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Published: August 24, 2010
 / Autumn 2010 / Issue 60

 
 

Doing Well by Doing Bad

Successful firms are more likely to break the law when their managers are under tremendous pressure to exceed quarterly goals.

Title: Why “Good” Firms Do Bad Things: The Effects of High Aspirations, High Expectations and Prominence on the Incidence of Corporate Illegality
Authors: Yuri Mishina (Michigan State University), Bernadine J. Dykes (University of Delaware at Newark), Emily S. Block (University of Notre Dame), and Timothy G. Pollock (Pennsylvania State University)
Publisher: Academy of Management Journal, vol. 53, no. 4
Date Published: August 2010

What drives big-name firms with storied histories — think Arthur Andersen — to risk it all by breaking the law? The authors of this paper cite several factors, including unrealistic expectations from analysts and shareholders, and unrelenting pressure on executives to exceed quarterly sales and profit targets. The authors find that prominent firms, rather than feeling secure in their status, face persistent pressure to maintain or improve their performance. As high-profile success becomes harder to sustain, managers increasingly engage in illegal behavior to fulfill external expectations and internal aspirations. (The authors focused solely on instances of corporate illegality, not examples of personal greed.)

The study examined 194 U.S. manufacturing firms that were traded on the S&P 500 between 1990 and 1999. Searching newspapers; SEC documents; and sources like the Corporate Crime Reporter, a legal newsletter that tracks company criminal and civil wrongdoing, the researchers discovered almost 500 incidents of corporate illegality. They found that companies were more apt to skirt the rules after they had already gained significant public recognition. In addition, the more a firm exceeded its stock price or performance expectations (measured as return on assets), the more likely it was to be involved in illegal activities. This was particularly true for prominent companies — defined as those that earned a spot on Fortune magazine’s “Most Admired Companies” list. According to the authors, the results suggest that when performance soars beyond aspirations, executives are more willing to take on risk to maintain their upward trajectory. Another proposed explanation is that a successful and prominent management team may develop a sense of infallibility and feel that laws don’t apply to them.

The study’s findings suggest several lessons for analysts, investors, and executives. First, corporate directors can help alleviate the pressure on management by evaluating them on their ability to meet long-term objectives, rather than quarterly earnings targets. The authors also suggest that both analysts and investors temper their expectations that companies should constantly exceed the previous quarter’s performance. 

Bottom Line: Although it may seem logical that large, thriving firms would be more likely to avoid illegal behavior because they have more to lose than less-successful companies, the opposite appears to be true — especially when the firm’s managers fear a decline in future performance.  

Author Profile:

  • Matt Palmquist was a founding staff writer and is currently a contributing editor at Miller-McCune magazine. Formerly, he was an award-winning feature writer for the San Francisco–based SF Weekly.
 
 
 
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