Corporate Wrongdoing Research Articles

Do organizational and political-legal arrangements explain financial wrongdoing?

The 2008 financial crisis was a systemic problem with deep-rooted structural causes that created opportunities to engage in financial malfeasance, a form of corporate wrongdoing. However, few quantitative studies exist on the effects of organizational and political-legal arrangements on financial malfeasance. In this paper, we examine the effects of organizational and political-legal arrangements that emerged in the 1990s in the FIRE sector (i.e., financial, insurance, and real estate) on financial malfeasance. Our historical contextualization demonstrates how changes in the political-legal arrangements facilitate the emergence of new corporate structures and opportunities for financial malfeasance. Our longitudinal quantitative analysis demonstrates that US FIRE sector corporations with a more complex organizational structure, larger size, lower dividend payment, and higher executive compensation are more prone to commit financial malfeasance.

Why Donnt General Counsels Stop Corporate Crime?

Corporate fraud is costly, involving hundreds of billions of dollars in lost reputational and out of pocket costs for stakeholders and hundreds of thousands of job losses for employees, suppliers and customers as well as loss of lives. To prevent fraud, general counsels (GCs) are charged as the gatekeepers for the corporation. They understand the law and they are expected to use their legal expertise to advise, intervene and report whenever they are suspicious of fraud. In spite of their legally-mandated central role, however, corporate counsels typically do not appear to discover any corporate wrongdoing. In this paper, we analyze the potential reasons why corporate counsels keep silent in the face of potential wrongdoing in their own firms and propose policy recommendations to better protect shareholders’ interests against self-dealing by top management.

The Pendulum Swings: Reconsidering Corporate Criminal Prosecution

Corporate crime continues to occur at an alarming rate, yet disagreement persists among scholars and practitioners about the role of corporate criminal prosecution. Some argue that corporations should face criminal prosecution for their misconduct, while others would reserve criminal prosecution for individual corporate officials. Perhaps as a result of this conflict, there has been a dramatic increase over the last decade in the use of deferred prosecution and non-prosecution agreements for some corporate crimes, even as the government continues to bring criminal charges for other corporate crimes. To move beyond our erratic approach to corporate crime, we need a better understanding of what is accomplished by the criminal prosecution of corporations, a construct that considers retributive and utilitarian theories but also takes into account the expressive function of criminal law and the societal need for condemnation, accountability, and justice when crime occurs.In this article, I provide a justification for corporate criminal prosecution that identifies the moral content of corporate crime, considers the deterrent value of corporate prosecution, and explains why the expressive value of the criminal law is indispensable in the corporate context. Corporate wrongdoing has pernicious effects on our communities, the economy, and the environment, which warrant the condemnation the criminal law provides. Criminal prosecution of corporations upholds the rule of law, validates the choices of law-abiding companies, and promotes accountability. Together those values contribute to our sense that justice has been done when crime occurs, which enhances trust in the legal system, provides the opportunity for societal catharsis, and allows us to move forward in the aftermath of criminal activity. When corporations face no consequences for their criminal behavior, we minimize their lawlessness, and increase cynicism about the outsized influence of corporations.

Corporate litigation and changes in CEO reputation: Guidance from U.S. Federal Court lawsuits

This study examines corporate litigation and changes in CEO reputation. Based on a sample of 9959 filed and settled environmental, antitrust, intellectual property (IP) and contractual lawsuits in the U.S. Federal Courts over the 2000–2007 period, we find that CEOs experience poorer reemployment prospects following contractual lawsuits. Additionally, reputational consequences depend significantly on the nature of the allegation and lawsuit merit. We also observe that IP lawsuits are associated with an increase in the number of outside board seats; no penalties follow politically sensitive environmental lawsuits. Overall, our findings contribute to the extant literature on market-based penalties for corporate wrongdoing.

