1

DESIGNING A COMPREHENSIVE ANTI-CORRUPTION COUNTERSTRATEGY FOR

THE PRIVATE SECTOR

A dissertation presented by

V-Tsien Gaius Fan

to

The School of Criminology and Criminal Justice

In partial fulfillment of the requirements for the degree of Doctor of Philosophy

in the field of

Criminology and Justice Policy

Northeastern University

Boston, Massachusetts

May 2014

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DESIGNING A COMPREHENSIVE ANTI-CORRUPTION COUNTERSTRATEGY FOR

THE PRIVATE SECTOR

by

V-Tsien Gaius Fan

ABSTRACT OF DISSERTATION

Submitted in partial fulfillment of the requirements

for the degree of Doctor of Philosophy in Criminology and Justice Policy

in the College of Social Sciences and Humanities at Northeastern University

May 2014

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ABSTRACT

I examine the possibility of designing a comprehensive anti-corruption counterstrategy for the

private sector. The first prong of my study determines the relationships between the

environment, management, and business controls in their effect on combating corruption.

Quantitative analysis of data from the World Bank’s Enterprise Surveys was performed in order

to frame a proper context in which measures against corruption can be considered. These

relationships were then considered in the subcontext of region, industry, and company size to

determine variation. Results show that business controls are generally resilient to the effects of

management. Management effects are resilient to environmental effects, but only direct business

controls (auditing) are resilient. Indirect business controls (internationally-recognized quality

certification) are sensitive to environmental effects but still retain promise as an anti-corruption

tool. Variations in these results are shown by region, industry, and company size, which

demonstrates the need for carefully tailored anti-corruption plans. The second and final prong of

my study examines whether the fields of institutional theory, business management, and

criminology can be merged to develop relevant insights and solutions. A review of the relevant

literature from these fields reveals the presence of a powerful backdrop in which the issue of

corruption can be framed and where following steps can be taken to address it. Interviews with

senior compliance personnel were conducted for added depth and insight. In summary, I argue

that strong leadership and controls when supported and implemented properly while considering

the larger context in which they are applied, in addition to considering a multidisciplinary

approach, can be a potent force against private sector corruption.

Keywords : Corruption, compliance, ethics, management, leadership, criminology, institutional

theory.

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ACKNOWLEDGEMENTS

I would like to express my gratitude to the following individuals for contributing to my progress

in my doctoral program and other areas of life:

My outstanding committee: Professors Nikos Passas, Ni (Phil) He, Christopher Robertson,

and Alvaro Cuervo-Cazurra. Their insight, advice, patience, and support were invaluable. I

could not have asked for a better group of advisors.

My family: parents Ching Chiao and Peng Cheng, wife Yinan, daughter Eowyn, and

adopted members Leonidas and Liancat. I also want to credit my late grandmother, Lim Ah

Lian, who lived out the principle that it is never acceptable to let your circumstances dictate your

destiny.

I would also be remiss if I do not mention the teachers and mentors who taught me the

meaning of sacrifice and value of good counsel.

Finally, I give honor to the Master Strategist and Tactician who gives meaning and hope in

all situations, even conflict and struggle.

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DEDICATION

For my daughter, Eowyn.

May you rise to serve and protect others.

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TABLE OF CONTENTS

ABSTRACT .....................................................................................................................................2

ACKNOWLEDGEMENTS .............................................................................................................4

DEDICATION .................................................................................................................................5

TABLE OF CONTENTS .................................................................................................................6

LIST OF FIGURES .........................................................................................................................8

LIST OF TABLES ...........................................................................................................................9

CHAPTER I INTRODUCTION ...................................................................................................11

CHAPTER II LITERATURE REVIEW .......................................................................................15

Definitions of Corruption .......................................................................................................15

Causes and Explanations of Corruption .................................................................................18

Consequences of Corruption in the Private Sector .................................................................23

Consequences of Corruption in the Public Sector ..................................................................24

Proposed Solutions to Combat Corruption .............................................................................25

The Role of Compliance and Ethics Program in Combating Corruption ...............................27

The Combination of Criminology and Institutional Theory as a Framework for Analyzing

and Addressing Private Sector Corruption .............................................................................30

CHAPTER III RESEARCH QUESTION, HYPOTHESES, AND METHODOLOGY ...............36

Research Question ..................................................................................................................36

Internationally-Recognized Quality Certification and Corruption .........................................39

Auditing and Corruption .........................................................................................................41

Leadership, Top Management Teams, and Corruption ..........................................................43

Role of Environmental Factors ...............................................................................................46

Role of Region, Industry, and Company Size ........................................................................48

Developing Counterstrategy ...................................................................................................52

Research Design .....................................................................................................................54

CHAPTER IV RESULTS AND FINDINGS ................................................................................59

Analysis of Full Dataset ..........................................................................................................59

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Regional Analysis of Dataset ..................................................................................................70

Industry Analysis of Dataset ...................................................................................................78

Analysis of Dataset by Company Size ....................................................................................85

Interview Results ....................................................................................................................91

CHAPTER V COUNTERSTRATEGY .........................................................................................94

Controls and Leadership Matter .............................................................................................94

Understanding Context ...........................................................................................................96

Multidisciplinary Approach ....................................................................................................98

Mixed Strategy ......................................................................................................................100

Creating Change ...................................................................................................................102

Theoretical Implications .......................................................................................................104

CONCLUSION ............................................................................................................................108

WORKS CITED ..........................................................................................................................112

APPENDIX

Details of World Bank Enterprise Survey 2006-2011 and Other Variables .........................126

Questionnaire for Compliance Personnel .............................................................................128

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LIST OF FIGURES

Figure 1 Proposed Theoretical Framework of Corruption Incorporating Criminology and

Institutional Theory ......................................................................................................35

Figure 2 Original Upper Echelon Model ....................................................................................37

Figure 3 Testable Model .............................................................................................................38

Figure 4 Proposed Counterstrategy Model ..................................................................................53

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LIST OF TABLES

Table 1 Hypothesized Relationships Between Controls, Management, and Environment ......14

Table 2 Potential Benefits and Drawbacks of Compliance Programs ......................................30

Table 3 Descriptive Statistics and Correlations ........................................................................65

Table 4.1 Effects of Environment, Management, and Business Controls on Preventing Informal

Payment Requests ...............................................................................................66

Table 4.2 Effects of Environment, Management, and Business Controls on Preventing

Distributions of Informal Payments .............................................................................67

Table 5 Effects of Independent Variables By Type of Environment ........................................68

Table 6 Effects of Independent Variables on Total Bribe Payments ........................................69

Table 7 GLOBE Survey Details ...............................................................................................72

Table 8.1 Regional Differences in Independent Variable Effectiveness for Internationally

Recognized Quality Certification ................................................................................74

Table 8.2 Regional Differences in Independent Variable Effectiveness for Auditing ................75

Table 8.3 Regional Differences in Independent Variable Effectiveness for Top Manager

Experience ...................................................................................................................76

Table 8.4 Regional Differences in Effects of Independent Variables .........................................77

Table 9.1 Industry Differences in Independent Variable Effectiveness for Internationally

Recognized Quality Certification ................................................................................80

Table 9.2 Industry Differences in Independent Variable Effectiveness for Auditing .................81

Table 9.3 Industry Differences in Independent Variable Effectiveness for Top Manager

Experience ...................................................................................................................82

Table 9.4 Industry Differences in Effects of Independent Variables ...........................................83

Table 9.5 Industry Differences in Effects of Independent Variables ...........................................84

Table 10.1 Company Differences in Independent Variable Effectiveness for Internationally

Recognized Quality Certification ................................................................................86

Table 10.2 Company Differences in Independent Variable Effectiveness for Auditing ...............87

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Table 10.3 Company Differences in Independent Variable Effectiveness for Top Manager

Experience ...................................................................................................................88

Table 10.4 Company Differences in Effects of Independent Variables ......................................89

Table 10.5 Company Differences in Effects of Independent Variables .....................................90

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But you should select from all the people able men, God-fearing, trustworthy, and hating bribes.

Place them over the people as commanders of thousands, hundreds, fifties, and tens. - Exodus

18:21

Leaders should be upright and virtuous but have many strategies. – Zhuge Liang

CHAPTER I : INTRODUCTION

Corruption is a scourge that affects all aspects of society, resulting in devastating effects for

a wide range of institutions and individuals. The private sector plays a significant role in the

supply-demand equation for corruption. When businesses are required to interact with

government officials for various considerations such as obtaining access to government provided

services, licensees, permits, or other legal requirements, opportunities for corruption present

themselves. By engaging in corruption, the private sector serves as an accomplice and

accessory, with magnified consequences due to the increased reach of multinational companies

in this era of globalization. Conversely, some aspects of the private sector also suffer from the

effects of corruption, especially companies that are smaller, less influential, and with fewer

resources (Fisman and Svensson, 2007; Bardhan, 1997; Shleifer and Vishny, 1993; Wei, 1997;

Dreher and Schneider, 2010; Friedman e al, 2000; Emerson, 2002; Ades and DiTella, 1999;

Rodriguez et al, 2005; Smarzynka and Wei. 2002).

Accordingly, combating corruption effectively is a prerogative, with the hope that its

consequences may be alleviated and mitigated for all affected parties, including businesses,

private citizens, and society at large. By reducing the frequency and intensity of corrupt acts, the

supply-demand equation may be considerably altered. Consequently, it is clear that developing

effective measures is paramount in addressing this detrimental phenomenon. Companies should

develop appropriate mechanisms to shield themselves from participation in corrupt activities. I

argue, however, that these measures, should not be considered in isolation as they can be affected

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by outside factors, such as management decisions, the political and business environment, as

well as regional, industry, and company differences.

As such, I propose a multi-pronged approach to the design of a comprehensive anti-

corruption counterstrategy for the private sector. I argue that the first part in development of

effective countermeasures requires the elucidation of context, wherein the relationships between

environmental factors, management, and business controls (i.e. auditing and certified

management systems) are carefully considered. Further, these relationships should also be

considered in the subcontext of region, industry, and company size to determine further

variations which will provide further insights for designing effective counterstrategy.

These aforementioned factors of environment, management, and controls potentially vary

in their ease of implementation, ability to be influenced, and corresponding effectiveness. As

evidenced by the numerous examples of companies involved in illegal activities worldwide,

there is a need for strong business controls that serve as limiting and deterrent mechanisms.

While controls and standards are necessary to address misconduct, they may also be the easiest

to implement. Voluntary control initiatives are potentially ineffective in the face of difficult

business environments where there is a high pressure to be involved in corruption. Yeager

(1995), for example, argues that voluntary codes of conduct by themselves are ineffective in

addressing misconduct. Even in the case of corporate compliance which is heavily linked to

legal requirements, the possibility of misconduct may still be high where there is a lack of

incentives for implementation as well as weak enforcement, investigations, and consequences.

Moreover, there is also the risk that even well-designed programs aimed at controlling

misconduct, including corruption, are developed in isolation without considering other factors

that may influence them. The actions and attitudes of corporate leadership and upper

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management influence the effectiveness of these controls and standards through a strong

commitment to development and implementation or a "tone at the top." The decision-making,

however, of leadership and management is harder to influence, either due to personal ethical

orientations of individuals, quality of leadership and management skills, and a relative lack of

priority placed on ethics, compliance, and integrity due to the profit-centered business

environment. Accordingly, the role of management may affect a commitment to integrity by

either failing to develop adequate controls or, in the scenario where there are strong ones, to

implement them effectively. For example, a company could have well-designed policies and

procedures but a lack of commitment from personnel could lead to under-enforcement or even

non-implementation of such policies and procedures.

Consequently, I argue that the effect of management factors can be quite significant on anti-

corruption policies and procedures. On a positive note, however, because the effects of

leadership and management can be possibly influenced by selection of ethical personnel and the

provision of effective training to increase awareness and technical skills in regards to combating

corruption. Quality and ethical management can also potentially ensure that policies and

procedures are not only well-designed but also strictly implemented.

Finally, even in the presence of strong management and controls, I argue that the effects of

the environment - i.e. the profit-making paradigm, level of corruption, quality of governance,

economic strength, competition, and institutions in a country where business is conducted - may

be so overwhelming that the effects of high-quality management and controls are eroded.

Companies may feel impotent, discouraged, and overwhelmed in the face of difficult odds to be

ethical and competitive in such environments. While these environmental effects may be

potentially countered by government investigations and prosecutions and legislation promoting

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ethical corporate behavior, they would be the most difficult to influence from a company's point

of view. In regions or industries where corrupt practices are either the norm or more prevalent,

the extent of influence that a single company has on the larger environment will be obviously

negligible.

Accordingly, as illustrated in Table 1, I hypothesize that there would be an inverse

relationship between the ability to influence the implementation/direction of these measures and

policies and their effectiveness. I argue that once these relationships are established, a proper

context can be framed in which effective anti-corruption counterstrategy can be considered and

implemented.

Table 1 - Hypothesized Relationships Between Controls, Management, and Environment

Factor Effects on

Corruption

Ability to

Influence or

Implement

Effects on

Controls

Effects on

Management

Controls Low High * *

Management Moderate Moderate Moderate *

Environment Varies Low High High

* not applicable

The second prong of my study involves a synthetic analytical approach from the

perspectives of criminology and institutional theory, as well as other business management

studies. Since the problem of corruption touches both business and criminal justice fields, I

propose that this approach has the potential to provide a powerful backdrop in which private

sector corruption can be analyzed with corresponding potential insights and solutions.

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CHAPTER II : LITERATURE REVIEW

Definitions of Corruption

As an initial matter, there should be a discussion on the definition of corruption. Plainly

speaking, however, there is no consensus. This phenomenon is due to differences between

national laws, diverse disciplinary and cultural perspectives, how the public is affected, and

public perceptions. Nonetheless, there are several categories which frame the boundaries of

what corruption is:

a. Public Office Definitions

Joseph Nye (1967, 966) provides a frequently cited public-office centered definition of

corruption:

"Corruption is behavior which deviates from the formal duties of a public role because

of private regarding (personal, close family, private clique) pecuniary or status gains; or

violates rules against the exercise of certain types of private regarding influence. This

includes such behavior as bribery (use of reward to pervert the judgment of a person in

a position of trust); nepotism (bestowal of patronage by reason of ascriptive relationship

rather than merit); and misappropriation (illegal appropriation of public resources for

private-regarding uses)."

While Nye's definition is a solid one which covers corrupt behavior beyond acts of bribery, the

weakness in this approach includes a too-narrow scope of benefit - i.e. benefits could also extend

to groups or individuals such as a political party or ethnic group - in addition to neglecting

scenarios where public officials do not have strictly defined formal roles.

b. Public Interest Definitions

Balancing out the public-office centered definitions are those that focus on the effects of

corruption on the public interest. Carl Friedrich's (1989, 10) definition is as follows:

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"Corruption can be said to exist whenever a power-holder who is charged with doing

certain things, i.e. who is a responsible functionary or office holder, is by monetary or

other rewards not legally provided for, induced to take actions which favour whoever

provides the rewards and thereby does damage to the public and its interests."

This approach introduces a broader view of the effects of corruption past strictly private benefits

as well as explicit exchanges. The issue here, however, involves what the scope of public

interest covers. A scenario in which a public official receives a bribe to refrain from performing

an unethical action may be deemed corruption as the intent of the law in that case would be for

the "public interest" as it is defined - i.e. bribing a guard in Nazi Germany to look the other way

when enforcing anti-Semitic laws.

c. Market-Based Definitions

Market-based definitions rely on economic principles such as the following definitions by

Nathaniel Leff (1989, 389) and Jacob Van Klaveren (1989, 25-26):

"Corruption is an extralegal institution used by individuals or groups to gain influence

over the actions of the bureaucracy. As such, the existence of corruption per se

indicates only that these groups participate in the decision making process to a great

extent than would otherwise be the case."

"Corruption means that a civil servant abuses his authority in order to obtain an extra

income from the public. Thus we will conceive of corruption in terms of a civil servant

who regards his offices as a business, the income of which he will seek to maximize.

The office then becomes a 'maximizing unit.'"

While acknowledging the economic effects of corruption, the weakness in these market-based

definitions is obvious as they ignore normative ethical aspects of behavior and legitimizes

corruption in many scenarios where bureaucracy is inefficient or burdensome.

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d. Agent-Client Definitions

This set of definitions incorporates the role of agents who are tasked to act on behalf of their

principals or employers, either sacrificing their principal's interest (personal corruption) or acting

illegally or unethically in the furtherance of that interest (official corruption). Accordingly, they

have the benefit of not restricting its scope to public or governmental officials, which is useful

when discussing the supply-side of corruption, which is often the private sector (Carvajal, 1999).

e. Infractions of the Law and Incompatibility with Public Opinion

Encompassing the definitions above are those based in national laws as well as the influence

of public opinion. Here, different countries may have diverging views of what corruption is as

enacted by national legislation as well as what is culturally accepted, especially in countries

where "gift-giving" in pursuit of an exchange is considered a norm. Legal definitions also have

the weakness of criminalizing behavior without considering ethical aspects (Gardiner, 2002).

f. Definitions by International Organizations

The following international organizations define corruption as such:

(i) World Bank

"The abuse of public office for private gain. Public office is abused for private gain

when an official accepts, solicits, or extorts a bribe. It is also abused when private

agents actively offer bribes to circumvent public policies and processes for

competitive advantage and profit."

(ii) Transparency International :

"The abuse of entrusted power for private gain. Corruption can be classified as

grand, petty, and political, depending on the amounts of money lost and the sector

where it occurs."

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(iii) United Nations and Organization for Economic Co-Operation and Development

(OECD)

Neither the UN nor OECD have explicitly defined corruption, but have chosen to list

actions that constitute it - i.e. active and passive bribery in public and private sectors,

embezzlement, misappropriation, trading in influence, abuse of functions, and illicit

enrichment.

