-Caveat Lector- from: http://blue.temple.edu/~eastern/jones.html <A HREF="http://blue.temple.edu/~eastern/jones.html">http://blue.temple.edu/~east ern/jones.html</A> ----- PERPETRATORS IN THE MARKETPLACE: A REVIEW OF EMPIRICAL RESEARCH IN CORPORATE CRIME Ray Jones University of Pittsburgh ABSTRACT A review of the empirical research on corporate crime provides an interesting answer to the question, "What happens when business violates the law?" The review of the research examines the principles, processes and outcomes of corporate crime to show how this type behavior is influenced, how it occurs and how it affects business and society. The analysis identifies a number of possible areas in which future research is needed on the principles, processes and outcomes of corporate crime. PERPETRATORS IN THE MARKETPLACE: A REVIEW OF EMPIRICAL RESEARCH IN CORPORATE CRIME Researchers in a variety of fields are interested in explaining what occurs when businesses violate the law. A great deal of research, both theoretical and empirical, has been conducted on a vast number of business crime-related topics. The research in this area has provided some interesting answers to the basic question, "What happens when business violates the law?" This paper will review the theoretical ideas which drive research in this topic area, and will then systematically analyze the empirical research on this subject using Wood's (1991) principles, processes and outcomes approach. This review will attempt to explain the motivations which influence, the actions which produce and the outcomes which stem from illegal behavior by business. Finally, Wood and Jones's (1995) concept of stakeholder matching will be used a heuristic to suggest avenues of future research in the field. In the end, answering the question "What happens when business violates the law?" will explain the role of perpetrators in the marketplace. Wood's Model as a Framework In order to answer the question, the role of perpetrators in the marketplace must be identified and analyzed systematically. Wood's Corporate Social Performance (CSP) model provides a useful framework for examining this topic because it allows one to evaluate how business behavior meets social expectations. This model is based on the principles, processes and outcomes framework. Principles refer to the principles of corporate social responsibility which emphasize expectations placed on business as an economic institution, expectations placed on specific firms and expectations placed on individuals as agents of a firm. This is the normative and motivational component of corporate social performance. Processes refer to processes of corporate social responsiveness which emphasize environmental assessment, stakeholder management and issues management. This is the "action" dimension of corporate social performance. Outcomes refer to the social impacts of policies, programs and operations, which are "...observable and open to assessment (Wood, 1991: 711)." This approach will be particularly useful in evaluating the empirical research on business crime-related topics, since it will organize the findings in a manner which will suggest what influences illegal behavior, how this behavior occurs and its various impacts. EMPIRICAL RESEARCH ON CORPORATE CRIME There are a number of theoretical streams in the study of corporate crime and illegal corporate behavior which provide an interesting theoretical context for the systematic review of the empirical research in this area. The idea that social factors are antecedents of corporate crime (Ermann and Lundman, 1978; Vaughan, 1984; Wokutch and Spencer, 1987; Daboub, Rasheed, Priem and Gray, 1995) establishes the relevance of examining empirical research on the principles of corporate crime. It will be interesting to examine how the research has depicted institutional, organizational and individual level expectations for behavior, and how these expectations serve as normative influences for actual behavior. The idea that organizational structures and processes are subtle yet important determinants of illegal corporate behavior (Clinard and Yeager, 1980; Baucus, 1989; Hill, Kelley, Agle, Hitt and Hoskisson, 1992 ) established the necessity of reviewing the empirical research on the processes of corporate crime. It will be interesting to examine how the research has identified environmental assessment, stakeholder management and issues management processes, and how these processes show the firm's level of responsiveness to organizational and environmental characteristics in regard to illegal behavior. Finally, the idea that illegal behavior has consequences on a firm's financial performance (Becker, 1968; Coffee, 1980; Karpoff and Lott, 1993; Frooman, 1994) established the usefulness of analyzing the empirical research on outcomes of corporate crime. It will be interesting to examine how the research has identified how this behavior produces social impacts, programs and policies, and how these outcomes affect society as a whole. In order to evaluate the empirical research in this area, the following questions will be asked and answered for each facet of CSP: �Does the empirical research adequately identify the necessary components of the particular facet of the CSP model? �What do the findings reveal about this subject? PRINCIPLES What the Research Identifies There are two main