seem to be political instability and a poor economy. For example, political instability in ex-communist states such as Poland, Bulgaria, Romania, Croatia and Georgia, and in the countries that have recently become an independent state, such as Serbia, is very high. The corruption level in countries where national income is extremely low, such as Bulgaria, is the highest in Eastern Europe. These countries also rate high on Hofstede’s power distance, one factor likely to

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Table 7.3 Rank 1 1 1 4 5 5 7 7 9 9 11 12 12 14 14 16 16 18 18 18 21 22 23 23 23 26 27 28 28 28 31

32 33

A summary, CPI 2008

Country

Rank

Country

Rank

Country

Denmark New Zealand Sweden Singapore Finland Switzerland Iceland Netherlands Australia Canada Luxembourg Austria Hong Kong Germany Norway Ireland United Kingdom Belgium Japan USA Saint Lucia Barbados Chile France Uruguay Slovenia Estonia Qatar Saint Vincent and the Grenadines Spain Cyprus Portugal Dominica

33 35 36 36 36 39 40 41 41 43 43 45 45 47 47 47 47 47 52 52 54 55 55 57 58 58 58 61 62 62

Israel United Arab Emirates Botswana Malta Puerto Rico Taiwan South Korea Mauritius Oman Bahrain Macau Bhutan Czech Republic Cape Verde Costa Rica Hungary Jordan Malaysia Latvia Slovakia South Africa Italy Seychelles Greece Lithuania Poland Turkey Namibia Croatia Samoa Tunisia Cuba Kuwait El Salvador

67 67 70 70 72 72 72 72 72 72 72 72 80 80 80 80 80 85 85 85 85 85 85 85 92 92 92 92 96 96 96 96 96 96

Georgia Ghana Colombia Romania Bulgaria China Macedonia Mexico Peru Suriname Swaziland Trinidad and Tobago Brazil Burkina Faso Morocco Saudi Arabia Thailand Albania India Madagascar Montenegro Panama Senegal Serbia Algeria Bosnia and Herzegovina Lesotho Sri Lanka Benin Gabon Guatemala Jamaica Kiribati Mali

62 65 65 67

induce corruption: Poland (68), Bulgaria (70), Georgia (73), Serbia (86), Romania (90). On the other hand, Paldam and Svendsen (2001) argue that the slowness of the transition of the old communist countries of Eastern and Central Europe, caused by a lack of trust, affects the level of corruption. This results in sanctions, damage to international image and reduced trust of national institutions. Joining the European Union in itself does not appear to improve the level of corruption, as is implied by worsening of Bulgaria’s CPI score – 3.6 in 2008, down from 4.1 in 2007. What has been done? The OECD Anti-bribery Convention was launched in 1999, aimed at reducing corruption in developing countries by encouraging sanctions against bribery in international business. However, it is questionable if the Convention has

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decreased the level of corruption in the 37 member countries (including seven non-OECD members). The main obstacle is still the lack of uniformity in the monitoring system, and jurisdictions differing in their approaches to criminal liability (OECD, 2007b). For example, the UK’s anti-corruption credentials within the OECD have suffered a setback following the December 2006 decision to discontinue a criminal investigation of British Aerospace Systems (BAE Systems) in relation to the Al Yamamah contract in Saudi Arabia. The decision to stop the criminal investigation raised acute concerns over the UK’s international commitment to combating corruption. The UK’s score went down to 7.7 in 2008 from 8.4 in 2007. Asia There are various patterns of corruption from one part of Asia to another, depending on a country’s religious and political background which seem to play a significant role in corruption. Collectivist and Confucianist philosophies are most prominent in countries which traditionally have a Buddhist influence such as China, Japan, Korea, Thailand and Taiwan, and which nurture collaborative expectations between the government and businesses. In Japan, Keiretsu account for over 20 per cent of Japanese economic activity; they are doing business with each other so as to promote a climate of trust and reliability (Backman, 1999). In Korea many Chaebol bosses have ended up in court on corruption charges: Daewoo’s Kim Woo-Jung was charged with accounting frauds totalling $40 billion (£22 billion) in 2001; top management from SK, Korean Airlines and most recently Samsung have also been charged with corruption and bribery. Nevertheless, the Korean government has been criticized for being reluctant to crack down on the Chaebols, as many found guilty of corruption have been granted an amnesty. Some countries such as Singapore, Hong Kong, South Korea and Japan are referred to as being relatively clean at bureaucratic levels (Caiden, 1998), compared to Muslim countries such as Indonesia and Malaysia and Catholic countries such as the Philippines, and socialist Burma and Laos which tend to show higher levels of corruption. In the Arab world, loyalty to kinship overrides bureaucratic legal–rational norms. Patron– client relations reinforce favouritism, nepotism and patronage, promoting illegal transactions, breeding official irresponsibility, and systematizing bribery, all in contradiction of Islamic precepts and Koranic law (Ghosheh, 1981). Macao, the former Portuguese colony returned to China in 1999, and Bhutan share similar trends. They were both included in the index from 2006 when they achieved the highest scores of 6.6 and 6, respectively; and then experienced dramatic decreases resulting in 5.4 and 5.2, respectively, in 2008. One of the explanations can be the rise of gambling, an important source of Macao’s economic growth. Its gambling revenue of $3.6 billion in 2006 is much higher than that of Las Vegas (BBC, 2007), but seems to have a negative effect on the level of corruption. In general, Asian culture is highly hierarchical and government is highly centralized. Power comes from one supreme source and filters down from there. Corruption is expected up to a point. The business media are burdened with censorship, poor distribution of foreign competitors, and a lack of independence from the businesses they are expected to report on. Journalists tend to receive ‘favours’ for positive reports and face ostracism or worse for critical reports. Many business conglomerates and political parties tend to have control over certain types of media, therefore the media has little

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reliability when reporting on business or government corruption. One exception could be Singapore. Africa The main issues for African countries are economic and political instability, which contribute to the high level of corruption. Most African countries have a very low gross national income (GNI) per capita, except for countries like Libya which have oil resources, and many experience civil wars. African countries are keen on attracting foreign direct investment (FDI). According to the World Bank data, the FDI inflow in Africa is heavily concentrated in South Africa and Nigeria: 90 per cent of FDI into West Africa is concentrated in Nigeria, making up 80 per cent of their GDP. The most common form of corruption in Africa is bribery, tax evasion, and accounting irregularities involving multinational companies (MNCs) and the government officials in these host countries. While South Africa is in a relatively good position in the CPI corruption ranking (54th), in Nigeria, which saw a tenfold increase in its FDI,2 the level of corruption is persistently very high (ranked 121st in the 2008 CPI). There are many bribery scandals related to MNCs: the Halliburton bribe-for-contract scandal relating to a $4 billion liquefied natural gas (LNG) plant in Nigeria had apparently been ongoing since 1999, and eventually the former CEO Albert Jack Stanley was convicted for bribing Nigerian officials (The Wall Street Journal, 2008); Siemens was convicted in 2007 on bribery charges worth £8.6 billion between 2000 and 2004 to four top government officials in Nigeria, Libya and Germany in an attempt to secure contracts (The Times, 2007); Chevron was involved in an $18 billion tax evasion; and Cadbury was sued by investors over accounting in Nigeria. In addition to MNC-induced corruption, other factors affecting corruption include poor human rights status due to civil wars (for example, Uganda) and political governance (for example, Togo), and access to what has been called ‘blood diamonds’ (for example, Sierra Leone). The Americas The Americas can be divided into three for the purpose of analysing corruption: North, South and Central America. The United States is a culture based on Protestant values and one of the largest and wealthiest of countries with a high GDP per capita of $46,000 per annum. Despite various efforts made to prevent corruption, such as anti-corruption policies, regulations and measurement, when it comes to business corruption, US companies seem to have received the most frequent mentions in scandals reported in the media. America’s ranking in 2008 was equal 18th with Japan and Belgium. In Latin America, deception, bribery, dumping, fraud and dishonest selling, are the most common types of corruption (Arruda, 1997). The majority of the Latin American population belongs to the Roman Catholic Church or other Christian sects, therefore in principle they are guided by religious values. However, these values contradict their cultural norm ‘el que no tranza no avanza’ which literally means ‘he who can’t con will never move on’, promoting unethical behaviour in order to be successful. Weak economy, inequality of wealth, and poor standard of living feature across South America, in particular in Brazil, Colombia, Cuba and Peru, and are major factors in inducing corruption. Drugs are another major issue in South America. Some of these countries, including Colombia, are heavily involved with drug trafficking and money

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laundering which are regarded as an easy way to earn money and a quick way to a better quality of life. People with power can easily bypass the laws. Many countries such as Argentina have realized that corruption contributed to their economic recession in 2001 and the government has brought in several laws to combat corruption involving extortion, bribery and tax evasion. As result, Argentina’s CPI has shown continuous improvement since 2004. Summary Various points emerge from examining the CPI data. First, the measure is clearly accepted and, despite its subjective nature, it is rarely challenged. Second, the measure is provided as a number, somewhere between 0 (very corrupt) and 10 (very clean). The implication is significant: corruption can be measured, it exists as a definable construct and one which has the same meaning globally because the same approach to measurement is used globally. This is pure Kantianism, that what is acceptable is universally agreed, and can be clearly differentiated from what is not acceptable. The implication is again a set of rules that should be embraced by law makers and enforcers. However, examining the background to such measures produces a somewhat different interpretation. Case studies: South Korea, Latvia and Greece The following case studies are presented to illustrate further the way comparative analysis can highlight approaches to corruption. Longitudinal data on three selected countries, South Korea, Latvia and Greece, are compared over a 10-year period between 1995 and 2008. Latvia is a country where the level of corruption has constantly improved in the last 10 years, Greece is an example of a country with a decreasing reputation for corruption, and South Korea is a country that is recovering its reputation, which had fallen following the economic crisis in the late 1990s (see Figure 7.1). The data used here are the Berlinbased Transparency International’s CPI which ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. As explained earlier it is a composite index, drawing on corruption-related data from surveys carried out by a variety of institutions. It reflects the views of businesspeople and analysts from around the world, including experts who are locals in the countries evaluated. South Korea has ranked 40th out of the 149 countries included in the 2008 study. Figure 7.1 shows how its score has varied over the 14 years the survey has been conducted. While South Korea’s scores have shown a consistent rise since a low point in 1999, indicating that its performance has been improving, the country is still languishing in the middle of the top half of the ranking table. Korea’s large economic conglomerates (Chaebols) dominate its industrial sector, and while they have been at the heart of the country’s economic growth, their power is such that they are often in monopolistic positions, a position of power that can be, and often is, abused (You, 2005). A tradition of bribery and favours dates from the early days of Korean economic development and is consequently difficult to break. Moves to improve Korea’s international reputation have had a marked, if slow, effect on perceptions of corruption. A series of prosecutions in the last 10 years have helped to resolve what had become a cultural problem. However, observers still cite examples of officialdom turning a blind eye to business corruption. For example, in 2008 President Lee Myung-bak pardoned (as is his right) 74 leading businesspeople including Hyundai

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6

5

4

3

2 1995

1996

1997

1998

1999 Latvia

Figure 7.1

2000

2001

2002

Greece

2003

2004

2005

2006

2007

2008

South Korea

Longitudinal case studies: South Korea, Latvia and Greece

Motor Chairman Chung Mong-Koo, convicted in 2007 of raising a slush fund to bribe government officials. His three-year suspended gaol sentence was overturned. SK Energy Chairman Chey Tae-won had received a suspended sentence for illegal stock trading and book-keeping irregularities involving more than US$1 billion. Share manipulation is common in Korea; it earns its wealthy perpetrators large gains and its victims are often small shareholders. Hanwha Group Chairman Kim Seung-Youn was jailed for kidnapping and assault. All were pardoned. The reason given for this leniency is to promote economic growth. Latvia appeared in the index for the first time in 1998 but is one of the few cases where the ranking shows consistent improvement, albeit from a very low base. Latvia is the poorest EU member state and its development has been largely influenced by the oil business, a potent mixture when looking for reasons why a country might suffer from corruption. The country has also come through a time of great transition. A market economy and free enterprise have replaced state command and control from when the country was a Russian satellite. Free and fair elections have been held to elect members of parliament, and political will to ensure change appears to be behind the improvement in the country’s corruption index. Following a critical speech in 2007 by the American ambassador, the Latvian foreign minister openly acknowledged that confidence in his country was not strong, and that politicians had to work to boost this confidence. A national anti-corruption bureau (KNAB) was founded in 2002, with the aim of reducing corruption, and improving prevention measurement, education of the public as well as the monitoring of the political parties. Greece, one of the oldest democracies on the planet, has seen its corruption index heading in the opposite direction. In 1998, there were significant gaps between the three countries: Greece had the highest average CPI score (4.9), followed by South Korea (4.2)

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and then Latvia (2.7) with a much lower score. Ten years later in 2008, Latvia’s score had surpassed that of Greece three years in a row, making Greece the most corrupt of the three countries. Greece has values inherited from the Eastern Orthodox tradition but its society seems to play by different rules. Bribery, although it is rarely called as such, is rife in everyday aspects of life. For example a newspaper article in 2003 alleged that doctors were regularly given money in the expectation of the best possible care for a patient and a nicer room at public hospitals, that a driving licence could be bought, and that town planning offices all need ‘hurry-up’ fees to issue permits without delay (Tzilivakis, 2003). According to an OECD report (2007a), Greece has been undertaking initiatives on corruption but not as efficiently as it should. In particular, Hellenic Aid, the coordinator of Greece’s international development cooperation and aid policy, appeared to have done nothing to increase awareness of the convention and foreign bribery offence for its staff. Summary The three cases, originally selected as they show different patterns in how their CPI ratings have changed over the decade, provide a different insight into what explains corruption. In Korea the rationale given for pardoning businessmen found guilty of corruption was the desired outcome of economic growth. The same objective was used earlier in South Korea’s history to ignore the power of the Chaebols. This is pure utilitarianism, the common good of increased wealth justifying taking a lenient view of the corruption of business leaders. The same is equally clear in Greece: in order to ensure proper treatment in the medical system, a bribe must be offered. Bribery becomes acceptable to the average citizen because it is the only way to achieve what is needed: the outcome, better health for one’s family, justifies the means, bribing a doctor. But perhaps the best insight into how corruption might be tackled came from Latvia and from the acceptance that the reputation of the country and its institutions is at risk unless and until it resolves its corruption problem. How the country is seen and wants to be seen is driving the solution, a national body that focuses on corruption and political commitment. Conclusion, limitations and future studies Most of the literature on corruption is still dominated by that from political science. Significant correlations between corruption and economic, cultural and political variables can be observed within the political corruption literature, yet the causality of some of the variables is still debatable. The case studies drawn from TI’s CPI demonstrate how such economic, political, and cultural variables at the national level might influence the corruption level. In particular, three cases were studied in depth over a 10-year period, to demonstrate three types of development: a successful case such as in Latvia where the level of corruption has been consistently improving, the less successful example of Greece which is presented here as consistently failing to recover its original position in 1995, and a third case of South Korea, a country which had a falling reputation, but is now showing signs of a fast recovery. A common factor in any improvement in corruption appears to be political will and having institutions dedicated to exposing and fighting corruption. Thus appears doubly difficult once corruption has become embedded as a cultural reality, as in Greece and to a certain extent in Korea. A number of implications can be drawn from this study. A business behaves ethically because it is afraid of legal consequences if it does not, or it believes it is the right thing

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to do. In combating corruption, both government and self-regulations are important. This should include having a policy and codes of conduct that clearly state the company’s ethical values and how its employees are expected to act when faced with the possibility of corrupt behaviour. This has to be implemented at all levels but especially among senior managers in the company. Whistleblowers, when they go through a proper channel and procedure, can contribute to uncovering high-profile corruption such as that in Enron, and therefore need proper protection. Both government and business might monitor an index such as the CPI regularly and work together in formulating strategies for combating corruption. There are a number of challenges and limitations in using TI data and political science literature in explaining business corruption studies in the twenty-first century. First, not all the countries have been subject to the surveys used to compile the index. India was ranked the 38th least corrupt out of 41 countries in 1995, while they were ranked the 88th least corrupt out of 159 countries included in the index in 2005. This then makes it difficult to compare the sample countries included in the ranking, without considering the longitudinal trend. Second, findings from any study using TI data may not be directly applicable to business corruption. Transparency International has tended to focus on corruption in the public sector and the surveys used in compiling the CPI tend to ask questions in line with the definition of ‘misuse of public power for private benefits’, with a focus, for example, on the bribing of public officials. However, business corruption can occur without involving public officials, and without reciprocating favours. Particularly in the twenty-first century we have seen that many if not the majority of large-scale business corruptions are committed by MNCs and in wealthy Western countries. Public officials are not necessarily the main agent in business corruption, for example accounting scandals or tax evasion, and the agents may not have received any favour in return. Finally, most of the studies seem to take the rationalistic Kantian or utilitarian approach. From this angle, the antecedents and consequences of corruption are largely negative as it leads to or is induced from an unequal distribution of resources and income, such as inequality in standard of living (Powpaka, 2002). The post-Enron period has seen the number of large-scale corruption cases increasing in Western countries where the level of social trust, freedom of the media, economic wealth and political stability are regarded as relatively high. Examples involve senior executives of companies such as Enron’s Kenneth Lay and The Telegraph’s Conrad Black, whose individual wealth placed them among the richest people in the world. When the corruption is institutionalized or endorsed by senior executives, the bigger the impact in our society (Caiden, 1998), especially when companies are perceived as reputable and performing well in the market. In other words, the Kantian and utilitarian logic failed to motivate businesses to refrain from engaging in corrupt behaviour, and explain the increasing level of corruption in developed countries. Virtue ethicists emphasize developing virtues such as integrity, empathy and conscientiousness, and reducing vices such as corruption or greed to enhance the good reputation of the company and their relations with others (Gopinath, 2008). Individual and organizational levels of virtue and vice, rather than the economic and political explanations given to explain corruption thus far, may probably better serve as antecedents of business corruption in developed countries. Future studies could investigate such challenges further by identifying the causes of business corruption empirically and internationally. In addition to testing national-level

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variables, industry and organizational reputation, virtues and vices of the organization and leaders, and the function of non-executive directors, could be included. A number of control variables such as size and ownership can be useful to test whether private firms pay more in bribes than their well-connected state-owned counterparts (for example, Lambsdorff and Cornelius, 2000: 76–7). In summary, utilitarianism seems to dominate the way businesspeople and many governments see the consequences of corruption, economic growth and personal gain predominating, while watchdogs such as TI take a strict Kantian approach in believing it is possible to define and measure what is right and wrong in absolute terms. But closer analysis highlights problems of definition, in determining with any precision what is ethical. The work of TI brings a much-needed spotlight to a dark corner of commercial and public life, but it is in danger of institutionalizing the notion that corruption is an absolute, that those who are corrupt know they are and can be shamed into changing. On the other hand corruption can be seen as the means to an end. Such a utilitarian perspective may be useful in understanding why corruption exists but cannot fully explain the rise in corruption in highly developed countries, unless one believes that greed has become an acceptable motive and enormous wealth a goal that justifies illegality. Interestingly, virtue ethics present a subtly different way forward for those who wish to counter corruption, by emphasizing the negative impact it has on the reputation of a country and its business, affecting economic prospects for citizens and business alike. Notes 1. See http://micpohling.wordpress.com/2007/06/07/world-morale-someone-accepting-bribe/. 2. Inward FDI in Nigeria has been increased tenfold in two decades, ranging from $1,477 billion (10year average 1990–2000) to $12,454 billion (in 2007), http://www.unctad.org/sections/dite_dir/docs/ wir08_fs_ng_en.pdf.

References AAPAM (1991), ‘Ethics and accountability in African public services’, paper presented at the Report of the XIIIth round Table of the African Association for Public Administration and Management (AAPAM), Kenya: ICIPE Science Press. Amundsen, I. (2002), ‘Corruption: definitions and concepts’, Chr. Michelsen Institute of Development Studies and Human Rights, Working Paper, Bergen. Argandona, A. (2001), ‘Corruption: the corporate perspective’, Business Ethics: A European Review, 10(2), 163–75. Arruda, M.C. (1997), ‘Business ethics in Latin America’, Journal of Business Ethics, 16(14), 1597–603. Backman, M. (1999), Asian Eclipse: Exposing the Dark Side of Business in Asia, London: John Wiley. Bardhan, P. (1997), ‘Corruption and development: a review of issues’, Journal of Economic Literature, 35(3), 1320–46. BBC (2007), ‘Macau’s thriving gambling industry’, http://news.bbc.co.uk/1/hi/programmes/from_our_own_ correspondent/6405477.stm, (accessed December 20, 2008). Caiden, G.E. (1998), ‘Toward a general theory of official corruption’, Asian Journal of Public Administration, 10(1), 3–26. China Daily (2007), ‘Call for law on bribing foreign officials’, available at: http://www.china.org.cn/english/ government/228935.htm (accessed 22 December). Elliott, K.A. (1997), ‘Corruption as an international policy problem: overview and recommendations’, in Elliott (ed.), Corruption and the Global Economy, Washington, DC: Institute for International Economics, pp. 175–233. Epstein, E.M. (1987), ‘The corporate social policy process: beyond business ethics, corporate social responsibility, and corporate social responsiveness’, California Management Review, 29, 99–114. Friedrich, C.J. (1966), ‘Political Pathology’, Political Quarterly, 37, 70–85.

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Gerring, J. and Thacker, S.C. (2005), ‘Do neoliberal policies deter political corruption?’, International Organization, 59(01), 233–54. Ghosheh, Z.R. (1981), ‘Ethics and values of public responsibility in arab public administration’, Arab Organization of Administrative Sciences (Amman), 7. Gopinath, C. (2008), ‘Recognizing and justifying private corruption’, Journal of Business Ethics, 82(3), 747–54. Gupta, S., Davoodi, H. and Tiongson, E. (2001), ‘Corruption and the provision of health care and education services’, in A.K. Jain (ed.), The Political Economy of Corruption, London: Routledge, pp. 111–41. Gyimah-Brempong, K. (2002), ‘Corruption, economic growth, and income inequality in Africa’, Economics of Governance, 3(3), 183–209. Hartman, E. M. (1998), ‘The role of character in business ethics’, Business Ethics Quarterly, 8(3), 547–59. Heidenheimer, A.J., Johnston, M. and Levine, V.T. (1989), Political Corruption: A Handbook, New Brunswick and Oxford: Transaction. Hofstede, G. (1991), Culture and Organization: Software of the Mind, New York: HarperCollins Business. Husted, B.W. (1999), ‘Wealth, culture, and corruption’, Journal of International Business Studies, 30(2), 339–60. Johnston, M. and Hao, Y. (1995), ‘China’s surge of corruption’, Journal of Democracy, 6, 8094. Klitgaard, R.E. (1988), Controlling Corruption, Berkeley, CA: University of California Press. Kumar, B.N. and Steinmann, H. (eds) (1998), Ethics in International Management, Berlin: Walter de Gneyter. La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R.W. (1997), ‘Trust in large organizations’, American Economic Review, 87(2), 333–38. Lambsdorff, J.G. (2006), ‘Causes and consequences of corruption: what do we know from a cross section of countries’, in S. Rose-Ackerman (ed.), International Handbook on the Economics of Corruption, Cheltenham, UK and Northampton, MA, USA, Edward Elgar, pp. 3–51. Lambsdorff, J.G. (2008), The Institutional Economics of Corruption and Reform: Theory, Evidence and Policy, Cambridge: Cambridge University Press. Lambsdorff, J.G. and Cornelius, P. (2000), ‘Corruption, foreign investment and growth’, in K. Schwab, L. Cook, P. Cornelius, J.D. Sachs, S. Sievers and A. Warner (eds), Africa Competitiveness Report 2000/2001, Oxford: Oxford University Press, pp. 70–78. Lambsdorff, J.G. and Nell, M. (2007), ‘Fighting corruption with asymmetric penalties and leniency’, Discussion Paper, CeGE Research Workshop, University of Göttingen, February. Li, H., Xu, L.C. and Zou, H. (2000), ‘Corruption, income distribution, and growth’, Economics and Politics, 12(2), 155–82. Manzetti, L. and Wilson, C.J. (2007), ‘Why do corrupt governments maintain public support?’, Comparative Political Studies, 40(8), 949–70. Miklos, I. (1995), Corruption Risks in the Privatization Process, Bratislava, MESA 10: Center for Economic and Social Analysis. Minow, N. (1996), ‘Downsizing corporate responsibility’, Public Relations Strategest, 2(3), 15–16. Nye, J.S. (1967), ‘Corruption and political development: a cost–benefit analysis’, American Political Science Review, 61, 417–27. Organisation for Economic Co-operation and Development (OECD) (2007a), ‘Anti-Bribery Convention and Greece; Report on Progress on the Implementation of the Phase 2 Recommendations since July 2005’, available at http://www.oecd.org/dataoecd/51/13/35140946.pdf, (accessed December 20, 2008). Organisation for Economic Co-operation and Development (OECD) (2007b), ‘Report on the application of the convention on combating bribery of foreign public officials in international business transactions and the 1997 recommendation on combating bribery in international business transaction’, Phase 2 Report, UK, approved October 16, 64. Osberg, L. and Smeeding, T. (2008), ‘Social values for equality and preferences for state intervention in the USA and Europe’, in C. Toff and J. Cordes (eds), Welfare State Reform in the United States and the European Union – Policy Choices and the Constitution of the New Welfare Society, Cambridge, UK: Cambridge University Press. Oxford English Dictionary (1989), second edition, Oxford University Press, OED online (accessed 6 December 2007). Paldam, M. and Svendsen, G.T. (2001), ‘Missing social capital and the transition in Eastern Europe’, Journal of Institutional Innovation, Development and Transition, (5), 21–34. Persson, T., Tabellini, G. and Trebbi, F. (2003), ‘Electoral rules and corruption’, Journal of the European Economic Association, 1(4), 958–89. Powpaka, S. (2002), ‘Factors affecting managers’ decision to bribe: an empirical investigation’, Journal of Business Ethics, 40(3), 227–46. Rose-Ackerman, S. (1978), Corruption: A Study in Political Economy, New York: Academic Press. Rose-Ackerman, S. (1999), Corruption and Government: Causes, Consequences, and Reform, Cambridge: Cambridge University Press.

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Stark, A. (1993), ‘What is the matter with business ethics?’, Harvard Business Review, May/June, 38–48. Swamy, A., Knack, S., Lee, Y. and Azfar, O. (2001), ‘Gender and corruption’, Journal of Development Economics, 64, 25–55. Tarkowski, J. (1989), ‘Old and new patterns of corruption in Poland and the USSR’, Telos, 80, 51–62. Thompson, D.F. (1993), ‘Mediated corruption: the case of the Keating Five’, American Political Science Review, 87(2), 369–81. Times, The (2007), ‘Siemens bribes reached around world’, November 16, available at: http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article2881841.ece (accessed 5 December 2008). Transparency International (2007), available at http://www.transperancy.org//news_room/faq/corruption_ faq#faqcorr1 (accessed 20 April 2009). Treisman, D. (2000), ‘The causes of corruption: a cross-national study’, Journal of Public Economics, 76(3), 399–457. Trompenaars, F. and Hampden-Turner, F. (1997), Riding the Waves of Culture, London: Nicholas Brierley. Tzilivakis, K. (2003), ‘Taking a bite out of corruption’, Athens News, available at: http://www.helleniccomserve.com/biteoutofcorruption.html (accessed December 21, 2008). Van Rijckeghem, C. and Weder, B. (2001), ‘Bureaucratic corruption and the rate of temptation: do low wages in civil service cause corruption?’, Journal of Development Economics, 65, 307–31. Wall Street Journal, The (2008), ‘U.S., Other Nations Step Up Bribery Battle’, September 12. West’s Encyclopedia of American Law (ed.) (1998), Michigan: Gale. World Bank (1999), available at World Bank Sourcebook p. 5, http://sitesources.worldbank.org/INTENERGY 2/Resources/electricitysourcebooksch2.pdf (accessed 20 April 2009). You, J.S. (2005), ‘Embedded autonomy or crony capitalism? Explaining corruption in South Korea, relative to Taiwan and the Philippines’, paper presented at the annual conference of the American Political Science Association, Washington, DC, September 1–4. You, J.S. and Khagram, S. (2005), ‘A comparative study of inequality and corruption’, American Sociological Review, 70(1), 136–57.

8

Ethical leadership R. Edward Freeman, Brian Moriarty and Lisa A. Stewart

What is ethical leadership? One typical response to various ‘ethics crises’ in business are clarion calls for more ‘ethical leadership’, yet there are few explanations of what exactly is meant by the term.1 Particularly following corporate malfeasance, the calls for such ethical leadership often reflect immediate desired actions that will ‘right the ship’. Many executives and business thinkers believe that ethical leadership, particularly following times of crisis, is simply a matter of leaders having good character. By having ‘the right values’ or being a person of ‘strong character’, the ethical leader can set the example for others and withstand any temptations that may occur along the way. Without denying the importance of good character and the right values, the reality of ethical leadership is far more complex and the stakes are much higher. Warren Buffett, a US investor, has famously suggested that when a manager with a good reputation meets a business with a bad one, it is often the reputation of the business that stays intact. In similar fashion, corporate crises often do call for some immediate elements and actions of ethical leadership, but enduring leadership which leads to great organizations requires a deeper set of characteristics. Over the past 25 years, in talking to executives in a number of industries about the problems of how to lead in a world of great change – globalization, democratization, and incredible technological advances – we have identified a number of touchstones for the idea of ‘ethical leadership’. Interestingly, the experiences have also traversed different ‘ethics’ crises – ranging from accounting frauds, most notably related to Enron and WorldCom, to the global financial and credit crisis which included federal bailouts and the bankruptcies of legendary financial institutions. Our experience is often contrary to the picture of business executives one finds in public discussion where they are often seen as greedy, competitive, and only concerned with compensation. In fact most executives want to be effective in their job and to leave their company and the world a better place, creating value on both fronts for those whose lives they affect. Our view of ethical leadership takes into account not only the leader but also his/her constituents (followers and key stakeholders), the context or situation that the leader and constituents face, the leader’s processes and skills, and the outcomes that result. Leaders are first and foremost members of their own organizations and stakeholder groups. As such, their purpose, vision, and values are aligned with those which benefit the entire organization and its key stakeholders. Leaders see their constituents as not just followers, but rather as stakeholders striving to achieve that same common purpose, vision, and values. These follower and stakeholder constituents have their own individuality and autonomy which must be respected to maintain a moral community. 192

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Ethical leaders embody the purpose, vision, and values of the organization and of the constituents, within an understanding of ethical ideals. They connect the goals of the organization with those of the internal employees and external stakeholders. Leaders work to create an open, two-way conversation, thereby maintaining a charitable understanding of different views, values, and constituents’ opinions. They are open to others’ opinions and ideas because they know that those ideas make the organization they are leading better. Characteristics of ethical leaders In today’s turbulent world, ethics and values are present at a number of levels for executives and managers – leaders who devote their time and energy to guiding the process of value creation. This broader concept of ethical leadership empowers leaders to incorporate and be explicit about their own values and ethics. The following list provides a framework for developing ethical leadership. Several of the framework characteristics may be applied to both leaders called upon in times of ethical crisis and immediate need, as well as those building enduring organizations. It is based on the observations of and conversations with a host of executives and students over the past 25 years, and on readings of both popular and scholarly business literature. Written from the perspective of the leader, these 10 facets of ethical leaders offer a way to understand ethical leadership that is more complex and more useful than just a matter of ‘good character and values’. Ethical leaders articulate and embody the purpose and values of the organization It is important for leaders to tell a compelling and morally rich story, but ethical leaders must also embody and live the story. This is a difficult task in today’s business environment where everyone lives in a fishbowl – on public display. So many political leaders fail to embody the high-minded stories they tell at election time, and more recently, business leaders have become the focus of similar criticism through the revelations of numerous scandals and bad behaviors. CEOs in today’s corporations are really ethical role models for all of society. In the aftermath of a scandal, one of the most important actions for a leader to take is to dramatically articulate a break with the past. Of course, this task is simpler for new leaders who come from outside the company and have been hired by the board to replace an executive ousted as the result of a scandal. Leaders in this position embody change by their very presence – the challenge for them is to connect with the root values of the firm to re-energize employees and convince high performers that the opportunities for them in sticking around outweigh the risks. In moving from the old negative story of the firm it is important to reconnect with a past vision of the unique value the firm provides to the world, and articulate how the new direction will revitalize the firm and differentiate itself from competitors in the marketplace. Anne Mulcahy became CEO of Xerox Corporation in 2001 after working at the company for 25 years. While Xerox had been long regarded as an innovative firm with an exemplary corporate culture, when Mulcahy took the reins the challenges she faced were daunting – Xerox was ‘over $17 billion in debt, bankruptcy appeared inevitable, and the US Securities and Exchange Commission was investigating alleged accounting irregularities’.2

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Given these circumstances, many well-intentioned individuals urged Mulcahy to slash the firm’s R&D budget as a necessary step toward pulling the firm out of debt. Instead Mulcahy and her team crafted an aspirational Wall Street Journal article, an unconventional internal vision statement – from the vantage of five years in the future, 2005 – detailing how Xerox would revitalize itself. This vision included placing ‘big bets on research and development investment’ with the firm becoming known as ‘a services-led technology company’.3 The employees at Xerox bought into this vision and under Mulcahy’s leadership the firm has realized one of the most remarkable turnarounds on record and has been recognized both as one of the best places to work and for its overall corporate culture of ethics. The current financial success of Xerox has been fueled by the R&D that the firm continued to undertake in the lean years of Mulcahy’s early leadership. Mulcahy and Xerox leadership communicated a vision of the firm whose unique value was inextricable from innovation. This vision helped the firm avoid short-term solutions that would have jeopardized the future of the company. Even firms with a strong sense of organizational purpose and values will face situations where complicity in crime or corruption is possible. Today’s multinational corporations sometimes have employees numbering in the tens or hundreds of thousands, dispersed across the globe. In effect, these organizations are themselves as large as small or even medium-sized cities. The associated hazard in these situations is that, to paraphrase one leader, organizations and their stakeholders need to recognize that there is typically crime in the city – even in the best of cities. Sometimes, however, the greatest risk exposure does not come from one’s own organization, but from a firm’s business partners or industry. An executive from a well-known US-based multinational firm faced such a challenge several years ago at an industry meeting when leaders from other firms engaged in a conversation about price-fixing in the industry (private conversation, Fall 2008). The executive left the meeting, refusing to participate in this conversation proposing collusion in illegal activity. Upon returning to his company, however, he felt that choosing not to participate in the conversation was not a significant enough response. He shared his anxiety with colleagues who agreed that they needed to send a clear signal about their position on price-fixing. Their strategy was to not simply walk out of industry meetings in which similar conversations arose, but to make a ‘noisy exit’ as they left the conversations. Their behavior became part of their corporate culture and history for taking responsibility for ethical business practice in their dealings. Ethical leaders focus on organizational success rather than on personal ego Ethical leaders understand their place within the larger network of constituents and stakeholders. It is not about the leader as an individual, it is about something bigger – the goals and mission of the organization. Ethical leaders also recognize that value is in the success of people in the organization. In 1998, in a bold gesture demonstrating how he valued the company’s line employees, Roger Enrico, former Chairman and CEO of PepsiCo, chose to forgo all but $1 of his salary, requesting that PepsiCo, in turn, contribute $1 million to a scholarship fund for employees’ children.4 In a similar manner, the founders of JetBlue began a process of matching, from their

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salaries, employee donations to a charity. Eventually, their entire salaries went to the JetBlue Crewmember Catastrophic Plan charity, to assist staff with crises not covered by insurance.5 The point of these examples is not that ethical leaders donate their salary to charities, but rather that ethical leaders identify and act on levers, such as employee loyalty, that drive organizational success. At a Home Depot shareholders’ meeting in May of 2006, then-CEO Robert Nardelli displayed not only arrogance but also disdain for the firm’s shareholders by directing the other board members to not attend and by greatly restricting the time for shareowners to ask questions.6 Highly negative reactions to this meeting, coupled with low performance and perceptions of lagging customer service, led to Nardelli’s departure. The firm, however, continued to garner severe criticism for customer service even after Frank Blake had taken over as CEO. On March 7, 2007 MSN Money editorialist Scott Burns, a formerly devoted Home Depot customer, wrote a blistering piece claiming that the company regularly abused its customers, wasting their time through poor service.7 Instead of firing back, disputing Burns’s claims – or simply ignoring them – Blake wrote an apology titled ‘Sorry we let you down’.8 Blake admitted that the company had made mistakes and communicated a clear plan for restoring the high level of customer service that had previously made the company so successful. He closed his letter by thanking Burns and the firm’s other critics for caring about the company enough to try and improve it. Ethical leaders find the best people and develop them This task is fairly standard in different models of leadership. Ethical leaders pay special attention to finding and developing the best people precisely because they see it as a moral imperative – helping them to lead better lives that create more value for themselves and for others. Finding the best people involves taking ethics and character into account throughout the interview, development, promotion, and rewards processes. Many CEOs have said to us that judging someone’s integrity is far more important than evaluating their experience and skills. Yet, in many organizations, employees are hired to fill a particular skill need with little regard to issues of integrity. Careful attention to hiring and onboarding, however, can give firms a competitive advantage. One example is in the insurance industry. Insurance companies are sometimes criticized for appearing to be more concerned with making a profit than with providing a surety against hazards for their customers. Customers often consider bureaucratic paperwork and loopholes to be a disservice. According to a Harris Poll over the course of three years, people in the United States consider health and life insurance companies among the least honest and trustworthy (Harris Interactive Inc., 2006). Despite evidence of a negative industry bias, Forrester Research found that 81 percent of United Services Automobile Association (USAA) customers believed that the company works for them rather than for ‘the bottom line’. Much of the firm’s success with regard to customer service is grounded in USAA’s unique approach to understanding the life situation of its customers. USAA’s clients consist mainly of military service personnel and their families. USAA employees, many of whom are former military personnel, undergo a unique and rigorous training process designed to help them understand the perspective of the

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customers they serve. The orientation is essentially a ‘boot camp’ for employees – a 10-week experience, simulating the challenges that military personnel experience every day. Trainees are given stern commands, heavy gear to wear, and military standard meals ready to eat (MREs) for lunch.9 The training is meant to instill a sense of solidarity and empathy with USAA’s customer base before an employee begins to respond to a customer. USAA’s practices have yielded customer service rankings – and employee and customer retention rates – far above its peers for the past decade. Since 1998, USAA has provided premier customer service compared across all industries in America. The firm was ranked number one by Business Week in the magazine’s 2007–08 Customer Service Champs rankings and is consistently placed on the Ward’s 50 Top Performers.10 Ethical leaders create a living conversation about ethics, values and the creation of value for stakeholders In 1991 Warren Buffett took over Salomon Brothers in the wake of a bond trading scandal, potentially putting his own reputation for exceptional business ethics at risk in order to help save a firm in which he had invested $700 million. Upon assuming the role of CEO, Buffett promised to cooperate with regulators investigating the firm and to dismiss anyone found guilty of wrongdoing. More than this, Buffett gave employees his home phone number and encouraged them to contact him at any time, day or night, if they had information to share or concerns about unethical practices at the firm.11 This assured employees that their new boss was very serious about fulfilling his promise to lead positive change at the firm. It also served to short-circuit chain-of-command issues at the firm – cases where employees might fear retribution from a supervisor for reporting misbehavior. In cases where there has been corruption or criminal behavior at a firm, it is necessary to get all the facts – to know who did what and when – and to find out how widespread your problems are. As our colleague Thomas Donaldson put it, ‘when you are at the bottom you need to look around in the mud’. Before moving forward from a scandal, leaders need to actively search for and identify anyone who was involved in illegal or unethical activity. This will help to inform decisions about which current employees fit the future culture of the firm that leaders wish to help build – and, which do not. Keeping those involved in wrongdoing in place – especially at the senior level – can be incredibly damaging to morale and may cause some of the people who wish to rebuild an ethical culture at the firm to head for the exits. Creating a living conversation about ethics and corporate values is not only important during instances of crime and corruption – this conversation also needs to be alive in organizations as standard operating practice. Too often business executives think that employees having a laminated ‘values card’ in their wallet or an organization having a purely compliance approach to ethics has solved the ‘ethics problem’. Suffice it to say that Enron and other scandal-plagued companies had these systems in place. What they did not have were mechanisms supporting conversations across all levels of the business where the basics of value creation, stakeholder principles and societal expectations were routinely discussed and debated. There is a fallacy that values and ethics are the ‘soft, squishy’ part of management. Nothing could be further from the truth.

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In organizations that have a live conversation about ethics and values, people hold each other and the company responsible and accountable for whether they are really living the values. And, they expect the leaders of the organization to do the same. Bringing such a conversation to life means that people must have knowledge of alternatives, must choose every day to stay with the organization and its purpose because it is important and inspires them. Making a strong commitment to bringing this conversation to life is essential to do if one is to lead ethically. Most people know the story of Johnson & Johnson’s former CEO Jim Burke and the Tylenol product recall in the 1980s in which, at a great short-term financial cost, he pulled all potentially tampered-with products off the shelves, thereby keeping the public’s trust intact. The less well-known background to this story, however, is critical to understanding the final outcome. Well before the Tylenol crisis hit, Johnson & Johnson had held a series of ‘challenge meetings’ all around the world, where managers sat and debated their ‘Credo’, a statement of their purpose and principles of who they wanted to be as a company. The conversation about ethics at Johnson & Johnson was alive, and in many ways made Jim Burke’s choice about handling the situation clearer than it otherwise would have been. Ethical leaders create mechanisms of dissent Many executives and other organizational leaders do not realize how powerful they are simply by virtue of their position. Psychologists such as Stanley Milgram have long ago demonstrated that most of the time people will obey what they perceive to be legitimate authority, even if there is no cost for disobedience. To avoid this ‘authority trap’ it is critical to have an established and explicit process or mechanism for employees to ‘push back’ if someone thinks that a particular activity, decision, individual, or internal process is out of line with the company’s mission and values. This constructive pushback process needs to be made part of the organizational culture, not just a line item in a compliance program document. Some companies have used anonymous e-mail and telephone processes to give employees a way around the levels of management that inevitably spring up as barriers in large organizations. Many executives also have used ‘skip level’ meetings where they meet and participate with employees in multiple levels in the organization to get a more realistic view of what is actually going on. General Electric’s famous ‘workout’ process – where workers meet to take responsibility for the issue, decide how to fix problems and make the company better – was a method for front-line employees to be empowered to constructively push back against the established policies and authority of management. All of these processes lead to better decisions, more engaged employees, and an increased likelihood of avoiding damaging mistakes. In a company that takes its purpose or values seriously, there must be mechanisms of pushing back to avoid the values becoming stale and dead. Indeed, many of the current corporate scandals could have been prevented if only there were more creative ways for people to express their dissatisfaction with the actions of some of their leaders and others in the companies. The process of developing these mechanisms of dissent will vary by company, by leadership style, and by culture, but it is a crucial leadership task for value creation in today’s business world.

