Corporate Corruption: Causes and Reactions - Essay Example

Corporate Corruption: Causes and Reactions Introduction Hardly a year goes by without a major case of corporate corruption being highlighted by the mass media. Some of the major cases that spring to mind include such notorious corporations as Enron, Global Crossing, and the ImClone stock trading case. Executives are charged with criminal offenses, politicians rush to propose new legislation, and the country tends to forget the root causes of corruption, and the public policies that make such corruption possible, until new cases inevitably emerge. To be sure, new cases emerge rather frequently. No sooner do the Enron executives of the world enter the appeals process than new indictments are being readied for the latest round of corporate scofflaws. Just two days ago, for instance, it was reported that one of America's foremost corporations, the chip maker Intel, is being investigated for unethical pricing methods in an effort to eliminate competition and to thereby sustain its share value (Landed, 2008: 27). Another major American multinational corporation, General Electric, is being forced to defend allegations of tax fraud by its subsidiaries in Latin America (Johnston, 2008: 27). The clear implications are threefold: (1) corporate corruption seems a systemic feature of the American capitalistic system; (2) heavily publicized efforts to create legislation and programs to prevent or minimize cases of corporate corruption seem riddled with flaws and loopholes; and, (3) the people whom suffer the most are the majority of the American public. In order to provide a clearer picture of the problems associated with corporate corruption, I would like to discuss the fundamental causes of corporate corruption, the types and consequences of corporate corruption, some illustrative cases, and some of the proposed remedies. Causes of Corporate Corruption As a preliminary matter, it is essential to note that corporate corruption is not a single, precise type of abuse; quite the contrary, cases of corporate corruption take many forms and manifest themselves in the abuse of different types of public trust and the violation of different types of legislative frameworks. There are, for instance, cases of corporate corruption which result from fraudulent or misleading accounting practices, from the improper use of inside or proprietary information in violation of relevant securities laws, from the use of offshore entities and jurisdictions in order to evade taxation and thus inflate balance sheets and share values, and fraudulent or misleading representations about products in development or research data. In short, the notion of corporate corruption must be viewed as an umbrella designation within which many different types of abuse may and do occur. What causes these different types of corporate corruption If policy makers are to design and implement effective types of protective legislation then it is imperative to understand the root causes or the motivations which lead those in charge of corporations to engage in abusive and corrupt practices. In a commentary delivered by a leading scholar to the Financial Times, it was stated thusly: What led American executives to think they could get away with hiding billions of dollars in corporate losses or invent staggering amounts of non-existent revenues Greed, arrogance, dishonesty and other human frailties are obvious answers. But they are not the most interesting. After all, hubris and corruption among the powerful are as old as the Bible. The 1990s excesses are another popular explanation. The economic bonanza and the ease with which new capital was raised even for the most unjustified ventures contributed to the recent wave of corporate frauds, as did the extravagant compensation schemes that became fashionable (Naim, 2002: n.p.) Such assertions, that greed causes corporate corruption for example, are misleading. They are misleading because greed is simply a generally category of human behavior; the truest causes are those which inspire the greed which in turn generates the motivation to be corrupt or dishonest. Policy makers must therefore be more nuanced in their public discourse, they must eschew such popular sound bites such as those that attribute corporate corruption to greed because greed means nothing without an operative context in which these corporate decision-makers exist. The sad reality, however, is that both the public policy makers and the mass media thrive on sound bites with the consequence being that root causes are rarely discussed meaningfully in public forums. This renders meaningful solutions extraordinarily difficult to achieve. The first point to note, though seemingly obvious, is that corporations are generally not charitable. They are created and operated in order to generate a profit. Many people depend on the corporation. There are shareholders and employees; these interests in need of protection range from returns on investment to the sanctity and security of pension funds. Federal and local revenue authorities also depend on corporations for income with which to provide social services to constituents. In many cases, corporations produce fundamental necessities associated with energy, transportation and communication infrastructure, or drugs necessary to cope with painful or debilitating illnesses. Profit, in turn, depends on notions of value and it is the pressure to value the corporation in attractive ways that most often leads corporate executives awry. The main cause of corporate corruption or abuse thus emanates from issues revolving around valuation. This may involve abusive tax practices in order to evade tax or inflate expenses and depreciation; this may involve hiding or covering up liabilities through abusive offshore banking arrangements; this may involve the commingling of pension funds with operating funds in order to inflate balance sheets while simultaneously placing at risk the hard earned retirement dollars of employees and their dependents; or, for purposes of illustration, this may involve inflating values in order for corporate executives to attain larger bonuses and better corporate perks. Recently, however, as technology and the market have changed, valuation has become more difficult. This, in turn, has created more opportunities for unscrupulous executives to tinker with values in order to attain various objectives. As noted by Naim, for example, In the past decade, brand names, patents, software and other intangible assets became important determinants of a company's value. Meanwhile, complicated