streams of empirical research in corporate crime which address the issue of social factors as antecedents of illegal behavior. The work on attitudinal antecedents suggests how individual attitudes drive this behavior, while the work on prior criminal violations as an antecedent suggests how criminal behavior is normatively influenced by prior illegal activity. Individual Expectations. TABLE 1 is a depiction of how criminal behavior in organizations is influenced at the individual level. Researchers are interested in examining the influence of such individual factors as ideology, perceptions of causality and perceptions of the firm's reputation on illegal behavior. As the table shows, however, they have not been able to produce consistent results. The lack of any consistency in the findings shows that researchers have not been able to show evidence of a direct link between individual attitudes and corporate crime. Organizational Expectations. TABLE 2 clearly shows that firms which have a history of committing illegal activities are likely to commit similar activities in the future. Firms which have committed illegal activities in the past, therefore, are likely to develop a predisposition to commit such behaviors in the future. Institutional Expectations. No empirical research has been conducted which shows the institutional expectations which influence the likelihood of firms engaging in illegal behavior. While this topic is a primary focus in the theoretical work in this field, it has not been addressed empirically. INTERPRETATION OF THE FINDINGS The empirical research on the principles which influence corporate crime is largely incomplete. The findings in regard to individual/attitudinal antecedents have yet to yield any meaningful results, and no empirical work has addressed institutional antecedents. The research on prior criminal violations as an organizational antecedent to corporate crime has potential, in that it consistently shows that firms who violate the law essentially develop a norm which makes such behavior acceptable. The study of prior violations gets difficult, however, when one considers the firm's motivations for repeating this behavior. Does recidivism occur simply when the firm's initial illegal activities were profitable for the firm, or do firms simply commit illegal behavior because of a disregard for the legal and societal standards which are meant to deter such behavior? It is also unclear as to whether recidivism is the product of "bad' companies, "bad" industries, "bad" products and/or "bad" people. This research does not propose where the influence to be recidivist come from. In short, this straightforward measurement of patterns of recidivism does not explain how this is an antecedent to illegal behavior. It is simply evidence that firms which commit illegal activities in general show a predisposition for committing the same violations in the future. The empirical research on the principles which influence corporate crime has another major flaw, the fact that the research which has been conducted focuses solely on what influences corporate crime. No empirical work addresses the societal expectations for individual, organizational and institutional behavior which deter corporate crime. There is no empirical study which addresses the simple question, "What causes firms not to behave illegally?" or "What causes firms to behave legally?" PROCESSES What the Research Identifies There are three main streams of empirical research in corporate crime which address the organizational structures and processes which influence illegal behavior. The work on financial performance as a predictor of illegal behavior shows how a firm's interpretation of an issue (its bottom line) drives the legality of its activities. The work on firm size and illegal behavior and on environmental influences and illegal behavior show how a firm's perception of its organizational and environmental characteristics influences its behavior. Issues Management. TABLE 3 shows how firms deal with one of the major issues faced by a firm - its financial performance. The idea that financial performance is a primary determinant of the likelihood of a firm committing criminal behavior has basically been "dismissed" in the empirical literature. This has been an explicit focus of Melissa Baucus in her 1989 and 1991 pieces. In regard to performance, it may be possible to show a relationship between a firm's growth rate and the likelihood of committing illegal behavior. The problem with this relationship is that the direction of this relationship is both theoretically and empirically muddled. Clinard and Yeager (1980) found that firms experiencing low growth rates are more likely to exhibit criminal behavior than firms with high growth rates. Cochran and Nigh (1987), on the other hand, found the opposite in their analysis. It is probably most accurate to state that there may be a relationship between growth rate and the likelihood of criminal behavior - but that this relationship needs further theoretical consideration and empirical development and analysis. In the end, the findings from TABLE 3 indicate that there is no consistent relationship between the "bottom line" of financial performance and the likelihood of criminal behavior. Environmental Assessment. TABLE 4 shows how firms' assessments of their size influence their