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Obedience on the part of middle managers enabled the $11 billion fraud at WorldCom, the largest in corporate history. To her credit, Betty Vinson, a senior manager in WorldCom’s accounting division, initially refused to follow orders when she was asked to make improper accounting adjustments – in the amount of $828 million – in order to help the company leaders convince Wall Street investors and analysts that it had met the quarterly earnings numbers these executives had predicted.12 In the financial quarters following the initial fraud, Vinson, who was concerned about jeopardizing the financial well-being of her family should she leave her position at WorldCom, eventually complied with these directives. Over the next two years, Vinson and dozens of other WorldCom employees repeatedly created fraudulent accounting records, even though they knew it was a dishonest way of doing business. Scott Sullivan, WorldCom’s CFO and a chief architect of the fraud, tried to assuage employee anxiety related to this activity by saying that, ‘nothing they had done was illegal and that he would assume all responsibility’.13 While Sullivan may have been credited with such sweeping authority within WorldCom’s culture, his illusory power to take responsibility for the actions of others evaporated before both the law and public sentiment. When the fraud became public, prosecutors failed to accept Vinson’s assertion that she was only following orders, and rather than risk indictment, she ended up negotiating a guilty plea as a co-conspirator in the fraud.14 When Gene Morse reported accounting irregularities to his boss, WorldCom Chief Audit Executive Cynthia Cooper, her immediate and consistent response was ‘Keep going’.15 Despite repeated attempts by Scott Sullivan and others at WorldCom to halt investigations, Ms. Cooper and her team did just that, unearthing a monumental case of corporate fraud in the process. While Cooper is most often characterized as a whistleblower, it may be more correct to describe her as an ethical leader – one who not only pushed back against the organization, but also created an environment that encouraged her team to push forward on this disheartening work which would ultimately lead to the loss of thousands of jobs, including their own and those of colleagues. Ethical leaders take a charitable understanding of others’ values Ethical leaders can understand why different people make different choices, but still have a strong grasp on what they would do and why. Following 27 years in South African prisons, Nelson Mandela was still able to see the good in his jailers. After one particularly vicious jailer was being transferred away from Robben Island because of Mandela’s protest and push back, the jailer turned to Mandela and stated ‘I just want to wish you people good luck’.16 Mandela interpreted this statement charitably as a sign that all people had some good within them, even those caught up in an evil system. Mandela felt that it was his responsibility to see this good in people and to try to bring it out. One CEO suggested that instead of seeing ethical leadership as preventing people from doing the wrong thing, we need to view it as enabling people to do the right thing. This is especially true in an age of increasing cultural complexity and globalization. Ethical leaders need to learn to be careful listeners who seek to understand the perspectives of others before passing judgment. This became clear during an executive education seminar for Indonesian business leaders. In one example, respect and family are important values in both the United

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States and Indonesia. There are, however, some important distinctions to be identified with regard to how these values are interpreted in practice among these different cultures. In Indonesia one way of demonstrating respect for one’s family is to give them preferential consideration in making hiring decisions. In the United States this would be viewed as nepotism, something clearly unethical from an American perspective. Individuals and cultures are complex. This complexity necessitates a dialogue in order to deepen understanding and help to identify points of mutuality that can be used to develop business practices that embody the values of multiple cultures. Ethical leaders make tough calls while being imaginative Some companies that experience scandals have a difficult time holding on to key members of their board. Understandably, board members with a golden reputation may feel that their good name has been tarnished by the misdeeds of employees and decide that disassociating themselves with the firm as quickly as possible is the best option. In one such case, a CEO who was new to the position as a result of previous wrongdoing at the company successfully convinced the majority of the board to stay and help the firm through the crisis. In fact, this situation in corporate turnarounds has been repeated many times and is based on some beliefs that existing directors can provide stability, good governance processes, and necessary counsel to new company leadership. When Ed Breen took over as Chief Executive of Tyco in July of 2002 – following massive financial fraud committed by his predecessor, however, he took a less familiar track – this ‘new CEO replaced all of Tyco’s top executives, two of its five division presidents and the former board’ in order to begin distancing the firm from the groupthink and lavish behaviors that had led to poor management and accounting irregularities.17 Breen took an enormous risk in removing such a large swath of Tyco’s leadership team and their organizational knowledge in one fell swoop, but the boldness of this decision clearly communicated to investors and employees that the meaning of ‘business as usual’ at Tyco had dramatically changed. Ethical leaders inevitably have to make a lot of difficult decisions, from reorienting the company’s strategy and basic value proposition to making individual personnel decisions such as working with employees exiting the organization. Ethical leaders do not attempt to avoid difficult decisions by using an excuse of ‘I’m doing this for the business’. The ethical leader consistently unites ‘doing the right thing’ and ‘doing the right thing for the business’. The idea that ‘ethical leadership’ is just ‘being nice’ is far from the truth. Often, exercising ‘moral imagination’ is the most important task.18 Mohammed Yunus founded the Grameen Bank on such moral imagination.19 By taking the standard banking practice of only lending to people with collateral, and turning it on its head, Yunus spawned an industry of micro-lending to the poor. The Grameen Bank’s motto is that poverty belongs in a museum. In addition to having one of the highest loan repayment rates in the banking industry, the bank’s program of lending to poor women in Bangladesh to start businesses has helped millions of them to be able to feed themselves. This leadership can just as often take place within the ranks of organizations as it does at the highest CEO and board levels. Several years ago, the CEO of DuPont was implementing a new, stringent company-wide commitment to reduce factory emissions.20 He visited one facility where the plant engineers insisted that such requirements could not

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be met. The chairman responded that the particular plant would then have to be closed – causing hundreds of job losses. Several weeks later, the plant engineers delivered the news to the CEO that they had figured out how to meet the requirements – and save money. While we do not know the names of the plant engineers who surely spent numerous hours determining how to meet the requirements, we see the results of their leadership and imagination. Ethical leaders know the limits of the values and ethical principles they live Sometimes values and principles conflict, which can cause leaders to think that good leadership is choosing between the lesser of two evils, or the ‘least worst’ scenario, figuring that the moral thing to do is to choose the option that does the least harm. It is precisely when it seems there is no good option among our available choices that we ought to think outside our current role and framework and imagine what a good choice or a better story might look like. The real choice here is not simply between the lesser of two evils, but often includes envisioning, analyzing, and acting on the option that is not initially apparent. Consider the example of a company that views its options as either serving customers who have been harmed by their product or trading off the interests of those customers in order to maintain its stock value for shareholders. In August of 2000, Firestone recalled millions of their tires deemed to be defective. Firestone managers had been aware of the problems associated with this product for years before they became public, but they chose to ‘settle cases confidentially, one at a time, making it difficult for consumer watchdogs or government regulators to discern a pattern that could have pointed to a broad public safety issue’.21 When these settlements became public, the Firestone brand was essentially destroyed. The Toro Company which produces lawn equipment has taken an alternative approach, taking ‘its management of product liability claims away from a litigationbased system to a compensation and settlement approach’.22 When a customer is harmed, Toro sends representatives to their home to ‘acknowledge suffering, express sympathy and regret for the accident, answer any questions about the product, and offer monetary compensation to those harmed’.23 Company representatives, however, are also charged with gathering the specific details of how the injury happened. This information is then shared with engineers who try to design product innovations that could make Toro products safer, whether the injury was determined to be caused by a product flaw or by user error. By sidestepping the contentious litigation process, Toro has been able to not only reduce its costs for injury claims, but also to better live its core value – making products that are safe. All values have limits, particular spheres in which they do not work as well as others. The limits for certain values, for instance, may be related to the context or the audience in which they are being used. Ethical leaders have an acute sense of the limits of the values they live and are prepared with solid reasons to defend their chosen course of action. Problems can arise when managers do not understand the limits of certain values. As an example, one issue common to the recent business scandals was that managers and executives did not understand the limits of ‘putting shareholders first’. Attempts to artificially keep stock prices high – without creating any lasting value for customers

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and other stakeholders – can border on fanaticism rather than good judgment. Business ethics is no different from any other part of our lives: there is no substitute for good judgment, sound advice, practical sense, and conversations with those affected by our actions. Ethical leaders frame actions in ethical terms As in the case of natural disasters, not all tragedies are caused by crime or corruption. Individuals and organizations, however, do bear some responsibility for disaster preparation and response. Before Hurricane Katrina and the Asian Tsunami, most people viewed their governments as holding primary responsibility – but when governments seemed to lack some of the core competencies and resources needed to quickly mobilize aid, some businesses jumped into this responsibility gap and delivered. Global corporate leaders such as Wal-Mart, Office Depot, and Home Depot were able to re-open stores quickly in areas devastated by Hurricane Katrina and mobilize vital supplies, such as bottles of water and blankets, to suffering communities. None of these companies framed their actions, internally or externally, in terms of profit, but rather in terms of corporate mission elements of serving their customers. These companies viewed providing for customers in need as part of their corporate mission, and moreover, as a moral obligation. Examples of framing activities and decisions in ethical terms occur in individual behavior within companies as well. When most of us look at a prescription bottle, we see a familiar product. Design student Deborah Adler, however, found the standard amber prescription drug bottle to be outdated and poorly designed after her grandmother became ill by mistakenly taking her husband’s prescription instead of her own. Almost completely unregulated by the Food and Drug Administration, the prescription drug bottle’s design had remained virtually unchanged since its inception following the Second World War, with the only addition being the safety cap in the 1970s. While the individual pharmacy logo tends to be clearly and colorfully displayed, the more critical medical information is often much less conspicuous. Different pharmacies place the patient’s name and dosage information in different areas and usually print both pieces of information in the same black and white font as the rest of the prescription label, making this information easy to overlook. Important warning labels are unclear – often complicated and plastered over each other or completely blended in with the bottle itself. Finally, the cylindrical bottle shape is counterintuitive, forcing patients to turn the bottle in search of the label. A recent study reports that 60 percent of patients have taken the wrong medicine, mainly due to the bottle’s design.24 Adler partnered with Target Corporation to design a new safer prescription bottle that overcomes each of these flaws. Adler, whose grandmother had been harmed by the previous design limitations of prescription bottles, was driven to improve their functionality because she viewed this as an ethical undertaking. Ethical leaders see their leadership as a fully ethical task. This entails taking seriously the rights and claims of others, considering the effects of one’s actions on others (stakeholders), and understanding how acting or leading in a certain way will have effects on one’s character and the character of others. There is nothing amoral about ethical leaders, and they recognize that their own values may sometimes turn out to be a poor guidepost.

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The ethical leader takes responsibility for using sound moral judgment. But there is a caution here. It is easy to frame actions in ethical terms and be perceived as ‘righteous’. Many have the view that ethics is about universal, inviolable principles that are carved into stone. We need to start with principles and values, and then work hard to figure out how they can be applied in today’s complex global business environment. Principles, values, cultures, and individual differences often conflict. Ethical leadership requires an attitude of humility rather than righteousness: a commitment to one’s own principles, and at the same time, openness to learning and to having conversations with others who may have a different way of seeing the world. Ethics is best viewed as an open conversation about those values and issues that are most important to us and to our business. It is a continual discovery and reaffirmation of our own principles and values, and a realization that we can improve through encountering new ideas. Ethical leaders connect the basic value proposition to stakeholder support and societal legitimacy The ethical leader must think in terms of enterprise strategy, not separating ‘the business’ from ‘the ethics’. Linking the basic raison d’être of the enterprise with the way that value gets created and society’s expectations is a gargantuan task. But, the ethical leader never hides behind the excuse of ‘It’s just business’. Examples of connecting the value proposition to societal legitimacy can occur on local or global levels. Despite intense opposition from a number of groups, Wal-Mart CEO Lee Scott won approval in early 2004 to build a new store in a West Side Chicago neighborhood by listening to and engaging stakeholders who would most benefit by the value that this new store would create.25 Partnering with black community leaders, Wal-Mart appealed to the needs of the community in sections of town where there was a real need for jobs and stores. Ultimately, the support of the community allowed Wal-Mart to win City Council’s approval. Wal-Mart also committed to seeking minority subcontractors to build the facility and to eventually hiring the majority of the store’s employees from the local community. In another example, Nike is the world’s largest apparel company based on a strong brand reputation for quality products. That brand was seriously threatened, however, when Nike’s subcontractors were found to have used child labor and to have unsanitary – and in some cases, abusive – working conditions. Although other companies in the sector had similar issues with their subcontractors, Nike was the prime target for nongovernmental organizations hoping to spotlight the issue and improve conditions by focusing on the most prominent industry brand. Today Nike is not only one of the ‘first-movers’ on publishing its Corporate Responsibility Report, but is also a leader in defining, measuring, publishing, and holding itself accountable to the metrics of corporate responsibility. Ethical leadership is about ‘raising the bar’, helping people to realize their hopes and dreams, creating value for stakeholders, and doing these tasks with the intensity and importance that ‘ethics’ connotes. That said, there must be room for mistakes, for humor, and for a humanity that is sometimes missing in our current leaders. Ethical leaders are ordinary people who are living their lives as examples of making the world a better place. Ethical leaders speak to us about our identity, what we are and what we can become, how we live and how we could live better.

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Becoming an ethical leader We have been privileged to know many executives that we would classify as ethical leaders. What these executives have in common is a profound and deep sense of ethical principles, values, and character at the core of their leadership. They see their job as making both others and the organizations they lead better, and enabling both of them to pursue their own missions, values, and aspirations. They are able to get things done in complicated organizations and societies. But, it is their ethical core which pervades their relationships with followers, the skills and processes which they use in leading them, their analysis of the contexts, and their own sense of self. Becoming an ethical leader is relatively simple. It requires a commitment to examining your own behavior and values, and the willingness and strength to accept responsibility for the effects of your actions on others, as well as on yourself. A ‘responsibility principle’ is a necessary ingredient for ‘managing for stakeholders’ to be useful in today’s business world. Ethical leaders must consider and take responsibility for the effects of their actions on customers, suppliers, employees, communities and other stakeholders. If business were simply concerned with shareholder value, then this ‘responsibility principle’ would be unnecessary, other than the responsibility to shareholders. To become an ethical leader, commit to asking yourself the following types of question: 1. 2. 3. 4. 5. 6. 7. 8.

What are my most important values and principles? Does my calendar – how I spend my time and attention – reflect these values? What would my subordinates and peers say my values are? What mechanisms and processes have I designed to be sure that the people who work for me can push back against my authority? What could this organization do or ask me to do that would cause me to resign for ethical reasons? What do I want to accomplish with my leadership? What do I want people to say about my leadership when I am gone? Can I go home at the end of the day and tell my children (or a loved one) about my leadership, and use my day’s work to teach them to be ethical leaders?

Developing ethical leaders A second responsibility for both ethical leaders and the organizations they lead is to develop the next generation of similar ethical leaders. While this responsibility is often tagged primarily to educational institutions, most especially business schools, it is indeed a shared responsibility that includes corporate organizations themselves and their current executive members. The best way for organizations to develop ethical leaders is to engage in some of these questions. Viewing business simultaneously in economic and ethical terms helps to send the message that ethics is not just an important set of rules not to violate, but that it is an integral part of what it means to work at your organization. There are some concrete steps about how best to develop ethical leaders within the framework that most global businesses find themselves. The first step is to bring life to a conversation about how the organization benefits its stakeholders and about understanding the organization’s values.

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This does not need to be a formal program. It could be as elaborate as town hall meetings. Or, as one executive suggested to us, we simply could have an ‘ethics’ or ‘stakeholders’ moment at most meetings. Such moments, analogous to ‘safety moments’ at companies like DuPont, set aside a brief time to raise concerns about the effects of the meeting on key stakeholders, or on a company’s values and ethics. Equally, the ‘ethics’ moment could elaborate on how the conversations and decisions of the meeting were aligned with company values. Many companies have leadership development programs. These programs need to be strengthened by adding the idea of ‘ethical leadership’. It is not necessary to use the specific principles we have developed, but companies can make themselves better by engaging participants in a conversation about what they see as ‘ethical leadership’. Executives can develop shared conversations and conceptions of how ‘ethical leadership’ can be implemented in their particular company. Executives need to figure out how to have ‘challenge meetings’, routine processes where anyone in the organization can raise a challenge to whether or not the company is living its values, or its enterprise strategy approach. Without the ability to challenge authority, there can be no such thing as true ethical leadership. Many fear that anarchy would be the result of such a process. Our experience is just the opposite. Values, purposes, principles, an enterprise approach – all deliver a disciplined way to think about how to make the business better and more effective, and help to develop true ethical leadership for both the organization and its corporate leaders. Notes 1.

2. 3. 4. 5. 6.

This chapter is based on research conducted by R. Edward Freeman, Jeffrey Harrison, Brian Moriarty, Lisa Stewart, Andrew Wicks, Patricia Werhane, Kirsten Martin, Bidhan Parmar and Margaret Cording. Portions of the chapter draw on previously published material and we are grateful to co-authors and editors for permission to recast that material for the purposes of the current volume. In particular see: R. Edward Freeman and Lisa Stewart, Developing Ethical Leadership, Charlottesville, VA: (Business Roundtable Institute for Corporate Ethics, 2006, available at: http://www.corporate-ethics.org/pdf/ ethical_leadership.pdf (accessed 15 September 2008); R. Edward Freeman, Jeffrey S. Harrison and Andrew C. Wicks, Managing for Stakeholders: Survival, Reputation and Success, New Haven, CT: Yale University Press, 2007; R. Edward Freeman, K. Martin, B. Parmar, M. Cording and P. Werhane, ‘Leading through values and ethical principles’, in Ronald J. Burke and Cary L. Cooper (eds), Inspiring Leaders, Oxford: Routledge, pp. 149–74; R. Edward Freeman, ‘Ethical leadership and creating value for stakeholders’, in R. Peterson and O. Ferrell (eds), Business Ethics: New Challenges for Business Schools and Corporate Leaders, Armonk, NY: M.E. Sharpe, 2004, pp. 82–97. In addition to our own work there is burgeoning and valuable literature here such as: Joanne B. Ciulla, Terry L. Price and Susan E. Murphy (eds), The Quest for Ethical Leaders: Essays on Leadership Ethics, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, 2005; Steven R. Covey, Principal-Centered Leadership, New York: Free Press, 1992; Terry L. Price, Understanding Ethical Failures in Leadership, Cambridge: Cambridge University Press, 2005. Don Tennant, ‘Anne Mulcahy on getting the color back into Xerox’, CIO Magazine, June 17, 2008, available at: http://www.cio.com.au/index.php/id;664217811;fp;4;fpid;51235;pf;1 (accessed 15 September 2008). Ibid. ‘Boss gives his salary to workers: Pepsi chief funds $1m in scholarships’, Associated Press, March 25, 1998. James Wynbrandt, Flying High: How JetBlue Founder and CEO David Neeleman Beats the Competition . . . Even in the World’s Most Turbulent Industry, London: John Wiley, 2004, pp. 221–2. Jennifer Waters, ‘Nardelli’s arrogance led to downfall at Home Depot: CEO’s behavior at annual meeting was too much to overcome, analysts say’, MarketWatch, January 3, 2007 available at http://www.

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7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

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marketwatch.com/news/story/nardellis-arrogance-led-downfall-analysts/story.aspx?guid={78CAB275E6CE-4134-A12F-5E26AD822CC9}&print=true&dist=printMidSection (accessed 15 September 2008). Scott Burns, ‘Home Depot shafting shoppers?’, MSN Money, March 7, 2007, available at: http://articles.moneycentral.msn.com/Investing/Extra/HomeDepotShaftingShoppers.aspx (accessed 15 September 2008) Frank Blake, ‘Home Depot CEO: Sorry we let you down’, MSN Money, March 13, 2007, available at http://articles.moneycentral.msn.com/Investing/Extra/HomeDepotCEOWeLetYouDown.aspx (accessed 15 September 2008) J. McGregor, ‘USAA: soldering on in insurance’, BusinessWeek, 5 March 2007. These passages on USAA are largely taken from Kevin Belt, Brian Moriarty and Heidi White, Walking a Mile in the Shoes of Your Customer, Charlottesville, VA: Business Roundtable Institute for Corporate Ethics, 2009. Kelly McParland, ‘Next time there’s a meltdown, phone 1-800-WarrenBuffett’, National Post, October 21, 2008, available at: http://network.nationalpost.com/np/blogs/fullcomment/archive/2008/10/21/kellymcparland-buffett-man-to-the-rescue.aspx (accessed 15 September 2008). Susan Pulliam, ‘Over the line: a staffer ordered to commit fraud balked, then caved – pushed by WorldCom bosses, accountant Betty Vinson helped cook the books – a confession at the Marriott’, The Wall Street Journal, June 23, 2003, A1. Ibid. Ibid. This case history was largely developed for Patricia H. Werhane and Brian Moriarty, Moral Imagination and Management Decision Making, Business Roundtable Institute for Corporate Ethics Bridge Paper, 2009. Susan Pulliam and Deborah Solomon, ‘How three unlikely sleuths exposed fraud at WorldCom, firm’s own employees sniffed out cryptic clues and followed hunches’, The Wall Street Journal, October 30, 2002, p. 1. Nelson Mandela, The Long Walk To Freedom: The Autobiography of Nelson Mandela, Boston, MA: Back Bay Books, 1995, p. 462. Associated Press, ‘CEO Breen is Tyco’s new sheriff in town’, March 21, 2004 available at: http://www. msnbc.msn.com/id/4574146/ (accessed 15 September 2008). Patricia H. Werhane, Moral Imagination and Management Decision Making, Oxford: Oxford University Press, 1999. Mohammed Yunus, founder of the Grameen Bank, spoke at the Ruffin Lecture Series of the Olsson Center for Applied Ethics at the University of Virginia’s Darden School of Business, November 20, 2004. R. Edward Freeman, Jessica Pierce and Richard H. Dodd, Environmentalism and the New Logic of Business: How Firms Can Be Profitable and Leave Our Children a Living Planet, Oxford: Oxford University Press, 2000, p. 1. Penni Crabtree, ‘Court orders often keep companies’ darkest secrets hidden’, The San Diego UnionTribune, September 8, 2002. Carole S. Houk, JD, LLM, Leigh Ana Amerson, BA and Lauren M. Edelstein, ‘Apology and disclosure: how a medical ombuds can help bring a policy to life’, Patient Safety and Quality Healthcare, May/June 2008, available at: http://www.psqh.com/mayjun08/apology.html (accessed 15 September 2008). Ibid. E. Hafferty, ‘Target clear RX bottles: industrial design in pharmaceuticals’, brandchannel.com, 2005, September 5, available at: http://www.brandchannel.com/features_profile.asp?pr_id=248 (accessed 15 September 2008) ‘Chicago approves its first Wal-Mart: after lengthy debate, city council votes to allow store’, Associated Press; updated 7:31 pm. ET, Wed., May 26, 2004.

9

Corruption, outrage and whistleblowing Brian Martin

Introduction The opening days of the public hearings on corrupt conduct had sensational revelations. The hearings were in Sydney but the focus was Wollongong, a city of 300,000 inhabitants some 80 kilometres south of Sydney – in particular relations between the local government and property developers. The hearings, in February 2008, were held by the Independent Commission Against Corruption (ICAC), a government-funded body in the state of New South Wales. ICAC had been conducting covert surveillance for two years into activities in Wollongong. At the hearings, at which witnesses could be compelled to testify, those who were recalcitrant or deceitful could be discredited and embarrassed by evidence from the surveillance. Beth Morgan, the opening witness, had worked for Wollongong Council, the local government body, as a senior development officer with authority to approve property development applications. She revealed that she had been having sexual affairs with three developers at the time their applications were under consideration. She approved their applications despite the proposals being in violation of council rules. This juicy story generated front-page coverage in the local newspaper, the Illawarra Mercury.1 There was plenty more to come. The developers had been paying bribes – money and expensive gifts – to Morgan and others. This included some staff members and some of the elected councillors. Local development is a prime arena for corruption. The web of rules and regulations gives local government planners a great deal of power over the fate of plans, large and small. Those with money and connections like to grease the wheels for their own applications. Varying the rules for developers allows windfall profits. There was a side story, even more startling. Two men, who had been to prison for fraud, posed as ICAC investigators and approached Morgan and various others offering to turn the Wollongong probe away from them – in exchange for money. Morgan paid them A$30,000. Others also paid generously. The two men collected more than A$500,000 in bribes to derail the investigation. The Wollongong corruption story is a nice case study because of the rich evidence available from 800 pages of testimony from the ICAC hearings and from investigative reporting stimulated by the hearings. The Wollongong case illustrates the methods commonly used in corrupt activities to limit scrutiny and reduce public outrage. These can be divided into five categories – the same categories observed in a wide range of injustices (Martin 2007). It is useful to outline these tactics before turning to the role of whistleblowers. Corruption: tactics to minimize outrage The first tactic of outrage minimization is cover-up. Beth Morgan kept her liaisons with developers secret. The violations of regulations in the approved applications were 206

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secret. Any behaviour that is socially disapproved is likely to be hidden. Sometimes corruption becomes such an accepted practice that it can be carried out more openly, but in Wollongong special deals between developers and governments were not publicly accepted – in fact, officially they were illegitimate and did not occur. So cover-up was vital to reduce the risk of public outrage. The ICAC hearings and media coverage cut through the cover-up and generated enormous community outrage, including the formation of two local citizen anti-corruption groups. If the first tactic of corruption is cover-up, the first tactic of anti-corruption is exposure. Cover-up and exposure are in relation to audiences. Many people knew informally about the existence of dodgy dealings in property development matters in Wollongong and elsewhere in Australia, but it was mostly at the level of gossip and rumours. The solid evidence from the ICAC hearings and the massive publicity revealed authoritative evidence of corruption to a much wider audience. The second tactic is denigration of critics, namely of those who operate honestly and try to oppose corrupt behaviour. Pro-development figures accused citizens who opposed projects of blocking progress in Wollongong. However, the more serious denigration occurred behind the scenes within the council, with honest workers being browbeaten and sidelined. The third tactic is reinterpretation, namely explaining the ways things are done as routine and legitimate and dismissing harmful effects of shady deals. In the Wollongong saga, developers in testimony to ICAC described payments as gifts, not bribes, and phone calls to the council general manager about their development applications as expressing opinions, not applying pressure. Failure to report donations to a political party was claimed to be an oversight. A key form of reinterpretation is simply to say that something suspicious is actually nothing to worry about. Joe Scimone, a Labor Party power broker named by ICAC as a person of interest, was Wollongong Council’s sustainability manager at a salary of A$168,000. He left this job under a cloud of harassment complaints, but general manager Rod Oxley gave him a nice reference and he landed an A$200,000 job at the Maritime Authority, a state government body. This was suspicious because of a Labor Party connection with the minister in charge of the Maritime Authority, Joe Tripodi – who, however, claimed that he was not involved in the appointment decision. The alternative interpretation is that behaviours are inappropriate. The publicity about the Wollongong shenanigans led to a wider questioning of developer donations to parties, entangling the state Labor government and pushing the state premier, Morris Iemma, to say that a ban on donations was under consideration. This rhetorical move has yet to be followed by any actual change in the law. But the naming of Scimone and the taint over his appointment led to him losing his job at the Maritime Authority. The fourth tactic to minimize outrage is to use official channels to give the appearance of legitimacy. In some systems, corruption is routine at the highest levels of government, enabling laws and court judgments to give the stamp of approval to operations. In other systems, corrupt officials are not so powerful, but the legislature and courts largely ignore the existence of corruption, thereby giving it tacit approval and allowing it to thrive. In yet other systems, corruption operates outside the radar of top officials, so this tactic is not available.

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A significant number of elected officials and high-level Wollongong Council workers were caught in the scandal. This meant that internal reform using the processes of the council itself was unlikely. The developer–government deals were not officially endorsed but nor were they the target of official action: this was a system of tacit approval. Beth Morgan, while she was involved in sex with developers, ran ethics training for other council workers. The ICAC investigation – another official channel – challenged the corruption culture. But it was a limited challenge. ICAC declined to expand the investigation, declaring that Joe Scimone’s appointment at the Maritime Authority was not of official interest. ICAC then recommended that Wollongong Council be dismissed, a recommendation acted upon with alacrity by Premier Iemma, who appointed administrators to run the council until 2012 even though local elections were scheduled for September 2008. This had the effect of getting rid of honest elected councillors as well as those named by ICAC, and denying voters the chance to elect a new council immediately. A fresh election almost certainly would have thrown Labor out of office; the state Labor government’s action prevented an election defeat in the wake of the scandal. The dismissal of the elected councillors had the symbolic effect of cleansing the council of corruption, though in practice it removed only a few individuals from the scene. ICAC’s recommendation to dismiss the councillors, combined with the state government’s decision to install administrators for several years, maximized the symbolism of change while limiting the political fallout beyond Wollongong. The fifth tactic to minimize reactions to corruption is intimidation and bribery, two forms of direct incentives to go along with operations. Intimidation, including threats, harassment, loss of jobs or job opportunities, and physical attacks, can be exercised against anyone who might jeopardize operations. Council workers who opposed dodgy approvals or who spoke up for proper procedures were bullied and sidelined. They knew their career would suffer. Citizen opponents of corruption have received death threats. Meanwhile, cooperation or support for shady operations can lead to payoffs, promotions and plum jobs. Beth Morgan was doing quite well until exposed by ICAC. In summary, corrupt operators can use five tactics to minimize public outrage: coverup, denigration of critics, reinterpretation, use of official channels for legitimation, and intimidation and bribery. Whether and how individual tactics are used depends on the circumstances. For example, some forms of institutionalized corruption, such as the mafia in Italy, involve extreme forms of intimidation, including maiming and murder. This may give the impression that brutality is inherent to corruption. However, brutality is simply one tactic, used when the capacity and need exists. Some forms of corruption can occur and persist without intimidation, for example skimming bank transactions through modifying computer codes, with cover-up being the main tactic used. If there are five tactics to minimize outrage from corruption, then increasing outrage involves five sets of counter-tactics. The counter to cover-up is exposure, widely seen as a cleansing process. The counter to denigration is validation, which means lauding those who challenge corruption. The counter to reinterpretation is interpreting actions as inappropriate, illegal, unfair – or corrupt. The counter to official channels is to discredit ineffectual official channels or to avoid them and instead mobilize popular action against corruption. The counter to intimidation is resistance, which can be aided by exposing and discrediting the intimidation.

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This framework of tactics and counter-tactics is taken from what is called the ‘backfire model’ (Martin 2007). Actions perceived as unjust can lead to public outrage, so it is predictable that powerful perpetrators will use one or more of the five tactics to inhibit outrage. This pattern is seen in a wide range of injustices, including censorship, sexual harassment, job dismissals, police beatings, massacres, torture and genocide. However, when these tactics fail, the action can backfire on the perpetrators, as in the beating of Rodney King by the Los Angeles Police or the massacre of peaceful protesters in Dili, East Timor by Indonesian troops, both in 1991. The five counter-tactics can be seen as part of a strategy against injustice, increasing the chance of backfire and hence deterring unjust actions. The next step is to apply this framework to whistleblowers. Recommendations for whistleblowers A whistleblower is someone who speaks out in the public interest (Glazer and Glazer 1989; Miceli and Near 1992; Hunt 1995, 1998; Miethe 1999; Alford 2001). What could be more in the public interest than exposing crime and corruption? If the first tactic of corruption is cover-up, then a whistleblower is a dire threat to corrupt operations. Therefore, it is reasonable to expect that all the tactics of corruption will be brought to bear against whistleblowers. That is exactly what is observed. There is a complication here. The tactics of minimizing outrage can be used in relation to the corrupt behaviour, for example cover-up of illegal payoffs. They can also be used in relation to the treatment of whistleblowers, for example cover-up of reprisals. But before dealing with all the problems that whistleblowers encounter, it is worth describing the usual recommendations for whistleblowers, as given by experienced whistleblower advisers (Lennane 1996; Devine 1997; Martin 1999). Collect large amounts of documentation of the problem This is a recurring theme. Reports, correspondence, witness accounts, photos, recordings – the documentation needs to be voluminous and revealing. Why? First, because perpetrators try to hide their operations. Documentation is needed to counter cover-up. Second, because perpetrators will try to deny, discredit or explain away the events and the evidence, or discredit the messenger. These are the tactics of reinterpretation and denigration. Suppose, at a meeting of a dozen staff, the boss clearly states that donations are not to be recorded. A naive whistleblower reports this to the board, expecting to be backed up by other staff at the meeting, only to find none of them willing to testify and the boss claiming that he/she had said the exact opposite. A more careful whistleblower records the meeting – surreptitiously – and, even better, saves an email spelling out the policy. The boss, in reply, says it was a slip of the tongue or a careless mistake in drafting the email and that everyone knows that donations have to be recorded. Beth Morgan said she had sex with three developers. Two of them admitted the relationships but one denied it. They might all have denied the relationships except for revealing emails and phone calls recorded by ICAC. Document your own performance and behave in an exemplary fashion Whistleblowers routinely come under attack, a phenomenon commonly called ‘shooting the messenger’. Rumours are spread, adverse claims asserted and derogatory comments

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are made. For example, whistleblowers might be told that their work is substandard, their commitment deficient, or they have mental problems. Hence, anyone thinking of blowing the whistle is wise to document their performance by saving citations of good work, obtaining statements from supervisors and co-workers, or collecting data on output and outcomes. Then, when claims are made about substandard work, the data can be used in defence. Typically, claims about bad work are only made after someone blows the whistle. It is very useful to be able to document good performance over a period of time and in relation to co-workers, revealing a double standard when criticisms are made only of the whistleblower. Rumours are harder to counter. Tales might be spread about sexual activity, drug habits, laziness and – ironically – illegal actions such as stealing or accepting bribes. The best counter to this is documentation of a good work history, respect from co-workers as a result of good work and good relations, and good behaviour. Whistleblowers come in all shapes and sizes, including those who are lazy workers, nasty colleagues and those who have a history of dubious behaviours. Some who speak out are easy to discredit even though their claims, on their own, might be worthy. The tactic of denigration is less likely to be effective against workers who are conscientious, productive and collegial. However, even a spotless record is not a guarantee against having one’s reputation smeared. In one case, a teacher who spoke out was confronted by a record of a student complaint – from five years earlier, and not previously revealed to her. Employers will go through a worker’s file looking for dirt or anything that can be construed negatively. Sometimes documents will be altered or forged to discredit a whistleblower. Whistleblowers routinely come under attack, being ostracized, harassed, given empty or impossible assignments, reprimanded, demoted, transferred, dismissed or blacklisted. These fit the tactic of intimidation, but they also have a devaluing function. When a worker is instructed to attend a psychiatric examination – a common reprisal – this serves to discredit as well as intimidate the worker. An employee who has spoken out and suffers reprisals is under immense stress, especially when there is no one around to offer support or explain why it is happening. Many whistleblowers start believing the lies said about them and crack under the strain. Their work performance suffers, they experience depression or mood swings and they adopt unhealthy habits such as heavy drinking. Such responses, while understandable, serve to justify the derogatory claims made about them. To be highly effective, whistleblowers should aim to continue working as well or better than before, showing through behaviour that claims and rumours are wrong. Some targets of harassment respond by weeping, shouting or making accusations. Emotional displays may be understandable but they all too easily give credibility to derogatory claims. It is far better to control one’s emotions and be seen as a solid, wellbalanced worker, though this is easier said than done when the stresses are enormous. Be wary of official channels Whistleblowers often assume that the problem they have discovered is a local deviation that can easily be rectified by those in authority or by official bodies. So they report the problem to their boss, not realizing that the boss might be involved directly. Alternatively, the boss might not be personally involved but nevertheless be aware of

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what is going on and hence culpably negligent for not having taken any action. The boss might be afraid to tackle a powerful clique, or want to protect the reputation of the unit or organization from bad publicity – and what could be worse than wider awareness of corruption? Someone’s head might have to roll, and it might be the boss’s. Doing nothing is far safer. The employee making the disclosure sees things differently, of course. For the whistleblower, it is simply a matter of truth and honesty. If something seems wrong, it should be investigated, and those in authority are the ones who can investigate. So let them know and the issue will be addressed. If only it were so simple. When bosses fail to act, employees may go to their boss’s boss, not aware that support for the hierarchy nearly always takes precedence over fixing problems. When nothing happens, the employee may go outside, to an ombudsman, anti-corruption agency, politician, court or other agency. Once again, the whistleblower assumes that these official channels provide justice. Once again, they are regularly disappointed. The track record of agencies, from the point of view of whistleblowers, is abysmal. A major Australian study (De Maria 1999) found that whistleblowers reported obtaining help in less than one out of ten approaches to agencies, and sometimes reported being worse off. Tom Devine, a highly experienced whistleblower adviser, in his book The Whistleblower’s Survival Guide (1997) gives advice about numerous official channels in the US. Some, like hotlines, he says are worse than useless, whereas others, like the False Claims Act, can be effective at times, but still have many shortcomings from the viewpoint of whistleblowers. Devine (2004) also points to statistics about court appeals using whistleblower laws: nearly all of them go against whistleblowers. The message from this is to be wary. Official channels do sometimes work, but not nearly as often or as reliably as most people assume. That means that it is wise to investigate before acting. Rather than reporting immediately to the boss, check with experienced organization members about the way the boss usually reacts to disclosures, and likewise for reporting to higher levels within the organization. When going to outside agencies, check their track record first. However, many agencies do not publish figures on outcomes, certainly not in the detail needed to assess whether to make a formal complaint. In that case, it is wise to consult with several independent sources, such as Devine’s book. Be prepared for reprisals The fifth tactic of corruption is intimidation (and bribery), so it is no surprise that whistleblowers are a prime target. Reprisals include ostracism, harassment, threats, spreading of rumours, reprimands, referral to psychiatrists, demotions, forced transfers, dismissal and blacklisting. These sorts of attack are incredibly damaging, far more than can be imagined by outsiders. Even the seemingly innocuous action of ostracism can be sufficient to cause serious distress (Williams 2001). Workers who used to say hello now look away; they may stay away during lunch and tea breaks, though they might whisper among themselves while casting worried glances at the target. Seldom is ostracism a conscious policy. Co-workers might avoid contact because they believe the claims of management or because they fear that any association with the whistleblower might result in them being targeted too.

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Many reprisals have a dual function, both frightening and discrediting the whistleblower. Referral to psychiatrists sends the message that the whistleblower might be insane. Reprisals are especially damaging to those workers who believe that the system works and hence report problems in the expectation that there will be an investigation and impartial assessment. Such workers do not think of themselves as whistleblowers. When reprisals begin – sometimes subtle measures such as not being invited to meetings, being given inconvenient shifts or inappropriate assignments, or being criticized for poor work – they cannot understand what is happening. They blame themselves, accepting the derogatory things said about them. Their work suffers, seemingly vindicating their critics. Researchers on whistleblowing have different assessments of the prevalence of reprisals. In some large-scale surveys, only a minority of workers who say they have spoken out at work report suffering any reprisals (Miceli and Near 1992). On the other hand, some researchers, by the emphasis of their studies, imply that speaking out without reprisals hardly counts as whistleblowing. For the purposes here, there is no need to reconcile these assessments, because all researchers agree that a sizeable number of whistleblowers do experience reprisals and that these reprisals can be incredibly damaging. How damaging? Many whistleblowers lose their job. Sometimes their career is destroyed. Many of them have health problems and suffer relationship breakdowns (Lennane 1993). Their belief systems – in particular, their trust in the system – are undermined (Alford 2001). To make things worse, few whistleblowers seem to have any effect on the problems they speak out about. They are harassed and expelled and the corrupt operations continue as before. This is the ultimate failure of whistleblowing. So: reprisals should be expected. Prior awareness is extremely helpful in being effective. Rather than blaming themselves, workers instead can recognize the tactics of intimidation and discrediting and devise means of surviving and, indeed, making the attack backfire. Documenting and exposing reprisals is quite powerful, often creating outrage. What to do? The track record of whistleblowers is poor. On small matters, there is less danger in speaking out. But when serious crimes are involved and corruption is entrenched, it is hard to make a difference. Many whistleblowers suffer reprisals, and some have their career destroyed. Is speaking out worth the risk when, so often, the problems remain entrenched? Many whistleblowers say yes. They would do it again despite the damaging consequences, because they know they have done the right thing. But there is another way to look at the matter: is it possible to obtain some of the positives of whistleblowing while minimizing the negatives? In other words, are there better options than speaking out? To approach this question, it is useful to return to tactics for minimizing outrage, noting the counter-tactics that whistleblowing involves: ● ●

Cover-up: whistleblowers challenge this directly with the counter-tactic of exposure. Indeed, this is the central rationale of whistleblowing. Devaluation of critics and challengers to corruption: whistleblowers challenge this to the extent that they themselves have credibility and a good record.

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Reinterpretation, including lying, minimizing and blaming: whistleblowers offer a different story. Official channels to give an appearance of justice: whistleblowers usually believe in official channels; they make their reports through the chain of command or to outside regulatory bodies. Intimidation: whistleblowers speak out in the face of threats and reprisals; however, the way they are treated sends a message to other workers about what lies in store should they too speak out.

In summary, whistleblowing’s key strengths are exposing and naming behaviours as crime and corruption. Its key weaknesses are relying on official channels and exposing whistleblowers to reprisals and discrediting. Is there a way to retain the strengths while minimizing the weaknesses? Leaking One option is leaking: anonymously providing information and documents to others who can expose problems and act. Leaking is sometimes categorized as a form of whistleblowing, but for the purposes here it is useful to distinguish between them, with whistleblowing involving openness about one’s identity. Leaking can challenge cover-up: it is a means to accomplish the key goal of exposure. Compared to whistleblowing, it greatly reduces the risk of reprisals. Furthermore, it sidesteps the often-ineffective option of official channels. Leaking can be thought of as a communication process in which the sender is the leaker, an insider with information, and the receiver is an outsider, someone who can make use of the information. There are two main types of recipients: journalists and activists. Journalists can use the information to produce stories that expose problems and generate community outrage. Activists can use the information to mobilize supporters and take more effective action. Often there is a synergy between media coverage and activism, with media stories stimulating campaigners and actions becoming the basis for media coverage. There are some other ways that leaks can support resistance. One is through direct communication to other workers. A dissident employee, or sometimes a group, can produce a newsletter and distribute it anonymously through leaflets or emails. Maintaining anonymity requires extraordinary care. A leaflet can be tracked from the source computer, a photocopier or the distribution process, including fingerprints. If managers suspect that an employee is involved with a leaflet, they might monitor the employee’s work computer, confiscate, steal or monitor the employee’s home computer or intercept correspondence, among other methods. So it would be wise to do all the work at a location totally unconnected with the workplace, for example doing the word processing on a relative’s computer, doing the photocopying at an off-site photocopier and circulating the leaflet when no one is around – while wearing gloves, of course! Anonymous email distribution is far easier. By using remailers, the origin of a message can be disguised, though it is still wise to use a distant cybercafe for sending messages. It is also possible to upload anonymous websites. Leakers and anonymous dissidents can also be identified on the basis of characteristic

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language and writing styles and according to who would know the information revealed. Therefore great care is needed in crafting messages. Employers will go to extraordinary lengths to track down leakers, using all sorts of tools for detection, such as installing photocopiers that add an identifying mark to each copy or making subtle changes in versions of documents given to different workers, so a leaker can be identified through the version leaked. There are counter-tactics too, such as external photocopying of documents to eliminate identifying marks, or retyping documents entirely. One of the nastiest responses to leaking is for managers to take reprisals, for example transfer or dismissal, against an arbitrary worker – not usually the leaker. This may make the actual leaker feel so bad as to own up to the act. Arbitrary reprisals send a message to all employees that severe sanctions will be imposed. On the other hand, punishing an innocent worker can cause resentment. Why is leaking such a threat to managers? Leaking accomplishes the same goal as whistleblowing, namely exposing problems. In addition, leaking enables reprisals to be avoided or reduced: intimidation is less effective. Furthermore, the leaker remains in the job, able to leak more information down the track. This is a crucial difference. Whistleblowers, in contrast, by revealing their identity, are immediately removed from the loop for sensitive information, often isolated through ostracism or removed entirely through dismissal. Leaking is also a great threat because it maintains a channel between knowledgeable insiders and concerned outsiders. The outsiders – journalists and activists – are able to act without much concern about reprisals. (On alliances between whistleblowers and protesters, see Martin 1999; De Maria 2008). Looking at the tactics of outrage reduction, an insider–outsider alliance enables most of the major anti-corruption counter-tactics: exposure of problems, reframing the activity as criminal, avoidance of official channels, and resistance to intimidation. The one disadvantage of leaking, from the point of view of tactics, is that there is no person who, by speaking openly, adds credibility to the message. On the other hand, anonymity restricts use of the tactics of devaluation. In the case of Wollongong, there is no information about leaks. But for ICAC to initiate a major investigation, some information must have been available. Curiously, one person complained that he had earlier reported problems to ICAC but had been ignored. In the wake of the publicity about corruption in Wollongong, two citizens’ groups were formed to push for changes. Options The key message here is to carefully consider options before acting. Whistleblowing and leaking are two options worth considering, but there are others: ●

●

Do nothing – for the time being. Sometimes it is wise to lie low, gather information, and wait for a suitable opportunity to act. Timing is crucial in acting against social problems, and it may be useful to wait months or years until conditions are right. This might mean waiting for an election, a local crisis, the emergence of a citizens’ group or finding a sympathetic journalist or a crusading editor. Blow the whistle. This is a risky strategy, according to all the evidence, especially when dealing with high-level crimes or systemic corruption. Blowing the whistle

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effectively requires gathering masses of information, developing a communication strategy, ensuring support from relatives and friends and preparing for reprisals. Lots of preparation will increase the chance of having an impact. Leak. This can be quite effective, especially if there are suitable recipients, typically journalists or action groups. Organize on the job. In opposing corruption, there is strength in numbers. The challenge is to build the numbers. Finding others who are willing to do something can be risky: some prospective allies might be part of corrupt operations, might inform those who are or simply be indiscreet or unreliable. Hence great care is needed in finding allies and developing a strategy: premature action can reveal the existence of opposition and lead to a witch-hunt. Union officials can sometimes be powerful allies, but just as often they are indifferent or part of the problem. The same applies to professional associations and internal auditors. If a group can be organized, then actions can be far more powerful. A single whistleblower can be ignored or discredited; half a dozen will have far more impact and can provide support for one another. A leaking operation involving a network of workers can be far more effective than a lone leaker (Flynn 2006). Leave and support activists. Sometimes the wisest option is to leave, especially if there are risks of being assaulted or framed for criminal actions. By far the safest way to blow the whistle is to get another job first – preferably one where corrupt former co-workers have no leverage – and then speak out. Other options after leaving are to offer confidential advice to activists or to help set up an action group.