The federal housing finance agency’s complaints against seventeen banks

Purpose – The purpose of this paper is to examine the basis of the complaints against banks which sold private label securities to Fannie Mae and Freddie Mac before the financial crisis. The examination shows that all but one of the cases was settled out of court. Nomura and RBS went to court, but the case against them was based on dubious evidence and on strict liability which only enabled the judge to set aside relevant evidence. The Securities and Exchange Commission’s evidence against senior executives of Fannie and Freddie shows that they deliberately purchased PLSs based on subprime loans to meet the government’s housing targets. Design/methodology/approach – The research was based on publicly available documents, including details of the Federal Housing Finance Agency’s (FHFA) complaints against the banks in question, the settlement agreements published by the DoJ, FHFA and SEC. Furthermore, it includes documentary evidence from the Financial Crisis Inquiry Committee and Senate Committees, the full transcript of the trial, opinions of the judge for the trial and the judgement. Findings – The findings are that many have concluded that settlements out of court fail to satisfy the demand for justice. They have been criticised as a trade-off between the prosecutor and the bank, with a view that the imposition of large fines is to pay back taxpayers’ money spent on rescuing the banks, rather than punishing those responsible. Such fines do little, if anything, to change the behaviour of banks. As a result, the Department of Justice issued a memorandum on 9 September to focus on individual accountability for corporate wrongdoing. It remains to be seen how many cases against senior executives will result from the change in direction. Research limitations/implications – The implications of the research are that it is important even in the aftermath of such a serious if not devastating financial crisis to ensure that the laws are properly applied and can stand up to any challenge that it has been stretched to obtain the results the administration of the day wants to see. In addition, care must be taken over both the imposition of large fines and the use to which the monies should be put. All the parties involved in bringing about the crisis should be held to account. The major cases against the banks have almost all been “resolved”. A change in direction has now taken place. Practical implications – The practical implications of holding individuals to account should now be tackled. It requires a careful examination of the laws and regulations already in place to ensure that it is clear within a bank as to who is responsible for what. It will only be possible to hold senior individuals to account if the laws are clear and if all the evidence is not hidden. It may also require a review of the contracts under which senior executives are employed, because to remove a person from his post and then find that he still has a large pension pot and bonuses due may not result in justice either. A delicate balancing act is required because banks require highly competent and motivated individuals to run them. Social implications – If a very large fine is imposed on a bank, the shareholders and customers pay. The shareholders will mostly own the shares through their pensions and their savings in mutual funds. Originality/value – There have been few studies of all the cases against the banks brought by the DoJ and FHFA and still fewer have recognized the fact that government housing policy was the source of the extent of the subprime mortgages.

Corporate Disorder and Wrongdoing

Wrongdoing in organizations is extensive and pervasive. It is also very costly. Corporate disorder creates conditions in the organization that can lead to wrongdoing. We explore two significant typ...

An Analysis of Penalties Under ASIC Administered Legislation: Scoping the Issues

This working paper is the first published output of an eighteen month (December 2014 – June 2016) research project conducted by staff at the Melbourne Law School that examines enforcement and penalties regimes under legislation administered by the Australian Securities and Investments Commission (ASIC). During 2015 and early 2016 the project will conduct a review of selected penalties over a ten year period from 2005 to 2014. This paper is an introductory publication that scopes the issues that will be examined in the course of the project. The paper begins with a brief overview of the project and identifies topics that will be considered as the project progresses. Part II discusses key findings in ASIC’s Report 387: Penalties for Corporate Wrongdoing which compares the penalties available to ASIC in relation to comparable regulators in other jurisdictions. Part III examines current debates about corporate wrongdoing and the adequacy of penalties, including the impact of recent parliamentary inquiries. Part IV explains ASIC’s regulatory and enforcement functions and briefly discusses the policy rationales that underlie such functions. Part V presents a preliminary set of data on ASIC’s enforcement activity sourced from its six monthly Enforcement Reports. Part VI makes initial observations in relation to comparable financial market regulatory agencies in other jurisdictions by reference to various criteria, including funding models. Part VII concludes the working paper.

Survey of Public Attitudes to Price Fixing in the UK, Germany, Italy and the USA

This paper reports the results of four surveys gauging public attitudes to price fixing and cartel enforcement in the United Kingdom, Germany, Italy and the United States. A previous study was carried out in the UK in 2007. The results show a robust understanding that price fixing is harmful and popular support for enforcement and punishment. In particular, there is an expectation that businesses should calculate their prices independently of each other. Overall there is surprising uniformity in opinion between the four jurisdictions despite significant differences in culture and levels of enforcement. Support for the imprisonment of cartelists has significantly increased in the UK since 2007, but the results suggest price-fixing is still viewed as being less serious than traditional crime and some other forms of corporate wrongdoing.

