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An Empirical Examination of the Causes of Corporate Wrongdoing in the United States

DOI:10.1177/001872679204501003
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Charles William Leslie Hill at University of Washington Seattle
Charles William Leslie Hill
Patricia C. Kelley
Patricia C. Kelley
Patricia C. Kelley
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Bradley Agle at Brigham Young University - Provo Main Campus
Bradley Agle
Michael A Hitt at Texas A&M University
Michael A Hitt
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Abstract

It has been argued that a firm's propensity to violate federal laws and regulations is related to firm size, diversity, financial pressures, and organizational structure and processes (Clinard & Yeager, 1980). The current paper tests these propositions using United States data from the Occupational Safety and Health Administration and the Environmental Protection Agency. The findings offer at best weak support for some of these propositions while strongly suggesting that most are invalid. The results have important implications for future research and practice.
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Human Relations
http://hum.sagepub.com/content/45/10/1055
The online version of this article can be found at:
DOI: 10.1177/001872679204501003
1992 45: 1055Human Relations
Hoskisson
Charles W. L. Hill, Patricia C. Kelley, Bradley R. Agle, Michael A. Hitt and Robert E.
United States
An Empirical Examination of the Causes of Corporate Wrongdoing in the
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... Een onderzoek onder 73 bedrijven in de financiële, verzekerings-en onroerendgoedsector toonde bijvoorbeeld aan dat met name grotere, complexe bedrijven en bedrijven met hoge variabele bonussen een grotere kans liepen om door de Amerikaanse financiële autoriteit (SEC) te worden beschuldigd van financiële malversaties (Prechel & Zheng, 2016). Hill et al. (1992) concluderen dat grote bedrijven vaker milieuregels overtreden dan arbeidsomstandighedenregels. Dat grote bedrijven vaker de regels overtreden kan enerzijds komen doordat grote bedrijven meer kans hebben illegale handelingen te plegen dan kleinere bedrijven (Baucus & Near, 1991) of beter in staat zijn om sancties te incasseren (Yeager, 1986). ...
... Dat grote bedrijven vaker de regels overtreden kan enerzijds komen doordat grote bedrijven meer kans hebben illegale handelingen te plegen dan kleinere bedrijven (Baucus & Near, 1991) of beter in staat zijn om sancties te incasseren (Yeager, 1986). Anderzijds geven Hill et al. (1992) aan dat een grotere mate van regelovertreding door grote bedrijven ook kan komen doordat deze grote bedrijven meer gemonitord worden door de bevoegde instanties dan kleinere bedrijven (Asch & Seneca, 1975;Hay & Kelly, 1974). Hoewel dit laatste aannemelijk is, lijkt een groter aantal inspecties niet van invloed te zijn op het aantal gevonden overtredingen, wanneer wordt gecontroleerd voor het aantal bedrijfslocaties (Gibbs & Simpson, 2009). ...
... Diverse studies vonden inderdaad een negatieve relatie tussen bedrijfsprestaties en regelovertredend gedrag van bedrijven (Asch & Seneca, 1975;Clinard & Yeager, 1980;Clinard, Yeager, Brissette, Petrashek & Harries, 1979). Andere empirische studies vinden echter geen significante verbanden (Baucus & Near, 1991;Hill et al., 1992;Simpson, 1986). ...