The key message is to consider options carefully and prepare thoroughly before acting. All too often, workers discover something that suggests fraud and immediately report it to the boss. If it is a minor matter, or a misunderstanding, or just involves one or two low-level workers, then reporting to the boss will be effective. But if the boss happens to be involved in the fraud, or has willingly ignored evidence of it, then reporting is likely to be met with reprisals or just shunting aside the worker who made the report. Whistleblower support groups commonly report that most of those who come to them have already blown the whistle and suffered reprisals. For those few who make contact when they are thinking of blowing the whistle, the prospects are far better, because experienced advisers can help select effective options. Whistleblowers should be admired. They are courageous and often suffer enormously for standing up for their principles. Unfortunately, courage does not always translate into effectiveness. Those who operate quietly behind the scenes, collecting information, organizing co-workers and feeding information to those who can act, also should be admired. They are the unsung heroes of many a campaign against corruption. Speaking out can be a tool against corruption, but to be effective it needs to be done in the right time and place. Whistleblowers often believe in telling the truth to those in power. This can work when the problem is not very serious or systematic, but when confronting high-level crime or entrenched corruption, the truth on its own is seldom very effective. To have a chance of bringing about change, the truth needs to be combined with a mobilized public, whether

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workers, local communities or international audiences. Publicity, within an organization or more widely, can provide a blowtorch for implementing good practice. This seems to have happened at Wollongong council, at least in the short term. Because of the extensive publicity, within Australia the very word ‘Wollongong’ has come to signify local government corruption. The result has been a turnaround for council staff, with intense and ongoing attention to ethical practices and a large turnover of personnel, bringing in many with no connection to previous practices. The price in careers has been enormous. However, it is far more promising than the previous regime, in which honest workers were regularly sidelined. That Wollongong became a story of corruption is a matter of chance. There are myriad other local government bodies with entrenched corrupt practices that have escaped scrutiny. For anyone who wants to help challenge these, by whistleblowing or other means, there is plenty to do. Note 1. The information about ICAC and Wollongong Council is drawn largely from hearings and reports by ICAC (http://www.icac.nsw.gov.au/) in its Operation Atlas, ‘Wollongong City Council – Allegations of Corrupt Conduct,’ (http://www.icac.nsw.gov.au/go/investigations-and-inquiries/transcripts/wollongongcity-council---allegations-of-corrupt-conduct) and stories in the Illawarra Mercury.

References Alford, C.F. (2001), Whistleblowers: Broken Lives and Organizational Power, Ithaca, NY: Cornell University Press. De Maria, W. (1999), Deadly Disclosures: Whistleblowing and the Ethical Meltdown of Australia, Adelaide: Wakefield Press. De Maria, W. (2008), ‘Whistleblowers and organizational protesters: crossing imaginary borders’, Current Sociology, 56, 865–83. Devine, T. (1997), The Whistleblower’s Survival Guide, Washington, DC: Fund for Constitutional Government. Devine, T. (2004), ‘Whistleblowing in the United States: the gap between vision and lessons learned’, in Calland, R. and Dehn, G. (eds), Whistleblowing around the World, Cape Town: Open Democracy Advice Centre; London: Public Concern at Work, pp. 74–100. Flynn, K. (2006), ‘Covert disclosures: unauthorized leaking, public officials and the public sphere’, Journalism Studies, 7, 256–73. Glazer, M.P. and Glazer, P.M. (1989), The Whistleblowers, New York: Basic Books. Hunt, G. (ed.) (1995), Whistleblowing in the Health Service: Accountability, Law and Professional Practice, London: Arnold. Hunt, G. (ed.) (1998), Whistleblowing in the Social Services: Public Accountability and Professional Practice, London: Arnold. Lennane, K.J (1993), ‘“Whistleblowing”: a health issue’, British Medical Journal, 307, 11 September, 667–70. Lennane, J. (1996), ‘What happens to whistleblowers, and why’, in Klaas Woldring (ed.), Business Ethics in Australia and New Zealand: Essays and Cases, Melbourne: Thomas Nelson, pp. 51–63. Martin, B. (1999), The Whistleblower’s Handbook, Charlbury, UK: Jon Carpenter. Martin, B. (2007), Justice Ignited: The Dynamics of Backfire, Lanham, MD: Rowman & Littlefield. Miceli, M.P. and Near, J.P. (1992), Blowing the Whistle, New York: Lexington Books. Miethe, T.D. (1999), Whistleblowing at Work, Boulder, CO: Westview. Williams, K.D. (2001), Ostracism: The Power of Silence, New York: Guilford Press.

10 Organizational responses to allegations of corporate corruption Vikas Anand, Alan Ellstrand, Aparna Rajagopalan and Mahendra Joshi

I think this antitrust fever is a craze, which we should meet in a very dignified way and parry every question with answers which while perfectly truthful are evasive of bottom facts. Excerpted from a letter written by a Standard Oil Director to John D. Rockefeller in 1888.1

Introduction Exposure of corporate corruption and wrongdoing is increasingly common in today’s world of intense media scrutiny. Organizations are often faced with allegations of impropriety that involve legal and/or ethical violations. Such allegations can range from being totally baseless to completely accurate. When faced with these accusations, organizations typically go into a crisis mode and they develop a strategy to counteract them (Dezenhall and Weber, 2007). The actual organizational response to these accusations is likely to be influenced by legal considerations, by the credibility of the allegations and the accusers and by organization routines and values. The opening excerpt also highlights the fact that organizations expended considerable effort in deciding their responses to allegations of impropriety well before the current cynical climate in the wake of numerous exposed corporate scandals. An organization’s response to such allegations is extremely important for a variety of reasons. First, the nature of the organizational response is likely to shape the attitudes of its key stakeholders (Pfeffer and Salancik, 1978; Pfarrer et al., 2008). Several instances exist where organizations accused of corruption lose support of groups such as key customers, local communities, and creditors because the response does not inspire confidence. During the early 1980s Beech-Nut Nutrition Corporation, a subsidiary of Nestlé, was accused of selling adulterated apple juice products that were diluted with water and nutritionally inferior. Beech-Nut responded to the allegations by claiming their innocence, blaming suppliers and suggesting that the transgressions were merely technical violations. After a protracted campaign to defend their position, the firm ultimately pleaded guilty, but only after paying fines, incurring legal costs and suffering lost sales of over $25 million (Welles, 1988). Second, the nature of the response determines the final resolution reached in resolving organizational corruption. For example, British Airlines was accused of colluding with Virgin Airlines over fuel surcharges on international flights. A fine was imposed but it was a reduced amount because the organization had cooperated in the investigation. In the words of the federal prosecutors, ‘BA (a foreign corporation) could have retained highly relevant documents in its foreign offices and refused to cooperate. It chose, however, to assist the United States early in its investigation in a highly significant and useful way’ and thus got away with a minimal fine. Finally, as Ashforth and Anand (2003) point out, the organizational response to initial 217

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exposure of corrupt acts goes a long way towards setting the future ethical climate of the organization because the response sends a clear signal to employees about what behaviors are considered normal. Interestingly, while there has been significant research (Brief et al., 2001; McKendall et al., 2002; Ashforth and Anand, 2003; Joshi et al., 2007) on why a firm commits violations and a limited amount of research (for example, Pfarrer et al., 2008) about the aftermath of a discovery of ethical violations by organizations, almost no research exists that has systematically examined the various responses a firm can exhibit in response to allegations of corporate corruption. For example, firms may accept or deny the allegations of ethical violations, they may choose to attack the alleger vehemently or try to buy time or wear down the accusers with stonewalling silence. With this chapter, partly based on an examination of dozens of case studies of how organizations responded to an accusation, we try to explore the variety of organizational responses to allegations of corruption. In the interest of parsimony, we focus our attention on only valid allegations of corruption, that is, allegations describing corrupt activities that have actually occurred in organizations and have been discovered by reputed external parties such as the regulatory bodies. Consistent with Ashforth and Anand (2003, p. 2) we define corruption as the ‘misuse of authority for personal, sub-unit and/or organizational gain’ where misuse refers to violations of societal norms. We take this approach because corrupt acts may become institutionalized in organizations, industries or even legal environments and thus may not be in violation of company, industry or legal standards per se. Organizational responses As part of a larger research project, we examined numerous instances of corporate corruption and identified five main types of response that firms are likely to adopt: (i) denial; (ii) reframing; (iii) deflection; (iv) buying time; and (v) acceptance. Firms may use several variations of these five responses as listed in Table 10.1. Denial In a denial response, firms refute all allegations of corruption. In adopting such a response firms believe that these denials would carry credence with key stakeholders or that the accuser will give up through attrition. A firm adopts a denial response when it feels that either because of prior credibility or owing to its financial muscle and lobbying clout, it can get away with such a response. A classic example is that of Reliance’s mobile network in India. In 2003, Mukesh Ambani of Reliance emphatically denied allegations that the firm had breached licensing regulations and that the government introduced a unified telecoms-licensing regime for the benefit of the company (The Economist, 2003). Reliance felt it could get away with a denial because of its connections with highly placed members of the Indian government who have publicly supported the organization and even appreciated its aggressive tactics for expansion. While the government did fine the firm Rs.5000 million for violating the license conditions, the newly introduced unified telecom regime benefited Reliance more than any of its competitors who cried foul at the firm’s tactics (Hazarika, 1987, p. 10; Kripalani, 2001; Rai, 2004, p. 1; The Hindu, 2003).

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Higher principle

Pre-emptive action

Refocusing attention

The firm portrays the act as acceptable or as a standard practice

Normalization

Deflection

The firm shifts responsibility for the act to a specific individual either inside or outside the firm

Scapegoating

Reframing

The firm may divert the attention of its detractors to some peripheral event to take their mind off the main allegation Anticipating an outcry, the firm takes strong pre-emptive measures to deflect the focus of key stakeholders The firm may cite moral reasons for the corruption

The firm refutes the allegation made against it

Denial

Denial

Explanation

Methods

Organizational responses

Type of response

Table 10.1

In the Iran Contra case, the CIA justified the supplying of arms to Iran by saying that the noble motive behind the act was to secure the release of hostages (Weiner, 2007)

Merck denied the negative side effects (heart attacks) of Vioxx for a long time and were accused of sending out ‘Dodge’ Vioxx document to salesmen on how to dodge safety concerns of the drug (Martinez, 2004; O’Rourke, 2006) In 2008, Tyson was charged with conspiring to smuggle in illegal immigrants to work on the production lines of the company. The firm’s lawyers said that any hiring of illegal immigrants was done by a few plant managers against company hiring policy. Further, this was not known to executives in the corporate headquarters (CBS News) In 2006 Microsoft was asked to testify before Congress about censoring internet content in China. The firm maintained that it was just following the rules laid down by the Chinese government and that from an overall perspective, they were not being unethical (Dann & Haddow, 2008 p. 228) When oil companies are accused of artificially profiteering from high gasoline prices, they may try to deflect attention by questioning government bans on oil exploration that are causing a national crisis When Nortel was being investigated for accounting irregularities, the firm took pre-emptive action and asked 10 of its directors to step down

Examples

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Buying time

Expert consultation

Investigation

The firm uses an external agency to conduct the investigation with the intention of silencing detractors and denying the accusation

A firm may decide to maintain a neutral silence; neither accepting nor denying the allegation The firm launches internal investigation with the intention of silencing detractors till the results are known

The firm may attack the accuser by doubting the veracity of its intentions and facts

Counter attack

Stonewalling

Explanation

Methods

(continued)

Type of response

Table 10.1

In 2002 Canal Plus (a Vivendi Subsidiary) blamed rival NDS (80% owned by News Corporation) for loss of revenues. Canal Plus claimed that NDS employed scientists to crack its rival’s encryption code and published it on the net enabling pirates to watch programs for free. NDS’s chief executive retorted that the allegation was ‘outrageous and baseless’ and served to cover up Canal Plus’ ‘inferior’ technology and ‘poor’ performance (Crane, 2005) Bridgewater CEO’s silence even after a much publicized faulty tires recall was seen as an example of stonewalling (Pfarrer et al., 2008) In 2006, amidst extensive probes over the timing of executive options in different firms, Apple announced that an internal investigating team had discovered ‘irregularities’ relating to stock options. This team didn’t comment on other questionable grants or whether the company would be held responsible for the irregularities (Bandler et al., 2006, p. A.3.) Enron brought in a law firm Vinson & Elkins to give a ‘true sale opinion’ that enabled the firm to book a $20 million gain in a transaction even though there was no valid business purpose for the transaction (Acello, 2004)

Examples

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Acceptance

The firm may offer compensation to the aggrieved party as a humanitarian gesture and not as an admission of liability.

A firm may accept the allegation but try to mitigate the damage by localization or by pointing out the benefits of the remedial action to society. The firm will undertake some token changes to satisfy its stakeholders that it’s remedying its past follies. The firm undertakes required fundamental changes in its structure.

Settling without liability

Minimization

Cosmetic change

Structural change

In 2004, Cross Country Bank (a bank that provided credit cards to people who couldn’t get them in other banks due to low credit score) faced civil suits alleging that it misled customers about terms and fees or engaged in abusive collection practices. Applied Card Systems (Collection arm of Cross Country Bank) settled the FTC allegations by agreeing to avoid them. However, the firm neither admitted nor denied the allegation. (PacelleM.2004) When Siemens was accused of money laundering and bribery in 2006, the Chief Executive responded that he ‘believed that the wrongdoing was confined to the struggling telecom equipment unit and a group of individuals who circumvented controls on their own initiative’ (Esterl, 2006 p. B.4). Companies accused of retaliating against whistleblowers may choose to set up an ombudsperson and tout that as evidence of their commitment to change. However, no real change in processes/actions may actually be initiated. When TAP Pharmaceuticals was accused of offering kickbacks for prescribing its drugs, it accepted the allegation and appointed a new ethics compliance officer. Employees were given computer training on resisting pressure from doctors for freebies and a new ethical code banned gifts (to hospitals) resembling inducements. (Bernard A., 2003)

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Reframing2 When a firm adopts a reframing response, it tries to recast facts or events so that its actions are seen in a positive or neutral light rather than as ethical breaches. Reframing responses can take the form of scapegoating and normalization. Scapegoating When adopting a scapegoating response, the firm dodges responsibility by singling out individuals and blaming them for the acts or events (Brown and Jones, 2000). Scapegoating can be of two types: ‘internal scapegoating’ occurs when an individual inside the organization is blamed for the corruption; ‘external scapegoating’ occurs when an external agency or organization is held responsible directly or indirectly for the ethical breach. For instance, in the case of the Alaskan oil spill, Exxon practiced both forms of scapegoating. It blamed the ship’s captain (an Exxon employee) for drunken negligence (Peterson, 1989, p. A3) and the US Government for not permitting the firm to use a chemical dispersant, thus delaying the cleanup of the oil spill (Kranish, 1989, p. 6). When a firm adopts a scapegoating response, it does not deny the accusation. However it tries to deny responsibility and portrays itself as a victim. Normalization In a normalization response, firms try to convince stakeholders that their actions are in compliance with standard industrial or market norms and do not contravene accepted societal standards. Multinational firms may blame the laws or culture of foreign nations that force them to commit certain acts to enable them to run their business in that country. This was evident in Microsoft’s handling of the internet censoring in China. Microsoft was accused of complying with the Chinese government’s demand of providing censored content in return for pursuing business in China. When testifying before Congress in 2006 about this issue, Jack Krumholtz, associate general counsel of Microsoft, stated that Microsoft was just following the rules laid down by the Chinese government. Additionally, Microsoft maintained that from an overall perspective, they were not being unethical. While there were many rights violations in the short run, letting foreign internet companies operate in China would result in more freedom for the Chinese in the long run (Dann and Haddow, 2008, p. 228). In this example, Microsoft used a combination of two responses: Normalization and ‘Focus on higher principles’, which is discussed later. Deflection In a deflection response, the firm tries to divert the stakeholder’s attention from the allegation to other factors that depict the organization in a more positive light. A deflection response is different from reframing in that it tries to focus on factors other than the facts of the allegation, whereas a reframing response tries to modify the alleged facts so that they appear to be ethical. A deflection response can occur in the following ways. Refocusing attention In this response, firms may decide to redirect the attention of the stakeholders to some other event that reinforces the firm’s positive image. For example, a firm may publicize its community development initiatives when it is being investigated for fraud. The firm hopes that this would divert stakeholders’ attention from the investigation. Refocusing attention may follow a denial response to speed up attrition. This kind of response was vividly present when members of the Canadian parliament accused

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Prime Minister Jean Chrétien of improperly using his influence as government leader to secure loans for a hotel and golf course he partly owned (Parker, 2001). The first reaction from the Prime Minister’s office was that of outright rejection. But once the opposition party had documented enough evidence and had convinced the Commercial Crime Section in Montréal to charge Chrétien, he tried to divert media attention by taking a trip to China (ibid.). The 10-day trade mission to China was reportedly quite high profile, involving signing of billions of dollars worth of business deals – helpful in shifting media attention from the allegation. When a member of the press questioned Chrétien in China about his alleged involvement in questionable business dealings he snapped – ‘we will discuss my personal ethics in Ottawa’ (ibid.). Pre-emptive action Firms may anticipate an outcry about an unethical action and adopt strong pre-emptive measures that make concerned stakeholders less likely to question or attack the organizations. Such measures could include temporarily suspending the executives responsible or transferring the perpetrators to a different unit or location. By taking pre-emptive actions, firms try to (i) demonstrate to stakeholders how seriously they take any allegations of corruption, (ii) focus the attention on remedial action taken instead of the ethics violation, and (iii) reduce the likelihood of sanctions by appearing to cooperate with the regulating authorities. For example, in 1991, Salomon Brothers was being investigated by government regulators for misusing names of customers and recording false sales in treasury auctions. The firm took pre-emptive action and suspended two managing directors in charge of its security trading desk on counts of ‘irregularities and rule violations’ in previous treasury auctions (Siconolfi et al., 1991 p. A1; Fuerbringer, 1991, p. 1). By taking this pre-emptive action, Salomon Brothers hoped to convince their stakeholders that the firm would not tolerate ethical violations by its employees. Focus on higher principle When firms adopt this response, they take a moralistic stand when defending their actions (Brown and Jones, 2000). Firms may argue that the action (unethical in society’s viewpoint) is justified as a means to serve a higher cause. Alternatively, the firm’s actions could be portrayed as a ‘lesser evil’ (a less harmful alternative to a destructive course of action). The CIA demonstrated a classic case of this response during the Iran Contra case when Oliver North supplied arms to Iran for the release of Americans in the Middle East and also funded the Contra in Nicaragua. All this was done without the knowledge of Congress and in direct contravention of the law (Weiner, 2007). When the operation was blown, the CIA justified it on the basis of the noble objective: release of arms for rescuing hostages. The higher principle is appealing to managers because it serves their loyalty to the organization and what it stands for. As Ashforth and Anand (2003) point out, in such firms organizational goals become highly salient and members are very likely to exhibit behaviors that serve the needs of the organization even if it means engaging in unethical means. For instance, police officers often exhibit solidarity by choosing not to testify against a colleague – even though it means committing perjury (Kappeler et al., 1994). Counter attack In this type of response, firms attempt to throw accusers off-balance by going on the offensive or counter suing them. Firms may question the accuser’s intentions or dismiss the facts as inaccurate. By adopting a counterattack response, firms believe

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that the accusers will back off when met with stiff opposition and that the counterattack may create ambiguity in the minds of the stakeholders about the validity of the accusation. A classic example of a counterattack response was seen in the Mitsubishi sexual harassment case. The Equal Employment Opportunity Commission (EEOC) charged the firm with creating conditions that led to over 700 women being sexually harassed over a period of time. The firm refuted this allegation and paid its workers to picket the EEOC offices and also set up hotlines for workers to call and protest to the legislators that the negative publicity generated by the EEOC claims would result in loss of sales which would ultimately lead to loss of jobs. These aggressive tactics were adopted to intimidate the EEOC, leading to it withdrawing its charges (Elstrom and Updike, 1996; Miller, 1998; Sharpe, 1996; Weimer and Thornton, 1997). Buying time When accused of corruption, firms’ responses may often be targeted towards buying time. In doing so, firms hope that the issue would die a natural death over time or the accuser may run out of resources. Firms buy time in the following ways. Stonewalling In this response, firms remain silent about the allegations. They may do this because an apology would be seen as an admission of guilt and denial may work against them if the allegations are proved. By adopting this response, firms hope that the issue will lose its intensity through attrition. Investigation Firms can launch an internal inquiry with the intention of silencing detractors until the results are known. These investigations make the firms look proactive as they voluntarily start a self-inspection and also allow ‘No Comment’ responses until the investigation comes to an end. In 2006, extensive probes over the timing of executive options were taking place in many organizations. Amidst these investigations, Apple announced that an internal investigating team comprised of external members of the board of directors had discovered ‘irregularities’ relating to stock options, including one made out to Steve Jobs. This grant was cancelled though and resulted in ‘no financial gain’. This team did not comment on other questionable grants or whether the company would be held responsible for the irregularities (Bandler et al., 2006 p. A.3). By going for an internal investigation, Apple tried to buy time and at the same time convince stakeholders that it took allegations of corruption very seriously. Expert consultation Firms may utilize the services of experts to inquire into an allegation. Experts are brought in as they are viewed as neutral observers with no vested interests and their exoneration is likely to be viewed credibly by stakeholders. Interestingly, the value of such external consultants has come under fire of late. William Simon argued that as experts, lawyers’ and academicians’ advice influences third-party opinion towards firms. Firms can take advantage of this influence by getting experts to falsely absolve them of ethical violations (Simon, 2008). Acceptance In this response, firms may accept the allegation and try to rebuild the lost goodwill among their stakeholders. Such remedial actions could be cosmetic (token changes that

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may not really affect the organization but would appease the critics) or real and structural (changes that would alter the organization fundamentally). Firms also display an acceptance response when they tacitly accept the allegation but do not want to make a public acknowledgment of it. The following are some ways that firms can respond by accepting (or appearing to accept). Settling without admitting guilt In this response, firms may agree to compensate without accepting the responsibility for the corruption. They may offer the compensation as a humanitarian gesture rather than as an act of atonement. For example, Halliburton Corporation was accused by the Securities and Exchange Commission (SEC) of violating security laws by not informing investors about a change in the firm’s accounting method and its effect on the reported profit. Robert C. Muchmore Jr, Halliburton’s former controller, undertook to settle the SEC action by agreeing to stop further violations and to pay $50,000. But, Halliburton did not accept or deny the commission’s accusations (Norris, 2004). Thus, the firm settled the action without accepting any of the allegations. Minimization A company may accept the allegation but try to mitigate the damage by (i) localization (blaming a specific rogue subunit for the act and emphasizing that it is not representative of the firm) or (ii) pointing out the benefits of the remedial actions to society. For instance, when Siemens was accused of money laundering and bribery in 2006, the chief executive responded that he ‘believed that the wrongdoing was confined to the struggling telecom equipment unit and a group of individuals who circumvented controls on their own initiative’ (Esterl, 2006, p. B.4). In this example, Siemens, while accepting the allegation, tries to minimize the damage by recasting the event as an aberration from the normally ethical corporate culture supposedly prevailing in the organization. Cosmetic change When firms adopt this response they accept the allegations of corruption. However, instead of making serious commitments to address the allegation, they may create superficial changes to the organizational structure or exhibit token gestures to remedy any damage done. Firms hope that the detractors are silenced and the public is satisfied by this window dressing. They then carry on with their business without any significant change in the procedures and values. Recently, Chan and Dixon (2007) studied the changes undertaken by the New South Wales Police (NSWP) of Australia after a Commission inquiry recommended several steps to minimize widespread corruption and misconduct in the NSWP. In spite of strong public sentiments and political pressure to change, the follow-up audits of the NSWP did not find significant changes in the process of police reform in its three reports (years: 2001, 2002, 2003) on the Commission’s recommendations (ibid.). The NSWP was more concerned about pursuing a ‘crime reduction agenda’ instead of the Royal Commission’s recommendations to completely reform the organization. Even though cultural and structural changes were not at all considered a priority, the Police Commissioner tried to project the image that ‘the reform is near completion’ (ibid., p. 450). At the same time, the organization continued to use hard data such as crime statistics as proxies of achieved effectiveness. Structural change In this response, firms accept the allegations. After atonement, a deep introspection occurs and fundamental changes are implemented accordingly. These

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changes could be explicit (typically in organizational structure) or implicit (typically in organization climate or top management attitude). A good example is that of TAP Pharmaceuticals. When TAP Pharmaceuticals was accused of offering kickbacks for prescribing its drugs, it accepted the allegation and appointed a new ethics compliance officer. Employees were given computer training on resisting pressure from doctors for gratuities and a new ethical code banned gifts (to hospitals) resembling inducements (Bernard, 2003). Multiple responses So far we have delineated individual organizational responses to corruption. However, in reality, firms react with multiple responses that are a mixture of the ones identified previously. These responses can be in the form of (i) a combination response or (ii) a sequential response. In a combination response, firms may exhibit two or more individual responses simultaneously. The case of Microsoft and internet censorship in China, which was discussed earlier in the chapter, is a classic example of a combination of two responses, a normalization response and a focus on higher principle response. In a sequential response, firms display a set of responses one after another. For example, in 1984, a leak of lethal Methyl Isocyanate from the Union Carbide Bhopal plant (a joint venture between Union Carbide India Ltd and the Indian government) killed more than 1,000 people in Bhopal and injured a hundred thousand. First, Union Carbide denied accusations that the safety measures were deficient in the Indian plant. After investigations, the firm claimed it was an act of sabotage and passed the responsibility to the local managers. After an initial ruling in the US, Union Carbide agreed to provide $80 million as humanitarian aid and not as an acceptance of liability (Gladwell, 1989). In this case, Union Carbide displayed a sequence of different responses to the allegations – first a denial response, then a minimization response and finally a settling without admitting guilt response. The organization chose to alter its response as the case proceeded and circumstances changed. Implications and conclusion In this chapter, we have described a framework of the various responses that a firm can adopt when faced with allegations of corruption. We have identified five major types of response: (i) denial (where firms refute allegations); (ii) reframing (where firms recast facts or events so that their actions are seen in a positive or neutral light); (iii) deflection (where firms try to divert stakeholders’ attention from the allegation to other factors that depict the organization in a more positive light); (iv) buying time (where firms try to buy time hoping that the allegation would die a natural death); and (v) acceptance (where firms publicly or tacitly accept the allegation and try to rebuild the lost goodwill among their stakeholders). These responses are not necessarily mutually exclusive – firms may exhibit these individually, in combination or sequentially. This framework is important as the kind of response that an organization adopts sends strong signals to the stakeholders, employees and society at large about its attitude and reaction to corruption allegations. These responses may elicit a strong reaction from stakeholder groups as they carefully interpret the nature of the response. This reaction may have a lasting influence on stakeholder relations and investors’ perceptions of the firm. While we have set the ball rolling by identifying five major types of

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response, further empirical research is needed to validate the comprehensiveness of this framework. This chapter offers fertile grounds for further research into the antecedents and consequences of the response that firms adopt when faced with corruption allegations. Some possible antecedents are elaborated below. Antecedents The demographic characteristics of top management may be an important antecedent in determining the response to allegations of ethical transgressions. The upper echelons perspective suggests that executive actions are a function of executives’ personalities, values and experiences. This perspective further suggests that demographic characteristics of executives can be used as valid, if imperfect, measures of executives’ cognitive frameworks (Hambrick and Mason, 1984; Hambrick, 2007). Past research has shown that executive characteristics are related to a variety of strategic corporate outcomes including organizational growth, innovation and conformity to strategic posture (Finkelstein and Hambrick, 1990; Boeker, 1997). In a recent example, researchers found that the gender of a CEO influences the outcome of investors’ decisions as they react more negatively to announcements of female CEOs than male CEOs (Lee and James, 2007). This might suggest that, if a female CEO is at the helm of the organization, she may have to be particularly careful in choosing a response to an ethical problem since she may be viewed negatively by investors. A second antecedent may be the organizational characteristics. These characteristics include the size of firm, type of firm (regional versus multinational), levels of diversification, firm age and position of the firm in the industry (monopoly or industrial leader versus follower). For example, large firms may tend to adopt a denial response when allegations of corruption are made. Such firms usually have a good number of detractors and openly accepting allegations will increase public hostility. Previous research also indicates that large firms in many industries are able to influence regulatory agencies. With the amount of direct and indirect influence over the agencies it is likely that these organizations perceive a sense of invulnerability in abjectly denying corporate misconduct. These firms also have abundant financial resources and lobbying clout that can help them to get away with a denial response. Yeager (1986), for instance, found that because large firms have enough provisions of slack resources to absorb legal costs, these firms are less likely to be afraid of punitive damages of legal battles for fraudulent activities. This further suggests that when accused of corrupt activities such organizations may choose denial tactics and play the wait and watch game in the court because they can afford to. Moreover, large firms are involved in more activities than small firms. While it increases the chances of corporate wrongdoing in one of its many units much more than in a smaller organization, the ability to monitor all these units typically becomes less (McKendall and Wagner, 1997). Organizational leaders may find it easier to deny any fraudulent activity than to accept it because of the lack of evidence in the firm concerning the activity. It also buys them some time to investigate the matter in much more depth. Future research can explore this area and determine if a relationship between organizational characteristics and response type adopted exists. Given that ethics is widely discussed in today’s world, research can also explore whether the ethical climate of firms determines the responses adopted. The ethical climate

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of an organization is defined as ‘the prevailing perceptions of typical organizational practices and procedures that have ethical content’ (Victor and Cullen, 1988, p. 101). An ethical climate develops within an organization when top management emphasizes ethical values, conveys these values through participatory processes to employees at all levels, develops policies of condemning ethical violations and builds a clear ethical code (McKendall and Wagner, 1997). It has been found that an ethical climate may prompt or discourage organizations from engaging in corrupt practices (Victor and Cullen, 1988; McKendall and Wagner, 1997). Given the role of ethical climate in determining incidences of corruption in organizations, we expect that a strong climate may reduce the chances of outright denials of alleged corrupt activities. One reason for this argument is that such organizations are routinely engaged in discussions regarding ethical dimensions of their work which decreases the element of surprise brought forth by an allegation (and therefore there is less chance of rejection of the whole idea that we can be corrupt). For example, a salesperson in such an institution may be required to report not just the increase in sales figures but also the means of achieving it. In such an organization the salesperson also knows that when a conflict arises between profits and ethics s/he should not automatically resolve it in favor of the former. In any case, in the event of an allegation, such an organization may have enough documentation to reflect back and analyze the truth in the allegation in much greater depth – decreasing the chance of an outright rejection of the allegation. However, past research also suggests that if an ethical code is just a document (for example, Enron’s ethical code, which ran to 64 pages), it may actually increase the chances of corrupt behavior becoming endemic in a firm (Joshi et al., 2007). This in turn may encourage firms to convince stakeholders that they are not violating societal standards. Consequences The consequences of adopting a particular response can be (i) economic; (ii) social; or (iii) internal. Economic factors including trust of stakeholders such as creditors, suppliers and customers, shareholder confidence, share price and so on are situation sensitive and may be adversely affected if the response adopted is not appropriate. Further research can explore the effect of adopting different responses on these economic indicators. The social consequences of adopting a particular response are subtle but consequential, especially if the responses become the standard operating procedures of many firms. Poor or inadequately thought-out responses may lead to a general cynicism in society, especially if firms are able to escape the consequences of their corrupt acts. An environment which is cynical about the organization is formed – one in which society turns blasé about ongoing corporate corruption and to an extent is desensitized to it. This could lead to reduced pressure on regulators to counter corruption and may even lead to increased corruption in society. Organizations that adopt appropriate responses may actually emerge much stronger after an incidence of corruption. For example, when Texaco was accused of racial discrimination, the CEO, Peter Bijur, publicly accepted the allegations and quickly implemented a well-designed program to increase diversity initiatives in the organization. Interestingly, Texaco was soon heralded as ‘a model for challenging racial discrimination’ (Singer, 2004).

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Internally, employees may read a lot into the response a firm adopts. For example, if a firm adopts a denial response and the employees know for a fact that the corrupt act was committed, then they may react in two ways. Either they may conclude that the firm condones ethical violations and take it as an encouragement to indulge in unethical acts, or employees may become demoralized when they witness their firm deceiving other stakeholders and society. Conclusion In this chapter we have discussed various types of response that firms may provide to the allegations of organizational corruption. Developing an understanding of these responses complements the already established area of research that has examined the antecedents to organizational corruption. Given that the response reflects whether the organization facing an allegation truly wants to change or not, a systematic understanding of this area can be extremely helpful for researchers, practitioners and policy makers. Researchers can help further understand the nature of responses and build on the causes and consequences of these responses. Practitioners and policy makers can help organizations better prepare for the post-allegation period by sharing the knowledge of these responses and their outcomes with the organizations. Notes 1. As cited in Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, New York: Simon & Schuster, 1991, p. 79. 2. Pfarrer et al. (2008) call this ‘Accounts’.

References Acello, R. (2004), ‘Enron lawyers in the hot seat’, ABA Journal, 90, pp. 22–4. Ashforth, B.E. and Anand, V. (2003), ‘The normalization of corruption in organizations’, Research in Organization Behavior, 25, 1–52. Bandler, J., Wingfield, N. and Bulkely, W.M. (2006), ‘Apple and CA report problems in options grants’, The Wall Street Journal (Eastern Edition), New York, June 30, p. A.3. Bernard, A. (2003), ‘Penalized drug firm softens sales tactics’, The Boston Globe, January 2, p. A.1. Boeker, W. (1997), ‘Executive migration and strategic change: the effect of top manager movement on productmarket entry’, Administrative Science Quarterly, 42 (2), 213–36. Brief, A.P., Buttram, R.T. and Dukerich, J.M. (2001), ‘Collective corruption in the corporate world: toward a process model’, in M.E. Turner (ed.), Groups at Work: Theory and Research, Mahwah, NJ: Lawrence Erlbaum, pp. 471–99. Brown, A.D. and Jones, M. (2000), ‘Honourable members and dishonourable deeds: sensemaking, impression management and legitimation in the “Arms to Iraq Affair”’, Human Relations, 53 (5), pp. 655–89. Chan, J. and Dixon, D. (2007), ‘The politics and police reform: ten years after the Royal Commission into the New South Wales Police Service’, Criminology and Criminal Justice, 7 (4), 443–68. Crane, A. (2005), ‘In the company of spies: when competitive intelligence gathering becomes industrial espionage’, Business Horizons, 48, 233–40. Dann, G.E. and Haddow, N. (2008), ‘Just doing business or doing just business: Google, Microsoft, Yahoo! and the business of censoring China’s internet’, Journal of Business Ethics, 79, 219–34. Denzenhall, E. and Weber, J. (2007), Damage Control: Why Everything You Know about Crisis Management is Wrong, New York: Portfolio Hardcover. Economist, The (2003), ‘Business: the right connections; Indian telecoms’, 369 (8355), December 20, p. 98. Elstrom, P. and Updike, E.H. (1996), ‘Fear and loathing at Mitsubishi’, Business Week, 3474, p. 35. Esterl, M. (2006), ‘Siemens CEO hopes new audit cuts scope of suspected fraud’, The Wall Street Journal (Eastern Edition), New York, December 22, p. B.4. Finkelstein, S. and Hambrick, D. (1990), ‘Top-management-team tenure and organizational outcomes: the moderating role of managerial discretion’, Administrative Science Quarterly, 35 (3), 484–503.

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Fuerbringer, J. (1991), ‘Salomon Brothers admits violations at treasury sales’, The New York Times, August 10, Section 1, p. 1, Column 3, Financial Desk. Gladwell, M. (1989), ‘The costly outcome of Bhopal; Union Carbide’s strategy proved less than a success’, The Washington Post, February 19, p. H1. Hambrick, D. (2007), ‘Upper echelons theory: an update’, Academy of Management Review, 32 (2), 334–43. Hambrick, D. and Mason, P. (1984), ‘Upper echelons theory: the organization as a reflection of its top management’, Academy of Management Review, 9 (2), 193–206. Hazarika, S. (1987), ‘International Report; Indian company’s tactics challenged’, The New York Times, May 4, Section D, p. 10, Column 1, Financial Desk. Hindu, The (2003), ‘Reliance becomes full-fledged cell operator’, November 13. Joshi, M., Anand, V. and Henderson, K. (2007), ‘The role of organizational practices and routines in facilitating normalized corruption’, in J. Langan-Fox, C.L. Cooper and R.J. Klimoski (eds), Research Companion to the Dysfunctional Workplace, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 235–51. Kappeler, V.E., Sluder, R.D. and Alpert, G.P. (1994), Forces of Deviance: Understanding the Dark Side of Policing, Prospect Heights, IL: Waveland Press. Kranish M. (1989), ‘Exxon says US blocked cleanup chemical’, The Boston Globe, April 3, National/Foreign, p. 6. Kripalani, M. (2001), ‘India’s reliance’, Business Week, June 25, Asian Cover Story, 3738, p. 20. Lee, P.M. and James, E.H. (2007), ‘“She”-e-os: gender effects and investor reactions to the announcements of top executive appointments’, Strategic Management Journal, 28, pp. 227–41. Martinez, Barbara (2004), ‘Merck explains documents’, The Globe and Mail (Canada), 15 November, p. B8. McKendall, M., DeMarr, B. and Jones-Ricker, C. (2002), ‘Ethical compliance programs and corporate illegality: testing the assumption of the corporate sentencing guidelines’, Journal of Business Ethics, 37 (4), 367–83. McKendall, M.A. and Wagner, J.A. (1997), ‘Motive, opportunity, choice and corporate illegality’, Organization Science, 8 (6), 624–47. Miller, J.P. (1998), ‘Mitsubishi will pay $34 million in sexual-harassment settlement’, The Wall Street Journal, 4, p. 4, section B. Norris, F. (2004), ‘Halliburton settles S.E.C. accusations’, The New York Times, August 4, p. 1, section C. O’Rourke, James S., IV (2006), ‘Merck & Co. Inc.: communication lessons from the withdrawal of Vioxx’, The Journal of Business Strategy, 27 (4), 11–22. Parker, S. (2001), ‘The stench thickens’, Newsmagazine, 28 (5), March 5, 10–13. Peterson, C. (1989), ‘Captain wasn’t drunk when tanker hit reef, crew tells probers’, The Washington Post, April 12, First Section, p. A.3. Pfarrer, M., Decelles, K., Smith, K. and Taylor, M. (2008), ‘After the fall: reintegrating the corrupt organization’, Academy of Management Review, 33(3), July, pp. 730–49. Pfeffer, J. and Salancik, G.R. (1978), The External Control of Organizations: A Resource Dependence Perspective, New York: Harper and Row. Rai, S. (2004), ‘A giant so big it’s a proxy for India’s economy’, The New York Times, June 4, Section W, Column 3, Business/Financial Desk, p. 1. Sharpe, R. (1996), ‘Divided ranks: women at Mitsubishi say union fell short on sexual harassment’, The Wall Street Journal, July 10, p. 1, section A. Siconolfi, M., Mitchell, C., Herman, T. and Sesit, M.R. (1991), ‘The big squeeze: Salomon’s admission of T-note infarctions gives market a jolt – firm’s share of one auction may have reached 85%; investigations under way – how much did bosses know?’, The Wall Street Journal (Eastern Edition), New York, August 12, p. A.1. Simon, W.H. (2008), ‘The market for bad legal advice: academic professional responsibility consulting as an example’, Stanford Law Review, 60 (6), 1555–603. Singer, A.W. (2004), ‘Your good name after you lost it’, Across the Board, 41 (6), 33–8. Victor, B. and Cullen, J. (1988), ‘The organizational bases of ethical work climates’, Administrative Science Quarterly, 33 (1), 101–25. Weimer, D.A. and Thornton, E. (1997), ‘Slow healing at Mitsubishi: it’s clearing up sex-harassment charges, but ill will lingers’, Business Week, 3545, p. 74. Weiner, T. (2007), Legacy of Ashes: The History of the CIA, Garden City, NY: Anchor; Reprint edition. Welles, C. (1988), ‘What led Beech-Nut down the road to disgrace?’, Business Week, 3039, 124–8. Yeager, P. (1986), ‘Analyzing corporate offenses’, in W. Fredrick (ed.), Research in Corporate Social Performance and Policy, Greenwich, CT: JAI Press, pp. 93–120.

