Managers' business school education and military ... - Semantic Scholar

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Human Relations [0018-7267(200005)53:5] Volume 53(5): 691–712: 012392 Copyright © 2000 The Tavistock Institute ® SAGE Publications London, Thousand Oaks CA, New Delhi

Managers’ business school education and military service: Possible links to corporate criminal activity Robert J. Williams, J. Douglas Barrett and Mary Brabston

A B S T R AC T

This study examined the moderating influence of two top management team (TMT) characteristics, namely managers possessing an MBA education or prior military experience, on the relationships between firm size and corporate criminal activity, and firm strategy and corporate criminal activity. The study utilized data from 184 Fortune 500 companies. The results suggest that both graduate business education and prior military service among members of a firm’s TMT strengthen the relationship between firm size and corporate criminal activity. Further, the results provide no support for the moderating influence of managers’ graduate business education or prior military experience on the relationships between firm strategy and corporate criminal activity.

KEYWORDS

criminal activity firm size firm strategy interactive effects MBA education military service

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Human Relations 53(5)

Background In recent years, corporate illegal activity has captured public attention and has resulted in significant economic losses for both taxpayers and for corporate stockholders. For example, the recent failures of many large savings and loan institutions have been attributed to illegal acts by the managers of these institutions. In many instances, stockholder wealth has been significantly eroded as several Fortune 500 firms have been sanctioned as violators of laws designed to prevent practices ranging from environmental degradation to anti-trust activities (Daboub et al., 1995; Davidson & Worrell, 1988). In examining corporate illegal activity, it is essential to correctly identify the hierarchical level (board of directors or top management team) within the organization at which most illegal behavior occurs. The firm’s top management team (TMT) consists of those senior executives charged with conducting the firm’s day-to-day operations. TMT members generally carry the title of CEO, president, executive vice president, senior vice president, group vice president or a vice president having a position on the board. Boards of directors possess the authority to oversee TMT decisions, evaluate firm performance and allocate rewards to shareholders and managers (Fama & Jensen, 1983). Boards safeguard invested capital and harmonize owner–management conflicts of interest (Daboub et al., 1995; Williamson, 1984). Despite these positive attributes of corporate boards, there is evidence that the lofty ideals associated with boards may not always be realized in practice. In recent years, the fiduciary relationship between owners and management seems to have diminished in strength, as a greater percentage of board members have been insiders (members of the firm’s TMT) (Kesner & Johnson, 1990). Further, in most corporations directors are picked by the CEO because of business or personal ties between the directors and the CEO, or to add symbolic luster to boards (Monks & Minow, 1991). Generally, directors are not chosen based upon their ability to challenge management (Monks & Minow, 1991). Since board members are generally selected, compensated and informed by management, they are subject to the perspectives and influence of management (Monks & Minow, 1991). Thus, it seems reasonable to assume that members of the TMT bear primary responsibility for those illegal acts committed in the firm’s name. The reasons managers commit illegal acts generally follow two schools of thought. The first is social learning theory, which proposes that individuals learn behaviors through modeling and imitation of others (Bandura, 1977). Behavioral norms present within an organization serve to promote behavior

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Williams et al. Managers’ business school education and military service

in accordance with codes of acceptable conduct among managers, or alternatively, can serve to promote organizational performance at all costs and a ‘bottom-line philosophy’ (Bandura, 1977; Staw & Ross, 1980; Yeager, 1986). Such an aggressive emphasis on performance often results in a deemphasis on behavior in accordance with codes of acceptable conduct and the emergence of illegal acts (Hill et al., 1992). The second approach explains corporate wrongdoing in more rational, utilitarian terms (Daboub et al., 1995). According to this perspective, the decision to commit illegal acts is based on rational calculations of the expected costs and benefits of the acts (Becker, 1964). Committing illegal acts will be attractive up to the point where the penalty for committing the act is equal to the net social cost of the act divided by the probability of detection (Becker, 1964; Daboub et al., 1995). This rational approach assumes that managers have sufficient information to make the necessary mental calculations about the expected benefits and potential costs of their actions. While both approaches may offer partial explanations for managerial misconduct, no comprehensive theory of corporate wrongdoing has been developed (Baucus & Near, 1991). Instead, researchers have tended to examine certain identifiable antecedent factors as catalysts for promoting managerial misconduct. Several factors such as firm size, firm performance and firm strategy have all been the focus of study on corporate wrongdoing (Baucus & Near, 1991; Clinard & Yeager, 1980; Daboub et al., 1995; Hill et al., 1992; Staw & Szwajkowski, 1975). Prior studies that have examined the link between antecedent factors and corporate wrongdoing have produced mixed results. Reasons cited for the lack of empirical clarity have included the use of insufficient data on corporate criminal violations, the use of inappropriate measures in designing prior studies, and the failure to use appropriate statistical techniques (Hill et al., 1992). Another limitation of prior studies may have been the failure to consider the types of experience and education among members of the firm’s TMT as factors that moderate the relationships between the antecedent factors and corporate wrongdoing (Daboub et al., 1995). The present study will examine the links among specific categories of managerial education, prior experience and illegal activity. This is not to imply that managerial education and experience are the only causal factors influencing corporate wrongdoing. Clearly, this is not the case. Rather, the present study with its exploratory nature seeks to add a piece to the overall puzzle of corporate crime and its impact on the firm. The results should suggest whether certain aspects of a manager’s background do exert some influence on illegal activity, and whether further study along these lines seems warranted.

