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Corporate Deviance – Financial Crime for Profiteering

• Corporate crime is big money. • Victims are consumers, taxpayers and

stockholders, citizens, residents. • Small percentage of felonies serve prison. Fines are

usually small enough to incorporate into Cost of Goods Sold (COGS) calculations.

• It goes on till it gets caught, and it’s hard to uncover.• Once uncovered, corporate lawyers know how to

stall to jack up the costs of investigation and prosecution, leading to deals and low penalties.

• Bad management is immoral?

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• Anti-competitive behavior • Fraud (advertising, product content, bait&switch)• Tax Fraud• Stock market manipulations• Discriminatory practices in hiring and promotion.• Deals with organized crime.• Illegal contracts• CEO benefits

Corporate Deviance – Financial Crime for Profiteering

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Corporate Deviance – Financial Crime for Profiteering

• Fraud:– Misrepresenting a business or deal as having certain

features while masking the unequal nature of it.• Profits through deception

– Product content– Advertising – Securities violations– Tax fraud

• Not reporting all income• Reporting exaggerations or overstating of expenses.• Money laundering• Off shoring corporate headquarters• Nauru

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Backdating Executive Stock Options (ESO).– Stating the date stock options were ‘purchased’ is at the trough value

of the stock. So if you buy x stock for y dollars, and then want to sell them at a peak price for, say, 5y, then you have just made 500%.

– It’s not illegal if…• No documents forged• It’s communicated to stockholders• It’s reflected in tax statements• It’s reflected in earnings

as an expense (which affects profit)

http://www.biz.uiowa.edu/faculty/elie/backdating.htm

Corporate Deviance – Financial Crime for Profiteering

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Corporate Deviance – Financial Crime for Profiteering

Running a company down the tubes and taking what’s left

• When Coca-Cola CEO Douglas Ivester announced his retirement, Bloomberg compensation analyst Graef Crystal observed, "Here is a man who is resigning after a two-year tenure as CEO that produced a return for shareholders of a negative 7.3 percent. For that, he is walking away with stock, options and other goodies worth at least $120 million." Meanwhile, as the AFL-CIO Executive PayWatch reports, Coca-Cola is laying off thousands of workers and facing a lawsuit alleging the company discriminated against black employees in promotions, pay and performance evaluations.

• Many CEOs make more in a year than their employees will make in a lifetime. Last year, the average CEO of a major corporation earned $12.4 million, including salary, bonus and other compensation such as exercised stock options, according to Business Week's latest survey of executive pay. That's $34,000 a day including Saturdays and Sundays.

• In 1980, CEOs made 42 times the pay of average factory workers. In 1990, they made 85 times as much. By 1999, CEOs made 475 times as much as workers*. It’s now down to about 320 since 2000 according to one source.

*http://www.commondreams.org/views/041700-101.htm, Holly Sklar

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http://www.aflcio.org/corporatewatch/paywatch/pay/

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Corporate Deviance – Financial Crime for Profiteering

• McKinnell [CEO of Pfizer], who is also head of the Business Roundtable, was even more assertive, dismissing critics who point to his $83 million lump-sum pension, his $16 million in total comp last year, and his stock's 42% decline (emphasis added) since he took charge in 2001 as proof of pay for nonperformance.

• While calling the overall debate "healthy," McKinnell questions the "agenda" of many "executive-compensation activists who try to inflame the issue of CEO pay."

• Says he: "There's a much larger issue here; compensation is being used as part of a battle over control of the corporation itself."

• In McKinnell's view, "an unholy alliance" of special interests - environmentalists, animal-rights activists, hedge funds - want to wrest decision-making control from boards and CEOs in pursuit of "their narrow interests," even though most shareholders "are pretty happy with the way companies today are being run."

• McKinnell also says a scrubbing of pay numbers that the Roundtable commissioned found that "a lot of those big ratios everyone points to are just not supported by the data. CEOs are still very well paid, but they're not that well paid."

• http://money.cnn.com/magazines/fortune/fortune_archive/2006/07/10/8380799/ Rik Kirkland, Fortune

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Corporate Deviance – Financial Crime for Profiteering

• Employment discriminationForms– Hiring and promotions discrimination by race, gender, religion, etc.

(although not all limitations are discrimination).– Preference for ‘people like us’– Glass ceilings, dead-ends.Mechanism– Not providing opportunities through training, mentoring, being included

in formal and informal meetings with clients and higher-ups.– Not having defined criteria for promotions, or criteria being biased to

represent one kind of person.Results– Salaries– Benefits– Job Satisfaction

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• Go through several examples and think about the causes of this form of deviance, and therefore, the possible controls necessary to avoid it.