illegal behavior. This is one of the few areas in the empirical research on corporate crime which has produced consistent findings. The relationship between large sized firms and the likelihood of perpetrating illegal behavior has been established an replicated. Quite simply, there is consistent support for the idea that large firms are more likely to commit criminal activities than small firms. Despite the fact that there are consistent findings, there have been a number of interesting challenges to this research which suggest that the relationship between size and behavior is much deeper than a simple linear relationship. For example, while Clinard and Yeager (1980) found a relationship between size and likelihood of illegal activity, these findings were not nearly as strong when they adjusted their data to account for "relative size" (number of violations per unit). Another interesting factor which muddles this research is the issue of diversif ication. Firms which are large, and are highly diversified are more likely to commit violations than firms which are large but are not highly diversified (Cochran and Nigh, 1987). In addition to these basic challenges, the concept of size has also been challenged. Hill et al. (1992) examined size related variables through an examination of the relationships between more complex factors such as decentralization, breadth of control and incentive systems. They found stronger relationships between these factors and the likelihood of perpetrating illegal behavior than in the strict linear relationship between size and the likelihood of illegal behavior. TABLE 5 shows a more direct and specific measure of the relationship between environmental assessment and illegal behavior. There is a somewhat consistent relationship in the empirical literature on corporate crime between environmental influences and illegal behavior. The most frequently measured dimension of environmental influences on illegal behavior is scarcity/munificence. The basic premise behind this relationship is that firms which face scarce environments are more likely to commit illegal behavior than firms in munificent environments. There have been a few studies which have examined the influence of dynamism and heterogeneity on the likelihood of illegal behavior (Staw and Szwajkowski, 1975; Baucus, 1991). The problem with these studies, however, is that they simply take measures of environmental performance and apply them to corporate crime. The theoretical support for the relationships between these factors and illegal behavior is typically lacking. In fact, researchers typically suggest that the empirical research will be a means of discovering and defining these relationships, since it is often unclear as to whether illegal behavior is more common in scarce or munificent environments. Stakeholder Management. There are no empirical studies of how stakeholder management processes affect the likelihood of illegal behavior. The empirical research on processes which influence corporate crime tends to focus solely on how firms manage their characteristics and perceptions of their environments (rather than on their management of stakeholder relationships) in regard to illegal behavior. INTERPRETATION OF FINDINGS The empirical research on processes of corporate is limited but promising. The issues management research on financial performance as an influence on illegal behavior is interesting because it is an attempt to see if the way a firm deals with a major issue (financial performance) affects the likelihood of illegal behavior. While this research has not produced any consistent findings, it has established the possibility of examining how a firm's management of particular issues involves the perpetration of illegal behavior. While the empirical work on issues management is in its infancy, the empirical work on environmental assessment processes and corporate crime is already yielding some interesting findings. The fact that a firm's perception of its size and its perception of the munificence/scarcity of its environment impact the likelihood of illegal behavior has been established (and even challenged). Both of these topics will remain important areas of inquiry into the future. It is also important to point out that the environmental assessment processes which have been studied (scarcity, munificence, dynamism and heterogeneity) all describe characteristics of a firm's environment. Focusing solely on these measures of environmental characteristics limits the possibility of the influence of other aspects of the environment. For example, boundary spanning is an interesting concept because it deals not with a characteristic of the environment, but with the firm's awareness of what is occurring in its environment. Firms with high level of boundary spanning activity are generally more aware of their environments than firms with low levels of boundary spanning activity. Gricar (1983) found that firms with high levels of boundary spanning activity were more likely to be responsive to regulation than firms with low levels of boundary spanning activity. This shows that the possibilities for more in-depth research on the relationship between environmental assessment and corporate crime are promising. The main limitation of the research on the processes of corporate crime is that it has yet to consider this behavior in the