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Firm size, strategy and illegal activity There has been substantial debate regarding the proposed link between firm size and corporate wrongdoing. Arguments have been offered in support of the notion that larger firms tend to be more heavily involved in illegal activity. Some view firm size as a proxy for structural complexity, thus, criminal activity may be easier to conceal in larger firms (Daboub et al., 1995; Finney & Lesieur, 1982). In larger firms, it may be more difficult to communicate with and monitor the behavior of organization members (Baucus, 1990; Simpson, 1986). Also, executives in larger firms may be more willing to engage in illegal acts given their firms’ greater ability to absorb punitive fines imposed for wrongdoing (Clinard & Yeager, 1980). The stigma associated with wrongdoing may be less in larger firms given the large number of separate divisions and hierarchical levels present within such firms. Managers may be able to contain the negative stigma within a division or group of divisions and, thus, distance themselves from illegal acts and their consequences (Yeager, 1986). Despite these arguments, there are some who question the link between size and wrongdoing. Several studies (e.g. Baucus, 1988; Baucus & Near, 1991; Perez, 1978) that have offered support for a positive link between size and wrongdoing have been criticized on methodological grounds, as they failed to demonstrate that larger firms committed proportionately more crimes than smaller firms (Hill et al., 1992). Some argue that due to their increased size and exposure, there is a greater likelihood that larger firms will be investigated for wrongdoing by authorities (Hay & Kelley, 1974; Hill et al., 1992). Also, larger firms may be better able to avoid criminal violations as a result of investment in controls that monitor firm activities and insure legal compliance. A study by Hill et al. (1992) examined, among other things, whether larger firms committed proportionately more crimes than smaller firms. Their results demonstrated a significant link between EPA violations per employee and firm size. Although the evidence remains somewhat unclear, following Hill et al. (1992), the present study will assume that larger firms do commit proportionately more illegal activity than smaller firms. This view seems valid given that 184 of the largest firms in the US economy will be examined in this study. Given their sizes, these firms should have knowledge of those laws affecting their activities and the resources needed to comply with those laws. In addition to size, firm strategy should influence the amount of illegal activity that occurs within the firm, such that higher levels of diversification

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should be related to higher levels of wrongdoing (Daboub et al., 1995). With respect to strategy, firms can pursue single business activities, or they can diversify into increasingly unrelated business activities. Unrelated diversified firms, or conglomerates, are the most highly diversified. These firms have expanded by adding largely unrelated businesses to their original business activities (Rumelt, 1974). Conglomerates generally possess the lowest levels of firm unit interdependence and operating synergy, and often have the least effective systems for controlling and coordinating the firm’s individual units (Rumelt, 1974). Managers in these units generally stress the performance of their divisions, often at the expense of overall firm performance. Less centralized strategic control coupled with heightened competition among divisional managers in highly diversified firms should contribute to higher levels of illegal acts in such firms.

