The higher up white-collar criminals are in a company, the less severely they are likely to be punished, with senior men typically treated most leniently of all, according to research presented at Victoria University of Wellington by Victoria Business School Advisory Board member Professor Paul M Healy.
The findings by Professor Healy, James R Williston Professor of Business Administration at Harvard Business School in the United States, and his Harvard colleague Jakurski Family Associate Professor of Business Administration George Serafeim come from their study of data from 667 companies around the world, including 24 in New Zealand.
Professor Healy and Associate Professor Serafeim’s paper Who Pays for White-collar Crime? documents “considerable variation in punishments meted out to senior perpetrators of white-collar crime” — with friendship and self-interest partly explaining how bosses handle criminals.
Some of the variation “is consistent with executives determining appropriate punishments through an analysis of costs and benefits to shareholders”, says the paper.
For instance, “allowing senior perpetrators to resign or quietly dismissing them (rather than publicly dismissing them and/or seeking legal action) may reduce the risk of legal action against the company in the form of criminal and civil fines, damages and sanctions”, and limit negative media exposure.
“Moreover, if the perpetrator is costly to replace, due to strong customer relationships or rich industry experience, which is more likely for senior perpetrators, short-term performance may deteriorate if the perpetrator is dismissed. The firm may then decide that even resignation or quiet dismissal is too costly, and opt to retain the valued senior perpetrator”.
Senior women perpetrators tended to receive similar punishments as junior perpetrators of similar crimes.
At the other end of the scale, “some companies appear to report crimes to regulators and make decisions on punishments that are unrelated to shareholder costs and benefits, consistent with their following a zero tolerance policy for white-collar crime.
“But the findings suggest that executives who mete out punishments are also influenced by self-interest. They issue lighter punishments to senior perpetrators, particularly senior males who are likely to belong to the dominant social network, and senior perpetrators of companies where multiple crimes have been detected during the past year, where it is more difficult to argue that the problem is ‘one bad apple’ and not a more systemic problem that affects the reputation and job security of senior managers”.
The variation in punishment is concentrated among crimes unreported to regulators (“where presumably management discretion is higher”), in firms with weak internal control systems (“where there may be less concern about crime”) and in countries where there is greater gender inequality (“where male social networks are likely to be strongest”).
Professor Healy and Associate Professor Serafeim’s study used data from accountancy firm PwC’s 2011 survey of global clients on their experiences with white-collar crime. From an initial 3877 responses, the data was refined to 667 companies that had experienced a crime in the past 12 months where the main perpetrator was an employee.
Companies’ responses were anonymous, ensuring there was little incentive not to report truthfully. Dominant sectors were financial services, retail services and manufacturing. The most frequent type of crime was asset misappropriation (79 percent), followed by accounting fraud and bribery (both 27 percent).
Companies dismissed the perpetrator in 78 percent of cases and pursued legal action in 40 percent, but only 17 percent reported the detected crimes to regulatory or legal authorities.
The study found that a one-step increase in seniority (from junior staff to middle manager or middle manager to senior executive) decreased the likelihood of punishment by around 23.5 percent. The likelihood of the most serious punishment (being dismissed and facing legal action) was 45 percent lower for senior executives than for junior staff.
However, the lower punishments for senior executives typically applied only to men. Senior women perpetrators tended to receive similar punishments as junior perpetrators of similar crimes.
“At these firms, some of their most successful employees were engaged in corruption – yet no one wanted to blow the whistle because they were afraid what that would mean for the organisation or their own careers.”
Further, in companies with a lot of crime, senior executives were 9.3 percent more likely to receive no punishment and nearly 12.4 percent less likely to be dismissed and face legal action compared with junior staff.
The tendency toward lower punishments for senior male executives and senior executives at companies with more crime was weaker in cases when crimes were reported to regulators, in companies with stronger internal controls, and in countries with less gender inequality (such as New Zealand).
Overall, write Professor Healy and Associate Professor Serafeim, these findings suggest that in companies and countries with weak governance decisions on the punishment of white-collar criminals are influenced by senior executives’ concerns about their own reputation and job security.
The importance of strong leadership and internal control systems was highlighted by New Zealander and Victoria alumnus Professor Healy on the recent return visit to Wellington where he presented the findings.
He drew on his case study of how one of the world’s largest companies, Siemens, succumbed to, addressed and recovered from corruption.
“If you don’t have a strong tone at the top and an effective control system in place, you risk employees taking short cuts that subsequently put the organisation at risk,” he said. “That was certainly the case at Siemens and a number of other organisations I have worked with. At these firms, some of their most successful employees were engaged in corruption – yet no one wanted to blow the whistle because they were afraid what that would mean for the organisation or their own careers.”