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DESIGNING A COMPREHENSIVE ANTI-CORRUPTION COUNTERSTRATEGY FOR
THE PRIVATE SECTOR
A dissertation presented by
V-Tsien Gaius Fan
to
The School of Criminology and Criminal Justice
In partial fulfillment of the requirements for the degree of Doctor of Philosophy
in the field of
Criminology and Justice Policy
Northeastern University
Boston, Massachusetts
May 2014
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DESIGNING A COMPREHENSIVE ANTI-CORRUPTION COUNTERSTRATEGY FOR
THE PRIVATE SECTOR
by
V-Tsien Gaius Fan
ABSTRACT OF DISSERTATION
Submitted in partial fulfillment of the requirements
for the degree of Doctor of Philosophy in Criminology and Justice Policy
in the College of Social Sciences and Humanities at Northeastern University
May 2014
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ABSTRACT
I examine the possibility of designing a comprehensive anti-corruption counterstrategy for the
private sector. The first prong of my study determines the relationships between the
environment, management, and business controls in their effect on combating corruption.
Quantitative analysis of data from the World Bank’s Enterprise Surveys was performed in order
to frame a proper context in which measures against corruption can be considered. These
relationships were then considered in the subcontext of region, industry, and company size to
determine variation. Results show that business controls are generally resilient to the effects of
management. Management effects are resilient to environmental effects, but only direct business
controls (auditing) are resilient. Indirect business controls (internationally-recognized quality
certification) are sensitive to environmental effects but still retain promise as an anti-corruption
tool. Variations in these results are shown by region, industry, and company size, which
demonstrates the need for carefully tailored anti-corruption plans. The second and final prong of
my study examines whether the fields of institutional theory, business management, and
criminology can be merged to develop relevant insights and solutions. A review of the relevant
literature from these fields reveals the presence of a powerful backdrop in which the issue of
corruption can be framed and where following steps can be taken to address it. Interviews with
senior compliance personnel were conducted for added depth and insight. In summary, I argue
that strong leadership and controls when supported and implemented properly while considering
the larger context in which they are applied, in addition to considering a multidisciplinary
approach, can be a potent force against private sector corruption.
Keywords : Corruption, compliance, ethics, management, leadership, criminology, institutional
theory.
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ACKNOWLEDGEMENTS
I would like to express my gratitude to the following individuals for contributing to my progress
in my doctoral program and other areas of life:
My outstanding committee: Professors Nikos Passas, Ni (Phil) He, Christopher Robertson,
and Alvaro Cuervo-Cazurra. Their insight, advice, patience, and support were invaluable. I
could not have asked for a better group of advisors.
My family: parents Ching Chiao and Peng Cheng, wife Yinan, daughter Eowyn, and
adopted members Leonidas and Liancat. I also want to credit my late grandmother, Lim Ah
Lian, who lived out the principle that it is never acceptable to let your circumstances dictate your
destiny.
I would also be remiss if I do not mention the teachers and mentors who taught me the
meaning of sacrifice and value of good counsel.
Finally, I give honor to the Master Strategist and Tactician who gives meaning and hope in
all situations, even conflict and struggle.
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DEDICATION
For my daughter, Eowyn.
May you rise to serve and protect others.
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TABLE OF CONTENTS
ABSTRACT .....................................................................................................................................2
ACKNOWLEDGEMENTS .............................................................................................................4
DEDICATION .................................................................................................................................5
TABLE OF CONTENTS .................................................................................................................6
LIST OF FIGURES .........................................................................................................................8
LIST OF TABLES ...........................................................................................................................9
CHAPTER I INTRODUCTION ...................................................................................................11
CHAPTER II LITERATURE REVIEW .......................................................................................15
Definitions of Corruption .......................................................................................................15
Causes and Explanations of Corruption .................................................................................18
Consequences of Corruption in the Private Sector .................................................................23
Consequences of Corruption in the Public Sector ..................................................................24
Proposed Solutions to Combat Corruption .............................................................................25
The Role of Compliance and Ethics Program in Combating Corruption ...............................27
The Combination of Criminology and Institutional Theory as a Framework for Analyzing
and Addressing Private Sector Corruption .............................................................................30
CHAPTER III RESEARCH QUESTION, HYPOTHESES, AND METHODOLOGY ...............36
Research Question ..................................................................................................................36
Internationally-Recognized Quality Certification and Corruption .........................................39
Auditing and Corruption .........................................................................................................41
Leadership, Top Management Teams, and Corruption ..........................................................43
Role of Environmental Factors ...............................................................................................46
Role of Region, Industry, and Company Size ........................................................................48
Developing Counterstrategy ...................................................................................................52
Research Design .....................................................................................................................54
CHAPTER IV RESULTS AND FINDINGS ................................................................................59
Analysis of Full Dataset ..........................................................................................................59
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Regional Analysis of Dataset ..................................................................................................70
Industry Analysis of Dataset ...................................................................................................78
Analysis of Dataset by Company Size ....................................................................................85
Interview Results ....................................................................................................................91
CHAPTER V COUNTERSTRATEGY .........................................................................................94
Controls and Leadership Matter .............................................................................................94
Understanding Context ...........................................................................................................96
Multidisciplinary Approach ....................................................................................................98
Mixed Strategy ......................................................................................................................100
Creating Change ...................................................................................................................102
Theoretical Implications .......................................................................................................104
CONCLUSION ............................................................................................................................108
WORKS CITED ..........................................................................................................................112
APPENDIX
Details of World Bank Enterprise Survey 2006-2011 and Other Variables .........................126
Questionnaire for Compliance Personnel .............................................................................128
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LIST OF FIGURES
Figure 1 Proposed Theoretical Framework of Corruption Incorporating Criminology and
Institutional Theory ......................................................................................................35
Figure 2 Original Upper Echelon Model ....................................................................................37
Figure 3 Testable Model .............................................................................................................38
Figure 4 Proposed Counterstrategy Model ..................................................................................53
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LIST OF TABLES
Table 1 Hypothesized Relationships Between Controls, Management, and Environment ......14
Table 2 Potential Benefits and Drawbacks of Compliance Programs ......................................30
Table 3 Descriptive Statistics and Correlations ........................................................................65
Table 4.1 Effects of Environment, Management, and Business Controls on Preventing Informal
Payment Requests ...............................................................................................66
Table 4.2 Effects of Environment, Management, and Business Controls on Preventing
Distributions of Informal Payments .............................................................................67
Table 5 Effects of Independent Variables By Type of Environment ........................................68
Table 6 Effects of Independent Variables on Total Bribe Payments ........................................69
Table 7 GLOBE Survey Details ...............................................................................................72
Table 8.1 Regional Differences in Independent Variable Effectiveness for Internationally
Recognized Quality Certification ................................................................................74
Table 8.2 Regional Differences in Independent Variable Effectiveness for Auditing ................75
Table 8.3 Regional Differences in Independent Variable Effectiveness for Top Manager
Experience ...................................................................................................................76
Table 8.4 Regional Differences in Effects of Independent Variables .........................................77
Table 9.1 Industry Differences in Independent Variable Effectiveness for Internationally
Recognized Quality Certification ................................................................................80
Table 9.2 Industry Differences in Independent Variable Effectiveness for Auditing .................81
Table 9.3 Industry Differences in Independent Variable Effectiveness for Top Manager
Experience ...................................................................................................................82
Table 9.4 Industry Differences in Effects of Independent Variables ...........................................83
Table 9.5 Industry Differences in Effects of Independent Variables ...........................................84
Table 10.1 Company Differences in Independent Variable Effectiveness for Internationally
Recognized Quality Certification ................................................................................86
Table 10.2 Company Differences in Independent Variable Effectiveness for Auditing ...............87
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Table 10.3 Company Differences in Independent Variable Effectiveness for Top Manager
Experience ...................................................................................................................88
Table 10.4 Company Differences in Effects of Independent Variables ......................................89
Table 10.5 Company Differences in Effects of Independent Variables .....................................90
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But you should select from all the people able men, God-fearing, trustworthy, and hating bribes.
Place them over the people as commanders of thousands, hundreds, fifties, and tens. - Exodus
18:21
Leaders should be upright and virtuous but have many strategies. – Zhuge Liang
CHAPTER I : INTRODUCTION
Corruption is a scourge that affects all aspects of society, resulting in devastating effects for
a wide range of institutions and individuals. The private sector plays a significant role in the
supply-demand equation for corruption. When businesses are required to interact with
government officials for various considerations such as obtaining access to government provided
services, licensees, permits, or other legal requirements, opportunities for corruption present
themselves. By engaging in corruption, the private sector serves as an accomplice and
accessory, with magnified consequences due to the increased reach of multinational companies
in this era of globalization. Conversely, some aspects of the private sector also suffer from the
effects of corruption, especially companies that are smaller, less influential, and with fewer
resources (Fisman and Svensson, 2007; Bardhan, 1997; Shleifer and Vishny, 1993; Wei, 1997;
Dreher and Schneider, 2010; Friedman e al, 2000; Emerson, 2002; Ades and DiTella, 1999;
Rodriguez et al, 2005; Smarzynka and Wei. 2002).
Accordingly, combating corruption effectively is a prerogative, with the hope that its
consequences may be alleviated and mitigated for all affected parties, including businesses,
private citizens, and society at large. By reducing the frequency and intensity of corrupt acts, the
supply-demand equation may be considerably altered. Consequently, it is clear that developing
effective measures is paramount in addressing this detrimental phenomenon. Companies should
develop appropriate mechanisms to shield themselves from participation in corrupt activities. I
argue, however, that these measures, should not be considered in isolation as they can be affected
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by outside factors, such as management decisions, the political and business environment, as
well as regional, industry, and company differences.
As such, I propose a multi-pronged approach to the design of a comprehensive anti-
corruption counterstrategy for the private sector. I argue that the first part in development of
effective countermeasures requires the elucidation of context, wherein the relationships between
environmental factors, management, and business controls (i.e. auditing and certified
management systems) are carefully considered. Further, these relationships should also be
considered in the subcontext of region, industry, and company size to determine further
variations which will provide further insights for designing effective counterstrategy.
These aforementioned factors of environment, management, and controls potentially vary
in their ease of implementation, ability to be influenced, and corresponding effectiveness. As
evidenced by the numerous examples of companies involved in illegal activities worldwide,
there is a need for strong business controls that serve as limiting and deterrent mechanisms.
While controls and standards are necessary to address misconduct, they may also be the easiest
to implement. Voluntary control initiatives are potentially ineffective in the face of difficult
business environments where there is a high pressure to be involved in corruption. Yeager
(1995), for example, argues that voluntary codes of conduct by themselves are ineffective in
addressing misconduct. Even in the case of corporate compliance which is heavily linked to
legal requirements, the possibility of misconduct may still be high where there is a lack of
incentives for implementation as well as weak enforcement, investigations, and consequences.
Moreover, there is also the risk that even well-designed programs aimed at controlling
misconduct, including corruption, are developed in isolation without considering other factors
that may influence them. The actions and attitudes of corporate leadership and upper
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management influence the effectiveness of these controls and standards through a strong
commitment to development and implementation or a "tone at the top." The decision-making,
however, of leadership and management is harder to influence, either due to personal ethical
orientations of individuals, quality of leadership and management skills, and a relative lack of
priority placed on ethics, compliance, and integrity due to the profit-centered business
environment. Accordingly, the role of management may affect a commitment to integrity by
either failing to develop adequate controls or, in the scenario where there are strong ones, to
implement them effectively. For example, a company could have well-designed policies and
procedures but a lack of commitment from personnel could lead to under-enforcement or even
non-implementation of such policies and procedures.
Consequently, I argue that the effect of management factors can be quite significant on anti-
corruption policies and procedures. On a positive note, however, because the effects of
leadership and management can be possibly influenced by selection of ethical personnel and the
provision of effective training to increase awareness and technical skills in regards to combating
corruption. Quality and ethical management can also potentially ensure that policies and
procedures are not only well-designed but also strictly implemented.
Finally, even in the presence of strong management and controls, I argue that the effects of
the environment - i.e. the profit-making paradigm, level of corruption, quality of governance,
economic strength, competition, and institutions in a country where business is conducted - may
be so overwhelming that the effects of high-quality management and controls are eroded.
Companies may feel impotent, discouraged, and overwhelmed in the face of difficult odds to be
ethical and competitive in such environments. While these environmental effects may be
potentially countered by government investigations and prosecutions and legislation promoting
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ethical corporate behavior, they would be the most difficult to influence from a company's point
of view. In regions or industries where corrupt practices are either the norm or more prevalent,
the extent of influence that a single company has on the larger environment will be obviously
negligible.
Accordingly, as illustrated in Table 1, I hypothesize that there would be an inverse
relationship between the ability to influence the implementation/direction of these measures and
policies and their effectiveness. I argue that once these relationships are established, a proper
context can be framed in which effective anti-corruption counterstrategy can be considered and
implemented.
Table 1 - Hypothesized Relationships Between Controls, Management, and Environment
Factor Effects on
Corruption
Ability to
Influence or
Implement
Effects on
Controls
Effects on
Management
Controls Low High * *
Management Moderate Moderate Moderate *
Environment Varies Low High High
* not applicable
The second prong of my study involves a synthetic analytical approach from the
perspectives of criminology and institutional theory, as well as other business management
studies. Since the problem of corruption touches both business and criminal justice fields, I
propose that this approach has the potential to provide a powerful backdrop in which private
sector corruption can be analyzed with corresponding potential insights and solutions.
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CHAPTER II : LITERATURE REVIEW
Definitions of Corruption
As an initial matter, there should be a discussion on the definition of corruption. Plainly
speaking, however, there is no consensus. This phenomenon is due to differences between
national laws, diverse disciplinary and cultural perspectives, how the public is affected, and
public perceptions. Nonetheless, there are several categories which frame the boundaries of
what corruption is:
a. Public Office Definitions
Joseph Nye (1967, 966) provides a frequently cited public-office centered definition of
corruption:
"Corruption is behavior which deviates from the formal duties of a public role because
of private regarding (personal, close family, private clique) pecuniary or status gains; or
violates rules against the exercise of certain types of private regarding influence. This
includes such behavior as bribery (use of reward to pervert the judgment of a person in
a position of trust); nepotism (bestowal of patronage by reason of ascriptive relationship
rather than merit); and misappropriation (illegal appropriation of public resources for
private-regarding uses)."
While Nye's definition is a solid one which covers corrupt behavior beyond acts of bribery, the
weakness in this approach includes a too-narrow scope of benefit - i.e. benefits could also extend
to groups or individuals such as a political party or ethnic group - in addition to neglecting
scenarios where public officials do not have strictly defined formal roles.
b. Public Interest Definitions
Balancing out the public-office centered definitions are those that focus on the effects of
corruption on the public interest. Carl Friedrich's (1989, 10) definition is as follows:
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"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 office holder, 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."
This approach introduces a broader view of the effects of corruption past strictly private benefits
as well as explicit exchanges. The issue here, however, involves what the scope of public
interest covers. A scenario in which a public official receives a bribe to refrain from performing
an unethical action may be deemed corruption as the intent of the law in that case would be for
the "public interest" as it is defined - i.e. bribing a guard in Nazi Germany to look the other way
when enforcing anti-Semitic laws.
c. Market-Based Definitions
Market-based definitions rely on economic principles such as the following definitions by
Nathaniel Leff (1989, 389) and Jacob Van Klaveren (1989, 25-26):
"Corruption is an extralegal institution used by individuals or groups to gain influence
over the actions of the bureaucracy. As such, the existence of corruption per se
indicates only that these groups participate in the decision making process to a great
extent than would otherwise be the case."
"Corruption means that a civil servant abuses his authority in order to obtain an extra
income from the public. Thus we will conceive of corruption in terms of a civil servant
who regards his offices as a business, the income of which he will seek to maximize.
The office then becomes a 'maximizing unit.'"
While acknowledging the economic effects of corruption, the weakness in these market-based
definitions is obvious as they ignore normative ethical aspects of behavior and legitimizes
corruption in many scenarios where bureaucracy is inefficient or burdensome.
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d. Agent-Client Definitions
This set of definitions incorporates the role of agents who are tasked to act on behalf of their
principals or employers, either sacrificing their principal's interest (personal corruption) or acting
illegally or unethically in the furtherance of that interest (official corruption). Accordingly, they
have the benefit of not restricting its scope to public or governmental officials, which is useful
when discussing the supply-side of corruption, which is often the private sector (Carvajal, 1999).
e. Infractions of the Law and Incompatibility with Public Opinion
Encompassing the definitions above are those based in national laws as well as the influence
of public opinion. Here, different countries may have diverging views of what corruption is as
enacted by national legislation as well as what is culturally accepted, especially in countries
where "gift-giving" in pursuit of an exchange is considered a norm. Legal definitions also have
the weakness of criminalizing behavior without considering ethical aspects (Gardiner, 2002).
f. Definitions by International Organizations
The following international organizations define corruption as such:
(i) World Bank
"The abuse of public office for private gain. Public office is abused for private gain
when an official accepts, solicits, or extorts a bribe. It is also abused when private
agents actively offer bribes to circumvent public policies and processes for
competitive advantage and profit."
(ii) Transparency International :
"The abuse of entrusted power for private gain. Corruption can be classified as
grand, petty, and political, depending on the amounts of money lost and the sector
where it occurs."
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(iii) United Nations and Organization for Economic Co-Operation and Development
(OECD)
Neither the UN nor OECD have explicitly defined corruption, but have chosen to list
actions that constitute it - i.e. active and passive bribery in public and private sectors,
embezzlement, misappropriation, trading in influence, abuse of functions, and illicit
enrichment.
(World Bank; Transparency International; United Nations Convention Against Corruption;
OECD).
