Once a Fraud, Always a Fraud?

Ever wonder how Corporates get into the habit of malpractice? Researchers Prof. Qinqin Zheng of School of Management Fudan University and Rosa Chun trace the origin of the issue as they delve deep into what pushes some companies into the practice of misconduct in emerging economies

By CoBS editorialist Kunal Ganorkar based on the research paper ‘Corporate Recidivism in emerging economies’ by Qinqin Zheng and Rosa Chun

We have all heard of Volkswagen being caught cheating on emission tests and being fined billions of dollars. Or about Wells Fargo being fined for hosting millions of fake accounts. Numerous are the companies that have indulged in unethical or illegal behaviour to pursue financial gains. Thankfully, we have regulatory bodies to keep them in check through hefty fines. However, some companies just never learn and repeat these malpractices time and again. This is where recidivism comes into play.

As such, corporate recidivism is seen in a much darker light than an isolated incidence of misconduct. Not only does it harm the offending company’s reputation but it also has a negative impact on those around it and society at large. Needless to say, it also attracts the heftiest of fines.

Despite this, we still observe companies engaging in recidivism. This is especially so in the context of an emerging economy such as China. This begs the question – why is it so prominent in developing economies and what causes companies to engage in it? Prof Qinqin Zheng of School of Management Fudan University and her colleague Rosa Chun have identified, through their research in over a thousand companies, three main factors.

Because that’s how we do it here

The first of these is something that Prof Zheng calls Internal Preconditioning. This refers to the traditions, habits and the way of doing things that, in a way, influence a company’s behaviour. Major preconditions can include internal factors such as financial disposition, corporate culture and leadership. In addition, because companies’ future actions or decisions rely on what path they took in the past, it is difficult to change these practices once they manifest. As such, firms continue to walk the road of malpractice, thus engaging in recidivism.

In the context of emerging countries, financial gain is seen as priority. So, when companies encounter financial difficulties, this stressful preconditioning motivates them to prioritize financial responsibility over other objectives such as environmental concern and ethics. This means that firms are more likely to resort to corporate malpractice which may eventually translate into recidivism.

To go with the flow

The future has always been undetermined for anyone and almost every decision is made under imperfect knowledge, be it an individual or a company level. As such, in order to cope with uncertainty and to avoid stakeholder pressures, companies show a tendency to follow recognised practices and managerial approaches of other companies – what Prof Zheng calls Inter-Organisational Imitation. By observing other companies’ similar recidivism, it is easier to obtain approval for their own processes and this leads to repeated malpractice. It is especially the case that in developing countries, collectivism, or group culture, is so influential that companies are constantly impelled to conform to the common behaviours of their peer group.

First impression is the last impression

The third factor is what researchers call Prevailing External Evaluations – or to put it simply, an outsider’s perception of the company. This puts a constraint on the way that companies can behave and is instrumental in shaping its behaviour. In order to enhance their social or economic health, companies sometimes accommodate relevant expectations, especially when these stakeholder expectations are deeply ingrained and widely observed.

In some emerging economies, companies conduct business in an environment which lends less emphasis to morals, which means that society, in general, is more prone to resort to immoral means to attain something. This provides an excellent backdrop for the growth of unethical pressures associated with the market arrangement of companies. In such a scenario, social status and respect depend mainly on financial performance rather than moral responsibility, implying that people are more tolerant and accepting towards immoral behaviours. Under this kind of external expectation, companies grow used to this low moral perception and lack motivation for improving their conduct and, as a result, such companies tend to rationalise their misconduct and continue to follow the unethical path, leading to recidivism.

What can we do about it?

  • To step out of the shadow towards the light, company managers need to refrain from early instances of misconduct: for misconduct on their part is likely to lead to their company subsequently indulging in recidivism.
  • By instilling ethical training programmes and oversight committees, companies can reduce the risk of recidivism that is caused by preconditioning. Another solution is to regularly conduct ethics and compliance audits through external agencies. Managers also need to actively monitor internal and external conditions to prevent the company from falling into the path dependency trap.
  • To avoid the negative impact of inter- organisational imitation, it is crucial for companies to work together and establish an ethical norm amongst themselves at the industry and regional level.
  • There is a substantial trend of accelerated institutional change and intensified regulatory enforcement in emerging economies. Managers should be aware that the scenario is changing from when stakeholders were tolerant of recidivism and that companies need to embrace more advanced ethical standards to thrive. Furthermore, policy-makers can play a part in effectively alleviating corporate recidivism.

Today, governments in many emerging economies have taken action to develop positive institutions and have also incorporated the notion of CSR into their regulations. Additionally, the emergence of globalisation has created a level playing field among companies and as a result facilitated the implementation of responsible business practices in emerging economies. The stage is set, the dice have been thrown. Are managers ready for what lies ahead?

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