Do Stronger Laws Prevent Corporate Crime?

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

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

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

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

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