(World Bank; Transparency International; United Nations Convention Against Corruption;

OECD).

For purposes of this dissertation, I gravitate to Transparency International's definition, as it

is broad enough to include corruption from both the public and private sectors while taking into

account their various manifestations (i.e. grand, petty, and political).

Causes and Explanations of Corruption and Corporate Crime

Understanding the causes and explanations of corruption from a theoretical standpoint is

integral to elucidating potential avenues in which it can be addressed. Criminological theory is

particularly insightful in this regard, as it delves into the various motivations, processes, and

mechanisms for corrupt behavior.

Corruption in the private sector falls under the definition of organizational white-collar or

corporate crime, which is "perpetrated by organizations or individuals acting on behalf of

organizations" (Braithwaite, 1989, 334). Consequently, corruption is a specific criminal

phenomenon that is a subset of the larger white-collar or corporate crime discussion. Hence, I

argue that theories and principles that apply to the latter and larger field will also potentially

apply to the more specific discussion of corruption.

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The motivation for corporate misconduct is primarily linked to serving the interests of the

corporation, greed and the profit motive, although other factors such as survival, pursuit of

status, and jealousy have been cited as additional ones (Naylor, 2000; Braithwaite, 1989).

Vaughan (1983, 1982) echoes the idea that profit maximization is the key motivating factor in

corporate misconduct. She builds on Merton's (1938) anomie theory which emphasizes

competition and economic success as culturally approved goals that eventually lead to the

erosion of norms supporting legitimate avenues of accomplishing these goals. According to

Vaughan, there are two processes where misconduct occurs - one where legitimate means are

blocked resulting in an organization's inability to compete and the other where legitimate means

are used to enter competition, but once there, the legitimate means become ineffective.

Consequently, the goal of profit maximization is illusory as there will always be the setting of a

higher financial goal once a lower one is reached. This idea is consistent with Passas' (1997)

contention, built on Merton's reference group theory, that certain individuals in societies with

high emphasis on financial goals will always compare themselves to those with higher financial

status, resulting in relative deprivation in all parts of a society.

Vaughan also lists organizational processes, structure, and complexity of transactions as

significant contributors to corporate crime. Although these components of the business sector

were originally designed for legitimate business activity, they can be usurped for illegitimate

purposes. Organizations often recruit individuals whose qualities and goals are aligned with the

organizational culture and needs, followed by the reinforcing of this relationship through

rewards, financial dependence, and insulation from the outside world. Organizational structure

also reduces the probability of detection and sanctioning of unethical or illegal behavior.

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In addition to the profit motive, Clinard (1980) argues that a corporation also desires to

shape its political and business environment. He adds that the drive for profit and power are not

illegal in themselves, but when it overshadows all other considerations, undesired consequences

potentially follow. He cites organizational structure and processes as some of the main

contributing factors to corporate crime - i.e. complex relationships and expectations; factors such

as size, delegation, and specialization that lead to an abdication of personal responsibility. He

also argues that organizational hierarchies promote rigidity and timidity in the lower ranks while

diluting any message that management might send. Consequently, even if those in the lower

ranks were to report unethical or illegal behavior, upper management may not want to be

informed of negative facts or knowledge, leading to tacit approval. Clinard also blames the

culture of organizations, tying them to industry norms, with more competitive industries

hypothesized to be more involved in corporate crime. The mechanism he cites to is Sutherland's

(1949) theory of learning by differential association where violations result due to economic

position and to Goodman's (1963) mechanism of socialization into the culture of an organization

based on industry conditions, traditions, market guidelines, corporation goals, and the

aspirations and qualities of managers.

Becker's (1968) economic model makes the argument for a rational choice framework in

corporate crime - where benefits of illegal activity are weighed against costs of detection and

punishment. Extending this framework is the principal-agent model whereby agents (i.e.

employees) have the discretion to conduct illegal activity while the principal (i.e. company,

stockholders) maintains power through incentive and control structures that affect the agent.

Joint decisions by both principal and agent affect the probability of deciding to partake in such

illegal activity (Alexander and Cohen, 1996).

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Consistent with the rational choice tradition, Cressey (1950, 1953, 1965) proposes a

framework whereby rationalization, pressure, and opportunity converge for illegal behavior. In

this framework, would-be violators legitimize their behavior through manipulation of definitions,

are driven by the motivation of status maintenance and enhancement, and weigh the risk of

getting caught in their decisions to commit illegal acts. Consistent with Vaughan (1982, 1983)

and Clinard (1980), Chirayath et al (2002) builds on the theory of differential association on an

organizational level whereby criminal behavior is learned, reinforced, and internalized through

corporate socialization and selective association with competitors.

Nonetheless, I argue that frameworks that solely focus on rational choice and controls have

validity but may not be as accurate in describing the problem as not all organizations or

companies participate in misconduct, especially where the rewards are significant and the

probability of detection are relatively small in comparison. Braithwaite (1985, 7) sums up:

"Given the great rewards and low risks of detection, why do so many business people

adopt the 'economically irrational' course of obeying the law?"

Braithwaite (1989) also sets forth a useful template for combining criminological theories to

explain corporate crime. He argues first for an opportunity theory whereby the combination of

goal blockage and illegitimate opportunities lead to a subculture conducive to crime. This

subculture is influenced by differential association but the mechanism of shaming is the "tipping

point" for whether norms favoring illegal activity take hold.

Beyond the analysis of individual and organizational behavior, the phenomenon of

globalization has also been posited to affect corporate misconduct. Consistent with Passas'

(2000, 1999) theory of global anomie, which links globalization with economic and corporate

misconduct through the mechanism of political, legal, and cultural asymmetries, Chirayath et al.

(2002, 132) blames "the transnational encouragement of the hyper-mobility of capital, the

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unending search for cheap foreign labor, and the immobility of domestic labor [resulting in]

oligopolization and expansionism." (see also Vaughan (1982) - predicting that modernization

would increase opportunities for wrongdoing and where norms would be challenged and eroded;

Grabosky (1998) - blaming rise in transnational crime on rapid mobility and a shrinking world).

Martin et al (2007) also finds empirical support for the role of cultural and institutional factors in

affecting firm-level bribery in different countries that supports an anomie framework.

Finally, Johnston (2005) adds to the discussion by proposing that corruption does not take

on a single form but rather can be delineated into syndromes of corruption which are expressed

differently depending on state, political, and social institutions in various countries. He identifies

corruption as having four forms - influence markets, elite cartels, oligarchs and clans, and

official moguls, with different prescriptions for reform. In regards to this study, Johnston’s

framework demonstrates that a generalized solution to corruption is not a wise one. Instead,

taking into account various factors to design a nuanced and more specific strategy is likely to be

more efficient and effective.

I propose that the various ideas discussed in the preceding paragraphs are applicable to

corruption, where bribery and other acts are generally committed to further the same ends of

profit maximization, survival, and pursuit of success. Because companies may be susceptible to

the mindset that they are unable to compete legally, they will also potentially resort to corrupt

acts to compensate for this perceived or actual setback. Moreover, organizational processes,

structure, and complexity of transactions will undoubtedly impact the rate and ease of corrupt

transactions as these factors serve as avenues of obfuscation and reduction of detection and

sanctioning. Large and complex organizational hierarchies also affect the acceptance of

employees’ personal responsibility to act ethically while mitigating related directives from

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management and leadership. Finally, the increase in transnational business also affects the

opportunities for corrupt activities through a combination of pressures to succeed, increased

mobility, and erosion of norms.

Consequences of Corruption in the Private Sector

Understanding the consequences of corruption in the private sector is also an integral part of

combating corruption. A strong awareness of the substantial and damaging effects of corruption

will lead to increased urgency on part of companies and governments to make combating

corruption a priority. Because corruption affects day-to-day operations, profits, and strategies of

businesses, efficiency and effectiveness of the private sector can be significantly hindered.

The nexus between government and the private sector is a fertile area for bribery and other

forms of corruption. Because businesses are required to interact with governmental officials,

whether on a domestic or international level, there are potentially limitless opportunities for

corrupt interactions between both parties (Svensson, 2003; Shleifer and Vishny, 1999; Bardhan,

1997). Accordingly, corruption poses a major threat to the business environment through the

effect of bribery due to its secretive nature and arbitrariness (Fisman and Svensson, 2007;

Bardhan, 1997; Shleifer and Vishny, 1993; Wei, 1997). Ultimately, the corrosive effects of

corruption can also lead to growth in the shadow economy of a country while reducing

competition among businesses, ultimately resulting in fewer formal firms – which as mentioned

previously, potentially increases corruption in another manifestation of its vicious cycle (Dreher

and Schneider, 2010; Friedman et al, 2000; Emerson, 2002; Ades and DiTella, 1999).

Corruption also specifically affects the private sector by altering business strategy,

especially in the context of multinational firms. Multinational subsidiaries, even those with a

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strong ethical commitment, are more likely to engage in corruption in environments where it is

pervasive (Rodriguez et al, 2005). Here, corruption also acts as a tax on foreign investors

through lack of bureaucratic transparency and poses obstacles to business through lack of asset

protection and fairness in dispute resolution (Smarzynska and Wei, 2002). Perversely, in high-

capture economies, participating in corruption increases asset protection and firm performance,

even though this results in weaker performance in the overall economy (Hellman et al, 2003).

Finally, corruption leads to higher exit rates and the stunting of firm growth (Hallward-Drier,

2009; Svensson, 2000).

Studies indicate that criminal violations are associated with larger firms, greater hierarchy,

those with lower performance compared to their industry, and those in dynamic, munificent

environments. The size of a firm may be linked with increased opportunities for illegal activity.

The link between firm size and criminality, however, has been called into question as larger

firms may be more likely to be investigated and their committing of crimes may not be

proportionally higher than smaller firms (Alexander and Cohen, 1996; Baucus and Near, 1991;

Svensson, 2000; Tanzi and Davoodi, 1997).

Consequences of Corruption in the Public Sector

In the public sector, investment, economic growth, and macroeconomic stability are also

negatively affected by corruption (Mauro, 1997; Gupta, 1998; Doh et al, 2003; Blackburn et al,

2004; Cuervo-Cazurra, 2008; Seligson, 2006; Emerson, 2002; Olken, 2006; Clausen et al, 2009;

Mo, 2001; Kaufmann and Wei, 1999; Serra, 2006). High corruption levels affect income

inequality, poverty, tax systems, social spending, formation of human capital, distribution of

asset ownership, and access to education (Gupta et al, 2002). Other aspects of society also

25

affected include bureaucratic transparency, operations, maintenance, and quality of public

infrastructure (Tanzi and Davoodi, 1997; Smarzynska and Wei, 2002). Moreover, the effects of

corruption are especially problematic as there appears to be a contagious effect when left

unchecked. Cadot’s (1987) model demonstrates how corruption, once incentivized at a lower

level, develops upstream, resulting in an environment tolerant and conductive to bribery while

Goel and Nelson (2007) demonstrate that in the United States, a state’s corruption levels are

affected by increases in the corruption levels of neighboring ones.

Proposed Solutions to Combat Corruption

In this section, proposed solutions to combat corruption are discussed. Being aware of the

range of proposed solutions is integral for decision-makers to develop appropriate

counterstrategy. These solutions range from political, economic, and company-level ones, which

provide a strong arsenal of available options in the fight against corruption.

Clinard (1980) recommends three approaches to addressing corporate misconduct, including

corruption : voluntary change through promotion of ethics and organizational reform;

government intervention in the private sector, including larger and more effective regulatory

staff, stiffer penalties, nationalization of industries, and wider use of publicity; and consumer

group pressures through lobbying, selective buying, and boycotts. He also emphasizes the

enforcement of codes of ethics, rewards for compliance, the role of business school education in

promoting ethics, and stricter enforcement of laws and related penalties, including prison for

individual offenders (Clinard, 1990).

On the other hand, Vaughan (1983, 1982) does not view increased governmental

surveillance and punishment of organizations as effective. Rather, she considers them as

26

potentially increasing motivation for illegal activities. For example, indicators that are

monitored may be falsified, added costs of surveillance may lead to increased pressures to attain

resources, and imposed sanctions may result in reduced profit-making capabilities. Instead, her

primary proposed solution to corporate crime is reducing transactional complexity in order to

reduce opportunities for illegal transactions, including simplifying reporting and filing

requirements and self-surveillance (Vaughan, 1983).

Further, Paternoster and Simpson (1996) have empirically demonstrated that it is a

combination of threats of punishment and appeals to morality that may be more effective as

potential solutions. In their study, they found that individuals with a high personal moral code

were not affected significantly by a cost-benefit analysis of whether to participate in illegal

activity, but sanctions were more effective for those with a weak moral code.

Apart from corporate solutions, economist Rose-Ackerman (1999) proposes solutions to

corruption grounded in a governmental perspective. Her main ideas are program elimination,

privatization of national industries, reform of public programs (especially in procurement), and

administrative reform. In regards to governmental regulation and intervention, Clinard,

Quinney, and Wildeman (1994) rely on a critical approach to emphasize their lack of

effectiveness. From their perspective, the economic and political power of corporations leads to

leniency and elites are often recruited into government where they end up contributing to the

passage of favorable laws and regulations. Snider (1993) adds nuance to this argument,

however, by stating that determinism is unwarranted as regulatory agencies have demonstrated

more autonomy and that legislation exists that does not protect capitalism. Subsequently, she

emphasizes that passing new laws is not as important as implementing them. There are also

questions about the effectiveness of investigations, prosecutions, and other anti-corruption

27

initiatives if factors such as governance, environment, and implementation are not considered

(Prendergast, 2002; Anechiarico and Jacobs, 1996; Kolstad and Wiig, 2009; Kugler et al, 2005;

Weismann, 2008).

Other possible mechanisms of combating corruption include involving international

organizations and related conventions like the United Nations Convention Against Corruption

(UNCAC) as well as establishing anti-corruption agencies and initiatives. There are questions,

however, about the effectiveness of these measures. Criticisms of the UNCAC include questions

about implementation and monitoring by implementing actors due to the balancing of

international obligations and domestic sovereignty and the non-mandatory nature of application

to the private sector. In terms of anti-corruption agencies and initiatives on a governmental

level, the effects of these may be negligible, and in some cases, have the possibility of increasing

the public’s perception of corruption rather than reducing actual corruption levels. Here, without

political will by governments, which in many cases is sorely lacking, these national anti-

corruption programs are potentially questionable in impact (Argandona, 2007; de Sousa et al,

2009; Webb, 2005; Rose-Ackerman, 1999; Steves and Russo, 2003; Shah and Schachter, 2004).

Possible mitigating factors to consider in effectiveness of combating corruption is taking into

account different strategies, including economic reform, depending on the country and the type

and stage of corruption it is facing (Shah, 2007; Hellman and Schankerman, 2000).

The Role of Compliance and Ethics Programs in Combating Corruption

One of the dominant strategies towards curbing and controlling behavior in the private

sector’s role in the supply-demand equation for corruption is the use of compliance and ethics

programs (Biegelman and Biegelman, 2010; Ruhnka and Boerstler 1998; Moohr, 2007). On a

28

practical level, such programs are integral in mitigating legal penalties for organizations and

factor heavily into government decisions to investigate or prosecute (Huff, 1996; Ruhnka and

Boerstler, 1998). Key to an effective compliance program is emphasizing and transmitting

aspirations and values supported by laws and regulations (Lange, 2008; Ashforth et al, 2008).

Although there are notable criticisms of compliance programs, including the charge of "window-

dressing" (Krawiec, 2005; Parker and Nielsen, 2009; Wellner, 2005; Conway, 1994; Laufer,

2008), difficulty in investigating and prosecuting such cases (Arjoon, 2005), inadequate or

overly harsh penalties (Parker, 2006), high costs of implementation (Goldsmith and King, 1997;

Wellner, 2005), and conflicts of interests (Coglianese, 2004) there are strong arguments for their

enactment and implementation.

Perhaps the most promising effects of a compliance framework are collateral consequences

such as reputational risks to companies that violate the law, which can be reflected in changes in

stock price and firm value. For certain offenses, including bribery, civil or market-based

sanctions are far more effective than criminal ones (Alexander, 1999). At the first news of

criminal allegations, reports of negative consequences concerning customers, management,

employees, and decline in stock prices rapidly ensue (Aviram, 2005; Moohr, 2007). Specifically,

market-based penalties (measured by mean dollar-valued stock-price decline) are estimated at

four times the value of court imposed penalties (Alexander, 1999). Murphy et al (2009) also

reinforce support for reputational penalties by demonstrating that allegations of misconduct are

followed by decreases in earnings and increases in stock return volatility. In their study of SEC

enforcement actions involving financial misrepresentation, Karpoff et al (2008) state that on

average, "firms lose 41% of their market value when news of the misconduct is revealed and

estimate that of this loss, 24.5% is related to the market's adjustment to more accurate financial

29

information, 8.8% reflects expected legal sanctions, and 66.8% reflects market-imposed

reputational penalties." Chhaochharia and Grinstein (2007) also found that the governance rules

enacted by the Sarbanes-Oxley Act, such as independence of audit committees, certification of

financial statements, monitoring of controls, and increased oversight, had an economically

significant impact on firm value, at least from investor perceptions. Finally, Goncharov et al.'s

(2006) study of the conformity of big German publicly traded corporations to the German

Corporate Governance Code (GCGC) demonstrated that firms that were more compliant with the

GCGC enjoyed a 9 percent premium on pricing in the capital markets with a 10 percentage point

increase in stock performance. Further, a potential benefit would be to use the tactic of

combining the implementation of compliance with a certified management system (i.e. ISO

9000), which would lead to an efficient use of financial and human resources. This approach not

only has the purpose of curtailing misconduct but increasing intelligence and information which

would allow better decision-making for their organizations (Wagner and Dittmar, 2007).