derivative financial instruments were almost universally adopted and globalisation fuelled rapid and complex corporate growth. These three business trends, while positive in many ways, also muddied balance sheets, wrought havoc in accounting standards and created the possibilities for managers to use the intellectual confusion of the time to rig the books and cash in their big bonuses. The line between excess and illegality became too easy and too tempting to cross (2002: n.p.) These changes in the way companies calculated value, therefore, contribute to confusion and increased layers of complexity. Not only did valuation become more difficult, but this increased complexity offered opportunities for corporate executives to mislead investors, governmental regulators, and the general public. The treatment of intangible assets, for example, was not well-defined by tax or accounting professionals and the judicial branches had not had the opportunity to settle questions of scope or interpretation; the result included reasonable attempts to stretch the laws in favorable ways and unreasonable attempts to exploit these uncertainties to generate unsustainable and inaccurate valuations. In addition to these new valuations issues, there were also a number of new investment vehicles and international developments that rendered accurate valuations extremely difficult. The evolution of financial derivatives, transfer-pricing disparities between and among trading partners bound by different legislative philosophies and frameworks, and the explosive global economic growth facilitated by the incorporation of China and India more fully into the global economic system all created a commercial context in which oversight was difficult and new opportunities emerged or unscrupulous corporate executives. Reactions to Corporate Corruption There have been a number of attempts to regulate corporations in order to protect the public. These regulations have addressed issues of unfair competition and antitrust, issues related to taxation and pension funds, accounting practices, and a whole array of issues confronted by corporations. In response mostly to the Enron case, President George W. Bush supported and subsequently announced a ten-point plan to encourage corporate responsibility and to attack corporate corruption. This ten-point plan incorporated the following: 1. Each investor should have quarterly access to the information needed to judge a firm's financial performance, condition, and risks. 2. Each investor should have prompt access to critical information. 3. CEOs should personally vouch for the veracity, timeliness, and fairness of their companies' public disclosures, including their financial statements. 4. CEOs or other officers should not be allowed to profit from erroneous financial statements. 5. CEOs or other officers who clearly abuse their power should lose their right to serve in any corporate leadership positions. 6. Corporate leaders should be required to tell the public promptly whenever they buy or sell company stock for personal gain. 7. Investors should have complete confidence in the independence and integrity of companies' auditors. 8. An independent regulatory board should ensure that the accounting profession is held to the highest ethical standards. 9. The authors of accounting standards must be responsive to the needs of investors. 10. Firms' accounting systems should be compared with best practices, not simply against minimum standards (quoted in President's Ten Point Plan: Corporate Responsibility, 2002: n.p.) In addition, a corporate task force was created within the Department of Justice and given authority to pursue and prosecute cases of corporate malfeasance, abuse, and corruption. This task force operates as a governing law enforcement organization that operates in conjunction with state agencies and relevant federal agencies such as the Securities and Exchange Commission and the Internal Revenue Service. The hope is to create more reliable standards for corporate behavior and to prosecute those whom violate these norms in violation of the public trust. These reactions have not been limited solely to American soil; in an effort to better regulate corporate behavior in foreign jurisdictions, the Congress previously enacted the Foreign Corrupt Practices Act (FCPA) in order to encourage ethical corporate practices and to discourage corporate corruption; some of the main provisions of the FCPA deal with prohibitions against bribing foreign officials, the giving of gifts, and other nefarious practices. Conclusions In the final analysis, corporate corruption is not a new problem; indeed, it is as old as the corporation itself. The modern era, however, has created more opportunities for corporate opportunities because of valuation uncertainties with intangible assets, cross-border trade, and sophisticated investments such as derivatives. In such an environment, with uncertainty and multiple governing jurisdictions, it becomes necessary to update and adapt legislation to fit new technological and global realities. In a fast-changing and competitive world, it is hardly surprising that corporate executives seek to stretch the limits of the law or to abuse unsettled areas of the law. Hopefully, the creation of the corporate task force and pieces of legislation such as the Foreign Corrupt Practices Act (FCPA) are steps in the right direction. Works Cited Foreign Corrupt Practices Act (FCPA). United States Department of Justice. http://www.usdoj.gov/criminal/fraud/fcpa/ Johnston, David C. (2008). GE Has a Brazilian Sized Headache 22 Corporate Crime Reporter 27, June 30, 2008. http://www.corporatecrimereporter.com/gebrazil063008.htm Kaufmann, D. (2006). Myths and Realities of Governance and Corruption. The World Economic Forum Global Competitiveness Report 2005-2006 Chapter 2.1. World Bank. Lande, Robert (2008). Antitrust Probes of Intel Chip Monopoly Heat Up 22 Corporate Crime Reporter 27, July 8, 2008. http://www.corporatecrimereporter.com/intel070808.htm Mokhiber, Russell (2007). Twenty Things You Should Know About Corporate Crime 21 Corporate Crime Reporter 25, June 12, 2007 http://www.corporatecrimereporter.com/twenty061207.htm> Naim, Moiss (2002). The Roots of Corporate Scandals. Carnegie Endowment for International Peace, originally published in the Financial Times, on Monday, September 30th, 2002 http://www.carnegieendowment.org/publications/index.cfmfa=view&id=1092 President's Ten Point Plan: Corporate Responsibility. The White House President George W. Bush. http://www.whitehouse.gov/infocus/corporateresponsibility/index2.html Read More