Jose Canseco, the noted baseball player and author of “Juiced“, was busy as a bee pollinating major league baseball with knowledge and practices for steroid and growth hormone use. (Here’s the link on Docuticker). This strikes me as similar to the stock option backdating scenario — interlocking boards of directors and using the same personal trainer can both be used to pollinate an industry with unethical practices. Obviously. Contagion is how crime spreads. But there is one more element missing with white collar crime: peer effects trivializing the criminality, and allowing the powerful white collar guys to slide. This isn’t plain vanilla graft, this seems to be a peer-contagion effect. How does that happen?
Mackenzie et al. have a report of how powerful people avoid criminal labels — in the stolen-artifact context. (Cite and abstract below). Apparently fencing stolen artifacts was pretty well accepted in the museum-antiquities world, sort of the new normal — rationalized by saying “finders keepers” and “we want to put everything on display at once for the public cultural good” (see here, for example, for the African viewpoint vs. here, for example, for the Western view — this tends to, not surprisingly, leave the tire tracks on indigenous populations without the means to visit New York or London to see their own cultural heritage.) Mackenzie et al go through how cultural artifact criminal theft statutes were written, and how, at the end, the laws are basically meaningless.
Because law makers are “white collar” they seem to collude in attempts to avoid criminalizing white collar unethical practices. And, giving “affirmative action” to white collar criminals allows the spread of criminality until it is the new normal.
This may be how they get to be industry wide — no one wants to rat out someone in their own social circle. After all, their kids may go to the same school. (I’m assuming this is beyond plain vanilla bribery or political corruption).
Just to pick a garden variety white collar crime, say stock option backdating, below is another paper showing how interlocking directorates spread that practice. As your loyal bloggist previously noted here and here, prosecutors and business scholars seemed to be in denial about the plain-vanilla fraud aspects — like how company lawyers could be co-conspirators. They seemed to be succumbing to their white-collar peers in big law firms: “C’mon, everyone does it”.
The practice was only noticed when the Wall Street Journal — which is New York based, not Palo Alto based — picked up on an academic study of “lucky CEO’s” — by Eric Lie. Wall Street investment firms — having been burned by Palo Alto in the dot.com era, has no love lost with Palo Alto. So why did they care? Maybe because the tech types were getting rich on stock options with prices set in 1999-2001 — when the investment houses took a bath during that same 1999-2001 era. Karma. Or the peer-effect reversed.
You can see this happening again and again. Take virtually any issue that comes out of an investment house — if it looks like fraud to the rest of us, there will be some Wall Street types arm-waving it away. Like the credit rating agencies and sub-prime mortgages.
And so, my guess is that in major league baseball, getting “juiced” was the new normal because powerful business interests were allowed to slide on the criminal aspects. I caught some of the hearings on C-Span, and there were Congressmen who were trying to find ways out for the baseball players (like Roger Clemens) — to give him a pass.
The lawmakers who wanted answers were those who had high school aged children in athletics, who knew that “juiced” was also normal in varsity athletics. I suppose the harm has to hit home — the law maker’s own family — before powerful white collar guys are really criminals. Peer-contagion turns into peer-revenge.
I don’t know why cultural/art pillagers are getting off without criminality — but perhaps now that there is cultural sensitivity and a self-interested Western world who wants to preserve (and make money from) authenticity, perhaps there will be peer-backlash.
1. Citation for Research Blogging:
Gould, E.D., Kaplan, T.R. (2008). Learning Unethical Practices
from a Co-worker:
The Peer Effect of Jose Canseco. Institute for the Study of Labor (“IZA”) in Bonn, Discussion Papers, 1(1), 1-36.
Learning Unethical Practices from a Co-worker: The Peer Effect of Jose Canseco*
This paper examines the issue of whether workers learn productive skills from their coworkers, even if those skills are unethical. Specifically, we estimate whether Jose Canseco, one of the best baseball players in the last few decades, affected the performance of his teammates. In his autobiography, Canseco claims that he improved the productivity of his teammates by introducing them to steroids. Using panel data on baseball players, we show that a player’s performance increases significantly after they played with Jose Canseco. After checking 30 comparable players from the same era, we find that no other baseball player produced a similar effect. Clearly, Jose Canseco had an unusual influence on the productivity of his peers. These results are consistent with Canseco’s controversial claims, and suggest that workers not only learn productive skills from their co-workers, but sometimes those skills may derive from unethical practices. These findings may be relevant to many workplaces where competitive pressures create incentives to adopt unethical means to boost productivity and profits.
JEL Classification: J24
Keywords: peer effects, corruption, crime, externalities
Eric D. Gould
Department of Economics
Hebrew University of Jerusalem
2. Mackenzie, S., Green, P. (2007). Performative Regulation: A Case Study in How Powerful People Avoid Criminal Labels. British Journal of Criminology, 48(2), 138-153. DOI: 10.1093/bjc/azm074
A Case Study in How Powerful People Avoid Criminal Labels
This paper explores the role of invested powerful business actors in the criminalization process as applied to the illicit antiquities market. We present a case study of the precise mechanics of the role played by trade interests in the formation of the Dealing in Cultural Objects (Offences) Act 2003. This process involved the trade’s entering appearance in the legislative process and neutralizing the possible constraining effects on its members of the new criminal offence which was to be created. We begin by exploring the political, historical and economic context in which discussion of the terms of the 2003 Act first began. We then follow the Act from its genesis through its various stages of drafting and re-drafting to its enactment. This case study of a single piece of legislation provides further data to add to the line of prior research that illustrates that powerful white-collar criminals, as well as sometimes preventing criminal legislation entering the statute books, can also influence the design of criminal legislation that does enter the statute books in order to protect themselves and their own business interests. We also use this case study of a process of contemporary lawmaking to outline the concept of performative regulation: broadly, that which in appearance serves political ends but in practice effects an inconsequential level of control.
3. Bizjak, J.M., Lemmon, M.L., Whitby, R.J. (2008). Option Backdating and Board Interlocks. American Finance Association 2008 New Orleans Meeting Papers, 1(1), 1-42.
Suggested citation from SSRN:
Bizjak , John M., Lemmon, Michael L. and Whitby, Ryan J., “Option Backdating and Board Interlocks” (February 2007). AFA 2008 New Orleans Meetings Paper Available at SSRN: http://ssrn.com/abstract=946787
We provide insight into how the controversial practice of backdating employee stock options spread across firms. Our analysis indicates that interlocked boards play a significant role in the spread of backdating. In some empirical specifications over one fourth of the unconditional probability that a firm starts to backdate options is explained by having a board member linked to another firm that already backdates. Our result on board interlocks provides an explanation of how this practice spread to a large number of firms across a wide range of industries. We also find evidence that links through auditors and geographic location influence the spread of backdating. Although we focus on the role that board interlocks play in explaining the spread of the practice of backdating stock options, we believe that our contribution to the literature is deeper. Our analysis indicates that boards operate in complex and dynamic social environments and suggests that recognizing and accounting for these connections is important to furthering our understanding of how boards function and the role that they play in providing managerial oversight and determining corporate strategy.