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A man's hands handcuffed behind his back.

Companies can reduce the incidence of white-collar crime by having clear policies that spell out what's considered right and wrong behavior.

A few bad men (and women, too)

By Pauline Oo

January 17, 2006

On January 30, the last and biggest trial in a recent string of corporate scandals is scheduled to take place. Enron founder Kenneth Lay and CEO Jeffrey Skilling will be tried on conspiracy, fraud, and other charges related to their company's downfall more than five years ago. Whatever the outcome, one-time energy giant Enron has already made our history books. It's a symbol of poor accounting practices and massive corruption.

And it's not the only scoundrel. Others who have gained similar notoriety are WorldCom, HealthSouth, Adelphia...

In 2002, the U.S. Congress passed the Sarbanes-Oxley Act to curb corporate or white-collar crime and prevent companies from fooling investors. The law has been called the most comprehensive reform of U.S. business practices in 60 years because it gives prosecutors and regulators new means to strengthen corporate governance, improve corporate responsibility and disclosure, and protect corporate employees and shareholders.

However, white-collar crime will continue to be prevalent in spite of the new legislation, says Karen Schnatterly, an assistant professor of strategic management and organization at the University of Minnesota's Carlson School of Management. Why? Because people will always search for a way to make easy money.

"[Out of the total U.S. population,] twenty to thirty percent of us are planning to steal, 20 to 30 percent would never steal, and 40 to 60 percent may give into the temptation occasionally or under certain conditions, such as pressure to meet numbers," says Schnatterly, who broached the topic of corporate crime and ethics with 300 people at the Carlson School's First Tuesday luncheon on January 10. "Psychological studies also show that some people think corporate theft is not a [real] crime. Or they rationalize stealing as borrowing. [For example,] a bank manager who borrows money believing he will put the money back."

Prosecuting corporate fraud

The Corporate Fraud Task Force, created by President Bush in 2002 and headed by Deputy Attorney General Larry Thompson, sets the strategies and policies for combating corporate crime. Thus far, it has investigated more than 320 potential corporate fraud matters, involving in excess of 500 individuals and companies, and obtained more than 250 corporate fraud convictions or guilty pleas, including at least 25 former CEOs.

"In two years, people will find a way around [the law] and we're going to see more white-collar crime," she says. "[The Sarbanes-Oxley Act] will not help prevent white-collar crime, it will just raise the cleverness ratio." In other words, the 20 to 30 percent of us who are planning to steal will get smarter about how we steal.

Despite the bleak picture of human nature, companies can reduce the incidence of white-collar crime by spelling out what's considered right and wrong behavior. According to Schnatterly, who conducted a comparison study on 160 U.S. firms, companies with clear policies and procedures, greater internal and external communication, and more extensive performance-based compensation for employees are less likely to experience corporate fraud than those without these factors.

Enron scored above the national average in only one of the three measures--employee profit sharing and pay. "If I was asked, before it crashed, if Enron had a chance of experiencing white-collar crime, I would have said yes. The fuel was there," she says.

"Other variables, such as board independence and CEO pay, do not appear to impact the probability of crime at all," she says.

Corporate crime in Minnesota?

Curious to see if a diminished likelihood of white-collar crime was characteristic of Minnesota companies in general, U professor Karen Schnatterly compared the state's 10 largest companies with their national counterparts using the three variables she found to be important: clear policies and procedures, greater communication, and more extensive performance-based compensation. "The corporate culture of the Minnesota companies seems to discourage crime more so than in similar companies based elsewhere," she says. "That's not to say white-collar crime, or even an Enron-like situation, can't occur in Minnesota But it appears much less likely.

Schnatterly offers some advice to those who invest or work for a firm: know your company's code of conduct (it should be clearly written and easily understood by everyone who reads it), board of directors (they should be outsiders but know the business of the company), and employee job descriptions (holding multiple roles increase the likelihood of crime--for example, a CEO who is also the chair and president); and pay attention to how a company talks about communication, what it says about itself, and how it communicates with its employees and other stakeholders, as well as how often it communicates with them.

"Do some of the research yourself," she says. "You can't trust mutual fund analysts. They were part of the problem with Enron, [scoring it higher than it deserved.]" (In November 2004, a jury convicted four Merrill Lynch & Co., Inc., executives of fraud, perjury, and obstruction of justice charges.)

To learn more about the Sarbanes-Oxley law, read Insights@Carlson School's "Sarbanes-Oxley: is it working."