Moreover, organizations may have more access to information and intelligence in

identifying challenges and problems related to ethics and compliance, as they by default will

have greater proximity to their specific industries. Such programs will benefit from greater

flexibility and insight by specific organizations (Coglianese et al, 2004). The potential benefits

and drawbacks of ethics and compliance programs are summarized in Table 2 below:

30

Table 2 - Potential Benefits and Drawbacks of Ethics and Compliance Programs

Benefits Drawbacks

Ability to emphasize and transmit aspirations

and values supported by laws and regulations

Difficulty investigating and prosecuting related

cases

Ability to capitalize on collateral consequences

reflected in various measures of firm value

Inadequate or overly harsh penalties

Efficient use of financial and human resources

when combined with management system

Improperly implemented programs

Ability of organizations to obtain information

and intelligence due to proximity to industries

High expense of development and

implementation

The Combination of Criminology and Institutional Theory as a Framework for Analyzing

and Addressing Private Sector Corruption

In order to have a better understanding of corruption and corresponding ways to address it,

and the second prong of my research design, I propose a synthetic framework that combines

elements of criminological theory and institutional theory, as well as other studies from business

management (Figure 1). I argue that looking at these relevant fields affecting corruption can lead

to more creativity, versatility, and expansion of knowledge.

In terms of explaining motivation or causation of corruption in the private sector, I build on

the anomie tradition of Merton (1938) who cites to the high relative emphasis on cultural goals

such as attaining wealth or success and the corresponding low relative emphasis on norms or

rules for attaining these goals, which results in a state of anomie or normlessness. Merton also

proposes the mechanism of individuals experiencing strain or pressure if they are prevented from

achieving success through legitimate means. As a result of this strain or pressure, several

possible responses can ensue: conformity, innovation, retreatism, ritualism, or rebellion.

31

Criminal activity is considered a form of innovation to address this discrepancy between goals

and means.

As multiple scholars have argued, this anomie/strain tradition can be applied to the corporate

world where profit maximization, growth, and efficiency are established and emphasized goals

(Passas, 1997, 1990; Vaughan, 1997, 1983, 1982; Naylor, 2000; Braithwaite, 1989). This

"ceaseless striving for success" (Passas, 1990) is exacerbated by globalization and the power of

multinational corporations (Passas, 2000; Chirayath et al, 2002; Grabosky, 1998). The key point

to be made here is that these goals will always exist and cannot be fully reached. Once a

corporation reaches a financial or status goal, it will need to maintain its position, exceed it, or

prevent a decline. Accordingly, companies may feel constant strain or pressure. When they

cannot use legitimate means to compete in the marketplace, companies may resort to corruption

as a form of innovation, or response to this state of events, to bridge the gap between its aims and

lack of legitimate means. In terms of corruption, this strain leading to the choice to participate in

bribery can occur at both high and low levels for companies. Companies that wish to obtain

lucrative contracts may need to pay a significant amount in bribes to government officials to

ensure favorable treatment. Those who feel that they are at a competitive disadvantage may

attempt to even out the playing field with their rivals by being involved in corruption.

Conversely, companies that wish to conduct a basic level of business may also need to pay bribes

for necessities such as licenses, permits, or access to utilities, hence striving for survival.

Companies also are affected in their decisions to be involved in corruption through the

process of differential association where behavior is influenced by the associations that one

interacts and identifies with, whether they are groups or individuals. These associations can

differ in intensity, frequency, priority, and duration (Sutherland and Cressey, 1960; Sutherland,

32

1949). Further, the process of differential reinforcement affects behavior through the balance of

rewards and punishments over time. Here, the amount, frequency, and probability of rewards

affect the likelihood of occurrence of behavior (Akers and Jensen, 2010; Akers, 1998). In

certain industries or countries where business is conducted, the pressure to bribe may be very

high. In such competitive environments, there is a history of high rates and incidence of

corruption. Further, there is an imbalance of rewards and punishments due to the lack of

detection, and even in situations where there are investigations and prosecutions, relatively lax

enforcement and low penalties. Corporate socialization and selective association with

competitors also likely adds to the process of differential association (Chirayath et al, 2002).

Finally, a subculture of corruption is normalized in companies through rationalizations and

systemized beliefs, leading to decreased respect for and commitment to the law (Passas, 1997).

This normalization of deviance can be a result of redefining deviations as acceptable risk

(Vaughan, 1997) or through a combination of institutionalization – corruption being practiced

unconsciously; rationalization – legitimizing corruption with socially constructed accounts; and

socialization – education of newcomers into the culture of misbehavior (Ashforth and Anand,

2003; Anand et al, 2005). Consequently, a lack of commitment to compliance and ethics in

addition to bribery used as an accepted and tolerated method of conducting business can lead to a

widespread culture of corruption. The case of the Siemens Corporation is a seminal example of

this creation of a subculture whereby decades of lax controls led to a situation whereby the

company and its subsidiaries regularly used a formidable arsenal of methods to engage in

corruption including cash desks where employees could withdraw sums for corrupt payments,

slush funds, resale transactions, and sham supplier agreements (Charging Documents, US vs.

Siemens).

33

In addition to criminology, I propose a parallel use of institutional theory from the field of

organizational management to explain the phenomenon of corruption. A significant component

of institutional theory involves the effect of isomorphisms - forces and constraining pressures

that affect organizations. Over time, through the isomorphic process, organizations become

more homogeneous. The first of these, coercive isomorphism, "results from both formal and

informal pressures exerted on organizations by other organizations upon which they are

dependent and by cultural expectations in the society within which organizations function. Such

pressures may be felt as force, as persuasion, or as invitations to join in collusion." Next,

mimetic isomorphism occurs when "organizational technologies are poorly understood, when

goals are ambiguous, or when the environment creates symbolic uncertainty," resulting in

imitation of organizations by others. Finally, normative isomorphism is the adoption of forms

and structures due to professional standards and practices established by education, training

methods, professional networks, and movement of employees among firms. Organizations can

adopt the effects of isomorphism in order to build stability and ensure survival but in doing so

exchange efficiency and effectiveness (Meyer and Rowan, 1977; DiMaggio and Powell, 1983,

150-151). Institutionalized activities can exist on an individual-level (i.e. managers following

norms, habits, customs, and traditions), organization-level (i.e. through shared political, social,

cultural, and belief systems), and interorganizational-level (i.e. through pressures from

government, industry alliances, and expectations from society) (Oliver, 1997). In general, the

greater the degree of institutionalization, the greater the uniformity and maintenance of practices,

and thereby resistance to change (Zucker, 1997). Scott (2008) identifies three elements that

support institutions - regulative, normative, and cultural-cognitive, which in turn are related

respectively to coercive, normative, and mimetic mechanisms. Oliver (1991) also discusses

34

possible strategic responses by organizations to institutional processes - acquiescence,

compromise, avoidance, defiance, and manipulation, which in turn are affected by cause, reason,

type, context, and mechanisms of pressures faced.

Because of the similarity in processes proposed by institutional theory to criminology in

explaining corruption, I argue that it can be co-opted and incorporated into a theoretical

framework. Coercive isomorphism parallels the strain or pressures described in Merton's anomie

theory. As defined by institutional theory, coercive isomorphism relates to rules, standards, and

expectations from other organizations. This definition can be extended to governments who

require bribes, general pressure from the business environment to achieve lofty and strict

financial goals, high corruption levels, poor environments related to governance and political

institutions, and even legal standards and rules that provide opportunities for corruption such as

unwieldy business regulations. Mimetic isomorphism parallels the mechanism of differential

association and reinforcement where exposure to corrupt behavior can lead to imitation. Here,

an organization adopts corrupt behavior for stability and survival in the face of uncertainty

related to the pressure to be involved in bribery, but exchanging integrity in the process. As

DiMaggio and Powell (1983, 154) hypothesize, "the more uncertain the relationship between

means and ends, the greater the extent to which the organization will model itself after

organizations that it perceives to be successful." In this case, the goals of survival and success

are interchangeable, as the former is a prerequisite for the latter. Firms that end up succumbing

to or actively engaging in corruption are more likely to be modeled after by others. Finally,

normative isomorphism parallels the formation of a corrupt subculture and normalization of

deviance through the potential avenues of lack of education and training, unethical behavior by

professional networks, and movement of corrupt employees. Here, instead of the adequate

35

provision of norms, there is an absence of such that prevents the regular pathway of normative

isomorphism.

Figure 1

Proposed Theoretical Framework of Corruption Incorporating Criminology and Institutional

Theory

Criminological Theory Institutional Theory

Strain/Pressure Business environment and corrupt

government officials; poor

environments related to

governance and political

institutions

Differential Association Pressure to be involved in,

frequency, and history of corrupt

behavior

Differential Reinforcement Imbalance in punishments and

rewards from lack of detection and

lax enforcement/penalties

Formation of Subculture and

Normalization of Corruption Rationalizations and redefinition of

risks

Decreased respect and

commitment to the law

Coercive Isomorphism

Business environment and corrupt

government officials; poor

environments related to

governance and political

institutions

Mimetic Isomorphism

Exposure to and imitation of

corrupt behavior from other

organizations

Normative Isomorphism

Absence of norms caused by:

Lack of education and training

Unethical behavior by professional

networks

Movement of unethical employees

36

CHAPTER III : RESEARCH QUESTION, HYPOTHESES, AND METHODOLOGY

Research Question

As discussed previously, a major component of developing counterstrategy is the elucidation

of context through the relationships between environmental factors, management, and business

controls. These variables are also linked to various theoretical concepts in the relevant

disciplines of criminology and institutional theory such as strain/coercive pressures,

cognitive/mimetic pressures, and normative pressures. By understanding the relationships

between these components, policy and theoretical implications can be generated with relevant

consequences for anti-corruption measures.

Hence, the first prong of the research question in order to elucidate context for developing

counterstrategy is as follows:

What are the relationships between environmental factors, management, business controls, and

corruption?

In this study, I propose using the framework of the upper echelon model (UE) as the starting

point of the analysis for a proper context in which to consider anti-corruption counterstrategy.

The UE model attempts to incorporate the cognitions, values, and perceptions of executives and

management in affecting strategic choices and outcomes, to corporate illegality. In short, leaders

and managers have the potential to affect performance directly and indirectly. Because these

cognitions, values, and perceptions of executive and management are difficult to measure,

managerial characteristics are used as proxies. In summary: “(1) strategic choices made in firms

are reflections of the values and cognitive bases of powerful actors; (2) the values and cognitive

bases of such actors are a function of their observable characteristics like education or work

experience, and as a result; (3) significant organizational outcomes will be associated with the

37

observable characteristics of those actors” (Carpenter et al, 2004, p. 750-752). Conversely, the

use of controls or systems are meant to standardize behavior through the use of punishment or

coercion to achieve compliance or attempting to align individuals with organizational goals and

values (Simon, 1957). Such controls can include compliance and ethics programs, as well as

independent auditing and certified management systems.

The original UE model (Figure 2) as proposed by Hambrick and Mason (1984) is as follows:

Figure 2

Original Upper Echelon Model

Based on this model, the strategic choices a company makes will have an effect on

performance, which in turn is a reflection of the top management team's (TMT) characteristics.

For example, there is evidence that age, which can be represented by managerial youth, is linked

with corporate growth. This state of events may be explained by the propensity of younger

managers and leaders to pursue riskier strategies than older ones. In a similar vein, the

functional track and relevant career experiences of a decision-maker may also exert influence on

the type of strategy chosen (Hambrick and Mason, 1984).

Observable UE

Characteristics Age

Functional tracks

Other career

experiences

Education

Socioeconomic roots

Financial position

Group characteristics

Strategic Choices

Product innovation

Unrelated diversification

Related diversification

Acquisition

Capital intensity

Plant & equipment newness

Backward integration

Forward integration

Financial leverage

Administrative complexity

Response time

Performance

Profitability

Variations in profitability

Growth

Survival

38

In terms of the measured variables in this dissertation, manager tenure falls under observable

UE characteristics while bribery and financial performance measures are performance indicators

under the UE framework. Auditing and internationally recognized certification fall under a

control framework. I argue, however, that this set of factors, at least in terms of quality of

implementation can also be thought of as strategic choices by a company and its

leadership/management or a commitment to compliance and ethics. Finally, augmenting the

model is the incorporation of variables to capture environmental factors such as poor

governance, burdensome business regulations, effects of corruption, informal competition, and

economic strength.

This testable model (Figure 3) is also consistent with the theoretical framework described

previously whereby the strains/pressures from environmental factors erode the effectiveness of

norms and controls.

Figure 3

Testable Model

TMT Characteristics

Top Manager Tenure

Strategic Choices of Control

Systems

Quality Certification

Auditing

Performance

Control of Bribery

Environmental Factors

Economic Strength

Business Regulations

Corruption

Governance

Informal Competition

39

Internationally-Recognized Quality Certification and Corruption

Internationally-recognized quality certifications or certified management systems (i.e. ISO

9000, ISO 14001, Six Sigma) are meant to increase the quality and scope of business practices,

including management practices. Certifications have the potential of improving performance

and technical standards and may be as useful as official laws to regulate behavior, with also the

possibility of promoting corporate social responsibility. Certifications may also potentially

provide a more uniform standard for companies on an international level in comparison to

national laws which may vary across countries (Graffin and Ward, 2010; Terlaak, 2007;

Zwetsloot, 2002). Because ISO 14001, an environmental management system, is instantly

recognized as a governing standard and widely known and adopted, it may be useful due to its

immediate legitimacy. Further, ISO 9000, a quality management standard, has been described as

an instrument of power and control that can be used effectively for mobilization, acquiring

legitimacy, and solving technical problems (Boiral, 2003; Walgenbach, 2001).

Although studies have been mixed in terms of certifications’ effect on financial

performance, they have been shown to reduce uncertainty, and improve clarity in implementation

and operating performance (Benner and Veloso, 2008; Naveh and Marcus, 2005; Quazi et al

2002; Walgenbach, 2001; Zu et al, 2008; Graffin and Ward, 2010). Bansal and Hunter (2003)

argue that there is evidence that the use of ISO 14001 certification improves financial

performance indirectly through improving international trade, increasing resource efficiency, and

improving product quality. Corbett et al (2005) also asserts that a firm's decision to seek their

first ISO 9000 certification was followed by significant abnormal improvements in financial

performance.

40

Implementation of certifications are affected by whether they are substantive or symbolic in

nature as well as the qualities of the implementing group which could involve dissidents,

ceremonial adopters, or quality enthusiasts, and the motives behind implementation (Christmann

and Taylor, 2006; Boiral, 2003; Bansal and Hunter, 2003). Boiral (2003) chronicles how the

implementation of a standard is affected by various factors such as renegotiation,

reinterpretation, and modification. His study of ISO 9000 implementation revealed that not all

organizations demonstrate total commitment to the values and standards of the management

system. 36 percent of companies were described as "quality enthusiasts" while the remaining

were "ceremonial integrators" at 40 percent and "dissidents" at 20 percent. The "ceremonial

integrators" saw the management system as unconvincing and questionable with improving a

company's image and generating contacts as the main motivation behind implementation.

Evaluation and auditing of the implementation of the management system was thought of as

either an examination to be passed or an adversarial game to be played. Christmann and Taylor

(2006) state that symbolic and substantive implementation of international certifiable standards

are affected by customer expectations, monitoring, and expected sanctions by customers (see

also Jiang and Bansal, 2003). Nonetheless, despite the challenges inherent in implementing such

systems, foreign suppliers may have the ability to improve standards in emerging economies via

this avenue.

From a theoretical standpoint, I propose that the choice of certified management systems as

a variable of interest fits within the normative component of pressures that may affect behavior

of companies (Scott, 2008). As the goal of these certified management systems is to set

standards for operations, performance, or other qualities, I argue that there is significant potential

for positive normative pressures on companies.

41

In summary, I conclude that companies that have certified management systems can be

surmised to have a commitment to meeting standards and increasing performance. Some of

these management systems have auditing requirements to ensure proper implementation, which

means that a company must demonstrate some measure of discipline and organization to meet

those standards. Accordingly, I argue that the role of certified management systems is one that

strengthens controls and increases resistance to corruption.

As such, I infer that the required discipline and organization may also mean that a company

is less tolerant of disorganization and lack of discipline in other areas of business, including

those related to ethics and compliance. By raising the level of professionalism and quality in a

company, among other factors, I also propose that certified management systems may also have

the added indirect effect of raising expectations for employees to also act in an ethical manner.

Consequently, I predict that those with an internationally-recognized quality certification will

have lower rates of corruption.

Hypothesis 1 - The presence of an internationally-recognized quality certification will be

negatively associated with rates of corruption.

Auditing and Corruption

The classic role of auditing aims to establish and enhance control through enforcing laws

and standards (Everett et al, 2007). The role of audits also has been shown to be particularly

effective in the anti-corruption arsenal (DiTella and Schargrodsky, 2003; Tanzi and Davoodi,

1997; Ferraz and Finan, 2008; Olken, 2007).

42

DiTella and Schargrodsky's (2003) study of wages and auditing on hospital purchasing in

Buenos Aires, Argentina is especially insightful. Their findings indicated that there was benefit

from using a mixed approach of using wages and auditing to controlling corruption per the

Becker-Stigler model of combining the two approaches. In their study, the effect of auditing

overrode that of wages when the former's level was high. When the level of auditing was

decreased, however, the role of wages had more of an effect. Accordingly, I propose that the

proverbial use of "carrots and sticks" should be considered in designing tactics and strategy

against corruption.