11 Reducing employee theft: weighing the evidence on intervention effectiveness Edward C. Tomlinson

Introduction Employee theft refers to ‘any unauthorized appropriation of company property by employees either for one’s own use or for sale to another’ (Greenberg, 1995, p. 154), and has been established as a very prevalent and costly crime (Westcott, 2006; Flandez, 2008; Hart, 2008). It has been estimated that up to 75 percent of employees have stolen from their employers on at least one occasion (McGurn, 1988), and that this form of theft costs US employers up to $994 billion annually (Association of Certified Fraud Examiners, 2008). Accordingly, managers have clear and compelling reasons to combat this insidious threat to their organization. In some cases, due to the criminal nature of the offense, employers may file charges against the offender so that a court may determine guilt and administer punishment in the criminal justice system. In order for this to occur, the court relies on a body of evidence to establish the guilt of the offender. This chapter concerns itself with evidence of a different kind – specifically an evaluation of the body of research that has examined how to reduce the occurrence of employee theft. Prior reviews of the employee theft literature have described several distinct approaches to reducing employee theft (Greenberg, 1997a; Tomlinson and Greenberg, 2005), implicitly suggesting that they are mutually exclusive categories. Furthermore, representatives of some approaches openly criticize the efficacy of the proposed interventions from other perspectives (for example, Gross-Schaefer et al., 2000). The diverse and ostensibly competing array of perspectives on reducing employee theft calls for a systematic examination of the extant research in an effort to discern what is known and what is yet to be discovered in addressing this practical problem. Toward this end, this chapter will summarize the competing perspectives for reducing employee theft, and then provide an integrative synthesis (Rousseau et al., 2008) that examines the evidence regarding each perspective. These efforts will culminate in a conclusion that establishes the current state of evidence on reducing employee theft, and frames the most pressing needs for future research in this area. Competing perspectives for reducing employee theft Given the magnitude and prevalence of employee theft throughout the economy (and particularly within especially vulnerable industries such as retailing), three primary perspectives on the origins of employee theft have emerged (Greenberg, 1997a; GrossSchaefer et al., 2000; Niehoff and Paul, 2000; Kidder, 2005; Tomlinson and Greenberg, 2005, 2007). Each perspective attributes employee theft to a distinct cause, with direct implications for the most suitable intervention. These perspectives are summarized in Table 11.1. 231

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Table 11.1

Different perspectives on employee theft

Perspective

Reason for stealing

Appropriate intervention

Security orientation

Employees have the opportunity to steal because of lax controls

Individual differences orientation Social orientation

Employees have personality or demographic characteristics that make them prone to dishonesty Employees believe stealing is socially acceptable or an acceptable response to unfair treatment

Accountability, monitoring, and surveillance mechanisms (e.g., security cameras, regular audits, etc.) Honesty or integrity tests and/ or background checks as a selection tool Manage informal norms to convey that theft is unacceptable Manage perceptions of organizational justice to eliminate motive for theft

Many loss prevention experts tend to adopt what has been termed the ‘security orientation’ (Greenberg, 1997a; Tomlinson and Greenberg, 2005, 2007). Under this perspective, employees steal simply because they can: theft is an act of opportunism (Sandberg, 2003). Therefore, the most appropriate strategy for reducing theft is to reduce or remove the opportunity to steal via detection mechanisms such as accountability, monitoring, and surveillance (Bintliff, 1994; Purpura, 2002). Typical interventions include regular loss prevention audits and investigations, internal accounting control systems, security cameras, and restricted access areas (Sennewald, 1996). Criminologists and industrial-organizational psychologists tend to favor the ‘individual differences orientation’ (Greenberg, 1997a; Tomlinson and Greenberg, 2005, 2007). This perspective views employee theft as occurring due to certain personality and/or demographic characteristics that render them prone to steal (Ash, 1991). For example, Hollinger and Clark (1983) found that those who were young, faced economic pressures, and/or were emotionally unstable, were more likely to steal from their employers. According to this perspective, the most appropriate strategy for reducing theft is to identify those individuals most prone to theft via pre-employment honesty or integrity tests (Sackett, 1994), and/or background checks (Brown and Pardue, 1985). Finally, the most recently introduced perspective on employee theft is the ‘social orientation’ (Greenberg, 1997a, 1997b; Tomlinson and Greenberg, 2005, 2007). Under this perspective, employees engage in theft because they believe it is socially acceptable to do so, or they feel unfairly treated at work. Interventions based on this perspective focus on managing social norms and perceptions of organizational justice to eliminate motives for theft (Tomlinson and Greenberg, 2005, 2007). These perspectives have generated some controversy among employee theft researchers. For example, one group of researchers (Gross-Schaefer et al., 2000) recently argued that traditional approaches to dealing with employee theft were ‘negative and reactive’ (p. 89) and ‘fail to deal with the root issues’ (p. 91), and a more proactive approach of treating employees fairly would be more effective. Echoing a similar sentiment, Litzky et al. (2006) suggested that monitoring of employees conveys distrust and creates ‘a self-fulfilling prophecy when the employees then live down to managers’ expectations’

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(p. 95). Brown et al. (1987) contend that the techniques used in the security orientation can be easily circumvented by employees motivated to do so, and must be detected through the use of an integrity test. The evidence for reducing employee theft Given the variety of perspectives on employee theft, and the controversy surrounding the most effective approach, this chapter will review the available behavioral science research that directly deals with attempts to reduce employee theft. This is in recognition of the need for evidence to inform management practice (Rousseau, 2006) instead of managers relying on intuition, fads, or ideologies. Because employee theft is a rampant problem across many industries and occupational levels, practicing managers will need the very best tools that researchers can provide to combat this problem. Accordingly, this chapter focuses on studies that have attempted to directly measure the effectiveness of an intervention in reducing employee theft, as opposed to the many other studies that have been observational or correlational (for a recent review, see Greenberg and Tomlinson, 2004b). Specifically, these studies employ some variation of the experimental method in an applied setting, which is necessary for determining the efficacy of proposed interventions. ‘Quasi-experiments’ allow for a comparison of the effect of an independent variable manipulation between treatment and control groups in a naturalistic setting, even though random assignment to groups is not possible and control over extraneous variables is limited (Campbell and Stanley, 1963; Whitley, 1996). ‘Time series quasi-experimental designs’ (Campbell and Stanley, 1963) paint a ‘before–after’ contrast where the results after an intervention are compared to a prior baseline period instead of a separate control group. ‘Situated experiments’ (Greenberg and Tomlinson, 2004a) import greater experimental control typical of laboratory experiments into the more naturalistic settings of the field. The process of evaluation in this chapter most closely resembles what has been termed an ‘integrative synthesis’ (Rousseau et al., 2008), whereby studies of an intervention are systematically conducted. In this case, since there are several approaches to reducing employee theft (each with its own preferred interventions), this chapter endeavors to cover the extant research on each of them. According to Rousseau et al., integrative syntheses evaluate primary studies along the following criteria: (a) construct validity of variables, (b) aspects of internal validity including covariation, temporal precedence, and non-spuriousness, (c) generalizability, and (d) contextualization or boundary conditions. Since this review will cover only studies that have captured the effects of interventions to reduce employee theft, the internal validity aspects of covariation and temporal precedence are already established. This synthesis identified intervention studies within each of the three major perspectives on employee theft reviewed above. Intervention studies relying on a security orientation paradigm have drawn upon reinforcement theory to specify the effects of certain contingent consequences in reducing employee theft. Research on the individual differences orientation has generally tested the effectiveness of using a pre-employment integrity test in reducing employee theft. Finally, interventions representing the social orientation have attempted to reduce employee theft by either managing social norms regarding theft or enhancing perceptions of organizational justice. Each group of studies will be reviewed in turn.

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Research on the security orientation Reinforcement theory (Skinner, 1971) has enjoyed a very influential position within organizational behavior, resulting in specific types of programs (usually referred to as ‘behavior modification’) that apply principles of the theory in actual work settings. Based on the premise that behavior is a function of its consequences, behavior modification techniques focus on the arrangement of specific consequences based on certain contingencies. In fact, even such simple interventions as a feedback mechanism to chart desirable behavior can result in a dramatic improvement in performance (‘At Emery Air Freight’, 1973). Studies based on reinforcement theory are relevant to the security orientation, as the focus is on detecting the presence of desirable/undesirable behavior and administering corresponding consequences. Marholin and Gray (1976) used instructions and group response-cost procedures (deducting cash shortages from cashiers’ pay when losses exceeded a predetermined threshold) to reduce cash shortages in a small family-style restaurant. A response cost is simply the removal of a reinforcer based on some contingent, undesirable response; in turn, this causes the response to be suppressed in the future. Specifically, among this group of six cashiers, whenever total cash shortages exceeded 1 percent of total daily sales, the pay for this group as a whole was reduced by that amount. Due to the technology employed at the time of the study, it was often difficult to pinpoint cash shortages to a specific employee, so the response cost was applied to the group of cashiers. The study occurred over a period of 41 days (with the pay deduction needing to be invoked only three times). The researchers collected intial baseline shortage data, an initial responsecost period, a second baseline, and a final response-cost period. Cash shortages were significantly affected by the presence or absence of the response cost. The mean daily shortages were: 4.02 percent for the initial baseline period, 0.43 percent for the initial response-cost period, 4.16 percent for the second baseline period, and 0.04 percent for the final response-cost period. McNees et al. (1979) conducted a product identification study where after-hours employees in a university snack bar were provided with feedback regarding type and amount of stolen food, along with the timeframe in which theft occurred. Specifically, employees were scheduled to re-stock the store from 11 pm to 1 am every night. The manager inventoried key theft items (potato chips, milk, ice-cream bars, and sandwiches) immediately after the shop closed at 11 pm and again after the stockers left at 1 am. A reliability check of a sample of inventories by two independent observers indicated that the measures of theft were highly accurate. An initial baseline period established the amount of theft for each key item. In the following phase, a sign posted near the time clock indicated how many bags of potato chips were stolen over the last 10 days, and asked for employees’ help in correcting this problem. In the next phase, the initial sign was replaced with another one indicating that theft of potato chips went down, but theft of milk went up. Again, a plea was made to employees for help in reducing this problem. The next sign to appear indicated that theft was almost nil for potato chips and milk, but asked for employees’ help in reducing theft of ice-cream bars. Finally, the last sign commended employees for the elimination of theft of chips, milk, and ice-cream bars, but proceeded to ask for help in reducing theft of cold sandwiches. The intervention appeared to be very successful, as the rate of theft across all key items was 13 items per five days to one item per five days.

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In another study, Gaetani and Johnson (1983) examined the independent and combined effects of data plotting, praise from supervisors, and state lottery tickets in reducing cash and inventory shortages (measured as an ‘efficiency estimate’) in a sample of 12 retail beverage stores. Thus, they were interested in the effects of positive reinforcement (instead of punishment) as a behavior management technique. Each of the 12 stores had a store manager who was solely responsible for cashier duties. Following the 21-week initial baseline period, the store managers were to begin posting their respective weekly efficiency estimates on a graph in their store provided for this purpose (with data from the prior 21 weeks already supplied). During the next phase, managers received praise from their plant manager (two levels above them) if their performance was better than the mean baseline level, but the graphs were not used in this phase. In the following phase, the data plotting and praise interventions were combined. Then, data plotting and praise were combined with a tangible reward of two state lottery tickets given to store managers for each week their efficiency estimates exceeded the baseline. Finally, the last phase returned to baseline conditions. Gaetani and Johnson found that the inclusion of the lottery tickets (a small yet tangible reward) had the most beneficial effect. They also found that the efficiency estimates at the end were higher than the initial baselines (yet lower than in the reinforcement conditions) for all three groups. In contrast to Marholin and Gray (1976), this suggests that some beneficial impact remained after the intervention was no longer in effect. Carter et al. (1988) informed grocery store employees of the most frequently stolen items in three categories (candy, personal hygiene, and jewelry) and posted bi-weekly graphs of those losses by category in the employee breakroom. The study took place in an independently owned and operated grocery store in Sweden that employed 60 workers. Tracking the sales of target items was enabled by the use of optical scanning cash registers that were able to read the bar codes on product packaging, and the rate of theft was computed by subtracting actual stock on hand to calculated stock. The study tracked this rate over the course of multiple baselines. During the initial phase, baseline measures were taken. In the second phase, an employee meeting was conducted to inform them of the purpose of the study, and to list the 10 most frequently stolen candy items and chart their baseline losses. The list and chart were posted in the breakroom, and the chart continued to be updated. The third phase occurred two weeks later, when employees received a list of the most frequently stolen personal hygiene items and a chart of those losses. After an additional 1½ weeks, the jewelry items and graph were added. Following each intervention, theft in the affected category fell and remained below its baseline for the duration of the study. Overall, theft from these categories went from an average of eight per day to two per day after the intervention. Carter and Holmberg (1992) used point-of-sale signage and public identification of high-risk items to reduce product theft in a Swedish grocery store. The study identified and tracked nine personal hygiene items over 15 weeks. Specifically, two signs were posted at either end of the personal hygiene aisle of the store that read, ‘Customer! Items marked with a red circle are frequently stolen by shoplifters!’ (English translation). A small red circle was placed on the edge of the shelf where each target item was stocked. An initial baseline phase tracked thefts of these items before the intervention. Then the signs and red circles were posted and left on display for the duration of the study. Measures of theft were taken five and 15 weeks after the intervention was initiated.

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Table 11.2

Summary of intervention studies conducted to reduce employee theft: security orientation

Study

Findings

Marholin & Gray, 1976

Docking the pay of cashiers (as a group) when shortages exceeded a set percentage of daily sales reduced cash shortages Informational signs decreased product theft among employees in a fast-food snack bar Small rewards (lottery tickets), praise from supervisors, and data plotting were effective in reducing cash and inventory shortages in retail stores Bi-weekly graphing of frequently stolen items reduced product theft in a grocery store Product identification (noting high-theft items with pointof-sale signage and red dots) reduced product theft in a grocery store Posting total monetary loss and total items missing reduced product theft in a drug store

McNees et al., 1979 Gaetani & Johnson, 1983

Carter et al., 1988 Carter & Holmberg, 1992

Oliphant & Oliphant, 2001

Following the intervention, theft of these items was almost completely eliminated at both measurement periods. Finally, Oliphant and Oliphant (2001) extended the posting technique by displaying total monetary loss and total missing items to isolate and reduce employee theft in a drug store. This is in contrast to publicly announcing the posting of specific target items (McNees et al., 1979; Carter et al., 1988), which was unable to determine if the theft reduction was due to employees stealing less or being more vigilant over shoplifting. Informing employees of specific items being monitored may encourage them to avoid stealing those particular items (but not necessarily non-targeted items) and to monitor those products for shoplifting. During the 12-week study period, 18 high-theft items were identified and inventoried by one researcher and an assistant twice daily (once before opening, and again after closing). Item by item, the researchers subtracted the amount sold from the daily reduction in inventory to calculate the amount of theft. For the first four weeks of the study, baseline data were collected (but not posted) for each of the items. After the fourth week, charts for both total number of missing items and total dollar amount of missing items began to be posted in the employee breakroom. Also, unlike earlier studies (McNees et al., 1979; Carter et al., 1988), there was no meeting or other kind of explanation given regarding the charts. However, encouraging comments were written on the charts (for example, ‘Fabulous’ or ‘Wonderful job’) with brightly colored markers to note positive trends in the data. During the baseline period, the average number of missing items was 28.5 items/week; this number dropped to 5.1 during the posting. A similar trend was observed for the dollar amount of targeted items ($177.67 during the baseline, $46.76 during the posting). These studies are summarized in Table 11.2. These studies will be evaluated in terms of construct validity, internal validity, generalizability, and contextualization in the following subsections.

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Construct validity The Marholin and Gray (1976) study focuses on cash shortages. This makes sense, as the group under study has routine access to cash. However, caution must be exercised when considering what we can learn about employee theft. Cash shortages can also conceivably occur due to unintentional error by the cashier in completing transactions as well as equipment or program malfunction (although the machines in this study were inspected ahead of time and found to be in working order), or by the manager counting the drawer at the end of the shift (although there was no significant difference between cash totals computed by the manager and the bank). In this study, it remains unclear whether the increased accuracy came from stealing less or greater cashier vigilance. In addition, this measure cannot detect any changes in other forms of theft, such as under-ringing merchandise, short-changing customers, and even stealing store merchandise. In Gaetani and Johnson (1983) the dependent variable is more comprehensive than that used by Marholin and Gray because of its inclusion of inventory, and one experimenter performed a reliability check on this measure during each phase that verified its accuracy. However, as with many measures of retail theft, this one is unable to distinguish between theft committed by employees compared to customers or vendors (McNees et al., 1979). The McNees et al. study focused on product theft as opposed to cash shortages, and is able to better capture employee theft because the measure is based on a time frame where theft from customers or vendors is not possible (that is, during the third shift when the shop was closed). Studies by Carter and his colleagues also focused on product theft; one study was only directed at employees (Carter et al., 1988) and the other involved an intervention that was directed at customers but would also have been noticed by employees (Carter and Holmberg, 1992). In both cases, they were unable to pinpoint whether theft was occurring due to employees or customers. Nonetheless, their measure of product theft had several advantages including the use of modern scanning equipment that enabled very accurate tracking of theft among the specified items, controls in place to adjust for damaged merchandise and delivery shortages, inventory that was conducted by two observers, and a reliability check between observers on inventories (which yielded 100 percent agreement). However, it appears that the researchers themselves conducted the inventory checks (Carter and Holmberg, 1992), which raises the possibility of bias in the theft measure. Finally, Oliphant and Oliphant (2001) purported to isolate shrink due to employee theft as opposed to shoplifting or other causes. Because their posting procedure did not specifically identify targeted items, they argued that employees would not know exactly what items to avoid stealing or watch more carefully to prevent shoplifting. Any reduction below the baseline, they argued, would be attributed to a reduction in employee theft. This would seem to presume that the level of shoplifting during the study period is constant, yet this variable may fluctuate considerably over time. There is also the possibility that the charts nonetheless prompted greater overall vigilance against shoplifting among the employees. Also, there were significant increases in both number of missing items and dollar value of missing items during the brief (four-week) baseline period, suggesting that shrink on the targeted items was somewhat volatile. This may have been inadequate to achieve a reliable baseline from which to compare intervention effectiveness. Nonetheless, one interesting finding was that after theft began to rise in the eighth and ninth weeks of the study, the chart was posted with the comment, ‘Can we lower

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this?’. Theft fell dramatically the following week, suggesting that the losses were due to employees instead of customers. Internal validity: non-spuriousness A clear limitation of these studies (Marholin and Gray, 1976; McNees et al., 1979; Carter et al., 1988; Carter and Holmberg, 1992; Oliphant and Oliphant, 2001) is that a more rigorous experimental method was not employed. There was no control group, and because intervention periods were compared to baseline periods within the same group, the potential influence of non-controlled variables (for example, history or maturation effects) cannot be eliminated or neutralized. In addition, the Carter and Holmberg study might be criticized on the grounds that their intial baseline data comprised 38 weeks while the intervention period only lasted 15 weeks, suggesting that a comparison of these time periods is not appropriate. In Gaetani and Johnson (1983) the group of 12 stores was matched in terms of the baseline efficiency estimate (the calculation of cash and inventory shortages) to form three groups, the last of which received no intervention at all until it received all interventions combined near the end of the study. While this allowed a comparison to be made between groups receiving an intervention to the one that did not, assignment to the conditions was not random and other factors may have contributed to the differences that resulted. In Oliphant and Oliphant, the intervention is confounded, as both the posting of the charts and the written feedback on them could have influenced the results. Generalizability Some of the sample sizes were very small. In Marholin and Gray (1976) there were only six cashiers in a single family-style restaurant. The McNees et al. (1979) study occurred in a single snack shop on a university campus, and the number of employees working during the time period in question was not even reported. Similarly, in Gaetani and Johnson (1983), the 12 store managers served as the only cashiers in their respective beverage stores. The studies by Carter and his colleagues both occurred in a single grocery store. Oliphant and Oliphant’s (2001) study consisted of a sample of eight stockers in a single drug store (that was part of a national chain), all of whom were women. Conceivably, these very small samples may have contributed to the decision to use a time-series quasi-experiment instead of a more rigorous experimental design (that is, inclusion of a control group). Despite the small samples, the general method of a behavior modification method to reducing theft appears to apply to several types of settings. Contextualization One very interesting aspect of the Marholin and Gray (1976) study is the penalty on the entire group instead of the specific cashier(s) with shortages. However, it should be noted that many modern cash management procedures in retail establishments (particularly large chains) have the ability to pinpoint specific individual cashiers whose drawers are short (or over) and by what amount, and punishing a group for what can now be clearly attributed to a specific offender may create more problems than it solves. In addition, the effect of the response-cost intervention seemed to disappear once it was withdrawn after the initial period, suggesting that this policy would need to stay in force for beneficial effects to continue. Oliphant and Oliphant (2001) also found evidence that the signs needed to be posted continuously in order to be beneficial. This is in contrast to the McNees et al. (1979) study, where once a key item was specifically mentioned

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in a sign, theft went down and remained low for up to three weeks later. Also, reductions in theft in their study did not occur until the specific item was mentioned in the sign. In other words, while the first sign noted the theft of chips, only theft of chips went down subsequently. Theft of other key items did not go down until they were specifically mentioned in subsequent signs. It is also unclear whether theft of other, non-key items measured in this study increased. Finally, while several studies (McNees et al., 1979; Carter et al., 1988; Carter and Holmberg, 1992; Oliphant and Oliphant, 2001) found that signage interventions reduced theft on the particular products they examined, another study found that product identification of cigarettes as a high theft item was associated with higher theft (Thurber and Snow, 1980). Summary In contrast to Marholin and Gray (1976), the focus in Gaetani and Johnson (1983) was on positive reinforcement instead of punishment to reduce cash shortages. Several studies examined some form of signage to convey the incidence of product theft, and this seemed to be effective across different settings. It is also noteworthy that, taken together, these theft reduction interventions involved very minimal costs to the employer. It also appears that the penalty does not need to be large to be an effective deterrent to cash shortages (Marholin and Gray, 1976). Notwithstanding, these studies, while positing that their effects were due to creating the perception of enhanced theft detection, do not represent stringent tests of the security orientation. The measure of theft was an aggregate figure, and incapable of being traced to any specific individual (much less whether that individual was an employee, customer, or vendor). The security orientation advocates surveillance and other forms of monitoring to isolate not only that theft is occurring, but also who in particular is guilty of this crime. While security specialists contend that such interventions work, I was unable to locate any intervention studies confirming this claim. This is a critical point, as others have argued that monitoring is ineffective because it motivates employees to discover ways to ‘beat the system’ (Brown et al., 1987; Taylor and Prien, 1998). Research on the individual differences orientation As indicated earlier, the individual differences orientation presumes that employees steal due to certain personality or demographic characteristics. A common approach to deal with theft on this basis involves the use of honesty or integrity tests, and intervention studies have been conducted to verify the efficacy of this approach. Terris and Jones (1982) tested the effectiveness of a commercial pre-employment integrity test (the Personnel Selection Inventory, or PSI) in a 30-unit chain of convenience stores. The PSI is a self-report psychological test that measures the respondent’s attitudes toward theft. It consists of three subscales that measure attitudes and values regarding theft, violence, and drug and alcohol abuse. This longitudinal study took place over 42 months, where the pre-employment test for the first 23 months was a polygraph test. During the following 19 months, the PSI was used instead. The monthly per-store shrink rate decreased significantly by 52 percent. Shrink as a percentage of sales also decreased significantly. Brown and Pardue (1985) tested the PSI in a chain of 53 drug stores operating primarily in the southeastern US and employing approximately 700 employees. The chain had a standing policy to administer annual polygraph tests to its employees and contracted

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a variety of independent polygraph firms for this purpose. Based on the polygraph test, examiners assigned either a passing or a failing score to each employee. (Employee PSI scores were not available to polygraph examiners.) A failing score was an indication of some admission or sign of deception. The PSI was also administered to all applicants during the study, and only those passing the PSI were hired. In the three years following the introduction of the test, the percentage of employees passing their annual polygraph test significantly increased, and shrinkage significantly decreased (by over one million dollars). Brown et al. (1987) investigated the application of the PSI as a selection tool to a chain of home improvement stores in the western United States over a five-year period. By the fifth year of the study, the number of employees reached approximately 4,000. The first three years of the study provided baseline data on turnover due to employee theft, drug abuse, and violence. During the final two years of the study, the PSI was added as a selection test. After the PSI was added as a pre-employment test, there was a 50 percent reduction in employee terminations for theft, illegal drug use, and violence, and a signficant reduction in shrink (over two million dollars). A study by Jones et al. (1990) employed a quasi-experimental design in testing the effectiveness of unidentified, professionally developed integrity tests on employee estimates of theft committed by an ‘average employee’. Specifically, six large supermarket chains participated in the study; two of these chains used integrity tests as part of their employee selection battery. These chains employed ‘a variety of overt integrity tests; thus, this research is not tied to one specific test publisher’ (p. 276). The other chains did not use integrity tests, and accordingly served as the control group. An anonymous survey was sent to one randomly selected employee from each store in the six chains (one employee was selected to minimize any effect of subject pool contamination). A total of 504 surveys were mailed, and 234 were used in the analyses. The dependent variable in this research was the respondent’s estimate of the weekly dollar amount of theft from the ‘average employee’. Results supported the prediction that theft was perceived to be significantly higher at chains that did not use integrity tests. Previous studies rely on integrity tests to identify applicants who may be prone to theft in order to avoid hiring them into the organization. Such tests often include a measure of ‘thrill seeking’ that predicts deviant behavior such as employee theft (Hogan and Hogan, 1989). One intriguing study by Latham (2001) took a different path to the same end. Noting that theft often occurred in a forest products company due to the thrill of engaging in such behavior, a system was put into place that removed the challenge and excitement from theft and a goal was set to lower theft from one million dollars a year to zero (that is, a difficult and specific goal). Specifically, confidential interviews with a sample of the mill’s 1,200 employees were conducted to understand why theft occurred (and not specific allegations or admissions of specific theft incidents). Based on the interviews, it was decided to support supervisors who insisted on and monitored honest behavior and to employ a method that would remove the ‘thrill’ from stealing. This was accomplished by instituting a library system so employees could begin to borrow all items that had previously been stolen. They further announced ‘amnesty days’ where company property could be returned ‘with no questions asked’. Property was returned by the truckload, theft dropped to virtually zero immediately and remained at a trivial level for three years following the intervention.

Reducing employee theft Table 11.3

241

Summary of intervention studies conducted to reduce employee theft: individual differences orientation

Study

Findings

Terris & Jones, 1982

Used the Personnel Selection Inventory (PSI) as a selection test to reduce shrinkage at a large chain of convenience stores Used the PSI as a selection test to reduce shrinkage at a large chain of drug stores Used the PSI as a selection test to reduce shrinkage at a chain of home improvement stores Integrity tests were associated with reduced theft perceptions in two supermarket chains compared to a control group A goal to reduce theft and introduction of library system led to reduction in theft in a forest products company

Brown & Pardue, 1985 Brown et al., 1987 Jones et al., 1990 Latham, 2001

These studies are summarized in Table 11.3. They will be evaluated in terms of construct validity, internal validity, generalizability, and contextualization in the following subsections. Construct validity The measure of theft used by Terris and Jones (1982) and Brown and Pardue (1985) was shrinkage, which may consist of losses other than theft (for example, product expiration, damaged merchandise, shoplifting, vendor theft, and so on), especially in a retail setting such as convenience stores and drug stores. In Brown and Pardue’s study, the method of calculating shrink changed during the course of the study, posing problems in interpreting changes in this dependent variable. In the study by Brown et al., selection based on the PSI was associated with a reduction in overall terminations (due to causes including employee theft, drug abuse, and violence). It is problematic that there was no measure of termination for employee theft alone. The dependent measure in the study by Jones et al. (1990) asks how much theft the employee perceives is typical at his/her store instead of using an actual, objective measure of theft reduction. Asking respondents for what behaviors are typical of their peers is intended to minimize problems associated with self-report data on a sensitive topic. The measure of property theft in Latham (2001) was never explicitly defined, so it is not clear how the company was able to detect the degree of theft. The validity of the integrity tests themselves should also be addressed. Most of these intervention studies relied on the PSI, although some others were not identified (rendering it impossible to demonstrate their validity). In general, there is a large body of research attesting to the validity of integrity tests (Murphy, 1993; Ones et al., 1993; Sackett, 1994). However, some researchers have criticized these tests for having limited validity and generating too many ‘false positives’ that inaccurately label applicants as prone to theft (Dalton and Metzger, 1993; Dalton et al., 1994). Unfortunately, space limitations preclude dealing with this issue in more depth. Internal validity: non-spuriousness As with the time-series quasi-experimental designs typical of empirical research concerning the security orientation, the studies on the PSI

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are unable to completely rule out changes in non-measured variables that influence the dependent variable (as no control group was employed). In addition, strong inferences of causality are precluded; a relationship between the PSI score and theft could indicate a variety of possible interpretations (Tomlinson and Greenberg, 2005). In addition, applicants in these studies were only hired if they passed the PSI and all other pre-employment tests (Brown et al., 1987; Brown and Pardue, 1985). With the exception of Brown et al., indicating that no other major personnel selection or loss prevention policy changes occurred during the study period, it is not clear from the studies if the initiation of the PSI was the only change in the pre-employment test battery during the study periods. On the other hand, administering the PSI offers a standardization often lacking in other techniques such as polygraphs and background checks (Brown et al., 1987). In addition, some studies were conducted over a long enough period to account for seasonal fluctuations and business cycles, such as the five-year study by Brown et al.. The study by Jones et al. (1990) is notable for its inclusion of a control group; however, random assignment to conditions was not possible (rendering this study a quasi-experiment), and the presence or absence of an integrity test was not able to be examined within a supermarket chain. Thus, there may be other systematic differences between supermarket chains besides integrity tests that explain the results. In addition, there was no pre-intervention measure establishing equivalence between the two groups before integrity tests were administered. Generalizability The PSI produced a similar pattern of results across different settings (drug stores and convenience stores and home improvement stores). A variety of integrity tests also appeared beneficial in supermarkets. In addition, some of these studies employed fairly large samples (Brown et al., 1987; Jones et al., 1990). The novel approach taken by Latham (2001) is likely to only be effective in settings where theft occurs ‘as a way for people to experience excitement in the workplace’ (p. 715). Contextualization The intervention studies in this category do not provide any specific insight regarding what boundary conditions may be at work. Summary One interpretation of this body of work is that cultivating a workforce with intolerant attitudes toward theft can create a culture of honesty that significantly combats the epidemic of employee theft (Brown and Pardue, 1985). There is also some indication that since theft can occur due to different reasons, solutions should be carefully tailored to their precise cause (Latham, 2001). Research on the social orientation Empirical intervention studies falling under the social orientation category have dealt with enhancing perceptions of organizational justice and managing norms with ethics programs. Organizational justice deals with employee perceptions of fairness, and these perceptions center around distributive justice (the degree to which employees receive deserved outcomes: Adams, 1965), procedural justice (the degree to which procedures used to determine outcomes are fair: Thibaut and Walker, 1975), and interactional justice (the degree to which the decision maker conveys information in a respectful manner: Bies and Moag, 1986). Perceptions of unfairness may motivate employees to retaliate

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against their employers by stealing (Greenberg and Tomlinson, 2004b; Tomlinson and Greenberg, 2005, 2007). Greenberg (1990) performed a quasi-experimental study to reduce asset shrinkage in a company that operated three manufacturing plants in the midwestern United States. Serious financial problems due to the loss of two major contracts compelled top management to impose a 15 percent pay cut for all employees in two of the plants for a 10-week period. The third plant served as the control group, as it consisted of demographically similar employees in the same types of jobs who did not receive a pay cut. Furthermore, the explanations given to employees for the pay cut differed among the two affected plants. In one plant (randomly selected to receive this condition), the pay cut announcement was made during a very brief (15-minute) meeting conducted by a junior executive. The only justification for the pay cut was that the company had lost two major contracts, but no further information was provided. The executive also did not convey any remorse or apology for this course of action. In the other plant, the president of the company conducted a personal visit that lasted approximately 1½ hours. He brought extensive materials outlining the temporary but dire financial condition of the firm and all of the various options the top management team had considered to avoid insolvency. The pay cut was deemed the best option as it would at least avoid layoffs. The president conveyed that the pay cut applied to all employees, including the top management team, and repeatedly expressed remorse for having to resort to such drastic measures. This study allowed for a test of both distributive justice (that is, when employees experience an underpayment inequity, they are more likely to rectify the inequity by stealing) and interactional justice (that is, thorough information conveyed in a socially sensitive manner can mitigate the likelihood of employees stealing in response to the inequity). As predicted, theft increased in the plants receiving the pay cut (relative to the control group) during the 10 weeks the reduction was in effect, yet theft rates were uniformly low among all three plants before and after the pay cut. From an intervention perspective, the more critical finding of the study was that enhancing the explanation given for the pay cut led to a theft rate that was less than half of the rate for the plant receiving the inadequate explanation (although even the plant with the adequate explanation had higher theft than the control group). Furthermore, a survey confirmed that employees in the plant with the inadequate explanation felt that they were treated more unfairly than those in the plant with the adequate explanation. Greenberg (1999) performed another intervention study that was designed to reduce employee theft by training managers in ‘interpersonal justice’ (that is, delegation, information sharing, respectful communication, and other topics related to fairness). The study was conducted in three convenience stores of the same chain, and all three of these stores were experiencing a high degree of asset shrinkage from areas where access was confined to employees. A pre-experimental survey of employees indicated that many of them felt very unfairly treated by their managers (for example, low pay, rude treatment, little information given to support decisions). One of the stores was selected at random to receive training for its managerial staff in interpersonal justice (IJT), while the other two stores served as control groups (that is, the second store was selected for training in an unrelated area, and the third store received no training at all). In the stores receiving training, no mention was made of theft reduction as a goal. Training took place for approximately two hours a week for eight weeks and employed various exercises and

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case studies. After the training, the theft rate in the IJT store decreased from approximately 8 to 4 percent, and maintained that level for six months thereafter. On the other hand, there was no change in theft in either of the two control groups. This study is especially remarkable in that the theft reduction reported here was a complete departure from training in typical loss prevention methods (Tilley et al., 1999). Unfortunately, a comprehensive review of this study is not currently possible because the manuscript is not in the public forum (for example, conference paper, journal article and so on). Finally, Greenberg (2002) conducted a situated experiment testing the effectiveness of a comprehensive ethics program in reducing theft of money. In a sample of customer service representatives working for the same financial services company across different locations of the United States, a comprehensive ethics program had been rolled out to a subset of offices six months earlier (with the remaining offices to receive the program after the study). This served as a naturalistic independent variable manipulation. The ethics program provided employees with 10 hours of training in ethics that consisted of a review of ethical principles, how to apply those principles in their job, practice sessions, and how to seek additional ethical guidance when necessary. Employees in both groups of stores were asked to participate in a one-hour study after their shift where they were promised a fair (yet unspecified) amount of pay in return for completing a survey on the physical layout of the office. Each employee took the survey individually. They were then underpaid by announcing that their actual pay would be much less than what was expected. Specifically, pilot testing determined that employees perceived $9.84 to be fair, yet they were actually paid $2.00. They were then asked to pay themselves out of a bowl of pennies that was always at the front of the training room (and frequently used for training purposes), as the experimenter had to leave the room to administer another survey. Before leaving, the experimenter took some additional change out of his pocket and placed it in the bowl in order to apparently ensure that enough money was in the bowl for the subject to pay him- or herself, but also to convey that the exact amount of money in the bowl was unknown (providing precise experimental control in determining theft). In every case, there was $4.64 in the bowl. Amounts taken in excess of $2 constituted theft. As predicted, theft was lower at the offices that had received the ethics training than the offices that had not. Furthermore, the ethics training had even more beneficial effects among those employees that had attained the conventional level of moral development. These studies are summarized in Table 11.4. They will be evaluated below in terms of construct validity, internal validity, generalizability, and contextualization, respectively. Table 11.4

Summary of intervention studies conducted to reduce employee theft: social orientation

Study

Findings

Greenberg, 1990

Explanations with high information and social sensitivity reduced asset shrink after a 15% pay cut in a manufacturing setting Training managers in interpersonal justice reduced asset shrink by convenience store employees Providing a comprehensive ethics program reduced theft of money

Greenberg, 1999 Greenberg, 2002

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Construct validity Contrary to the use of shrink as a proxy for employee theft in retail settings, Greenberg’s (1990) use of asset shrinkage in a manufacturing setting likely offers a more precise estimate. Unlike retail stores, shrink calculations in manufacturing would not be affected by factors such as shoplifting by customers and product expiration dates. Furthermore, company officials unobtrusively collected the shrink measure weekly, and were blind to the experimental hypotheses. With respect to the key intervention, although the explanations were not scripted, they were videotaped, and ratings from a sample of undergraduate students confirmed the experimental manipulation. In Greenberg (1999), the measure of asset shrinkage in the convenience stores largely ruled out the possible contamination of theft by customers. Finally, in Greenberg (2002), the measure of employee theft taken here can be directly attributed to a specific individual, unlike the other studies that have employed aggregate measures (where loss could be due to unspecified origin, and not wholly employee theft) or perceptions (that could be subject to recall and other biases). This measurement approach is also consistent with other research on theft in social psychology (for example, Diener et al., 1976). Internal validity (non-spuriousness) Greenberg (1990) demonstrated the equivalence of worker demographic and job-level characteristics, as the assignment of plants to experimental conditions was not random, and collected measures of shrink before the intervention (which established that there were no significant differences among plants at this point in time). Typical of quasi-experiments, it was impossible to rule out any differences in unmeasured variables that may have influenced the findings (such as different norms regarding theft). He also noted that the experimental manipulation employed confounded the degree of information and the sensitivity in which it was presented. A follow-up laboratory investigation using a student sample rectified this issue, finding that information adequacy and social sensitivity had both indendent and additive effects in mitigating theft following an underpayment inequity (Greenberg, 1993). In Greenberg’s (2002) situated experiment, it was again confirmed that no significant worker characteristics existed between the offices with and without the ethics program. Company managers assured that employees voluntarily agreeing to participate in the study did not differ from the overall employee population. In addition, since employees participated individually, there is the possibility that some employees may have learned about aspects of the study from others who went before them. However, the experimenter conducted individual debriefing sessions that asked employees not to discuss their experience with others until after the study, and an analysis of the data did not reveal any significant differences depending on when employees participated. Generalizability While Greenberg’s (1990) study took place in manufacturing plants, several types of job were represented (low-level management, hourly wage semiskilled and unskilled production workers, and clerical employees). Greenberg (1999) reported similar beneficial effects of enhanced interactional justice on asset shrinkage via interpersonal justice training for convenience store managers. In Greenberg (2002), employees were primed to engage in theft by being underpaid, given an explicit opportunity to steal, and yet were only able to steal a very trivial amount of money (averaging less than 20 cents among those who stole). It is unclear how the findings would be affected in other settings with more money (or other assets) at stake.

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Contextualization The effectiveness of explanations with high information adequacy and social sensitivity employed by Greenberg (1990) are likely to be ultimately determined by how sincere and honest they are perceived to be by the recipients (Shapiro et al., 1994). Furthermore, Greenberg (2002) aptly summarizes the boundary conditions that can be gleaned: Previous studies (Greenberg, 1990, 1993) have shown that theft occurs among underpaid employees only when they are treated in an undignified and uncaring manner. However, the present findings reveal that such violations of interactional justice (Bies, 2001) are not necessary to trigger employee theft. Rather, employees who have been underpaid steal when conditions conspire for them to do so – that is, when they have an opportunity to take company funds without being caught, when no formal admonitions against employee theft exist, and when they have failed to attain a level of moral development that would discourage them from stealing. (pp. 997–8)

Summary Compared to the other perspectives on employee theft, there have been fewer intervention studies on the social orientation. This is understandable, as it is a much more recent approach to understanding employee theft. There has been one other study based on the social orientation that should be briefly mentioned in this regard. Shapiro et al. (1995) tested the relationship between procedural justice perceptions and employee observations of theft by peers after several interventions to enhance procedural justice were implemented, including soliciting employee input in defining theft and drafting a code of ethics. Because no baseline data were collected before the intervention, it is not possible to determine if the intervention reduced theft (that is, technically, this is not an intervention study). Overall, the few social orientation intervention studies that have been conducted to date were very rigorous in comparison to studies falling under the other perspectives (for example, use of control groups, establishing pre-intervention similarity, more precise measure of employee theft). Synthesis and conclusions At this point, we are prepared to inventory the available evidence at hand to determine what is known about reducing employee theft. Based on the preceding review, I shall synthesize the evidence to distinguish between what we can confidently claim in terms of reducing employee theft and what we cannot. I shall begin with the latter. Where is the evidence non-existent? A comparison between Table 11.1 and the remaining tables immediately reveals that there are many gaps between what is argued in the various perspectives on reducing employee theft and empirical intervention studies that confirm (or refute) the advocated interventions. In other words, despite the many bold proclamations, there is a dearth of evidence. For example, while the practitioner literature often strongly advocates certain interventions, there is no rigorous scientific confirmation of the efficacy of some of these interventions (for example, specific auditing procedures, hidden cameras, background checks and so on). Returning to an earlier example, the security orientation strongly advocates monitoring and surveillance (for example, Bintliff, 1994), while others argue that this approach may actually stimulate theft by motivating employees to find ways

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to ‘beat the system’ (Brown et al., 1987). Absent credible empirical evidence, we are left to wonder which allegation is true. To maintain credibility, researchers must take special care to ground their recommendations on rigorous evidence instead of anecdotes, speculation, or ideology. Of course, there are many observational and correlational studies that have suggested plausible interventions (Greenberg and Tomlinson, 2004b; Tomlinson and Greenberg, 2005), but have yet to be subjected to the stronger scrutiny that comes from an experimental study. For example, standing groups may develop norms over time that condone or explicitly encourage certain forms of theft (Mars, 1974). Therefore, rotating group membership and providing confidential corporate hotlines may inhibit the formation of these norms (Tomlinson and Greenberg, 2005), but to date no intervention studies have confirmed this notion. Other possibilities can easily be envisioned as well. Greenberg (1990) provided evidence that a pay cut is perceived as a distributive injustice and results in higher employee theft than a control group in the same company. Extending this line of reasoning suggests that paying competitive wages and benefits would lead to a reduction in employee theft. Observational studies (Dalton, 1959; Ditton, 1977; Mars, 1982), anecdotal reports from practitioners (Filipowski, 1993; Greengard, 1993), and suggestions from researchers (Niehoff and Paul, 2000) suggest that this is the case, but we have yet to see rigorously conducted intervention studies to verify that this is the case. Where is the evidence weak? As reviewed above, several of these intervention studies suffer from critical limitations. One particularly vital area for future research to address is the conceptualization and operationalization of employee theft. Many dependent measures suffered from contamination (for example, unable to distinguish between employee theft versus theft from customers, vendors). More research using precise measures of employee theft (Greenberg, 2002) can be utilized by constructing situated experiments (Greenberg and Tomlinson, 2004a). Another issue of concern is the nature of some independent variable manipulations used in intervention studies. In any intervention, it is vital to understand precisely what is causing an effect. Thus, it is important to control for as many extraneous variables as possible, and avoid confounds in the independent variable manipulation. For example, the signs posted by McNees et al. (1979) might be argued to contain the elements of interactional justice, insofar as they provided thorough information regarding what was being stolen and when, as well as social sensitivity by expressing appreciation to employees when theft subsequently decreased. In the study by Oliphant and Oliphant (2001), it is difficult to disentangle the effect of the posting of theft data itself from the written remarks of encouragement and praise (which again might suggest the role of interactional justice). What evidence is the strongest? The available evidence does tell us several important points about reducing employee theft. First, behavioral modification (especially through data posting) is associated with a reduction in shrink for many items, and it is very likely that at least a significant portion of that reduction is due to less theft from employees. It is not clear how long the

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effect lasts or how long the posting must take place to maintain the effect. Second, the use of integrity tests (especially the PSI) as a selection device does lead to a reduction in shrink in various retail settings. Given the nature of the intervention as a hiring tool, it is extremely likely that much of this theft reduction is due to lower employee theft. This finding is despite the arguments of very vocal critics of this intervention (Dalton and Metzger, 1993; Dalton et al., 1994). Third, the evidence indicates that social norms are affected by the presence of a comprehensive ethics program, such that the program leads to less theft. In addition, employees steal less when they are not paid inequitably and when they receive a high degree of interactional fairness. Taken together, there is sound evidence for aspects of each perspective. The assertions by some researchers that the interventions proposed by other perspectives are ineffective are currently without merit. While some researchers favor the obviously noble prescription of fair treatment of employees inherent in the social orientation (for example, GrossSchaefer et al., 2000; Everton et al., 2007), each perspective has its evidence-supported virtues as well as its shortcomings. For example, the limitations of the organizational justice approach should also be pointed out: some people will steal no matter how fair you are to them. It is apparent that no single approach is sufficient to eradicate theft. Given this evidence-based set of conclusions, it is critical to now proceed with rigorously conducted research on interventions where we are currently lacking empirical evidence. Furthermore, considering the support that exists for each perspective, the time appears ripe for beginning to examine how each of these perspectives interrelate with the others. Instead of competing, it may be more plausible that they are (or can be) mutually reinforcing. For example, the social orientation might be best understood as a complement to other approaches to theft reduction, rather than a necessary replacement the other approaches altogether (Tomlinson and Greenberg, 2007). That is, the social orientation may provide the means to enact the traditional interventions more effectively (for example, Alge et al., 2006). As one illustration, Marholin and Gray (1976) specifically recommended providing employees voice before implementing behavioral modification interventions to enhance employee acceptance. Furthermore, the intervention that imposed a penalty on the entire group when cash was short may have been more effective due to its influence on informal group norms that in turn facilitated greater cashier accuracy (Tomlinson and Greenberg, 2005). Indeed, Niehoff and Paul (2000) state that a ‘multifaceted approach will be most effective’ (p. 61). Greenberg (2002) echoes this sentiment by noting, ‘Although each of these orientations contributes somewhat to our understanding of theft behavior, it is clear that no single approach paints a complete picture. Instead, elements of all these approaches appear to be involved’ (p. 986). Kidder (2005) argues how each of these different perspectives can be integrated, and this type of theory-building can pave the way for future intervention studies that span each perspective on reducing employee theft. In closing, it cannot be overstated exactly how challenging it is to conduct rigorous intervention studies on a phenomenon such as employee theft. It is by nature a surreptitious activity, rendering it extremely difficult to isolate precisely. In addition, researchers have difficulty finding organizations willing to participate in scientific research. This may be due to some company managers fearing what the findings may reveal about their level of proficiency in dealing with theft. Or, when theft is detected, management may

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decide to act so quickly that rigorous research is not possible (Terris and Jones, 1982). Nonetheless, employee theft has clearly been established as a pressing management concern, and worth our best scholarly efforts to eradicate. References Adams, J.S. (1965), ‘Inequity in social exchange’, in L. Berkowitz (ed.), Advances in Experimental Social Psychology, Vol. 2, New York: Academic Press, pp. 267–79. Alge, B.J., Greenberg, J. and Brinsfield, C.T. (2006), ‘An identity-based model of organizational monitoring: integrating information privacy and organizational justice’, Research in Personnel and Human Resources Management , 25, 71–135. Ash, P. (1991), The Construct of Employee Theft Proneness, Park Ridge, IL: SRA/London House. Association of Certified Fraud Examiners (2008), Report to the Nation on Occupational Fraud and Abuse, Austin, TX: Association of Certified Fraud Examiners. ‘At Emery Air Freight: Positive reinforcement boosts performance’, (1973), Organizational Dynamics, 1, 41–50. Bies, R.J. (2001), ‘Interactional (in)justice: the sacred and the profane’, in J. Greenberg and R. Cropanzano (eds), Advances in Organizational Justice, Stanford, CA: Stanford University Press, pp. 89–119. Bies, R.J. and Moag, J.S. (1986), ‘Interactional justice: communication criteria of fairness’, in R.J. Lewicki, B.H. Sheppard and M.H. Bazerman (eds), Research on Negotiation in Organizations, Vol. 1, Greenwich, CT: JAI Press, pp. 43–55. Bintliff, R.L. (1994), Crime-proofing Your Business,. New York: McGraw-Hill. Brown, T.S., Jones, J.W., Terris, W. and Steffy, B.D. (1987), ‘The impact of pre-employment integrity testing on employee turnover and inventory shrink losses’, Journal of Business and Psychology , 2 (2), 136–49. Brown, T.S. and Pardue, J. (1985), ‘Effectiveness of personnel selection inventory in reducing drug store theft’, Psychological Reports , 56, 875–81. Campbell, D.T. and Stanley, J.C. (1963), Experimental and Quasi-experimental Designs for Research, Chicago, IL: Rand McNally. Carter, N. and Holmberg, B. (1992), ‘Theft reduction in a grocery store through product identification’, Journal of Organizational Behavior Management , 13 (1), 129–35. Carter, N., Holmstrom, A., Simpanen, M. and Melin, L. (1988), ‘Theft reduction in a grocery store through product identification and graphing of losses for employees’, Journal of Applied Behavior Analysis, 4, 385–89. Dalton, D.R. and Metzger, M.B. (1993), ‘“Integrity testing” for personnel selection: an unsparing perspective’, Journal of Business Ethics, 12, 147–56. Dalton, D.R., Metzger, M.B. and Wimbush, J.C. (1994), ‘Integrity testing for personnel selection: a review and research agenda’, Research in Personnel and Human Resources Management, 12, 125–60. Dalton, M. (1959), Men Who Manage, New York: John Wiley. Diener, E., Fraser, S.C., Beaman, A.L. and Kelem, R.T. (1976), ‘Effects of deindividuation variables on stealing among Halloween trick-or-treaters’, Journal of Personality and Social Psychology, 33, 178–83. Ditton, J. (1977), Part-time Crime: An Ethnography of Fiddling and Pilferage, London: Macmillan. Everton, W.J., Jolton, J.A. and Mastrangelo, P.M. (2007), ‘Be nice and fair or else: understanding reasons for employees’ deviant behaviors’, Journal of Management Development, 26, 117–31. Filipowski, D. (1993), ‘HR plays a direct role in decreasing employee theft’, Personnel Journal, April, 88. Flandez, R. (2008), ‘Stop that thief’, The Wall Street Journal, June 16, p. R6. Gaetani, J.J. and Johnson, C.M. (1983), ‘The effect of data plotting, praise, and state lottery tickets on decreasing cash shortages in a retail beverage chain’, Journal of Organizational Behavior Management , 5 (1), 5–15. Greenberg, J. (1990), ‘Employee theft as a reaction to underpayment inequity: the hidden cost of pay cuts’, Journal of Applied Psychology, 75, 561–68. Greenberg, J. (1993), ‘Stealing in the name of justice: informational and interpersonal moderators of theft reactions to underpayment inequity’, Organizational Behavior and Human Decision Processes, 54, 81–103. Greenberg, J. (1995), ‘Employee theft’, in N. Nicholson (ed.), The Blackwell Encyclopedic Dictionary of Organizational Behavior, Oxford: Blackwell, pp. 154–55. Greenberg, J. (1997a), ‘A social influence model of employee theft: beyond the fraud triangle’, in R.J. Lewicki, B.H. Sheppard and R.J. Bies (eds), Research on Negotiation in Organizations, Vol. 5, Greenwich, CT: JAI, pp. 22–49. Greenberg, J. (1997b), ‘The STEAL motive: managing the social determinants of employee theft’, in R. Giacalone and J. Greenberg (eds), Antisocial Behavior in Organizations, Thousand Oaks, CA: Sage, pp. 85–108. Greenberg, J. (1999), ‘Interpersonal justice training (IJT) for reducing employee theft: some preliminary results’, unpublished data, Ohio State University.