context of stakeholder management. It would be interesting to study how illegal behavior fits in the realm of stakeholder management because corporate crime and illegal business behavior are common business practices. It seems highly logical to consider how this common form of behavior impacts a firm's stakeholder relationships. OUTCOMES What the Research Identifies There are three main streams of empirical research which address the consequences of illegal behavior in regard to a firm's financial performance. The work on product recalls and their effect on financial performance show the outcomes of a program based on the illegal activity and/or negligence of a firm. The work on consumer harm and financial performance shows how a firm's irresponsible and/or criminal policies toward consumers have negative financial outcomes. Finally, the work on how specific forms of illegal behavior (typically anti-trust activities) have negative financial outcomes is an interesting measure of the financial impact of illegal behavior. Social Programs. TABLE 6 shows how firms that engage in programs which identify their illegal behavior and/or negligence suffer negative financial consequences.The empirical work on the influence of product recalls on a firm's financial performance is interesting because there is a consistent relationship between the announcement of a variety of types of recalls (pharmaceutical, automobile and consumer products) and negative financial performance. Social Policies. TABLE 7 shows how firms which have irresponsible and/or criminal policies toward consumers suffer negative financial consequences. This shows how stockholders react negatively when they become aware of instances in which firms harmed consumers. Stockholders essentially "back away" from companies which are identified for harming consumers. It can be argued that the harm of consumers is evidence of a negative social policy, since a firm must choose to be negligent in order for product harm to occur. Since product design is intentional and firms generally tests their products before putting them on the market (Frooman, 1995), a firm which produces products which are not safe for human use or consumption, or whose design places consumers at an unjustified risk for injury is essentially operating with a socially irresponsible policy. The firm exhibits a belief that it is not concerned with the safety of consumers in its business activities. This research shows that society punishes firms for such behavior through the market. Social Impacts. TABLE 8 shows how firms which commit specific illegal activities suffer negative financial consequences. This body of empirical research shows a consistent and significant relationship between firms who commit antitrust violations and negative financial performance. This indicates that stockholders and society alike view antitrust activities as serious legal and/or ethical violations. It can be argued that this is a direct measure of the impact of illegal behavior, since society and stockholders expect firms who are subject to conform to these regulations (Frooman, 1995). Thus, the firms who do not uphold antitrust regulations are viewed as willful violators of the law. Businesses are held accountable by stockholders, society and government alike not to violate antitrust regulations. Firms which do choose to violate antitrust laws (and are detected for doing so) will be punished by society through the market. Interestingly enough, however, two studies in the area of negative environmental performance (Viscusi and Hersch, 1990 and LaPlante and LaNoie, 1994) have shown a relationship between negative environmental performance and positive financial performance. This may indicate that society (particularly stockholders) do not view negative environmental performance as "corporate crime". It may simply be indicative of the view that stockholders prefer firms which wait before responding to environmental regulations or complying with environmental mandates. INTERPRETATION OF THE FINDINGS The empirical research on outcomes of corporate crime has produced strong evidence in one of the most interesting and identifiable outcomes areas - financial performance. The key aspect of these studies of outcomes is that unlike the empirical research on principles and processes of corporate crime, illegal and criminal behavior is the independent (rather than dependent) variable. This research is fascinating because it shows a consistent and significant relationship between a variety of illegal programs, policies and behaviors and negative financial performance. This research does not suggest, however, whether society and stakeholders perceive product recalls, consumer harm and antitrust/illegal behavior as socially irresponsible. In fact, it can be argued that what may be going on is that not punishment of socially irresponsible behavior and/or criminal behavior, but rather punishment of behavior which society and stockholders simply consider to be poor business performance (see Frooman, 1995). The positive relationship shown between negative environmental performance and positive financial performance lends credence to this idea, because it shows how stockholders essentially reward firms who commit illegal/socially irresponsible behavior. It can be argued that these firms are rewarded because their questionable activities