For purposes of this dissertation, I gravitate to Transparency International's definition, as it
is broad enough to include corruption from both the public and private sectors while taking into
account their various manifestations (i.e. grand, petty, and political).
Causes and Explanations of Corruption and Corporate Crime
Understanding the causes and explanations of corruption from a theoretical standpoint is
integral to elucidating potential avenues in which it can be addressed. Criminological theory is
particularly insightful in this regard, as it delves into the various motivations, processes, and
mechanisms for corrupt behavior.
Corruption in the private sector falls under the definition of organizational white-collar or
corporate crime, which is "perpetrated by organizations or individuals acting on behalf of
organizations" (Braithwaite, 1989, 334). Consequently, corruption is a specific criminal
phenomenon that is a subset of the larger white-collar or corporate crime discussion. Hence, I
argue that theories and principles that apply to the latter and larger field will also potentially
apply to the more specific discussion of corruption.
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The motivation for corporate misconduct is primarily linked to serving the interests of the
corporation, greed and the profit motive, although other factors such as survival, pursuit of
status, and jealousy have been cited as additional ones (Naylor, 2000; Braithwaite, 1989).
Vaughan (1983, 1982) echoes the idea that profit maximization is the key motivating factor in
corporate misconduct. She builds on Merton's (1938) anomie theory which emphasizes
competition and economic success as culturally approved goals that eventually lead to the
erosion of norms supporting legitimate avenues of accomplishing these goals. According to
Vaughan, there are two processes where misconduct occurs - one where legitimate means are
blocked resulting in an organization's inability to compete and the other where legitimate means
are used to enter competition, but once there, the legitimate means become ineffective.
Consequently, the goal of profit maximization is illusory as there will always be the setting of a
higher financial goal once a lower one is reached. This idea is consistent with Passas' (1997)
contention, built on Merton's reference group theory, that certain individuals in societies with
high emphasis on financial goals will always compare themselves to those with higher financial
status, resulting in relative deprivation in all parts of a society.
Vaughan also lists organizational processes, structure, and complexity of transactions as
significant contributors to corporate crime. Although these components of the business sector
were originally designed for legitimate business activity, they can be usurped for illegitimate
purposes. Organizations often recruit individuals whose qualities and goals are aligned with the
organizational culture and needs, followed by the reinforcing of this relationship through
rewards, financial dependence, and insulation from the outside world. Organizational structure
also reduces the probability of detection and sanctioning of unethical or illegal behavior.
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In addition to the profit motive, Clinard (1980) argues that a corporation also desires to
shape its political and business environment. He adds that the drive for profit and power are not
illegal in themselves, but when it overshadows all other considerations, undesired consequences
potentially follow. He cites organizational structure and processes as some of the main
contributing factors to corporate crime - i.e. complex relationships and expectations; factors such
as size, delegation, and specialization that lead to an abdication of personal responsibility. He
also argues that organizational hierarchies promote rigidity and timidity in the lower ranks while
diluting any message that management might send. Consequently, even if those in the lower
ranks were to report unethical or illegal behavior, upper management may not want to be
informed of negative facts or knowledge, leading to tacit approval. Clinard also blames the
culture of organizations, tying them to industry norms, with more competitive industries
hypothesized to be more involved in corporate crime. The mechanism he cites to is Sutherland's
(1949) theory of learning by differential association where violations result due to economic
position and to Goodman's (1963) mechanism of socialization into the culture of an organization
based on industry conditions, traditions, market guidelines, corporation goals, and the
aspirations and qualities of managers.
Becker's (1968) economic model makes the argument for a rational choice framework in
corporate crime - where benefits of illegal activity are weighed against costs of detection and
punishment. Extending this framework is the principal-agent model whereby agents (i.e.
employees) have the discretion to conduct illegal activity while the principal (i.e. company,
stockholders) maintains power through incentive and control structures that affect the agent.
Joint decisions by both principal and agent affect the probability of deciding to partake in such
illegal activity (Alexander and Cohen, 1996).
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Consistent with the rational choice tradition, Cressey (1950, 1953, 1965) proposes a
framework whereby rationalization, pressure, and opportunity converge for illegal behavior. In
this framework, would-be violators legitimize their behavior through manipulation of definitions,
are driven by the motivation of status maintenance and enhancement, and weigh the risk of
getting caught in their decisions to commit illegal acts. Consistent with Vaughan (1982, 1983)
and Clinard (1980), Chirayath et al (2002) builds on the theory of differential association on an
organizational level whereby criminal behavior is learned, reinforced, and internalized through
corporate socialization and selective association with competitors.
Nonetheless, I argue that frameworks that solely focus on rational choice and controls have
validity but may not be as accurate in describing the problem as not all organizations or
companies participate in misconduct, especially where the rewards are significant and the
probability of detection are relatively small in comparison. Braithwaite (1985, 7) sums up:
"Given the great rewards and low risks of detection, why do so many business people
adopt the 'economically irrational' course of obeying the law?"
Braithwaite (1989) also sets forth a useful template for combining criminological theories to
explain corporate crime. He argues first for an opportunity theory whereby the combination of
goal blockage and illegitimate opportunities lead to a subculture conducive to crime. This
subculture is influenced by differential association but the mechanism of shaming is the "tipping
point" for whether norms favoring illegal activity take hold.
Beyond the analysis of individual and organizational behavior, the phenomenon of
globalization has also been posited to affect corporate misconduct. Consistent with Passas'
(2000, 1999) theory of global anomie, which links globalization with economic and corporate
misconduct through the mechanism of political, legal, and cultural asymmetries, Chirayath et al.
(2002, 132) blames "the transnational encouragement of the hyper-mobility of capital, the
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unending search for cheap foreign labor, and the immobility of domestic labor [resulting in]
oligopolization and expansionism." (see also Vaughan (1982) - predicting that modernization
would increase opportunities for wrongdoing and where norms would be challenged and eroded;
Grabosky (1998) - blaming rise in transnational crime on rapid mobility and a shrinking world).
Martin et al (2007) also finds empirical support for the role of cultural and institutional factors in
affecting firm-level bribery in different countries that supports an anomie framework.
Finally, Johnston (2005) adds to the discussion by proposing that corruption does not take
on a single form but rather can be delineated into syndromes of corruption which are expressed
differently depending on state, political, and social institutions in various countries. He identifies
corruption as having four forms - influence markets, elite cartels, oligarchs and clans, and
official moguls, with different prescriptions for reform. In regards to this study, Johnston’s
framework demonstrates that a generalized solution to corruption is not a wise one. Instead,
taking into account various factors to design a nuanced and more specific strategy is likely to be
more efficient and effective.
I propose that the various ideas discussed in the preceding paragraphs are applicable to
corruption, where bribery and other acts are generally committed to further the same ends of
profit maximization, survival, and pursuit of success. Because companies may be susceptible to
the mindset that they are unable to compete legally, they will also potentially resort to corrupt
acts to compensate for this perceived or actual setback. Moreover, organizational processes,
structure, and complexity of transactions will undoubtedly impact the rate and ease of corrupt
transactions as these factors serve as avenues of obfuscation and reduction of detection and
sanctioning. Large and complex organizational hierarchies also affect the acceptance of
employees’ personal responsibility to act ethically while mitigating related directives from
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management and leadership. Finally, the increase in transnational business also affects the
opportunities for corrupt activities through a combination of pressures to succeed, increased
mobility, and erosion of norms.
Consequences of Corruption in the Private Sector
Understanding the consequences of corruption in the private sector is also an integral part of
combating corruption. A strong awareness of the substantial and damaging effects of corruption
will lead to increased urgency on part of companies and governments to make combating
corruption a priority. Because corruption affects day-to-day operations, profits, and strategies of
businesses, efficiency and effectiveness of the private sector can be significantly hindered.
The nexus between government and the private sector is a fertile area for bribery and other
forms of corruption. Because businesses are required to interact with governmental officials,
whether on a domestic or international level, there are potentially limitless opportunities for
corrupt interactions between both parties (Svensson, 2003; Shleifer and Vishny, 1999; Bardhan,
1997). Accordingly, corruption poses a major threat to the business environment through the
effect of bribery due to its secretive nature and arbitrariness (Fisman and Svensson, 2007;
Bardhan, 1997; Shleifer and Vishny, 1993; Wei, 1997). Ultimately, the corrosive effects of
corruption can also lead to growth in the shadow economy of a country while reducing
competition among businesses, ultimately resulting in fewer formal firms – which as mentioned
previously, potentially increases corruption in another manifestation of its vicious cycle (Dreher
and Schneider, 2010; Friedman et al, 2000; Emerson, 2002; Ades and DiTella, 1999).
Corruption also specifically affects the private sector by altering business strategy,
especially in the context of multinational firms. Multinational subsidiaries, even those with a
24
strong ethical commitment, are more likely to engage in corruption in environments where it is
pervasive (Rodriguez et al, 2005). Here, corruption also acts as a tax on foreign investors
through lack of bureaucratic transparency and poses obstacles to business through lack of asset
protection and fairness in dispute resolution (Smarzynska and Wei, 2002). Perversely, in high-
capture economies, participating in corruption increases asset protection and firm performance,
even though this results in weaker performance in the overall economy (Hellman et al, 2003).
Finally, corruption leads to higher exit rates and the stunting of firm growth (Hallward-Drier,
2009; Svensson, 2000).
Studies indicate that criminal violations are associated with larger firms, greater hierarchy,
those with lower performance compared to their industry, and those in dynamic, munificent
environments. The size of a firm may be linked with increased opportunities for illegal activity.
The link between firm size and criminality, however, has been called into question as larger
firms may be more likely to be investigated and their committing of crimes may not be
proportionally higher than smaller firms (Alexander and Cohen, 1996; Baucus and Near, 1991;
Svensson, 2000; Tanzi and Davoodi, 1997).
Consequences of Corruption in the Public Sector
In the public sector, investment, economic growth, and macroeconomic stability are also
negatively affected by corruption (Mauro, 1997; Gupta, 1998; Doh et al, 2003; Blackburn et al,
2004; Cuervo-Cazurra, 2008; Seligson, 2006; Emerson, 2002; Olken, 2006; Clausen et al, 2009;
Mo, 2001; Kaufmann and Wei, 1999; Serra, 2006). High corruption levels affect income
inequality, poverty, tax systems, social spending, formation of human capital, distribution of
asset ownership, and access to education (Gupta et al, 2002). Other aspects of society also
25
affected include bureaucratic transparency, operations, maintenance, and quality of public
infrastructure (Tanzi and Davoodi, 1997; Smarzynska and Wei, 2002). Moreover, the effects of
corruption are especially problematic as there appears to be a contagious effect when left
unchecked. Cadot’s (1987) model demonstrates how corruption, once incentivized at a lower
level, develops upstream, resulting in an environment tolerant and conductive to bribery while
Goel and Nelson (2007) demonstrate that in the United States, a state’s corruption levels are
affected by increases in the corruption levels of neighboring ones.
Proposed Solutions to Combat Corruption
In this section, proposed solutions to combat corruption are discussed. Being aware of the
range of proposed solutions is integral for decision-makers to develop appropriate
counterstrategy. These solutions range from political, economic, and company-level ones, which
provide a strong arsenal of available options in the fight against corruption.
Clinard (1980) recommends three approaches to addressing corporate misconduct, including
corruption : voluntary change through promotion of ethics and organizational reform;
government intervention in the private sector, including larger and more effective regulatory
staff, stiffer penalties, nationalization of industries, and wider use of publicity; and consumer
group pressures through lobbying, selective buying, and boycotts. He also emphasizes the
enforcement of codes of ethics, rewards for compliance, the role of business school education in
promoting ethics, and stricter enforcement of laws and related penalties, including prison for
individual offenders (Clinard, 1990).
On the other hand, Vaughan (1983, 1982) does not view increased governmental
surveillance and punishment of organizations as effective. Rather, she considers them as
26
potentially increasing motivation for illegal activities. For example, indicators that are
monitored may be falsified, added costs of surveillance may lead to increased pressures to attain
resources, and imposed sanctions may result in reduced profit-making capabilities. Instead, her
primary proposed solution to corporate crime is reducing transactional complexity in order to
reduce opportunities for illegal transactions, including simplifying reporting and filing
requirements and self-surveillance (Vaughan, 1983).
Further, Paternoster and Simpson (1996) have empirically demonstrated that it is a
combination of threats of punishment and appeals to morality that may be more effective as
potential solutions. In their study, they found that individuals with a high personal moral code
were not affected significantly by a cost-benefit analysis of whether to participate in illegal
activity, but sanctions were more effective for those with a weak moral code.
Apart from corporate solutions, economist Rose-Ackerman (1999) proposes solutions to
corruption grounded in a governmental perspective. Her main ideas are program elimination,
privatization of national industries, reform of public programs (especially in procurement), and
administrative reform. In regards to governmental regulation and intervention, Clinard,
Quinney, and Wildeman (1994) rely on a critical approach to emphasize their lack of
effectiveness. From their perspective, the economic and political power of corporations leads to
leniency and elites are often recruited into government where they end up contributing to the
passage of favorable laws and regulations. Snider (1993) adds nuance to this argument,
however, by stating that determinism is unwarranted as regulatory agencies have demonstrated
more autonomy and that legislation exists that does not protect capitalism. Subsequently, she
emphasizes that passing new laws is not as important as implementing them. There are also
questions about the effectiveness of investigations, prosecutions, and other anti-corruption
27
initiatives if factors such as governance, environment, and implementation are not considered
(Prendergast, 2002; Anechiarico and Jacobs, 1996; Kolstad and Wiig, 2009; Kugler et al, 2005;
Weismann, 2008).
Other possible mechanisms of combating corruption include involving international
organizations and related conventions like the United Nations Convention Against Corruption
(UNCAC) as well as establishing anti-corruption agencies and initiatives. There are questions,
however, about the effectiveness of these measures. Criticisms of the UNCAC include questions
about implementation and monitoring by implementing actors due to the balancing of
international obligations and domestic sovereignty and the non-mandatory nature of application
to the private sector. In terms of anti-corruption agencies and initiatives on a governmental
level, the effects of these may be negligible, and in some cases, have the possibility of increasing
the public’s perception of corruption rather than reducing actual corruption levels. Here, without
political will by governments, which in many cases is sorely lacking, these national anti-
corruption programs are potentially questionable in impact (Argandona, 2007; de Sousa et al,
2009; Webb, 2005; Rose-Ackerman, 1999; Steves and Russo, 2003; Shah and Schachter, 2004).
Possible mitigating factors to consider in effectiveness of combating corruption is taking into
account different strategies, including economic reform, depending on the country and the type
and stage of corruption it is facing (Shah, 2007; Hellman and Schankerman, 2000).
The Role of Compliance and Ethics Programs in Combating Corruption
One of the dominant strategies towards curbing and controlling behavior in the private
sector’s role in the supply-demand equation for corruption is the use of compliance and ethics
programs (Biegelman and Biegelman, 2010; Ruhnka and Boerstler 1998; Moohr, 2007). On a
28
practical level, such programs are integral in mitigating legal penalties for organizations and
factor heavily into government decisions to investigate or prosecute (Huff, 1996; Ruhnka and
Boerstler, 1998). Key to an effective compliance program is emphasizing and transmitting
aspirations and values supported by laws and regulations (Lange, 2008; Ashforth et al, 2008).
Although there are notable criticisms of compliance programs, including the charge of "window-
dressing" (Krawiec, 2005; Parker and Nielsen, 2009; Wellner, 2005; Conway, 1994; Laufer,
2008), difficulty in investigating and prosecuting such cases (Arjoon, 2005), inadequate or
overly harsh penalties (Parker, 2006), high costs of implementation (Goldsmith and King, 1997;
Wellner, 2005), and conflicts of interests (Coglianese, 2004) there are strong arguments for their
enactment and implementation.
Perhaps the most promising effects of a compliance framework are collateral consequences
such as reputational risks to companies that violate the law, which can be reflected in changes in
stock price and firm value. For certain offenses, including bribery, civil or market-based
sanctions are far more effective than criminal ones (Alexander, 1999). At the first news of
criminal allegations, reports of negative consequences concerning customers, management,
employees, and decline in stock prices rapidly ensue (Aviram, 2005; Moohr, 2007). Specifically,
market-based penalties (measured by mean dollar-valued stock-price decline) are estimated at
four times the value of court imposed penalties (Alexander, 1999). Murphy et al (2009) also
reinforce support for reputational penalties by demonstrating that allegations of misconduct are
followed by decreases in earnings and increases in stock return volatility. In their study of SEC
enforcement actions involving financial misrepresentation, Karpoff et al (2008) state that on
average, "firms lose 41% of their market value when news of the misconduct is revealed and
estimate that of this loss, 24.5% is related to the market's adjustment to more accurate financial
29
information, 8.8% reflects expected legal sanctions, and 66.8% reflects market-imposed
reputational penalties." Chhaochharia and Grinstein (2007) also found that the governance rules
enacted by the Sarbanes-Oxley Act, such as independence of audit committees, certification of
financial statements, monitoring of controls, and increased oversight, had an economically
significant impact on firm value, at least from investor perceptions. Finally, Goncharov et al.'s
(2006) study of the conformity of big German publicly traded corporations to the German
Corporate Governance Code (GCGC) demonstrated that firms that were more compliant with the
GCGC enjoyed a 9 percent premium on pricing in the capital markets with a 10 percentage point
increase in stock performance. Further, a potential benefit would be to use the tactic of
combining the implementation of compliance with a certified management system (i.e. ISO
9000), which would lead to an efficient use of financial and human resources. This approach not
only has the purpose of curtailing misconduct but increasing intelligence and information which
would allow better decision-making for their organizations (Wagner and Dittmar, 2007).