Business education, military service and illegal activity If firm size and strategy do, in fact, serve to influence illegal activity, it is the authors’ contention that the types of experience and education of the firm’s TMT should moderate the strength of the relationship between these factors and illegal activity. It is proposed that graduate business training (MBA education) and prior military experience among managers should strengthen the links between firm size and wrongdoing, and firm strategy and wrongdoing (Daboub et al., 1995; Howell et al., 1986). These two managerial attributes were chosen for study due to their attractiveness to firms in recruiting managerial personnel (Wall Street Journal, 1985). While these managerial attributes may be attractive to many firms, their possible links to corporate wrongdoing have been largely unexplored. The research on TMT demographic variables encompasses a wide array of managerial characteristics and their links to various organizational outcomes. Studies in this area have sparked controversy, with some arguing that identifiable managerial characteristics are poor substitutes for deep-rooted managerial attributes and their effect upon firm performance. These same researchers argue that the theory is weak and is plagued by unproven suppositions and untested hypotheses. This argument may have validity. Therefore, we view this study as exploratory in nature and as an initial attempt to test those untested propositions about the variables presented. The authors are aware of no studies that have examined the effects of MBA education and prior military service on managers’ propensity toward illegal activity. Depending upon the results, further studies may be warranted.

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MBA education The global economic slowdown in the 1980s and the resulting corporate downsizing temporarily cast a shadow on the MBA degree. Nevertheless, as the global economy regained its momentum in the 1990s, the prestige and attractiveness of the MBA degree has generally been restored (The European, 1995; Shelley, 1997). In 1997, for example, the number of MBA degrees awarded by American business schools approached 97,000, compared with 68,000 MBA graduates in 1987. Many experts believe the demand for MBA graduates will remain strong for several years. A survey by the US Bureau of Labor Statistics indicated that demand for general managers and top executives in the USA, a primary market for the MBA degree, will result in the creation of approximately 47,000 new managerial jobs each year during the 1996–2006 time period (Shelley, 1997). Business education is unique in its fundamental focus on teaching students those techniques necessary for enhancing firm value. Analysis of the firm’s competitive position, analysis of the firm’s internal strengths and weaknesses and the formulation and implementation of proper competitive strategies comprise the essential components of an MBA education. Some argue that the nature of an MBA education places undue emphasis on economic accomplishments, often at the expense of promoting behavior in accordance with codes of acceptable conduct (Jones et al., 1990). It has been proposed that the course content of the typical MBA program (accounting, finance, marketing, management, and quantitative methods) teaches a language devoid of ethical symbols and codes of acceptable conduct (Daboub et al., 1995; Jones et al., 1990). Further, MBA training stresses a rational, economic world view and provides a set of simplified assumptions about human behavior and organizational relationships (Jones et al., 1990). Some may argue that as a consequence of MBA training business students may be less likely to exhibit behavior in accordance with codes of acceptable conduct than students in other fields (Daboub et al., 1995). In fact, there is some evidence that practitioners with graduate business degrees do exhibit a greater propensity for illegal behavior than non-MBA graduates (Kelley et al., 1990). We are not making the argument that the completion of an MBA program has some inherently evil effect on some individuals. Rather, the emphasis upon enhancing a firm’s financial performance and the ‘bottom-line’ philosophy, so prevalent in graduate business programs, should exert some influence upon managerial attitudes and actions regarding corporate wrongdoing. Or perhaps the type of person who pursues an MBA degree in anticipation of career advancement and personal economic rewards

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may be more prone to commit illegal activity than individuals pursuing other academic degrees. The typical MBA curriculum allocates little time, if any, on defining acceptable managerial behavior and the consequences of pursuing improper behavior. Nevertheless, there has been an emerging trend in some business schools toward exposing business students to some type of ethical training. Some business schools have added an ethics seminar, or have added an ethics component to an existing course requirement within their curricula. Given the lack of empirical support for the theoretical propositions, we performed exploratory data analysis in order to examine these proposed relationships. The analysis is exploratory in nature, as we acknowledge that there may be other factors, which contribute to each of our explanatory and response variables. Although the theory, as previously discussed, cannot be ‘proven’, the results of this study should shed light on the strength of the relationships among the variables examined. It is proposed that there is a significant positive relationship between MBA training attained by members of the firm’s TMT and each of firm size, firm strategy and illegal activity. Hypothesis 1a: the relationship between firm size and the firm’s involvement in illegal activities becomes stronger for firms with TMTs having a higher percentage of members with MBA degrees. Hypothesis 1b: with higher levels of corporate diversification, the firm’s involvement in illegal activities becomes stronger for firms with TMTs having a higher percentage of members with MBA degrees.