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Greenberg, J. (2002), ‘Who stole the money and when? Individual and situational determinants of employee theft’, Organizational Behavior and Human Decision Processes, 89, 985–1003. Greenberg, J. and Tomlinson, E.C. (2004a), ‘Situated experiments in organizations: transplanting the lab to the field’, Journal of Management , 30, 703–24. Greenberg, J. and Tomlinson, E.C. (2004b), ‘The methodological evolution of employee theft research: the DATA cycle’, in R.W. Griffin and A.M. O’Leary-Kelly (eds), The Dark Side of Organizational Behavior, San Francisco, CA: Jossey-Bass, pp. 426–61. Greengard, S. (1993), ‘Theft control starts with HR strategies’, Personnel Journal, April, 81–91. Gross-Schaefer, A., Trigilio, J., Negus, J. and Ro, C. (2000), ‘Ethics education in the workplace: an effective tool to combat employee theft’, Journal of Business Ethics, 26 (2), 89–100. Hart, K.M. (2008), ‘Not wanted: thieves’, HR Magazine, April 119–23. Hogan, J. and Hogan, R. (1989), ‘How to measure employee reliability’, Journal of Applied Psychology, 74, 273–79. Hollinger, R.C. and Clark, J.P. (1983), Theft by Employees, Lexington, MA: Lexington Books. Jones, J.W., Slora, K.B. and Boye, M.W. (1990), ‘Theft reduction through personnel selection: a control group design in the supermarket industry’, Journal of Business and Psychology, 5 (2), 275–79. Kidder, D. (2005), ‘Is it “who I am”, “what I can get away with”, or “what you’ve done to me”? A multi-theory examination of employee misconduct’, Journal of Business Ethics, 57, 389–98. Latham, G.P. (2001), ‘The importance of understanding and changing employee outcome expectancies for gaining commitment to an organizational goal’, Personnel Psychology, 54, 707–16. Litzky, B.E., Eddleston, K.A. and Kidder, D.L. (2006), ‘The good, the bad, and the misguided: how managers inadvertently encourage deviant behaviors’, Academy of Management Perspectives, 20, 91–103. Marholin, D.I. and Gray, D. (1976), ‘Effects of group response-cost procedures on cash shortages in a small business’, Journal of Applied Behavior Analysis, 9 (1), 25–30. Mars, G. (1974), ‘Dock pilferage: a case study in occupational theft’, in P. Rock and M. McIntosh (eds), Deviance and Social Control, London: Tavistock, pp. 209–28. Mars, G. (1982), Cheats at Work: An Anthropology of Workplace Crime, Boston, MA: Allen & Unwin. McGurn, S. (1988), ‘Spotting the thieves who work among us’, The Wall Street Journal, March 7, p. A16. McNees, P., Gilliam, S.W., Schnelle, J.F. and Risley, T. (1979), ‘Controlling employee theft through time and product identification’, Journal of Organizational Behavior Management, 2, 113–9. Murphy, K.R. (1993), Honesty in the Workplace, Pacific Grove, CA: Brooks/Cole. Niehoff, B.P. and Paul, R.J. (2000), ‘Causes of employee theft and strategies that HR managers can use for prevention’, Human Resource Management, 39, 51–64. Oliphant, B.J. and Oliphant, G.C. (2001), ‘Using a behavior-based method to identify and reduce employee theft’, International Journal of Retail and Distribution Management, 29, 442–51. Ones, D.S., Viswesvaran, C. and Schmidt, F.L. (1993), ‘Comprehensive meta analysis of integrity test validities: findings and implications for personnel selection and theories of job performance’, Journal of Applied Psychology, 78, 679–703. Purpura, P.P. (2002), Security and Loss Prevention, 4th edn, Boston, MA: Butterworth-Heinemann. Rousseau, D.M. (2006), ‘Is there such a thing as “evidence-based management”?’, Academy of Management Review, 31, 256–69. Rousseau, D.M., Manning, J. and Denyer, D. (2008), ‘Evidence in management and organizational science: assembling the field’s full weight of scientific knowledge through syntheses’, Academy of Management Annals, 2 (1), 475–515. Sackett, P.R. (1994), ‘Integrity testing for personnel selection’, Current Directions in Psychological Science, 3, 73–6. Sandberg, J. (2003), ‘Office sticky fingers can turn the rest of us into Joe Fridays’, The Wall Street Journal, November 19, p. B1. Sennewald, C. (1996), Security Consulting, 2nd edn, Boston, MA: Butterworth-Heinemann. Shapiro, D.L., Buttner, E.H. and Barry, B. (1994), ‘Explanations: what factors enhance their perceived adequacy?’, Organizational Behavior and Human Decision Processes, 58, 346–68. Shapiro, D.L., Treviño, L.K. and Victor, B. (1995), ‘Correlates of employee theft: a multi-dimensional justice perspective’, International Journal of Conflict Management, 6, 404–14. Skinner, B.F. (1971), Contingencies of Reinforcement, East Norwalk, CT: Appleton-Century-Crofts. Taylor, R.R. and Prien, K.O. (1998), ‘Preventing employee theft: a behavioral approach’, Business Perspectives, 10 (4), 9–13. Terris, W. and Jones, J.W. (1982), ‘Psychological factors related to employees’ theft in the convenience store industry’, Psychological Reports, 51, 1219–38. Thibaut, J. and Walker, L. 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Tilley, B., Dafoe, R. and Putsey, L. (1999), Positive Loss Prevention, Uxbridge, Ontario: Bob Tilley. Tomlinson, E.C. and Greenberg, J. (2005),‘Discouraging employee theft by managing social norms and promoting organizational justice’, in R.E. Kidwell and C.L. Martin (eds), Managing Organizational Deviance, Thousand Oaks, CA: Sage, pp. 211–32. Tomlinson, E.C. and Greenberg, J. (2007), ‘Understanding and deterring employee theft with organizational justice’, in J. Langan-Fox, C.L. Cooper and R.J. Klimoski (Eds.), Research Companion to the Dysfunctional Workplace, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 285–301. Westcott, S. (2006), ‘Are your staffers stealing? How to prevent employee theft and protect your bottom line’, Inc. Magazine, October, pp. 33–5. Whitley, B.E. (1996), Principles of Research in Behavioral Science, Mountain View, CA: Mayfield.

12 Corporate ethical codes as a vehicle of reducing corruption in organizations Betsy Stevens

Corruption – a historical problem Corruption has scarred the image of US business almost since its inception. From the importation of slaves to the exploitation of immigrants, use of sweatshops, and the greed of the Robber Barons in the nineteenth century to the Enron, Tyco and WorldCom scandals, business has been plagued with corruption and has struggled unsuccessfully to maintain a clean image in the public eye. For example, In 1968, 42 percent of Americans who were surveyed agreed with the statement, ‘Most businessmen will do anything – honest or not – for a buck’ (Baumhart, 1961). The next decade saw little improvement; business was heavily involved in government, the defense industry, and seen by many as profiting from the Vietnam war. Gallup polls conducted in 1976 and 1977 revealed that 19 percent of the American public rated the ethical standards of business executives ‘low or very low’ (Gallup, 1977). In the 1980s Lincoln Savings and Loan collapsed to the tune of $3.4 billion, eventually costing the American taxpayers almost $500 billion (Allis and Greenwald, 1996). Although times were prosperous, public skepticism toward business ethics continued. In 1986 a New York Times/CBS poll found that 56 percent of respondents rated business ‘fair’ or ‘poor’ regarding their contributions to the well-being of the community in which they were located (Lipset and Schneider, 1987) and in the following year, another poll showed that 49 percent of respondents thought that white collar business crime was ‘very common’ (Jackson and Collingwood, 1987). Throughout the 1990s, 18 percent of Americans rated the ethics of business executives on average ‘low’ or ‘very low’, and only about 21 percent rated them ‘high’ or ‘very high’ (McAneny, 1992, 1993, 1995, 1997; McAneny and Moore, 1994; Newport, 1998; Gallup, 2000). Problems continued as tobacco companies were indicted for withholding evidence that cigarette smoking was strongly linked to cancer. Drexel Burnham Lambert’s Michael Milkin and Ivan Boesky went to jail for insider trading, and the decade ended with evidence that managers at Firestone/Bridgestone were aware that Ford Motor Company SUVs were rolling over because of tire problems. The new millennium brought the Enron, Tyco and WorldCom scandals. Enron’s CEO, Kenneth Lay, was charged with fraud and the company’s market capitalization fell $60 billion. He was found guilty of conspiracy and fraud in May, 2006 and was facing 20–30 years in prison, but died of a heart attack before serving prison time. Because he died while his conviction was under appeal, the conviction was vacated. The US judicial system considers a person innocent until proven guilty and since Lay had filed an appeal over the conviction, he was technically cleared through means of his death. Jeff Skilling of Enron is serving 24 years in a federal prison in Minnesota. He received a longer sentence than the others who were convicted as there was evidence of his lying about Enron 252

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in 2001 when Fortune raised questions (Boyle and Tkaczyk, 2008). Andrew Fastow, another Enron executive, is in prison in Louisiana. Enron’s bankruptcy in 2001 cost $68.8 billion including a loss of $800 million in employee pension funds. Arthur Andersen, a highly respected accounting and consulting firm that had launched a $5 million project in the 1980s to teach ethics to business school students (Berton, 1988), went defunct due to ethical problems with Enron audits. Corrections to Enron’s misstated income back to 1997 have been estimated to reduce its audited profits by $591 million (Brody et al., 2003). Tyco’s Dennis Kozlowski and his CFO were charged with stealing $600 million from the company; Kozlowski is in the state prison in New York, and Martha Stewart went to prison for insider trading of Imclone stock along with Sam Waksal, its founder, who pleaded guilty to securities and bank fraud. Richard Scrushy, CEO of Healthsouth, one of the nation’s largest healthcare companies, inflated company earnings by $1.4 billion in an attempt to satisfy shareholders. While evidence is clear that Scrushy directed employees to falsify records, he was acquitted of all 26 charges of accounting fraud, but convicted of bribery in 2006 over a seat on the state hospital regulatory board. Scrushy is currently serving seven years in Beaumont, Texas. Worldcom’s bankruptcy in 2002 cost $103.4 billion (Clinard and Yeager, 2005). Bernard Ebbers of Worldcom is serving 25 years in a Louisiana federal prison. Americans continued to be skeptical of big business in the new millennium. Between 2002 and 2006, only 17 percent of Americans rated the ethics of the business executive ‘high’ or ‘very high’ and around 25 percent rated them ‘low’ or ‘very low’ (Jones, 2005). Corporate crime can cost a company between 1 and 6 percent of its annual sales and can seriously damage its reputation and financial structure (Schnatterly, 2003). Investment banking was not spared as nearly a billion and a half dollars in fines were levied against 10 major US investment and brokerage firms for malfeasance and fraud (Coxe, 2003). The US is currently experiencing a severe financial crisis and most of the investment banks disappeared during September 2008. Most of these companies had ethical codes, but did not follow them. Doing so might have saved the organizations. Corruption – an international problem Problems have not been confined to the US. Four out of five companies worldwide suffered corporate fraud between 2004 and 2007. Corporate malfeasance hurts everyone involved – employees, shareholders and stakeholders. The average cost of fraud to large companies with revenues of more than $5 billion exceeded $20 million and most of this was passed on to shareholders (Financial Executive, 2007). Parmalat, an Italian dairy company founded in 1961, filed for bankruptcy in 2003 as a result of fraudulent accounting practices. In 2008, 24 executives, including the founder, Calisto Tanzi, were on trial for fraudulent accounting and criminal association (‘Parmalat trial gets underway’, 2008). Parmalat’s CEO Enrico Bondi has accused banks and former auditor, Deloitte and Touche, with inflating earning results and hiding debt; the company never earned a profit despite reporting earnings every year. They recently settled a class action lawsuit for $40 million in stock brought on by US investors (‘Parmalat pays . . .’, 2008). Hollinger International, a British-founded company, also found itself in trouble. Conrad Black, a Canadian who later became a British citizen and member of the House of Lords, is the former chairman of Hollinger International. He was convicted in 2007 of

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defrauding the media company’s shareholders by backdating stock options and obstructing justice. He stole millions of dollars, falsified documents and lied to shareholders when he diverted money from the company into his own accounts between 1998 and 2001. Black is currently serving six and half years in a Florida prison and is appealing the two fraud convictions. Daewoo, a Korean industrial company with joint ventures all over world, produces electronic goods, computers, telecommunications, construction equipment and automobiles. Kim Woo-Chong, its, founder, perpetrated fraud by inflating Daewoo’s assets. The company collapsed in bankruptcy following the 1997–98 financial crisis in Korea. Daewoo still exists today, but the collapse cost Korean taxpayers $29 billion in order to bail out the lenders. Woo-Chong was convicted in 2006, sentenced to 10 years and ordered to pay back $22 billion (Kraar, 2005), but Korea has a habit of pardoning offenders. Woo-Chong, aged 70, is appealing the conviction; his sentencing has been delayed for a year because of a heart condition. Seven of his key executives were indicted, but received suspended sentences. Swedish insurance company Skandia‘s top executives paid themselves large bonuses in excess of $350 million, some of which they did not disclose, took corporate flats and refurnished them at corporate expense, and generally raided the till. Chairman Bengt Braun resigned in December 2003, and other key executives have since left the company. Shareholders were extremely unhappy with the losses and executive corruption; prices of shares in the company plummeted (The Wall Street Journal, 2003; Helin and Sandstrom, 2007). A few key players have gone to jail, but in the long run, most second- and third-tier executives have not been punished or lost their job. Of those second-tier executives, few are punished and those who are receive light sentences. Many of the firms are still doing business. The US and other countries simply lack the means to prosecute all of the egregious behavior and illegal activities that occur. Companies reorganize themselves and go on, leaving shareholders to pick up the pieces. Company boards of directors continue to grant enormous salaries to CEOs as if they were rock stars. Shareholders foot the bill. Parmalat still exists and so do Daewoo and Enron. HealthSouth is doing well. They are all in business and have not been held sufficiently accountable for their crimes. But Arthur Andersen no longer exists because of its involvement with Enron. Bear Stearns Companies Inc. and Lehman Brothers, former prestigious US investment banks, are also gone. The current US crisis The US, currently in a recession, is suffering from a financial crisis unparalleled since the Great Depression, caused by banks selling too many mortgages to people who could not afford them. Credit was given freely to many individuals, then banks reduced their risks by moving the mortgages off their books and selling them in bundles. When the economy contracted early in 2008, many people with these mortgages were either unable or unwilling to pay them when housing values dropped. Many of them were sold subprime mortgages; they had weak credit histories and could barely afford the homes they purchased. Their homes lost value and their adjustable rate monthly mortgage fees increased. The number of bankruptcies has skyrocketed. Now taxpayers are bearing the brunt of the mortgage bankers running out of control. Banks were careless, loose with cash, and

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issued far too many risky mortgages in their quest to make more money. Evidence of wrongdoing by those who issued mortgages abounds (Miller and Fallati, 2007; Efrati and Perez, 2008). But the ultimate losers were the investment banks, the large insurers, stockholders and of course, the taxpayers. Lehman Brothers filed for bankruptcy (Chapter 11, US bankruptcy code) in September, 2008 and Bank of America bought Merrill Lynch for $50 billion. Other investment banking companies have needed federal emergency assistance. Bear Stearns was subsumed by JP Morgan Chase which also bought the bankrupt Washington Mutual Bank; the collapse represented the largest bank failure in US history. Stockholders were left with nothing and the CEO departed with an $11.6 million severance package and his $7.5 million signing bonus. He took over from former CEO Kerry Killinger who has been blamed for the failure. Insurance giant AIG needed a federal bailout; its failure could have caused a meltdown in the US stock market. While the investment banking industry has been hard hit and shares of Bear Stearns and Lehman essentially became worthless, the CEOs walked away with large bonus packages. Could strong ethical codes based on values, building wealth without exploitation, honesty and good ethics have saved Bear Stearns and Lehman Brothers? Lehman Brothers, AIG and Bear Stearns had corporate ethical codes, but they did not heed their own codes. Excessive greed and the unbridled quest for more money became their undoing. Where was diligence, care and reason and the desire to take care of employees and shareholders? Their downfall was caused by an excessive focus on short-term money without regard for the well-being of the corporation in the long run. Why the corruption? So why did Enron, Tyco, Worldcom, Hollinger, Parmalat and the other scandals occur in the first place? Why have so many US banks failed? Are people less honest today? Can we trust our corporate leaders? Enron employees signed a code on their first day of employment, but the board of directors suspended it when it became inconvenient (Sims and Brinkman, 2003). Enron also had three sets of books; they have become the key example of twenty-first century corporate corruption. AIG, Lehman Brothers, and Bear Stearns and Companies all had codes, but ignored them. The US government stepped in to save AIG because the consequences to the economy would have been dire. Why do these corporate meltdowns continue to occur? One key reason is that companies have been allowed to act recklessly and with abandon. Also there is considerable evidence that crime pays – at least in the US. Courts there have ordered restitution to victims of corporate fraud, but most are not repaid. A study by the US General Accounting Office (GAO) examined five white-collar financial fraud criminal debt cases and found that victims collected only about 7 percent of what was owed to them (Engel, 2005). Nine investment banks including Morgan Stanley Dean Witter were fined in 2003. SEC Chairman William Donaldson noted that Morgan Stanley Dean Witter’s CEO Philip Purcell showed ‘a troubling lack of contrition’ (Gross, 2003, p. 2). The fines ($1.4 billion) represented only a fraction of the profits that companies gained through corrupt practices, and the sanctions amounted to a slap on the wrist. Although there is a definite history of corruption in business, many believe that it is getting worse. Some people believe that there is a loss of the Protestant work ethic which has been the foundational view of work in much of Britain, Europe and the United

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States: put in a full day’s work, waste nothing, and live moderately. When the first US income tax was levied in 1861 to support the cost of the Civil War, taxes were paid on the honor system. Farmers and businessmen published their income in the town newspaper and paid their taxes based on their self-stated worth (Crossen, 2003). This public system worked in the 1860s because people did not want to publicly lie and damage their reputations. Personal integrity and honor were important to the nineteenth-century businessman whose neighbors probably had a reasonable idea of his financial worth anyway. Would this system work today? How have we and the times changed? Corruption is not new to the twenty-first century as there are plenty of examples from previous centuries. What is new is the corporation, a fairly recent artifact and invention of the twentieth century. Its forerunners were church organizations and the medieval trade guilds found in England and Europe. America, in particular, developed corporations as an outgrowth of the industrial revolution and many were manufacturing organizations. They evolved, some fell by the wayside and some grew and developed over the years. Today’s corporation is typically multinational and has multiple stakeholders. The world is truly a global village and its many corporations are an economic staple. Has this changed the nature of ethics? Has a group-think or pack-rat mentality developed where corruption is acceptable and no one is responsible? The economics of most developed nations are now so inextricably economically entwined with multinational corporations that corruption cannot be allowed to rule. What is a good solution? The ethical code How can a corporation compete in the world market today and still operate as an honest and ethical entity? The corporate ethical code must set the tone for the organization and be the key, corporate strategic document upon which all decisions are based. Adherence to the code must be the first and foremost commitment made by the organization – above anything else. Only a few corporations have made this type of commitment. Johnson & Johnson Corporation is one exemplary organization with that commitment. When their product, Tylenol, was tampered with and poisoned in the 1980s, they pulled every single bottle off the shelves of stores all over the country. J&J took a short-term economic loss which paid off many times over after the crisis passed. Their reputation is impeccable and they remain a model corporation, largely because of this action. Organizations must learn to deal with the changes which occur and must be sufficiently flexible to survive in a rapidly changing environment. Many companies have not been able to respond quickly enough to competition and to the ways in which technology has changed business. Technology has brought about changes and the corporation must restructure itself to meet the new demands. The role of accountants has changed Accounting problems and simply bad ethics are responsible for many of the problems that corporations like Enron, Tyco, Worldcom and Hollinger experienced, and changes in accounting practices made it easier for some of them to cheat. The accounting profession has changed its scope and relationship to business. New technology has allowed accountants to expand their role from bookkeeping to influencing strategic decisions and directions of the corporation. Historically, accountants simply kept the books and ensured that the figures were accurate and true. Today their span of control is much

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greater; they have a wider range of decisions to make and they are more vulnerable to pressure from CEOs and outside forces. Until recently, the public perception of accountants was relatively constant. Typical views included such stereotypes as unexciting, dull, and obsessed with small details, and terms such as ‘bean-counter’, although deprecating, reflected generalizations about the profession. Accountants were seen as honest, numbers-obsessed straight-shooting individuals. They often joked about wearing green eye-shades, reflecting the hours they spent poring over balance sheets and ledgers. But a shift occurred in the mid-1990s. Because of unethical financial reporting practices in corporations such as Tyco, WorldCom, and Enron, public perception changed. Accounting schemes and misrepresentations now seemed commonplace to the American public. Enron’s widely publicized collapse in 2001 caused a major and dramatic shift in the way the accounting industry was seen (Intini, 2006). Investors’ trust in the soundness of corporate decisions and the integrity of accountants was shaken (Ibrahim, 2006). Indeed, the profession experienced a crisis in public confidence (Elias, 2006). A Columbia University accounting professor and former chairman of the Financial Accounting Standards Board noted that regaining the public’s trust will take a ‘gigantic effort’ on the part of the profession (Kirk, 2005, p. 32). Accountants are now more suspect, the stereotypes have shifted, and the once-ignored accountant is more interesting to the public eye. Recently, Gallup added the accountant to the list of professions in its Honesty and Ethics Poll (Gallup, 2000). In this poll, Americans are asked to indicate the extent to which they believe members of certain professions are ethical. Although the poll has been conducted since 1976, accountants were not included until 2000. As a profession, accounting has typically been viewed as ethical. But after its scope and relationship to business changed, accountants now have more power and influence in organizations. As accounting professor Edwin Cohen notes, ‘Technology has allowed accounting professionals to expand their role from just bookkeeping to influencing the strategic direction of organizations today’ (‘Depaul . . .’, 2007). This has caused a recent paradigm shift. Picking up on these changes, the media have begun portraying accountants in more interesting ways. Tony Dimnik and Sandra Felton studied filmmakers’ portrayal of accountants in over 300 movies produced between 1939 and 2000. They found that the accountant was not typically an interesting character and tended to have sex off-screen. However, they have seen the stereotype of accountants change over time and note the now-typical portrayal of accountant as villain. Dimnik observed that stereotypes of accountants are ‘richer’ and post-Enron films depict the accountant as either in jail or going to jail (Intini, 2006). Clearly both the public perception of accounting and that portrayed in the media have been altered by the accountant’s evolving role in business. Legislating the honesty of accountants and executives In the aftermath of the Enron, Tyco and WorldCom scandals, the US government passed legislation to toughen the requirements of executive oversight, and provided tougher penalties for executives who cheat investors. The Sarbanes–Oxley Act of 2002 set ethics standards for the preparation of accounting reports, strengthened the standards for auditor independence and banned corporate loans to directors. The act created a code of ethics for senior financial officers and requires that top managers certify they have read quarterly and annual reports. Annual reports must

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include an assessment of the internal control structures. One public accounting partner in charge of SEC (Securities and Exchange Commission) practices noted, ‘The dumb CEO is no excuse any more. There will be zero tolerance. Companies must find CEOs who understand financial statements’ (Coustan et al., 2004, p. 47). Sarbanes–Oxley represents considerable change in corporate governance and was enacted in response to egregious acts of mismanagement, managerial greed, and corporate excesses; executives were targeted for either being or playing dumb. Corporate boards of directors were seen as not doing their job of examining financial records and looking for problems. Recent evidence shows that companies are strengthening their board of directors and doing a better job of overseeing financial matters. Time will tell whether their motives are simply compliance with the act or if corporations are actually trying to reform. Many have complained that Sarbanes–Oxley is costly to American business, but it has seemed to be a necessary piece of legislation since corporations were not scrutinizing their accounting and financial systems sufficiently. Why should organizations have an ethical code? Today a large number of corporations have an ethical code. Corporations increasingly adopted them in the 1980s and 1990s and today most American companies have a code (Treviño et al., 1999; Chonko et al., 2003). Also about 53 percent of the largest worldwide companies have an ethical code (Kaptein, 2004). Many firms without codes find themselves under increasing pressure from stakeholders to develop one. Citizens and stockholders believe that such codes help a company stay on the right track and act more ethically. It certainly looks better to outsiders when a company has a code as it communicates to both insiders and outsiders that the company cares about ethics. Codes can help improve the company’s reputation and encourage governmental authorities to let the company manage itself with less regulation. They can improve work climate and leave employees feeling positive about the company (Manley, 1991). European companies have increasingly used codes to regulate labor relations (Sobszak, 2003) which also probably discourages government intervention. But the most important reason to have codes is that under the right conditions, they can shape employee behavior and positively influence ethical decision making. They can serve as core foundational documents that give organizational members a sense of shared values and commitment to a common purpose in the organization. If used properly, codes can save a company. Lehman Brothers and Bear Stearns would probably exist today if they had followed their codes. Definitions of an ethics code Codes are written documents which state the major philosophical principles and articulate the values embraced by the organization. In contrast, mission statements spell out the objectives of a company and proclaim the goals the organization intends to pursue. An early definition in the literature described them as: written documents ranging in length from one paragraph to more than fifty pages which are intended to impact behavior. Firms frequently attempt to manage and articulate ethics through these messages which are designed for internal and external audiences. . . . Most importantly they are messages through which the corporations hope to shape employee behavior and affect change through explicit statements of desired behavior.’ (Stevens, 1994, p. 64)

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Ethical codes also articulate the ethical parameters of the organization – what is acceptable and what is not (Stevens, 1996). They are policy documents which define the responsibilities of the organization to stakeholders and spell out the conduct expected of employees. Some contain guidelines describing desirable behavior and others prohibit certain behaviors such as bribery and conflict of interest. They enhance social responsibility and clarify the norms and values that the organization seeks to uphold. Ethical codes differ from mission statements by articulating the value system and answering the question: with what ethical standards and values should the mission be pursued? They have also been called codes of conduct, business principles, codes of ethics and corporate ethics statements. Many different scholars have proposed and used various terms to describe these corporate documents. Ethics scholars Muel Kaptein, professor of business ethics at Erasmus University in Holland and Mark Schwartz, assistant professor at York University in Toronto, Canada recently published an article in the Journal of Business Ethics arguing for the term ‘business code’ instead of ‘ethical code’ (2008). They believe that the term ‘ethics’ is superfluous and not needed. Why? Their article reviewed different terms, then offered a new version of a definition for a business (ethical) code: ‘A business code is a distinct and formal document containing a set of prescriptions developed by and for a company to guide present and future behavior on multiple issues of at least its managers and employees toward one another, the company, external stakeholders and/or society in general’ (p. 112). Kaptein and Schwartz’s definition eliminates the word ‘ethics’ but still focuses on behavior; however, the definition seems too narrow in its scope. Ethical codes should be more than ‘a set of prescriptions’ and the word ‘ethics’ needs to be part of the term to distinguish them from other types of codes. If codes focus too narrowly on prescribing or dictating behavior, they miss the transformational aspects that could be present, and lack guiding, visionary parameters of thought and language. A 1996 study showed that codes were generally framed from a defensive position to protect the organization against egregious behavior and could benefit by being more instructional and transformational (Stevens, 1996). Too much focus on prescriptive behavior means that the transformational and instructional elements are compromised. A number of scholars have also argued against the downward, command-style approach of communicating ethical values. History of codes Organizational ethical codes have existed for a number of years. An early volume, Codes of Ethics (Heermance, 1924), contains 134 ethical codes from organizations active in the US in the 1920s. They included organizations such as the National Association of Straw Hat Manufacturers, the National Automobile Dealers’ Association and the National Association of Peanut Butter Manufacturers. These associations reflected the pre-corporate status of many small companies which existed to produce single products. Consequently they reflected the limited interests of one-product companies. Morals and values articulated in these codes are an interesting comment on the ethical mores of the time. The Retail Advertising Division of the Associated Advertising Clubs deplored false advertising and ‘pledged . . . to use such terms as “sample,” “clearance,” “remnants,” “special purchase,” “marked down” and “reduced” only when expressing

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exact fact’ (ibid., p. 14). The National Automobile Dealers Association condemned the ‘used car trading allowance’ as unethical (p. 37), and the National Confectioners’ Association decried packaging candy with ‘punch boards, raffle cards, and similar devices . . . obviously intended for games of chance’. They argued that these ‘encourage and develop the gambling habit in children, are injurious to their morals, and are detrimental to the best interests of the Candy Industry and are a menace to the future development of the industry’ (p. 119). Advertisers today seem unconcerned with such issues and use prize tokens with regularity; winning a prize in a candy package or from a cola can is not seen as a moral issue today, but went against the strong Protestant work ethic prevalent in the 1920s. One was not supposed to receive anything except through earning from hard work. Although ethical codes did not receive much attention in scholarly journals in the first half of the twentieth century, several studies were published in the 1960s (White and Montgomery, 1980). Scholars agree that codes proliferated in the 1970s (Becker and Fritsche, 1987; Molander, 1987; Brooks, 1989) and became all the rage in the 1980s. Some believed that the rush to formulate codes was a genuine attempt to promote better ethics and others believe it was simply window dressing. Companies, they thought, adopted them because it looked good to have one. With hindsight, it appears that the critics of many companies were right – many codes were simply for show. With Watergate, corporate scandals and acts of unethical behavior, corporations in the 1980s wanted to address increasing accusations of corruption. Some responded by developing ethics codes to publicize their ethical virtues and display a new moral image. Evidence appearing in the late 1980s and early 1990s showed that while a number of corporations had adopted codes, many were doing it for the wrong reasons (Stevens, 1994). Typically very image-conscious, corporations worried that they might look bad if they lacked a code. Throughout the 1980s and 1990s, corporations increasingly adopted ethical codes and most global companies today have a code. Paying bribes, even in countries where they were often expected, was banned in 1977 by the Foreign Corrupt Practices Act. Previously, individuals in some companies had been bribing foreign officials and harbormasters and many of the new codes prohibited this practice. Firms could also receive lighter penalties under US Federal Sentencing Guidelines if they had a code. Companies mostly wrote defensive documents designed to protect the corporation against unscrupulous behavior, and warned employees to follow the law rather than writing aspirational documents to provide direction and guidance in ethical situations (Stevens, 1996). The content of codes Studies of ethical code content in the 1980s showed that codes mostly reflected concern over unethical behaviors that could hurt profits; and topics showed a weak commitment to social responsibility (Cressey and Moore, 1983). Complying with federal laws and avoiding conflicts of interest were also major themes (White and Montgomery, 1980). An extensive content analysis performed by Mathews (1987) showed that firms emphasized avoiding illegal activities and employee misconduct in the codes. They placed little emphasis on the environment, product quality, or safety. Another study confirmed that the most frequently mentioned topics in codes were conflict of interest, gifts, and misuse of confidential information (Pitt and Groskaufmanis, 1990). A different study

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shortly thereafter showed that codes were primarily designed to defend organizations against egregious behavior by employees and were lacking in ethical guidance and vision (Stevens, 1996). Several years later Snell and Herndon agreed, concluding that codes were focused on corporate self-defense (2000). Code content differs across countries and continents. Langlois and Schleglemilch’s study of codes from the UK, France, Germany and the US showed that British and European codes discussed government and customer relations less frequently than did American codes. Kaptein concluded that most codes described company responsibilities for quality of products, and services, protecting the environment and complying with laws (2004). His study also identified content differences with European, Asian and American codes. European codes focused far more on the environment than American ones, while 64 percent of American codes mentioned honesty as compared with 45 percent of European codes and only 38 percent of Asian codes. Fairness was mentioned more frequently in European and Asian codes than in American ones. When codes don’t work While evidence is strong showing that codes are effective when the right conditions are in place, sometimes they do not work and companies with codes act unethically. Culture plays a strong role as does a lack of communication when codes fail. Ineffective codes are usually circumstances of a culture that does not accept the code or the way it has been communicated. For example, Marnburg (2000) measured the ethical attitudes of engineers and economists in a group of Norwegian businesses with codes and found that the mere existence of a code did not influence the attitudes of respondents. He observed that it was not enough simply to have a code; processes and systems that symbolize the code need to be in place for the code to be effective and in this case, they were not. Another study looked at whether an ethical compliance program of ethical codes, training and communication would result in fewer OSHA (Occupational Safety and Health Administration) violations. They found no positive correlation and concluded that the ethics programs might simply be artifacts to deflect any criticism of the corporations’ ethics (McKendall et al., 2002). Regulation and control are the problems. It is no surprise that the codes in these compliance programs did not achieve their goals. Forced code compliance does not work because codes imposed on employees by senior management are generally not accepted into the landscape and culture of the organization. Snell and Herndon (2000) also saw codes fail for cultural reasons. Chinese organizations failed to adopt best practices of a code because of the collectivist features in the culture. Pseudo-support was given, but companies did not adhere to the code even when it was in their best interests. The authors hypothesized that power distance and culture caused the behavior since subordinates are under pressure to publicly support superiors even if they do not agree with a decision. So codes imposed by senior managers were essentially rejected by the workers. Snell and Herndon’s study illustrates the interplay between culture and codes; codes imposed by external agents upon workers are simply ineffective. Simply put, good ethics cannot be ordered by management; codes attempting to impose legal controls are very ineffective. In another study, Healy and Iles (2000) found that codes issued by London IT firms to govern information and technology did not work. Behavior of IT end users in organizations was not changed. Again, using codes to achieve governance and compliance did

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not work. Top-down attempts to control and order ethics typically fail. Healey and Iles stated, ‘Codes of ethics are a means by which organizations seek to exercise power, control and ownership’ (p. 123). But this is the wrong motive because ethical codes are not meant to be instruments of control. When used in this fashion, they fail, which explains why Marnburg, McKendall et al., Healey and Iles, and Snell and Herndon reported unsuccessful results. In all of these studies, codes failed to regulate behavior, demonstrating that the mere existence of a code does not prevent unethical behavior. Schwartz (2000) also observed that codes cannot be compliance control systems, and Treviño and Weaver (2003; p. 194) argued that this is true because forced legal compliance places codes outside the climate and culture boundaries where employees feel ownership. (Culture and cooperation – not mandatory compliance – create the climate where codes become effective. When codes do work A number of studies yield evidence that codes are effective when used in the right way. Companies must be seriously committed to the code and not consider it a decorative artifact. Ford and Richardson (1994) compared companies with codes of ethics and those without and found fewer instances of unethical behavior in companies with codes. The workability or effectiveness of codes is affected by context and design, formal controls, and individual influences such as self-control (Casel et al., 1997). Codes work when the right structures are in place. Behavior of managers is also important to the effectiveness of a code. Laufer and Robinson’s (1997) study revealed that when employees’ and managers’ behavior is consistent with codes, their behavior positively influences others in the organization. The last two studies indicate that when codes are partnered with managers who value ethics and act with integrity, they can serve as valuable managerial tools. Members of organizations with codes feel more positive about themselves and their organization with regard to their freedom to act ethically. They are also more satisfied with the outcomes of ethical dilemmas that are covered by a code (Adams et al., 2001). Adams et al. also showed that even when members could not recall specific details of the codes, they had a positive impact on perceptions of ethics within their companies. Somers (2001) discovered that management accountants perceived less wrongdoing in organizations with corporate codes, and respondents in organizations without formal codes were more aware of wrongdoing. His study showed that accountants in firms with ethical codes were influenced positively by the codes in the areas of profitability, moral behavior and charitable donations. Salesmen and -women also responded positively. Additionally, Valentine and Barnett (2002) noted that sales professionals in companies with codes thought their companies had higher ethical standards than sales companies without codes. Treviño and Weaver (2003, p. 8) discovered a correlation between alumni who attended college with honor codes and were employed by organizations with strong ethical codes. Employees self-reported fewer unethical behaviors, which suggests that businesses may benefit from hiring graduates of honor code colleges. They also found that ethical leadership and open discussions about ethics in the organizations contributed to increased ethical behavior. Their research shows that strong leaders who share their values with others positively affect the organization and its code. Codes are valuable when coupled with the right ethical behavior from managers and, when partnered

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with the right actions from managers, they are more effective than formal ethical training (Adam and Rachman-Moore, 2004). Most companies reward people who can solve problems and increase profits. Too often they reward only results and do not reward those with ethical standards or those who follow the spirit of the code. Boards of directors must become more involved; almost one-quarter are currently not involved (Megan, 2002). They set policies and should not distance themselves from the codes. Implementation is the key to code effectiveness and it belongs at the top. Schwartz et al. (2005) argue that the message of valuing ethics should come from the top and corporate boards should be more involved. Kaptein and Schwartz (2008) examined existing studies of ethical codes to determine their effectiveness. They noted conflicting results and cited various definitions of terms, deficient empirical studies and methodologies, and a lack of theory as reasons for the mixed results. They observed that no empirical study has yet been conducted to account for all of the varying factors in the environment of a corporation that could contribute to the success or failure of a code. This is due to the complex nature of codes and their relationship to the company culture. Stakeholders and environmental factors can affect a code’s success. Stevens et al. (2005) showed that financial executives would integrate codes into strategic decision making if market stakeholders pressured them to do it. The Kaptein and Schwartz study revealed that 28 studies of corporate codes had a significant positive relationship in terms of effectiveness, 13 had a weak positive relationship and 26 studies showed no positive relation. Several others showed mixed results and one reported a negative relationship. Overall, this may be taken as additional evidence that codes do work, and while the authors suggest that there might be methodological problems with some studies, a growing body of studies supports the notion that ethical codes do work. It is critical that employees are aware of the code and know it is viable. They need to be knowledgeable about it and know when to use it. Both Wotubra (1995) and Chonko et al. (2003) showed that the usefulness of codes as decision-making instruments increased with the familiarity of the code’s content. Both of the studies reported that codes played a role in impacting behavior and perceiving right ethical actions. The codes functioned not as a set of stand-alone rules, but as an integrated, embedded part of the organizational culture. Codes which become organizationally embedded have managers behind them who can create ethical cultures. When managers lead by setting clear standards and expecting the best from everyone including themselves, they create a culture which supports the code. Codes and compliance programs will fail when they are not part of the organization’s culture. Codes are valuable managerial tools which can send a powerful message to members of the organization about ethical business practices. They are important symbolic artifacts of companies committed to good ethics and they communicate a clear message to employees, shareholders, and stakeholders about a company’s vision and willingness to embrace high standards. Good communication is paramount. Companies must create cultures with open communication where employees are rewarded for speaking out when they see wrong actions or words. Perlow and Williams (2003) noted in a Harvard Business Review article that silence can kill a company, and cited the Enron corporation an example of silenced people. Companies have an ethical responsibility to create open cultures where

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communication flows freely throughout the organization. Closed organizations where people are afraid to speak can spell financial and reputational disaster. Codes should act as powerful beacons to employees of the corporation and sanctions must be applied when codes are violated. Employees see and hear organizational actions and respond accordingly. If actions of managers or employees are not in line with the code and nothing happens, the code will fail. Nitsch et al. (2005) observed that frustration, anger and cynicism develop when code violations are unchecked. Codes are only effective when code violations are appropriately sanctioned. Employees are sensitive to fairness issues and perceived unfairness or unequal treatment can cause low trust in the organization (Kickup, 2005). Organizational leaders must build trust by ensuring that justice prevails and the code is followed and will strengthen members’ commitments to it. Scalet (2006) observed that people face cooperative dilemmas in organizations and codes of ethics can help develop patterns of trust among employees. Because codes can help remove trust obstacles, they assist people in working through the healthy tensions that exist in any organization (ibid.). Helin and Sandstrom (2007) reviewed 34 empirical studies of codes published between 1994 and 2007 and categorized them into content studies, output-oriented studies (is behavior affected?) and transformation studies (are they becoming part of the organization’s practices?). Their article focuses on the need for further research on ethical codes, arguing that researchers do not know exactly how they work and how they are communicated within the organization. Only eight of the 34 studies they examined fit the transformational category and attempted to study how codes become organizationally embedded in the corporation. Helin and Sandstrom correctly argued for more corporate ethical code studies that examine exactly how codes work and what features of the code and cultures make a difference. Employees’ perceptions of management and its objectives and motives for establishing an ethics program are key factors in the success of the program. Managers must monitor codes, and the ways they are communicated, and be observant regarding a code’s effectiveness. Communication plays a pivotal role in the effectiveness of a code. If organizational members are unaware of the code or have little idea what it says or stands for, the ethical concepts in the codes cannot be enacted by organizational members. Weeks and Nantel (1992) and Adam and Rachman-Moore (2004) noted the relationship between codes and organizational communication. They saw that codes could be effective if the channels through which they were communicated were effective. The manner in which ethical codes are communicated contributes directly to their success or failure. Schwartz’s study of codes (2004) found that codes are effective when they are readable, relevant and written positively rather than negatively. When codes are integrated into an organizational climate and leaders communicate the value of ethics with their own behavior, the codes have a significant impact. Ethical companies What companies have successfully integrated their ethical codes and achieved a strong ethical culture? The Ethicsphere Institute identifies companies which have exemplar records in areas such as the environment, supplier factories and product liability, and produces a list of the world’s most ethical companies. Firms that make the list also must have no records of bribery, discrimination or fraud. In 2007 they named Accor (France) as the

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top hotel company, Duke Energy (US) as the energy leader, HSBC (UK) as the top bank, American Express (US) as the best in financial services and Volvo (Sweden) for automobiles. In 2008 Accor, Duke Energy, HSBC and American Express again won the top awards in their categories and BMW (Germany) won the award for automobiles. For winners in other categories and to read more about this organization, go to http//ethicsphere. Business Ethics Magazine identifies the 100 best corporate citizens, but this list is limited to companies headquartered in the US. In 2007 they named Green Mountain Coffee Roasters, Advanced Microdevices, Nike, Motorola, Intel, IBM, Agilent, the Timberland Company, Starbucks and General Mills as the top 10 ethical companies. Their website indicates that selection is made by a panel of judges with professional and academic credentials. The Conference Board is a research organization that promotes good business practices and ethics. As such, they do not provide lists of best companies, but their research is widely respected on the subject of business ethics. Both Business Ethics Magazine and the Conference Board can be located through any good search engine, such as Google. Conclusion Management in organizations is shaped on the ways ideas are framed and language plays a key role. When corporations accept the concept that language shapes thought (Whorf, 1956) and that ideas are perceived according to how they are addressed in conversation and debate (Pfeffer, 1992), then words used in an ethical code and the very act of creating the code is an important managerial process. The symbolic act of creating the codes, and finding the right words to express the ideas and behaviors valued by the organization, have considerable organizational significance. Codes may influence behavior through the dialogue that is created among employees about key ethical issues. Corporate ethics codes, along with other key strategic documents, frame how the organization is perceived. Language used to create the codes is central to the meaning and the perception of its ideas. Codes can make or break an organization. They create the organizational climate and ensure that ethical behavior is encouraged, expected and rewarded. Corporate ethical codes have earned a secure place as strategic management tools, but communication is a requirement for success. A body of research now exists demonstrating that if codes are embedded in the organizational culture and communicated effectively, they can guide and shape ethical behavior. Managers must be models of desirable behavior and live the code; employees need to know that sanctions will be applied if codes are violated. Employees also must be aware of the content in their company’s code and participate in discussions about the code so that they have full understanding of it. Codes do not work when they are written by management and passed down as edicts to employees. Employees need to perceive the ethical code as a personal document in which they have ownership, as a key component of the organization, and one that is central to the organization’s very existence. References Adam, M.A. and D. Rachman-Moore (2004), ‘The methods used to implement an ethical code of conduct and employee attitudes’, Journal of Business Ethics, 54, 225–44. Adams, J.S., A. Taschian and T. Shore (2001), ‘Codes of ethics as signals for ethical behavior’, Journal of Business Ethics, 29, 199–211. Allis, S and J. Greenwald (1996), Time South Pacific (Australia/New Zealand edition), 51, 70.