Moreover, organizations may have more access to information and intelligence in
identifying challenges and problems related to ethics and compliance, as they by default will
have greater proximity to their specific industries. Such programs will benefit from greater
flexibility and insight by specific organizations (Coglianese et al, 2004). The potential benefits
and drawbacks of ethics and compliance programs are summarized in Table 2 below:
30
Table 2 - Potential Benefits and Drawbacks of Ethics and Compliance Programs
Benefits Drawbacks
Ability to emphasize and transmit aspirations
and values supported by laws and regulations
Difficulty investigating and prosecuting related
cases
Ability to capitalize on collateral consequences
reflected in various measures of firm value
Inadequate or overly harsh penalties
Efficient use of financial and human resources
when combined with management system
Improperly implemented programs
Ability of organizations to obtain information
and intelligence due to proximity to industries
High expense of development and
implementation
The Combination of Criminology and Institutional Theory as a Framework for Analyzing
and Addressing Private Sector Corruption
In order to have a better understanding of corruption and corresponding ways to address it,
and the second prong of my research design, I propose a synthetic framework that combines
elements of criminological theory and institutional theory, as well as other studies from business
management (Figure 1). I argue that looking at these relevant fields affecting corruption can lead
to more creativity, versatility, and expansion of knowledge.
In terms of explaining motivation or causation of corruption in the private sector, I build on
the anomie tradition of Merton (1938) who cites to the high relative emphasis on cultural goals
such as attaining wealth or success and the corresponding low relative emphasis on norms or
rules for attaining these goals, which results in a state of anomie or normlessness. Merton also
proposes the mechanism of individuals experiencing strain or pressure if they are prevented from
achieving success through legitimate means. As a result of this strain or pressure, several
possible responses can ensue: conformity, innovation, retreatism, ritualism, or rebellion.
31
Criminal activity is considered a form of innovation to address this discrepancy between goals
and means.
As multiple scholars have argued, this anomie/strain tradition can be applied to the corporate
world where profit maximization, growth, and efficiency are established and emphasized goals
(Passas, 1997, 1990; Vaughan, 1997, 1983, 1982; Naylor, 2000; Braithwaite, 1989). This
"ceaseless striving for success" (Passas, 1990) is exacerbated by globalization and the power of
multinational corporations (Passas, 2000; Chirayath et al, 2002; Grabosky, 1998). The key point
to be made here is that these goals will always exist and cannot be fully reached. Once a
corporation reaches a financial or status goal, it will need to maintain its position, exceed it, or
prevent a decline. Accordingly, companies may feel constant strain or pressure. When they
cannot use legitimate means to compete in the marketplace, companies may resort to corruption
as a form of innovation, or response to this state of events, to bridge the gap between its aims and
lack of legitimate means. In terms of corruption, this strain leading to the choice to participate in
bribery can occur at both high and low levels for companies. Companies that wish to obtain
lucrative contracts may need to pay a significant amount in bribes to government officials to
ensure favorable treatment. Those who feel that they are at a competitive disadvantage may
attempt to even out the playing field with their rivals by being involved in corruption.
Conversely, companies that wish to conduct a basic level of business may also need to pay bribes
for necessities such as licenses, permits, or access to utilities, hence striving for survival.
Companies also are affected in their decisions to be involved in corruption through the
process of differential association where behavior is influenced by the associations that one
interacts and identifies with, whether they are groups or individuals. These associations can
differ in intensity, frequency, priority, and duration (Sutherland and Cressey, 1960; Sutherland,
32
1949). Further, the process of differential reinforcement affects behavior through the balance of
rewards and punishments over time. Here, the amount, frequency, and probability of rewards
affect the likelihood of occurrence of behavior (Akers and Jensen, 2010; Akers, 1998). In
certain industries or countries where business is conducted, the pressure to bribe may be very
high. In such competitive environments, there is a history of high rates and incidence of
corruption. Further, there is an imbalance of rewards and punishments due to the lack of
detection, and even in situations where there are investigations and prosecutions, relatively lax
enforcement and low penalties. Corporate socialization and selective association with
competitors also likely adds to the process of differential association (Chirayath et al, 2002).
Finally, a subculture of corruption is normalized in companies through rationalizations and
systemized beliefs, leading to decreased respect for and commitment to the law (Passas, 1997).
This normalization of deviance can be a result of redefining deviations as acceptable risk
(Vaughan, 1997) or through a combination of institutionalization – corruption being practiced
unconsciously; rationalization – legitimizing corruption with socially constructed accounts; and
socialization – education of newcomers into the culture of misbehavior (Ashforth and Anand,
2003; Anand et al, 2005). Consequently, a lack of commitment to compliance and ethics in
addition to bribery used as an accepted and tolerated method of conducting business can lead to a
widespread culture of corruption. The case of the Siemens Corporation is a seminal example of
this creation of a subculture whereby decades of lax controls led to a situation whereby the
company and its subsidiaries regularly used a formidable arsenal of methods to engage in
corruption including cash desks where employees could withdraw sums for corrupt payments,
slush funds, resale transactions, and sham supplier agreements (Charging Documents, US vs.
Siemens).
33
In addition to criminology, I propose a parallel use of institutional theory from the field of
organizational management to explain the phenomenon of corruption. A significant component
of institutional theory involves the effect of isomorphisms - forces and constraining pressures
that affect organizations. Over time, through the isomorphic process, organizations become
more homogeneous. The first of these, coercive isomorphism, "results from both formal and
informal pressures exerted on organizations by other organizations upon which they are
dependent and by cultural expectations in the society within which organizations function. Such
pressures may be felt as force, as persuasion, or as invitations to join in collusion." Next,
mimetic isomorphism occurs when "organizational technologies are poorly understood, when
goals are ambiguous, or when the environment creates symbolic uncertainty," resulting in
imitation of organizations by others. Finally, normative isomorphism is the adoption of forms
and structures due to professional standards and practices established by education, training
methods, professional networks, and movement of employees among firms. Organizations can
adopt the effects of isomorphism in order to build stability and ensure survival but in doing so
exchange efficiency and effectiveness (Meyer and Rowan, 1977; DiMaggio and Powell, 1983,
150-151). Institutionalized activities can exist on an individual-level (i.e. managers following
norms, habits, customs, and traditions), organization-level (i.e. through shared political, social,
cultural, and belief systems), and interorganizational-level (i.e. through pressures from
government, industry alliances, and expectations from society) (Oliver, 1997). In general, the
greater the degree of institutionalization, the greater the uniformity and maintenance of practices,
and thereby resistance to change (Zucker, 1997). Scott (2008) identifies three elements that
support institutions - regulative, normative, and cultural-cognitive, which in turn are related
respectively to coercive, normative, and mimetic mechanisms. Oliver (1991) also discusses
34
possible strategic responses by organizations to institutional processes - acquiescence,
compromise, avoidance, defiance, and manipulation, which in turn are affected by cause, reason,
type, context, and mechanisms of pressures faced.
Because of the similarity in processes proposed by institutional theory to criminology in
explaining corruption, I argue that it can be co-opted and incorporated into a theoretical
framework. Coercive isomorphism parallels the strain or pressures described in Merton's anomie
theory. As defined by institutional theory, coercive isomorphism relates to rules, standards, and
expectations from other organizations. This definition can be extended to governments who
require bribes, general pressure from the business environment to achieve lofty and strict
financial goals, high corruption levels, poor environments related to governance and political
institutions, and even legal standards and rules that provide opportunities for corruption such as
unwieldy business regulations. Mimetic isomorphism parallels the mechanism of differential
association and reinforcement where exposure to corrupt behavior can lead to imitation. Here,
an organization adopts corrupt behavior for stability and survival in the face of uncertainty
related to the pressure to be involved in bribery, but exchanging integrity in the process. As
DiMaggio and Powell (1983, 154) hypothesize, "the more uncertain the relationship between
means and ends, the greater the extent to which the organization will model itself after
organizations that it perceives to be successful." In this case, the goals of survival and success
are interchangeable, as the former is a prerequisite for the latter. Firms that end up succumbing
to or actively engaging in corruption are more likely to be modeled after by others. Finally,
normative isomorphism parallels the formation of a corrupt subculture and normalization of
deviance through the potential avenues of lack of education and training, unethical behavior by
professional networks, and movement of corrupt employees. Here, instead of the adequate
35
provision of norms, there is an absence of such that prevents the regular pathway of normative
isomorphism.
Figure 1
Proposed Theoretical Framework of Corruption Incorporating Criminology and Institutional
Theory
Criminological Theory Institutional Theory
Strain/Pressure Business environment and corrupt
government officials; poor
environments related to
governance and political
institutions
Differential Association Pressure to be involved in,
frequency, and history of corrupt
behavior
Differential Reinforcement Imbalance in punishments and
rewards from lack of detection and
lax enforcement/penalties
Formation of Subculture and
Normalization of Corruption Rationalizations and redefinition of
risks
Decreased respect and
commitment to the law
Coercive Isomorphism
Business environment and corrupt
government officials; poor
environments related to
governance and political
institutions
Mimetic Isomorphism
Exposure to and imitation of
corrupt behavior from other
organizations
Normative Isomorphism
Absence of norms caused by:
Lack of education and training
Unethical behavior by professional
networks
Movement of unethical employees
36
CHAPTER III : RESEARCH QUESTION, HYPOTHESES, AND METHODOLOGY
Research Question
As discussed previously, a major component of developing counterstrategy is the elucidation
of context through the relationships between environmental factors, management, and business
controls. These variables are also linked to various theoretical concepts in the relevant
disciplines of criminology and institutional theory such as strain/coercive pressures,
cognitive/mimetic pressures, and normative pressures. By understanding the relationships
between these components, policy and theoretical implications can be generated with relevant
consequences for anti-corruption measures.
Hence, the first prong of the research question in order to elucidate context for developing
counterstrategy is as follows:
What are the relationships between environmental factors, management, business controls, and
corruption?
In this study, I propose using the framework of the upper echelon model (UE) as the starting
point of the analysis for a proper context in which to consider anti-corruption counterstrategy.
The UE model attempts to incorporate the cognitions, values, and perceptions of executives and
management in affecting strategic choices and outcomes, to corporate illegality. In short, leaders
and managers have the potential to affect performance directly and indirectly. Because these
cognitions, values, and perceptions of executive and management are difficult to measure,
managerial characteristics are used as proxies. In summary: “(1) strategic choices made in firms
are reflections of the values and cognitive bases of powerful actors; (2) the values and cognitive
bases of such actors are a function of their observable characteristics like education or work
experience, and as a result; (3) significant organizational outcomes will be associated with the
37
observable characteristics of those actors” (Carpenter et al, 2004, p. 750-752). Conversely, the
use of controls or systems are meant to standardize behavior through the use of punishment or
coercion to achieve compliance or attempting to align individuals with organizational goals and
values (Simon, 1957). Such controls can include compliance and ethics programs, as well as
independent auditing and certified management systems.
The original UE model (Figure 2) as proposed by Hambrick and Mason (1984) is as follows:
Figure 2
Original Upper Echelon Model
Based on this model, the strategic choices a company makes will have an effect on
performance, which in turn is a reflection of the top management team's (TMT) characteristics.
For example, there is evidence that age, which can be represented by managerial youth, is linked
with corporate growth. This state of events may be explained by the propensity of younger
managers and leaders to pursue riskier strategies than older ones. In a similar vein, the
functional track and relevant career experiences of a decision-maker may also exert influence on
the type of strategy chosen (Hambrick and Mason, 1984).
Observable UE
Characteristics Age
Functional tracks
Other career
experiences
Education
Socioeconomic roots
Financial position
Group characteristics
Strategic Choices
Product innovation
Unrelated diversification
Related diversification
Acquisition
Capital intensity
Plant & equipment newness
Backward integration
Forward integration
Financial leverage
Administrative complexity
Response time
Performance
Profitability
Variations in profitability
Growth
Survival
38
In terms of the measured variables in this dissertation, manager tenure falls under observable
UE characteristics while bribery and financial performance measures are performance indicators
under the UE framework. Auditing and internationally recognized certification fall under a
control framework. I argue, however, that this set of factors, at least in terms of quality of
implementation can also be thought of as strategic choices by a company and its
leadership/management or a commitment to compliance and ethics. Finally, augmenting the
model is the incorporation of variables to capture environmental factors such as poor
governance, burdensome business regulations, effects of corruption, informal competition, and
economic strength.
This testable model (Figure 3) is also consistent with the theoretical framework described
previously whereby the strains/pressures from environmental factors erode the effectiveness of
norms and controls.
Figure 3
Testable Model
TMT Characteristics
Top Manager Tenure
Strategic Choices of Control
Systems
Quality Certification
Auditing
Performance
Control of Bribery
Environmental Factors
Economic Strength
Business Regulations
Corruption
Governance
Informal Competition
39
Internationally-Recognized Quality Certification and Corruption
Internationally-recognized quality certifications or certified management systems (i.e. ISO
9000, ISO 14001, Six Sigma) are meant to increase the quality and scope of business practices,
including management practices. Certifications have the potential of improving performance
and technical standards and may be as useful as official laws to regulate behavior, with also the
possibility of promoting corporate social responsibility. Certifications may also potentially
provide a more uniform standard for companies on an international level in comparison to
national laws which may vary across countries (Graffin and Ward, 2010; Terlaak, 2007;
Zwetsloot, 2002). Because ISO 14001, an environmental management system, is instantly
recognized as a governing standard and widely known and adopted, it may be useful due to its
immediate legitimacy. Further, ISO 9000, a quality management standard, has been described as
an instrument of power and control that can be used effectively for mobilization, acquiring
legitimacy, and solving technical problems (Boiral, 2003; Walgenbach, 2001).
Although studies have been mixed in terms of certifications’ effect on financial
performance, they have been shown to reduce uncertainty, and improve clarity in implementation
and operating performance (Benner and Veloso, 2008; Naveh and Marcus, 2005; Quazi et al
2002; Walgenbach, 2001; Zu et al, 2008; Graffin and Ward, 2010). Bansal and Hunter (2003)
argue that there is evidence that the use of ISO 14001 certification improves financial
performance indirectly through improving international trade, increasing resource efficiency, and
improving product quality. Corbett et al (2005) also asserts that a firm's decision to seek their
first ISO 9000 certification was followed by significant abnormal improvements in financial
performance.
40
Implementation of certifications are affected by whether they are substantive or symbolic in
nature as well as the qualities of the implementing group which could involve dissidents,
ceremonial adopters, or quality enthusiasts, and the motives behind implementation (Christmann
and Taylor, 2006; Boiral, 2003; Bansal and Hunter, 2003). Boiral (2003) chronicles how the
implementation of a standard is affected by various factors such as renegotiation,
reinterpretation, and modification. His study of ISO 9000 implementation revealed that not all
organizations demonstrate total commitment to the values and standards of the management
system. 36 percent of companies were described as "quality enthusiasts" while the remaining
were "ceremonial integrators" at 40 percent and "dissidents" at 20 percent. The "ceremonial
integrators" saw the management system as unconvincing and questionable with improving a
company's image and generating contacts as the main motivation behind implementation.
Evaluation and auditing of the implementation of the management system was thought of as
either an examination to be passed or an adversarial game to be played. Christmann and Taylor
(2006) state that symbolic and substantive implementation of international certifiable standards
are affected by customer expectations, monitoring, and expected sanctions by customers (see
also Jiang and Bansal, 2003). Nonetheless, despite the challenges inherent in implementing such
systems, foreign suppliers may have the ability to improve standards in emerging economies via
this avenue.
From a theoretical standpoint, I propose that the choice of certified management systems as
a variable of interest fits within the normative component of pressures that may affect behavior
of companies (Scott, 2008). As the goal of these certified management systems is to set
standards for operations, performance, or other qualities, I argue that there is significant potential
for positive normative pressures on companies.
41
In summary, I conclude that companies that have certified management systems can be
surmised to have a commitment to meeting standards and increasing performance. Some of
these management systems have auditing requirements to ensure proper implementation, which
means that a company must demonstrate some measure of discipline and organization to meet
those standards. Accordingly, I argue that the role of certified management systems is one that
strengthens controls and increases resistance to corruption.
As such, I infer that the required discipline and organization may also mean that a company
is less tolerant of disorganization and lack of discipline in other areas of business, including
those related to ethics and compliance. By raising the level of professionalism and quality in a
company, among other factors, I also propose that certified management systems may also have
the added indirect effect of raising expectations for employees to also act in an ethical manner.
Consequently, I predict that those with an internationally-recognized quality certification will
have lower rates of corruption.
Hypothesis 1 - The presence of an internationally-recognized quality certification will be
negatively associated with rates of corruption.
Auditing and Corruption
The classic role of auditing aims to establish and enhance control through enforcing laws
and standards (Everett et al, 2007). The role of audits also has been shown to be particularly
effective in the anti-corruption arsenal (DiTella and Schargrodsky, 2003; Tanzi and Davoodi,
1997; Ferraz and Finan, 2008; Olken, 2007).
42
DiTella and Schargrodsky's (2003) study of wages and auditing on hospital purchasing in
Buenos Aires, Argentina is especially insightful. Their findings indicated that there was benefit
from using a mixed approach of using wages and auditing to controlling corruption per the
Becker-Stigler model of combining the two approaches. In their study, the effect of auditing
overrode that of wages when the former's level was high. When the level of auditing was
decreased, however, the role of wages had more of an effect. Accordingly, I propose that the
proverbial use of "carrots and sticks" should be considered in designing tactics and strategy
against corruption.