Corporate litigation and executive turnover

We examine executive turnover following environmental, antitrust, intellectual property (IP), and contractual lawsuits filed against their companies. We find that companies' responses to lawsuits depend on the nature of the allegations. In particular, contractual lawsuits are followed by increased turnover of CEOs and inside directors, whereas following environmental and IP lawsuits, only outside directors tend to depart. Antitrust lawsuits are followed by increased appointments of inside directors. We also find that lawsuit merit and pecuniary demands for damages play a role in determining executive turnover. In addition, we find some evidence of reduced CEO compensation following lawsuits. Overall, we provide insights into the effectiveness of the executive labor market in responding to alleged corporate wrongdoing.

Saving face? When emotion displays during public apologies mitigate damage to organizational performance

In the wake of corporate transgressions and scandals, how do apologizers’ expressed emotions affect investors’ perceptions of the organization in question? We analyzed the market effects of normative versus deviant facial affect expressed during apologies for corporate wrongdoing. Archival data revealed that the expression of deviant affect was associated with decreased investor confidence in the form of negative stock market returns; adverse financial effects persisted up to three months post-apology. Moreover, this effect was exacerbated when a company representative with greater responsibility within the organization delivered the apology. Experimental data further revealed that third parties interpreted deviant affect (smiling) as a signal of insincerity, which reduced their confidence in these representatives’ organizations. Ultimately, we find that subtle emotion expressions are detected by stakeholders, signal insincerity, and have important consequences for organizations. We suggest that organizations must carefully consider the nonverbal behavior of apologetic representatives in the wake of transgressions.

A Walk on the Dark Side: Corporate Wrongdoing in Non-Market Arenas

From the Enron scandal of the 90s to the more recent financial crisis, the misdeeds of firms are a frequent topic of media and scholars, alike. While a growing stream of research examines firm misc...

National Culture and Internal Control Material Weaknesses Around the World

The scandals surrounding questionable accounting practices and corporate wrongdoing during 2000-2008 have often been attributed to the lack of effective internal controls. We examine the relations between national culture and the incidence and number of reported internal control material weaknesses (ICMWs). We focus on three dimensions of national culture—individualism, uncertainty avoidance, and power distance (as identified by Hofstede)—which we hypothesize are related to ICMW. Consistent with our hypotheses, cross-country analysis indicates that individualism and power distance are positively related, and uncertainty avoidance is negatively related, to the existence of ICMW. We also find a significant positive relation between individualism and the number of ICMWs. These results are robust to a variety of sensitivity tests. In addition, we document that all three dimensions of national culture influence the propensity to remediate previously identified ICMW.

National Culture and Internal Control Material Weaknesses Around the World

The scandals surrounding questionable accounting practices and corporate wrongdoing during 2000-2008 have often been attributed to the lack of effective internal controls. We examine the relations between national culture and the incidence and the number of reported internal control material weaknesses (ICMW). We focus on three dimensions of national culture, individualism, uncertainty avoidance, and power distance (as identified by Hofstede (2001)), which we hypothesize are related to ICMW. Consistent with our hypotheses, cross-country analysis indicates that individualism and power distance are positively related, and uncertainty avoidance is negatively related, to the existence of ICMW. We also find a significant positive relation between individualism and the number of ICMW. These results are robust to variety of sensitivity tests. Additionally, we document that all three dimensions of national culture influence the propensity to remediate previously identified ICMW.

Enhancing the Accountability of Transnational Corporations: The Case for ‘Decoupling’ Environmental Issues

The lack of accountability of transnational corporations (TNCs) for any harmful behaviour in the fields of environment, labour and human rights is a concern for the global community. Despite various attempts, neither the United Nations nor the home or host countries of most TNCs have so far provided any effective, binding solutions. This article argues that an important reason for the lack of advancement in introducing greater accountability is because issues such as workers' rights, the environment and human rights are often discussed together. A new approach, one that is solely focused on protecting the environment, is desirable especially with the rise of new capital exporters. In 2013, China detached the issue of the environment from those of workers' or human rights, in its attempt to tackle overseas corporate wrongdoing. Its environmental guidelines are worth emulating, but it lags behind in areas such as human rights. Analysing the position of the environment among the other fields involved in the debate, we first identify several theoretical reasons for detaching the former from an international law perspective. We then provide a comparative functional analysis of four extraterritorial corporate social responsibility Bills – those in the United States (2000), Australia (2000), the United Kingdom (2002) and Canada (2009) – all of which were rejected by their national parliaments. This lends additional support to the thesis that including the environment with other targeted fields stands in the way of home countries improving the environmental behaviour of their overseas corporations.