Kluin, M., Wiering, E., Peeters, M., Blokland, A. A. J., & Huisman, W. (2020) - Regelovertreding en incidenten bij Brzo-bedrijven een longitudinale benadering
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  • Feb 2020
Nederland is de laatste jaren opgeschrikt door een aantal ernstige incidenten in de chemische industrie. Bedrijven met grote hoeveelheden gevaarlijke stoffen worden over het algemeen jaarlijks geïnspecteerd op basis van het Besluit risico’s zware ongevallen (Brzo). Marieke Kluin en collega’s hebben de inspectierapporten van 494 van deze bedrijven onder de loep genomen om in kaart te brengen welke regels deze bedrijven overtreden en of er achterliggende patronen te ontdekken zijn die voorspellend kunnen zijn voor toekomstige incidenten. Conclusie Uit de analyse blijkt dat 9 op de 10 bedrijven de regels weleens overtreedt. Gemiddeld zijn er 15 overtredingen per bedrijf geregistreerd. Een klein aantal ‘notoir overtredende’ bedrijven (7%) is hierbij verantwoordelijk voor een kwart van alle geregistreerde overtredingen. Verder blijkt dat bedrijven die de regels overtreden, veel verschillende regels overtreden. Het gaat daarbij om overtredingen op het gebied van externe veiligheid, ongevalsrisico en milieuschade. Op basis van de data hebben de onderzoekers patronen ontdekt waarbij de bedrijven in 3 groepen ingedeeld kunnen worden: bedrijven waarbij de overtredingen toenemen bedrijven waarbij de overtredingen afnemen bedrijven waarbij de overtredingen gelijk blijven Bedrijfskenmerken en de branche hangen slechts in beperkte mate samen met deze indeling. In een deelstudie zijn de onderzoekers nagegaan of incidenten en de ernst ervan te voorspellen zijn aan de hand van eerdere patronen van regelovertreding, eerder gemelde incidenten en een aantal bedrijfskenmerken. Dit lijkt tot op heden niet het geval te zijn. Dit geldt ook voor de inzet van toezicht.
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... However, as organization theorists moved from an earlier emphasis on intra-organizational processes (incentives, structure, culture) towards broader institutional and network mechanisms, they all but abandoned this topic in the misconduct literature (Cooper, Dacin, & Palmer, 2013;Greve, Palmer, & Pozner, 2010). Indeed, at the organizational level, empirical evidence on the relationship between performance pressure and misconduct is mixed (Daboub, Rasheed, Priem, & Gray, 1995;Hill, Kelley, Agle, Hitt, & Hoskisson, 1992) and also not necessarily convincing from an empirical point of view. One important, but theoretically limited, exception in the accounting literature is Campbell and Shang (2021), which propose a similar empirical approach to ours though focusing on developing indicators of corporate misconduct risk starting from employees' reviews. ...
... However, empirical support for this model has been mixed (Clinard, Yeager, & Clinard, 2017;Hill et al., 1992). To reconcile these results, recent research adopted a symbolic interactionist perspective to study the impact of organizational culture as a mechanism towards the normalization and rationalization of misconduct inside organizations (MacLean, 2008;Campbell and Göritz, 2014), finding that culture could explain how illegal behaviors become part of taken-for-granted routines. ...
... Previous studies on the effect of organizational structure on misconduct suggest that the organization's structural feature is not a sufficient condition to explain misconduct (Hill et al., 1992;McKendall & Wagner, 1997;Simpson & Koper, 1997). For example, Hill et al. (1992) studied misconduct in the manufacturing sector by analyzing a range of different factors, from firm size to financial strain and decentralization, using Environmental Protection (EPA) and Occupational Safety and Health Administration (OSHA) data. ...
Under Pressure: Cultural and Structure as Antecedents of Organizational Misconduct
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Does toxic organizational culture lead to misconduct? To address this question, we build on Merton's strain theory and theorize the relationship between organizational culture, structure and misconduct. We first argue that organizations with cultures characterized by strong performance pressure are more likely to engage in misconduct. Then we consider how organizational structure moderates this relationship, and hypothesize that in more formalized organization this relationship is weaker, while it is stronger in more decentralized organizations. To test these hypotheses, we use natural language processing to identify cultural content in Glassdoor employee reviews of 880 publicly traded firms combined with official penalties due to misconduct provided by Good Jobs First. The empirical results lend support to our hypotheses. Organizations with high performance pressure cultures are 65% more likely to be fined for misconduct than organizations with low pressure. The moderation effects of the organizational structure are also supported.
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... A large number of studies have examined corporate frauds and misconduct based on analyses of fraudulent financial reporting, auditing issues and management misconduct (Arnold & De Lange, 2004;Baker & Hayes, 2004;Brody et al., 2003;Ferrell & Ferrell, 2011;Hogan et al., 2008;Morrison, 2004;Murison, 2013;O'Connell, 2004;Ogawa, 2017;Rezaee, 2005;Rockness & Rockness, 2005). In the area of organization studies, research has focused on why fraud occurs (Hill et al., 1992;Schnatterly, 2003) while some focus on how it occurs (Ashforth et al., 2008). Dyck et al. (2013) estimated the percentage of firms engaged in fraud and its economic cost. ...