Ferraz and Finan's (2008) findings corroborate the effectiveness of audits, but with an

additional factor of media dissemination of findings. In their study of the Brazilian federal

government's use of random audits of municipalities and its connection to electoral outcomes,

the release of the audit outcomes had a significant impact on incumbents' electoral performance,

with further effects in municipalities where local radio broadcasted this information. This study

indicates that an additional factor of educating an audience on corrupt individuals through a

medium, especially the powerful avenue of mass media, can operate as an effective tool for

shaming with other consequences for violators.

Finally, Olken's (2007) study of Indonesian village road projects indicate that increasing the

probability of government audits reduced missing expenditures and cost estimates. Conversely,

grassroots monitoring was relatively ineffective. In this study, top-down monitoring had a

significant effect even in a highly corrupt environment.

Moderating auditing’s effects, however, could be auditors’ biases and qualities and potential

collusion with corporate wrongdoers (Bazerman et al, 2002; Karcher, 1996). Internal auditing is

also problematic as it creates conflict of interests and whistle-blowing scenarios (Hunton and

43

Rose, 2011). Another possible problem is the circumventing of these financial controls through

delegation of illegal payments to other parties and other tactics.

From a theoretical standpoint, the choice of auditing as a variable of interest also fits within

the normative component of pressures. It is clear that the role of auditing is to act as a control

and a mechanism for setting standards for good financial practices, exerting significant

normative pressures on companies to act ethically (Scott, 2008).

Notwithstanding the potential problems with auditing, I predict that its effect should still be

significant. The various empirical studies demonstrate that the effectiveness of auditing holds

true even in environments with high corruption. Further, when carried out properly, I argue that

effective and independent auditing can help identify inaccuracies and potential instances of

misconduct, while also serving as a deterrent to future misconduct. Its role as a control may be a

significant one as potential participants in bribery may be less likely to be involved if there is an

increased risk that their misconduct would be detected. Requests for bribes may also be curtailed

if would-be requesters know in advance that a company is less inclined to comply. As such, I

predict that companies with annual financial statements checked by an external auditor will be

negatively associated with rates of corruption.

Hypothesis 2 - The presence of annual financial statements certified or validated by an external

auditor will be negatively associated with rates of corruption.

Leadership, Top Management Teams, and Corruption

Consistent with upper echelon theory, which links organizational outcomes with qualities of

management, top management teams (TMT) can affect an organization’s performance through

44

several pathways, including affecting setting of strategy, resources, employment affiliations with

various parties in a business plan, and time spent in the business arena (Finkelstein et al, 2009;

Pegels et al, 2008; Carpenter et al, 2004; Hambrick and Mason, 1984; Collins and Clark, 2003;

Higgins and Gulati, 2006; Holcomb et al, 2009; Nair, 2006; Colbert et al, 2008; Mackey, 2008;

Goll and Rasheed, 2005). The proposition above is also consistent with anomie theory as top

management teams have the potential to provide strong normative guidance which would disrupt

deviant and corrupt processes (Passas 2000; 1999). Manager qualities also have been linked to

performance across several industries while management techniques may transcend cultural

backgrounds and override the effects of environmental influences (Norburn and Birley, 1988;

Al-Jafary and Hollingsworth, 1983; Weaver et al, 1999). Influencing the effects of strategic

leadership and management, however, are organizational rules and characteristics (Kull and

Wacker, 2010; Hendricks and Singhal, 2001; Shrivastava and Nachman, 1989; Mackey 2008).

Nevertheless, the effect of leadership and management is substantial, with one study

demonstrating that CEO effects are generally greater than those of the industry and the firm

(Mackey, 2008). Even in the context of economic development throughout history, the role of

leadership and management is significant in affecting the development and form of economic

and political institutions, whether they take an extractive or inclusive form (Acemoglu and

Robinson, 2013; Ferguson, 2013).

Top leadership and CEOs through transformational leadership affect congruence,

organizational performance, and risk taking by senior management (Colbert et al, 2008; Simsek,

2007). Clinard's (1983) interviews of middle management reveals the significant role of top

management and pressures, specifically the CEO, in influencing corporate misconduct and

45

deviance. Consequently, a strong argument can be made that the burden should fall on executive

leadership to set the example for leading change and overcoming inertia (Boeker, 1997).

In regards to illegality, it has been hypothesized that such activities are a result of corporate

strategy and the role of the TMT (Clinard, 1983). TMT characteristics such as length of service,

functional background, formal business education, age, and military service, as well as

homogeneity in each of these characteristics, have also been hypothesized to neutralize or

enhance relationships between context and corporate illegal activity (Daboub et al, 1995).

Manager tenure, the primary quality studied in this dissertation, is one of the significant

components of a TMT, including others such as heterogeneity and size (Certo et al, 2006).

While several articles argue that the tenure of a TMT can increase strategic change in certain

circumstances and rationality, which in turn increases performance (Boeker, 1997; Goll and

Rasheed, 2005), TMTs with longer tenure in general are associated with less strategic change

(Finkelstein et al, 2009). In terms of corruption, this finding can cut both ways. First, it could

mean that TMTs with longer tenure are less apt to address an external threat by initiating illegal

activities. However, it could also mean that in situations where illegal activities have already

been undertaken, steps to curb this behavior are also less likely, resulting in passive acquiescence

(Daboub et al, 1995). TMTs with longer tenure may also not appreciate the need to keep up to

date with compliance responsibilities and monitoring the presence of threats to corporate

integrity, which may be heightened in certain industries and environments.

From a theoretical standpoint, the choice of top manager tenure as a variable of interest fits

both within the normative component of pressures and the cognitive element which is linked to

mimetic mechanisms. The practices of management clearly set the standard for subordinates and

the company as a whole, providing significant potential for establishing norms that can disrupt or

46

prevent the formation of a corrupt subculture while providing the basis for establish an ethical

one and simultaneously providing a model for mimesis (Scott, 2008).

Because there is significant support for the idea that TMTs with longer tenures may be more

passive in the face of challenges, including corruption, I predict that its effect will be positively

associated with levels of corruption. Further, I predict that the effect of TMTs on business

controls will mitigate the effects of business controls on corruption.

Hypothesis 3 - The duration of the top manager’s tenure will be positively associated with rates

of corruption.

Hypothesis 4 - The top manager’s tenure will mitigate the effects of business controls on

corruption.

Role of Environmental Factors

Environmental factors to consider are poor governance, weak institutions, and poverty,

which have been demonstrated to affect corruption levels (Mo, 2001; Serra, 2006; Shleifer and

Vishny, 1993; Gonzalez et al, 2004; Treisman, 2007; Emerson, 2006; Tanzi and Davoodi, 1997).

Industries with increased complexity in terms of business models and those associated with more

government regulation and oversight tend to be associated with higher levels of corruption

through increased opportunities for bribery (Kenny, 2007; Stansbury, 2005; Baucus and Near,

1991). Incidence and total cost of bribes are affected by quality of a country's infrastructure,

court and regulatory system (Herrera et al. 2007; Treisman, 2007; Wu, 2009) and low per capita

income (Sanyal, 2005). Levels of corruption can also be indicated in a country's informal or

shadow economy, which can in turn indicate firms fleeing an intrusive or corrupt government but

47

resulting in increased pressure on remaining firms that intend to remain in the formal

marketplace. This competition in turn results in more pressure to engage in bribery to maintain

survival (Dreher and Schneider, 2010; Friedman et al, 2000; Emerson, 2002; Ades and DiTella,

1999; Wu, 2009).

My hypothesis here is that environmental factors weakens both the effects of business

controls and management characteristics on corruption. I argue that individual companies and

managers, regardless of their qualities or ethical orientations, may be disproportionately affected

by the power of these factors. For example, managers may ultimately be pressured to conform to

industry norms of bribery and corruption, especially when faced with the need to produce profits

and results (Clinard, 1983). Even if these managers are ethical, their actions might be overruled

or thwarted by other sources, especially by those higher in the corporate hierarchy. In relation to

controls, including ethics and compliance programs, managers may choose to neglect either the

proper development or implementation of such. In countries where poverty levels are high,

managers may feel increased pressure to be involved in corruption to maintain their company's

or individual positions. Poor governance, weak institutions, and high corruption levels may also

affect managers adversely by imparting a sense of discouragement that there are no alternatives

to participating in corruption. Further, there are similarities between competitor firms in terms of

decision making characteristics, which can provide pressure and corrupt business models for

imitation.

From a theoretical standpoint, these environmental variables fit within the coercive

component of pressures affecting companies. The variables contemplated by this dissertation

(i.e. perceptions of corruption as an obstacle, quality of regulatory and legal frameworks,

economic strength, threat from shadow economy) capture aspects of difficult environments

48

related to poor governance, corrupt officials, and weak institutions. Several of these

environmental variables, specifically those that measure quality of regulatory and legal

frameworks (i.e. Transparency's Corruption Perception Index, World Bank's Doing Business

Index, fairness of court system) also fall directly within the category of regulatory pressures

while others may be considered as indirectly related or consequences of such (i.e. GDP per

capita, threat from informal sector, threat from corruption) (Scott, 2008).

As such, if an industry is associated with corruption, I argue that there is added pressure for

TMTs to conform to an environment where bribery is accepted in order to compete, which in

turn feeds passive acquiescence or strategic inertia (Pegels et al, 2008). While companies

certainly have control over their goals and corresponding practices, I propose that the

environment, which companies may contribute to, constrains the ability for further change

(DiMaggio and Powell, 1983).

Hypothesis 5 - Environmental factors will strongly mitigate the effects of business controls and

top manager tenure on corruption.

Role of Region, Industry, and Company Size

I also argue that the role of region, industry, and company size are relevant in developing

counterstrategy as there will likely be variation in effects of the relevant variables based on these

different sub-contexts. On a theoretical level, there will be nuance in the coercive pressures

inherent in these sub-contexts. For example, in certain industries, there may be increased

hierarchy, bureaucratic obstacles, and organizational peculiarities that affect corruption rates.

Conversely, certain regions may contain cultural expectations that serve as additional forms of

49

coercive pressures. I propose that these pressures are likely to affect the effect of normative and

mimetic ones, which will in turn have consequences for developing counterstrategy.

The regions contemplated in the WBES are Sub-Saharan Africa (AFR), East Asia Pacific

(EAP); Eastern Europe and Central Asia (ECA); Caribbean and Mexico (CCM); and South

America (SAM).1 The industries contemplated in the WBES are Manufacturing, Chemical and

Pharmaceutical, Construction and Transportation, Wholesale and Retail, Information and

Communication, and Professional, Technical, and Scientific. Companies were separated by their

sizes - Small (5 to 19 employees); Medium (20 to 99 employees); Large (more than 100

employees).

Industry Effects

Firm size and industry difference have been demonstrated to affect the propensity to bribe

(Wu, 2009; Martin et al, 2007). In regards to industry differences, some sectors are especially

notorious for corruption. According to Transparency International's Bribe Payers Index, the

pertinent industries in the dataset are ranked as follows (with actual rank in parentheses, lower

ranking number denotes higher corruption):

1. Public Works Construction (19)

2. Pharmaceutical and Healthcare (13)

3. Heavy Manufacturing (12)

4. Transportation and Storage (8)

5. Telecommunications (8)

6. Information Technology (3)

7. Light Manufacturing (1)

1 Originally, the CCM and SAM regions were aggregated as the Latin America and Caribbean region

(LAC). For accuracy, I separated them.

50

The explanations for these phenomena are varied depending on the industry but with some

commonalities, namely interaction with government officials, complex business models and

corresponding regulation, and how lucrative a sector is.

The construction industry, widely considered as one of the most corrupt sectors, is linked to

large payments and budgets for bribery, uniqueness of projects, number of phases in planning

and implementation, a culture of secrecy, and the lack of a single organization in charge of

governance. The construction industry is also closely intertwined with government as major

clients, regulators, and owners of construction companies (Kenny, 2007; Stansbury, 2005).

Likewise, the transportation industry, which is linked to construction, shares a similar reputation

for corruption as roughly one-half of construction projects are transport related. Further, the

industry also captures a large share of a nation's economy, typically 10 to 20 percent of the

national budget. Finally, the construction industry in general has significant connections to top

government officials and a tendency towards implementing large capital projects (Siebler, 2012).

In the pharmaceutical industry, high corruption is linked to the lucrative nature of the sector

as well as the significant degree of government regulation, a complex supply chain, and wide

information asymmetries (Cohen et al, 2007). In telecommunications, complex systems of

governance, high value of transactions, and relationship between the private sector and

government have been cited as causes for corruption (Sutherland, 2012). Finally, even the retail

sector is not immune, as the reasons for corruption cited are the industry's operational

requirements for large amounts of real estate and employees, high volume of shipping and

transportation, and the high competition for business (Volkov, 2011).

51

Regional Effects

I propose that there are regional differences, likely due to culture, affecting the nature of

corruption (Martin et al, 2007). Culture has been hypothesized to affect economic development

(Landes, 1998; Fukuyama, 1995), international relations (Huntington, 1996), as well as political

and military strategy (Handel, 2001; Liddell Hart, 1954). Further, cultural dimensions have also

been shown to moderate the implementation of management systems (Kull and Wacker, 2010;

Quazi et al, 2002). For example, a study of corruption in Australia, India, Indonesia, and

Singapore showed significant variation in propensities to punish corrupt behavior across cultures.

(Cameron et al, 2005).

As a potentially insightful source, I refer to the Global Leadership and Organizational

Behavior Effectiveness Research Project (GLOBE) which studied cross-cultural leadership to

explain the variation between regions in terms of relationships between my variables of interest

and how they pertain to preventing private sector corruption (House et al, 2004). Analyzing the

full dataset by region and drawing inferences is also defensible since regional history is often

tied together. Cultural differences may affect how corruption is tolerated and the effectiveness

of corresponding measures taken against it. As this dissertation contemplates the role of

leadership and its various manifestations of action taken against corruption, the GLOBE study

and its findings are especially relevant. While leadership may be a universal practice that can

transcend borders, culture still affects its practice significantly.

Company Size Effects

Finally, the size of a company is relevant. Large corporations in general are usually the

chief violators of the law (Clinard, 1980). Small and medium sized enterprises are also more

52

vulnerable to corruption - SMEs usually pay more bribes in terms of frequency and amount as

well as being subject to more requests. This is due to various effects including a more tolerant

culture due to informality and close relationships among company officials and with supplier and

government agents, short term vision based on survival, limited financial, technical, and human

resources, inability to exert strong influence over officials and institutions, informal capital

structure, and a greater perception of the power of corruption over that of large companies

(UNODC Report on Corruption Prevention in Small and Medium-Sized Enterprises, 2012).

Developing Counterstrategy

Ultimately, the purpose of this dissertation is to incorporate the results of the statistical

analysis as well as the second prong of merging institutional theory, criminology, and business

management to provide a framework and foundation for developing counterstrategy. This model

will allow for a tailored approach rather than a one-size-fits-all model. Just as anti-corruption

strategy for the public sector should be considered and implemented based on various factors

such as the type of corruption regime faced, levels and manifestations of corruption, and regional

differences, so it should be with private sector corruption (Johnston, 1997; Shah, 2007; Shah and

Schachter, 2004). Figure 4 below delineates the foundation for the proposed method of

developing counterstrategy.

53

Criminology,

Institutional Theory,

Business

Management Studies

Counterstrategy

Relationships

between

Environment,

Management, and

Business Controls

Effects of

Region,

Industry, and

Company Size

C

Figure 4 - Proposed Counterstrategy Model

54

Research Design

For the examination of the relationships between the role of the environment, management,

qualities of control practices, and corruption, I use firm-level data drawn from the World Bank’s

Enterprise Surveys (WBES), which encompasses 130,000 firms from the economies of 135

countries. The World Bank has collected this data since 2002, covering a range of topics

including access to finance, corruption, infrastructure, crime, competition, and performance

measures. The WBES dataset that I analyze covers a time period between 2006 and 2011.

Strengths and Limitation of the Dataset

The WBES is appropriate for this study as it is comprehensive in terms of variables

measured, including those necessary for the proposed analysis, specifically measures of

corruption, management qualities, and business controls. The dataset also contains variables that

account for region, industry, and company size which allows for a nuanced analysis of

relationships between the relevant variables.

Another strength of the WBES is that it is firm-level data, which disaggregates variables,

including the perception of corruption (Andvig, 2005). When implemented appropriately, the

use of micro-level survey methods and interview techniques can provide accurate data on

corruption (Reinikka and Svensson, 2006). One issue, however, to take into consideration is the

non-response and false response rate for sensitive questions in the WBES (Jensen et al, 2007),

which can be addressed with various statistical strategies, including substituting mean values for

missing data and deletion. In general for this dissertation, non-responses were treated as

affirmative answers for sensitive questions relating to informal payments and missing data was

deleted.

55

Another limitation of the WBES data is that it is mostly limited to developing and

transitioning economies. On a variable level, the only indicator for TMT qualities is manager

experience while the internationally recognized quality certification indicator does not

distinguish between types. For example, the ISO 9000 standard which deals with quality

management has been adopted at a different rate than ISO 14001 which deals with environmental

management. The anonymity of the WBES also prohibits linking data to other firm specific

variables.

Variables

Discussion of variables and statistical analysis methods are discussed below. These

variables were chosen as they were related to the various factors of interests discussed above,

capture the incidence of corruption in diverse sectors, provide a glimpse into the environmental

factors surrounding a company, and are connected to the relevant theoretical principles from

criminology and institutional theory. Details of variables in the WBES survey instrument are

included in the Appendix.