Military service The TMTs of most firms possess at least one member who has prior military experience and, in a number of cases, there are TMTs in which one-half or more of team members have served in the military. There is a growing number of business executives whose past military service makes them highly valued members of the TMT (Wall Street Journal, 1985, 1997). Military units and business units are similar in that both involve human interaction in problem-solving situations (Carey, 1996). Yet, an important difference between the two involves their approach to team management. In order to reduce the incidence of a dictatorial leadership style, many firms in the private sector have adopted a committee style of management (Carey, 1996). This style often strives for group consensus on a decision before its implementation and decision time can be relatively long. In contrast, the military has developed an effective team-based organization with strong leadership (Carey, 1996; Wall Street Journal, 1997). By necessity, the military

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creates true leaders of teams, leaders who develop subordinates and who make decisions based on the information and guidance of their subordinates (Carey, 1996; Francis, 1993). While many private sector firms now practice management by committee in which true leadership is sacrificed in favor of group consensus, many of these units fail to recognize that effective team management still requires a strong leader. By striving for consensus, many organizational decisions require far too much time and may not be decisive, as the committee seeks a decision that will please all its members. Alternatively, the military style of leadership has retained two aspects of organizational success often missing from private sector firms; short turnaround time and accountability (Carey, 1996). Military managers assume the role of decision maker when team consensus is not possible, and they are generally able to make decisions more quickly and decisively. Such aspects of military management would seem to be especially attractive to private sector firms undergoing strategic or structural change or facing rapidly changing environments (Francis, 1993). Downsizing in the military has prompted many officers to pursue positions in the private sector. Many firms, particularly those in defense, manufacturing and pharmaceuticals have favorably viewed prior military officers as mature, results-oriented leaders (Nation’s Business, 1996; Wall Street Journal, 1997). Nevertheless, the track record of former officers in making a successful transition from the public to the private sector is mixed (Business Week, 1995). For many officers the fit between military experience and private sector needs has been poor (Business Week, 1995). In such cases the contribution of former officers may be more symbolic than substantive. An often-overlooked contribution of former officers who move into the private sector is the team spirit and sense of cohesion that they bring to a TMT. There is a strong culture associated with the military, a culture that demands discipline, sacrifice, and a sense of duty and honor (Taylor & Rosenbach, 1984). Military managers understand systems and procedures and they understand that teams, not individuals, win (Nation’s Business, 1996). Military service instills allegiance to a greater cause than the individual, encourages political conservatism, fraternity among members and a sense of community (Daboub et al., 1995; Janowitz, 1971). Military service should help to craft and sharpen an individual’s code of conduct and abhorrence of illegal activity. Team members with prior military service should be mindful of their duty to the firm and in preserving its good name. Such managers may be more likely to behave in accordance with codes of acceptable conduct and avoid active participation in illegal activity than executives without prior military service (Janowitz, 1971).

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While active participation in illegal activity may, theoretically, be less for executives with prior military service, the passive acquiescence in illegal activity may actually be stronger for these same executives (Daboub et al., 1995). The military culture, with its emphasis on teamwork, group solidarity and goal attainment, may make prior service executives more reluctant to take corrective action once illegal activity is encountered within the firm (Daboub et al., 1995). These same executives, who might not actively engage in an illegal act themselves, might be slow to detect and correct the unlawful behavior of fellow team members in order to preserve team solidarity and/or protect the firm’s name. Given these views on military service and criminal activity, the general nature of the illegal acts committed by managers should help clarify which position is more accurate. The present study examines violations of Environmental Protection Agency and Occupational Safety and Health Administration regulations. Often, these crimes are crimes resulting from accident or omission, rather than commission. Once such crimes have occurred, prior military officers may practice damage control in order to protect the firm’s name and the reputation of fellow team members. While the arguments posed may be somewhat speculative, given the nature of the criminal violations examined, the present study adopts the passive acquiescence perspective. It is proposed that managers with prior military experience should seek to maintain team solidarity and cohesion in the face of illegal activity. Thus, the links between firm size and illegal activity, and firm strategy and illegal activity, should be stronger in firms having such managers. Hypothesis 2a: the relationship between firm size and the firm’s involvement in illegal activities becomes stronger for firms with TMTs having a higher percentage of members with prior military experience. Hypothesis 2b: with higher levels of corporate diversification, the firm’s involvement in illegal activities becomes stronger for firms with TMTs having a higher percentage of members with prior military experience.

