Thursday, October 26, 2006
Skilling and the Dark Side of the System: Temptations, Laws, and the Importance of a Systemic View on Corporate Scandals
Earlier this week, Jeffrey Skilling, former CEO of Enron, was sentenced to 24 years and 4 month in jail for his role in what has become to be known as the one of the biggest cases of fraud in the history of the
Coincidentally, I watched the excellent documentary on Enron “Enron: The Smartest Guys in the Room” just a couple of days before. This movie sets out in a very entertaining but still highly substantial way the history of Enron from its beginnings in the 1980s until its collapse. It is really highly recommendable!
There was just one thing that kind of bothered me: the whole film focused very much on the personality of the people that were involved in the fraud. At some point, the filmmakers suggest that the criminal activities of the Enron execs were somehow linked to their need to prove their manliness (they loved to show-off with scars they got during motorbike races etc.).
This completely blinds out the more systemic aspect of the Enron scandal. Maybe this criticism is not justified, because there are scenes in the movie that suggest that it was not just the problem of one isolated firm, but that the whole scandal implied more people then just the nerdy Enron execs. Thus, the involvement of all major
At least since Hanna Arendt’s book on the Eichmann trial in
In yesterdays’ Echo der Zeit – a Swiss radio show on DRS 1 – a study on white-collar crime in Switzerland that was carried out by PWC was quoted. It states that in 2003 25% of the Swiss companies were affected by some sort of white-collar crime (mostly though embezzlement and fraud). One year later, this proportion had risen to 33%. Another study, carried out by, KPMG finds even higher proportions.
The trend seems to be towards even more white-collar criminality in the future. Thus, the Swiss Federal Police Office identifies in its Report on Homeland Security 2005 – still according to Echo der Zeit – a particular risk of criminality in the hedge fund industry.
Recent examples of supposedly criminal behaviour by managers (most of them have not been sentenced yet) are many in
Again the legislator has undertaken steps in order to counter this development: A reform proposal of the Stock Corporation Law has been elaborated by the Federal Administration, a public supervisory agency on audit companies will take up its activities in 2007 and legal responsibilities concerning corporate fraud have been newly defined: since 2003, the company as a legal entity can be held responsible for crimes committed by its employees.
However, and that’s the point I want to get at, it seems that the problem – in
Thanks for the comment. Yes, liberalisation was indeed an important factor in the Enron story. Its initial success in the 1980s was very much linked to liberalisation and new trading technics. Also, the changes in the regulation of the Californian energy market was one major factor in explaining Enron's fall. Again, the movie gives an impressive account just how traders found loopholes and arbitrage possibilities in the Californian regulations.
Concerning the role of individuals and "psychological" factors in explaining the "misbehaviour" of execs I agree with you as well. In fact, if you look at Agency theory (Jensen and Meckling 1976), which suggest that it is just human to try to extract private benefits from situations where one has more information or more control over assets than others do. This view suggests, hence, that the individual matters very much: a very greedy person will be more eager to take advantage of its information advantages than a very integer person.
As a political scientist from the "Lausanne school" I'm reluctant, however, to attribute too much importance to psychological explanations. I'm probably wrong in doing so, but one reason is just that such factors are extremley tricky to handel in empirical research. "Manliness" for instance can be seen as a value that belongs to a certain system of values or to a culture. In that sense you're right, it actually is part of the systemic factors. Yet, such factors are very difficult to measure.
Anyway, there is some kind of renewed interest for what is called "leadership" or "personality" in political science. This approach puts the individual and its characteristics in the center of the analysis. Maybe these approaches could enrich the analysis of corporate scandals.
I just wanted add that this theory of action based on self-interested, opportunistic behaviour aiming at maxising one's personal (most often material) utility is not the only one. In organisational psychology and organisational sociology, theories of action have been developed that see non material factors such as personal satisfaction, recognition by peers etc. as main driver of managers action. In this perspective, it is harder, it seems to me, to explain managers' criminal behaviour. In fact, agency theory, suggests that people behave par défaut in irrespective of rules and values as long as they don't risk punsihment. In otherwords a manger will not care about legal and ethical values as long as the risk of being caught is outweighed by the benefits that he gets from his behaviour.
In the second approach, however, one would rather think that people would per se behave with integrity and opportunistic behaviour is rather the exception, which has to be explained by exceptional circumstances (such as important pressures for instance). Again, this doesn't mean that personality is not important in the latter view, but its just a bit more optimistic way of seeing people...
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