Measures of Corruption

The measures of corruption that I use are the following

1. Utilities (Composite variable measuring requests for informal payments or gifts for

water, electricity, and telephone connections)

2. Licenses (Composite variable measuring requests for informal payments or gifts for

obtaining construction permits, import licenses, and operating licenses)

56

3. Tax (Individual variable measuring requests for informal payments or gifts during tax

meetings or inspections)

4. Government Contract (Individual variable measuring percentage of contract value paid

in informal payments or gifts to secure the contract)

5. All Payments (Individual variable measuring percentage of total annual sales or total

annual value in informal payments or gifts with regards to customs, taxes, licenses,

regulations, and services)

Business Controls

The business controls I examine are the following:

1. Quality Control (QC) (Individual variable measuring whether a company has an

internationally-recognized quality certification)

2. Audit (Individual variable measuring whether a company has its annual financial

statement checked and certified by an external auditor)

Effect of Management

Top Manager Tenure (TMT) (Individual variable measuring the total number of years of

experience of the firm's top manager working in the sector)

57

Environmental Factors

The environmental factors that I use are the following:

1. Transparency International Corruption Perception Index (TI) - Index that ranks the

perception of the integrity of a country's public sector. According to Transparency

International, it is considered the most widely used indicator of corruption worldwide

2. World Bank’s Ease of Doing Business Index (WBBI) - Index that ranks economies in

terms of the conduciveness of its regulatory environment to doing business

3. Gross Domestic Product per Capita (GDPC)

4. Fairness of Court System (ctsystemfair) - WBES variable measuring perceived

fairness and impartiality of the court system

5. Threat from Informal Sector (infranked) - WBES variable measuring perceived

severity of threat of competitors in the informal sector

6. Threat from Corruption (corrobst) - WBES variable measuring perceived severity of

threat of corruption to business operations

Analytical Strategy and Method

I used logistic regression and multivariate regression techniques to determine the

relationships between the environmental variables, top manager tenure, business controls, and

measures of corruption. The variables measuring corruption in utilities, licenses, and tax were

dichotomous, hence logistic regression was the appropriate method of analysis. The variables

measuring corruption in government contracts and all payments in general were continuous,

hence multivariate regression was used for the analysis.

58

A three-model strategy was used - the first and baseline model incorporating only the

business controls and measures of corruption to determine direct effects of auditing and quality

certification. The second model introduces the top manager tenure variable to examine the

effects of management on the business controls. Finally, the third and full model incorporates

the environmental variables to examine their effect on management and business controls. This

three-model framework for analysis was conducted for the full dataset as well as on a regional,

industry, and company-size basis.

Interviews with Senior Compliance Personnel

To add depth and insight, I also conducted interviews with several senior compliance

personnel from various companies. These interviews were arranged with the assistance of the

Ethics and Compliance Officer Association. The questionnaire used is available in the

Appendix.

59

CHAPTER IV: RESULTS AND FINDINGS

Analysis of Full Dataset

Table 3 lists the descriptive statistics and correlations for the variables in this study. Tables

4.1 and 4.2 state the results of the full model analysis of informal payment requests and

distributions. These results indicate the following:

I. The effects of an internationally recognized quality certification were promising initially

in decreasing informal payment requests and distributions but are mostly negated by

environmental effects.

II. The effects of an independent auditor show a decrease in informal payment requests and

distributions.

III. The effects of a top manager's tenure show a decrease in informal payment requests and

distributions.

IV. The effects of a top manager's tenure affect those of business controls but do not negate

them. Accordingly, the latter is generally resilient to management effects.

V. The effects of the environmental variables affect those of business controls, but differ

based on the type of the latter. Quality certification is more sensitive to the effects of the

environmental variables while auditing is more resilient.

VI. The effects of the environmental variables affect those of the top manager's tenure, but do

not negate it. Accordingly, the latter is resilient to environmental effects.

At the baseline model level (Model 1), quality certification was effective in preventing

informal payment requests and distributions for the license, tax, and government contract

dependent variables. Auditing was effective across the board for all dependent variables. Once

60

the top manager tenure independent variable is introduced in Model 2, the effect of quality

certification was decreased for two out of the three dependent variables for quality certification

(license and government contract) and across the board for auditing. Top manager tenure was

effective across the board for decreasing informal payment requests and distributions. In the full

model where several environmental independent variables are incorporated (Model 3), quality

certification was only effective for the tax dependent variable. Auditing and top manager tenure

were effective across the board despite the inclusion of powerful environmental variables.

Accordingly, there is strong support for Hypothesis 1 - "The presence of an internationally-

recognized quality certification will be negatively associated with rates of corruption" and

Hypothesis 2 - "The presence of annual financial statements certified or validated by an external

auditor will be negatively associated with rates of corruption." Both these measures were

demonstrated to have a lowering effect on rates of informal payment requests and distributions.

There is also substantial support for Hypothesis 4 - "The top manager’s tenure will mitigate

the effects of business controls on corruption" as both business controls of quality certification

and auditing, incorporating the top manager tenure variable (Model 2), demonstrates lesser

effectiveness of the business control variables.

In regards to Hypothesis 3 - "The duration of the top manager’s tenure will be positively

associated with rates of corruption," support was not as predicted. The results of the analysis for

the full data set (but not for the regional analysis), showed the opposite - that the top manager

tenure was negatively associated with rates of corruption.

Finally, there is more of a nuanced set of findings for Hypothesis 5 - "Environmental factors

will strongly mitigate the effects of business controls and top manager tenure on corruption."

61

While quality certification is sensitive to the effects of environmental variables, auditing and top

manager tenure are more resilient.

Tables 5 and 6 measure the effects of quality certification, auditing, and top manager tenure

on both corruption measures of informal payment requests and distributions. Table 5 measures

the projected estimated reduction in probability of informal payment requests. Additionally, the

effect of the level of pressure in the environment is measured for the projected estimated

reduction in probabilities of requests and distributions. Five category levels of environment were

created - High Pressure where the environmental variables were set at the highest level for

exertion of pressure in the dataset (i.e. low TI Corruption Perception Index, low ranking for WB

Doing Business Index, low GDP per capita, low perceived fairness and impartiality of the court

system, high perceived severity of threat from informal sector, and high perceived severity of

threat of corruption to business operations); STD +1 where the environmental variables were set

at one standard deviation toward higher pressure than the average; Average Pressure; STD -1 one

standard deviation toward lower pressure than the average; and Low Pressure with the lowest

level for exertion of pressure. Further, Tables 5 and 6 measure the combination effect of having

an experienced top manager (at 25 years of experience in the sector), auditing, and quality

certification where applicable.

Table 5 also shows that as environmental pressures increase, top manager tenure, auditing,

and quality certification all decrease in effectiveness. The effects of the independent variables

decrease significantly with a higher slope at the STD +1 and High Pressure levels and increase

with a lesser slope at the STD-1 and Low Pressure levels. The combination effect of the

independent variables that were shown to be effective in the full model is also quite substantial.

For tax, where all the independent variables were effective, informal payment requests were

62

estimated to be reduced by close to 48 percent at the Average Pressure level. For utilities and

licenses, where top manager tenure and auditing were effective, informal payment requests were

estimated to be reduced by close to 43 and 44 percent respectively at the Average Pressure level.

On an individual level, the effects of auditing are substantial at the Average Pressure level,

decreasing informal payment requests by about 20 to 25 percent. The top manager effect is also

substantial depending on the years of experience. An experienced manager with 15 years of

tenure decreases requests by about 12 to 17 percent, while a highly experienced manager with 25

years of tenure decreases requests by about 20 to 30 percent at the Average Pressure level.

Quality certification, while only effective for tax, decrease requests by about 15 percent at the

Average Pressure level.

Table 6 shows the projected estimated reduction in percentage of amount of informal

payments distributed. The effect of top manager tenure is substantial for government contracts,

with a projected percentage reduction of around 22 and 37 percent for an experienced manager

(15 years tenure) and highly experienced manager (25 years tenure). This effect is lower for all

payments at around 10 and 17 percent respectively for each type of manager. The effect of

auditing projects to around 22 percent for government contract and 13 percent for all payments.

Quality certification was not effective for either government contract or all payments. The

projected combination effect for auditing and top manager tenure set at 25 years is around 59

percent for government contract and 31 percent for all payments.

From this set of tables that represent analysis of the complete data set, the following

conclusions can be generated:

Auditing and top manager tenure are effective in both preventing informal payments and

distributions. Both these measures serve as an outer and inner shield in preventing corruption

63

in a company. The projected estimated reductions in informal payment requests and

distributions are quite substantial. These findings are particularly encouraging as it demonstrates

that there are measures and steps that can be taken to combat corruption effectively. The

presence of strong effective controls also helps balance out the differential reinforcement

equation, as increased likelihood of detection and corresponding penalties are now in play. In

turn, I argue that effective countermeasures such as these help disrupt the formation of corrupt

subcultures and normalization of deviant behavior.

Quality certification is promising as a business control but its effects are often wiped out by

environmental effects. On the other hand, auditing is extremely resilient in resisting

environmental effects. These findings demonstrates that various controls may respond

differently to other factors that could affect them such as environmental ones. Nevertheless, it is

possible that with adjustments to account for such factors may prove to increase the resilience of

controls such as quality certification to increase their effectiveness as an anti-corruption measure.

Conversely, I propose that more resilient controls may be adopted initially as a first-line response

to corruption.

As predicted, the effect of top manager tenure decrease the effectiveness of business controls.

However, the effect of top manager tenure does not wipe out the effects of business controls. As

predicted, the effects of the environment are the most significant on business controls, decreasing

them substantially or negating them. Environmental effects decrease those of top manager

tenure, but the latter is resilient. These findings show that the sensitivity and resilience of

controls and aspects of manager characteristics can vary depending on the factors involved.

Finally, the effect of top manager tenure being associated with a decrease in informal

payment requests and distributions is a good indicator that tenure increases rationality and

64

cognitive development (Goll and Rasheed, 2005; Daboub et al. 2005) and time spent in the

business arena affects managerial ability and performance (Holcomb et al, 2009). This finding is

also consistent with prior findings that there are negative relationships between age and unethical

behavior and a positive relationship between younger managers and vulnerability to societal and

organizational pressures. Older managers tend to have higher levels of moral development,

stricter interpretations of ethical standards of conduct, are less likely to rationalize illegal

behavior, and are more resilient to industry and organizational pressures. Further, the more

experienced a CEO or manager is in terms of perspectives and functional experiences, the more

he or she can draw on for alternatives and solutions to various problems (Troy et al, 2011). As

discussed previously, strong and ethical management practices provide the normative impetus

and foundation to prevent corrupt subculture formation.

65

Table 3

Descriptive Statistics and Correlations

*p<.05, **p<.01, ***p<.001

Mean S.D. 1 2 3 4 5 6 7 8 9 10

1. TI Corruption Perception Index 32.86 12.25 1.00

2. WB Ease of Doing Business

Index 103.15 43.38 -.58*** 1.00

3. GDP per capita 5182.46 4585.76 .44*** -.43*** 1.00

4. Informal competitors as

obstacle 1.69 1.43 .002 .03*** -.06*** 1.00

5. Fairness/impartiality of court

system 2.15 2.14 .14*** -.04*** .02 *** -.13*** 1.00

6. Corruption as obstacle 1.83 1.51 -.12*** .08*** -.05*** .30*** -

.028*** 1.00

7. Top manager’s experience 17.31 11.11 .17*** -.14*** .13*** .07*** -.07*** .08*** 1.00

8. Int'l recognized quality

certification .21 .41 .09*** -.11*** .10*** -.05*** .02*** .004 .07*** 1.00

9. Use of external auditor .48 .50 .08*** -.08*** .005 -.01** .03*** .02*** .09*** .25*** 1.00

10. Company size 1.69 .77 .10*** -.13*** .11*** -.05*** .01** .009* .14*** .34*** .33*** 1.00

66

Table 4.1

Effects of Environment, Management, and Business Controls on Preventing Informal Payment Requests

Predictors and Controls Model 1

DV =

Utilities

Model 2

DV =

Utilities

Model 3

DV =

Utilities

Model 1

DV =

Licenses

Model 2

DV =

Licenses

Model 3

DV =

Licenses

Model 1

DV =

Tax

Model 2

DV =

Tax

Model 3

DV =

Tax

Environmental variables Odds Ratios

TI Corruption Perception Index .951*** .954*** .948***

WB Ease of Doing Business

Index

1.01*** 1.00 1.00***

GDP per capita 1.00*** 1.00*** 1.00***

Informal competitors as obstacle 1.02 1.06*** 1.06***

Fairness/impartiality of court

system

.973 .876*** .831***

Corruption as obstacle 1.13*** 1.06*** 1.25***

Control variable

Company size .779*** .814*** .908** 1.06** 1.06*** 1.17*** .916*** .934*** 1.03

Independent Variables

Top manager’s experience .977*** .984*** .983*** .985*** .987*** .991***

Int'l recognized quality

certification

.926 .942 1.00 .887** .889** .995 .769*** .768*** .850***

Use of external auditor .738*** .768*** .779*** .726*** .751*** .719*** .753*** .775*** .734***

Observations 21969 21619 19488 27126 26650 23885 38681 37761 33572

Prob > chi2 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Pseudo R2 .013 .022 .10 .004 .009 .08 .008 .011 .11

Change in Pseudo R2 .009 .087 .005 .076 .003 .10

*p<.05, **p<.01, ***p<.001

67

Table 4.2

Effects of Environment, Management, and Business Controls on Preventing Distributions of Informal Payments

Predictors and Controls Model 1

DV =

Government

Contract

Model 2

DV =

Government

Contract

Model 3

DV =

Government

Contract

Model 1

DV =

All

Payments

Model 2

DV =

All

Payments

Model 3

DV =

All

Payments

Environmental variables Standardized Coefficients

TI Corruption Perception Index -.019** .014***

WB Ease of Doing Business Index .017*** .005***

GDP per capita -.00009*** -.00005***

Informal competitors as obstacle .16*** .053**

Fairness/impartiality of court system -.41*** -.22**

Corruption as obstacle .33*** .38***

Control variable

Company size -.75*** -.61*** -.42*** -.36*** -.33*** -.19***

Independent Variables

Top manager’s experience -.053*** -.043*** -.011*** -.011***

Int'l recognized quality certification -.284* -.233*** .03 -.066 -.058 .027

Use of external auditor -.702*** -.652*** -.629*** -.194** -.188** -.206***

Observations 20793 20643 19004 42383 41856 37578

Prob > F 0.00 0.00 0.00

F (change) 8.94 22.88 -7.79 75.79

R2 .01 .02 .05 .004 .004 .003

Adj. R2 .01 .02 .05 .004 .004 .003

Change in R2 .01 .04 .00 .001

Df 3, 20789 4, 20638 10, 18993 3, 42379 4, 41851 10, 37567

*p<.05, **p<.01, ***p<.001

68

Table 5

Effects of Independent Variables By Type of Environment

(Projected Estimated Reduction in Probability of Bribe Being Asked)

Top Manager Effect

15 | 25 years of

experience

High Pressure STD +1 Average STD -1 Low Pressure

Tax 5.91% | 9.92% 8.01% | 13.24% 11.99% | 19.27% 13.19% | 20.85% 13.43% | 21.41%

Utilities 10.86% | 18.11% 13.94% | 22.73% 18.82% | 29.54% 20.64% | 32.13% 21.43% | 33.11%

Licenses 8.87% | 14.90% 11.40% | 18.80% 16.57% | 26.30% 18.80% | 29.54% 19.76% | 30.73%

Audit High

Pressure STD +1 Average STD -1

Low

Pressure

Tax 12.96% 17.07% 24.29% 26.41% 26.73%

Utilities 12.08% 15.14% 19.71% 21.29% 22.06%

Licenses 13.99% 17.52% 24.16% 26.99% 28.00%

Int'l Recognized

Quality

Certification

High

Pressure STD +1 Average STD -1

Low

Pressure

Tax 7.60% 10.05% 14.39% 15.46% 15.81%

Combination High

Pressure STD +1 Average STD -1

Low

Pressure

Tax

(Manager +25

years, QC, Audit)

27.72% 35.38% 47.73% 50.84% 51.53%

Utilities

(Manager +25

years, Audit)

27.70% 34.15% 43.28% 46.61% 47.87%

Licenses

(Manager +25

years, Audit)

26.44% 27.47% 43.91% 48.42% 50.11%

69

Table 6

Effects of Independent Variables on Total Bribe Payments

(Projected Estimated Reduction in Percentage of Amount of Bribes Paid)

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Top Manager Effect

(15 | 25 years of

experience)

Percentage

Reduction

Government

Contract

2.89% 0.65% | 1.08% 22.49% | 37.37%

All Payments 1.57% 0.16% | 0.27% 9.55% | 17.20%

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Audit Effect Percentage

Reduction

Government

Contract

2.89% 0.63% 21.80%

All Payments 1.57% 0.21% 13.38%

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Combination Effect

(Manager +25 Years,

Audit)

Percentage

Reduction

Government

Contract

2.89% 1.71% 59.17%

All Payments 1.57% 0.48% 30.57%

70

Regional Analysis of Dataset

Tables 8.1 to 8.4 show the variations in effectiveness of independent variables by region as

well as the relationships between them and the environmental variables.

In terms of business controls, auditing is substantially effective in the African, East Asia

Pacific, South Asian, and Caribbean/Mexico regions, with a more moderate effect in the South

American region, and no effect in the Eastern Europe/Central Asian region. As such, other than

the Eastern Europe/Central Asian region, auditing's effect is generally universal. This is an

encouraging finding as it demonstrates that there are some countermeasures that are generally

useful against corruption.

Quality certification is generally ineffective for all regions. In the Eastern Europe/Central

Asian regions, it was effective for utilities and licenses at the baseline model level and with the

incorporation of top manager tenure (Model 2), but its effects are wiped out by those of the

environment in the full model (Model 3). However, for the tax dependent variable, quality

certification was effective for the African and Eastern Europe/Central Asia. It was also effective

for the government contract dependent variable for the South American region.