Research design Sample The process of selecting the sample firms began by examining all firms that were continuously listed on the Fortune 500 for the years 1991 through 1994. Due to mergers and acquisitions, and firms replacing other firms on the Fortune 500, many of the firms listed in 1991 no longer existed as separate entities in 1994. We identified 202 firms that remained in the Fortune

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500 as separate entities during the entire 1991–4 time period. Of these 202 continuously listed firms, adequate TMT data were available for 184 firms and these 184 firms comprise the sample.

Measures Citations The combined total number of citations levied against each firm for violations of Occupational Safety and Health Administration (OSHA) and Environmental Protection Agency (EPA) regulations during the 1991–4 time period divided by the firm’s revenues during the same time period served as the dependent variable. The resulting variable (citations) measures the average number of legal violations per firm for each dollar of sales. Following Hill et al. (1992), both OSHA and EPA violations were utilized, as these two categories of violations constitute the largest two sources of corporate legal violations. The data on cited OSHA and EPA violations were obtained from the US Government under the 1974 Freedom of Information Act. Following written and verbal correspondence with OSHA and EPA officials, it was determined that a time lag of from one to two years existed between the commission of a violation and its final adjudication, depending upon the firm involved and the type of violation. Therefore, the present study recognized a two-year lag between the citation period (1991–4) and the period in which the antecedent factors and the TMT characteristics were measured (1989–92). Firm size Firm size (size) served as an independent variable. Size was measured as the logarithm of average firm sales during the 1989–92 period. Firm strategy Strategy (strategy) was included as an independent variable and Rumelt’s (1974) typology was used to classify each firm’s strategy. Rumelt categorized firm strategies based upon the proportion of the firm’s revenues derived from its largest business activity or group of related business activities. Single business firms are committed to a single business activity, vertically integrated firms produce and sell a variety of end products, related diversified firms have diversified by adding new businesses similar to the firm’s existing businesses and unrelated diversified firms have added businesses that are largely unrelated to the firm’s current business activities (Rumelt, 1974). An examination

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of the sample firms revealed the number of firms pursuing each strategy; single business (36 firms), vertical integration (32 firms), related diversification (72 firms) and unrelated diversification (44 firms). Since synergy and firm unit interdependence diminishes as the level of diversification increases, we treated strategy as a continuous variable ranging from 1 (single business) to 4 (unrelated diversification) in the analysis. Two attributes of the firms’ TMTs and their interactive patterns with firm size and strategy were included as independent variables. These include the percentage of team members possessing MBA degrees (MBA) and the percentage of team members with prior military experience as officers (2nd Lieutenant or higher) in their service branches (military). A yes/no criterion was elected for calculating military, rather than years of service, as it was often difficult to determine the exact number of years of each individual’s military service. TMT data were compiled for the years 1989–92 through biographical data available in the Dun & Bradstreet Reference Book of Corporate Managements, the companies’ annual reports, and press releases. Following Michel & Hambrick (1992) and Hambrick (1994), each firm’s TMT was defined to include all firm officers above the level of vice president (e.g. CEO, president, senior vice president, group vice president, executive vice president) and other officers serving on the firm’s board of directors. Biographical data for each of the four years were averaged over the 1989–92 time period in order to obtain a representative composite of each TMT over this period. Control variables There is evidence that financial performance may prompt firms to engage in illegal activity. During hard times, firms may attempt to cut costs in order to preserve declining profit margins. Such actions may result in reduced concern for, and emphasis on, environmental protection and employee safety, and violations of EPA and OSHA regulations may occur (Baucus & Near, 1991; Clinard & Yeager, 1980; Perez, 1978). Therefore, firm performance was included as a control variable. Each firm’s industry adjusted return on assets (ROA) for 1989–92 was used to measure firm performance. The average of all the members’ tenure on the TMT (TENT) was included as a control variable. Long TMT tenure has been associated with commitment to the organizational status quo and with reduced managerial risk taking. This often results in a reluctance by managers to try novel ideas and, generally, a reduced tendency by managers to engage in risky endeavors (Finkelstein & Hambrick, 1990; Katz, 1982; Michel & Hambrick, 1992; Staw & Ross, 1980).

