Do Stronger Laws Prevent Corporate Crime?

Societal consequences give power to formal sanctions.

The wave of corporate scandals symbolized by Enron Corp.’s downfall spurred federal and state authorities to clamp down on white-collar criminals. There are now more investigators, stiffer penalties and greater oversight for many corporate activities. All of which leads one to ask: Do tougher laws and more aggressive enforcement deter crime?

The answer, according to the authors of the December 2006 working paper, Why Managers Fail to Do the Right Thing: An Empirical Study of Unethical & Illegal Conduct, is “yes.” But not because executives fear the courts. For deterrent measures to work, they have to act through more personal mechanisms that are active even when the courts are silent.

The authors — N. Craig Smith, senior fellow in marketing and business ethics at the London Business School; Sally S. Simpson, chair and professor of criminology and criminal justice at the University of Maryland; and Chun-Yao Huang, assistant professor of marketing at National Taiwan University — surveyed 78 businesspeople to determine their “intent to commit” corporate crimes given three hypothetical scenarios. The survey respondents, including managers from a U.S.-based Fortune 500 consumer goods company and MBA and executive MBA students from a mid-Atlantic university, replied to scenarios involving a price-fixing scheme, environmental pollution and bribery. In each scenario, the respondents were made aware of the corresponding legal ramifications.

The verdict? No one wants to go to jail, of course. But for managers who consider stretching the rules, it’s not jail time, per se, that might keep them on the straight and narrow. “What we’ve found is that there’s no significant effect of formal sanctions acting directly on the ‘intent to commit,’” says Smith. However, “they do have an effect on the ‘intent to commit’ through other variables,” namely, outcome expectancies and moral evaluations, as the research terms them.

“Outcome expectancies” refers to the possibility that the action could hurt (or help) executives’ careers or social standing within their company, community or family. In other words, executives are more fearful of wearing a scarlet letter than of doing hard time. That reality suggests that increasing the social costs of committing crimes — for example, by making transgressions public even if the courts don’t act, or by making it explicitly known that a shady decision will be a black mark on an individual’s record within a company or industry — could be as important as criminal, civil or regulatory sanctions.

Of equal importance is the second variable: “moral evaluations,” or an executive’s recognition of any ethical boundaries, in terms of both absolute moral fairness and a relative sense of what is culturally acceptable. The authors write, “Encouraging recognition of the ethical dimensions of a business situation increases the possibility of constraints on unethical conduct,” supporting the infusion of ethics in business education and training.

One reason these two pathways are important is that they are deterrents even if the deed would go unnoticed or unpunished by the courts. Shady practices can persist if offenders find a way around the letter of the law, but outcome expectancies and moral evaluations still can come into play. “There’s a lot of store placed in formal sanctions . . . [but] that in itself isn’t going to be enough,” says Smith. “You have to communicate the moral opprobrium and the other outcomes that come from the act.”

Managers also might want to emphasize the rules to their troops. “Despite compliance initiatives,” Smith says, “I don’t think companies can be confident that managers are sufficiently informed about the law.” And it’s equally important to convey the law’s moral underpinnings. Further, because employees tend to carry out direct orders without necessarily considering the ethical implications, it is important to implement measures, such as whistle-blower hot lines, that encourage workers to question orders that may be unethical or illegal.

From the policy-making perspective, tougher sentencing might not be the deterrent that lawmakers expect. In fact, respondents believed existing punishments, both for individual wrongdoers and for their companies, were already severe. “This might suggest that our respondents, at least, have come close to a ceiling,” the authors assert, “and increased severity of formal sanctions might not have as much effect on curbing misconduct as increased attention to the perceived certainty of sanctions.” In other words, the authors suggest, stepping up the enforcement of existing laws could be a better deterrent than doubling sentences. However, the authors stress that “this is not to imply that [harsher sentences] and other directives of the Sarbanes-Oxley Act are without merit.” Formal sanctions are still likely to reduce misconduct, because the two pathways the researchers studied are reinforced by stronger laws. But communicating the regulatory changes — for example, an increase in enforcement resources — and the reasoning behind them are key, according to the authors: “This is one important way by which it is useful for policy-making to speak to both ethical and legal constraints.”

The research was conducted in the late 1990s, well before revelations at Enron, Worldcom Inc. and elsewhere put corporate malfeasance high on the agenda. If the survey were conducted now, post–Sarbanes-Oxley, Smith would expect to see similar results, though perhaps with lower overall intents to commit crimes. “But what we’re interested in isn’t the absolute willingness to commit these unethical acts,” he says. Rather, the important aspect is how sanctions potentially lower the intent to commit. And when it comes to using laws to deter corporate crime, it turns out that the message is as important as the medium.

For more information, contact the authors at the following e-mail addresses: N. Craig Smith, NCSmith@london.edu; Sally S. Simpson, ssimpson@crim.umd.edu; and Chun-Yao Huang, cyhuang@management.ntu.edu.tw.