Ferraz and Finan's (2008) findings corroborate the effectiveness of audits, but with an
additional factor of media dissemination of findings. In their study of the Brazilian federal
government's use of random audits of municipalities and its connection to electoral outcomes,
the release of the audit outcomes had a significant impact on incumbents' electoral performance,
with further effects in municipalities where local radio broadcasted this information. This study
indicates that an additional factor of educating an audience on corrupt individuals through a
medium, especially the powerful avenue of mass media, can operate as an effective tool for
shaming with other consequences for violators.
Finally, Olken's (2007) study of Indonesian village road projects indicate that increasing the
probability of government audits reduced missing expenditures and cost estimates. Conversely,
grassroots monitoring was relatively ineffective. In this study, top-down monitoring had a
significant effect even in a highly corrupt environment.
Moderating auditing’s effects, however, could be auditors’ biases and qualities and potential
collusion with corporate wrongdoers (Bazerman et al, 2002; Karcher, 1996). Internal auditing is
also problematic as it creates conflict of interests and whistle-blowing scenarios (Hunton and
43
Rose, 2011). Another possible problem is the circumventing of these financial controls through
delegation of illegal payments to other parties and other tactics.
From a theoretical standpoint, the choice of auditing as a variable of interest also fits within
the normative component of pressures. It is clear that the role of auditing is to act as a control
and a mechanism for setting standards for good financial practices, exerting significant
normative pressures on companies to act ethically (Scott, 2008).
Notwithstanding the potential problems with auditing, I predict that its effect should still be
significant. The various empirical studies demonstrate that the effectiveness of auditing holds
true even in environments with high corruption. Further, when carried out properly, I argue that
effective and independent auditing can help identify inaccuracies and potential instances of
misconduct, while also serving as a deterrent to future misconduct. Its role as a control may be a
significant one as potential participants in bribery may be less likely to be involved if there is an
increased risk that their misconduct would be detected. Requests for bribes may also be curtailed
if would-be requesters know in advance that a company is less inclined to comply. As such, I
predict that companies with annual financial statements checked by an external auditor will be
negatively associated with rates of corruption.
Hypothesis 2 - The presence of annual financial statements certified or validated by an external
auditor will be negatively associated with rates of corruption.
Leadership, Top Management Teams, and Corruption
Consistent with upper echelon theory, which links organizational outcomes with qualities of
management, top management teams (TMT) can affect an organization’s performance through
44
several pathways, including affecting setting of strategy, resources, employment affiliations with
various parties in a business plan, and time spent in the business arena (Finkelstein et al, 2009;
Pegels et al, 2008; Carpenter et al, 2004; Hambrick and Mason, 1984; Collins and Clark, 2003;
Higgins and Gulati, 2006; Holcomb et al, 2009; Nair, 2006; Colbert et al, 2008; Mackey, 2008;
Goll and Rasheed, 2005). The proposition above is also consistent with anomie theory as top
management teams have the potential to provide strong normative guidance which would disrupt
deviant and corrupt processes (Passas 2000; 1999). Manager qualities also have been linked to
performance across several industries while management techniques may transcend cultural
backgrounds and override the effects of environmental influences (Norburn and Birley, 1988;
Al-Jafary and Hollingsworth, 1983; Weaver et al, 1999). Influencing the effects of strategic
leadership and management, however, are organizational rules and characteristics (Kull and
Wacker, 2010; Hendricks and Singhal, 2001; Shrivastava and Nachman, 1989; Mackey 2008).
Nevertheless, the effect of leadership and management is substantial, with one study
demonstrating that CEO effects are generally greater than those of the industry and the firm
(Mackey, 2008). Even in the context of economic development throughout history, the role of
leadership and management is significant in affecting the development and form of economic
and political institutions, whether they take an extractive or inclusive form (Acemoglu and
Robinson, 2013; Ferguson, 2013).
Top leadership and CEOs through transformational leadership affect congruence,
organizational performance, and risk taking by senior management (Colbert et al, 2008; Simsek,
2007). Clinard's (1983) interviews of middle management reveals the significant role of top
management and pressures, specifically the CEO, in influencing corporate misconduct and
45
deviance. Consequently, a strong argument can be made that the burden should fall on executive
leadership to set the example for leading change and overcoming inertia (Boeker, 1997).
In regards to illegality, it has been hypothesized that such activities are a result of corporate
strategy and the role of the TMT (Clinard, 1983). TMT characteristics such as length of service,
functional background, formal business education, age, and military service, as well as
homogeneity in each of these characteristics, have also been hypothesized to neutralize or
enhance relationships between context and corporate illegal activity (Daboub et al, 1995).
Manager tenure, the primary quality studied in this dissertation, is one of the significant
components of a TMT, including others such as heterogeneity and size (Certo et al, 2006).
While several articles argue that the tenure of a TMT can increase strategic change in certain
circumstances and rationality, which in turn increases performance (Boeker, 1997; Goll and
Rasheed, 2005), TMTs with longer tenure in general are associated with less strategic change
(Finkelstein et al, 2009). In terms of corruption, this finding can cut both ways. First, it could
mean that TMTs with longer tenure are less apt to address an external threat by initiating illegal
activities. However, it could also mean that in situations where illegal activities have already
been undertaken, steps to curb this behavior are also less likely, resulting in passive acquiescence
(Daboub et al, 1995). TMTs with longer tenure may also not appreciate the need to keep up to
date with compliance responsibilities and monitoring the presence of threats to corporate
integrity, which may be heightened in certain industries and environments.
From a theoretical standpoint, the choice of top manager tenure as a variable of interest fits
both within the normative component of pressures and the cognitive element which is linked to
mimetic mechanisms. The practices of management clearly set the standard for subordinates and
the company as a whole, providing significant potential for establishing norms that can disrupt or
46
prevent the formation of a corrupt subculture while providing the basis for establish an ethical
one and simultaneously providing a model for mimesis (Scott, 2008).
Because there is significant support for the idea that TMTs with longer tenures may be more
passive in the face of challenges, including corruption, I predict that its effect will be positively
associated with levels of corruption. Further, I predict that the effect of TMTs on business
controls will mitigate the effects of business controls on corruption.
Hypothesis 3 - The duration of the top manager’s tenure will be positively associated with rates
of corruption.
Hypothesis 4 - The top manager’s tenure will mitigate the effects of business controls on
corruption.
Role of Environmental Factors
Environmental factors to consider are poor governance, weak institutions, and poverty,
which have been demonstrated to affect corruption levels (Mo, 2001; Serra, 2006; Shleifer and
Vishny, 1993; Gonzalez et al, 2004; Treisman, 2007; Emerson, 2006; Tanzi and Davoodi, 1997).
Industries with increased complexity in terms of business models and those associated with more
government regulation and oversight tend to be associated with higher levels of corruption
through increased opportunities for bribery (Kenny, 2007; Stansbury, 2005; Baucus and Near,
1991). Incidence and total cost of bribes are affected by quality of a country's infrastructure,
court and regulatory system (Herrera et al. 2007; Treisman, 2007; Wu, 2009) and low per capita
income (Sanyal, 2005). Levels of corruption can also be indicated in a country's informal or
shadow economy, which can in turn indicate firms fleeing an intrusive or corrupt government but
47
resulting in increased pressure on remaining firms that intend to remain in the formal
marketplace. This competition in turn results in more pressure to engage in bribery to maintain
survival (Dreher and Schneider, 2010; Friedman et al, 2000; Emerson, 2002; Ades and DiTella,
1999; Wu, 2009).
My hypothesis here is that environmental factors weakens both the effects of business
controls and management characteristics on corruption. I argue that individual companies and
managers, regardless of their qualities or ethical orientations, may be disproportionately affected
by the power of these factors. For example, managers may ultimately be pressured to conform to
industry norms of bribery and corruption, especially when faced with the need to produce profits
and results (Clinard, 1983). Even if these managers are ethical, their actions might be overruled
or thwarted by other sources, especially by those higher in the corporate hierarchy. In relation to
controls, including ethics and compliance programs, managers may choose to neglect either the
proper development or implementation of such. In countries where poverty levels are high,
managers may feel increased pressure to be involved in corruption to maintain their company's
or individual positions. Poor governance, weak institutions, and high corruption levels may also
affect managers adversely by imparting a sense of discouragement that there are no alternatives
to participating in corruption. Further, there are similarities between competitor firms in terms of
decision making characteristics, which can provide pressure and corrupt business models for
imitation.
From a theoretical standpoint, these environmental variables fit within the coercive
component of pressures affecting companies. The variables contemplated by this dissertation
(i.e. perceptions of corruption as an obstacle, quality of regulatory and legal frameworks,
economic strength, threat from shadow economy) capture aspects of difficult environments
48
related to poor governance, corrupt officials, and weak institutions. Several of these
environmental variables, specifically those that measure quality of regulatory and legal
frameworks (i.e. Transparency's Corruption Perception Index, World Bank's Doing Business
Index, fairness of court system) also fall directly within the category of regulatory pressures
while others may be considered as indirectly related or consequences of such (i.e. GDP per
capita, threat from informal sector, threat from corruption) (Scott, 2008).
As such, if an industry is associated with corruption, I argue that there is added pressure for
TMTs to conform to an environment where bribery is accepted in order to compete, which in
turn feeds passive acquiescence or strategic inertia (Pegels et al, 2008). While companies
certainly have control over their goals and corresponding practices, I propose that the
environment, which companies may contribute to, constrains the ability for further change
(DiMaggio and Powell, 1983).
Hypothesis 5 - Environmental factors will strongly mitigate the effects of business controls and
top manager tenure on corruption.
Role of Region, Industry, and Company Size
I also argue that the role of region, industry, and company size are relevant in developing
counterstrategy as there will likely be variation in effects of the relevant variables based on these
different sub-contexts. On a theoretical level, there will be nuance in the coercive pressures
inherent in these sub-contexts. For example, in certain industries, there may be increased
hierarchy, bureaucratic obstacles, and organizational peculiarities that affect corruption rates.
Conversely, certain regions may contain cultural expectations that serve as additional forms of
49
coercive pressures. I propose that these pressures are likely to affect the effect of normative and
mimetic ones, which will in turn have consequences for developing counterstrategy.
The regions contemplated in the WBES are Sub-Saharan Africa (AFR), East Asia Pacific
(EAP); Eastern Europe and Central Asia (ECA); Caribbean and Mexico (CCM); and South
America (SAM).1 The industries contemplated in the WBES are Manufacturing, Chemical and
Pharmaceutical, Construction and Transportation, Wholesale and Retail, Information and
Communication, and Professional, Technical, and Scientific. Companies were separated by their
sizes - Small (5 to 19 employees); Medium (20 to 99 employees); Large (more than 100
employees).
Industry Effects
Firm size and industry difference have been demonstrated to affect the propensity to bribe
(Wu, 2009; Martin et al, 2007). In regards to industry differences, some sectors are especially
notorious for corruption. According to Transparency International's Bribe Payers Index, the
pertinent industries in the dataset are ranked as follows (with actual rank in parentheses, lower
ranking number denotes higher corruption):
1. Public Works Construction (19)
2. Pharmaceutical and Healthcare (13)
3. Heavy Manufacturing (12)
4. Transportation and Storage (8)
5. Telecommunications (8)
6. Information Technology (3)
7. Light Manufacturing (1)
1 Originally, the CCM and SAM regions were aggregated as the Latin America and Caribbean region
(LAC). For accuracy, I separated them.
50
The explanations for these phenomena are varied depending on the industry but with some
commonalities, namely interaction with government officials, complex business models and
corresponding regulation, and how lucrative a sector is.
The construction industry, widely considered as one of the most corrupt sectors, is linked to
large payments and budgets for bribery, uniqueness of projects, number of phases in planning
and implementation, a culture of secrecy, and the lack of a single organization in charge of
governance. The construction industry is also closely intertwined with government as major
clients, regulators, and owners of construction companies (Kenny, 2007; Stansbury, 2005).
Likewise, the transportation industry, which is linked to construction, shares a similar reputation
for corruption as roughly one-half of construction projects are transport related. Further, the
industry also captures a large share of a nation's economy, typically 10 to 20 percent of the
national budget. Finally, the construction industry in general has significant connections to top
government officials and a tendency towards implementing large capital projects (Siebler, 2012).
In the pharmaceutical industry, high corruption is linked to the lucrative nature of the sector
as well as the significant degree of government regulation, a complex supply chain, and wide
information asymmetries (Cohen et al, 2007). In telecommunications, complex systems of
governance, high value of transactions, and relationship between the private sector and
government have been cited as causes for corruption (Sutherland, 2012). Finally, even the retail
sector is not immune, as the reasons for corruption cited are the industry's operational
requirements for large amounts of real estate and employees, high volume of shipping and
transportation, and the high competition for business (Volkov, 2011).
51
Regional Effects
I propose that there are regional differences, likely due to culture, affecting the nature of
corruption (Martin et al, 2007). Culture has been hypothesized to affect economic development
(Landes, 1998; Fukuyama, 1995), international relations (Huntington, 1996), as well as political
and military strategy (Handel, 2001; Liddell Hart, 1954). Further, cultural dimensions have also
been shown to moderate the implementation of management systems (Kull and Wacker, 2010;
Quazi et al, 2002). For example, a study of corruption in Australia, India, Indonesia, and
Singapore showed significant variation in propensities to punish corrupt behavior across cultures.
(Cameron et al, 2005).
As a potentially insightful source, I refer to the Global Leadership and Organizational
Behavior Effectiveness Research Project (GLOBE) which studied cross-cultural leadership to
explain the variation between regions in terms of relationships between my variables of interest
and how they pertain to preventing private sector corruption (House et al, 2004). Analyzing the
full dataset by region and drawing inferences is also defensible since regional history is often
tied together. Cultural differences may affect how corruption is tolerated and the effectiveness
of corresponding measures taken against it. As this dissertation contemplates the role of
leadership and its various manifestations of action taken against corruption, the GLOBE study
and its findings are especially relevant. While leadership may be a universal practice that can
transcend borders, culture still affects its practice significantly.
Company Size Effects
Finally, the size of a company is relevant. Large corporations in general are usually the
chief violators of the law (Clinard, 1980). Small and medium sized enterprises are also more
52
vulnerable to corruption - SMEs usually pay more bribes in terms of frequency and amount as
well as being subject to more requests. This is due to various effects including a more tolerant
culture due to informality and close relationships among company officials and with supplier and
government agents, short term vision based on survival, limited financial, technical, and human
resources, inability to exert strong influence over officials and institutions, informal capital
structure, and a greater perception of the power of corruption over that of large companies
(UNODC Report on Corruption Prevention in Small and Medium-Sized Enterprises, 2012).
Developing Counterstrategy
Ultimately, the purpose of this dissertation is to incorporate the results of the statistical
analysis as well as the second prong of merging institutional theory, criminology, and business
management to provide a framework and foundation for developing counterstrategy. This model
will allow for a tailored approach rather than a one-size-fits-all model. Just as anti-corruption
strategy for the public sector should be considered and implemented based on various factors
such as the type of corruption regime faced, levels and manifestations of corruption, and regional
differences, so it should be with private sector corruption (Johnston, 1997; Shah, 2007; Shah and
Schachter, 2004). Figure 4 below delineates the foundation for the proposed method of
developing counterstrategy.
53
Criminology,
Institutional Theory,
Business
Management Studies
Counterstrategy
Relationships
between
Environment,
Management, and
Business Controls
Effects of
Region,
Industry, and
Company Size
C
Figure 4 - Proposed Counterstrategy Model
54
Research Design
For the examination of the relationships between the role of the environment, management,
qualities of control practices, and corruption, I use firm-level data drawn from the World Bank’s
Enterprise Surveys (WBES), which encompasses 130,000 firms from the economies of 135
countries. The World Bank has collected this data since 2002, covering a range of topics
including access to finance, corruption, infrastructure, crime, competition, and performance
measures. The WBES dataset that I analyze covers a time period between 2006 and 2011.
Strengths and Limitation of the Dataset
The WBES is appropriate for this study as it is comprehensive in terms of variables
measured, including those necessary for the proposed analysis, specifically measures of
corruption, management qualities, and business controls. The dataset also contains variables that
account for region, industry, and company size which allows for a nuanced analysis of
relationships between the relevant variables.
Another strength of the WBES is that it is firm-level data, which disaggregates variables,
including the perception of corruption (Andvig, 2005). When implemented appropriately, the
use of micro-level survey methods and interview techniques can provide accurate data on
corruption (Reinikka and Svensson, 2006). One issue, however, to take into consideration is the
non-response and false response rate for sensitive questions in the WBES (Jensen et al, 2007),
which can be addressed with various statistical strategies, including substituting mean values for
missing data and deletion. In general for this dissertation, non-responses were treated as
affirmative answers for sensitive questions relating to informal payments and missing data was
deleted.
55
Another limitation of the WBES data is that it is mostly limited to developing and
transitioning economies. On a variable level, the only indicator for TMT qualities is manager
experience while the internationally recognized quality certification indicator does not
distinguish between types. For example, the ISO 9000 standard which deals with quality
management has been adopted at a different rate than ISO 14001 which deals with environmental
management. The anonymity of the WBES also prohibits linking data to other firm specific
variables.
Variables
Discussion of variables and statistical analysis methods are discussed below. These
variables were chosen as they were related to the various factors of interests discussed above,
capture the incidence of corruption in diverse sectors, provide a glimpse into the environmental
factors surrounding a company, and are connected to the relevant theoretical principles from
criminology and institutional theory. Details of variables in the WBES survey instrument are
included in the Appendix.