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Baumhart, R. (1968), ‘How ethical are businessmen?’, Harvard Business Review, 39 (July–August), 6–9. Becker, J. and D. Fritzche (1987), ‘Business ethics: a cross-cultural comparison of managers’ attitudes’, Journal of Business Ethics, 6, 289–95. Berton, L. (1988), ‘Arthur Andersen launches program to teach ethics’, The Wall Street Journal, March 11, 31 (E), col. 4. Boyle, M. and Tkaczyk, C. (2008), ‘Corporate convicts: where are they now?’, Fortune, June 9, 157 (12), 96–7. Brody, R.G., D.J. Lowe and K. Pany (2003), ‘Could $51 million be immaterial when Enron reports income of $105 million?’, Accounting Horizons, 17 (2) 153–61. Brooks, L.J. (1989), ‘Corporate codes of ethics’, Journal of Business Ethics, 8, 117–19. Casel, C., P. Johnson and K. Smith (1997), ‘Opening the black box: corporate codes of ethics in their organization context’, Journal of Business Ethics, 16, 1077–93. Chonko, L.B., T.R. Wotruba and T. Loe (2003), ‘Ethics codes familiarity and usefulness: views on idealist and relativist managers under conditions of turbulence’, Journal of Business Ethics, 42, 237–52. Clinard, M.B. and P. Yeager (2005), Corporate Crime, Transaction, Edison, NJ. Coustan, H., L. Lienicke, M. Rexroad and J. Ostrosky (2004), ‘Sarbanes–Oxley: what it means to the marketplace’, Journal of Accountancy, 197 (2), 43–7. Coxe, D. (2003), ‘Wall Street’s shame’, Maclean’s, 116 (20) 36–8. Cressey, D. and C.A. Moore (1983), ‘Managerial values and corporate codes of ethics’, California Management Review, 25, 53–77. Crossen, C. (2003), ‘Years ago, some people begged for an income tax’, Greensboro News and Record, North Carolina, June 8, E.1. ‘Depaul Accounting Professor achieves 50 years of service’, available at aacsb.edu/Publications/Enewsline/ archive_print/vol16, issue 6.pdf (accessed June 15, 2007). Efrati, A and E. Perez (2008), ‘Wall Street, lenders face subprime scrutiny’, The Wall Street Journal (Eastern edition), May 5, 251, issue 105, p. A4,. Elias, R.Z. (2006), ‘The impact of professional commitment and anticipatory socialization on accounting student’s ethical orientation’, Journal of Business Ethics, 68, 83–90. Engel, G.T. (2005), ‘Criminal debt: court-ordered restitution amounts far exceed likely collections for the crime victims in selected financial fraud cases’, GAO-05-80, January 1, 1–30. Financial Executive (2007), 23 (9), November, p. 12. Ford, R.C. and W.D. Richardson (1994), ‘Ethical decision making: a review of empirical literature’, Journal of Business Ethics, 13 (3), 205–21. Gallup, G. (1977), The Gallup Poll: Public Opinion 1972–1977, Scholarly Resources Inc., Wilmington, DE. Gallup, G. (2000), ‘Honesty and ethical standards’, in The Gallup Poll: Public Opinion, 1999, Scholarly Resources Inc., Wilmington, DE. Gross, D. (2003), ‘Is this any way to punish fraud? Unsettling’, New Republic, 28, (19), May 19, 2. Healy, M. and J. Iles (2002), ‘The establishment and enforcement of codes’, Journal of Business Ethics, 39 (1), 117–24. Heermance, E.L. (1924), Codes of Ethics, Free Press, Burlington, VT. Helin, S and J. Sandstrom (2007), ‘An inquiry into the study of corporate codes of ethics’, Journal of Business Ethics, 75, 253–71. Ibrahim, N.A., J.P Angelides, and D.P. Howard (2006), ‘Corporate social responsibility: a comparative analysis of perceptions of practicing accountants and accounting students’, Journal of Business Ethics, 66, 157–67. Intini, J. (2006), ‘Boring no more’, Maclean’s, 119 (49), 49. Jackson, S. and H. Collingwood (1987), ‘Business Week/Harris poll: “Is an anti-business backlash building?”’ Business Week, July 20, p. 78. Jones, J.M. (2005), ‘Nurses remain atop honesty and ethics list’, Gallup News Service, December 5. Kaptein M. (2004), ‘Business codes of multinational firms: what do they say?’, Journal of Business Ethics, 50, 13–31. Kaptein, M. and M. Schwartz (2008), ‘The effectiveness of business codes: a critical examination of existing studies and the development of an integrated research model’, Journal of Business Ethics, 77, 111–27. Kickup, J. (2005), ‘Does trust matter? The relationship between equity sensitivity and perceived organizational justice’, Journal of Business Ethics, 56 (3), 205–18. Kirk, D. (2005), ‘Regaining trust’, Journal of Accountancy, 200 (4), 30–2. Kraar, L. (2005), ‘A fugitive boss faces the music’, Fortune International, 152 (1), November 7, 13–14. Langlois, C.C. and B.B. Schlegelmilch (1990), ‘Do corporate codes of ethics reflect national character? Evidence from Europe and the United States’, Journal of International Business Studies, 4th quarter, 519–39. Laufer, W. and D.C. Robinson (1997), ‘Corporate ethics initiatives as social controls’, Journal of Business Ethics, 16 (10), 1029–48. Lipset, S.M. and W. Schneider (1987), The Confidence Gap, Johns Hopkins University Press, Baltimore.

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Manley, W. (1991), Executive’s Handbook of Model Business Conduct Codes, Prentice-Hall, New York. Marnburg, E. (2000), ‘The behavioural effects of corporate ethical codes: empirical finds and discussion’, Business Ethics: A European Review, 9 (3), 200–10. Mathews, M.C. (1987), ‘Codes of ethics: organizational behavior and misbehavior’, in W.C. Frederick (ed.), Research in Corporate Social Performance and Policy, Vol. 9, Greenwich, CT: JAI Press, Inc., pp. 7–30. McAneny, L. (1992), ‘Pharmacists again top “Honesty and Ethics” poll; ratings for Congress hit new low’, The Gallup Poll Monthly, 322 (July) 2–4. McAneny, L. (1993), ‘Pharmacists retain wide lead as most honorable profession’, The Gallup Poll Monthly, 334 (July), 37–39. McAneny, L. (1995), ‘Annual Honesty & Ethics Poll: “Racial divisions evident in ratings of police, lawyers”’, The Gallup Poll Monthly, 362, 28–32. McAneny, L. (1997), ‘Honesty & ethics poll: “pharmacists again most trusted; police, federal lawmakers’ images improve”’, The Gallup Poll Monthly, 376, 25–7. McAneny, L. and D. Moore (1994), ‘Annual Honesty & Ethics poll: Congress and media sink in public esteem’, The Gallup Poll Monthly, 34, 2–4. McKendall, M., B. DeMarr and C. Jones-Rikkers (2002), ‘Ethical compliance programs and corporate illegality: testing the assumptions of the corporate sentencing guidelines’, Journal of Business Ethics, 37, 367–83. Megan, B. (2002),’Why ethics and compliance program can fail’, Journal of Business Strategy, 23 (6), 37–41. Miller, K.W. and T.R. Fallati (2007),’A tough job for the SEC,’ International Financial Law Review, 26, (12), December, p. 30. Molander, E.A (1987), ‘A paradigm for design, promulgation, and enforcement of ethical codes’, Journal of Business Ethics, 6 (8), 519–631. Newport, F. (1998), ‘No single problem dominates Americans’ concern today’, The Gallup Poll Monthly, 392 (May), 4–5. Nitsch, D., M. Baetz and J.C. Hughes (2005), ‘Why code of conduct violations go unreported: a conceptual framework to guide intervention and future research’, Journal of Business Ethics, 57, 327–41. ‘Parmalat pays $40M to settle class action lawsuit in US’ (2008), Euroweek, May 9, Issue 1053, 52. ‘Parmalat trial gets underway’ (2008), Accountancy, May, 141 (1377), 15. Perlow, L. and S. Williams (2003), ‘Is silence killing your company?’, Harvard Business Review, 81 (5), 52–9. Pfeffer, J. (1992), Managing with Power: Politics and Influence in Organizations, Harvard Business School Press, Boston, MA. Pitt, H.L. and K.A. Groskaufmanis (1990), ‘Minimizing corporate civil and criminal liability: a second look at corporate codes of conduct’, The Georgetown Law Journal, 78, 1559–654. Scalet, S. (2006), ‘Prisoners’ dilemmas, cooperative norms, and codes of business ethics’, Journal of Business Ethics, 65, 309–23. Schnatterly, K. (2003), ‘Increasing firm value through detection and prevention of white collar crime’, Strategic Management Journal, 24, 587–614. Schwartz, M. (2000), ‘Why ethical codes constitute an unconscionable regression’, Journal of Business Ethics, 65, 309–23. Schwartz, M. (2004), ‘Effective corporate codes of ethics: perceptions of code users’, Journal of Business Ethics, 55, 323–43. Schwartz, M., T. Dunfee and M. Kline (2005), ‘Tone at the top: an ethics code for directors?’, Journal of Business Ethics, 58, 79–100. Sims, R.R. and J. Brinkman (2003), ‘Enron ethics (or culture matters more than codes)’, Journal of Business Ethics, 45, 243–56. Snell, R.S. and N.C. Herndon (2000), ‘An evaluation of Hong Kong’s corporate code of ethics initiative’, Asia Pacific Journal of Management, 17 (3), 493–518. Sobszak, A. (2003), ‘Codes of conduct in subcontracting networks: a labour law perspective’, Journal of Business Ethics, 44, 225–34. Somers, M.J. (2001), ‘Ethical codes and organizational context: a study of the relationship between codes of conduct, employee behavior and organizational values’, Journal of Business Ethics, 30 (2), 185–95. Stevens, B. (1994). ‘An analysis of corporate ethical codes studies: where do we go from here?’, Journal of Business Ethics, 13, 63–9. Stevens, B. (1996), ‘Using the competing values framework to assess corporate ethical codes’, Journal of Business Communication, 33 (1), 71–84. Stevens, J., H. Steensma, D. Harrison and P. Cochran (2005), ‘Symbolic or substantive document? The influence of ethics codes on financial executives’ decisions’, Strategic Management Journal, 26, 181–95. Treviño, L.K. and D. Weaver (2003), Managing Ethics in Organizations, Stanford University Press, Stanford, CA. Treviño, L.,G. Weaver, D. Gibson and B. Toffler (1999), ‘Managing ethics and legal compliance. What works and what hurts’, California Management Review, 41 131–51.

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Valentine, S. and T. Barnett (2002), ‘Ethical codes and sales professionals’ perceptions of their organization’s ethical values’, Journal of Business Ethics, 40, (3), 191–200. Wall Street Journal, The (2003), Eastern Edition, December 2, 242, issue 108, p. 13. Weeks, W.A. and J. Nantel (1992), ‘Corporate codes of ethics and sales force behavior: a case study’, Journal of Business Ethics, 11, 753–60. White, B.J. and R. Montgomery (1980), ‘Corporate codes of conduct’, California Management Review, 13 (2), 80–87. Whorf, B. (1956), Language, Thought and Reality, MIT Press, Cambridge, MA. Wotruba, T.R. (1995), ‘A comprehensive framework for the analysis of ethical behavior with a focus on sales organizations’, Journal of Personal Selling and Sales Management, 10, (spring), 29–42.

13 Transparency International: global franchising and the war of information against corruption Luís de Sousa and Peter Larmour

Introduction Transparency International (TI) has gained an indisputable reputation as the most prominent civil society ‘corruption fighter’ at the global level for several reasons. It was the first to get hold of a transnational issue which had only been sporadically and vaguely addressed by other non-governmental organizations (NGOs).1 Its mission was recently defined as ‘to work to create change towards a world free of corruption’.2 The issue of corruption was framed in a non-dichotomous way in order to avoid stigmatization of particular actors to the corrupt exchange. Everybody is called upon in the fight against ‘the evil of corruption’ through a coalition-building strategy involving all sectors of society: government, private sector and civil society (Eigen 2002: 190). No concrete ‘enemies’ were individualized. This all-inclusive strategy in the pursuit of their holistic mission (‘a world free of corruption’) gave the organization considerable political leverage both at the national and international levels. It has played an active role in pressing for the adoption of two international conventions against corruption (by the Organisation for Economic Co-operation and Development: OECD; and the United Nations: UN) and some of its national chapters (NCs)3 have created corruption-monitoring mechanisms and pressed for the adoption or review of national legal frameworks. It displays wide international representation of local arrangements. In short, TI has played a major role in bringing corruption and anti-corruption into the agenda of multilateral organizations and national governments. The purpose of this chapter is to understand the rise, future, and implications of this new ‘integrity warrior’ (Sampson 2005) and to locate it in a wider context and history of anti-corruption activity. In what context was TI born (Galtung, 2000, 2001)? How does it operate in pursuing its mission? How has it evolved in organizational terms to accomplish its objectives and adjust its modus operandi to a changing world? To what extent is TI aware of other players and how far do they cooperate with each other towards the common goal of fighting corruption? How successful has TI been in relation to expected results? What implications has it had (or can rightly claim) as a product of its action? The birth of an ‘integrity fighter’ in a changing world Transparency International was formally launched in May 1993 with the purpose of raising global awareness to the problem of corruption in international business transactions. The original version of the Charter reflected this initial intention of the founders. This was not surprising since most of them were World Bank executives, lawyers, aid and development officials, chief executive officers (CEOs) and retired political leaders.4 TI’s early history has often been told. Its key events include the first meetings among its 269

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founding fathers;5 the decision to create national chapters, rebuffed and then embraced by the World Bank; and the adoption of the Corruption Perceptions Index (CPI) as its signature product (Larmour 2006; De Sousa 2009). After internal ructions in the early 2000s it has moved into middle age. Its name is pre-eminent in the anti-corruption field, and the band of brothers who imagined the organization have stepped aside, or retired, to be replaced by professionals with experience in aid organizations and NGOs (Sampson 2005). TI’s working strategy, however, has remained consistent. It issues press statements criticizing government, and its CPI annually offends governments, but it is keen to offer advice and ‘work with’ governments who show signs of wanting to act against corruption. It sees the private sector as a potential ally. It deliberately eschews campaigns against individuals.6 Its 90 locally established NCs, though they vary in size, composition and activities, are bound to follow this coalitional strategy. It is enforced formally through a process of accreditation and reaccreditation, and informally through network socialization. In tone the organization is much like the international bodies – the World Bank, or the Commonwealth Secretariat – that its founders came from. Its style is somewhat bureaucratic; its building blocks are national units; it competes and cooperates with other international organizations like the OECD. Most of its statistics are collected on a national basis, and the CPI ranks countries rather than say, corrupt regions, sectors or government agencies (all are tarred with the same brush). Its funding is mainly from national ministries of foreign affairs (via aid and development agencies) and foundations.7 Its founding father, Peter Eigen, was a former World Bank official, and its current chair, Huguette Labelle, formerly ran the Canadian International Development Agency. However, there are other organizational elements that are less governmental and more corporate, particularly the carry forward of ‘Personal Active members’ – a loose network of influential contacts of its founder – whose existence and membership sometimes offended the NCs. It runs a biennial international conference that includes more than national delegations and is now in its 13th edition.8 There are world-historic, global processes that have provided the conditions for the new international interest in corruption. These have included the global spread of democracy (with its own characteristic vulnerabilities to corruption emerging from political financing and a myriad of sleazy relationships between politicians and business); economic transitions in formerly socialist economies; privatization and deregulation of market economies; the promotion of international free trade; a new interest in ‘good governance’ as a condition for growth in developing economies; and the growth or reemergence of a series of anti-corruption actors (governmental, on the one hand, such as anti-corruption agencies and multilateral anti-corruption forums or networks, and societal on the other hand, such as domestic and international anti-corruption NGOs and populist parties). Campaigns against it are a regular feature of the politics of most countries, and national anti-corruption campaigns and institutions have a longer history than TI. TI is only part of that wider normative process, which can be termed ‘the international anti-corruption regime’ if we focus on the legislative/regulatory processes or ‘the international anti-corruption movement’ if attention is paid to the mobilization of domestic and global attention to the problem, although the latter is still a disputed label (De Sousa 2009).9 At the international level, the UN General Assembly issued a series of resolutions

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supporting the fight against corruption at all levels of policy making. International economic financial organizations (the OECD; the International Monetary Fund: IMF; the World Bank) equally have realized that their rehabilitation programs could not be accomplished solely through the recruitment of expert economists and that specific social, cultural, political, and institutional factors conditioning development had to be brought into account. Financial aid to underdeveloped economies, rather than contributing to development, was helping to sustain corrupt elites in power. The European Commission has insisted on good governance as a criterion to its preferential financial treatment and trading benefits with developing countries, and a guiding principle to enlargement/ accession strategies. The European Parliament has also taken a recriminatory position in regard to corruptive practices within EU institutions, more precisely, the Commission. During the 1990s, a number of multilateral negotiations under the aegis of international/ regional governmental organizations, such as the Organization of American States, the United Nations, the European Union, the African Union, the Council of Europe, the OECD, the IMF and the World Bank, led to the adoption of guiding principles and international conventions criminalizing the bribery of foreign public officials, harmonizing national penal laws and procedures, facilitating cross-border criminal cooperation and so on. Further to these soft and hard law instruments, joint action plans were being drafted and adopted while new anti-corruption governmental networks, such as the Council of Europe Group of States Against Corruption (GRECO) were being established to improve the capacity of states to fight corruption. Everywhere corruption was regarded as a priority issue and no intergovernmental organization (IGO) wanted to be seen without an action plan against corruption (Mény and De Sousa 1999; Abbott 2001). TI in search of a constituency: the national chapters While traditional anti-corruption national actors look outwards to international forums and higher levels of decision making to compensate for the insufficiency of domestic instruments in addressing cross-border of corruption, TI had to look downwards in search of national partners and constituencies where most anti-corruption instruments need to be ratified, implemented and, hopefully, evaluated. The first Annual General Meeting (AGM) at Quito, Ecuador, in 1994, was important to the organization’s institutionalization for three major reasons: first, it marks the beginning of the organization in operational terms – an international Secretariat (henceforth TI-S) is put in place; second, it represents a major shift in TI’s mission, broadening its scope beyond international trade to cover all types of corruption including the ‘petty’ corruption suffered by citizens on a daily basis at the domestic level (Bajolle 2006); and third, it is the starting point of the franchising process of TI – national chapters were created and multiplied rapidly. At the Quito AGM it became clear that if TI were to prove meaningful in the fight against corruption it had to descend to the terrain and search for local constituencies (De Sousa 2009). The Charter was later amended to include this broadened scope of action and now reads: the purpose of the Society is to take action to combat corruption and prevent criminal activities arising from corruption so as to help build a world in which Government, politics, business, civil society and the daily lives of people are free of corruption.10

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The meaning of any particular idea, or tool depends in part on its context. General ideas like ‘corruption’ or ‘transparency’ – its presumed opposite – have different inflections and connotations as they are transferred and translated into local contexts (De Sousa 2002). Among regions familiar to the authors, in Western Europe, for example, anticorruption was shaped by the interplay of a key number of ‘social forces that were hitherto largely held in check or lacked the muscle to stand up against the arrogance and corruption of the elites’ (Della Porta and Meny 1997: 3). At the forefront the press, but also magistrates, opposition party leaders, disaffected party members, populist parties/ movements, watchdog groups and NGOs have intervened in the public arena to make their points of view valid about what they believed to be unacceptable behaviour in public life. In Central and Eastern Europe, regime transition was a multifold process: it not only meant transition from socialist to liberal democracy, but it equally meant transition from command to market economy and the rebuilding of the state along the new parameters set by a new and aggressive private sphere. These rapid institutional and social changes not only gave rise to several opportunity structures to corruption, but also lowered the moral costs of its occurrence. Besides the structural changes in the political system, state and market and their impact on the daily lives of citizens, what happened with the end of the Cold War was the collapse of the popular belief in the old communist value system. The general deterioration of old value systems and the emergence of new ones was not a harmonious and pacific process. It created a moral chaos in post-communist countries that has been regarded by some authors as a major cause of increasing corruption in the region: The end of communism brought unemployment (often well disguised), poverty, a sharp decline in health and welfare services, a rise in nationalist tensions, and a general climate of aggressive, often desperate, individualism and communalism, all of which are likely to affect the relationship between citizens and officials adversely. Economic dislocation made many entrepreneurs and senior officials conspicuously – and not always legitimately – rich, while putting the incomes of junior officials under severe pressure. While local democratization should have encouraged junior officials to behave better, the moral chaos and economic pressures of the transition may have encouraged them to behave worse. How these contending influences are balanced is an empirical question. Lack of motivation, unclear responsibilities, difficult personal circumstances (low wages), a bad example at the top and poor monitoring of their activities, all provide conditions that encourage corruption amongst junior officials though they neither guarantee nor excuse it. (Miller et al. 1997: 183–84)

The anti-corruption activity in Central and Eastern Europe emerges partly as a response to mounting domestic public pressure and partly as a condition for borrowing and structural fund support by international financial institutions and the European Union. For a region with little tradition in civil society mobilization and organizations, in less than a decade, Central and Eastern Europe became overpopulated with several ‘independent’/protest press and radio stations, anti-corruption NGOs – including the virtuous TI chapters – and populist parties/movements with a vigorous anti-corruption discourse. To these civil society initiatives one should add the proliferation of specialized agencies and inquiry commissions adding up to the folkloric tone that anti-corruption has assumed in the region.

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In Australia, scandals in state governments had led to the creation of anti-corruption commissions in three states: New South Wales in 1989; Queensland in 1989; and Western Australia in 1996 (Larmour and Grabosky 2001; Hindess 2004). In the first two the main focus was on police corruption, which had spread through the judiciary and into state politics. In Western Australia there was more concern with improper links between business interests and politicians making decisions on development proposals – so called ‘WA Inc.’. In developing regions less familiar to us, such as Africa and Latin America, anticorruption had a long tradition in international assistance. A lot of money was poured into setting anti-corruption agencies, NGOs experienced in fighting it and supporting democratic institutions (such as political parties and a free press), but with few practical results. In some instances, anti-corruption even served to legitimize political purges. But even in such adverse social and institutional conditions, the issue became probably the most spoken problem affecting these young democracies. Everywhere, corruption was no longer reported as the product of an occasional ‘rotten apple’, but a systemic phenomenon often with greater success than the legitimate political system from which it draws its resources (Della Porta and Mény 1997). It no longer appeared to be an exception, but a norm: threatening democratic foundations, causing institutional crisis, destabilizing the global economy, helping ‘organized crime’ to breed, fomenting public deception about political life, and undermining the idea of the ‘public interest’. The changing nature of the state and the blurring of the public/private divide have been at the core of the problematic of corruption in recent years, alerting decision makers to the need to strengthen controls and revise standards in public life (Della Porta 1992; Mény 1992). The complexity of modern decision-making processes – different layers, actors, and mechanisms of political influence – added to the lack of transparency in which public decisions and procedures have been carried out, permitted a privileged access to state resources and undermined public confidence in democratic government. TI had originally seen itself as an international ginger group concerned with a specifically international problem – corruption by international business – in which its founders could legitimately claim expertise. Now it was playing in a number of different games, often with more experienced and knowledgeable players. At the least, local institutions and actors had turf and reputation to protect, even as they welcomed new allies and the resources – intellectual and moral as well as financial – they might bring with them. TI’s international network was attractive to some national players, while it offered a distinct (non-confrontational, impersonal) strategy, and some new ideas and indices. But it did not have much money itself. TI itself could not buy its way in to these local games, but many of its officials had experience in the aid industry so could help local groups tap into international funding – and donors directly funded local TI groups: the Council of Europe in Eastern Europe; AusAid in the Pacific Islands; and so on. TI’s relationship with its national chapters is rather like a franchise. TI offers a powerful brand name, media resources, advice about how to combat corruption, and – sometimes – seed money. Then they are on their own, to raise money, commission surveys, lobby governments and otherwise combat corruption. Like a franchiser, TI limits the number of licences to one per country, so franchisees are not competing with each other in the same territory. And as in a franchise, the relationship between the centre and the field is often tense: franchisees can feel they are out there, in the firing line doing the real work,

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but getting insufficient support from ‘head office’.11 TI-S can also feel frustrated: they created this brand, after all, and must protect its reputation for everyone’s benefit. The franchise model thus creates and depends upon a certain kind of monopoly. But national chapters often swim in a sea of other anti-corruption NGOs and they may even feel they no longer need TI and secede. This volatility, however, is more apparent than real. Very few chapters have left, or were invited to leave, the network. The institutionalization of TI: centripetal and centrifugal drives for franchising TI’s institutionalization can tentatively be divided into four phases: ●

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the brief foundation period from 1993 to 1995, during which TI formally accredited an initial network of five NCs: Denmark, Ecuador, Germany, the UK and the US. These founding constituents would prove important within TI’s internal governance structure and process in years to come. The franchising of TI started formally at the 1994 AGM in Quito, but at that stage its goals and activities were yet too narrow and there was no clear idea in which direction the organization would be heading; the post-1994 AGM period, which lasts until the entry into force of the OECD Convention in 1999. In this period, TI institutionalized and expanded rapidly thanks to the success of highly mediatized initiatives, out of which the Corruption Perceptions Index (henceforth CPI) was the most relevant. The creation of TI’s official website at this stage also proved crucial to give visibility to the organization’s activities and instruments; from 1999 to 2003, TI was at its peak. It displayed a consolidated organization and a reputable ‘brand’ in the domain of anti-corruption. Following the October 2002 Casablanca Meeting, TI redefined its mission and introduced new accreditation rules to membership to control the scope and quality of the franchising process; and the post-2003 period, when TI’s future (from a financial and functional point of view) looked uncertain, its capacity to deliver innovative and highly mediatized products was less striking (thus wearing out some of the glamour of the brand) and the internal governance problems and power contests between the NCs at the bottom and the network core or Establishment at the top started to mount. The products were wearing thin and even its charismatic chairman, Peter Eigen, admitted that the TI’s PCI had a ‘certain weakness’.12 The organization appeared to be facing a mounting crisis as the tasks it faced demanded a degree of professionalism which, after the enforced departures of Fredrik Galtung and Jeremy Pope, TI-S appeared unable to meet. Eigen himself retired in 2005, to be replaced by the newly elected chair, Huguette Labelle.13

These four stages in TI’s institutionalization can be explained through two major dynamics of franchising. At an early stage, and following the unexpected success14 of the first CPI, TI expanded fast into a global organization. The centrifugal drive for franchising was dictated both by the need to search for a constituency (legitimization and representation factors) and the need to consolidate the ‘brand’ (the marketing factor). Once the organization became relatively solid (in terms of its membership, structure,

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governance and funding) and its brand became well known worldwide – particularly through the CPI and the passing of the OECD anti-bribery convention – the franchising became inevitably centripetal as TI tried to maintain the reputation of its brand. Most initial NCs started from informal contacts developed by the two TI founding fathers, Peter Eigen and Jeremy Pope, drawing from their previous careers as World Bank official and Commonwealth Secretariat, respectively. The recruitment of Jeremy Pope as TI’s founding managing director on 1 January 1994 was particularly crucial. Right from the start, he promoted the creation of NCs, something that would give him considerable leverage within the organization. If TI were to operate as a global NGO it had to enlarge its membership and franchise its organization, since most anti-corruption work had to be carried out at the national level.15 The adoption of international antibribery conventions or the simple translation of TI’s Source Book into various languages as a mobilization tool highlighted the need for a constituency. Pope’s National Integrity System (NIS) project was evidence of his view that after successfully mobilizing global concern towards corruption, TI had to search for a constituency through which to carry out its anti-corruption work (Galtung and Pope 1999: 268–72). According to TI’s official history,16 at the beginning, only 15 NCs were envisaged. Incrementalism would soon give place to unleashed membership as TI profited from the initial mobilization impact of the CPI. TI rushed into franchising. Catch-all membership superseded the organization’s consolidation and what it had to offer in terms of initiatives against corruption. Moreover, Peter Eigen’s initial insistence that TI chapters be ‘new’ NGOs, and not signed-up existing NGOs, dictated that these new chapters began at the bottom of a steep learning curve. Most of these new TI-S ‘sponsored’ entities had no grassroots support or experience in corruption control issues. These NCs would nevertheless play a decisive role in supporting TI-S policies at a later consolidation stage.17 The first round of NCs included developing and OECD countries, transition and consolidated democracies, with a fair geographical spread: Kenya, Bangladesh, the US, the UK, Denmark, France, Germany and Ecuador (where the Ecuadorian Vice President Alberto Dahik was serving as the first chair of TI’s Advisory Council until his enforced resignation18). One membership trump for TI, contrary to its founder’s initial reluctance to open membership to existing civil service oganizations, was the adhesion of Poder Ciudadano in 1994, a prestigious Argentinian civil rights NGO created in 1989 whose founder, Luis Moreno Ocampo, had been appointed General Prosecutor at the International Criminal Court at The Hague. The reputation of Poder Ciudadano and its well-established networks with other Latin American civil society organizations (CSOs) and national contacts paved the way for TI’s expansion in the region. By 2000, all major Latin American countries were covered, with Mexico joining in 1999 and Brazil some months later.19 History is at stake in more recent constitutional arguments about the relative power of the loose network of influential men that Peter Eigen assembled, and the rapidly expanding number of national chapters. The process of enlarging membership to NCs raised three major internal governance implications of a political, financial and legal nature. One of the problems of the unleashed process of franchising was the incapacity of the organization to vouch for the quality of its members in order to protect its brand against unexpected scandals associated with some of its NCs. In 2003, TI put in place an accreditation system and committee20 to control a process that was no longer easily controllable.

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Once enlarged membership and franchising were set on track, there was little TI could do to stop increasing demands from below for greater internal transparency, accountability and democratization. TI insisted on a key number of normative and organizational requisites which future members must adhere to (membership acquis21) and designed different levels of affiliation for local constituents: National Chapter (full membership); Chapter in Formation (in view of short-term full membership); National Contact (regular contact without membership); and Ally (informal contact). Although these different statuses may imply a kind of evolutionary path to full membership, not all NCs have followed it. Some Chapters in Formation have now applied for NC status (such as the case with Acción Ciudadana in Guatemala). Others would opt to remain local anti-corruption NGOs allied to TI’s mission (for example, the Algerian National Contact22) or cooperating with TI or some of its NCs from time to time (for example, the cases of Bolivia23 and El Salvador24). The Membership Accreditation Committee’s25 role is not so much about minimizing legal ordeals that can arise from granting active membership status, but about controlling enlargement which has institutional and power implications for TI’s internal governance. It is more a screening mechanism for future members than a continuous process of quality certification. With regard to entry, if TI were to be considered a ‘movement’, as it often claims, no conditionality other than allegiance to a basic set of principles and lines of action could be put in place. As Della Porta and Diani put it succinctly, ‘social movements do not have members, but participants’ (2006: 26). The mode of franchising adopted by TI is quite puzzling for an organization that claims to be an embodiment of civil society. Its constituency looks more like the UN General Assembly than a movement of peoples. The decision to constitute single national units (thus excluding the possibility of having subnational units or more than one unit per country) has had its gains and losses. On the one hand, TI has been able to acquire a hegemonic position in the industry of anti-corruption and to launch wellsynchronized and global-raising awareness actions thanks to its strategy of franchising. On the other hand, it has converted the self-proclaimed ‘movement’ into a bureaucratic, conservative and resource-draining organization,26 excluding along the way many valuable contributions. National Chapters in Action Recent research has begun to provide glimpses of how TI’s national chapters survive in these diverse national contexts (De Sousa et al. 2009). The strategies of engagement are largely standardized. Most NCs do not see themselves as a ‘protest and street-mobilizing’ but as opinion-forming organizations. In line with TI’s position, their major strategies of engagement are about informing and raising awareness and, to some extent, lobbying and pressing decision makers to adopt certain corruption control instruments. The coalition-building strategy is standard to most NCs which is in itself evidence that the network lacks grassroots composition. Most NCs claim that their projects or programmes have had an impact on increasing awareness of corruption, strengthening the anti-corruption structures and empowering civil society. However, there is little or no credible evaluation of results. Usually, neither TI-S nor the donors ask for impact assessments but when they do, NCs provide proxy indicators of success with no independent certification.

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Research is expected to play a major role in the daily life of TI and in particular of its NCs, since TI’s guiding principles eschew NCs from investigating corruption allegations. Moreover, given the intended preventive character of most of their activities, research is needed to detect areas of concern and recommend possible solutions. In practice, however, few NCs carry research of their own and have little capacity to attract critical mass on a voluntary basis or to contract payroll experts to undertake research on policy matters. In the words of a TI-S staff member, ‘TI manages research more than it actually executes’. TI is a hub of contacts. It knows where to get the information and expertise from, but does not develop research capabilities of its own. This model has been replicated down the ladder by most NCs. Those who have been successful in attracting academics/researchers into their organization have been able to develop and deliver innovative products, such as the research on arms trade and corruption developed by TI-UK, the monitoring of electoral fraud and corruption by Transparência Brasil, and the assessment on the prospects of the international penal instruments put in place by the two conventions (OECD and UN) developed by TI-Canada. The NCs’ autonomy in setting their own agendas is largely dependent on their capacity to attract critical mass (for instance, through internship programmes or by establishing close relationships with academia) and alternative financial resources. The world around TI is changing, which means that crucial adaptation strategies have to be put in place. As the issue of corruption is losing its allure to donors and IGOs, TI is paying more attention to alliances with research units and centres. Since 2003, TI has been operating the U4 Anti-Corruption Research Centre and Helpdesk in collaboration with the Christian Michelsen Institute (CMI) in Bergen, Norway.27 TI is also aware that the one country–one chapter franchising strategy it has adopted can be costly since it may bring unproductive chapters into the network while leaving other potentially interesting allies outside. TI has shown great difficulty in building bridges with neighbouring NGOs who are also dedicated to the issue of corruption and good governance, even if in a more sectoral and less specialized manner. Mediatization and the war of information Although the media played a crucial role in helping the larger and dispersed opinions to converge, the shift of public perceptions about corruption cannot be interpreted solely as a consequence of greater media exposure. In fact, throughout the 1980s, Western European readers showed signs of indifference to allegations brought forward by the press. Moreover, even in countries where the freedom of the press is limited, corruption has become a political priority, opening the way to selected purges and a series of violations of human rights under the anti-corruption banner (De Sousa 2002). The media were/are important players in unveiling corruption cases and mobilizing people’s attention to the problem and its control. CPI was designed for the media. It played to national emotions. Its critics explore the methodological traps, data incongruence and social and political impact of its ranking and labelling; its authors produce more defences – including long methodological notes. TI begins its crusade with a stunning marketing operation: the launching of the first edition of the CPI.28 The CPI leverages off existing surveys already produced for other purposes and ranks countries on a 10-point scale from the ‘highly clean’ (10) to the ‘highly corrupt’ (0). Ranking is a simplistic form of comparison, whose foremost

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function is to convey information on the number of ‘better’ units than the unit in question (Dahl 2009). This explains why the instrument was so appealing to today’s mass media. CPI has the ‘advantage’ of reducing a complex and qualitative problem to a single nominal dimension. Ranking functions as a kind of national league table, drawing on nationalist feelings like a World Cup. It manages to be subjective, relativist and positivist all at the same time. According to TI representatives, one of the reasons why the CPI became such a widely accepted measure is its ability to translate a complex problem into something easily understood and media-friendly (Galtung 2005; Dahl 2009). This simplification of reality happens in all indexes (including in macro-economic ones), but this has not stopped decision makers, scholars and journalists from using them indiscriminately and without sufficient care about the fallacies of these various measurements. Even if the founders claim that they were initially reluctant to publish it, they are consensual about the CPI’s impact in world opinion and helped to create the brand ‘Transparency International’. Part of the success of TI as an anti-corruption INGO is due to the CPI. It was a formidable instrument for raising awareness that had the onus of putting corruption onto the front pages of all the newspapers in the developing world. Once the first edition was published in Der Spiegel, the CPI rapidly caught everybody’s attention and other international media wanted to have access to the first ‘measurement’ of corruption and to learn more about this new organization. TI leaders were reportedly uneasy about adopting the CPI – they had to decide whether or not to disown it. It recorded perceptions, rather than the actuality, of corruption. It reinforced prejudices and offended lower-ranking governments that TI wanted to influence. And its design meant that it was slow to recognize the kind of improvements that TI said it wanted to achieve, and provided no particular guide to what should be done to achieve improvements. It could also embarrass its national chapters, who had no say in the scoring, but were near at hand when governments were looking for someone to blame. Its attractiveness to the media, however, trumped all these reasons for caution and the CPI remains TI’s signature product, in spite of the other kinds of tools it has produced, partly to compensate for criticisms and weakness of the CPI itself, partly to create a framework for national chapters to carry out their work. These were: ●

The National Integrity System (NIS) reports, which looked at country level, and the architecture of anti-corruption (declaring an interest, one of the authors coordinated a series of these studies in the Pacific Islands). TI has never paid sufficient attention to the policy potential of the NIS reports. This is partly because it is a costly instrument, partly because it is difficult to transform it into something digestible for the media. The NIS reports are a series of in-country produced studies based on a standard questionnaire that provides an extensive diagnostic assessment of the strengths and weaknesses of the key institutions that enable good governance and national integrity in a country.29 The research team responsible for the country report can add other questions, on cultural issues, for example. The project is open to innovation. Research teams are often anchored to NCs of the country concerned. Recruitment of experts is variable and their quality questionable. TI-S handling of this instrument has been precarious, affecting negatively the quality of the reports produced.

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The Bribe Payers Index (BPI), which responded to the charge that the CPI was ‘blaming the victim’ of corruption by foreign firms. The BPI was developed by Fredrik Galtung to compensate for the CPI’s blind spot: [W]hile CPI casts a spotlight on the major bribe takers of the world, it lets the major bribe givers and safe havens of looted funds off the hook. To correct this imbalance, I was responsible for an effort to develop a brand new index for TI in 1999 to track international bribery. The result was the Bribe Payers Index of leading exporting countries. The imbalanced message of the CPI was to some extent corrected through the commission of this (relatively expensive) new instrument. Yet TI has only produced two BPIs in the ten years between the first launch of the CPI in 1995 and 2004. The BPI remains virtually unknown in the wider public and is generally ignored in the world press. (Galtung 2006: 109)

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The Global Corruption Barometer responded to the charge that the CPI only reflected elite, business and foreign opinion, by asking ordinary people about their perceptions and practices. The survey is conducted by Gallup International on behalf of TI in more than 60 countries around the world. The Source Book is less a response to the failings of CPI and it can be seen as a set of standards to which national chapters can refer in their work (Dahl 2009). The ‘sorcerer’s book’, as it is graciously called by some TI members, describes and proposes ‘practical reforms’ that can be applied to ‘each sector of society’ in order to fight corruption. It reviews various ‘lessons learned’ so far in the global fight against corruption, and ends up by providing a compilation of emerging best practice. TI has also tried to rebuff criticisms on its lack of capacity to produce analytical works through the publication of thematic research books with a prestigious academic publisher (that is, Cambridge University Press). Although the Global Corruption Report (GCR) shows little in-house research, it offers an annual assessment of the state of corruption research around the world. The GCR is divided into two parts: the first is a thematic section devoted to a short expert analysis of one key corruption issue; the second shows the latest empirical insights and methodological advances in diagnosing and assessing corruption. The GCR is a clear example that TI is not yet motivated to develop research, but to manage outside research capabilities.

The CPI, whatever its faults, did provide the authority of numbers, facilitating the coming out of corruption as a suitable topic for discussion in the world of international organizations and business. It also – as Galtung (2005) argued – put Western countries and developing countries ‘on the same page’ – though the latter tended to cluster towards the bottom. It supported a shift in thinking in the economics profession, which now had figures that could be correlated with other figures (such as GDP) to show, for example, the ill effects of corruption on development. In the enthusiasm for the CPI, the ‘P’ was often elided. For example, in spite of TI’s warnings that the index was not a good measure of change – it reflected perceptions, and last year’s perceptions were factored into this year’s to stabilize the result – an Indonesian anti-corruption body was reported as celebrating a marginal change in its score as a measure of its success.