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There is some anecdotal evidence that managers with shorter TMT tenure may be more likely to engage in illegal activity than managers with longer tenure. This argument is based upon the dual factors of executive mobility and status within the TMT. More mobile executives, those having less TMT tenure, are often more aggressive and more prone to risk taking in order to advance their own career objectives (Clinard, 1983). Clinard (1983) obtained survey results from middle managers who adhere to the notion that more mobile and less tenured executives are often less concerned with maintaining the organizational status quo and with preserving the firm’s long term reputation. With less concern for maintaining the firm’s good name, managers with short tenure might be more willing to respond to external threats from changing environmental and competitive conditions by engaging in illegal activity. Further, managers with shorter tenure may find their status and influence limited within the TMT. They may be compelled to accomplish lofty organizational goals established by TMT members with longer tenure and experience (Clinard & Yeager, 1980). If these goals are too ambitious, short-tenured managers may face the choice of not meeting the expectations of fellow team members, or of engaging in illegal acts deemed necessary to complete their assigned tasks (Clinard & Yeager, 1980). Admittedly, these arguments regarding TMT tenure are somewhat controversial and based on limited evidence. Some make the counterargument that short-tenured managers are more restrained in their actions, possess less power and knowledge of the firm and are less likely to commit illegal acts. These arguments may also have validity. At any rate, TMT tenure should exert some influence on illegal activity and its inclusion as a control variable seems justified. It has been argued that the similarity of group members (group homogeneity) with respect to members’ tenure on the team, and functional background affects member cohesiveness and behavior (Festinger, 1950; Pfeffer, 1983). Therefore, TMT Homogeneity (HOMOGEN) was included as a third control variable. An overall homogeneity composite measure was calculated. This measure averaged both TMT tenure homogeneity and functional homogeneity. Tenure homogeneity was measured using the coefficient of variation, defined as the standard deviation divided by the mean. This measure has been used in prior studies (e.g. Michel & Hambrick, 1992; O’Reilly et al., 1989), and is a preferred dispersion measure for interval data (Allison, 1978). The level of TMT functional homogeneity was calculated using categorical data. First, each manager’s functional background was based on an evaluation of the biographical data. Seven occupational categories were used to classify functional tracks: (1) accounting and finance; (2) marketing and sales; (3) production; (4) engineering; (5) general management and

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administration; (6) research and development; and (7) legal affairs. Two researchers examined employment data, and placed each manager into a given category based on the manager’s employment history. Obviously, the determination of functional background was somewhat subjective, especially for those managers with experience in more than one area. Nevertheless, great care was taken to properly classify each manager as to functional background, as detailed biographical information was gathered on each manager. The overall functional homogeneity of the TMT was measured in a similar manner to that used by Michel & Hambrick (1992). Specifically, a variation of the Herfindal-Hirschman index (Scherer, 1980) of the following form was used: 7

H=

∑ S2i

i=l

where H is homogeneity and Si is the proportion of team members having functional track i.

Analytical procedures A hierarchical, moderated regression analysis was used to test the hypotheses. In the base model (model 1), the dependent variable (citations) was regressed on the four independent variables and the three control variables. Next, four interaction terms were added to the basic model in successive runs, one for the interaction of firm size with MBA education (model 2), the interaction of firm strategy with MBA education (model 3), the interaction of size with military service (model 4), and the interaction of strategy with military service (model 5). The increment in R2 resulting from the inclusion of the interaction terms in the regression equation was used to assess the significance of the interactions.

Results The hypotheses are summarized in Table 1. Table 2 presents the descriptive statistics and results of the hierarchical regression analysis are presented in Table 3. The average TMT was composed of 7.5 members, with TMT size ranging from 3 to 28 members. The average tenure was 8.4 years, with a range of from 3 to 18 years. On average, the percentage of team members possessing an MBA education was 26 percent, while 36 percent of team

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Table I

Proposed theoretical relationships among the variables

MBA education among TMT members Hypothesis 1a: Strengthens the relationship between firm size and corporate illegal activity. Hypothesis 1b:

Strengthens the relationship between firm strategy (specifically, higher levels of diversification) and corporate illegal activity.

Prior military service among TMT members Hypothesis 2a: Strengthens the relationship between firm size and corporate illegal activity. Hypothesis 2b:

Table 2

Variables 1 2 3 4 5 6 7 8

Strengthens the relationship between firm strategy (specifically, higher levels of diversification) and corporate illegal activity.