Was Kiobel Detrimental to Corporate Social Responsibility? Applying Lessons Learnt From American Exceptionalism

The recent decision in the US Supreme Court Kiobel case applied the presumption against extraterritoriality towards the Alien Tort Statute, decreasing the potential scope of tort actions that can be made against corporations for severe human rights violations. In light of the growing influence of multinational corporations and the lack of any international law regime to regulate corporate wrongdoing, this decision might be seen as a blow against one of the few potential avenues for justice for those victims of corporate human rights violations. The Alien Tort Statute is not a jurisdictional statute that allows for claims under international law but is rather a uniquely American cause of action unconnected to international law. The question remains whether an extension of American law to provide remedies for severe corporate human rights abuses can be justified in the absence of any such remedies existent in international law. This article will attempt to answer this question applying criteria developed by leading scholars in response to American exceptionalism. It will argue that the Kiobel decision, rather than being detrimental to holding corporations accountable, actually addresses many of the negative aspects of extraterritorial litigation whilst preserving some possibility of remedy for victims of severe human rights violations by corporations.

Enforceability of Mandatory Arbitration Clauses for Shareholder-Corporation Disputes

Investor litigation is an increasingly vexatious field of law. Nearly every time a significant change of control or corporate ownership occurs, plaintiffs’ attorneys file standardized complaints to set in motion class action suits. Ultimately, the settlements shareholders receive fail to achieve the practical effects that parties on both sides desire. Shareholders may receive pennies on the dollar of what they allege was lost by corporate wrongdoing, and, in some cases, shareholders may not receive monetary recovery as the settlement requires only that the corporation to make changes to its governing documents. These suits distract directors and management from the core operational aspects of their business. Corporations will pay enormous fees to attorneys and experts to defend against the suits. Often times, as a result of director and officer liability insurance, neither corporations nor directors pay damages out of pocket, making it unlikely that the suits serve a deterrent function, one of the principal policy goals behind allowing for such suits.

"Market Manipulations: Quilts, Patches, Stitches and the Understanding of Patterns of Misconduct"

With two major recent rounds of scandals, studies of corporate wrongdoing have proliferated. Yet we still lack comparative social scientific understandings of the most common forms of fraud. In thi...

When the Ivory Tower Is Toppled by Reality: The Case of Corporate Social Responsibility Research

For decades I tracked and filed information from many different sources on corporate wrongdoing, both the unethical but legal kind (all wrongdoing is unethical and some of the worst of it is made legal by a subservient government) and the illegal kind. After I retired as an industrial–organizational (I–O) psychologist I expanded substantially my archival research and eventually wrote two books that are very pertinent here.

Corporate Wrongdoing and the Art of the Accusation. By Robert R. Faulkner. New York: Anthem Press, 2011. Pp. x+192. $99.00 (cloth); $32.95 (paper).

Previous articleNext article No AccessBook ReviewsCorporate Wrongdoing and the Art of the Accusation. By Robert R. Faulkner. New York: Anthem Press, 2011. Pp. x+192. $99.00 (cloth); $32.95 (paper).Harland PrechelHarland PrechelTexas A&M University Search for more articles by this author PDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by American Journal of Sociology Volume 119, Number 3November 2013 Article DOIhttps://doi.org/10.1086/672946 Views: 26Total views on this site For permission to reuse a book review printed in the American Journal of Sociology, please contact [email protected]PDF download Crossref reports no articles citing this article.

Understanding Corporate Compliance and Wrongdoing in Interdisciplinary Context

The prevention of wrongdoing, both civil and criminal, is a growing preoccupation of businesses. The academic study of such compliance and potential wrongdoing is also a growth industry. However, much like a decentralized firm with various subunits that do not communicate efficiently with each other, academic research across fields has remained in various silos. Insights, both empirical and theoretical, in economics, finance, accounting, strategy/management and law often cover similar issues regarding compliance and corporate wrongdoing. While the frameworks, data and specific research questions may vary across disciplines, overall work in one field does not cross over into others to better inform research across each of these fields. This essay introduces new research into the topic of corporate compliance and wrongdoing in interdisciplinary context.