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Conclusions: the future of TI TI has been able to both institutionalize the anti-corruption norm and spread its doctrine at the global level via the action of its local constituencies. TI certainly faces important governance challenges ahead as numbers grow and its capacity to deliver and innovate is less convincing, but its role in the fight against corruption has been neither marginal nor dispensable. It has followed the life cycle of many organizations – from individual enthusiasm through overcoming resistance to acceptance and institutionalization. TI swims in a cutthroat world of competition for grants, media attention, and the ear of powerful officials. TI has a kind of first-mover advantage at the international level – it was the first to bring this issue to the attention of the international community. Until TI, corruption was something talked about sotto voce, in the corridors, and outside the formal sessions of international meetings, delegations and negotiations. TI brought it out into the open, as a proper topic for reports, meetings, consultancies and action plans. But it has to continue to struggle for funding and attention, and is vulnerable to competition for both. One of its founding fathers, Jeremy Pope, and its favourite ‘son’ (Fredrik Galtung) split from TI to form their own anti-corruption NGO. Its name ‘TIRI’, like Transparência Brasil, illustrates another move in the game of franchising: their names are tantalizingly similar to the brands from which they seceded (TIRI’s website cheekily points out that it is a Maori word, not an acronym). Like TI it gets funding from donor agencies and foundations, such as Soros. TI’s international pre-eminence in the world of surveys is also challenged by Global Integrity,30 an offspring of the Center for Public Integrity in Washington, DC, which produces an alternative measurement of corruption (or better, of domestic institutional capacity to fight corruption and ensure good governance) to the CPI. TI’s funding by northern aid donors is vulnerable to decisions that they might want to do this themselves, or through another vehicle. The U4 website – funded by several donors, and managed by a Norwegian NGO – in many ways does research and advising tasks that TI might have been expected to do itself. It has a help desk. It collates and comments on research in a more sophisticated and critical way than TI does (U4 refers questions to TI, which lists its answers on its own website, but for U4 it is only one provider among many). The fact that information, ideas ‘tools’ are now ‘all on the web’ makes it hard to profit from innovation: nothing is new for long enough to pay back the costs of discovering it. TI-S has also eschewed selling its authority rather than expertise through private consulting work. One of the least discussed questions in the burgeoning literature concerning the current global anti-corruption regime, which TI is ideologically committed to promote and strategically interested to safeguard in order to stay in business, is how long will this concern last and how serious the problem of corruption actually is. As Barry Hindess (2009) put it: ‘while there are cases in which corruption poses an urgent practical problem, it is not significant in the way TI suggests, and further, that its proposed remedy does not address the problem it describes’. The suggestion that anti-corruption reforms are likely to have limited success is hardly new. The Swedish economist Gunnar Myrdal (1968) was one of the first to denounce the folkloric tone of anti-corruption campaigns. Nevertheless, there have been very few studies looking at the way anti-corruption campaigns can be abused, serve the interests of powerful groups, and have unintended consequences. Frank Anechiarico and James Jacobs (1996) were pioneers of this critical

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approach, arguing that the layers of supervision introduced after each new corruption scandal in New York were severely limiting the effectiveness of the bureaucracy. More recently a series of scholars from the Central European University, particularly Andras Sajó, who co-edited what he called a ‘Sceptic’s Handbook’ on corruption (Kotkin and Sajó 2002), Ivan Krastev (2004), Martin Tisné and Daniel Smilov (2004) have raised questions about the negative consequences of donor-sponsored anti-corruption campaigns in Eastern Europe. TI has lost much of its initial flair and shine and this is partly due to the fact that the issue of corruption, like many other issues in the global agenda, follows a cycle of interest, activity, and disappointment. Corruption has not completely lost its allure, but has become second to other emerging concerns in the global agenda, such as terrorism, depletion of fossil energy resources and more recently the failure of financial markets. None of these issues is self-contained. They can permeate to other problems and dynamics. Much of the discussion on the current financial crisis is centred on questions of integrity and transparency of financial markets (from the perks and privileges of CEOs to the use of off-shores). The future of TI is largely dependent on how successful it will be in keeping the demand for anti-corruption measures high by adapting its mission to a changing global agenda. Notes 1.

2. 3.

4.

5.

There are plenty of NGOs at the national level, from which TI can choose to develop partnerships or propose NC membership, but it has no real competitors in the global arena. Once TI captured the issue of anti-corruption and its brand consolidated, it would have been difficult for a new INGO (international NGO) to emerge and try to leapfrog TI’s monopoly in this domain. TI seized effectively an opportunity structure which emerged as a result of various conjunctural factors (Mény and de Sousa 1999; Krastev 2000), but this does not mean that it is the only INGO with an interest in corruption-related issues. Global Witness and George Soros’s Open Society Institute, which were founded about the same time (1993) and with whom TI has collaborated regularly, have equally an interest in and, to an extent, a different understanding of corruption and anti-corruption. Not surprisingly, TI has generally avoided creating close partnerships with other, more-established INGOs with whom it has much in common, such as Amnesty International, Friends of the Earth and Médecins sans Frontières as part of a strategy of ‘territorial demarcation’. Having said this, some collaboration between TI and other INGOs has taken place but only after careful consideration of the expected costs and benefits involved. Strategic cooperation has taken place when the partners facilitate TI’s access to power circles and potential sources of funding. These criteria have equally been used to refuse certain partnerships (Cisar 2003: 47). See http://www.transparency.org/about_us (accessed 3 October 2008). In order to simplify the designation of NCs, the expression ‘TI-country’ (for example, TI-Canada) will often be used as a substitute for the chapter’s real name (for example, Transparency International Canada Inc.). By no means is it intended to give a subsidiary role to the NCs, since, formally speaking, these locally registered NGOs do not depend upon TI to exist as legal entities. TI’s founding charter was signed by the following people: the German Peter Eigen, a former World Bank official, who, according to all accounts, originated the idea of an anti-corruption NGO; Peter Conze from GTZ (the German Society for Cooperation and Development); Jeremy Pope, former Counsel to the Commonwealth Secretariat-General; Fritz Heimann, from General Electric; Michael Hershman, president of the Fairfax Group; Frank Vogl, president of Vogl Communications and former Director of Information and Public Relations at the World Bank; Roy A. Stacey, US Deputy Assistant for African Affairs; Laurence Cockcroft, development economist; Kamal Hossain, former Minister of Foreign Affairs of Bangladesh; and Jerry Parfitt (Bajolle 2006: 11). Its founders recollect its history around exotic locations: the garden of a house in Kenya, rented by the World Bank from the wife of the finance minister; a vacation in the Galapagos islands; a conference in Davos. Memories are often vaguer about who, exactly, was there. Lists of the founding fathers begin with Peter Eigen, its founder and current Chairman of the Board. They often include Frank Vogl, Hansjorg Elshorst, George Moody Stewart, Fritz Heiman, Michael van Hulten, Lawrence Cockcroft and Jeremy Pope. And it was ‘fathers’. There is a jostling, competitive, alpha-male style to the founders,

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10. 11.

12. 13.

14. 15.

16. 17. 18.

Research companion to corruption in organizations and a ‘naughty boy’ delight in breaking the rules they had been brought up on. At first, it was mainly a Western, Anglo-Saxon elite-based organization, but not by default. Some non-Western leaders were initially engaged in the project – Tunku Aziz of Malaysia, Kamal Hossain of Bangladesh and Olusegun Obasanjo of Nigeria – others would follow. There was also a favourite son, Fredrik Galtung, who joined early, and provided much intellectual drive to the organization, until he left angrily, with Jeremy Pope, in 2003. See TI’s Guiding Principles: http://transparency.org/about_us/organisation/statement (accessed 23 October 2008). See TI’s 2007 Audited Financial Report: http://transparency.org/about_us/annual (accessed 23 October 2008). The International Anti-Corruption Conference: http://www.13iacc.org/ (accessed 23 October 2008). Though some of its founders refer to TI as ‘the global anticorruption movement’, it is only part of that wider process. TI is better defined as an INGO whose franchising process has, on some occasions, been entangled with local dynamics and movements. At most, we can refer to it as a confederation of anticorruption NGOs, since it does not qualify on many criteria as a social movement or transnational activist network. According to Wang and Rosenau there are ‘two reasons why TI is neither a social movement nor transnational activist network closely linked with grassroots organizations. First . . . activist networks that base their campaigns on “short and clear” causal chains and that can galvanize support by images of bodily damage, especially to the vulnerable members of the population, are likely to succeed. But neither of these is easily done regarding corruption. . . . Second, the covert and dispersed nature of corruption . . . indicates that it is hard for potential participants to know that they have made a difference; and yet this knowledge is the lifeblood of any social movement’ (2001: 39). In the same vein, Cisar argues that TI has never sought confrontational action as an anti-corruption strategy (2003: 46). Protest is central to the definition of social movements (Della Porta and Diani 2006: 20–9), whereas building coalitions with all power actors has been TI’s strategy throughout its existence (See ‘TI Approach’, available at: http:// www.transparency.org/about_us/approach (accessed November 2 2007)). This explains why TI prefers to sit at the ‘high table’ with World Economic Forum (WEF) institutions instead of being ‘out in the streets’ standing in opposition to the promoters of neoliberalism and globalization (world governing and financial institutions, corporations, governments of powerful/developed countries). This is also evidence that, intentionally or inadvertently, TI’s anti-corruption discourse has married conveniently the neoliberal discourse promoted by those international agencies, whose action TI claims to have contested (Börzel and Risse 2002; Hindess 2005). See TI’s Charter: http://transparency.org/about_us/organisation/charter (accessed 23 October 2008). It is precisely in those countries where TI’s franchising process has been preceded by local civil society mobilizations that the relationships between TI-S have been particularly difficult. This was particularly the case with the Philippines and Brazil, whose national chapters have always rejected the idea of ‘incorporation’ and a top-down approach to agenda setting. Transparência Brasil has recently renounced its NC status and opted to maintain a non-institutionalized cooperative relationship with TI without statutory obligations of any sort, treating TI as one among several potential partners in the field of anticorruption. Vanguard newspaper, Nigeria, 30 November 2004. Huguette Labelle is a powerful figure in Canada. She has served in several State department offices before she was appointed President of the Canadian International Development Agency (CIDA) where she worked for almost seven years, during which time she was active in over 100 countries. Her election as chairperson of TI was very important in a period in which TI was facing serious financial difficulties. CIDA is currently one of the major donors of TI. Initially, the founders had more humble expectations of TI’s franchising process: they thought the organization would only achieve around 15 NCs in a decade or so. The fight against corruption is still mainly, if not mostly a national-based and national-oriented effort. Democracy is a territorial-based concept and if the fight against corruption is meant to improve its quality or ensure its normal functioning, it will have to play in its jurisdictional territory, looking at the performance of its institutions, at the expectations of its citizens and the national leaders’ predisposition to do something about it. People show only limited concern about what has been done and how successful the combat against corruption has been in neighbouring countries. People may resort to stereotyped visions of foreign societies and political systems, which CPI has probably reinforced, but remain largely indifferent to corruption and anti-corruption efforts elsewhere. TI History, from the TI website: http://www.transparency.org/about_ti/history.html. It was Fredrik Galtung who succeeded in breaking this mould when he persuaded Eigen to accept an existing Argentinian NGO, Poder Ciudadano, as a national chapter, on the grounds that it had already filled the space there might otherwise have been for a national chapter. Dahik had been at the World Bank and was a personal friend of Peter Eigen. His relationship with TI

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22. 23. 24. 25. 26.

27.

28.

29. 30.

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ended in 1995 when he was accused of corruption and he fled the country, to live in Costa Rica where he was granted political asylum. There was a previous failed attempt at constituting a NC in Brazil by the organization Transparência, Consciência e Cidadania. In 2000, another Brazilian NGO Transparência Brazil became an accredited NC of TI. Although we can talk of accreditation previously, the rules and principles underpinning this process were only defined in 2003. A new Membership Accreditation Committee was put in place. TI NCs are free to organize themselves in the way they see fit and to define their own mandates and work programmes, but ‘they must follow two important rules of conduct: 1) they will not investigate and expose individual cases of corruption as such activity would undermine efforts to build coalitions which promote professional and technical improvements of anti-corruption systems; and 2) they must avoid party politics as partisan activity would damage TI’s credibility’ (TI Sourcebook 2000, Ch. 15). These two principles were agreed to by the initial NCs at the first AGM, in Quito, Ecuador, May 1994 and still constitute the baseline of TI’s membership acquis. During the Annual Membership Meeting held in Prague on 6 October 2001, TI defined more in detail these standards and policies in the ‘Statement of Vision, Values and Guiding Principles of Transparency International’ (called the ‘Umbrella Statement’). Association Algérienne de Lutte contre la corruption. Fundacíon Ética y Democracia. Probidad. Three seats in the Membership Accreditation Committee are held by non-voting members of TI. The consolidation of TI’s finances went hand in hand with its franchising and the development of high media impact products (such as the CPI). Starting with an income of around US$591,581 in 1994, by 2000, when TI had become a reputable ‘brand’ in anti-corruption, the organization was cashing in US$3,769,000. Ten years later, TI was running a budget of US$8,820,853. ‘The U4 Helpdesk provides targeted, timely and evidence-based advice on anti-corruption issues to the staff of member international development agencies – both at their headquarters and field offices worldwide – on a demand driven basis’. For more information: http://www.transparency.org/policy_research/ u4_helpdesk (accessed 13 September 2008). The CPI is a so-called ‘composite index’, with each score based on at least three independent survey sources. For the 2004 CPI, 18 data sources from a total of 12 institutions were used: (1) the World Economic Forum; (2) the Institute of Management Development; (3) the Economist Intelligence Unit; (4) Information International from Beirut; (5) the World Market Research Centre; (6) Gallup International on behalf of Transparency International; (7) Freedom House’s Nations in Transit; (8) the Merchant International Group Limited (London); (9) the Political and Economic Risk Consultancy (in Hong Kong); (10) Columbia University; (11) a multilateral development bank; and (12) the Business Environment and Enterprise Performance Survey of the European Bank for Reconstruction and Development and the World Bank. The methodology was developed by an economist at the University of Passau, Germany, Professor Lambsdorff. He is also the director of statistical work on the CPI. See: http://www.transparency.org/policy_research/nis (accessed 13 September 2008). See: http://www.globalintegrity.org/ (accessed 23 October 2008).

References Abbott, Kenneth W. (2001), ‘Rule making in the WTO: lessons from the case of bribery and corruption’, Journal of International Economic Law, 4 (2), 275–96. Anechiarico, Frank and Jacobs, James (1996), The Pursuit of Absolute Integrity: How Corruption Control Makes Government Ineffective, Chicago, IL and London: University of Chicago Press. Bajolle, Julie (2006), ‘The origins and motivations of the current emphasis on corruption: the case of transparency international’, paper presented at Workshop 2: The International Anti-Corruption Movement, European Consortium for Political Research Joint Sessions of Workshops, Nicosia, Cyprus, 25–30 April (unpublished). Börzel, T.A. and Risse, T. (2002), ‘Public–private partnerships: effective and legitimate tools of international governance?’, in E. Grande and L.W. Pauly (eds), Complex Sovereignty: On the Reconstitution of Political Authority in the 21st century, Toronto: University of Toronto Press, pp. 195–216. Cisar, O. (2003), ‘Strategies for using information techniques for curbing public sector corruption: the case of the Czech Republic (CCR)’, International Policy Fellowship 2002, Final Research Report, Budapest: Open Society Institute, http://www.policy.inu/cisar/IPF_nal.pdf, (accessed 19 August 2008). Dahl, Matilda (2009), ‘How do international organizations scrutinize transforming states? The case of transparency international and the Baltic States’, in De Sousa et al. (eds), pp. 152–67. Della Porta, Donatella (1992), Lo scambio occulto (The hidden exchange), Bologna: il Mulino. Della Porta, D. and Diani, M. (2006), Social Movements: An Introduction, Oxford: Blackwell Publishing.

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Della Porta, Donatella and Mény, Yves (1997), Democracy and Corruption in Europe, London: Pinter. De Sousa, Luís (2002), ‘Corruption: assessing ethical standards in political life through control policies’, unpublished PhD thesis, European University Institute. De Sousa, Luís (2009), ‘TI in search of a constituency: the institutionalization and franchising of the global anti-corruption doctrine’, in De Sousa et al. (eds) pp. 186–208. De Sousa, Luís, Larmour, Peter and Hindess, Barry (eds) (2009), Governments, NGOs and Anti-Corruption: The New Integrity Warriors, London: Routledge/ECPR Studies in European Political Science. Eigen, Peter (2002), ‘Measuring and combating corruption’, Policy Reform, 5 (4), pp. 187–201. Galtung, Fredrik (2000), ‘A global network to curb corruption: the experience of transparency international’, in Ann M. Florini (ed.), The Third Force: The Rise of Transnational Civil Society, Washington, DC: Brookings Institution Press, pp. 17–48. Galtung, Fredrik (2001), ‘Transparency International’s network to curb corruption’, in Gerald E. Caiden, O.P. Dwivedi and Joseph Jabbra (eds), Where Corruption Lives, Bloomfield, CT: Kumarian Press, pp. 189–216. Galtung, Fredrik (2006) ‘Measuring the immeasurable: boundaries and functions of (macro) corruption indices’, in Fredrik Galtung and Charles Sampford (eds), Measuring Corruption, Aldershot: Ashgate, pp. 101–30. Galtung, Fredrik and Pope Jeremy (1999), ‘The global coalition against corruption: evaluating Transparency International’, in Andreas Schedler, Larry Diamond and Marc F. Plattner (eds), The Self-restraining State: Power and Accountability in New Democracies, Boulder, CO: Lynne Rienner, pp. 257–84. Hindess, Barry (2004), Corruption and Democracy in Australia, Canberra: Democratic Audit of Australia, Australian National University. Hindess, Barry (2005), ‘Investigating international anti-corruption’, Third World Quarterly, 26 (8): 1389–98. Hindess, Barry (2009), ‘International anti-corruption as a programme of normalization’ in De Sousa et al. (eds), pp. 19–32. Kotkin and A. Sajö (eds) (2002), Political Corruption in Transition. A Sceptic’s Handbook, Budapest/NY: CEU Press. Krastev, Ivan (2004), Shifting Obsessions. Three Essays on the Politics of Anticorruption, Budapest/New York: CEU Press. Larmour, Peter (2006), ‘Civilisation techniques: Transparency International and the spread of anti corruption’ in B. Bowden and L. Seabrooke (eds), Global Standards of Market Civilization, London: Routledge, pp. 95–106. Larmour, Peter and Grabosky, Peter (2001), ‘Corruption in Australia: its prevention and control’, in Gerald E. Caiden, O.P. Dwivedi and Joseph Jabbra (eds), Where Corruption Lives, Bloomfield, CT: Kumarian Press, pp. 175–88. Mény, Yves (1992), La corruption de la Republique, Paris: Fayard. Mény, Yves and de Sousa, Luis (1999), ‘Corruption: political and public aspects’ in International Encyclopedia of the Social and Behavioral Sciences, London: Elsevier Science, pp. 2824–30. Miller, William, Koshechkina, Tatyana and Grødeland, Ase (1997), ‘How citizens cope with postcommunist officials: evidence from focus group discussions in Ukraine and the Czech Republic’, in Paul Heywood (ed.), Political Corruption, Oxford: Blackwell/The Political Studies Association, pp. 181–209. Myrdal, Gunnar (1968), Asian Drama: An Inquiry into the Poverty of Nations, New York: Atheneum. Sampson, Steven (2005), ‘Integrity warriors: global morality and the anti-corruption movement in the Balkans’, in D. Haller and C. Shore (eds), Corruption. Anthropological Perspectives, London/Ann Arbor, MI: Pluto Press, pp. 103–30. Tisné, M. and Smilov, D. (2004), ‘From the ground up: assessing the record of anticorruption assistance in Southeastern Europe’, Policy Studies Series, Budapest: Center for European Policy Studies/Central European University, available at: http://www.soros.org.ba/docs_pravo/wp-anticorruption.a1.pdf (accessed 10 October 2007). Wang, Hongying and Rosenau, James N. (2001) ‘Transparency International and corruption as an issue of global governance’, Global Governance, 7, (1) (January), 25–49.

14 Canadian corporate corruption L.S. Rosen

Introduction From our perspective of being forensic, investigative accountants who handle corporate fraud and corruption cases across the world, Canada is more than a curiosity. Many investors in the world inappropriately seem to think that Canada has minimal corporate shenanigans, and therefore is relatively safe for investments. Other investors and executives know otherwise, and are able to take essential precautions. The knowledge unevenness and gap breeds corporate white-collar crime against the many ill-informed investors in Canada. The reality is that Canada’s weak corporate laws and fragmented securities laws, ineffective court decisions, negligible monitoring of pyramid scheme corporate financing activities and the essentially non-existent prosecutions make Canada a haven for corporate criminals and corruption. Knowledgeable financial tricksters are easily able to circumvent the few laws and barriers that exist in Canada. The decade since 2000 has provided many examples of financial shenanigans and corporate failures. Prosecution of the US’s Enron and related financial trickery have not improved overall investor protection in Canada, despite what some business writers tend to assume. Canada’s common border with the US is both a hindrance and a blessing for investors and citizens. Historically, enough Canadian company stocks have been traded in both Canada and in the US (and therefore have to comply with US securities laws), that an illusion has been created that Canada has protections against serious securities corruption. In essence, defrauded Canadians have often been able to utilize various US laws to recover some of their lost investment dollars from these ‘cross-listed’ (Canada–US) stocks. But, especially serious limitations exist with investors’ rights in Canada when US laws do not apply. Lawsuits against directors, officers and auditors all too often become abandoned, usually because of the costs of litigation. Supporting laws often do not exist to help investors when ‘Canada only’ stocks collapse for various reasons, mainly from forms of corruption. In contrast to the false aura of investor protection created for US–Canada crosslisted Canadian corporations, a variety of hindrances occur when a stock is traded only in Canada. Investors typically are left on their own when corruption occurs, because Canada does not have any governmental or quasi-governmental bodies that have a clear primary mandate of monitoring financial trickery and promoting ‘investor protection’. Financial fraudsters are well aware of the legal freedoms that they have been granted through neglect in Canada, and have utilized the many loopholes to avoid penalties. Consequently, given political apathy, financial scams are especially commonplace in Canada. The country does not have an equivalent to, for example, the US’s Securities and Exchange Commission (SEC). Corporate and securities laws of the US have been 285

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much watered down by politicians before they are considered for usage in Canada. An unwarranted pretence of politicians is that Canada does not have securities problems. When few prosecutions occur, it is easy to claim that securities crimes are infrequent in Canada. Myths about the quality of Canada’s investor protection system unfortunately abound among international researchers. One reason is that even basic tabulations of securities trickery are not readily available in Canada. Frequency and magnitude of financial failures caused by corruption seemingly are known by only a few who conduct investigations. Indeed, the last in-depth public investigation of suspicious corporate failures was published over 20 years ago.1 A second, less-probing, analysis occurred three years later.2 But, by 1989, Canada somehow unwisely chose to pretend that criminals would not be attracted by an overly loose, permissive environment. The decision of Canada’s politicians to ignore billions of dollars of investor losses obviously has a variety of major consequences. The surprising absence of concern by the average citizen eventually will have to show itself in reduced pension dollars at retirement. But, at the present date, Canadian citizens are seemingly not sufficiently aware of the financial crisis that lies ahead. Objections to Canada’s essentially one-sided investor laws are still uncoordinated, largely because financial support is lacking for an organization that is devoted to changing laws. Canada’s ability to disguise to the world its significant deficiencies in investors’ rights would be an interesting sociological study. But, many other research studies can be formulated along philosophical and practical business policy lines. Clearly, financial instrument complexities and the downsides of weak financial reporting are not understood by the average Canadian investor. Thus, losses from these financial collapses are significant, and are inevitable. Canada has consistently elected to ‘let the fox guard the hen house’. That is, selfregulating organizations (such as those in charge of financial reporting standards and quality, or for the policing of broker-dealers, and similar) are allowed to set the level of performance standards for investors’ rights. Occasionally, the courts intervene, and set higher standards for such matters as financial reporting.3 However, most of these selfregulating bodies have become self-serving, often to extremes. Self-regulation simply has not functioned, even partially effectively, in Canada. Standards are frequently kept too low to litigate for matters such as negligence. Lessons can therefore be learned for other nations, to avoid Canada’s dismal experience with self-regulation, and the extensive financial corruption that ensues. As will be described shortly, complex financial failures are common in Canada, contrary to what gets reported by researchers and in the media. Some evidence Since 2000, Canadian investors have lost billions of dollars of savings for a variety of preventable reasons. Stated bluntly (and as will be explained shortly), Canadian corporate and securities law, court decisions and investigation/prosecution of securities crimes overwhelmingly favor the perpetrators. Trading based on inside financial information, for instance, is rarely prosecuted. ‘Cooking’ of a company’s books is commonplace. Other trickery is widespread and is ineffectively policed. Swindled investment ‘savings’ are almost never returned to investors in Canada.

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Owners of equity shares of companies that are traded only in Canada occasionally can become members of a class action lawsuit when share prices collapse. But, the politicians have added built-in obstructions that have to be overcome, such as needing court approval to launch a class action securities lawsuit.4 Such obstacles serve to discourage class action lawyers who have to absorb the costs of warranted, yet unsuccessful, lawsuits. Occasionally, a wealthy investor will finance a lawsuit against Canadian directors, officers and auditors. But, in our experience, these wealthy individuals tend not to be Canadians and are often seeking, besides money, some form of retaliation or revenge. Overall, for the majority group of ‘only Canadian-traded’ stocks, chances of financial recovery are remote, even when a strong case exists for the plaintiffs. Given the highly misleading media focus that Canada’s investor protection system is somehow mysteriously of high quality, it seems wise to provide a listing of a few major Canadian financial failures in which especially serious allegations of negligence, corruption or fraud have been alleged. Many of the undernoted scenarios have ended up in court. A majority of Canadian director–officer–auditor cases tend to be settled before a court decision has been rendered. Hence, statistics showing court ‘convictions’ are highly misleading in tabulating the depth of financial failures and the frequency of financial shenanigans. Researchers have to be content with gathering evidence from the court records of what each side was alleging when a claim was filed. For many of the cases we are not permitted to provide additional details because, being frequent expert witnesses, we were required to sign confidentiality agreements when cases were being settled out of court. Nevertheless, we believe that even a short listing of Canadian financial failures is ample evidence that Canada has significant deficiencies in monitoring and prosecuting the pillaging of investors. For unknown reasons, Canadian politicians are ignoring the devastating impact that financial scams are having, and will have, on retirees’ portfolios. Financial hardships are likely to become more and more evident over the next 20 years. As a general rule, weak financial reporting standards permit cover-ups of such matters as incompetence and inept decision making by management, fraud against investors, self-dealing-related party transactions and much more. Cover-ups can be designed to be effective for five or more years. Eventually, though, a manipulated company simply runs out of cash, and collapses. Meanwhile, pending bankruptcy, more and more cash gets extracted from naive investors into companies that are failing, but which are still permitted to publish misleading audited financial statements, based on flimsy rules. Some of the more prominent, recent Canadian financial failures wherein extremely serious allegations of wrongdoing have been made include the following: 1.

Income trusts, especially so-called business income trusts (2001–07). Perhaps 200 different companies could be included in this business trust category, with over half being suspect. Virtually all used the common approach of paying to investors monthly cash distributions of 125 to 300 percent of what the entity actually earned (that is, income or profit). A company that had net income of perhaps $1 million in a month might pay out $3 million that month (and similar for several months) to its misnamed ‘trust unitholders’. Unfortunately, investors focused on the $3 million instead of the fact that the cash distribution was not sustainable in the next few years.

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Research companion to corruption in organizations Where did the additional $2 million ($3 million – $1million) come from? Often, the $2 million would be borrowed, or arise from selling more units/shares/stock to the unwary. Thus, a form of pyramid scheme or Ponzi fraud was being utilized whereby borrowings from ‘Peter, to pay Paul’ were occurring. Clearly, in time, the ‘Peters’ of Canada would eventually stop lending money and the scam would collapse, because Paul did not get paid. Charles Ponzi worked his pyramid ‘borrowing’ schemes in the US in the 1910–20 period. Nevertheless, Canada has taken little action to prevent Ponzi schemes from continuously being utilized in Canadian stock markets. The latest massive outbreak of such Ponzi schemes (2001–07) appeared to occur primarily or only in Canada, and cost investors over Can$30 billion at the last count. Despite such huge losses, the politicians never bothered to investigate, and try to head off repetitions. Prosecutions were essentially nil. As a consequence, Canada is still wide open for another pyramid round of conning the public, including by utilizing the services of many professionals and large public corporations. Professionals largely remained silent while the trickery extended over several years. Few media articles or programs appeared to offset extensive advertising about the false merits of income trusts. In essence, the income trust bubble in Canada progressed because stock market regulators and auditors sided with the perpetrators. Seemingly, they saw no point in carrying out their societal role of acting on behalf of shareholders/investors, and issuing frequent warnings. Through their inaction, the politicians thus were parties to the income trust unitholder fleecings. One particularly disturbing element to Canada’s income trust Ponzis involved the widespread publication of ‘fake yields’ on trust unit investments. Instead of ‘yield’ (or return on investment) being the conventional earned income divided by investment capital, the yield was calculated as cash distributed to unitholders divided by investment (owners’ equity) capital. Thus, using our previous example of $3 million of cash being distributed to investors versus $1 million of income actually being earned, the ‘yield’ magically tripled. Nevertheless, Canada’s auditors and provincial securities regulators ignored such a blatant yield computation scam. No disciplinary action has yet been taken on behalf of swindled investors. ‘Buyer beware’ warnings are unsuccessful in the face of massive contrary advertising. Nortel Networks (2000–2008). At its peak Nortel’s shares were selling for roughly Can$125 per share. In 2008 (after a 1 share for 10 share reverse split), Nortel was selling for less than Can$1. The Can$125 versus the equivalent of under 10 cents per share is startling, to say the least. Nortel was a cross-listed Canadian stock, which led to serious litigation occurring in the US, and close to zero prosecution in Canada. Multi-million dollar penalty payments were made in the US, including to securities violation monitors. Canadian securities fines of roughly Can$1 million were less than 1 percent of what Nortel had to pay in the US. Nortel, virtually alone, portrays the essence of Canada’s non-existent investor protection system, and coddling of financial tricksters. At issue in Nortel was (and still is) material dollar overstatements of revenue and profit. Nortel’s audited annual financial statements had to be amended four times

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for a misstated four- or five-year time period. Several senior executives are facing a series of charges, with the serious ones being in the US. Bre-X Minerals (roughly 1995–2005). Bre-X was a mining promotion that employed fraudulent gold ore samples. It typified the vast array of Canadian scams involving mining companies. Although securities fraud charges were brought in Canada, the effort was a dismal one by the prosecutors, and the court dismissed the case. Many investors have lost millions. Yet, the perpetrators remain free to operate as they may choose. Occasionally, after such cases some directors and officers are excluded from acting as directors/officers of a public company in the future. But, the investors still have to absorb 100 percent of the losses. Obviously, not all scams can be prevented. But, simplistic trickery can be curtailed by taking basic monitoring functions, ideally with government help. Canadian politicians apparently do not subscribe to prevention philosophies. Castor Holdings Limited (1992, to date). This case is still before the courts; hence, little may be said. Nevertheless, the case shows how difficult ‘prosecutions’ can be in Canada for private as well as public companies. Investors’ losses could exceed Can$1 billion. By 2008, the case had been at trial for almost 10 years. Whereas some unfortunate, unavoidable problems have arisen since 1992, in basic terms, justice has so far been denied. The Castor case is also a prime example of what has to occur in Canada. That is, ‘foreign’ investors are obligated to finance much of the litigation cost and expenses of the necessary investigations. Otherwise, civil actions tend to not proceed. Governments are simply not parties to helping investors most of the time, because they step aside and let the ill-resourced investors bear the brunt of well-healed defendants. Crocus Investment Fund (primarily 2000 to date). In essence, this case was eventually settled out of court. Hence, investors will receive some repayment, albeit a small fraction of what they invested. Noteworthy is that, even when the defendants in a case agree to settle, many months or years typically elapse before cash is received by aggrieved investors. Litigation costs can be very high and obstructionist tactics are commonplace. Also of note is that most defendants, who pay to settle a case, want investors to agree to financial settlement clauses wherein no admission of negligence or prosecutions of similar offences is made. Thus, for researchers who do not gather such settlement data, a country can appear to be much safer than actually is the reality.

As we write, many dozens of other twenty-first century alleged fraud and corruption cases have been filed in Canadian courts. Yet, the business media in Canada rarely mention such cases. Accordingly, it is far too easy for securities regulators to falsely claim that Canada is relatively free of securities crimes. Shockingly, many business writers are not aware of more than 10 percent of Canadian collapses that have occurred under suspicious circumstances. Such denials are ‘gifts from heaven’ for financial tricksters. Unaware, trusting Canadians make easy prey. To obtain a solid grasp that Canada’s financial reporting deficiencies are hardly new, other time periods merit attention. Prior to 2000, and commencing about 1980, several

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extremely serious financial failures occurred in Canada. Nevertheless, during the decade of the 1990s, no worthwhile public hearings were held to learn about causation and possible cures. As a consequence, at a time when essential learning should have been taking place, Canada slipped into a denial mode. Financial tricksters had nothing to lose once denial became their ally. Even when the Canadian Senate held brief hearings after the Enron collapse (primarily in 2002–03), the politicians chose to ignore any Canadian implications. Financial problems were somehow treated as not likely to recur. Such indifference troubled many class action lawyers, who felt that political obstructionism would be too great to overcome if major new class actions were commenced. Such an open landscape merely caused scams to flourish. For those wanting to pursue or analyze cases in which noteworthy allegations of financial trickery have been made, the undernoted listing could prove useful for the 1980–2000 period. Given that several of the cases were settled through mediation, or arbitration or intense discussions, the term ‘allegations’ (or ‘not proven in court’) must apply. Hundreds of cases could be listed. What follows are cases that have interesting themes for researchers. Company names are listed. In brackets following each name are the Canadian provinces in which the court case was filed, and additional descriptions to help with further research and media comment, if any: ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Bramalea Group of Companies (Ontario); Canadian Commercial Bank (Alberta); Castor Holdings Limited (Quebec); Confederation Life Insurance (Ontario); Confederation Trust Company (Ontario); Hercules Managements (Manitoba); Kingsway Insurance (Jevco Insurance; Quebec); Livent Entertainment group (Ontario); Merit Energy (Alberta); National Business Systems (Ontario); Nesmont Mining (British Columbia); Northland Bank (Alberta; Surrey Credit Union case, filed in British Columbia); Philip Services companies (Ontario); Pineridge Capital (British Columbia); Principal Group of companies (Alberta); Standard Trust (Ontario); Shamray Group of companies (Manitoba); Teachers Investment & Housing Cooperative (British Columbia); Victoria Mortgage (Kripps case; British Columbia); and YBM Magnex (Ontario).

Vital context for researchers Several factors have to be well understood in order to be in a position to evaluate the public investor environment in Canada. Some matters have already been described. For example, vital implications arise from Canada not having implemented an equivalent to the 1933–34 US SEC legislation, after the 1929 stock market crash. Canada essentially

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drifted post-crash (1929–35) until after the Second World War, when a group, now called the Canadian Institute of Chartered Accountants (CICA), commenced a process of introducing elementary disclosure standards for financial reporting to the public. Given that the CICA were primarily a group of financial statement auditors, the potential for serious conflict of interest existed. In reality, over time, the CICA had to convince the clients of the auditors (that is, publicly traded corporations) to adhere to certain basic concepts of financial measurement and note disclosure. Without such, individual investors would be at the mercy of miscellaneous public relations hype about a particular company, instead of some harder facts that could be used for investment decisions. Nevertheless, serious looseness in financial reporting practices allowed the infamous Vancouver Stock Exchange to be used to fleece investors for about 50 years. Canada’s politicians surprisingly embraced CICA’s inherently flawed self-regulatory outlook. Politicians failed to adequately recognize that a limit existed in how far the public corporations would cooperate, and chose to not hide undesirable financial outcomes. More than gentle persuasion was in order, but was not legislated. In the early 1970s, Canada’s collections of politicians in the separate provinces, as well as federally, individually revised or enacted corporations or Companies Act legislation in each province or territory, in support of much of the CICA’s financial reporting position. The provinces also incorporated CICA financial pronouncements into securities acts. (Still, at the end of 2008, Canada did not have federal securities legislation.) As of late 2008, this same self-regulatory philosophy (as opposed to government control and/or strong, independent oversight) pervades Canada’s so-called ‘investor protection system’. Although provincial securities commissions exist for processing paperwork associated with public securities offerings, these bodies rarely try to prosecute for flagrant usage of Ponzi frauds (that is, wherein money is criminally ‘borrowed’ from one investor to pay off a creditor who is seeking or demanding repayment).5 Investors, therefore, have to be especially vigilant because ‘nobody is minding the store’, to keep scam artists at bay. Prosecution, if any, occurs through civil court actions brought on by, mainly, harmed creditors. Class actions by investors are still in their infancy in Canada. Typically, investors seek to file their lawsuits in the US to gain the benefits of much more demanding US legislation. But, as stated, a Canadian corporation’s stock would have to be traded in both the US and Canada to gain US protections. Tricksters therefore tend to focus on manipulating stocks that are traded only in Canada. In broad terms, Canadian politicians have given huge scope to Canadian corporations to, all too frequently, report as they may choose. Financial collapses are commonplace, from having had much less cash-profitable operations over many years than what the audited financial statements have portrayed. Protests, and documentation sent to politicians to prove the existence of rising problems, are almost entirely ignored. Investors are simply not a political priority, despite the looming effects on their pension plans, and reduced dollars for retirement. Unfortunately, compounding problems add up to a troublesome investment environment. Unfortunately, investors face bad news in other respects. The Supreme Court of Canada (SCC) has added considerably to investors’ woes. The Hercules Managements v. Ernst & Young case (then Clarkson Gordon, in Canada) was decided in 1997, and essentially concluded that published, annual, audited financial statements were not really

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to be used for investors’ individual investment decisions. That is, the entire concept of having an auditor verify corporate managements’ financial statement assertions, before sending the financial statements to public stockholders, was thrown out the window. Instead, the SCC embraced a rather peculiar argument suggested by lawyers for the CICA and Ernst & Young to the effect that the intended purpose of annual audited financial statements was to evaluate management. Such evaluation somehow was to occur on a ‘collective’ basis by all shareholders. Overall, the SCC’s decision failed to consider elementary consequences. On a practical basis, assembling all shareholders for such an evaluation of a public company is certainly a remote possibility. But, more importantly, given the extensive choices of how to account and report that exist, especially in Canada where the auditors choose how to word the financial reporting rules or pronouncements, other major deficiencies arise. One overwhelming shortcoming of the SCC’s decision is particularly basic: how many corporate officers are likely to adopt tough accounting that makes them ‘look bad’ in the eyes of shareholders/stockholders? The SCC clearly ignored vital corporate law and investor protection history, seemingly just to protect auditors from negligence claims. Typically, when a senior court misunderstands an important issue so badly, the elected politicians ought to be coming to the rescue with new legislation, to negate the SCC’s decision. But, such did not happen in Canada in any worthwhile investor protection sense. The 1997 ‘Hercules decision’, as it has become known, has demoralized investors and opened the door to those who want to ‘cook the books’. As a consequence, Canadian promoters have introduced a series of ‘investment products’ that virtually guarantee losses to investors. Two such batches of products, ‘asset-backed commercial paper’ (ABCP) and ‘income trusts’ (explained earlier) have cost investors billions of dollars over the past 5–6 years. Attempts at corporate and securities reform this decade have been minimal in Canada. Lobbying by large corporations has been directed towards simplifying the rules for issuing new securities. Investor protection, through monitoring financial reporting and prosecuting offenders, has been negligible.6 Indeed, the situation can only get worse in Canada, because Canada seemingly wants to adopt International Financial Reporting Standards (IFRS), which turn greater control over to management, to adapt the numbers. Such is especially serious for a country such as Canada, given the absence of investor protection agencies and minimal prosecution. A counter balance to management power is definitely needed, given Canada’s history of investor neglect. Basic corruption Canada’s corporate regulatory structure easily allows directors and officers to receive unwarranted salary, bonuses, expense accounts and a long list of fringe benefits. All that is needed is to have a group of friends serving as members of the board of directors. Rubber-stamping of CEOs’ and CFOs’ pay packages by boards can be an everyday occurrence. But, far more costly to public shareholders is the add-on trickery such as stock options, interest-free loans, purchases from executive-owned companies and an assortment of stock price manipulation. All that is needed is a friendly auditor and loose financial

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reporting rules. Canada has such a collection of weak reporting rules, and obviously the auditors intend to make them weaker by adopting IFRS, mentioned earlier. Researchers can test the caliber of financial reporting in a country simply by studying a handful of financial reporting obligations of that country. Canada, for example, seems to experience an extensive amount of self-dealing or related party transactions. That is, one related party can benefit by selling to another at other than fair market values for the goods and services. If the buying company is publicly owned, and the selling company is owned by one or more directors or officers, amazing transfers of cash can occur, unbeknown to the public company’s owners. For example, executives may purchase products or services for (we will assume) $1,000 and then sell them to the public company for $5,000. The buyer and seller are obviously the same person (an executive of each of the companies), essentially dealing with him- or herself. Secrecy can be maintained, especially the lack of knowledge by public investors. Unless the financial reporting rules of the country require full disclosure in annual, audited financial statements, such self-dealings can continue in privacy for years, with executives making undisclosed $4,000 profits on each transaction (perhaps daily). Greed and corruption become a top priority for management, unknown to the public shareholders. An extensive number of ways exist to hide the $4,000 profit per transaction. For instance, various faked costs can be added to the $1,000 for assumed storage, insurance, interest, overhead and similar so-called operating costs. Then, when the service is charged at a price of $5,000 to the public company, the dollar amount magically represents the ‘cost’ to the executive’s selling company. In Canada, as part of the politician’s self-regulation philosophy for professionals, the auditors’ collective has been permitted to choose the wording of the financial reporting, accounting and auditing rules. Over the years, these rules have been less and less relevant for catching corrupt, fraudulent, unethical, or whatever you may wish to call these overnight, ‘$1,000 cost becomes a $5,000 revenue benefit’. The absence of monitoring, investigation and prosecution in Canada clearly is a massive insult for investors. But, such dismal regulatory performances year after year are apparently known to sophisticated investors. What is not well known, apparently, is that the weak auditing and financial reporting rules directly aid the corruption. Auditors are required to make enquiries of corporate management as to the names of related parties. A few additional auditing procedures have to be conducted to meet professional standards. But, a serious search for related party dealings does not necessarily have to be completed. If ‘indications’ of fraud are detected by the auditor, they must be probed. However, arguments can be raised, such as in a court, that such ‘indications’ were trivial, or were not conclusive, or similar ‘cop-outs’ apply. In the final analysis, a court may have to reach a conclusion. Meanwhile, the investors lose their money. In a similar vein, an auditor does not have to seek out the ‘fair market value’ of the services/products. That is, external evidence does not have to be gathered to support the $5,000 price. Required financial disclosure in Canada (as well as in several other countries) falls far short of having to tell public shareholders that they are being fleeced. Evasive wording, and technical terms, in financial statements would seem to suggest that ‘all is fair’ in the self-dealings, when in fact the corruption is widespread.

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Thus, once again, Canadian politicians refuse to get close enough to reality to learn that ‘self-regulation’ of auditors and accountants has long since become unacceptable and is detrimental to public investors and citizens, generally. Financial reporting weaknesses that are really nothing more than ‘open flood gates’ make a mockery of Canada’s investor protection. The role of an auditor as a stockholder’s gatekeeper, for catching inappropriate management assertions about an entity’s state of finances, has become inoperative. Standards of financial reporting should be being set by Canadian citizens, with the support of the courts and elected officials. Legislation should be backing up the reporting rules and be enforced by investigators and prosecutors. In Canada, much of corporate and securities law of the past 100–150 years has been brushed aside by self-interest. The clear losers of these extensive related-party selfdealings are the owners of the public companies. A direct result is that, on retirement, the value of owned companies is less than what it ought to be. Standards of living on retirement have to be diminished. What is all too often worse is that billions of dollars of good money/fresh investment are being used to support ‘crooked’ companies. Financial statements, usually audited, that portray continuous corruption as being ‘in accordance with accounting and auditing rules’, should be thoroughly unacceptable to investors and citizens. Yet, in Canada, an invitation to invest in corrupt corporate situations is an everyday occurrence. If the public knew that the audited financial statements were just more ‘false advertising’, then such would be a ‘more acceptable’ scenario. But, when the opposite message of safety is being conveyed through the silence of the politicians and securities regulators, circumstances cry out for immediate change. Many further examples in addition to self-dealings/related party transactions can be provided to help to evaluate the state of a particular country’s reporting quality. However, revenue recognition stands out as another favorite of the shenanigan artists. In its most basic roots, a company should not record revenue (or turnover) unless some fundamental terms are in place, such as: 1. 2. 3.

an enforceable contract of purchase and sale exists; the sales price surely will be collected in cash or an equivalent; and the cost of providing the service or product can be estimated reasonably closely.

