How competition can encourage unethical business practices

How competition can encourage unethical business practices

A fundamental belief in our free enterprise capitalistic society is that competition is good because it benefits the people, the consumers. Rarely do we question that belief or display a willingness to look at the dark side of competition. Recent research has done just that.

First, take a look at competition among educational institutions for the best students, which is becoming increasingly an issue. According to Carmen Nobel, writing in the Harvard Business Schools publication, Working Knowledge. a senior admissions officer at Claremont McKenna College resigned after admitting to inflating reported SAT scores of the incoming classes for six years to boost the schools rankings in the U.S. News and World Reports annual report of top colleges and universities in the United States. Nobel argues that the scandal, which is not the first of its kind, questions the value of competitive rankings, and the value of competition in general.

That sentiment was echoed in aresearch report entitled, Competition and Illicit Quality. by Victor Bennett of the USC Marshall School of Business, Lamar Pierce of Washington Universitys Olin Business School, Jason Snyder of the UCLA Anderson School and Michael W. Toffel of Harvard Business School. They contend many companies in highly competitive industries are likely to bend the rules to keep their customers.

Competition is generally thought to be good for companies because it keeps prices low and quality high. But when meeting customer demand is bad for society at large, then competition has a flip side, says Bennett, who led the research. The research was based on a study of 11,000 New York vehicle emission test facilities. The researchers found that companies with a greater number of local competitors passed cars with considerably high emission rates, and lost customers when they failed to pass the tests. Bennett and his colleagues concluded in contexts when pricing is restricted, firms use illicit quality as a business strategy.

Ernst & Youngs 12th annual Global Fraud Survey (2012) of more than 1,700 senior executives in 43 countries, including chief financial officers and heads of legal and compliance audits, showed 15% were willing to make cash payments to win or retain business. The corruption perception index of Transparency International. a multinational organization dedicated to curbing corruption in business, ranked countries according to its level of corruption. The U.S ranked 24, with New Zealand first and

Canada 10th, in terms of the absence of corruption.

How competition can encourage unethical business practices

In the Harvard Business Review. Malcolm S. Salter argues that the short-term focus of businesses invites corruption. He cites examples such as Wall Streets mortgage banking fiasco, defining it as institutionally supported behaviour that while not necessarily unlawful, undermines a companys legitimate processes and core values. In the private sector, institutional corruption typically entails gaming societys laws and regulations, tolerating conflicts of interest, persistently violating accepted norms of fairness and pursuing various forms of cronyism. Salter contends that the excessive focus of executives on short-term results discourages long-term investments and weakens the economy.

That view is reflected in a Harvard Business School Working Paper by Nelson P. Repenning and Rebecca M. Henderson, entitled, Making the Numbers? Short Termism & The Puzzle of Only Occasional Disaster. They argue a vigorous tradition in the accounting literature establishes that firms routinely sacrifice long-term investments to manage earnings and are rewarded for doing so.

In research conducted by the U.S. Business Roundtable Institute for Corporate Ethics, chief executives were asked to identify the most pressing ethics issues facing the business community. Effective company management in the context of todays short-term investor expectations was among the most cited concerns. The report identified an excessive focus on short-term results because of intense competition as a factor in some executives willingness to engage in unethical practices.

So it seems that competition is not always good for consumers and society as a whole, particularly if it is driven by questionable ethical and short-term practices.