Globe and Mail: Why some elite companies cheat to stay ahead

The following article about research by Beedie School of Business faculty Rekha Krishnan and Rajiv Krishnan Kozhikode was published by the Globe and Mail on January 29.

By Darah Hansen.

It makes sense that a big company with a strong bank account and reputation for moral behaviour would do everything in its power to maintain that standing among its elite peers.

Right? Not so, according to a recent study from Rekha Krishnan of Simon Fraser University’s Beedie School of Business in Burnaby, B.C. Dr. Krishnan and SFU co-author Rajiv Krishnan Kozhikode, who is also her brother, found that the opposite can be true in organizations with the most to lose.

The study, published in the Academy of Management Journal, examined corporate deviance committed by commercial banks operating in India, from incidents of illegal loan recovery practices to threatening and verbal abuse of customers who default on loans – “anything that is not considered legal,” says Dr. Krishnan, who is currently a visiting scholar at Stanford University in California.

Included in the study were both domestic Indian banks and multinational brands.

The study expands on previous research that found high-status organizations suffer heavy penalties when they are caught engaging in illegal activities, with others of the same standing disassociating themselves from the offenders when they behave in an undesired way.

The common sense belief is that top banks would want to avoid that kind of penalty because they have much more to lose than lower status organizations.

“They don’t have the need to engage in illegality and yet they do,” says Dr. Krishnan.

The research posits that the sense of security enjoyed by elite organizations has been greatly overestimated. Many are so eager to maintain their reputations that they will engage in deviant behaviours – even acts of illegality – out of fear that they may not be able to meet the expectations of associates and shareholders.

This was especially true when a high-status bank had experienced a decline in its financial asset quality or had fallen behind the financial asset quality of its peers, according to the study.

However, when a bank’s business partners placed greater emphasis on corporate social responsibility, it minimized a bank’s tendency to resort to illegal loan recovery practices.

“What we can say from this is … if you want your associates to be clean, you must very clearly signal to them that you care about integrity,” she says. “They will take it seriously, too.”

Although the study focused on institutions in India, the findings can be applied to organizations around the globe, Dr. Krishnan says.

Read the full article on the Globe and Mail website.