Top manager tenure is the most effective in the African, South Asian, and Eastern

Europe/Central Asian regions, nominal effect for the South American region, and no effect for

the Caribbean/Mexico region. Interestingly, the effects of top manager tenure has a positive

correlation with informal payment requests in the South Asian and East Asia Pacific regions,

while the others demonstrate a negative correlation, consistent with the analysis of the full data

set. The effect of top manager tenure, however, was not significant in the Caribbean/Mexico

region. This finding is important as it demonstrates that there may be regional differences in the

applicability of a countermeasure, in this case, how top manager tenure affects corruption levels.

71

This finding also provides evidence that managerial qualities may not have a universally similar

effect and there are other factors that could affect them, as discussed below.

Finally, the effects of the independent variables differ slightly by region. For example, in

the African region, auditing is estimated to reduce informal payments less than other regions

(Table 8.4). This finding demonstrates that countermeasures may have variation in their

intensity and effects based on location.

A potential explanation for the results of the regional analysis comes from the GLOBE study

(House et al, 2004). As stated above the following regions demonstrate the following:

East Asia Pacific and South Asia - Positive correlation with informal payment requests

and distributions for manager effect

Eastern Europe/Central Asia and Africa - Negative correlation informal payment requests

and distributions for manager effect

South America and Caribbean/Mexico - Low to no manager effect for informal payment

requests and distributions

The GLOBE study measures various components of a region's perspective of leadership and

management, including the following factors:

Self-Protective (self-centered, status conscious, conflict inducer, face saver, procedural)

Autonomous (individualistic, independent, autonomous, unique)

Participative Leadership (participative, autocratic reverse scored)

The appropriate regions that the GLOBE study analyzed corresponding to those in the

WBES measured as follows:

72

Table 7 GLOBE Survey Details

Region Self-Protective Autonomous Participative

Leadership

East Asia Pacific High Medium Low

South Asia High Medium Low

Africa Medium Low Medium

Eastern Europe/Central Asia High-Medium High Low

South America Medium Low Medium

Caribbean/Mexico Medium Low Medium

For the East Asia Pacific and South Asian regions where top manager tenure is positively

correlated with informal payment requests and distributions, the results are supported as the

leadership qualities valued according to the GLOBE survey would be someone vested with

significant power (medium autonomous score), saddled with real and perceived responsibility for

the organization (high self protective score), but with less accountability (low self participative

leadership score).

For the African region where top manager tenure is negatively correlated with informal

payment requests and distributions, the combination effect of the GLOBE survey may also be

instructive in explanation. Here, the region shows a medium self-protective score, low

autonomous score (second to last in the GLOBE survey), and medium for participative

leadership, resulting in someone with moderate real and/or perceived responsibility for the

organization, but with increased accountability and checks and balances.

For the Eastern Europe and Central Asian region, where there is also a negative correlation

with corruption rates, its profile at first glance looks similar to the East Asia Pacific and South

Asian regions. The potential difference here, however, that accounts for the difference in the

direction of correlation is the self-protective score, while technically in the high category, is

73

closer to the medium category - while the East Asia Pacific and South Asian regions ranked in

the top three for the GLOBE survey.

Finally, for the South American and Caribbean/Mexico regions, the main difference between

these regions and the rest that demonstrate the lack of effectiveness of top manager tenure is the

fact that these regions ranked the highest in the GLOBE survey for team orientation. The

combination of high ranking for team orientation with low autonomous score may mean that

leaders or managers in this region are too paralyzed to have any effect on corruption.

74

Table 8.1

Regional Differences in Independent Variable Effectiveness for Internationally

Recognized Quality Certification

Utilities

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 1 1.01 1.17 .766* 1.50 .877 1.11

Model 2 1.00 1.20 .770* 1.41 .902 1.08

Model 3 .955 1.17 .876 1.45 .962 1.01

Licenses

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 1 .979 1.05 .712* 1.09 .840* .977

Model 2 .979 1.03 .725*** 1.06 .841 .981

Model 3 1.02 1.09 .867 1.07 .941 1.04

Tax

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 1 .781** 1.05 .661*** .966 .853 1.04

Model 2 .786** 1.06 .664*** .956 .815 1.05

Model 3 .737*** 1.08 .827* .958 .903 .995

Govt Contract

Std Coefficients AFR EAP ECA SAR SAM CCM

Model 1 .081 -.686 -.260 -.639 -.688** .209

Model 2 .129 -.687 -.207 -.587 -.673** .215

Model 3 .277 .224 -.038 -.653 -.501* .160

All Payments

Std Coefficients AFR EAP ECA SAR SAM CCM

Model 1 -.066 -.066 .029 -.102 -.194 -.140

Model 2 -.045 -.063 .028 -.112 -.188 -.199

Model 3 -.030 -.136 .162 -.079 -.013 -.248

*p<.05, **p<.01, ***p<.001

75

Table 8.2

Regional Differences in Independent Variable Effectiveness for Auditing

Utilities

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 1 .589*** 1.15 .866 .587* 1.02 .687**

Model 2 .597*** 1.19 .889 .641* 1.02 .681**

Model 3 .710*** .886 1.14 .468** .957 .707*

Licenses

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 1 .575*** .611*** .995 .564** .869 .934

Model 2 .586*** .643*** 1.02 .558** .861 .928

Model 3 .646*** .589*** 1.23* .378*** .834* .972

Tax

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 1 .733*** .862 1.04 .524*** .793* .592***

Model 2 .733*** .855 1.07 .545*** .803* .585***

Model 3 .836*** 1.00 1.17 .604** .715** .676**

Govt

Contract Std Coefficients

AFR EAP ECA SAR SAM CCM

Model 1 -1.75*** 2.76** -.393 -.027 -.014 -.235

Model 2 -1.68*** 2.95** -.372 -.046 -.011 -.243

Model 3 -1.27*** 4.39*** -.278 -.175 -.123 -.120

All Payments Std Coefficients

AFR EAP ECA SAR SAM CCM

Model 1 -.493*** .718*** .246 -.192 -.220 .025

Model 2 -.448*** .693*** .249 -.184 -.221 -.031

Model 3 -.064 .519*** .289 -.196 -.350** .178

*p<.05, **p<.01, ***p<.001

76

Table 8.3

Regional Differences in Independent Variable Effectiveness for Top Manager Experience

Utilities

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 2 .998 .994 .989* 1.04*** .987** 1.01**

Model 3 1.00 .998 .987* 1.05*** .988* 1.01

Licenses

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 2 .982* 1.00 .984*** .993 .992* 1.01

Model 3 .989** 1.00 .989** .994 .994 1.00

Tax

Odds Ratios AFR EAP ECA SAR SAM CCM

Model 2 1.00 1.01* .975*** 1.01* .994 .998

Model 3 .995 1.01* .983*** 1.02* .994 .995

Govt

Contract Std Coefficients

AFR EAP ECA SAR SAM CCM

Model 2 -.049*** -.021 -.013 -.013 .0005 -.005

Model 3 -.054*** .005 -.012 -.013 .003 -.007

All Payments Std Coefficients

AFR EAP ECA SAR SAM CCM

Model 2 -.014* .001 .002 .005 -.007 .006

Model 3 -.017** -.001 .012 .010 -.003 .002

*p<.05, **p<.01, ***p<.001

77

Table 8.4

Regional Differences in Effects of Independent Variables2

(Projected Estimated Reduction in Probability of Bribe Being Asked)

Top Manager Effect (15 | 25 years of experience)

Tax

EAP SAR

17.27% | 30.11%

(Increase)

6.74% | 37.24%

(Increase)

Utilities

ECA SAR SAM

15.77% | 25.02% 72.80% | 137.45%

(Increase) 16.13% | 25.50%

Licenses ECA AFR SAM

13.17% | 21.12% 12.20% | 19.72% 7.99% | 13.04%

Audit

Tax AFR SAR CCM SAM

13.74% 33.10% 31.13% 27.96%

Utilities AFR SAR CCM

22.31% 42.78% 27.59%

Licenses AFR SAR EAP

29.31% 52.06% 32.74%

Internationally Recognized Quality Certification

Tax AFR ECA

23.36% 16.78%

2 In terms of reducing payment of bribes, only the African and South American regions

demonstrated effectiveness for independent variables. In Africa, top manager experience was

effective for government contracts and all payments; and audit for government contracts. In

South America, internationally recognized quality certification was effective for government

contracts and auditing for all payments.

78

Industry Analysis of Dataset

The results of the industry analysis (Tables 9.1 to 9.5) are as follows:

In terms of business controls. auditing was most effective for the Manufacturing (5 out of 5

dependent variables) and Wholesale and Retail (4 out of 5 dependent variables) sectors, while

being marginally effective for the Construction and Transportation (1 out of 5 dependent

variables) sector. It was not effective for the other sectors. Consistent with the other analyses,

quality certification was ineffective across the board. While it was effective in Model 1 and

Model 2 for several dependent variables in various sectors (licenses for Manufacturing,

Construction and Transportation, Information and Communication; utilities for Chemical and

Pharmaceutical; government contract for Manufacturing), this promising initial effect was

negated by the presence of the environmental variables, demonstrating sensitivity to such.

Top manager tenure was most effective for the Manufacturing (5 out of 5 dependent

variables) and Wholesale and Retail (5 out of 5 dependent variables) sectors, while marginally

effective for the Chemical and Pharmaceutical (1 out of 5 dependent variables); Information and

Communication (1 out of 5 dependent variables); and Professional, Technical, and Scientific (1

out of 5 dependent variables) sectors. The effect of top manager tenure was extremely high

initially for the Professional, Technical, and Scientific sector, but its effect was wiped out by

environmental effects for three dependent variables. In the Information and Communication and

Professional, Technical, and Scientific sectors, where top manager tenure effects survived

environmental effects, its effect were higher than other sectors (Table 9.4). It is interesting to

note that the effect of top manager tenure was more effective for the Information and

Communication and Professional, Technical, Scientific sectors. It is possible here that managers

79

may have more of a "white-collar" background with more formal education which may allow

them to navigate government systems more effectively.

These results from the industry analysis may be partially explained by TI's Bribe Payer's

Index. Sectors where auditing and top manager tenure were nominally effective or not at all (i.e.

Construction and Transportation; Chemical and Pharmaceutical) are considered industries with

extremely high corruption. In such industries, it is possible that these measures are not as

resilient to environmental effects. Sectors where measures are more effective tend to be lower

on the scale or not ranked at all (i.e. Manufacturing; Wholesale and Retail).

80

Table 9.1

Industry Differences in Independent Variable Effectiveness for Internationally Recognized Quality Certification

Utilities

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 .900 .549** .905 1.08 1.04 1.17

Model 2 .907 .581* .877 1.10 .981 1.22

Model 3 .983 .701 1.10 1.06 1.11 1.02

Licenses

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 .856** .878 .757* 1.08 .454** 1.12

Model 2 .855** .877 .763* 1.08 .474** 1.13

Model 3 .985 .975 1.02 1.12 .672 1.19

Tax

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 .756*** .714* .669* .921 .612* .484*

Model 2 .751*** .710* .659* .929 .625* .496*

Model 3 .840** .983 .821 .907 .605 .502*

Govt Contract

Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 -.450* -.366 -.472 -.206 -1.17 1.05

Model 2 -.413* -.352 -.440 -.136 -1.20 1.18*

Model 3 -.167 .078 -.175 .039 -.849 .948

All Payments

Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 -.171 .015 -.092 -.003 .362 .560

Model 2 -.161 .020 -.099 .036 -.032 .638

Model 3 -.063 .123 .069 -.003 .055 .437

*p<.05, **p<.01, ***p<.001

81

Table 9.2

Industry Differences in Independent Variable Effectiveness for Auditing

Utilities

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 .774*** .778 .789 .643*** 1.33 .809

Model 2 .799*** .759 .840 .682*** 1.40 .863

Model 3 .814** .754 .787 .752** 1.39 .951

Licenses

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 .738*** 1.16 .908 .631*** 1.27 .659

Model 2 .754*** 1.20 .926 .664*** 1.34 .728

Model 3 .743*** 1.09 .832 .617*** 1.44 .632

Tax

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 .775*** .984 .832 .684*** 1.16 .684

Model 2 .785*** 1.00 .855 .719*** 1.19 .715

Model 3 .759*** .714 .730* .703*** 1.14 .736

Govt Contract

Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 -.579*** -.368 -.819* -1.10*** -.873 -.197

Model 2 -.547** -.369 -.783* -.957*** -.879 -.205

Model 3 -.500** .031 -1.09** -.748** -1.12 -.190

All Payments

Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 1 -.162* .346 -.031 -.253* -.635 -.193

Model 2 -.163* .357 -.031 -.230* -.766* -.153

Model 3 -.183* .264 -.200 -.236 -.714 -.244

*p<.05, **p<.01, ***p<.001

82

Table 9.3

Industry Differences in Independent Variable Effectiveness for Top Manager Experience

Utilities

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 2 .979*** .973** .985*** .975*** .995 .903***

Model 3 .987*** .979* 1.00 .976*** .987 .969

Licenses

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 2 .984*** .983** .987* .984** .970** .935**

Model 3 .988*** .990 .992 .981*** .960*** .955**

Tax

Odds Ratios Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 2 .987*** .989 .989 .983*** .986 .948***

Model 3 .991*** .996 .997 .983*** .984 .991

Govt Contract

Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 2 -.051*** -.021 -.029 -.070*** -.019 -.096***

Model 3 -.041*** -.011 -.022 -.064*** -.024 -.005

All Payments

Std Coefficients Manufacturing Chem & Pharm Const & Transp Wholesale & Retail Info & Comm ProTechSci

Model 2 -.009** -.008 -.007 -.019*** -.002 .041*

Model 3 -.007* -.010 -.001 -.024*** -.007 -.009

*p<.05, **p<.01, ***p<.001

83

Table 9.4

Industry Differences in Effects of Independent Variables3

(Projected Estimated Reduction in Probability of Bribe Being Asked)

Top Manager Effect (15 | 25 years of experience)

Manufacturing Wholesale & Retail Other

Tax

11.15% | 18.00% 20.41% | 31.92%

Utilities 15.50% | 24.64% 26.29% | 42.01%

Chem & Pharm

(25.17% | 38.60%)

Licenses 13.74% | 22.03% 20.39% | 32.07%

Info & Comm

(40.11% | 58.41%)

ProTechSci

(43.39% | 60.36%)

Audit

Manufacturing Wholesale & Retail

Tax 21.88% 27.21%

Utilities 16.75% 21.84%

Licenses 22.30% 32.89%

3 Internationally Recognized Quality Certification was only effective for the ProTechSci

category and Tax variable.

84

Table 9.5

Industry Differences in Effects of Independent Variables

(Projected Estimated Reduction in Percentage of Amount of Bribes Paid)

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Top Manager Effect

(15 | 25 years of

experience)

Percentage

Reduction

Government

Contract

2.77% (Manuf)

3.12% (Whole & Ret)

0.61% | 1.02%

0.97% | 1.61%

22.02% | 36.82%

31.09% | 51.60%

All Payments 1.45% (Manuf)

1.55% (Whole & Ret)

0.11% | 0.18%

0.36% | 0.60%

7.59% | 12.41%

23.23% | 38.71%

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Audit Effect Percentage

Reduction

Government

Contract

2.77% (Manuf)

3.12% (Whole & Ret

3.15% (Const & Trans)

0.50%

0.75%

1.09%

18.05%

24.04%

34.60%

All Payments 1.45% (Manuf) 0.18% 12.41%

85

Analysis of Dataset by Company Size

The results of the analysis of the dataset by company size (Tables 10.1 to 10.5) are as follows:

As an initial matter, informal payment requests and distributions were calculated to be higher

for small and medium-sized companies than for large ones. This is an interesting finding that

demonstrates the likely vulnerability of smaller and medium-sized companies to corruption

versus larger ones with more influence and resources.

Auditing was effective across the board for small, medium, and large companies. Quality

certification was generally ineffective for all companies except for the tax category, where it was

effective for all sizes. Top manager tenure was effective across the board. These findings are

consistent with those from the other analyses.

Promisingly, the effect of top manager tenure and auditing was highest for small companies

in the utilities and license categories. This finding has the potential to offset the effect of the

prior one regarding higher informal payment requests and distributions in smaller companies.

Finally, the effect of top manager tenure and auditing exhibited a U shape curve - highest for

small companies, decreasing for medium-sized companies, and increasing for large ones in the

utilities and license categories (Tables 10.4 and 10.5). This pattern is interesting as it could

possibly be explained by effects of top manager and auditing being strong at the small company

level due to size and at the large company level due to resources. The lesser effect at the

medium size company level is potential due to a combination of size and less resources.