Descriptive statistics

Mean

Citations 15.14 Size 22.53 ROA 0.06 TMT tenure 8.44 TMT homogeneity 0.53 Strategy 2.68 MBA education 0.26 Military service 0.36

SD

Correlations ––––––––––––––––––––––––––––––––––––––––––––– 1 2 3 4 5 6 7 8

20.55 0.87 0.05 2.81 0.07 0.94 0.19 0.21

.25*** –.16* .19* .05 .17* .02 –.05

–.03 –.13 –.12 .09 –.03 –.10

–.01 .10 –.11 .07 –.06

–.02 –.03 –.02 .08

.04 .01 –.09

.24** .07 .15+

N = 184 +p < .10 *p < .05 **P < .01 ***p < .001

members had served as officers in the military. The average number of citations per firm during the time period was 15, with a range of 0 (16 firms had no citations) to 140. Table 2 revealed several significant correlations between selected variables. As expected, size was positively correlated with citations, while return on assets (ROA) was negatively correlated with the dependent variable. The strong positive correlation between TMT tenure and citations was surprising,

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Table 3

Results of hierarchical regression analysis

Dependent variable: Citations Regression variables

T-statistics ––––––––––––––––––––––––––––––––––––––––––––––––––––––––– model 1 model 2 model 3 model 4 model 5

Intercept Size ROA TMT tenure TMT homogeneity Strategy MBA education Military service

–3.625*** 3.577*** –2.175* 3.474*** 1.120 0.509 0.586 –0.847

MBA size MBA strategy Military size Military strategy F R-Square ∆R-Square

–0.344 0.138 –2.093* 3.634*** 1.178 0.764 –2.411* –1.311

–3.454*** 3.597*** –2.173* 3.391*** 1.140 –0.613 –0.965 –0.883

–0.141 –0.049 –1.951+ 3.915*** 1.002 0.582 0.045 –2.321*

–3.431*** 3.541*** –2.171* 3.448*** 1.097 0.099 0.573 –0.394

2.440* 1.162 2.289* 0.168 4.165*** .22

4.566*** .27 .05***

3.825*** .23 .01

4.450*** .26 .04**

3.613*** .22 .00

N = 184 +p < .10 *p < .05 **P < .01 ***p < .001

given the theoretical arguments to the contrary regarding these variables. Procedures outlined by Belsley et al., (1980) were used to detect the presence of multicollinearity among the variables. The collinearity diagnostics indicated that multicollinearity did not pose a significant problem in conducting the analysis. Model 2 (Table 3) revealed a positive and significant interaction between MBA education and size (p < .05), while model 3 revealed no significant interaction between MBA education and strategy. The interaction between military and size in model 4 was significant (p < .05), while the interaction term for military and strategy (model 5) was not significant. The two significant interaction terms were plotted for visual inspection (Figures 1a and b), and the interactive patterns were in line with theory. Thus, the results offer support for Hypotheses 1A and 2A, but fail to support H1B and H2B.

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Figure 1(a)

Interaction of MBA with size

Figure 1(b)

Interaction of military with size

Discussion As predicted, the results suggest that the link between firm size and corporate illegal activity becomes stronger as the percentage of TMT members possessing an MBA degree or prior military experience rises. Alternatively, the link between firm strategy and illegal activity was not moderated by either

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of these same variables. Firm size reflects structural complexity and, possibly, a means by which firms may attempt to conceal their illegal acts. The results support this notion both directly by statistically linking size to illegal activity and perhaps indirectly by failing to support a link between strategy and wrongdoing. Regarding the second point, with increased levels of diversification the firm becomes more operationally fragmented, and individual operating units function as separate entities. Although speculative, it may be that the ‘cloak’ of complexity so prevalent in large, strategically focused firms, is not as readily available in diversified firms. In the latter, the various divisions are viewed as smaller autonomous units of a larger organization and careful monitoring of these divisions might make the detection of illegal activity more probable and less attractive to managers. Although the results for firm size are significant, we recognize that other factors may affect the variables in this study. Control variables for TMT tenure and homogeneity were included in the analysis, but the possibility exists that team socialization beyond that controlled for might somehow influence the team’s propensity to violate the law. For example, strong member socialization might be fostered among graduates of the same business school or among officers who served in the same branch of the military, both uncontrolled factors in this study. Given the results for MBA education, there is support for the view of some that business schools might wish to incorporate more ethical training into their curricula. Many business schools have taken the lead in encouraging appropriate behavior (obedience to established laws) in students and future managers by incorporating business ethics topics in some courses. Although no exact figures were available, the International Association for Management Education (AACSB) reported to the authors that the number of business schools requiring an ethics component in their graduate curriculum has been rising in recent years. While many applaud this trend, there are some academicians who feel that teaching students codes of acceptable conduct is both difficult to accomplish and may not be necessary. Some have argued that students pursuing a business degree may engage in more unacceptable behavior than other students and that it may be more a matter of self-selection bias, rather than the nature of business training itself that contributes to such wrongdoing (see McCabe et al., 1991). For example, McCabe et al. (1991) observed a lower ethical standard among students entering an MBA program than students entering law school. The MBA degree, and other business/commerce related degrees, is just one type of degree program, and other degree programs may also stress ‘bottom line’ performance. Obviously, different academic disciplines stress

