Fear of bad performance drives firms to break law
November 19th, 2009 - 4:11 pm ICT by IANSWashington, Nov 19 (IANS) The more reputed and financially sound a corporation is, the more likely it is to violate the law, says a new study.
Michigan State University scholar (MSU) Yuri Mishina and colleagues argue that it is the prospect of poor performance in the future, not the past and intense pressure to do better, that compels firms to break laws.
Previous research suggested high-performing firms are less likely to feel the strains that can trigger illegal activities such as fraud, false claims and environmental and anti-competitive violations.
The MSU-led study analysed 194 large manufacturing firms in the US between 1990 and 1999.
“We found that high-performing companies tended not to be able to sustain that high level of performance over time,” said Mishina, assistant professor of management, who led the study.
“At the same time, high performing and highly prominent companies tend to be the ones that are punished most severely for not meeting performance expectations,” said Mishina.
“And so it becomes a choice: Do I cut corners to try to meet these high performance goals and maybe get caught, or do I accept the results of not meeting my performance goals and be punished for sure,” said Mishina, assistant professor of management.
Internal pressure includes company officials’ perception of how they’re faring against the competition, while external pressure is driven by heightened investor expectations brought about by strong market performance, Mishina said.
The researchers say three factors potentially fuel illegal behaviour: loss aversion, or the tendency to prefer avoiding losses above all else; hubris, in which managers come to believe they cannot fail; and the house-money effect, or the concept that people perceive themselves to be gambling with the “house’s money” rather than their own capital.
Mishina also said analysts, investors and company directors need to be careful about how they evaluate firm performance and the pressure they place on management to constantly improve performance, says an MSU release.
“By focusing completely on fairly short-term financials we’re ignoring a lot of other things,” he added. “And the emphasis on this performance seems to be what’s driving this type of illegal behaviour.”
The study will appear in the Academy of Management Journal.
Tags: assistant professor, company directors, company officials, hubris, illegal activities, illegal behaviour, intense pressure, investor expectations, loss aversion, market performance, michigan state university, mishina, performance expectations, performance goals, poor performance, previous research, prominent companies, strong market, university scholar, yuri