Measures of Corruption
The measures of corruption that I use are the following
1. Utilities (Composite variable measuring requests for informal payments or gifts for
water, electricity, and telephone connections)
2. Licenses (Composite variable measuring requests for informal payments or gifts for
obtaining construction permits, import licenses, and operating licenses)
56
3. Tax (Individual variable measuring requests for informal payments or gifts during tax
meetings or inspections)
4. Government Contract (Individual variable measuring percentage of contract value paid
in informal payments or gifts to secure the contract)
5. All Payments (Individual variable measuring percentage of total annual sales or total
annual value in informal payments or gifts with regards to customs, taxes, licenses,
regulations, and services)
Business Controls
The business controls I examine are the following:
1. Quality Control (QC) (Individual variable measuring whether a company has an
internationally-recognized quality certification)
2. Audit (Individual variable measuring whether a company has its annual financial
statement checked and certified by an external auditor)
Effect of Management
Top Manager Tenure (TMT) (Individual variable measuring the total number of years of
experience of the firm's top manager working in the sector)
57
Environmental Factors
The environmental factors that I use are the following:
1. Transparency International Corruption Perception Index (TI) - Index that ranks the
perception of the integrity of a country's public sector. According to Transparency
International, it is considered the most widely used indicator of corruption worldwide
2. World Bank’s Ease of Doing Business Index (WBBI) - Index that ranks economies in
terms of the conduciveness of its regulatory environment to doing business
3. Gross Domestic Product per Capita (GDPC)
4. Fairness of Court System (ctsystemfair) - WBES variable measuring perceived
fairness and impartiality of the court system
5. Threat from Informal Sector (infranked) - WBES variable measuring perceived
severity of threat of competitors in the informal sector
6. Threat from Corruption (corrobst) - WBES variable measuring perceived severity of
threat of corruption to business operations
Analytical Strategy and Method
I used logistic regression and multivariate regression techniques to determine the
relationships between the environmental variables, top manager tenure, business controls, and
measures of corruption. The variables measuring corruption in utilities, licenses, and tax were
dichotomous, hence logistic regression was the appropriate method of analysis. The variables
measuring corruption in government contracts and all payments in general were continuous,
hence multivariate regression was used for the analysis.
58
A three-model strategy was used - the first and baseline model incorporating only the
business controls and measures of corruption to determine direct effects of auditing and quality
certification. The second model introduces the top manager tenure variable to examine the
effects of management on the business controls. Finally, the third and full model incorporates
the environmental variables to examine their effect on management and business controls. This
three-model framework for analysis was conducted for the full dataset as well as on a regional,
industry, and company-size basis.
Interviews with Senior Compliance Personnel
To add depth and insight, I also conducted interviews with several senior compliance
personnel from various companies. These interviews were arranged with the assistance of the
Ethics and Compliance Officer Association. The questionnaire used is available in the
Appendix.
59
CHAPTER IV: RESULTS AND FINDINGS
Analysis of Full Dataset
Table 3 lists the descriptive statistics and correlations for the variables in this study. Tables
4.1 and 4.2 state the results of the full model analysis of informal payment requests and
distributions. These results indicate the following:
I. The effects of an internationally recognized quality certification were promising initially
in decreasing informal payment requests and distributions but are mostly negated by
environmental effects.
II. The effects of an independent auditor show a decrease in informal payment requests and
distributions.
III. The effects of a top manager's tenure show a decrease in informal payment requests and
distributions.
IV. The effects of a top manager's tenure affect those of business controls but do not negate
them. Accordingly, the latter is generally resilient to management effects.
V. The effects of the environmental variables affect those of business controls, but differ
based on the type of the latter. Quality certification is more sensitive to the effects of the
environmental variables while auditing is more resilient.
VI. The effects of the environmental variables affect those of the top manager's tenure, but do
not negate it. Accordingly, the latter is resilient to environmental effects.
At the baseline model level (Model 1), quality certification was effective in preventing
informal payment requests and distributions for the license, tax, and government contract
dependent variables. Auditing was effective across the board for all dependent variables. Once
60
the top manager tenure independent variable is introduced in Model 2, the effect of quality
certification was decreased for two out of the three dependent variables for quality certification
(license and government contract) and across the board for auditing. Top manager tenure was
effective across the board for decreasing informal payment requests and distributions. In the full
model where several environmental independent variables are incorporated (Model 3), quality
certification was only effective for the tax dependent variable. Auditing and top manager tenure
were effective across the board despite the inclusion of powerful environmental variables.
Accordingly, there is strong support for Hypothesis 1 - "The presence of an internationally-
recognized quality certification will be negatively associated with rates of corruption" and
Hypothesis 2 - "The presence of annual financial statements certified or validated by an external
auditor will be negatively associated with rates of corruption." Both these measures were
demonstrated to have a lowering effect on rates of informal payment requests and distributions.
There is also substantial support for Hypothesis 4 - "The top manager’s tenure will mitigate
the effects of business controls on corruption" as both business controls of quality certification
and auditing, incorporating the top manager tenure variable (Model 2), demonstrates lesser
effectiveness of the business control variables.
In regards to Hypothesis 3 - "The duration of the top manager’s tenure will be positively
associated with rates of corruption," support was not as predicted. The results of the analysis for
the full data set (but not for the regional analysis), showed the opposite - that the top manager
tenure was negatively associated with rates of corruption.
Finally, there is more of a nuanced set of findings for Hypothesis 5 - "Environmental factors
will strongly mitigate the effects of business controls and top manager tenure on corruption."
61
While quality certification is sensitive to the effects of environmental variables, auditing and top
manager tenure are more resilient.
Tables 5 and 6 measure the effects of quality certification, auditing, and top manager tenure
on both corruption measures of informal payment requests and distributions. Table 5 measures
the projected estimated reduction in probability of informal payment requests. Additionally, the
effect of the level of pressure in the environment is measured for the projected estimated
reduction in probabilities of requests and distributions. Five category levels of environment were
created - High Pressure where the environmental variables were set at the highest level for
exertion of pressure in the dataset (i.e. low TI Corruption Perception Index, low ranking for WB
Doing Business Index, low GDP per capita, low perceived fairness and impartiality of the court
system, high perceived severity of threat from informal sector, and high perceived severity of
threat of corruption to business operations); STD +1 where the environmental variables were set
at one standard deviation toward higher pressure than the average; Average Pressure; STD -1 one
standard deviation toward lower pressure than the average; and Low Pressure with the lowest
level for exertion of pressure. Further, Tables 5 and 6 measure the combination effect of having
an experienced top manager (at 25 years of experience in the sector), auditing, and quality
certification where applicable.
Table 5 also shows that as environmental pressures increase, top manager tenure, auditing,
and quality certification all decrease in effectiveness. The effects of the independent variables
decrease significantly with a higher slope at the STD +1 and High Pressure levels and increase
with a lesser slope at the STD-1 and Low Pressure levels. The combination effect of the
independent variables that were shown to be effective in the full model is also quite substantial.
For tax, where all the independent variables were effective, informal payment requests were
62
estimated to be reduced by close to 48 percent at the Average Pressure level. For utilities and
licenses, where top manager tenure and auditing were effective, informal payment requests were
estimated to be reduced by close to 43 and 44 percent respectively at the Average Pressure level.
On an individual level, the effects of auditing are substantial at the Average Pressure level,
decreasing informal payment requests by about 20 to 25 percent. The top manager effect is also
substantial depending on the years of experience. An experienced manager with 15 years of
tenure decreases requests by about 12 to 17 percent, while a highly experienced manager with 25
years of tenure decreases requests by about 20 to 30 percent at the Average Pressure level.
Quality certification, while only effective for tax, decrease requests by about 15 percent at the
Average Pressure level.
Table 6 shows the projected estimated reduction in percentage of amount of informal
payments distributed. The effect of top manager tenure is substantial for government contracts,
with a projected percentage reduction of around 22 and 37 percent for an experienced manager
(15 years tenure) and highly experienced manager (25 years tenure). This effect is lower for all
payments at around 10 and 17 percent respectively for each type of manager. The effect of
auditing projects to around 22 percent for government contract and 13 percent for all payments.
Quality certification was not effective for either government contract or all payments. The
projected combination effect for auditing and top manager tenure set at 25 years is around 59
percent for government contract and 31 percent for all payments.
From this set of tables that represent analysis of the complete data set, the following
conclusions can be generated:
Auditing and top manager tenure are effective in both preventing informal payments and
distributions. Both these measures serve as an outer and inner shield in preventing corruption
63
in a company. The projected estimated reductions in informal payment requests and
distributions are quite substantial. These findings are particularly encouraging as it demonstrates
that there are measures and steps that can be taken to combat corruption effectively. The
presence of strong effective controls also helps balance out the differential reinforcement
equation, as increased likelihood of detection and corresponding penalties are now in play. In
turn, I argue that effective countermeasures such as these help disrupt the formation of corrupt
subcultures and normalization of deviant behavior.
Quality certification is promising as a business control but its effects are often wiped out by
environmental effects. On the other hand, auditing is extremely resilient in resisting
environmental effects. These findings demonstrates that various controls may respond
differently to other factors that could affect them such as environmental ones. Nevertheless, it is
possible that with adjustments to account for such factors may prove to increase the resilience of
controls such as quality certification to increase their effectiveness as an anti-corruption measure.
Conversely, I propose that more resilient controls may be adopted initially as a first-line response
to corruption.
As predicted, the effect of top manager tenure decrease the effectiveness of business controls.
However, the effect of top manager tenure does not wipe out the effects of business controls. As
predicted, the effects of the environment are the most significant on business controls, decreasing
them substantially or negating them. Environmental effects decrease those of top manager
tenure, but the latter is resilient. These findings show that the sensitivity and resilience of
controls and aspects of manager characteristics can vary depending on the factors involved.
Finally, the effect of top manager tenure being associated with a decrease in informal
payment requests and distributions is a good indicator that tenure increases rationality and
64
cognitive development (Goll and Rasheed, 2005; Daboub et al. 2005) and time spent in the
business arena affects managerial ability and performance (Holcomb et al, 2009). This finding is
also consistent with prior findings that there are negative relationships between age and unethical
behavior and a positive relationship between younger managers and vulnerability to societal and
organizational pressures. Older managers tend to have higher levels of moral development,
stricter interpretations of ethical standards of conduct, are less likely to rationalize illegal
behavior, and are more resilient to industry and organizational pressures. Further, the more
experienced a CEO or manager is in terms of perspectives and functional experiences, the more
he or she can draw on for alternatives and solutions to various problems (Troy et al, 2011). As
discussed previously, strong and ethical management practices provide the normative impetus
and foundation to prevent corrupt subculture formation.
65
Table 3
Descriptive Statistics and Correlations
*p<.05, **p<.01, ***p<.001
Mean S.D. 1 2 3 4 5 6 7 8 9 10
1. TI Corruption Perception Index 32.86 12.25 1.00
2. WB Ease of Doing Business
Index 103.15 43.38 -.58*** 1.00
3. GDP per capita 5182.46 4585.76 .44*** -.43*** 1.00
4. Informal competitors as
obstacle 1.69 1.43 .002 .03*** -.06*** 1.00
5. Fairness/impartiality of court
system 2.15 2.14 .14*** -.04*** .02 *** -.13*** 1.00
6. Corruption as obstacle 1.83 1.51 -.12*** .08*** -.05*** .30*** -
.028*** 1.00
7. Top manager’s experience 17.31 11.11 .17*** -.14*** .13*** .07*** -.07*** .08*** 1.00
8. Int'l recognized quality
certification .21 .41 .09*** -.11*** .10*** -.05*** .02*** .004 .07*** 1.00
9. Use of external auditor .48 .50 .08*** -.08*** .005 -.01** .03*** .02*** .09*** .25*** 1.00
10. Company size 1.69 .77 .10*** -.13*** .11*** -.05*** .01** .009* .14*** .34*** .33*** 1.00
66
Table 4.1
Effects of Environment, Management, and Business Controls on Preventing Informal Payment Requests
Predictors and Controls Model 1
DV =
Utilities
Model 2
DV =
Utilities
Model 3
DV =
Utilities
Model 1
DV =
Licenses
Model 2
DV =
Licenses
Model 3
DV =
Licenses
Model 1
DV =
Tax
Model 2
DV =
Tax
Model 3
DV =
Tax
Environmental variables Odds Ratios
TI Corruption Perception Index .951*** .954*** .948***
WB Ease of Doing Business
Index
1.01*** 1.00 1.00***
GDP per capita 1.00*** 1.00*** 1.00***
Informal competitors as obstacle 1.02 1.06*** 1.06***
Fairness/impartiality of court
system
.973 .876*** .831***
Corruption as obstacle 1.13*** 1.06*** 1.25***
Control variable
Company size .779*** .814*** .908** 1.06** 1.06*** 1.17*** .916*** .934*** 1.03
Independent Variables
Top manager’s experience .977*** .984*** .983*** .985*** .987*** .991***
Int'l recognized quality
certification
.926 .942 1.00 .887** .889** .995 .769*** .768*** .850***
Use of external auditor .738*** .768*** .779*** .726*** .751*** .719*** .753*** .775*** .734***
Observations 21969 21619 19488 27126 26650 23885 38681 37761 33572
Prob > chi2 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Pseudo R2 .013 .022 .10 .004 .009 .08 .008 .011 .11
Change in Pseudo R2 .009 .087 .005 .076 .003 .10
*p<.05, **p<.01, ***p<.001
67
Table 4.2
Effects of Environment, Management, and Business Controls on Preventing Distributions of Informal Payments
Predictors and Controls Model 1
DV =
Government
Contract
Model 2
DV =
Government
Contract
Model 3
DV =
Government
Contract
Model 1
DV =
All
Payments
Model 2
DV =
All
Payments
Model 3
DV =
All
Payments
Environmental variables Standardized Coefficients
TI Corruption Perception Index -.019** .014***
WB Ease of Doing Business Index .017*** .005***
GDP per capita -.00009*** -.00005***
Informal competitors as obstacle .16*** .053**
Fairness/impartiality of court system -.41*** -.22**
Corruption as obstacle .33*** .38***
Control variable
Company size -.75*** -.61*** -.42*** -.36*** -.33*** -.19***
Independent Variables
Top manager’s experience -.053*** -.043*** -.011*** -.011***
Int'l recognized quality certification -.284* -.233*** .03 -.066 -.058 .027
Use of external auditor -.702*** -.652*** -.629*** -.194** -.188** -.206***
Observations 20793 20643 19004 42383 41856 37578
Prob > F 0.00 0.00 0.00
F (change) 8.94 22.88 -7.79 75.79
R2 .01 .02 .05 .004 .004 .003
Adj. R2 .01 .02 .05 .004 .004 .003
Change in R2 .01 .04 .00 .001
Df 3, 20789 4, 20638 10, 18993 3, 42379 4, 41851 10, 37567
*p<.05, **p<.01, ***p<.001
68
Table 5
Effects of Independent Variables By Type of Environment
(Projected Estimated Reduction in Probability of Bribe Being Asked)
Top Manager Effect
15 | 25 years of
experience
High Pressure STD +1 Average STD -1 Low Pressure
Tax 5.91% | 9.92% 8.01% | 13.24% 11.99% | 19.27% 13.19% | 20.85% 13.43% | 21.41%
Utilities 10.86% | 18.11% 13.94% | 22.73% 18.82% | 29.54% 20.64% | 32.13% 21.43% | 33.11%
Licenses 8.87% | 14.90% 11.40% | 18.80% 16.57% | 26.30% 18.80% | 29.54% 19.76% | 30.73%
Audit High
Pressure STD +1 Average STD -1
Low
Pressure
Tax 12.96% 17.07% 24.29% 26.41% 26.73%
Utilities 12.08% 15.14% 19.71% 21.29% 22.06%
Licenses 13.99% 17.52% 24.16% 26.99% 28.00%
Int'l Recognized
Quality
Certification
High
Pressure STD +1 Average STD -1
Low
Pressure
Tax 7.60% 10.05% 14.39% 15.46% 15.81%
Combination High
Pressure STD +1 Average STD -1
Low
Pressure
Tax
(Manager +25
years, QC, Audit)
27.72% 35.38% 47.73% 50.84% 51.53%
Utilities
(Manager +25
years, Audit)
27.70% 34.15% 43.28% 46.61% 47.87%
Licenses
(Manager +25
years, Audit)
26.44% 27.47% 43.91% 48.42% 50.11%
69
Table 6
Effects of Independent Variables on Total Bribe Payments
(Projected Estimated Reduction in Percentage of Amount of Bribes Paid)
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Top Manager Effect
(15 | 25 years of
experience)
Percentage
Reduction
Government
Contract
2.89% 0.65% | 1.08% 22.49% | 37.37%
All Payments 1.57% 0.16% | 0.27% 9.55% | 17.20%
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Audit Effect Percentage
Reduction
Government
Contract
2.89% 0.63% 21.80%
All Payments 1.57% 0.21% 13.38%
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Combination Effect
(Manager +25 Years,
Audit)
Percentage
Reduction
Government
Contract
2.89% 1.71% 59.17%
All Payments 1.57% 0.48% 30.57%
70
Regional Analysis of Dataset
Tables 8.1 to 8.4 show the variations in effectiveness of independent variables by region as
well as the relationships between them and the environmental variables.
In terms of business controls, auditing is substantially effective in the African, East Asia
Pacific, South Asian, and Caribbean/Mexico regions, with a more moderate effect in the South
American region, and no effect in the Eastern Europe/Central Asian region. As such, other than
the Eastern Europe/Central Asian region, auditing's effect is generally universal. This is an
encouraging finding as it demonstrates that there are some countermeasures that are generally
useful against corruption.
Quality certification is generally ineffective for all regions. In the Eastern Europe/Central
Asian regions, it was effective for utilities and licenses at the baseline model level and with the
incorporation of top manager tenure (Model 2), but its effects are wiped out by those of the
environment in the full model (Model 3). However, for the tax dependent variable, quality
certification was effective for the African and Eastern Europe/Central Asia. It was also effective
for the government contract dependent variable for the South American region.