Example:

CEOs excessive compensation and/or backdating of stocks.

First, what theories explain these behaviors?

Second, given the sources, what is needed to counteract either the motivations, neutralizations or external control structure?

Third, what barriers are there to enforcement, either currently or for the suggested policies?

Corporate Deviance – Financial Crime for Profiteering

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Corporate Crime - Physical Harm

• Factors instrumental in making it difficult to identify and prosecute corporate behavior that results in death, disfigurement and illness:– Corporations as non-entities with multiple chains of authority make either

everyone responsible, but since everyone can pass the buck or claim ignorance, no one becomes responsible.

– It is rare to see criminal prosecutions, let alone convictions, which ‘educates’ correctionalist institutions to not seek that route.

– Individual cases can be silenced through settlements.– Criminality requires intent, and it is rare to see actual intent. Rather, decisions

are made that emphasize profits or public image (and good will is a financial concept).

– Even when someone in a corporation is tasked to identifying problematic products or processes, they can be blinded to unusual patterns because the language used to describe events doesn’t cover the situation.

In other words, organizational structure, power hierarchies and social construction of reality create a situation where corporate malfeasance can go so unnoticed as to make it seem untouchable. Not okay, just untouchable.

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Facilitators of Corporate Violence

Corporations consistently try to avoid reaching conclusions that their products are harmful, even when evidence is compelling. Why is this?

• Organizational structure• Profit-motive• Culture and personality• Punishments mild• Corporate-government connections • Public opinion• Perpetrators removed from victim• Often no law is actually violated.

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No responsibility

The Challenger

Corporation structure and organization means no one’s responsible

Managers who identify problems become the problem:

“Adversarial truth” therefore gets suppressed.

Escalation to upper levels therefore is to be avoided.

Senior management therefore can claim ignorance, and blame lower-level folks, who say:

“This isn’t my reporting channel”

“He is not in the launch decision chain”

Thus loss of individual-level moral responsibility due to corporate structure could lead one to conclude that no one felt responsible and therefore, no one was responsible.

It’s hard to prosecute for bad-decisions. No one at Thiokol was fired, let alone indicted or convicted.

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Culture

BF Goodrich

• Culture of derision and disrespect directed the ability to accept conclusions.– Senior designer’s plans were faulty

– Junior ‘fresh out of college’ engineer made observation

– Senior manager without college degree wouldn’t escalate and instead attacked junior.

– Allegiances along political lines emerged. – Profit motivation for executives pressured lower level to

deny adversarial truth and to write the qualifying report no matter what the evidence showed.

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The Language of Avoidance

• Ford and Pinto

– Profit motive is dominant value

– Organizational scripts limit interpretation.

• Market motive circumvented normal quality processes

• Tests showed Pinto would suffer tank rupture.

• Cost benefit analysis led to conclusion that ‘Consumer Homicide’ was worth it.

• Race & class: Who would buy Pintos?

• Neutralization: Cars don’t kill people, bad roads and drivers kill people.

Recall – to remember, to become aware of issues, to call back.

• Why did Dennis Gioia, Recall Coordinator and Analyst, not recommend a recall?

• Things didn’t fit into organizational script and interpretive process.

– Strong Ford culture and indoctrination

– Intimidated to ‘heel’ to Ford company preferences

– His own career cost-benefit analysis

– Good person who made bad choices

– Moral failure – weak internalization of values

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Public Opinion and Corporate Crime

Recent convictions carry much more weight:

• Worldcom:

– Ebbers 25 years,

– VP Finance, 5 years.

• Enron:

– Richard Causey: 7 years

– Kenneth Lay: convicted on all counts.

– Skilling: 24 years plus $26 out-of-pocket fines.

• Tyco

– 2 executives got 8.33 years to 25 for looting hundreds of millions of dollars

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Theoretical Underpinnings: Karl Mannheim

• Bureaucratic conservativism – Don’t rock the boat• Traditional conservatism – We’re in power, so it must be right and

good• Bourgeois liberalism – ‘rational’ discourse by all the people – allows

approval of folly by majority.• Socialist thought: there are real conflicts of interest• Fascism – When socialism and liberalism appear as relativist fronts

for an ideology, the other side of the conflict seeks to define an alternate, absolute truth. “Fascism is the ideology of the marginal politician…It finds its followers among those who want to return to dogmatic certainties; in a time of chaos, there are many who would sacrifice everything for law and order”. (Conrad & Makowsky). It always has a coercive component. “My way or the highway – or prison”

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Mannheim to Mills

For Mannheim • (a) all governments are run by bureaucracies • (b) Bureaucratic operations become interdependent• (c) Question is will it be an intelligent and humanistic elite or a short-

sighted, irrational and foolish elite? *

• C Wright Mills • Picked up on Weber’s and Mannheim’s theories of bureaucracy in

modern society by combining the notion of bureaucracy interdependence and elite rule.