have a positive contribution to their performance. It may be the case, therefore, that firms are only punished when the questionable activities are viewed as having negative consequences on the firm's bottom line. In addition to questioning the nature of the findings on the outcomes of corporate crime, it must be emphasized that the empirical research in this area has strictly limited itself to how illegal behavior has negative financial consequences for firms. There has not been any consideration of how corporate crime and illegal behavior have legal, ethical and discretionary outcomes for the firm and no consideration of how corporate crime can affect society as a whole. The lack of research in these areas is particularly glaring, due to the fact that this area of CSP is supposedly the most observable and open to assessment (Wood, 1991). There is no empirical work, therefore, which addresses the basic question, "How does corporate crime affect society as a whole?" It is also worth noting that one of Eugene Szwajkowski's most interesting criticisms of research in his 1986 review of the field in Research on Corporate Social Performance and Policy has yet to be addressed. He pointed out that there was a tremendous theoretical and empirical void in regard to discussion and measurement of the severity of harm of corporate criminal behavior. This criticism, and his point that the harm produced by corporate violations should be compared with the harm produced by other types of non business criminal behavior (for example, robbery and arson), have not been considered in subsequent empirical studies. AVENUES OF FUTURE RESEARCH The Fatal Flaw The review of the empirical research on principles, processes and outcomes of corporate crime has shown how this work has improved the understanding of what motivates corporate crime, how it occurs and what effects it has. This review has also shown that there are a number of areas in which substantial new research could be undertaken. Before making specific suggestions as to what could be done, it is first necessary to point out what can be considered the "fatal flaw" of both the research which has been and can conceivably be done in the future. This will show the limitations of what future research can expect to accomplish. The "classic" problem of the empirical research on corporate crime is that empirical measures are based almost exclusively on firms who were caught committing illegal activities. This focus on firms who were detected leads to the basic challenge: "Are researchers simply measuring the most inept or most unlucky corporate criminals?" In other words, if researchers focus solely on those firms that are detected, the realm of illegal corporate behavior does not include the firms who commit illegal activities which are never detected. Research on corporate crime, therefore, has not been able to answer the basic question, "How much criminal activity occurs in business?". Due to the simple fact that the behavior being studied is illegal, it is difficult to imagine a solution to this measurement problem. As legal scholar John Coffee so aptly suggests, there is "no soul to damn or no body to kick" when corporate crime is perpetrated (1981). Since there is no "soul" or "body", how can corporate crime be measured through any other means than studying firms which have been caught? Attempting to examine behavior illegal behavior beyond that which has been developed would either entail researchers developing a means of detecting criminal behavior which has not been detected by the proper authorities or would entail "confessions" of illegal behavior on the part of perpetrators. A researcher developing a means of detecting the undetected is unrealistic, since it does not seem logical that a researcher or team of researchers could put forth a greater monitoring effort than those currently employed by government agencies, lawmaking and law enforcement bodies. Getting perpetrators to "admit their sins" also seems unlikely, since a perpetrator would essentially have to choose to admit an activity which could have grave personal and/or organizational consequences. Quite simply, the flawed measure of corporate crime as a the number of detected violations is the only feasible and attainable measure of corporate crime; which makes it the best measure of corporate criminal activity which researchers can hope to achieve. Apparently, this fatal flaw must be accepted. Stakeholder Matching The problem of the fatal flaw notwithstanding, there is a vast potential for innovative and important research on corporate crime and illegal business behavior. One of the keys to generating such research is Wood and Jones' concept of stakeholder matching of variables in empirical research in CSP (1995). Stakeholder matching refers to the idea that empirical research in CSP should be based on valid "matches" of stakeholder relationships. A stakeholder relationship should reflect stakeholders who set expectations for performance, stakeholders who experience the effects of performance and stakeholders who evaluate the outcomes of performance. It will be interesting to examine the potential for future research on the principles, processes and outcomes of corporate crime through the context of stakeholders who set expectations, experience effects and evaluate outcomes. This work promises to clarify and probe