Top manager tenure is the most effective in the African, South Asian, and Eastern
Europe/Central Asian regions, nominal effect for the South American region, and no effect for
the Caribbean/Mexico region. Interestingly, the effects of top manager tenure has a positive
correlation with informal payment requests in the South Asian and East Asia Pacific regions,
while the others demonstrate a negative correlation, consistent with the analysis of the full data
set. The effect of top manager tenure, however, was not significant in the Caribbean/Mexico
region. This finding is important as it demonstrates that there may be regional differences in the
applicability of a countermeasure, in this case, how top manager tenure affects corruption levels.
71
This finding also provides evidence that managerial qualities may not have a universally similar
effect and there are other factors that could affect them, as discussed below.
Finally, the effects of the independent variables differ slightly by region. For example, in
the African region, auditing is estimated to reduce informal payments less than other regions
(Table 8.4). This finding demonstrates that countermeasures may have variation in their
intensity and effects based on location.
A potential explanation for the results of the regional analysis comes from the GLOBE study
(House et al, 2004). As stated above the following regions demonstrate the following:
East Asia Pacific and South Asia - Positive correlation with informal payment requests
and distributions for manager effect
Eastern Europe/Central Asia and Africa - Negative correlation informal payment requests
and distributions for manager effect
South America and Caribbean/Mexico - Low to no manager effect for informal payment
requests and distributions
The GLOBE study measures various components of a region's perspective of leadership and
management, including the following factors:
Self-Protective (self-centered, status conscious, conflict inducer, face saver, procedural)
Autonomous (individualistic, independent, autonomous, unique)
Participative Leadership (participative, autocratic reverse scored)
The appropriate regions that the GLOBE study analyzed corresponding to those in the
WBES measured as follows:
72
Table 7 GLOBE Survey Details
Region Self-Protective Autonomous Participative
Leadership
East Asia Pacific High Medium Low
South Asia High Medium Low
Africa Medium Low Medium
Eastern Europe/Central Asia High-Medium High Low
South America Medium Low Medium
Caribbean/Mexico Medium Low Medium
For the East Asia Pacific and South Asian regions where top manager tenure is positively
correlated with informal payment requests and distributions, the results are supported as the
leadership qualities valued according to the GLOBE survey would be someone vested with
significant power (medium autonomous score), saddled with real and perceived responsibility for
the organization (high self protective score), but with less accountability (low self participative
leadership score).
For the African region where top manager tenure is negatively correlated with informal
payment requests and distributions, the combination effect of the GLOBE survey may also be
instructive in explanation. Here, the region shows a medium self-protective score, low
autonomous score (second to last in the GLOBE survey), and medium for participative
leadership, resulting in someone with moderate real and/or perceived responsibility for the
organization, but with increased accountability and checks and balances.
For the Eastern Europe and Central Asian region, where there is also a negative correlation
with corruption rates, its profile at first glance looks similar to the East Asia Pacific and South
Asian regions. The potential difference here, however, that accounts for the difference in the
direction of correlation is the self-protective score, while technically in the high category, is
73
closer to the medium category - while the East Asia Pacific and South Asian regions ranked in
the top three for the GLOBE survey.
Finally, for the South American and Caribbean/Mexico regions, the main difference between
these regions and the rest that demonstrate the lack of effectiveness of top manager tenure is the
fact that these regions ranked the highest in the GLOBE survey for team orientation. The
combination of high ranking for team orientation with low autonomous score may mean that
leaders or managers in this region are too paralyzed to have any effect on corruption.
74
Table 8.1
Regional Differences in Independent Variable Effectiveness for Internationally
Recognized Quality Certification
Utilities
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 1 1.01 1.17 .766* 1.50 .877 1.11
Model 2 1.00 1.20 .770* 1.41 .902 1.08
Model 3 .955 1.17 .876 1.45 .962 1.01
Licenses
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 1 .979 1.05 .712* 1.09 .840* .977
Model 2 .979 1.03 .725*** 1.06 .841 .981
Model 3 1.02 1.09 .867 1.07 .941 1.04
Tax
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 1 .781** 1.05 .661*** .966 .853 1.04
Model 2 .786** 1.06 .664*** .956 .815 1.05
Model 3 .737*** 1.08 .827* .958 .903 .995
Govt Contract
Std Coefficients AFR EAP ECA SAR SAM CCM
Model 1 .081 -.686 -.260 -.639 -.688** .209
Model 2 .129 -.687 -.207 -.587 -.673** .215
Model 3 .277 .224 -.038 -.653 -.501* .160
All Payments
Std Coefficients AFR EAP ECA SAR SAM CCM
Model 1 -.066 -.066 .029 -.102 -.194 -.140
Model 2 -.045 -.063 .028 -.112 -.188 -.199
Model 3 -.030 -.136 .162 -.079 -.013 -.248
*p<.05, **p<.01, ***p<.001
75
Table 8.2
Regional Differences in Independent Variable Effectiveness for Auditing
Utilities
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 1 .589*** 1.15 .866 .587* 1.02 .687**
Model 2 .597*** 1.19 .889 .641* 1.02 .681**
Model 3 .710*** .886 1.14 .468** .957 .707*
Licenses
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 1 .575*** .611*** .995 .564** .869 .934
Model 2 .586*** .643*** 1.02 .558** .861 .928
Model 3 .646*** .589*** 1.23* .378*** .834* .972
Tax
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 1 .733*** .862 1.04 .524*** .793* .592***
Model 2 .733*** .855 1.07 .545*** .803* .585***
Model 3 .836*** 1.00 1.17 .604** .715** .676**
Govt
Contract Std Coefficients
AFR EAP ECA SAR SAM CCM
Model 1 -1.75*** 2.76** -.393 -.027 -.014 -.235
Model 2 -1.68*** 2.95** -.372 -.046 -.011 -.243
Model 3 -1.27*** 4.39*** -.278 -.175 -.123 -.120
All Payments Std Coefficients
AFR EAP ECA SAR SAM CCM
Model 1 -.493*** .718*** .246 -.192 -.220 .025
Model 2 -.448*** .693*** .249 -.184 -.221 -.031
Model 3 -.064 .519*** .289 -.196 -.350** .178
*p<.05, **p<.01, ***p<.001
76
Table 8.3
Regional Differences in Independent Variable Effectiveness for Top Manager Experience
Utilities
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 2 .998 .994 .989* 1.04*** .987** 1.01**
Model 3 1.00 .998 .987* 1.05*** .988* 1.01
Licenses
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 2 .982* 1.00 .984*** .993 .992* 1.01
Model 3 .989** 1.00 .989** .994 .994 1.00
Tax
Odds Ratios AFR EAP ECA SAR SAM CCM
Model 2 1.00 1.01* .975*** 1.01* .994 .998
Model 3 .995 1.01* .983*** 1.02* .994 .995
Govt
Contract Std Coefficients
AFR EAP ECA SAR SAM CCM
Model 2 -.049*** -.021 -.013 -.013 .0005 -.005
Model 3 -.054*** .005 -.012 -.013 .003 -.007
All Payments Std Coefficients
AFR EAP ECA SAR SAM CCM
Model 2 -.014* .001 .002 .005 -.007 .006
Model 3 -.017** -.001 .012 .010 -.003 .002
*p<.05, **p<.01, ***p<.001
77
Table 8.4
Regional Differences in Effects of Independent Variables2
(Projected Estimated Reduction in Probability of Bribe Being Asked)
Top Manager Effect (15 | 25 years of experience)
Tax
EAP SAR
17.27% | 30.11%
(Increase)
6.74% | 37.24%
(Increase)
Utilities
ECA SAR SAM
15.77% | 25.02% 72.80% | 137.45%
(Increase) 16.13% | 25.50%
Licenses ECA AFR SAM
13.17% | 21.12% 12.20% | 19.72% 7.99% | 13.04%
Audit
Tax AFR SAR CCM SAM
13.74% 33.10% 31.13% 27.96%
Utilities AFR SAR CCM
22.31% 42.78% 27.59%
Licenses AFR SAR EAP
29.31% 52.06% 32.74%
Internationally Recognized Quality Certification
Tax AFR ECA
23.36% 16.78%
2 In terms of reducing payment of bribes, only the African and South American regions
demonstrated effectiveness for independent variables. In Africa, top manager experience was
effective for government contracts and all payments; and audit for government contracts. In
South America, internationally recognized quality certification was effective for government
contracts and auditing for all payments.
78
Industry Analysis of Dataset
The results of the industry analysis (Tables 9.1 to 9.5) are as follows:
In terms of business controls. auditing was most effective for the Manufacturing (5 out of 5
dependent variables) and Wholesale and Retail (4 out of 5 dependent variables) sectors, while
being marginally effective for the Construction and Transportation (1 out of 5 dependent
variables) sector. It was not effective for the other sectors. Consistent with the other analyses,
quality certification was ineffective across the board. While it was effective in Model 1 and
Model 2 for several dependent variables in various sectors (licenses for Manufacturing,
Construction and Transportation, Information and Communication; utilities for Chemical and
Pharmaceutical; government contract for Manufacturing), this promising initial effect was
negated by the presence of the environmental variables, demonstrating sensitivity to such.
Top manager tenure was most effective for the Manufacturing (5 out of 5 dependent
variables) and Wholesale and Retail (5 out of 5 dependent variables) sectors, while marginally
effective for the Chemical and Pharmaceutical (1 out of 5 dependent variables); Information and
Communication (1 out of 5 dependent variables); and Professional, Technical, and Scientific (1
out of 5 dependent variables) sectors. The effect of top manager tenure was extremely high
initially for the Professional, Technical, and Scientific sector, but its effect was wiped out by
environmental effects for three dependent variables. In the Information and Communication and
Professional, Technical, and Scientific sectors, where top manager tenure effects survived
environmental effects, its effect were higher than other sectors (Table 9.4). It is interesting to
note that the effect of top manager tenure was more effective for the Information and
Communication and Professional, Technical, Scientific sectors. It is possible here that managers
79
may have more of a "white-collar" background with more formal education which may allow
them to navigate government systems more effectively.
These results from the industry analysis may be partially explained by TI's Bribe Payer's
Index. Sectors where auditing and top manager tenure were nominally effective or not at all (i.e.
Construction and Transportation; Chemical and Pharmaceutical) are considered industries with
extremely high corruption. In such industries, it is possible that these measures are not as
resilient to environmental effects. Sectors where measures are more effective tend to be lower
on the scale or not ranked at all (i.e. Manufacturing; Wholesale and Retail).
80
Table 9.1
Industry Differences in Independent Variable Effectiveness for Internationally Recognized Quality Certification
Utilities
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 .900 .549** .905 1.08 1.04 1.17
Model 2 .907 .581* .877 1.10 .981 1.22
Model 3 .983 .701 1.10 1.06 1.11 1.02
Licenses
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 .856** .878 .757* 1.08 .454** 1.12
Model 2 .855** .877 .763* 1.08 .474** 1.13
Model 3 .985 .975 1.02 1.12 .672 1.19
Tax
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 .756*** .714* .669* .921 .612* .484*
Model 2 .751*** .710* .659* .929 .625* .496*
Model 3 .840** .983 .821 .907 .605 .502*
Govt Contract
Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 -.450* -.366 -.472 -.206 -1.17 1.05
Model 2 -.413* -.352 -.440 -.136 -1.20 1.18*
Model 3 -.167 .078 -.175 .039 -.849 .948
All Payments
Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 -.171 .015 -.092 -.003 .362 .560
Model 2 -.161 .020 -.099 .036 -.032 .638
Model 3 -.063 .123 .069 -.003 .055 .437
*p<.05, **p<.01, ***p<.001
81
Table 9.2
Industry Differences in Independent Variable Effectiveness for Auditing
Utilities
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 .774*** .778 .789 .643*** 1.33 .809
Model 2 .799*** .759 .840 .682*** 1.40 .863
Model 3 .814** .754 .787 .752** 1.39 .951
Licenses
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 .738*** 1.16 .908 .631*** 1.27 .659
Model 2 .754*** 1.20 .926 .664*** 1.34 .728
Model 3 .743*** 1.09 .832 .617*** 1.44 .632
Tax
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 .775*** .984 .832 .684*** 1.16 .684
Model 2 .785*** 1.00 .855 .719*** 1.19 .715
Model 3 .759*** .714 .730* .703*** 1.14 .736
Govt Contract
Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 -.579*** -.368 -.819* -1.10*** -.873 -.197
Model 2 -.547** -.369 -.783* -.957*** -.879 -.205
Model 3 -.500** .031 -1.09** -.748** -1.12 -.190
All Payments
Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 1 -.162* .346 -.031 -.253* -.635 -.193
Model 2 -.163* .357 -.031 -.230* -.766* -.153
Model 3 -.183* .264 -.200 -.236 -.714 -.244
*p<.05, **p<.01, ***p<.001
82
Table 9.3
Industry Differences in Independent Variable Effectiveness for Top Manager Experience
Utilities
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 2 .979*** .973** .985*** .975*** .995 .903***
Model 3 .987*** .979* 1.00 .976*** .987 .969
Licenses
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 2 .984*** .983** .987* .984** .970** .935**
Model 3 .988*** .990 .992 .981*** .960*** .955**
Tax
Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 2 .987*** .989 .989 .983*** .986 .948***
Model 3 .991*** .996 .997 .983*** .984 .991
Govt Contract
Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 2 -.051*** -.021 -.029 -.070*** -.019 -.096***
Model 3 -.041*** -.011 -.022 -.064*** -.024 -.005
All Payments
Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci
Model 2 -.009** -.008 -.007 -.019*** -.002 .041*
Model 3 -.007* -.010 -.001 -.024*** -.007 -.009
*p<.05, **p<.01, ***p<.001
83
Table 9.4
Industry Differences in Effects of Independent Variables3
(Projected Estimated Reduction in Probability of Bribe Being Asked)
Top Manager Effect (15 | 25 years of experience)
Manufacturing Wholesale & Retail Other
Tax
11.15% | 18.00% 20.41% | 31.92%
Utilities 15.50% | 24.64% 26.29% | 42.01%
Chem & Pharm
(25.17% | 38.60%)
Licenses 13.74% | 22.03% 20.39% | 32.07%
Info & Comm
(40.11% | 58.41%)
ProTechSci
(43.39% | 60.36%)
Audit
Manufacturing Wholesale & Retail
Tax 21.88% 27.21%
Utilities 16.75% 21.84%
Licenses 22.30% 32.89%
3 Internationally Recognized Quality Certification was only effective for the ProTechSci
category and Tax variable.
84
Table 9.5
Industry Differences in Effects of Independent Variables
(Projected Estimated Reduction in Percentage of Amount of Bribes Paid)
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Top Manager Effect
(15 | 25 years of
experience)
Percentage
Reduction
Government
Contract
2.77% (Manuf)
3.12% (Whole & Ret)
0.61% | 1.02%
0.97% | 1.61%
22.02% | 36.82%
31.09% | 51.60%
All Payments 1.45% (Manuf)
1.55% (Whole & Ret)
0.11% | 0.18%
0.36% | 0.60%
7.59% | 12.41%
23.23% | 38.71%
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Audit Effect Percentage
Reduction
Government
Contract
2.77% (Manuf)
3.12% (Whole & Ret
3.15% (Const & Trans)
0.50%
0.75%
1.09%
18.05%
24.04%
34.60%
All Payments 1.45% (Manuf) 0.18% 12.41%
85
Analysis of Dataset by Company Size
The results of the analysis of the dataset by company size (Tables 10.1 to 10.5) are as follows:
As an initial matter, informal payment requests and distributions were calculated to be higher
for small and medium-sized companies than for large ones. This is an interesting finding that
demonstrates the likely vulnerability of smaller and medium-sized companies to corruption
versus larger ones with more influence and resources.
Auditing was effective across the board for small, medium, and large companies. Quality
certification was generally ineffective for all companies except for the tax category, where it was
effective for all sizes. Top manager tenure was effective across the board. These findings are
consistent with those from the other analyses.
Promisingly, the effect of top manager tenure and auditing was highest for small companies
in the utilities and license categories. This finding has the potential to offset the effect of the
prior one regarding higher informal payment requests and distributions in smaller companies.
Finally, the effect of top manager tenure and auditing exhibited a U shape curve - highest for
small companies, decreasing for medium-sized companies, and increasing for large ones in the
utilities and license categories (Tables 10.4 and 10.5). This pattern is interesting as it could
possibly be explained by effects of top manager and auditing being strong at the small company
level due to size and at the large company level due to resources. The lesser effect at the
medium size company level is potential due to a combination of size and less resources.