86

Table 10.1

Company Differences in Independent Variable Effectiveness for Internationally

Recognized Quality Certification

Utilities

Odds Ratios Small Medium Large

Model 1 1.15 .846* .849

Model 2 1.22* .840* .862

Model 3 1.30** .922 .902

Licenses

Odds Ratios Small Medium Large

Model 1 .855 .863* .943

Model 2 .873 .864* .942

Model 3 .941 .986 1.05

Tax

Odds Ratios Small Medium Large

Model 1 .755*** .783*** .736***

Model 2 .754*** .785*** .728***

Model 3 .775** .869* .836*

Govt Contract

Std Coefficients Small Medium Large

Model 1 -.144 -.475* -.142

Model 2 -.033 -.431 -.124

Model 3 .029 -.059 .008

All Payments

Std Coefficients Small Medium Large

Model 1 .260 -.224* -.140

Model 2 .305* -.235* -.149

Model 3 .224 -.099 -.030

*p<.05, **p<.01, ***p<.001

87

Table 10.2

Company Differences in Independent Variable Effectiveness for Auditing

Utilities

Odds Ratios Small Medium Large

Model 1 .649*** .866* .715**

Model 2 .686*** .893 .732**

Model 3 .757*** .824** .794*

Licenses

Odds Ratios Small Medium Large

Model 1 .635*** .861** .664***

Model 2 .662*** .887* .686***

Model 3 .641*** .827** .719***

Tax

Odds Ratios Small Medium Large

Model 1 .690*** .849*** .737***

Model 2 .714*** .876*** .746***

Model 3 .717*** .794*** .711***

Govt Contract

Std Coefficients Small Medium Large

Model 1 -1.09*** -.345 -.083

Model 2 -.948*** -.329 -.104

Model 3 -.773*** -.446* -.094

All Payments

Std Coefficients Small Medium Large

Model 1 -.098 -.363*** -.187

Model 2 -.072 -.379*** -.198

Model 3 -.037 -.439*** -.233

*p<.05, **p<.01, ***p<.001

88

Table 10.3

Company Differences in Independent Variable Effectiveness for Top Manager Experience

Utilities

Odds Ratios Small Medium Large

Model 2 .968*** .981*** .987**

Model 3 .982*** .986*** .987**

Licenses

Odds Ratios Small Medium Large

Model 2 .978*** .984*** .988***

Model 3 .983*** .987*** .988***

Tax

Odds Ratios Small Medium Large

Model 2 .985*** .988*** .989***

Model 3 .991*** .990*** .991*

Govt Contract

Std Coefficients Small Medium Large

Model 2 -.082*** -.037*** -.010

Model 3 -.064*** -.028** -.012

All Payments

Std Coefficients Small Medium Large

Model 2 -.017*** -.008 -.004

Model 3 -.015*** -.007 -.004

*p<.05, **p<.01, ***p<.001

89

Table 10.4

Company Differences in Effects of Independent Variables

(Projected Estimated Reduction in Probability of Bribe Being Asked)

Top Manager Effect (15 | 25 years of experience)

Small Medium Large

Tax 11.96% | 17.97% 12.73% | 20.46% 11.80% | 19.02%

Utilities 21.03% | 32.92% 16.69% | 26.50% 16.51% | 26.15%

Licenses 19.39% | 30.56% 15.23% | 24.37% 14.32% | 22.91%

Audit

Small Medium Large

Tax 25.69% 18.83% 26.92%

Utilities 21.55% 15.78% 19.11%

Licenses 31.54% 14.59% 24.33%

Internationally Recognized Quality Certification

Small Medium Large

Tax 20.36% 12.00% 15.23%

Combination Effect

Small Medium Large

Tax

Manager +25,

QC, Audit

51.72% 43.07% 49.51%

Utilities

Manager +25,

Audit

47.45% 37.84% 39.92%

License

Manager +25,

Audit

52.37% 35.18% 41.31%

90

Table 10.5

Company Differences in Effects of Independent Variables

(Projected Estimated Reduction in Percentage of Amount of Bribes Paid)

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Top Manager Effect

(15 | 25 years of

experience)

Percentage

Reduction

Government

Contract

3.59% (Small)

2.63% (Medium)

1.57% (Large)

0.96% | 1.60%

0.42% | 0.71%

0.18% | 0.30%

26.74% | 44.57%

15.97% | 27.00%

11.47% | 19.11%

All Payments 1.82% (Small) 0.22% | 0.37% 12.09% | 20.33%

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Audit Effect Percentage

Reduction

Government

Contract 3.59% (Small) 0.77% 21.45%

All Payments 1.45% (Medium) 0.44% 30.35%

Average Amount of

Percentage Paid

(Contract and Total

Sales)

Combination Effect

Manager +25 years,

Audit

Percentage

Reduction

Government

Contract 3.59% (Small) 1.73% 66.02%

91

Interview Results

Two senior compliance personnel from major multinational companies were interviewed with

the corresponding results:

Management’s Effect on Business Controls

In regards to the role of management affecting business controls, both affirmed the

significance of senior leadership and management setting the correct tone for the organization.

Specific components of focus include the important role of the audit committee in monitoring

compliance issues, regular reports on findings and investigations, and effective communication

between compliance personnel and senior management.

Environment’s Effect on Management and Business Controls

In regards to the role of environment affecting both controls and management, the first

interviewee stated that the competitive business environment and pressure to meet financial

targets was a significant factor. The second interviewee stated that potential financial limitations

may play a factor in implementing compliance initiatives but this was mitigated by the necessity

of doing so.

Industry Differences

In regards to differences by industry in affecting compliance, the first interviewee stated that

there were none and that the issues presented were universal. The second interviewee stated that

there were industry differences linked to the transparency of transactions, with certain sectors

such as the construction and pharmaceutical industry being linked to more corruption.

92

Company Size Differences

Both interviewees confirmed that the size of a company affected compliance. The first

interviewee stated that the larger a company, the harder it is to implement compliance, with a

possible solution of looking to automation of controls and increased ability to obtain and analyze

data. The second interviewee stated that larger companies have more resources to use on

compliance with smaller companies facing a disadvantage due to fewer resources.

Regional Differences

Both interviewees also confirmed that there were regional differences. The first interviewee

stated that there are more resources for compliance in the United States but that countries with

increased levels of corruption required more focus. The second interviewee also corroborated

this sentiment, with recommendations for proper risk assessment depending on business partners

and project.

Recommendations to Improve Business Controls

Both interviewees had recommendations regarding the improvement of business controls in

order to increase their resilience to factors such as the environment and management. The first

interviewee stated that standardizing controls and proactive monitoring, especially auditing, were

key components to implement. Finally, this interviewee also emphasized the use of mechanisms

to collect data from all over the world for analysis. The second interviewee emphasized the need

for proper design of controls in order to minimize disruption to business and economize the use

of resources, with a focus on automation.

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Recommendations to Improve Management

Both interviewees had recommendations regarding the improvement of management to

environmental factors. The first interviewee emphasized the setting of realistic financial targets

as well as educating managers on the consequences of corrupt behavior, including criminal

sanctions, debarment, and financial consequences. The second interviewee also emphasized the

need for awareness and education of managers, combined with the setting of proper incentives to

encourage ethical behavior including linkage to financial compensation.

Other Factors Affecting Compliance

Both interviewees stressed the role of legislation such as the US Foreign Corrupt Practices

Act and UK Bribery Act and related investigations in affecting compliance. The investigation

and prosecution of such cases coupled with media attention focuses a spotlight on ethics and

compliance issues.

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CHAPTER V: COUNTERSTRATEGY

Corruption is a troublesome enemy to combat because it is difficult to define and detect. It

is also likely not understood as well as other violations. In many situations, firms are unaware of

the range of strategies that are available to them to either reduce the costs of corruption or deter

it (Doh et al, 2003). Accordingly, I argue that a combination of good strategy and tactics is

necessary if firms are to have a chance in addressing corruption effectively.

Controls and Leadership Matter

The first principle to highlight, as indicated by the data analysis, is that business controls,

leadership, and management matter in combating corruption. Auditing, quality certification (to a

lesser extent), and top manager tenure function as an outer shield against informal payment

requests as well as an inner shield for informal payment distributions. This set of results may be

useful in transitioning the mindset of companies from feeling like weak and passive victims to

being able to resist corrupt influences and forces. The outer shield principle will likely be more

applicable to firms operating in developing countries where corruption is high. The inner shield

principle is particularly applicable in an ethics and compliance context where the focus is on

preventing payment of bribes and to evade liability from government investigation and

prosecution.

The effectiveness of business controls is an encouraging finding. Despite possible cynicism

on the theoretical and practical motivations behind implementing them, I propose that simple

measures such as auditing may have a significant effect on preventing corruption. Certified

management systems and quality certifications can also be improved upon to be more resilient

and thus increase its effectiveness.

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I strongly argue that tailoring controls to a situation is also essential. For example, Sethi and

Sama (1998) have proposed using different focus for controls depending on the situation a

company is in. For an ethically hostile environment, using legally based coercive techniques and

social ostracism is preferred. For high growth economic activity environments where there are

high structural opportunities for exploitation but low institutional temptations, capitalizing on

reputations is the better approach. In regulated or high stable mature business environments,

where both structural opportunities for exploitation and institutional temptations are low,

focusing on voluntary restraints and compliance is adequate. Further, in an intensely competitive

and entrepreneurial environment where there are low structural pressures but high institutional

ones, companies should focus on controlling individual behavior. Finally, designing appropriate

controls also requires taking into consideration business operations and financial resources, with

minimal disruption to the former and efficiency for the latter. Here, the use of automation could

be effective in increasing the effectiveness of such controls.

The finding that top manager tenure is resilient to environmental variables and effective in

preventing bribery is extremely promising. Not only does this finding align with the various

theories, prior work on leader and manager influence on companies' operations and performance,

and the interviews with senior compliance personnel, but it also shows that harnessing and

development of leaders and managers is a crucial resource to invest in. In general, anti-

corruption and compliance recommendations emphasize a "tone at the top" in order to create an

ethical culture. While this recommendation is solid in principle and practical in reality, there is

probably more to having experienced leadership than solely this factor. It is likely that an

experienced manager has increased ability to obtain recourse through alternative government

channels or to deflect the need for informal payments when faced with bribe requests (Herrera,

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2007). This ability may be due to a wider professional network or increased knowledge on how

to deal with such issues. The effect of top managers is also significant as it shows how ordinary

people may have extraordinary impact on their circle of influence. Shielding a company from

bribery requests and payments has far-reaching consequences, including promoting integrity,

efficiency, and a commitment to profits, while also protecting employees in general.

Accordingly, identifying leaders and managers who will be committed to ethics and compliance

and providing them with appropriate education and incentives is an important component of a

company’s overall strategy.

The effectiveness of business controls and top managers may be also harnessed to do more

for the larger problem of corruption. Companies can act as change agents, especially those who

are influential and visible, specifically leaders in their fields. Visibility of a company has several

consequences. This factor may force companies to adopt stringent measures to comply with the

law, but later on these companies may also serve as pioneers that provide standards for less

visible and influential companies, thereby affecting the business and even the political

environment in which they operate in. Possible avenues can include influencing legislation,

organizing training related to preventing bribery and encouraging compliance, exposing public

agency corruption, and generally leveraging corporate assets to shape government policy (Hills

et al, 2009).

Understanding Context

As demonstrated by the data analysis, not only do the effects of business controls and top

manager tenure differ by region, industry, and company size, but also the relationships between

them and environmental variables. Not every measure will be effective in every case -

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depending on region, industry, company size, and even type of dependent variable. Each

measure will have different costs and benefits as well as sensitivity and resilience. Hence, the

effects of environmental pressures are not uniform as they will vary by the independent variable

considered.

Taking context into consideration is important in terms of what measures to use. This is

similar to surveying the state of a battlefield before actual engagement starts as well as the larger

environment - i.e. political climate and economic resources. This is also akin to having as much

information or intelligence about the scenario at hand. Considering context allows for more

efficient use of resources and prevents discouragement in terms of feeling like a helpless victim

of circumstances.

Consequently, context in this case can be paramount in affecting the effectiveness of

strategy and tactics to be developed and implemented. A practical scenario where context would

be important would be knowing which measure is to be used. In a given region, a direct measure

might be more effective initially than an indirect measure, which would allow a company to use

the former to gain a foothold in combating corruption while using others to build on their gains.

For example, perhaps it is wise to ignore management efforts in Asian regions where the data

show a positive correlation with bribery, but to instead focus on strong controls. For small

companies, where the data show the effects of management to be the strongest, this finding can

compensate for the availability of less resources devoted to ethics and compliance. In large

companies, where the effects of management are weaker, steps can be taken to address this state

of events, either through education or awareness or by increased reliance on controls, including

focusing on automation. In large companies, however, the probability of greater access to

financial resources for ethics and compliance should be capitalized on. For medium sized

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companies, the benefit is understanding the different patterns for management and controls.

Here, the effects of leadership are less than small companies and are greater than large ones but

the effects of controls appear to be the weakest. With this phenomenon in mind, management

can be strengthened while diverting more efforts to design and implementation of controls.

Multidisciplinary Approach

I propose that taking a multidisciplinary approach from the standpoint of criminology and

institutional theory, as well as from the general management literature is also useful. Borrowing

from and merging fields allows for creativity and expansion of knowledge and also allows for

more versatility in approach. This synthetic approach may result in a worthwhile addition to the

anti-corruption arsenal.

From a criminological standpoint, removing strain from a company's standpoint in terms of

reducing the profit motive and inexhaustible motivation for achievement might be difficult and

even impossible. The same goes for the forces behind coercive isomorphism from institutional

theory. Coercive isomorphism, however, may be co-opted in the sense that coercive forces from

government and other institutions may pressure organizations to be more committed to ethics

and compliance. This impetus can come from increased investigations and prosecutions,

followed by appropriate sanctions. The United States taking the lead in increasing enforcement

of the Foreign Corrupt Practices Act in recent years has correspondingly increased the urgency

for companies to improve their ethics and compliance efforts. Moreover, as mentioned

previously, companies may also lessen poor governance by reporting instances of corruption and

resisting it, either reducing or deflecting some of the pressure from these coercive forces.

Introducing compliance and ethics may also lessen, however slightly, pressures from the profit

motive, although admittedly difficult.

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The presence of a strong commitment to ethics and compliance, especially through effective

and well-designed programs will play into the differential association framework from

criminology and mimetic isomorphism from institutional theory. Here, the benefits of

compliance and other controls should either be emphasized or developed. Further, better

detection, increased enforcement of laws and standards, with proper sanctions for violations and

rewards for commitment to integrity can play a significant role in reinforcing ethical behavior.

Finally, strengthening and training leaders and management is paramount. For example,

borrowing from a transformational leadership style, which has been posited to contribute to the

creation of an ethical environment could be utilized (Carlson and Perrewe, 1995). Another factor

to consider would be to strengthen ties between key management and leadership in terms of

combating corruption without compromising the long term goals of a company and preventing

conflict related to such (Colbert et al, 2008). If these measures are shown and perceived to be

effective, they will create a cycle of proliferation which will balance out the corruption-favoring

differential association equation as well as provide models for mimesis. The strength here is that

unlike coercive forces and strain, companies have more control over the direction and expression

of differential associations and mimesis, especially if countermeasures to corruption are shown

to be effective, efficient, and beneficial to companies. Increasing models of compliance also

slows down the rate of mimesis of those more susceptible to corruption (DiMaggio and Powell,

1983).

Finally, a zero tolerance approach to maintaining integrity will help prevent the formation of

subcultures and normalization of deviance processes. Again, keen monitoring and strict

enforcement are key to prevention of subculture formation by negating the effects of

rationalization and redefinition of unethical behavior. By immediately addressing instances of

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corruption and isolating the perpetrators involved, companies can quarantine this behavior to

prevent further infection of others in the company. Striking hard at perpetrators and making

examples of them is also probably a good idea. This mechanism will be heavily influenced by

top management and leadership. This is also applicable to the processes of normative

isomorphism where a culture of integrity can be established through education, training, good

behavior by networks, and movement of ethical employees. Industry organizations and business

schools can also incorporate a higher commitment to ethics and compliance in addition to the

dominant discussions on profit and growth.

Mixed Strategy

Using a mixed strategy is wise. A mixed strategy will involve combination of measures,

including tough controls, appeals to morality, and benefits (Paternoster and Simpson, 1996;

DiTella and Schargrodsky, 2003; Braithwaite, 1985). Auditing, for example, is a direct measure

that is extremely effective and resilient. The downside of such a measure, however, is that it

might be too obvious and inspire cynicism. Quality certification while less effective on its face

has its benefits as an indirect measure. As previously detailed, the potential benefits of

implementing certified management systems include improvement in financial performance

(Bansal and Hunter, 2003; Corbett et al, 2005; Schroeder et al, 2008); business and operating

performance (Naveh and Marcus, 2005; Schroeder et al, 2008; Zu, 2008); instrument of

mobilization and governance (Boiral, 2003; Christmann and Taylor, 2006; Walgenbach, 2001);

and advantages over legislation or marked based policies (Bansal and Hunter, 2003). These

advantages should be capitalized on, which will have the dual effect of promoting ethics and

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compliance, but in a more subtle fashion. Indirect measures may be more palatable and easier to

implement than direct ones.

As demonstrated by the projected reduction of informal payment requests and distributions,

the combination of various methods - in this study's case, management, auditing, and in some

scenarios, quality certification - can reduce corruption quite significantly. This combination

method is akin to combating a disease with multiple drugs, which attacks different aspects of a

pathogen, with one avenue compensating for the weaknesses of another.

Just as the Buenos Aires hospital study detailed by DiTella and Schargrodsky (2003)

examined the combination effects of wages and auditing, integrating incentives and controls is a

viable model. Not everyone responds solely to rules and regulations, but these are necessary for

those who do not. Likewise, appealing to morality is effective for others. This should be

capitalized on especially with benefits like customer, supplier, and employee loyalty (Gilley et

al, 2010). The role of auditing and other direct measures are also important because they

compensate for the weaknesses of voluntary codes of conduct, which are lack of enforcement

and power (Doh et al, 2003).

A good strategy will also consider sequence and intensity. Olken's (2007) study of

Indonesian road projects show that increase in the probability of audit decreases corruption.

Certainty and randomness of auditing might also be useful here. Adding the layer of

dissemination (Ferraz and Finan, 2007) may heighten the impact of a combination strategy. This

dissemination is probably a lot easier with the development of various social media tools and

more accessible publishing tools.

Resisters and dissenters in organizations must also be addressed, neutralized, or dismissed.