The relationship between politics, legal system and financial reporting on fraud
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Motivation: Fraud is a challenging problem. Its economic effects are clear – worse public services, less financially stable and profitable companies, charities deprived of resources needed for charitable purposes and diminished levels of disposable income of everyone. In every sector globally, fraud has an adverse impact on the quality of life. Fraud threatens the effective and efficient utilization of resources and hence is of great concern to industries, the whole community and academia. Research Question: Does political regime moderate the relationship between financial reporting regime and on fraud? Does the legal system moderate the relationship between financial reporting regime and on fraud? What is the impact of financial reporting regime, legal regime and political regime on fraud at national level? Idea: This study investigates how political, legal and financial reporting impacts on fraud at a country level and whether any triangular effects exist. Data: Country level data published by ACFE, World Fact book, Deloitte IAS Plus Report, IFAC Report and Economic Intelligence Unit Report on Democracy Index for 106 countries for the years 2010 to 2014 was used. Tools: To test study’s hypotheses and to determine the interactive effects of legal regime, political regime and financial reporting regime on fraud, a three-way ANOVA is used. To determine the impact of the independent variables on fraud, pooled regression analysis is used. Findings: The findings provide both theoretical and empirical evidence on the interaction effects of political, legal and financial reporting regimes on fraud. Political and legal regime has a significant interaction with financial reporting on fraud as posited by political accountability theory and legal theory. Even the main effects of each regime separately are statistically significant. Contribution: given the complex nature of frauds, the study is relevant to regulators, practising auditors, legal and political experts and politicians engaged in the debate on frauds and how to address this harmful act at a cross country level. When collusion exists between executive, legislative oversight in a full democratic regime is weakened, impacting the mechanism of fraud minimisation.
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... Larger firms are more likely to be investigated and not necessarily more likely to commit crimes. Also, larger firms can more easily absorb penalties for illegal acts and (Hill et al., 1992). Poor performance may increase the possibility of a crime. ...
Internal corporate governance as a source of firm value: The impact of internal governance on the incidence of white collar crime.
Thesis
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  • Jan 2001
White collar crime can cost firms from 2--5% of their sales annually. The magnitude of the loss is significant, and there is little research into how to reduce this loss. Any solution to this problem must originate within the firm. This study begins the investigation of governance structures and their ability to impact the occurrence of white collar crime. Governance can be external, as in the structure of ownership, the Board of Directors or the CEO, or it can be internal, as in the policies and procedures, the accounting system and the employee compensation of the firm. This study creates a framework relating external and internal governance to the occurrence of white collar crime. This study adopts a holistic and multi-variable approach to governance building on agency and organizational theories. Firms that have announced a white collar crime from 1987--1998 form the basis of the sample. Each of these firms is then matched with a firm similar in size and scope, but from the year prior to the announcement. Governance variables are gathered from documents filed with the Securities and Exchange Commission (SEC) including the annual report, 10K and proxy statement for all of these firms. The final sample is 72 'crime firms' and 72 'non-crime firms'. First the level of value loss is investigated. Results indicate that the value loss over a three day window around the announcement day are statistically but not economically significant, representing about 1% of firm market value. However, when actual future performance is investigated, the commission of a crime has a negative and significant effect on return on assets (ROA) in the year following the crime, and more crimes generate significant negative ROA for three years following the crime. Discriminant analyses indicate that firms with crime and firms without crime have significantly different governance structures, and subsequent logit and regression tests indicate that firms with fewer crimes have stronger policies and procedures and stronger liaison roles. The firms with fewer crimes may also have more employee contingent pay, higher morale, Boards paid with contingent compensation, fewer insiders on the Audit committee, and less Board ownership. Prior performance has little to do with the probability of occurrence of a crime.
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... On the contrary Sutherland (1949), found that a larger organization is associated with a greater number of white collar crimes. Hill et al. (1992), found that factors such as decentralization, span of control, and reward/incentives mechanisms led to a non-linear relation between the size of organization and the number of white collar crimes. ...