86
Table 10.1
Company Differences in Independent Variable Effectiveness for Internationally
Recognized Quality Certification
Utilities
Odds Ratios Small Medium Large
Model 1 1.15 .846* .849
Model 2 1.22* .840* .862
Model 3 1.30** .922 .902
Licenses
Odds Ratios Small Medium Large
Model 1 .855 .863* .943
Model 2 .873 .864* .942
Model 3 .941 .986 1.05
Tax
Odds Ratios Small Medium Large
Model 1 .755*** .783*** .736***
Model 2 .754*** .785*** .728***
Model 3 .775** .869* .836*
Govt Contract
Std Coefficients Small Medium Large
Model 1 -.144 -.475* -.142
Model 2 -.033 -.431 -.124
Model 3 .029 -.059 .008
All Payments
Std Coefficients Small Medium Large
Model 1 .260 -.224* -.140
Model 2 .305* -.235* -.149
Model 3 .224 -.099 -.030
*p<.05, **p<.01, ***p<.001
87
Table 10.2
Company Differences in Independent Variable Effectiveness for Auditing
Utilities
Odds Ratios Small Medium Large
Model 1 .649*** .866* .715**
Model 2 .686*** .893 .732**
Model 3 .757*** .824** .794*
Licenses
Odds Ratios Small Medium Large
Model 1 .635*** .861** .664***
Model 2 .662*** .887* .686***
Model 3 .641*** .827** .719***
Tax
Odds Ratios Small Medium Large
Model 1 .690*** .849*** .737***
Model 2 .714*** .876*** .746***
Model 3 .717*** .794*** .711***
Govt Contract
Std Coefficients Small Medium Large
Model 1 -1.09*** -.345 -.083
Model 2 -.948*** -.329 -.104
Model 3 -.773*** -.446* -.094
All Payments
Std Coefficients Small Medium Large
Model 1 -.098 -.363*** -.187
Model 2 -.072 -.379*** -.198
Model 3 -.037 -.439*** -.233
*p<.05, **p<.01, ***p<.001
88
Table 10.3
Company Differences in Independent Variable Effectiveness for Top Manager Experience
Utilities
Odds Ratios Small Medium Large
Model 2 .968*** .981*** .987**
Model 3 .982*** .986*** .987**
Licenses
Odds Ratios Small Medium Large
Model 2 .978*** .984*** .988***
Model 3 .983*** .987*** .988***
Tax
Odds Ratios Small Medium Large
Model 2 .985*** .988*** .989***
Model 3 .991*** .990*** .991*
Govt Contract
Std Coefficients Small Medium Large
Model 2 -.082*** -.037*** -.010
Model 3 -.064*** -.028** -.012
All Payments
Std Coefficients Small Medium Large
Model 2 -.017*** -.008 -.004
Model 3 -.015*** -.007 -.004
*p<.05, **p<.01, ***p<.001
89
Table 10.4
Company Differences in Effects of Independent Variables
(Projected Estimated Reduction in Probability of Bribe Being Asked)
Top Manager Effect (15 | 25 years of experience)
Small Medium Large
Tax 11.96% | 17.97% 12.73% | 20.46% 11.80% | 19.02%
Utilities 21.03% | 32.92% 16.69% | 26.50% 16.51% | 26.15%
Licenses 19.39% | 30.56% 15.23% | 24.37% 14.32% | 22.91%
Audit
Small Medium Large
Tax 25.69% 18.83% 26.92%
Utilities 21.55% 15.78% 19.11%
Licenses 31.54% 14.59% 24.33%
Internationally Recognized Quality Certification
Small Medium Large
Tax 20.36% 12.00% 15.23%
Combination Effect
Small Medium Large
Tax
Manager +25,
QC, Audit
51.72% 43.07% 49.51%
Utilities
Manager +25,
Audit
47.45% 37.84% 39.92%
License
Manager +25,
Audit
52.37% 35.18% 41.31%
90
Table 10.5
Company Differences in Effects of Independent Variables
(Projected Estimated Reduction in Percentage of Amount of Bribes Paid)
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Top Manager Effect
(15 | 25 years of
experience)
Percentage
Reduction
Government
Contract
3.59% (Small)
2.63% (Medium)
1.57% (Large)
0.96% | 1.60%
0.42% | 0.71%
0.18% | 0.30%
26.74% | 44.57%
15.97% | 27.00%
11.47% | 19.11%
All Payments 1.82% (Small) 0.22% | 0.37% 12.09% | 20.33%
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Audit Effect Percentage
Reduction
Government
Contract 3.59% (Small) 0.77% 21.45%
All Payments 1.45% (Medium) 0.44% 30.35%
Average Amount of
Percentage Paid
(Contract and Total
Sales)
Combination Effect
Manager +25 years,
Audit
Percentage
Reduction
Government
Contract 3.59% (Small) 1.73% 66.02%
91
Interview Results
Two senior compliance personnel from major multinational companies were interviewed with
the corresponding results:
Management’s Effect on Business Controls
In regards to the role of management affecting business controls, both affirmed the
significance of senior leadership and management setting the correct tone for the organization.
Specific components of focus include the important role of the audit committee in monitoring
compliance issues, regular reports on findings and investigations, and effective communication
between compliance personnel and senior management.
Environment’s Effect on Management and Business Controls
In regards to the role of environment affecting both controls and management, the first
interviewee stated that the competitive business environment and pressure to meet financial
targets was a significant factor. The second interviewee stated that potential financial limitations
may play a factor in implementing compliance initiatives but this was mitigated by the necessity
of doing so.
Industry Differences
In regards to differences by industry in affecting compliance, the first interviewee stated that
there were none and that the issues presented were universal. The second interviewee stated that
there were industry differences linked to the transparency of transactions, with certain sectors
such as the construction and pharmaceutical industry being linked to more corruption.
92
Company Size Differences
Both interviewees confirmed that the size of a company affected compliance. The first
interviewee stated that the larger a company, the harder it is to implement compliance, with a
possible solution of looking to automation of controls and increased ability to obtain and analyze
data. The second interviewee stated that larger companies have more resources to use on
compliance with smaller companies facing a disadvantage due to fewer resources.
Regional Differences
Both interviewees also confirmed that there were regional differences. The first interviewee
stated that there are more resources for compliance in the United States but that countries with
increased levels of corruption required more focus. The second interviewee also corroborated
this sentiment, with recommendations for proper risk assessment depending on business partners
and project.
Recommendations to Improve Business Controls
Both interviewees had recommendations regarding the improvement of business controls in
order to increase their resilience to factors such as the environment and management. The first
interviewee stated that standardizing controls and proactive monitoring, especially auditing, were
key components to implement. Finally, this interviewee also emphasized the use of mechanisms
to collect data from all over the world for analysis. The second interviewee emphasized the need
for proper design of controls in order to minimize disruption to business and economize the use
of resources, with a focus on automation.
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Recommendations to Improve Management
Both interviewees had recommendations regarding the improvement of management to
environmental factors. The first interviewee emphasized the setting of realistic financial targets
as well as educating managers on the consequences of corrupt behavior, including criminal
sanctions, debarment, and financial consequences. The second interviewee also emphasized the
need for awareness and education of managers, combined with the setting of proper incentives to
encourage ethical behavior including linkage to financial compensation.
Other Factors Affecting Compliance
Both interviewees stressed the role of legislation such as the US Foreign Corrupt Practices
Act and UK Bribery Act and related investigations in affecting compliance. The investigation
and prosecution of such cases coupled with media attention focuses a spotlight on ethics and
compliance issues.
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CHAPTER V: COUNTERSTRATEGY
Corruption is a troublesome enemy to combat because it is difficult to define and detect. It
is also likely not understood as well as other violations. In many situations, firms are unaware of
the range of strategies that are available to them to either reduce the costs of corruption or deter
it (Doh et al, 2003). Accordingly, I argue that a combination of good strategy and tactics is
necessary if firms are to have a chance in addressing corruption effectively.
Controls and Leadership Matter
The first principle to highlight, as indicated by the data analysis, is that business controls,
leadership, and management matter in combating corruption. Auditing, quality certification (to a
lesser extent), and top manager tenure function as an outer shield against informal payment
requests as well as an inner shield for informal payment distributions. This set of results may be
useful in transitioning the mindset of companies from feeling like weak and passive victims to
being able to resist corrupt influences and forces. The outer shield principle will likely be more
applicable to firms operating in developing countries where corruption is high. The inner shield
principle is particularly applicable in an ethics and compliance context where the focus is on
preventing payment of bribes and to evade liability from government investigation and
prosecution.
The effectiveness of business controls is an encouraging finding. Despite possible cynicism
on the theoretical and practical motivations behind implementing them, I propose that simple
measures such as auditing may have a significant effect on preventing corruption. Certified
management systems and quality certifications can also be improved upon to be more resilient
and thus increase its effectiveness.
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I strongly argue that tailoring controls to a situation is also essential. For example, Sethi and
Sama (1998) have proposed using different focus for controls depending on the situation a
company is in. For an ethically hostile environment, using legally based coercive techniques and
social ostracism is preferred. For high growth economic activity environments where there are
high structural opportunities for exploitation but low institutional temptations, capitalizing on
reputations is the better approach. In regulated or high stable mature business environments,
where both structural opportunities for exploitation and institutional temptations are low,
focusing on voluntary restraints and compliance is adequate. Further, in an intensely competitive
and entrepreneurial environment where there are low structural pressures but high institutional
ones, companies should focus on controlling individual behavior. Finally, designing appropriate
controls also requires taking into consideration business operations and financial resources, with
minimal disruption to the former and efficiency for the latter. Here, the use of automation could
be effective in increasing the effectiveness of such controls.
The finding that top manager tenure is resilient to environmental variables and effective in
preventing bribery is extremely promising. Not only does this finding align with the various
theories, prior work on leader and manager influence on companies' operations and performance,
and the interviews with senior compliance personnel, but it also shows that harnessing and
development of leaders and managers is a crucial resource to invest in. In general, anti-
corruption and compliance recommendations emphasize a "tone at the top" in order to create an
ethical culture. While this recommendation is solid in principle and practical in reality, there is
probably more to having experienced leadership than solely this factor. It is likely that an
experienced manager has increased ability to obtain recourse through alternative government
channels or to deflect the need for informal payments when faced with bribe requests (Herrera,
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2007). This ability may be due to a wider professional network or increased knowledge on how
to deal with such issues. The effect of top managers is also significant as it shows how ordinary
people may have extraordinary impact on their circle of influence. Shielding a company from
bribery requests and payments has far-reaching consequences, including promoting integrity,
efficiency, and a commitment to profits, while also protecting employees in general.
Accordingly, identifying leaders and managers who will be committed to ethics and compliance
and providing them with appropriate education and incentives is an important component of a
company’s overall strategy.
The effectiveness of business controls and top managers may be also harnessed to do more
for the larger problem of corruption. Companies can act as change agents, especially those who
are influential and visible, specifically leaders in their fields. Visibility of a company has several
consequences. This factor may force companies to adopt stringent measures to comply with the
law, but later on these companies may also serve as pioneers that provide standards for less
visible and influential companies, thereby affecting the business and even the political
environment in which they operate in. Possible avenues can include influencing legislation,
organizing training related to preventing bribery and encouraging compliance, exposing public
agency corruption, and generally leveraging corporate assets to shape government policy (Hills
et al, 2009).
Understanding Context
As demonstrated by the data analysis, not only do the effects of business controls and top
manager tenure differ by region, industry, and company size, but also the relationships between
them and environmental variables. Not every measure will be effective in every case -
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depending on region, industry, company size, and even type of dependent variable. Each
measure will have different costs and benefits as well as sensitivity and resilience. Hence, the
effects of environmental pressures are not uniform as they will vary by the independent variable
considered.
Taking context into consideration is important in terms of what measures to use. This is
similar to surveying the state of a battlefield before actual engagement starts as well as the larger
environment - i.e. political climate and economic resources. This is also akin to having as much
information or intelligence about the scenario at hand. Considering context allows for more
efficient use of resources and prevents discouragement in terms of feeling like a helpless victim
of circumstances.
Consequently, context in this case can be paramount in affecting the effectiveness of
strategy and tactics to be developed and implemented. A practical scenario where context would
be important would be knowing which measure is to be used. In a given region, a direct measure
might be more effective initially than an indirect measure, which would allow a company to use
the former to gain a foothold in combating corruption while using others to build on their gains.
For example, perhaps it is wise to ignore management efforts in Asian regions where the data
show a positive correlation with bribery, but to instead focus on strong controls. For small
companies, where the data show the effects of management to be the strongest, this finding can
compensate for the availability of less resources devoted to ethics and compliance. In large
companies, where the effects of management are weaker, steps can be taken to address this state
of events, either through education or awareness or by increased reliance on controls, including
focusing on automation. In large companies, however, the probability of greater access to
financial resources for ethics and compliance should be capitalized on. For medium sized
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companies, the benefit is understanding the different patterns for management and controls.
Here, the effects of leadership are less than small companies and are greater than large ones but
the effects of controls appear to be the weakest. With this phenomenon in mind, management
can be strengthened while diverting more efforts to design and implementation of controls.
Multidisciplinary Approach
I propose that taking a multidisciplinary approach from the standpoint of criminology and
institutional theory, as well as from the general management literature is also useful. Borrowing
from and merging fields allows for creativity and expansion of knowledge and also allows for
more versatility in approach. This synthetic approach may result in a worthwhile addition to the
anti-corruption arsenal.
From a criminological standpoint, removing strain from a company's standpoint in terms of
reducing the profit motive and inexhaustible motivation for achievement might be difficult and
even impossible. The same goes for the forces behind coercive isomorphism from institutional
theory. Coercive isomorphism, however, may be co-opted in the sense that coercive forces from
government and other institutions may pressure organizations to be more committed to ethics
and compliance. This impetus can come from increased investigations and prosecutions,
followed by appropriate sanctions. The United States taking the lead in increasing enforcement
of the Foreign Corrupt Practices Act in recent years has correspondingly increased the urgency
for companies to improve their ethics and compliance efforts. Moreover, as mentioned
previously, companies may also lessen poor governance by reporting instances of corruption and
resisting it, either reducing or deflecting some of the pressure from these coercive forces.
Introducing compliance and ethics may also lessen, however slightly, pressures from the profit
motive, although admittedly difficult.
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The presence of a strong commitment to ethics and compliance, especially through effective
and well-designed programs will play into the differential association framework from
criminology and mimetic isomorphism from institutional theory. Here, the benefits of
compliance and other controls should either be emphasized or developed. Further, better
detection, increased enforcement of laws and standards, with proper sanctions for violations and
rewards for commitment to integrity can play a significant role in reinforcing ethical behavior.
Finally, strengthening and training leaders and management is paramount. For example,
borrowing from a transformational leadership style, which has been posited to contribute to the
creation of an ethical environment could be utilized (Carlson and Perrewe, 1995). Another factor
to consider would be to strengthen ties between key management and leadership in terms of
combating corruption without compromising the long term goals of a company and preventing
conflict related to such (Colbert et al, 2008). If these measures are shown and perceived to be
effective, they will create a cycle of proliferation which will balance out the corruption-favoring
differential association equation as well as provide models for mimesis. The strength here is that
unlike coercive forces and strain, companies have more control over the direction and expression
of differential associations and mimesis, especially if countermeasures to corruption are shown
to be effective, efficient, and beneficial to companies. Increasing models of compliance also
slows down the rate of mimesis of those more susceptible to corruption (DiMaggio and Powell,
1983).
Finally, a zero tolerance approach to maintaining integrity will help prevent the formation of
subcultures and normalization of deviance processes. Again, keen monitoring and strict
enforcement are key to prevention of subculture formation by negating the effects of
rationalization and redefinition of unethical behavior. By immediately addressing instances of
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corruption and isolating the perpetrators involved, companies can quarantine this behavior to
prevent further infection of others in the company. Striking hard at perpetrators and making
examples of them is also probably a good idea. This mechanism will be heavily influenced by
top management and leadership. This is also applicable to the processes of normative
isomorphism where a culture of integrity can be established through education, training, good
behavior by networks, and movement of ethical employees. Industry organizations and business
schools can also incorporate a higher commitment to ethics and compliance in addition to the
dominant discussions on profit and growth.
Mixed Strategy
Using a mixed strategy is wise. A mixed strategy will involve combination of measures,
including tough controls, appeals to morality, and benefits (Paternoster and Simpson, 1996;
DiTella and Schargrodsky, 2003; Braithwaite, 1985). Auditing, for example, is a direct measure
that is extremely effective and resilient. The downside of such a measure, however, is that it
might be too obvious and inspire cynicism. Quality certification while less effective on its face
has its benefits as an indirect measure. As previously detailed, the potential benefits of
implementing certified management systems include improvement in financial performance
(Bansal and Hunter, 2003; Corbett et al, 2005; Schroeder et al, 2008); business and operating
performance (Naveh and Marcus, 2005; Schroeder et al, 2008; Zu, 2008); instrument of
mobilization and governance (Boiral, 2003; Christmann and Taylor, 2006; Walgenbach, 2001);
and advantages over legislation or marked based policies (Bansal and Hunter, 2003). These
advantages should be capitalized on, which will have the dual effect of promoting ethics and
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compliance, but in a more subtle fashion. Indirect measures may be more palatable and easier to
implement than direct ones.
As demonstrated by the projected reduction of informal payment requests and distributions,
the combination of various methods - in this study's case, management, auditing, and in some
scenarios, quality certification - can reduce corruption quite significantly. This combination
method is akin to combating a disease with multiple drugs, which attacks different aspects of a
pathogen, with one avenue compensating for the weaknesses of another.
Just as the Buenos Aires hospital study detailed by DiTella and Schargrodsky (2003)
examined the combination effects of wages and auditing, integrating incentives and controls is a
viable model. Not everyone responds solely to rules and regulations, but these are necessary for
those who do not. Likewise, appealing to morality is effective for others. This should be
capitalized on especially with benefits like customer, supplier, and employee loyalty (Gilley et
al, 2010). The role of auditing and other direct measures are also important because they
compensate for the weaknesses of voluntary codes of conduct, which are lack of enforcement
and power (Doh et al, 2003).
A good strategy will also consider sequence and intensity. Olken's (2007) study of
Indonesian road projects show that increase in the probability of audit decreases corruption.
Certainty and randomness of auditing might also be useful here. Adding the layer of
dissemination (Ferraz and Finan, 2007) may heighten the impact of a combination strategy. This
dissemination is probably a lot easier with the development of various social media tools and
more accessible publishing tools.
Resisters and dissenters in organizations must also be addressed, neutralized, or dismissed.