Based on Christmann and Taylor's (2006) study, it appears that roughly a third of companies are

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full supporters from inception of certified management systems. Forty percent appear to be in

the unconvinced zone, with their acceptance of implementation restricted to a ceremonial role.

The remaining twenty seven percent are active resisters. At first glance, this is problematic, but

viewing this state of events from an optimistic perspective, it means that if a company can

persuade the unconvinced zone to cooperate, it only leaves roughly a quarter of companies in the

true resister zone. Building on the quality enthusiasts is a non-negotiable requirement, either

using them as consultants or examples to be followed. Ceremonial integrators can be persuaded

to cooperate by appointing proper individuals to be in charge, avoiding technicality, building

consensus, and focusing on practical and instrumental implementation over symbolic window-

dressing.

Finally, a good strategy will consider the fluidity of the situation. No system is perfect and

perpetrators will eventually evolve and adapt. A possible plan here would be to use war-gaming

to brainstorm ways to overcome measures (Herman and Frost, 2009). Systems must always be

tested, likely with the assistance of individuals outside the company to provide a fresh and

unbiased perspective of a company's anti-corruption measures.

Creating Change

Finally, the issue of creating change should be discussed. In companies where corruption

has become the norm or where attitudes towards it are lax, certain problems will be presented.

Greenwood and Hinings (1996) delineate two avenues of potential change - evolutionary and

revolutionary - that are affected by factors such as normative embeddedness, mechanisms for

dissemination of ideas, permeability to other fields, patterns of value commitment, power

dependencies, and capacity for action. Other factors to be considered are organizational

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environment, social position of actors, development of vision, mobilization of allies, and use of

social capital (Battilana, 2009).

Revolutionary change occurs where individuals desiring change are located at interstices of

several social networks, organizations, and institutions, where decision-makers take ideas

seriously, and there are necessary resources. Evolutionary change, on the other hand, tends to

occur where the prior factors do not occur but innovations fit the institutional context better and

are more likely to persist over time (Campbell, 2004).

A change framework like Kotter's (1996) where establishing urgency and showing that a

larger problem can be addressed incrementally should also be useful. The inner shield and outer

shield framework would be applicable to the latter goal while urgency can be fulfilled with

several paths. Hardy and Maguire (2008), however, raise the dilemma where those who want to

make change often lack resources and power to realize their vision while dominant actors who

have the power to do so are more likely to embrace the status quo.

Hence, I propose what I call the "shock and change" method. Revolutionary change must be

accompanied by components of evolutionary change to ground long-lasting changes in an

organization. The "shock" component functions as the first step to deinstitutionalizing

corruption. Capitalizing on external factors such as customer expectations and sanctions

(Christmann and Taylor, 2006; Jiang and Bansal, 2003), investor perceptions with resulting

effects on firm value (Chhaochharia and Grinstein, 2007; Goncharov et al, 2006) and preventing

direct consequences such as prosecution and investigation (Huff, 1996; Ruhnka and Boerstler,

1998) and collateral consequences (Aviram, 2005; Moohr, 2007; Murphy, 2009; Karpoff, 2008).

These factors should be emphasized as the "shock" or revolutionary part of change, while then

coming up with an incremental but consistent plan to ground change. Another option is using an

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external threat such as prosecution and investigation to build on for a change initiative, but this

approach is obviously not optimal for a company.

Individuals interested in leading change should be concerned about timing. There is no

point to starting a change initiative that will fail from lack of momentum or resources. Potential

change agents should wait for a combination of support, external issues, resources and such to

begin their initiatives. Thus, compliance and ethics initiatives is not "one size fits all" from a

substantive standpoint, but also from an implementation one.

Ultimately, one of the keys to building an ethical and compliant culture is linking such

behavior to adding value to a company. Realistically, ethics and compliance are likely perceived

as being antithetical to the primary profit-making motive of the private sector. But if one thinks

about this issue differently, having effective tools and strategies to combat corruption actually

helps businesses to be more profitable. Preventing informal payment requests enables businesses

to operate more efficiently, adding to the bottom line. Preventing informal payment distributions

has even more direct effects, resulting from minimizing loss from revenues and contracts.

Theoretical Implications

This section discusses the theoretical implications of the results and findings of this study.

These are particularly important as reinforcement for proposed solutions to corruption as well as

further elucidation of relationships between variables and concepts in the relevant theories.

As an initial matter, the effectiveness of the combination of normative business controls and

normative/cognitive effects of top managers in reducing informal payment requests and

distributions, and potentially disrupting the formation of corrupt subcultures, are consistent with

the differential association and differential reinforcement concepts grounded in social learning

theory whereby intensity, frequency, priority, and duration of associations with positive

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pressures as well as the amount, frequency, and probability of rewards and punishments are

relevant in affecting behavior (Sutherland and Cressey, 1960; Sutherland, 1949; Akers and

Jensen, 2010; Akers, 1998). Consequently, I propose that the related policy recommendation

here would be to invest in ethical managers and strong controls, which is consistent with the

promotion of ethics and compliance measures as the antidote to corrupt behavior (Clinard, 1980,

1990).

Moreover, the results and findings of this dissertation indicate that the various types of

institutional pressures interact with each other. Cognitive elements, which are tied to mimetic

pressures, as measured by top manager tenure and the normative element captured by the effect

of auditing (and to a lesser extent, quality certification) are shown to be resistant to regulatory

ones which are tied to coercive pressures, as measured by the environmental factors. Cognitive

and regulatory elements are also shown to affect normative ones as measured by their effect on

business controls. While the consequences of coercive pressures are significant in mitigating

those of management and business controls, it is also encouraging to note that certain normative

and mimetic pressures are not completely susceptible to these coercive pressures, especially the

role of managers and auditing. This finding demonstrates that it is possible to select normative

and mimetic components that are more resilient to coercive ones. It may also be possible to

increase the resiliency of more sensitive normative and mimetic components to make them more

effective. Consequently, I propose that some measures can be used as frontline ones while

others are adjusted for effectiveness and efficiency. The resiliency of cognitive elements is also

a promising avenue for further exploration, as they may be viewed as a crucial pivot point for

anti-corruption strategy. By capitalizing on cognitive elements, specifically those affecting

leadership and management, that are resistant to regulatory ones while carefully considering their

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effects on normative ones, better anti-corruption measures can be developed. On a policy level,

focusing on strengthening leaders and managers likely increases the amount and effect of

positive mimetic pressures, which in turn can decrease corruption.

Further, I argue that the results and findings of this dissertation demonstrate that the

relationship between institutional pressures vary in intensity and effect depending on the context

in which they are considered, such as region, industry, and company size. The results of the

regional analysis are consistent with the likelihood that there are coercive pressures possibly due

to additional cultural variations that affect the effects of normative and mimetic pressures.

Similarly, the results of the industry and company size analyses are consistent with

demonstrating the presence of coercive pressures such as organizational structure, processes, and

complexity that account for variation in the effects of normative and mimetic ones (Vaughan

1983, 1982; Clinard, 1980). In industries or regions with a greater reputation or incidence for

corruption, the potential of decreased positive mimetic pressures, increased presence of corrupt

mimetic ones and coercive pressures affects the effectiveness of normative components. This

finding is also consistent with anomie theory where strain and pressures weakens controls and

norms, leading to the formation of corrupt subculture (Passas 2000; 1999). Consequently, I

propose that the policy recommendations here would be to take into account and reduce the

effects of those pressures, such as decreasing transactional complexity and addressing the

negative effects of organizational structure per the recommendations of the scholars cited above.

Finally, while components of compliance and ethics are likely contemplated initially as

normative pressures, these can be eventually co-opted to become mimetic pressures if related

anti-corruption measures are shown to be effective and perceived as worth being followed on an

organizational level, as well as to become coercive pressures if the overall business, political,

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and social environment views ethical practices as a cultural expectation. Overall, I argue that the

contribution of criminology and institutional theory to forming a viable theoretical framework in

which to analyze private sector corruption is valuable, but with the nuance that the effects of

various components are not homogeneous, interact with each other, and can be affected by sub-

contexts, requiring careful analysis and consideration.

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CONCLUSION

Corruption is a formidable enemy. Its consequences are myriad, including detrimental

effects from an economic, institutional, and governance point of view.

The main findings and contributions to the literature of this dissertation are as follows:

1. Combating corruption with available measures can be effective.

2. Understanding the context in which these measures are implemented is paramount

3. Taking a multidisciplinary approach, specifically from the fields of criminology,

institutional theory, and business management, can provide powerful insights into

developing appropriate solutions.

First, as the data analysis shows, the effects of certain countermeasures, especially the role

of certain controls like auditing and that of management, can be quite substantial in deterring

both bribe requests and dispensations. While it is difficult to attack corruption, a defensive or

deterrent strategy may help curtail its incidence and effects. The role of management and

controls may potentially serve as barriers or shields. This approach may buy time to build up

more resistance and ultimately serve a basis for a counterattack on corruption if the business

environment has shifted enough to a culture of ethics and compliance to have an effect on society

in general, including the political environment. On a practical level, measures that are proven to

be effective prevents firms from dropping out of the formal economy or altogether. This

scenario is good overall for improving economic development and governance. The results of

this study posit that leadership and controls, when properly supported and implemented, are

powerful factors.

Taking into account appealing to morality while instituting strong controls is also a

circumspect approach. Human nature is such that even the best of individuals will succumb to

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pressures, which may exist in certain scenarios presented by the political and business

environment. Hence, strong protections must be put in place. It is, however, ethical and

committed individuals that will likely provide the impetus and leadership for sustained change.

These individuals should be supported and ultimately placed in positions of influence. With

necessary resources, they may be able to effect positive change in difficult environments.

Further, those already in power should be inoculated through anti-corruption education and

training to build up their resilience to the environmental pressures, and thereby reducing the

probability of being involved in corrupt activities.

I strongly argue that these factors, however, should be considered in the proper context - i.e.

the interrelationships between them and environmental factors as well as by region, industry, and

company size. This study demonstrated that certain business controls are more sensitive to

environmental factors, while generally resilient to the role of management. Variations are also

shown depending on region, industry, and company size. Consequently, taking context into

consideration will allow for more efficient and effective use of resources in the fight against

corruption.

Future research could focus on other qualities of management or leadership such as

functional background, formal business education, military service, and team and tenure

heterogeneity and their role on preventing corruption or other types of corporate crime (Certo et

al; 2006; Daboub et al, 1995; Greening and Johnson, 1996; Norburn and Birley, 1988). The

effectiveness of other compliance and anti-corruption measures should be studied as well. Other

analyses to consider are those on an intraregional and intraindustry basis. Finally other

components of anti-corruption strategy such as collective action, systemic and strategic reform,

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public-private partnership, and the role of civil society and international donors should be

considered.

In regards to implications for managers and policymakers, the most obvious ones based on

this study are to find ways to strengthen and educate managers and to encourage careful and

nuanced planning for anti-corruption counterstrategy. Selection of managers should not only

take into consideration ability to contribute to a company's bottom-line, but also the ability to

withstand pressures from a competitive business environment which may encourage corrupt

behavior. Managers should be continuously educated on ethics and compliance issues, as well as

measures to take when faced with difficult scenarios involving bribery and other unlawful

opportunities.

Next, I propose that anti-corruption counterstrategy should be developed with the utmost

care. Careful research and analysis are prerogatives in this endeavor, with the contemplation of

pertinent factors present in certain regions or industries, as well as the resources and limitations

of a company. The incorporation of criminology into designing anti-corruption counterstrategy

is likely a good avenue to pursue. The aforementioned combination of criminological principles

such as anomie/strain, differential association/reinforcement, and formation of subculture with

corresponding principles in institutional theory provide a powerful backdrop in which

counterstrategy can be formed.

In regards to strain and coercive isomorphism, the main impetus for change will likely come

from governments interested in pursuing an anti-corruption agenda. At this point of history, the

US and UK through the enactment and implementation of the US Foreign Corrupt Practices Act

and UK Bribery Act respectively, are leading the way. This state of events is obviously not

going to be popular with the private sector, but the effects of such legislation has the effect of

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lessening the focus on a pure profit motive for business, adding the requirement for ethics and

compliance.

Based on the requirement for ethics and compliance, the perspective of differential

association/reinforcement can thus be utilized to design proper countermeasures. For example,

an increase in focus on ethics and compliance through awareness, education, and implementation

can help alter the differential association equation to reduce the likelihood of corrupt activities.

Conversely, strong ethics and compliance programs will increase the detection of such behaviors

with corresponding penalties, which also alters the balance in favor of preventing corrupt

activities. From a mimetic standpoint, companies that realize the benefits of strong ethics and

compliance will come to imitate other companies that have successfully integrated these

components into their overall business plan and operations.

Finally, the presence of strong ethics and compliance programs supported by the role of top

management prevents the formation and normalization of a corrupt subculture. Where a

subculture of corruption has been strongly embedded, studies from institutional theory and

business management may be insightful in reversing this course of events by providing tactics

and reasons for beneficial change.

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APPENDIX

DETAILS OF WORLD BANK ENTERPRISE SURVEY 2006-2011 AND OTHER VARIABLES

Corruption Indicators

Utilities

Over the last two years, did this establishment submit an application to obtain an electrical

connection? (Yes/No/Don't Know)

In reference to that application for an electrical connection, was an informal gift or payment

expected or requested? (Yes/No/Don't Know/Refuse to Answer)

Over the last two years, did this establishment submit an application to obtain a water

connection? (Yes/No/Don't Know)

In reference to that application for a water connection, was an informal gift or payment expected

or requested? (Yes/No/Don't Know/Refuse to Answer)

Over the last two years, did this establishment submit an application to obtain a telephone

connection? (Yes/No/Don't Know)

In reference to that application for a telephone connection, was an informal gift or payment

expected or requested? (Yes/No/Don't Know/Refuse to Answer)

Licenses

Over the last two years, did this establishment submit an application to obtain a construction-

related permit? (Yes/No/Don't Know)

In reference to that application for a construction-related permit, was an informal gift or payment

expected or requested? (Yes/No/Don't Know/Refuse to Answer)

Over the last two years, did this establishment submit an application to obtain an import license?

(Yes/No/Don't Know)

In reference to that application for an import license, was an informal gift or payment expected

or requested? (Yes/No/Don't Know/Refuse to Answer)

Over the last two years, did this establishment submit an application to obtain an operating

license? (Yes/No/Don't Know)

In reference to that application for an operating license, was an informal gift or payment

expected or requested? (Yes/No/Don't Know/Refuse to Answer)

Tax

Over the last 12 months, how many times was this establishment either inspected by tax officials

or required to meet with them? (Scale)

In any of these inspections or meetings was a gift or informal payment expected or requested?

(Yes/No/Don't Know/Refuse to Answer)

Government Contract

Over the last 12 months, has this establishment secured a government contract or attempted to

secure a contract with the government? (Yes/No/Don't Know)

When establishments like this one do business with the government, what percent of the contract

value would be typically paid in informal payments or gifts to secure the contract? (Percentage)

127

All Payments

We’ve heard that establishments are sometimes required to make gifts or informal payments to

public officials to “get things done” with regard to customs, taxes, licenses, regulations, services

etc. On average, what percent of total annual sales, or estimated total annual value, do

establishments like this one pay in informal payments or gifts to public officials for this purpose?

(Percentage)

Business Controls

Quality Certification

Does this establishment have an internationally-recognized quality certification? (Yes/No/Still in

Process/Don't Know)

Auditing

In the last complete fiscal year, did this establishment have its annual financial statement

checked and certified by an external auditor? (Yes/No/Does Not Apply)

Top Manager Tenure

How many years of experience working in this sector does the top manager have? (Scale)

Environmental Variables

Pressure from Informal Competition

Does this establishment compete against unregistered or informal firms? (Yes/No/Don't Know)

Quality of Court System

I am going to read some statements that describe the courts and the way government officials

interpret laws and regulations that affect this establishment’s business. For each statement, please

tell me if you Strongly disagree, Tend to disagree, Tend to agree, or Strongly agree.

"The court system is fair, impartial and uncorrupted”

Pressure from Corruption

[T]ell me if you think that [Corruption] is No Obstacle, a Minor Obstacle, a Major Obstacle, or a

Very Severe Obstacle to the current operations of this establishment.

Transparency International Corruption Perception Index (Non WBES Scale)

Quality of Business Environment

World Bank's Ease of Doing Business Index (Non WBES Scale)

Economic Indicator

Gross Domestic Product per Capita (Non WBES Scale)

Control Variable

Size of firm (Small ≥ 5 ≤ 19/Medium = 20 ≤ 99/Large ≥100)

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QUESTIONNAIRE FOR COMPLIANCE PERSONNEL

1. What are the ways where management affects the quality of business controls (i.e.

auditing, financial practices, compliance) targeted to prevent corruption and other types

of corporate misconduct?

2. What are the ways where business controls can be designed or improved to minimize

negative effects of management?

3. What are the ways where the business environment affects the quality of business

controls?

4. What are the ways where the political environment affects the quality of business

controls?

5. What are the ways where business controls can be designed or improved to minimize

negative effects of the business environment?

6. What are the ways where business controls can be designed or improved to minimize

negative effects of the political environment?

7. What are the ways where the business environment affects management in regards to

preventing corruption and other forms of corporate misconduct?

8. What are the ways where the political environment affects management in regards to

preventing corruption and other forms of corporate misconduct?

9. What are the ways where management can be strengthened or improved to minimize the

effects of the business and political environment?

10. How do industry differences affect the issues previously discussed?

11. How do company size differences affect the issues previously discussed?

12. If your company conducts business overseas, are there any differences in how your

compliance strategy is conducted?

13. What factors such as events or legislation have been instrumental in affecting your

company's compliance strategy?