• Noted declining significance of middle class • Noted the limited access social institution of the economic elite.

– The inner core of those who hold key roles in multiple spheres.

– The fact that these core roles are not equal opportunity positions.

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Mills and the MIC

• Industry benefits from the military; and industry seeks to control government decision-making.

• The same players appear in all three spheres.

• Eisenhower coined the phrase ‘military-industrial complex’ and warned of its inherent threats.

• Mills felt that there’s no checks & balances against MIC.

• Mills points out that it’s not that there aren’t valid military threats, but that the MIC takes control of governmental strategy to work in to the favor of the Elite’s and not to the nation as a whole.

• And, every state needs an enemy: if it’s not communism, or capitalism, or terrorism (and the more vague the better), then it’s drugs, heretics, morality, or someone else’s culture.

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Functionalism View of Elite Deviance

• Defining and controlling of deviance is a technique for invoking social control forces

• Power is not distributed equally across society– Power is desirable

– Lots of power enables control over others

– Those with a lot of power can choose to deprive others of their own rights (including access to knowledge & info)

• Power Elite is not individual behavior, it’s a group relationship.– Application of socially-controlling deviance must have societal buy-

in for it to work.

– Claims-making becomes a required marketing method to get widespread acceptance

– Claims are not always true but will lead to ED’s desired outcome.

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Michels’ Law of Oligarchy

Organizations become oligarchical through the following process:

• A rather small number of people carry out the bulk of the decisions because it’s more expeditious

• This delegated set of leaders takes on more power, seeking to extend their authority, and new leaders are selected by old.

• Decisions are carried out behind-the-scenes.• Leaders become more ‘conservative’ in that they oppose change, as they begin

to re-interpret the organization’s mission to serve them. • Members expect that the organization will fulfill their needs; but leaders look to

fulfill their own needs.• It usually takes a crisis for anything to get fixed. • Members don’t oppose because

– They don’t know what’s going on– They’re too spread out to have power

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Michels - 2

“Who says ‘organization’ really means ‘oligarchy’”.• It may not be so much evil as delinquent, but it can be grossly

irresponsible.

What is the cure?• Crisis to catalyze change (but not always)• Regular, detailed communications to members• Accountability, e.g., outside audits, with separation from board

members.• Adherence to by-laws• Competent leadership

– Start with a core, or toss out the old bunch.– Activist leadership – people seeking and knowing how to bring about

change that is in line with what’s needed and wanted.

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Claims-Making

Claims-making: – Defining deviance in a way that it will benefit someone through latent functions. – It’s therefore a technique in the arsenal of social control. – To get the word about the ‘new’ deviance it requires marketing. That’s what

claims making is.

• It may be a real problem now recognized (e.g., child abuse)• Or a condition blown completely out of proportion (e.g., ‘stranger-abducted

missing children’). • It doesn’t matter if the condition exists, just that a claim is being made

about it.• Claims-makers shape our sense of what the problem is – for their own

benefit.• Words are important (teen pregnancy versus teen promiscuity)

• As with other marketing efforts, claims become fads.

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Claims-making -2

• Consequences – Punish or socially control violators– Enhance certain socio-political actors or institutions– Make money– Rationalize problematic behavior (medicalization)

• How to make claims– Evoke negative emotionality – horror, fear, outrage– Separate context from condition and make atypical seem typical– Use attention grabber – Rely on official sources– Make all responsibility the individuals’ not the system

• Stigmatize them• Typify the trouble-makers

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Lies, Damned Lies, and Statistics?

• Statistics can be a tool for claims-making

• Use big numbers

• Use official sources

• Use big numbers from official sources

• Trust the media to repeat it over again.

• You don’t need statistics for the last point, any ‘fact’ will do, especially if ‘experts said…’

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Process of Claims-Making

• Process– Cite Evidence– Use rhetoric– Assert solution

• Who makes claims?– Victims – grass roots– Professionals – PR Firms– Actors and organizations that will profit in one way or

another.