Investigating Gender Preferences on The Choice of Motives and Modus of Corruption in Kementerian X: A Multinomial Logistic Regression Approach
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This study aims to analyze gender preferences in the selection of motives and modus of corruption. This study also uses age, years of service, position level, and type of institution as control variables that might have correlation with the motives and modus of corruption. Using Multinomial Logistic Regression test, the results indicate that gender has no correlation with the types of motives, institution type has siginificant correlation with fraudster’s motives, while position level, age, and years of service have a partial correlation with the choice of motives. Another result stipulates that age, years of service, and institution type remarkably predispose the choice of modus, while gender and position level have no correlation. The results of this study could help the organization to design a fraud prevention and internal control system that fits organization’s needs. Also, it provides insight to Gender Mainstreaming Unit (PUG) as to how to optimize the role of female employees of the organization in preventing and detecting corruption. Finally, this study suggests that the existence of a robust control system at each level of the organization and the optimized role of internal compliance unit is imperative to the success of the organization’s efforts to prevent and combat corruption.
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Pinpointing Persistent Polluters: Environmental Offending and Recidivist Companies in England
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The extent to which firms can be deterred from offending has received significant attention. Despite this, the evidence for such deterrence remains inconclusive. This article suggests that instead of focusing on the deterrence aimed at companies, we should instead begin with a less contentious observation; that companies are frequently recidivists, and that an emphasis on the factors associated with company recidivism would be a useful starting point for thinking about offending by firms. The article explores this through an investigation of companies pursued by the UK’s Environment Agency in England between 2000 and 2016. The logistic regression analysis suggests that being a utilities company, a large enterprise or a new company were all predictive of repeat offending. Conversely, whether a company was fined after its initial offense was not predictive of whether it would re-offend. The implications of these findings for regulatory work and future research are discussed.
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Previous research on corporate governance has extensively explored the motives of corporate fraud. However, this research has paid little attention to employees, the real executors of fraud, resulting in the psychological and behavioral decision-making process of employees who commit fraud in enterprises becoming a “black box” that has not yet been opened. Based on the theory of planned behavior, our study integrates the existing research findings on driving factors of employee fraud and anti-fraud practical experience, extracts the key factors of employee fraud motive, and develops a multidimensional scale of employee fraud motive. The exploratory factor analysis (EFA) generates three subscales, comprising 14 items, measuring attitude, subjective norm and perceived behavioral control of employee fraud motive. The confirmatory factor analysis (CFA) supports the reliability, discriminant validity and convergent validity of the new scale. The multiple regression results show that the score of employee fraud motive is positively correlated with the amount of employee fraud occurrence, indicating that the predictive validity of the scale holds. Overall, the scale developed in our study displays good reliability and validity, and is worth spreading.
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Although corporate social responsibility (CSR) activities may facilitate firms to meet stakeholders' demands and gain legitimacy, there is little understanding of whether and how they may bring in harmful consequences such as chief executive officer (CEO) wrongdoing. We developed a framework to explore how CSR activities lead to CEO wrongdoing based on the fraud triangle of pressure, opportunity, and rationalization. Using a sample of 530 listed firms in China that issued CSR reports between 2011 and 2018, we found a positive relationship between CSR participation and CEO wrongdoing. We also found that this positive relationship is strengthened by firms' internal capability to gain profit and their risk orientation. Our study contributes to the CSR literature by examining the potential dark side of CSR activities, and by bridging stakeholder theory and CEO wrongdoing literature.
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Who Commits Corporate Wrongdoing: Predicting Illegal Corporate Behavior Using Event History Analysis.
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An event history analysis of Fortune 500 firms indicated that larger firms or firms in a dynamic environment were more likely to behave illegally. Contrary to predictions, firms in a scarce environment were less likely to behave illegally; environmental heterogeneity, firm performance and organizational slack were not supported as antecedents.
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Assistant Professor of Finance, New York University. The author acknowledges the helpful suggestions and comments of Keith V. Smith, Edward F. Renshaw, Lawrence S. Ritter and the Journal' reviewer. The research was conducted while under a Regents Fellowship at the University of California, Los Angeles.
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