deeper into the role of perpetrators in the marketplace. Principles Normative expectations are set by a wide range of actors. Individuals have expectations in regard to illegal behavior, as do firms and their relevant stakeholders. It is also important to emphasize that their institutional expectations set by society. Firms (and individuals within firms) experience the effects of normative expectations. The impact of these expectations is judged by the firm, its stakeholders and society. In order to thoroughly examine principles of illegal behavior, therefore, these issues must be taken into account. Researchers should focus on studying the types of norms which are developed (at the individual, organizational and institutional level) and then analyze how firms respond to these norms. Finally, researchers should be concerned with judging the impact of these norms. For example, if a firm is in a setting where it is acceptable to behave illegally, researchers should be concerned with how this norm of accepted illegality influences behavior. Processes The expectations concerning processes of illegal behavior are set both internally by the firm and in its external environment, in that the types of activities undertaken by a firm in regard to illegal behavior are motivated by endogenous and exogenous forces. A firm's stakeholder network is the primary set of actors who experience the effects of a firm's illegal behavior processes. Firms evaluate the effects of the processes by determining whether these processes led to favorable or unfavorable outcomes. A firm's stakeholder network also evaluates the outcomes of the firm's use of these processes. When studying processes of illegal behavior, researchers should study how firms determine what processes they will use when engaging in illegal behavior. Researchers should also focus on how the use of these processes affects the firm's stakeholder relationships. Finally, the use of these processes should be judged according to how they can be "managed" to produce outcomes which affect the firm's performance and the firm's stakeholders. Outcomes The expectations which define the "acceptability" of outcomes of illegal behavior are set both by the firm an by society. Acceptability refers to the nature of the outcome, in that the outcome of a particular illegal behavior can either be judged as bad (unethical) behavior and/or bad (inferior) performance. It is also worth noting that an outcome of illegal behavior could potentially be judged favorably both by the firm and/or society. The outcomes of illegal behavior are experienced by the firm, its stakeholder network and society as whole. Those actors who experience the effects of the outcomes of a firm's illegal behavior also have the opportunity to evaluate these The outcomes of a firm's illegal behavior should focus on the nature of the outcomes. When are these outcomes positive and when are these outcomes negative? In addition to this basic judgment of right and wrong, researchers should focus on determining when negative outcomes are unethical and when negative outcomes are simply an indicator of inferior business performance. It is also important to identify and analyze the specific effects of the outcomes of illegal behavior. How are firms, stakeholders and society positively and negatively affected by illegal behavior? Finally, the severity of harm of a firm's illegal behavior should be judged (and compared with the severity of harm produced by other types of non business-related crimes) to show the true impact of corporate crime and illegal business behavior on society. THE ROLE OF PERPETRATORS IN THE MARKETPLACE This paper began by posing the question, "What happens when business violates the law?" The principles, processes and outcomes approach to this subject has shown how corporate crime and illegal business behavior is influenced, how it occurs and its effects. In regard to principles, social factors are important antecedents of the illegal behavior of business. While the existing research on this topic is incomplete and inconclusive in regard to explaining what causes and deters such behavior, researchers can address this topic area by focusing on the types of norms which influence illegal behavior, how firms respond to these norms, and how these norms have a wide range of impacts. In regard to processes, organizational structures and processes are important determinants of illegal behavior. While the existing research in this area is limited, it has shown that organizational size and environmental processes affect the likelihood of illegal behavior. In order to further develop this area, researchers should examine how firms choose specific processes, how these processes influence a firm's stakeholder relationships and the specific outcomes of the management of processes. In regard to outcomes, illegal behavior has negative consequences on firms and society as a whole. While the existing research has shown strong evidence that being detected for committing illegal behavior results in negative financial performance, additional research must be conducted on the social outcomes of illegal behavior. In order to further develop this area, researchers should focus on judging the nature of outcomes and examining the effects of specific impacts, programs and policies. 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