That is, revenue is the commencement point in determining whether a company is making a profit versus being a loser. Revenue is the anchor for an income or profit and loss financial statement. Obviously, collecting a known or contracted amount of cash from a sale is quite fundamental. Despite these basic rules, every year we encounter audited financial statements that report revenue which has no hope of being collected. The customers may not exist, or they are bankrupt, or the inventory/goods have been returned as non-functioning and similar conditions may apply. Quite often the fakery concerning overstated revenue exists because management has a bonus plan based on profit, or the company needs money and has to con a banker, or stock options exist and the stock price has to be hyped upward quickly or a large creditor wants to see that the company has turned itself around.

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The ‘dot com’ era saw all of the revenue recognition scams. Without improvements, another round of trickery awaits. Currently, the US has the strongest revenue recognition rules, especially for variations of what are called ‘multiple deliverables’ (that is, many segments of a final operative product). IFRS has many holes, but is not as deficient as it is for self-dealing transactions. The easier a scam artist’s task of circumventing financial reporting rules, the worse off the investor will become. The same applies to weak auditors who twist requirements. The ideal is not to force exceedingly complex costly rules on corporations. Balance is required. However, Canada is so one-sided in its current approach that ‘balance’ seems a distant dream. The rules have to be tough enough that they can be enforced. But, room for thoughtful judgment must exist. Canada’s lack of a competent enforcement agency is a major shortcoming for investors. But, allowing auditors to pick out weak reporting rules is not far behind. The combination, along with the SCC’s Hercules Management case is overwhelming and devastating for investors. Canadians and investors in Canada should be deeply worried. Investors who want to learn how to protect themselves have no choice but to comprehend the common financial reporting tricks or shenanigans. Comprehending self-dealing and faked revenue are a good start. But, to make progress against corruption, two other broad categories of financial manipulation should be mastered: 1. 2.

converting expenses into assets, so as to falsely increase corporate income/profit, by lowering expenses; and reducing liabilities by corruptly increasing revenue whenever a need exists to increase executives’ bonuses, or to deceive auditors/stockholders.

Both of the above are nasty tricks, but are frequently utilized. Typical expenses that are shifted out of an income or profit statement and buried on a balance sheet as bloated assets are interest expenses, executive compensation, carrying costs of underutilized assets, factory overheads, costs of commencing new product lines and much more. Expenses that are being re-labeled as assets are only assets when their cost can be recovered through sales of products or services. Assets cannot be places to hide unrecorded losses. In a similar vein, management should not be permitted by regulators to build up fake liabilities on the balance sheet, when times are good. When no ‘build-up’ occurs, the liabilities cannot later be drawn down and called revenue, so as to fatten executive bonuses, through bogus income manipulation. The foregoing examples should serve to stress that, with weak accounting rules, ample opportunity exists to ‘cook the books’. Auditors who are too friendly with corporate management become essentially of no value to investors. Indeed, auditors can be harmful if investors believe that they are part of an investor protection system. An active, independent monitoring or police group must exist. Canada does not have such and therefore ‘Canada-only, listed stocks’ can be dangerous. Investors are advised to assume that stock market securities manipulation is widespread in Canada. To assume otherwise is failing to face reality.

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Essential reform Proof that self-regulation of corporations and securities activities has not functioned even minimally in Canada is easy to gather. For greater investor protection to occur, attitudes of politicians have to change dramatically. Researchers who fail to collect the plentiful evidence of extensive swindles, and apparently speak primarily to Canada’s so-called ‘regulators’, are hindering progress for investors. Misleading, but flattering, ‘research’ has been seized upon by Canada’s politicians, to block vital steps forward. All too often the misleading research has been conducted outside of Canada. Day-to-day observation over several years may be necessary to assemble representative databases. Valuable research can be possible through gathering facts such as filed litigation in each Canadian province. For example, litigation against the six largest public accounting firms can be identified and will open the door to other corporate corruption allegations. Court-rendered decisions, although somewhat rare, quote various cases that have been addressed, including those in which corporate directors and officers have faced charges. Patterns of overstating income, assets and owners’ equity readily become evident. A major step forward for investors would be a Canadian national (not individual provincial) securities monitor and prosecutor. Legislation would have to be enacted, and appropriate dollars provided each year by taxpayers, to set in motion a long-lasting regulatory environment. Deregulation and self-regulation are pointless when an offsetting ‘checks and balances’ power base and system does not exist. The training of effective securities monitors commonly takes over five years, as we well know from having operated a forensic accounting and auditing practice for many years. Leadership tone is vital. A culture of demanding evidence and analyzing it very carefully for court purposes cannot be overstressed. Sloppy investigation does not generate ‘convictions’. Vicious behavior is not acceptable either. But, power lobbying by tricksters has to be controlled. In the period just after the Second World War, the vast majority of Canadians were not inclined to invest in equity shares. Bonds were, by far, the investment of choice. Little by little, primarily through income tax incentives, Canadians were enticed into the equity markets. Today, after a series of significant recent swindles of investor-savers, serious doubts have to exist about investors’ faith in Canadian equities. Considerable research is in order to determine the percentage of investors who have already shied, or will shy, away from equities for the next several years. The very fact that a term such as ‘income trusts’ (that is, a double misnomer) was used for many years to extract money from otherwise cautious investors is troublesome. The fact that provincial securities ‘regulators’ and auditors remained silent while the swindling was in progress demonstrates that Canada’s securities markets are not trustworthy. Politicians and others have immensely understated the magnitude of corporate corruption and the need for prompt reform.7 Notes 1. Estey Commission into the failure of two Alberta banks, Canadian Commercial Bank and Northland Bank. See Report of the Inquiry into the Collapse of the CCB and Northland Bank, August 1986, The Honourable Willard Z. Estey, Commissioner. 2. Final Report of the Inspector, William E. Code, QC into Associated Investors of Canada Ltd. and First Investors Corporation Ltd., July 1989. (These companies were part of the Principal Group.) 3. Kripps v. Deloittes (Touche Ross), Court of Appeal of British Columbia, 1997. The Appeal Court rejected

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4. 5. 6. 7.

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Canada’s then reporting standard for overdue loans and set a higher level for the company’s auditor. The Supreme Court of Canada declined to hear Deloitte’s appeal. Jim Middlemiss, ‘Imax Case Could Open Door To New Lawsuits’, National Post/Financial Post, December 15, 2008, p. FP1. See Canadian Business magazine, September 24, 2007 issue, and its magazine cover page title, ‘A Good Country for Crooks: Canada’s losing war against white-collar crime’, by John Gray. Researchers are able to verify the dismal track record of Canadian provinces’ securities commissions by reading their annual reports over a several-year period. Prosecutions and convictions for ‘cooking the books’ are minimal to none in most of the years. Those who desire additional evidence of the magnitude of securities trickery in Canada are invited to read (usually monthly) columns under the name ‘Al Rosen’ in Canadian Business magazine (‘Between the Lines’), since 2000, and the National Post/Financial Post (‘Comment’), since 2004.

Index Abbott, K.W. 271 accountants 256–8 Acello, R. 220 Adam, A.M. 117, 263, 264 Adams, J.S. 242, 262 Adler, Deborah 201 Adler, P.S. 16 affluenza 49–50 Afghanistan 11 Africa, corruption 179, 182, 184 Agarwal, J. 158 agency 4, 107–8, 116 Ahuvia, A.C. 54 AIG Insurance 34, 255 Akaah, I.P. 79, 80 Albrecht, C. 8, 15, 38 Albrecht, W.S. 18 Alford, C.F. 21, 209, 212 Alge, B.J. 248 Allis, S. 252 Amabile, T.M. 162 American Dream 40–41, 48 Amundsen, I. 175 Anand, V. 14–15, 18, 108, 114, 217, 218, 223 Andreoli, N. 72, 75, 76, 77, 78, 79, 80 Anechiarico, F. 280 Angell, M. 6, 35 Antes, A.L. 150, 162 Antonuccio, D.O. 6 Apple 220, 224 Arendt, H. 107–8, 111 Argandoña, A. 159, 175 Argyle, M. 50 Arlow, P. 159 Arneson, J. 81 Aronson, E. 111, 112 Arruda, M.C. 184 Arthur Andersen 3, 5–6, 253, 254 Ash, P. 232 Ash, S. 111 Ashforth, B.E. 1, 62, 64, 65, 67, 70, 71, 74, 92, 104, 217, 218, 223 Asia, corruption 182, 183–4 Audi, R. 109 auditors 12 Australia anti-corruption activity 273 New South Wales Police 225

Wollongong Council case 206–7, 208, 214, 216 Backman, M. 183 bad apples 3, 104, 106, 107–10 bad barrels 3, 104, 106, 110–14 Baird, E. 53 Bajolle, J. 271 Bamossy, G. 46 Banaji, M.R. 61 Bandler, J. 220, 224 Bandura, A. 4, 112 Bardhan, P. 174 Barings Bank 108 Barling, J. 79, 82 Barnett, T. 262 Bartels, L.K. 78 Bass, D. 104, 107 Baucus, M.S. 77 Bauman, Z. 111, 113, 114 Baumhart, R. 252 Bazerman, M.H. 12, 115 Bear Stearns Companies Inc. 254, 255 Beck-Dudley, C.L. 77 Becker, J. 260 Beech-Nut Nutrition Corporation 217 behavioral modification 234, 247–8 Belk, R.W. 40, 46, 48 Bennett, R.J. 63, 64 Beorkrem, M.N. 159 Berenson, A. 36 Bernard, A. 221, 226 Berry, C.M. 63, 64, 67, 68, 74, 75 Bersoff, D.M. 75 Berton, L. 253 Bhattacharya, U. 9 Bies, R.J. 242 Bintliff, R.L. 232, 246 Bird, K. 147 Birkinshaw, J. 124 Birnbaum, J.H. 37 Birsch, D. 111 Biswas-Diener, R. 51 Black, Conrad 8, 188, 253–4 Blackburn, K. 62 Blake, Frank 195 Bligh, M.C. 62 Boeker, W. 227

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Bok, S. 114 Boyle, M. 253 Braithwaite, J. 36 Bratsis, P. 105 Bre-X Minerals 289 Bribe Payers Index (BPI) 279 bribery 10, 176, 177, 187, 208, 260 Bridgewater 220 Brief, A.P. 218 Brinkman, J. 255 Brock, M.E. 150 Brocke, M. 94, 95, 96, 100 Brody, R.G. 253 Bromiley, P. 7 Brooks, L.J. 260 Brown, A.D. 222 Brown, K.W. 55 Brown, M.D. 223 Brown, M.E. 78, 148, 166, 239 Brown, T.S. 232, 233, 239, 240, 241, 242, 247 Bruursema, K. 75 Budd, J.M. 145 Buffett, Warren 192, 196 Business Ethics Magazine 265 Butterfield, K.D. 67, 73, 74 Caiden, G.E. 183, 188 Callahan, D. 38 Campbell, D.T. 146, 233 Canada corporate corruption 2, 222–3, 285–90, 292–5 context 290–92 financial statement fraud 8–9 income trusts 287–8, 292 crony capitalism 11 greed 33–4 investor protection 285, 286, 287, 291, 292, 294, 295 lawyers 2, 4–5 reform 296 revenue recognition 294–5 self-regulation 286, 291, 293–4, 296 Canadian Institute of Chartered Accountants (CICA) 291 Canadian Medical Association Journal 6 Canal Plus 220 Cardinal, L.B. 154 Carroll, A.B. 67 Carson, T.C. 21 Carter, N. 235, 236, 237, 238 Carver, C.S. 53 Casel, C. 262 Castor Holdings Limited 289 Central and Eastern Europe 181–2, 272

Ceranic, T.L. 148 Chadha, R. 40 Chan, J. 225 Chaplin, L.N. 44 Charness, N. 165 Chatman, J.A. 54 Chave, E.J. 93 cheating 37–8 Chen, Y.-J. 73 Chevron 184 Child, J. 2, 37 China 10 bribery 176 codes of ethics 261 corruption, action against 11 internet censorship and Microsoft 222, 226 Chonko, L.B. 258, 263 Chrétien, Jean 223 CIA, Iran Contra case 219, 223 Cialdini, R.B. 116 Clark, J.P. 232 Clarke, F. 2 Clinard, M.B. 253 Cocanougher, A.B. 110 codes of ethics 21–3, 72, 117–18, 255, 256, 265 content of 260–61 and culture 261 definitions of 258–9 failure of 261–2 history of 259–60 impact of 75–7 reasons for 258 in sciences 147–8 success of 262–4 Codes of Ethics (Heermance) 259 Cohen, E. 257 Collingwood, H. 252 Collins, D. 67 Collins Concise English Dictionary 176, 177–8 collusion 35, 177 Colvin, G. 37 Conference Board 265 conflicts of interest 11–12 conformity 111–12 conjoint analysis 92–3, 94–5, 102 applications of 96–7 example 97–8 future research with 101 limitations 101 results interpretation 98–100 traditional survey methodology comparison 100–101 use of 95–8 Connelly, S. 149

Index Conroy, S.J. 72 Cook, P.J. 38 Cook, T.D. 146 Cooper, W.H. 95 Cornelius, P. 179, 189 corporate ethical codes see codes of ethics corrupt organizations (COs) 3, 106, 116 corruption 62, 65, 252–4 antecedents 179–80 comparative measurement 181–5 costs of 2 definitions 1, 173–6 escalation of 104–5, 106–7, 116–18 bad apples 107–10 bad barrels 110–14 ease 114–15 pervasiveness 116 severity 115 reasons for 3–4, 255–6 recovery from 15–16 reduction, methods of codes of ethics 21–3 control 17–18 culture, change of 17 government regulations 23 MBA education 16–17 monitoring 23–4 whistleblowing 18–21 types 176–9 Corruption Perceptions Index (CPI) 23–4, 181, 185, 274, 277–8, 279, 283 2008 summary of countries 182 Africa 184 Americas 184–5 Asia 183–4 Europe 181–3 limitations of 188 Cortina, J.M. 79 cosmetic change 221, 225 counterfeiting 176, 177 counterproductive work behavior (CWB) 63, 65, 66, 74–5, 81–2 Coustan, H.L. 258 cover-up 212, 213 Coxe, D. 253 Crane, A. 36, 220 Cressey, D. 117, 260 Cressey, D.R. 108, 112 crime seriousness research 93–4 Crocus Investment Fund 289 crony capitalism 10–11, 34 Crossen, C. 256 Csikszentmihalyi, M. 45, 55 Cullen, J.B. 3, 67, 77, 158, 228 cultural values 10, 180, 261

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Daewoo 183, 254 Dahl, M. 278, 279 Dalal, R.S. 64, 67 Dalton, D.R. 241, 248 Dalton, M. 247 Damanpour, F. 146, 154 Dann, G.E. 219, 222 Darley, J.M. 109, 116 Davis, J. 4 Davis, K. 127 Dawson, S. 46, 47, 48 De Graaf, J. 49, 50, 56 De Maria, W. 211, 214 De Sousa, L. 270, 271, 272, 276, 277 Deci, E. 48 Deckop, J.R. 49 Della Porta, D. 272, 273, 276 denial as rationalization 108, 114 of corruption 218–19 Deshpande, S.P. 81 Dess, G.G. 145 Detert, J.R. 4, 74 Deutsch, M. 111 deviant workplace behavior 63, 65, 66, 74–5, 81–2 Devine, T. 209, 211 Dezenhall, E. 217 Diani, M. 276 Dickson, M.W. 78 Diener, E. 45, 50, 51, 55, 245 DiFuria, Joan 52–3 Dimnik, T. 257 Ditton, J. 247 Dixon, D. 225 Doig, A. 37 Donaldson, T.J. 133 Dooley, K. 113 Dozier, J.B. 19 Dumler, M.P. 70 Dunbar, K. 146 Dunn, E.W. 53 DuPont 199–200 Easterbrook, G. 50, 51 Easterlin, R.A. 51 Eastern Europe, corruption 181–2, 272 Ebbers, Bernard 9, 111, 253 Edwards, A.L. 93–4 Efrati, A. 255 Eichmann in Jerusalem (Arendt) 107 Eigen, P. 269, 270, 274, 275 Ekvall, G. 159 Elias, R.Z. 257 Elkind, P. 113, 114

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Elliot, A.L. 114 Elliott, K.A. 37, 179 Elstrom, P. 224 Emerson, T.L.N. 72 Emmon, R.A. 163 employee theft and intervention effectiveness 231–3 individual differences orientation 232, 233, 239–42 reduction of theft, evidence of 246–9 security orientation 232, 233, 234–9, 246–7 social orientation 232, 233, 242–6, 248 Engardio, P. 112 Engel, G.T. 255 Enrico, Roger 194 Enron 5, 113, 114, 115, 117, 252–3, 255 allegations, response to 220 code of ethics 22 rationalization 109 Epstein, E.M. 173 Ericsson, K.A. 165 Esterl, M. 221, 225 ethical climate 3, 77–8, 227–8 ethical codes see codes of ethics ethical companies 264–5 ethical culture 1, 263 ethical decision making 73–4, 85, 148–50 ethical distance 112–13, 114, 115 ethical judgment 73, 80, 81, 84, 85, 94–5 ethical leaders 192–3, 204 characteristics 193–202 actions framed in ethical terms 201–2 articulate and embody purpose and values 193–4 find and develop the best people 195–6 knowledge of the limits of values and principles 200–201 living conversation about ethics and values 196–7 mechanisms of dissent, creation of 197–8 organizational success focus 194–5 others’ values, understanding of 198–9 tough calls and imagination 199–200 value proposition and societal legitimacy connection 202 how to become 203 how to develop others 203–4 ethical sensitivity 72, 73, 84 Ethics Resource Center 1, 75, 76, 78 Ethicsphere Institute 264 Europe, corruption measurement 181–3 Everett, J. 62 Everton, W.J. 248 extrinsic aspirations 46, 47, 48–9, 54 Exxon 222

Fallati, T.R. 255 Feist, G.J. 146, 165 Felton, S. 257 Fernandes, M.F. 95 Ferrell, O.C. 96 Fielder, F.E. 154, 167 Fielder, J. 111 Filipowski, D. 247 Financial Executive 253 financial statement fraud 8–9, 15 Finke, R.A. 147 Finkelstein, S. 227 Firestone 200 Fisman, R. 9 Flandez, R. 231 Fleishman, G. 77 Fleming, P. 15, 75, 109, 113, 115, 116, 117 Flynn, K. 215 Folger, R. 95, 101 Ford, R.C. 67, 110, 262 Ford Pinto 8, 35 Forte, A. 81 Foucault, M. 107 Fox, S. 64, 65, 67, 69, 74, 75, 79, 81–2 Francis, B. 96 Frank, R.H. 38, 41, 51 Franke, G.R. 67, 73 Frankfurt, H.G. 110 fraud 1–2, 8–11, 15, 37, 38, 178 Frederick, W.C. 140 French, J.R.P. 15 Friedrich, C.J. 174 Fritsche, D. 260 Fromm, E. 48 Fuerbringer, J. 223 Furnham, A. 50 Gaetani, J.J. 235, 236, 237, 238, 239 Gagnon, M.A. 6 Galtung, F. 269, 275, 278, 279, 280 Garcia, J.E. 154, 167 Gatewood, R.D. 67 Gaumnitz, B.R. 77 Gauthier, J. 61 Gelfand, M.J. 69 Gelman, S. 158 gender and ethical judgment 72, 73 General Electric 111–12, 197 George, D. 45 Gerard, H. 111 Gerring, J. 179 Ghillyer, A. 123 Ghosheh, Z.R. 183 Gibelman, M. 158 Gibson, D.E. 74, 75

Index Gilovich, T. 55 Gino, F. 15 Gioia, D.A. 2, 8, 16, 35, 37, 111, 112 Gladwell, M. 226 Glassman, M. 83 Glazer, M.P. and Glazer, P.M. 19, 209 Global Corruption Barometer 279 Global Corruption Report (GCR) 279 Global Integrity 280 Goldbart, Stephen 52–3 Golden, L. 45 Gopinath, C. 188 Gorman, M.E. 146 government corruption 9–11 government regulations 23 Grabosky, P. 273 Grameen Bank 199 Grant, R.M. 112 Gray, D. 234, 235, 236, 237, 238, 239, 248 Greece, corruption 182, 185, 186, 187 greed 3–4, 33–7, 41–2, 55, 255 among children 44 change away from 55–6 materialism 45–9 Greenberg, J. 74, 75, 79, 231, 232, 233, 242, 243, 244, 245, 246, 247, 248 Greenberg, L. 82 Greengard, S. 247 Greenwald, J. 252 Gresham, L.G. 96 Grojean, M.W. 78 Groskaufmanis, K.A. 260 Gross, D. 255 Gross-Schaefer, A. 231, 232, 248 Grover, S.L. 79, 83 Grush, J.E. 68 Gualtieri, Joanne 17, 21 Guinea, action against corruption 11 Guion, R.M. 63 Gundlach, M.J. 19 Gupta, S. 179, 180 Gyimah-Brempong, K. 180 Haddad, C. 111 Haddow, N. 219, 222 Haidt, J. 148, 149 Haines, R. 109 Hair, J.F. 96, 99, 100 Halliburton 184, 225 Hambrick, D. 227 Hampden-Turner, F. 173 Hannah, D.R. 24 Hao, Y. 174 happiness 50–53, 54–5 Harris, J. 7

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Hart, K.M. 231 Hartman, E.M. 173 Hartman, S.J. 159 Hawkins, D.I. 110 Hayden, A. 41 Hazarika, S. 218 Healthsouth 253, 254 Healy, M. 261, 262 Heidenheimer, A.J. 174 Helin, S. 67, 75, 76, 77, 254, 264 Helton-Fauth, W. 147, 148, 151 Hendry, J. 141 Henik, A. 69 Hercules Managements v. Ernst & Young 291–2 Herndon, N.C. 261 higher education 13, 16–17, 38, 54 Hill, C.W.L. 8, 35 Hill, D. 14 Hindess, B. 273, 280 Hofstede, G. 180 Hogan, J. 240 Hogan, R. 240 Holling, H. 97 Hollinger, R.C. 232 Hollinger International 8, 253–4 Holmberg, B. 235, 236, 237, 238 Holtfreter, K. 94 Home Depot 195, 201 Honesty and Ethics Poll (Gallup) 257 Honeycutt, E.D. Jr. 83 Honore, C. 56 Hughes, J. 96 Hui, C. 79, 83 Husband, P. 40 Husted, B.W. 175, 179 Ibrahim, N.A. 257 Iles, J. 261, 262 Ilie, A. 75 incivility 61, 65 income trusts 287–8 India 10, 188 Indonesia 10, 34 insurance fraud 38 integrity tests 63, 239–40, 241, 242, 248 interactional justice 242, 243, 247 International Labour Organization (ILO) 124, 136, 138, 139, 140 International Monetary Fund (IMF) 34, 132 interpersonal deviance 64, 74 interpersonal justice 243–4 intimidation 208, 211, 212, 213 Intini, J. 257 intrinsic aspirations 46, 47, 48, 54 investment banks 255

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Ip, P.-K. 10 Iran Contra case 219, 223 Ispas, D. 75 Izzo, J. 43, 55 Jackall, R. 109, 111 Jackson, S. 252 Jacobs, J. 280 James, E.H. 227 James, L.R. 69, 158 Jansen, E. 158 Jasanoff, S. 158 Jawahar, I.M. 83 JetBlue 194–5 John, D.R. 44 John, O.P. 163 Johnson, C.M. 235, 236, 237, 238, 239 Johnson & Johnson 197, 256 Johnston, M. 174 Jones, A.P. 69 Jones, J.M. 253 Jones, J.W. 239, 240, 241, 242, 249 Jones, M. 222, 223 Jones, T.M. 69, 73, 101 Joseph, J. 81 Joshi, M. 218, 228 Journal of Business Ethics 75, 259 Journal of the American Medical Association 6 Kahneman, D. 115 Kanner, A.D. 46 Kanter, D.L. 162 Kantian approach to ethics 173, 179, 185, 188, 189 Kappeler, V.E. 223 Kaptein, M. 22, 75, 76, 117, 258, 259, 261, 263 Karande, K. 83 Kasser, T. 46, 47, 48, 49, 53, 54, 55 Keane, C. 111 Kelloway, E.K. 63 Keon, T.L. 158 Key, S. 71 Khagram, S. 180 Khandwalla, P. 113 kickback 176, 178 Kickup, J. 264 Kidder, D.L. 69, 231, 248 Kidwell, R.E., Jr. 64 Kirk, D. 257 Kisamore, J.L. 79, 83 Klein, K.J. 69, 70 Kligyte, V. 148, 150, 165, 166, 167 Klitgaard, R.E. 174 Kochan, C.A. 145 Kochan, T.A. 2

Kohlberg, L. 4, 19, 74, 109, 166 Kotkin, S. 281 Kozlowski, Dennis 9, 37, 253 Kozlowski, S.W.J. 69 Kraar, L. 254 Kramer, R.M. 113, 115 Kranish, M. 222 Krastev, I. 281 Krieger, L.S. 13 Kripalani, M. 218 Kuhn, T.S. 146 Kumar, B.N. 173 Kwan, Y.K. 94 La Porta, R. 180 labour relations in MNEs see multinational enterprises, labour relations and ethical issues Lacroix, Vincent 34 Lambsdorff, J.G. 175, 176, 179, 189 Lancaster, T.D. 62 Landers, R.M. 45 Lane, R.E. 48 Lange, D. 92 Lange, D.A. 17 Langlois, C.C. 261 Larmour, P. 270, 273 Larson, V. 46 Lasch, C. 40 Latham, G.P. 240, 241 Latin America, corruption 184, 275 Latvia 182, 185, 186, 187 Laufer, W. 262 Lawrence, B.S. 86 Lay, Kenneth 188, 252 leaking 213–14, 215 Lee, P.M. 227 Leeson, Nick 16, 108 Lefkowitz, J. 61, 69, 72, 74, 75, 76, 77, 78, 79, 80 legitimacy theory 126, 127–8, 139–40 Lehman Brothers 254, 255 Lennane, J. 209 Lennane, K.J. 212 Leonard, L. 109 Leparin 8 Lere, J.C. 77 Levenson, J.L. 159 Levy, A.S. 115 Levy, J.S. 115 Lewin, K. 60, 68, 79 Lewis, G. 61 Lexchin, J. 6 Li, H. 179 Lipset, S.M. 252

Index Litzky, B.E. 232 Locke, E. 48 Loe, T.W. 67, 73 Longman Dictionary of Business English 176, 177–8 Luce, M.F. 96 Lund, D. 79, 80 Lyubomirsky, S. 54 Macao 34–5, 183 Madden, G. 117 Madoff, Bernard 2, 15 Malka, A. 54 Malloy, D.C. 158 Mandela, Nelson 198 Manley, W. 258 Manzetti, L. 174 Marholin, D.I. 234, 235, 236, 237, 238, 239, 248 Markus, H.R. 149 Marnburg, E. 261 Mars, G. 36 Marshall, E. 145 Martin, B. 21, 206, 209, 214 Martin, C.L. 64 Martin, K.D. 10, 67, 77 Martinez, B. 219 Martinson, B.C. 145 Mason, P. 227 materialism 44, 45–9, 55, 56 Mathews, M.C. 260 Mayer, D.M. 71, 78 MBA students 13, 16–17, 38, 54 McAneny, L. 252 McCabe, A.C. 73 McDevitt, R. 69 McGurn, S. 231 McIvor, S. 37 McKendall, M. 218, 227, 228, 261 McKinney, J.A. 23 McLean, B. 113, 114 McNees, P. 234, 236, 237, 238, 247 media, corruption reporting 277, 278 mediated corruption 175 Megan, B. 263 Mény, Y. 271, 272, 273 Merck 6, 15, 35, 219 Merriam–Webster Online Dictionary 176, 177–8 Mesmer-Magnus, J.R. 19, 67, 72 Messick, D.M. 75, 109, 113, 115 Messick, S. 147 Metzger, M.B. 241, 248 Mexico, police corruption 5 Miceli, M.P. 209, 212

Miceli, M.R. 19, 20 Microsoft and internet censorship in China 222, 226 Miethe, T.D. 209 Miklos, I. 181 Milanovic, B. 41, 52 Milgram, S. 104, 111, 112–13 Miller, J.P. 224 Miller, K.W. 255 Miller, L.E. 68 Miller, W. 272 Minow, N. 173 Mirvis, P.H. 162 Misangyi, V.F. 17 Mischel, W. 68, 69 misconduct, individual and organizational antecedents 60 empirical findings 72–86 literature reviews codes of ethics, impact of 75–7 ethical climate, impact of 77–8 ethical decision making antecedents 73–4 ethical sensitivity antecedents 72 whistleblowing antecedents 72–3 workplace deviance antecedents 74–5 primary research, individual and organizational antecedents considered jointly 78–85 research conclusions 86 meta-issues causality 71–2 dependent variable measurement 67–8 focal constructs 60–61 counterproductive work behavior 63 incivility/rude behavior 61 integrity testing 63 organizational corruption 62 organizational deviance 62 organizational misbehavior 62–3 overlapping constructs 64–5 unethical behavior 61 guidelines for study 65–7 levels issues 69–71 theoretical explanatory system 68–9 Mitsubishi 224 Moag, J.S. 242 Molander, E.A. 260 money 44–8, 50–54 money laundering 178, 179 Montgomery, R. 260 Montinola, G.R. 62 Moore, C.A. 117, 260 Moore, C.W. 23

305

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Research companion to corruption in organizations

Moore, D. 252 Moore, D.A. 12 moral development 4, 109 moral disengagement 4 motivational blindness 15 Motowidlo, S.J. 151 Mulcahy, Anne 193–4 multinational enterprises, labour relations and ethical issues 123–6, 140–42 collective bargaining 136 ethical dilemma 123–4 legitimacy theory 126, 127–8, 139–40 local versus expatriate labour 128–36, 140 Nigeria 125, 126, 139, 140, 142 local versus expatriate labour 135–6 subcontracting 138 trade unions 135 South Africa 123, 125, 139–40, 142 local versus expatriate labour 133–4 subcontracting 136–8 trade unions 126, 134 stakeholder theory 126–7, 134, 139 subcontracting 136–9 trade unions 124, 126, 134, 135, 136, 138 Zambia 125, 129–33, 139, 140, 142 Mumford, M.D. 145, 146, 149, 150, 151, 154, 156, 159, 166, 167 Murphy, K.R. 162, 241 Myers, D.G. 48, 162 Myrdal, G. 280 Nantel, J. 264 Nardelli, Robert 195 National Integrity System (NIS) 275, 278 NDS 220 Near, J.P. 19, 20, 21, 209, 212 Needleman, J. 48, 55, 56 Nell, M. 176 Newport, F. 252 Nguyen, N.T. 73 Niehoff, B.P. 231, 247, 248 Nigeria corruption 184 MNEs, labour and ethical issues 125, 126, 135–6, 138, 139, 140, 142 Nijhof, A.H.J. 71 Nike 202 Nitsch, D. 77, 264 normalization response 219, 222 Norris, F. 225 Nortel Networks 219, 288–9 Nye, J.S. 174, 175 O’Connor, J. 154 O’Connor, J.P. 8

O’Dwyer, B. 117 OECD Anti-Bribery Convention 182–3 O’Fallon, M.J. 67, 73, 74 Oliphant, B.J. and Oliphant G.C. 236, 237, 238, 247 Oliveira, A. 69 Ones, D.S. 63, 162, 241 organizational complexity 113–14, 116 organizational deviance 62, 65, 74 organizational justice 242–4, 246, 248 organizational misbehavior 62–3, 65 organizational responses to corruption allegations 217–18, 226–7, 229 acceptance 221, 224–6 cosmetic change 221, 225 minimization 221, 225 settling without liability 221, 225 structural change 221, 225–6 antecedents 227–8 buying time 220, 224 consequences 228–9 deflection 222 counter attack 220, 223–4 higher principle focus 219, 223 pre-emptive action 219, 223 refocusing attention 219, 222–3 denial 218–19 multiple responses 226 reframing 219, 222 organizations of corrupt individuals (OCIs) 3, 106, 116 O’Rourke, J.S. VI. 219 Osberg, L. 181 ostracism 211 outrage at corruption, tactics to minimize 206–9 counter-tactics 208, 209 cover-up 206–7 denigration of critics 207 intimidation and bribery 208 official channels, use of 207–8 reinterpretation 207 Oxford English Dictionary 174, 176, 177–8 Oyserman, D. 149 Pacelle, M. 221 Pachter, W.S. 6 Paldam, M. 182 Pardue, J. 232, 239, 241, 242 Parker, C.P. 158 Parker, S. 223 Parmalat 253, 254 Patterson, D.M. 79, 84 Paul, R.J. 231, 247, 248

Index Paulhus, D.L. 95 Peake, P.K. 68 peer pressure 111 Pelletier, K.L. 62 Penney, L.M. 162 PepsiCo 194 Perez, E. 255 Perlow, L. 263 Perrow, C. 113, 116 personality tests 163, 164 Personnel Selection Inventory (PSI) 239–40, 241–2, 248 Persson, T. 179 Peterson, C. 222 Peterson, R.S. 158 Pfarrer, M.D. 16, 217, 218, 220 Pfeffer, J. 217, 265 pharmaceutical industry 6–7, 8 Philip, M. 92 Phillips, T. 44 Pickens, J.C. 145 Pierce, C.A. 94 Pinto, J. 3, 64, 65, 92, 106, 116 Pitt, H.L. 260 police corruption 5 Pollay, R. 46 Pomerantz, E.M. 69 Ponzi schemes 288 Pope, J. 275, 280 power distance 180, 181, 261 Powpaka, S. 188 Prasad, R. 81 price fixing 35, 194 PricewaterhouseCoopers Global Economic Crime Survey 2, 18 Prien, K.O. 239 Pritchard, R.D. 96 procedural justice 242, 246 PSI 239–40, 241–2, 248 Punch, M. 36 Purpura, P.P. 232 pushback process 197–8 Putnam, R.D. 41 Rachman-Moore, D. 117, 263, 264 Rai, S. 218 Rajgopal, S. 7 Randall, D.M. 95 Raskin, R. 163 rationalization 8, 14, 108–9, 112, 114, 116 Raven, B. 15 Rebitzer, J. 45 Redmond, M.R. 154 reinforcement theory 234–5 Reingold, J. 3, 37

307

Reliance 218 Rest, J.R. 73, 148 revenue recognition 294–5 Reynolds, S.J. 148 Richardson, A.J. 95 Richardson, R. 81 Richardson, W.D. 67, 110, 262 Richins, M.L. 46, 47, 48 Rietdijk, M.M. 71 Rifkin, J. 40, 41 Roberts, B.W. 69 Robertson, D.C. 60, 65, 67, 69, 78, 79, 84 Robinson, D.C. 262 Robinson, J. 41 Robinson, S.L. 63, 64 Rockness, H. and Rockness J. 77 Rodrigues, S. 2, 37 Rodriguez, P. 10 Roozen, I. 96 Rosanas, J.M. 117 Rose-Ackerman, S. 9, 174, 176 Rosenmerkel, S.P. 95, 101 Ross, W.T. 79, 84 Rousseau, D.M. 231, 233 Russia 5, 10, 34, 35, 39 Ryan, M. 96 Ryan, R.M. 48, 55 Ryhammer, L. 159 Sackett, P.R. 63, 81, 232, 241 Sajó, A. 281 Salancik, G.R. 217 Salomon Brothers 196, 223 Sama, L.M. 78 Sandberg, J. 232 Sandström, J. 67, 75, 76, 77, 254, 264 Sarbanes–Oxley Act (2002) 21, 23, 257–8 Sarmah, R. 62 Scalet, S. 264 scapegoating 219, 222 Scheines, R. 71 Schleglemilch, B.B. 261 Schminke, M. 158 Schnake, M.E. 70 Schnatterly, K. 253 Schneider, W. 252 Schor, J. 41, 44, 45, 49, 56 Schroth, R.J. 114 Schultz, P. 43 Schumann, P.L. 61 Schwartz, M.S. 21, 75, 76, 117, 259, 262, 263, 264 Schweitzer, M.E. 74, 75

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Research companion to corruption in organizations

scientists, corruption of 145–6, 165–7 environment, strategies and ethical decisions 158–62 ethics in science and engineering 146–50 behavioral theories 147–8 response theories 148–50 field, strategies and ethical decisions 154–8 person, ethical decisions and sensemaking 162–5 strategies and ethical decisions 151–4 studies, limitations of 165–6 Scrushy, Richard 253 Segal, J. 50, 56 Seligman, M.E.P. 45, 51 Sellin, T. 93 Sennewald, C. 232 Shapiro, D.L. 246 Sharpe, R. 224 Sheldon, K.M. 13, 54, 55 Shell International 126, 135 Shepherd, P.L. 96 Sherwin, M.J. 147 Shoaf, V. 78 Shoda, Y. 69 Siconolfi, M. 223 Siemens 184, 225 Simon, W.H. 224 Simonton, D.K. 145 Simpson, S. 111–12 Sims, R.L. 158 Sims, R.R. 255 Singer, A.W. 228 Sirgy, M.J. 46 Sisodia, R. 37 Skandia 254 Skilling, Jeff 109, 252–3 Skinner, B.F. 234 Slayton, P. 4–5, 36 Smeeding, T. 181 Smilov, D. 281 Smith, J.W. 37 Snell, R.S. 261 Sobszak, A. 258 Société Générale 17 Somers, M.J. 117, 262 Sonenshein, S. 149, 166 Sorell, T. 141 South Africa corruption 35, 184 MNEs, labour and ethical issues 123, 125, 139–40, 142 local versus expatriate labour 133–4 subcontracting 136–8 trade unions 126, 134

South America, corruption 182, 184–5 South Korea, corruption 182, 183, 185–6, 187, 254 Spector, P.E. 64, 65, 67, 69, 74, 75, 79, 81–2, 162 sports, cheating in 13–14, 38 Srivastava, A. 53 Srivastava, S. 163 stakeholder theory 126–7, 134, 139 Stanley, J.C. 233 Stark, A. 173 Staw, B. 115 Steinmann, H. 173 Steneck, N. 145 Stevens, B. 22, 75, 76, 77, 258, 259, 260, 261 Stevens, J.H. 263 Stewart, F. 132 Stone, T.H. 83 stonewalling 220, 224 Strange, J.M. 149 Strobel, L.P. 8, 35 Stylianou, S. 93, 94, 95 subprime mortgages 254–5 Suharto, President 34 Sullivan, B.N. 2 Sullivan, Scott 198 Sutherland, E.H. 111 Svendsen, G.T. 182 Svensson, J. 9 Swamy, A. 179 Sweden, employee theft reduction study 235–6 Taiwan, corruption 10–11 Tang, T.L.-P. 73 TAP Pharmaceuticals 221, 226 Tarkowski, J. 174 tax evasion 178, 179 Taylor, L. 45 Taylor, R.R. 239 Tenbrunsel, A.E. 75, 109 Terris, W. 239, 241, 249 Terry, H. 163 Texaco 228 Thacker, S.C. 179 Thibaut, J. 242 Thompson, D.F. 175 Thompson, J.D. 113 Thornton, E. 224 Thurstone, L.L. 93 Tilley, B. 244 time affluence 54–5 Tisne, M. 281 Tkaczyk, C. 253

Index Toffler, B.L. 3, 37 Tomlinson, E.C. 231, 232, 233, 242, 243, 247, 248 Toro Company 200 Toronto Star 11, 37, 39 Transparency International (TI) 9, 23–4, 34, 35, 188, 189, 269 beginnings of 269–71 Bribe Payers Index (BPI) 279 corruption definition 23, 174 Corruption Perceptions Index (CPI) 23–4, 181, 185, 274, 277–8, 279, 283 2008 summary of countries 182 Africa 184 Americas 184–5 Asia 183–4 Europe 181–3 limitations of 188 franchising 274–6 future of 280–81 Global Corruption Barometer 279 Global Corruption Report (GCR) 279 institutionalization 274–6 national chapters 271–4, 275, 276–7, 283 National Integrity System (NIS) reports 278 Personal Active members 270 Source Book 279 Treisman, D. 179, 180 Treviño, L.K. 22, 69, 77, 78, 79, 85, 86, 109, 148, 166, 258, 262 Trompenaars, F. 173 trust, betrayal of 4–6, 112 Tsalikis, J. 96 Tsang, J. 75 Turiel, E. 109 Tversky, A. 115 Tyco 199, 253 Tylenol 197, 256 Tyson 219 Tyson, T. 75 Tzelgov, J. 69 Tzilivakis, K. 187 Ulrich, T.A. 159 unethical behavior 61, 65 Union Carbide, Bhopal 226 United Kingdom, corruption measurement 181, 183 United Nations 38, 125, 126 United Services Automobile Association 195–6 United States American Dream 40–41, 48 banking system, greed in 35–6

309

corruption 181, 182, 184, 252–3, 255–6 False Claims Act 21, 211 financial crisis 254–5 government corruption 11 income inequality 41 police corruption 5 punishment 9 Securities and Exchange Commission (SEC) 9, 225 university degrees, sale of 7 university students 13, 16–17, 37–8, 54 Updike, E.H. 224 US News & World Report 9 utilitarian approach to ethics 173, 180, 187, 188, 189 Valentine, S. 77, 262 Van Boven, L. 55 Van de Ven, A. 113 Van Rijckeghem, C. 179 Vansteenkiste, M. 54 Vardi, Y. 62, 64, 69 Vaughn, D. 62, 114 Velilla, M. 117 Viader-Cohen, D. 159 Victor, B. 3, 77, 158, 228 Vioxx 6, 219 virtue ethics 173, 188, 189 Viswesvaran, C. 19, 67, 72 Von Glinow, M.A. 159 Wagner, J.A. 227, 228 Waksal, Samuel 9, 253 Walker, L. 242 Walker, M.A. 94 Wall Street Journal 184, 194, 254 Wal-Mart 201, 202 Wanek, J.E. 63 Warren, D.E. 116 Wasieleski, D. 79, 85 Wealth of Nations, The (Smith) 40 Weaver, D. 262 Weaver, G.R. 23, 77, 117, 159 Weber, J. 71, 79, 85, 217 Weder, B. 179 Weeks, W.A. 264 Weimer, D.A. 224 Weiner, T. 219, 223 Weinfurt, K. 12 Weisberg, R.W. 146 Weiss, A. 53 Weitz, E. 62, 64, 69 Welles, C. 217 West, M.A. 159 Westcott, S. 231

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Research companion to corruption in organizations

whistleblowers 19, 209, 215 recommendations for 209–12 support groups 215 Whistleblower’s Survival Guide (Devine) 211 whistleblowing 18–21, 72–3, 212–13, 214–16 White, B.J. 260 Whitley, B.E. 233 Whorf, B. 265 Whybrow, P.C. 45 Whyte, G. 115 Williams, K.D. 211 Williams, O.F. 109 Williams, S. 263 Wilson, C.J. 174 Witt, L.A. 159 Wolfgang, M.E. 93 Wollongong Council case 206–7, 208, 214, 216 Wolosin, R. 111 Woo-Chong, Kim 254 workplace deviance 63, 65, 66, 74–5, 81–2 World Bank 9–10, 132–3, 174 WorldCom 111, 113, 198, 253

Wotruba, T.R. 77, 263 Wright, N. 46 Wrightsman, L.S. 163 Xerox Company 193–4 Xiao, Y. 154 Yeager, P. 227, 253 You, J.S. 180, 185 Youngblood, S.A. 69, 79, 85 Zahra, S.A. 2 Zambia, labour and ethical issues in MNEs 125, 129–33, 139, 140, 142 Zatzick, C.D. 24 Zekany, K.E. 111 Zerbe, W.J. 95 Zhang, X. 8 Zimbardo, P. 105, 107, 111 Zuckerman, H. 145, 146 Zugelder, M.T. 83 Zyglidopoulos, S.C. 15, 75, 109, 113, 115, 116, 117