Based on Christmann and Taylor's (2006) study, it appears that roughly a third of companies are
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full supporters from inception of certified management systems. Forty percent appear to be in
the unconvinced zone, with their acceptance of implementation restricted to a ceremonial role.
The remaining twenty seven percent are active resisters. At first glance, this is problematic, but
viewing this state of events from an optimistic perspective, it means that if a company can
persuade the unconvinced zone to cooperate, it only leaves roughly a quarter of companies in the
true resister zone. Building on the quality enthusiasts is a non-negotiable requirement, either
using them as consultants or examples to be followed. Ceremonial integrators can be persuaded
to cooperate by appointing proper individuals to be in charge, avoiding technicality, building
consensus, and focusing on practical and instrumental implementation over symbolic window-
dressing.
Finally, a good strategy will consider the fluidity of the situation. No system is perfect and
perpetrators will eventually evolve and adapt. A possible plan here would be to use war-gaming
to brainstorm ways to overcome measures (Herman and Frost, 2009). Systems must always be
tested, likely with the assistance of individuals outside the company to provide a fresh and
unbiased perspective of a company's anti-corruption measures.
Creating Change
Finally, the issue of creating change should be discussed. In companies where corruption
has become the norm or where attitudes towards it are lax, certain problems will be presented.
Greenwood and Hinings (1996) delineate two avenues of potential change - evolutionary and
revolutionary - that are affected by factors such as normative embeddedness, mechanisms for
dissemination of ideas, permeability to other fields, patterns of value commitment, power
dependencies, and capacity for action. Other factors to be considered are organizational
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environment, social position of actors, development of vision, mobilization of allies, and use of
social capital (Battilana, 2009).
Revolutionary change occurs where individuals desiring change are located at interstices of
several social networks, organizations, and institutions, where decision-makers take ideas
seriously, and there are necessary resources. Evolutionary change, on the other hand, tends to
occur where the prior factors do not occur but innovations fit the institutional context better and
are more likely to persist over time (Campbell, 2004).
A change framework like Kotter's (1996) where establishing urgency and showing that a
larger problem can be addressed incrementally should also be useful. The inner shield and outer
shield framework would be applicable to the latter goal while urgency can be fulfilled with
several paths. Hardy and Maguire (2008), however, raise the dilemma where those who want to
make change often lack resources and power to realize their vision while dominant actors who
have the power to do so are more likely to embrace the status quo.
Hence, I propose what I call the "shock and change" method. Revolutionary change must be
accompanied by components of evolutionary change to ground long-lasting changes in an
organization. The "shock" component functions as the first step to deinstitutionalizing
corruption. Capitalizing on external factors such as customer expectations and sanctions
(Christmann and Taylor, 2006; Jiang and Bansal, 2003), investor perceptions with resulting
effects on firm value (Chhaochharia and Grinstein, 2007; Goncharov et al, 2006) and preventing
direct consequences such as prosecution and investigation (Huff, 1996; Ruhnka and Boerstler,
1998) and collateral consequences (Aviram, 2005; Moohr, 2007; Murphy, 2009; Karpoff, 2008).
These factors should be emphasized as the "shock" or revolutionary part of change, while then
coming up with an incremental but consistent plan to ground change. Another option is using an
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external threat such as prosecution and investigation to build on for a change initiative, but this
approach is obviously not optimal for a company.
Individuals interested in leading change should be concerned about timing. There is no
point to starting a change initiative that will fail from lack of momentum or resources. Potential
change agents should wait for a combination of support, external issues, resources and such to
begin their initiatives. Thus, compliance and ethics initiatives is not "one size fits all" from a
substantive standpoint, but also from an implementation one.
Ultimately, one of the keys to building an ethical and compliant culture is linking such
behavior to adding value to a company. Realistically, ethics and compliance are likely perceived
as being antithetical to the primary profit-making motive of the private sector. But if one thinks
about this issue differently, having effective tools and strategies to combat corruption actually
helps businesses to be more profitable. Preventing informal payment requests enables businesses
to operate more efficiently, adding to the bottom line. Preventing informal payment distributions
has even more direct effects, resulting from minimizing loss from revenues and contracts.
Theoretical Implications
This section discusses the theoretical implications of the results and findings of this study.
These are particularly important as reinforcement for proposed solutions to corruption as well as
further elucidation of relationships between variables and concepts in the relevant theories.
As an initial matter, the effectiveness of the combination of normative business controls and
normative/cognitive effects of top managers in reducing informal payment requests and
distributions, and potentially disrupting the formation of corrupt subcultures, are consistent with
the differential association and differential reinforcement concepts grounded in social learning
theory whereby intensity, frequency, priority, and duration of associations with positive
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pressures as well as the amount, frequency, and probability of rewards and punishments are
relevant in affecting behavior (Sutherland and Cressey, 1960; Sutherland, 1949; Akers and
Jensen, 2010; Akers, 1998). Consequently, I propose that the related policy recommendation
here would be to invest in ethical managers and strong controls, which is consistent with the
promotion of ethics and compliance measures as the antidote to corrupt behavior (Clinard, 1980,
1990).
Moreover, the results and findings of this dissertation indicate that the various types of
institutional pressures interact with each other. Cognitive elements, which are tied to mimetic
pressures, as measured by top manager tenure and the normative element captured by the effect
of auditing (and to a lesser extent, quality certification) are shown to be resistant to regulatory
ones which are tied to coercive pressures, as measured by the environmental factors. Cognitive
and regulatory elements are also shown to affect normative ones as measured by their effect on
business controls. While the consequences of coercive pressures are significant in mitigating
those of management and business controls, it is also encouraging to note that certain normative
and mimetic pressures are not completely susceptible to these coercive pressures, especially the
role of managers and auditing. This finding demonstrates that it is possible to select normative
and mimetic components that are more resilient to coercive ones. It may also be possible to
increase the resiliency of more sensitive normative and mimetic components to make them more
effective. Consequently, I propose that some measures can be used as frontline ones while
others are adjusted for effectiveness and efficiency. The resiliency of cognitive elements is also
a promising avenue for further exploration, as they may be viewed as a crucial pivot point for
anti-corruption strategy. By capitalizing on cognitive elements, specifically those affecting
leadership and management, that are resistant to regulatory ones while carefully considering their
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effects on normative ones, better anti-corruption measures can be developed. On a policy level,
focusing on strengthening leaders and managers likely increases the amount and effect of
positive mimetic pressures, which in turn can decrease corruption.
Further, I argue that the results and findings of this dissertation demonstrate that the
relationship between institutional pressures vary in intensity and effect depending on the context
in which they are considered, such as region, industry, and company size. The results of the
regional analysis are consistent with the likelihood that there are coercive pressures possibly due
to additional cultural variations that affect the effects of normative and mimetic pressures.
Similarly, the results of the industry and company size analyses are consistent with
demonstrating the presence of coercive pressures such as organizational structure, processes, and
complexity that account for variation in the effects of normative and mimetic ones (Vaughan
1983, 1982; Clinard, 1980). In industries or regions with a greater reputation or incidence for
corruption, the potential of decreased positive mimetic pressures, increased presence of corrupt
mimetic ones and coercive pressures affects the effectiveness of normative components. This
finding is also consistent with anomie theory where strain and pressures weakens controls and
norms, leading to the formation of corrupt subculture (Passas 2000; 1999). Consequently, I
propose that the policy recommendations here would be to take into account and reduce the
effects of those pressures, such as decreasing transactional complexity and addressing the
negative effects of organizational structure per the recommendations of the scholars cited above.
Finally, while components of compliance and ethics are likely contemplated initially as
normative pressures, these can be eventually co-opted to become mimetic pressures if related
anti-corruption measures are shown to be effective and perceived as worth being followed on an
organizational level, as well as to become coercive pressures if the overall business, political,
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and social environment views ethical practices as a cultural expectation. Overall, I argue that the
contribution of criminology and institutional theory to forming a viable theoretical framework in
which to analyze private sector corruption is valuable, but with the nuance that the effects of
various components are not homogeneous, interact with each other, and can be affected by sub-
contexts, requiring careful analysis and consideration.
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CONCLUSION
Corruption is a formidable enemy. Its consequences are myriad, including detrimental
effects from an economic, institutional, and governance point of view.
The main findings and contributions to the literature of this dissertation are as follows:
1. Combating corruption with available measures can be effective.
2. Understanding the context in which these measures are implemented is paramount
3. Taking a multidisciplinary approach, specifically from the fields of criminology,
institutional theory, and business management, can provide powerful insights into
developing appropriate solutions.
First, as the data analysis shows, the effects of certain countermeasures, especially the role
of certain controls like auditing and that of management, can be quite substantial in deterring
both bribe requests and dispensations. While it is difficult to attack corruption, a defensive or
deterrent strategy may help curtail its incidence and effects. The role of management and
controls may potentially serve as barriers or shields. This approach may buy time to build up
more resistance and ultimately serve a basis for a counterattack on corruption if the business
environment has shifted enough to a culture of ethics and compliance to have an effect on society
in general, including the political environment. On a practical level, measures that are proven to
be effective prevents firms from dropping out of the formal economy or altogether. This
scenario is good overall for improving economic development and governance. The results of
this study posit that leadership and controls, when properly supported and implemented, are
powerful factors.
Taking into account appealing to morality while instituting strong controls is also a
circumspect approach. Human nature is such that even the best of individuals will succumb to
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pressures, which may exist in certain scenarios presented by the political and business
environment. Hence, strong protections must be put in place. It is, however, ethical and
committed individuals that will likely provide the impetus and leadership for sustained change.
These individuals should be supported and ultimately placed in positions of influence. With
necessary resources, they may be able to effect positive change in difficult environments.
Further, those already in power should be inoculated through anti-corruption education and
training to build up their resilience to the environmental pressures, and thereby reducing the
probability of being involved in corrupt activities.
I strongly argue that these factors, however, should be considered in the proper context - i.e.
the interrelationships between them and environmental factors as well as by region, industry, and
company size. This study demonstrated that certain business controls are more sensitive to
environmental factors, while generally resilient to the role of management. Variations are also
shown depending on region, industry, and company size. Consequently, taking context into
consideration will allow for more efficient and effective use of resources in the fight against
corruption.
Future research could focus on other qualities of management or leadership such as
functional background, formal business education, military service, and team and tenure
heterogeneity and their role on preventing corruption or other types of corporate crime (Certo et
al; 2006; Daboub et al, 1995; Greening and Johnson, 1996; Norburn and Birley, 1988). The
effectiveness of other compliance and anti-corruption measures should be studied as well. Other
analyses to consider are those on an intraregional and intraindustry basis. Finally other
components of anti-corruption strategy such as collective action, systemic and strategic reform,
110
public-private partnership, and the role of civil society and international donors should be
considered.
In regards to implications for managers and policymakers, the most obvious ones based on
this study are to find ways to strengthen and educate managers and to encourage careful and
nuanced planning for anti-corruption counterstrategy. Selection of managers should not only
take into consideration ability to contribute to a company's bottom-line, but also the ability to
withstand pressures from a competitive business environment which may encourage corrupt
behavior. Managers should be continuously educated on ethics and compliance issues, as well as
measures to take when faced with difficult scenarios involving bribery and other unlawful
opportunities.
Next, I propose that anti-corruption counterstrategy should be developed with the utmost
care. Careful research and analysis are prerogatives in this endeavor, with the contemplation of
pertinent factors present in certain regions or industries, as well as the resources and limitations
of a company. The incorporation of criminology into designing anti-corruption counterstrategy
is likely a good avenue to pursue. The aforementioned combination of criminological principles
such as anomie/strain, differential association/reinforcement, and formation of subculture with
corresponding principles in institutional theory provide a powerful backdrop in which
counterstrategy can be formed.
In regards to strain and coercive isomorphism, the main impetus for change will likely come
from governments interested in pursuing an anti-corruption agenda. At this point of history, the
US and UK through the enactment and implementation of the US Foreign Corrupt Practices Act
and UK Bribery Act respectively, are leading the way. This state of events is obviously not
going to be popular with the private sector, but the effects of such legislation has the effect of
111
lessening the focus on a pure profit motive for business, adding the requirement for ethics and
compliance.
Based on the requirement for ethics and compliance, the perspective of differential
association/reinforcement can thus be utilized to design proper countermeasures. For example,
an increase in focus on ethics and compliance through awareness, education, and implementation
can help alter the differential association equation to reduce the likelihood of corrupt activities.
Conversely, strong ethics and compliance programs will increase the detection of such behaviors
with corresponding penalties, which also alters the balance in favor of preventing corrupt
activities. From a mimetic standpoint, companies that realize the benefits of strong ethics and
compliance will come to imitate other companies that have successfully integrated these
components into their overall business plan and operations.
Finally, the presence of strong ethics and compliance programs supported by the role of top
management prevents the formation and normalization of a corrupt subculture. Where a
subculture of corruption has been strongly embedded, studies from institutional theory and
business management may be insightful in reversing this course of events by providing tactics
and reasons for beneficial change.
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APPENDIX
DETAILS OF WORLD BANK ENTERPRISE SURVEY 2006-2011 AND OTHER VARIABLES
Corruption Indicators
Utilities
Over the last two years, did this establishment submit an application to obtain an electrical
connection? (Yes/No/Don't Know)
In reference to that application for an electrical connection, was an informal gift or payment
expected or requested? (Yes/No/Don't Know/Refuse to Answer)
Over the last two years, did this establishment submit an application to obtain a water
connection? (Yes/No/Don't Know)
In reference to that application for a water connection, was an informal gift or payment expected
or requested? (Yes/No/Don't Know/Refuse to Answer)
Over the last two years, did this establishment submit an application to obtain a telephone
connection? (Yes/No/Don't Know)
In reference to that application for a telephone connection, was an informal gift or payment
expected or requested? (Yes/No/Don't Know/Refuse to Answer)
Licenses
Over the last two years, did this establishment submit an application to obtain a construction-
related permit? (Yes/No/Don't Know)
In reference to that application for a construction-related permit, was an informal gift or payment
expected or requested? (Yes/No/Don't Know/Refuse to Answer)
Over the last two years, did this establishment submit an application to obtain an import license?
(Yes/No/Don't Know)
In reference to that application for an import license, was an informal gift or payment expected
or requested? (Yes/No/Don't Know/Refuse to Answer)
Over the last two years, did this establishment submit an application to obtain an operating
license? (Yes/No/Don't Know)
In reference to that application for an operating license, was an informal gift or payment
expected or requested? (Yes/No/Don't Know/Refuse to Answer)
Tax
Over the last 12 months, how many times was this establishment either inspected by tax officials
or required to meet with them? (Scale)
In any of these inspections or meetings was a gift or informal payment expected or requested?
(Yes/No/Don't Know/Refuse to Answer)
Government Contract
Over the last 12 months, has this establishment secured a government contract or attempted to
secure a contract with the government? (Yes/No/Don't Know)
When establishments like this one do business with the government, what percent of the contract
value would be typically paid in informal payments or gifts to secure the contract? (Percentage)
127
All Payments
We’ve heard that establishments are sometimes required to make gifts or informal payments to
public officials to “get things done” with regard to customs, taxes, licenses, regulations, services
etc. On average, what percent of total annual sales, or estimated total annual value, do
establishments like this one pay in informal payments or gifts to public officials for this purpose?
(Percentage)
Business Controls
Quality Certification
Does this establishment have an internationally-recognized quality certification? (Yes/No/Still in
Process/Don't Know)
Auditing
In the last complete fiscal year, did this establishment have its annual financial statement
checked and certified by an external auditor? (Yes/No/Does Not Apply)
Top Manager Tenure
How many years of experience working in this sector does the top manager have? (Scale)
Environmental Variables
Pressure from Informal Competition
Does this establishment compete against unregistered or informal firms? (Yes/No/Don't Know)
Quality of Court System
I am going to read some statements that describe the courts and the way government officials
interpret laws and regulations that affect this establishment’s business. For each statement, please
tell me if you Strongly disagree, Tend to disagree, Tend to agree, or Strongly agree.
"The court system is fair, impartial and uncorrupted”
Pressure from Corruption
[T]ell me if you think that [Corruption] is No Obstacle, a Minor Obstacle, a Major Obstacle, or a
Very Severe Obstacle to the current operations of this establishment.
Transparency International Corruption Perception Index (Non WBES Scale)
Quality of Business Environment
World Bank's Ease of Doing Business Index (Non WBES Scale)
Economic Indicator
Gross Domestic Product per Capita (Non WBES Scale)
Control Variable
Size of firm (Small ≥ 5 ≤ 19/Medium = 20 ≤ 99/Large ≥100)
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QUESTIONNAIRE FOR COMPLIANCE PERSONNEL
1. What are the ways where management affects the quality of business controls (i.e.
auditing, financial practices, compliance) targeted to prevent corruption and other types
of corporate misconduct?
2. What are the ways where business controls can be designed or improved to minimize
negative effects of management?
3. What are the ways where the business environment affects the quality of business
controls?
4. What are the ways where the political environment affects the quality of business
controls?
5. What are the ways where business controls can be designed or improved to minimize
negative effects of the business environment?
6. What are the ways where business controls can be designed or improved to minimize
negative effects of the political environment?
7. What are the ways where the business environment affects management in regards to
preventing corruption and other forms of corporate misconduct?
8. What are the ways where the political environment affects management in regards to
preventing corruption and other forms of corporate misconduct?
9. What are the ways where management can be strengthened or improved to minimize the
effects of the business and political environment?
10. How do industry differences affect the issues previously discussed?
11. How do company size differences affect the issues previously discussed?
12. If your company conducts business overseas, are there any differences in how your
compliance strategy is conducted?
13. What factors such as events or legislation have been instrumental in affecting your
company's compliance strategy?