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different ideologies. Engineers, for example, are more likely to have been exposed to rational analyses than those students who studied the humanities. Each disciplinary ideology would tend to lie along a continuum, with certain disciplines stressing a rational/egoistic approach, with others leaning toward a romantic/altruistic mindset. Also, managers possessing MBA degrees may have differing undergraduate backgrounds and certain combinations of study may tend to produce different results. The same is true for managers with military backgrounds regarding undergraduate major. In the case of firm size, the results have linked MBA education to illegal activity as though the education encouraged the wrongdoing. The authors are not advocating a direct causal link between business education first, followed by wrongdoing. Rather, this finding might encourage other researchers to look closer as to why MBA education and illegal activity are linked at all. Perhaps the link may be more indicative of the nature of the individual pursuing the degree, rather than the nature of the training itself. Such conjecture goes beyond the exploratory nature of this study. As this debate evolves, business schools might wish to move slowly in making dramatic changes in their curricula. The belief that an individual’s core value system might be significantly changed through limited academic exposure via ethics training seems unrealistic. In larger firms prior military experience among top managers was found to increase the likelihood that the firm would be more heavily involved in illegal activity. Similar to MBA education, this moderating effect of military service on wrongdoing was not found among managers with similar backgrounds in more highly diversified firms. While speculative, perhaps the positive aspects of the military experience, i.e. the development of personal discipline, sense of team and loyalty to the team and the reliance upon established procedures and codes of conduct are somehow overridden by the need to preserve TMT solidarity and cohesion, and protection of the firm’s name in larger firms. The present study has certain limitations that future research should address. In using the total number of citations as the gauge of illegal activity, differences in the magnitude and severity of illegal acts were not considered. Obviously, minor violations of the law might be committed more often than major violations. Future studies might utilize a more finely grained measure of criminal activity. The nature of the TMT data serves as a limitation. For example, the classification scheme used to assign managers to a functional area required subjective evaluation by raters. While care was taken to correctly classify the functional background of each manager, several managers had worked in several functional areas during their careers, making it sometimes difficult to

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determine a category for the manager. A more precise measurement of this variable would improve the results of future studies. While TMT data are easily obtained and reflect managerial characteristics, they are detached representations of actual team characteristics. The addition of more psychometric data would improve our understanding of group dynamics associated with TMTs. The links between business education and TMT member socialization patterns, and military service and TMT member socialization patterns, should be examined. Two research questions present themselves here. First, to what extent does member socialization and interaction contribute to criminal activity, i.e. is it more or less interaction that encourages illegal activity? Next, what specific factors encourage member interaction? For instance, does attendance at the same graduate school, or having served within the same branch of the military encourage such interaction? Answers to these questions can only enhance our knowledge of TMT dynamics. The mere passage of time might erode the theoretical links among business education, military service and managers’ propensity for wrongdoing. Obviously, people change over time. The length of time that has elapsed since finishing graduate school or military service and its effect on managerial behavior might provide an avenue for future research. Finally, TMT compensation could be examined as a factor that may influence managerial misconduct. Recalling the rational model of managerial misconduct, managers commit illegal acts as long as it is economically viable. To a large extent, it is the compensation level of managers that determines how viable wrongdoing actually is given that dismissal from the firm may result from excessive wrongdoing. It is hoped that this study will serve to stimulate further research that may help answer many of these challenging questions.

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Dr Robert J. Williams is Assistant Professor of Management at the University of North Alabama. Refereed publications have appeared in the Academy of Management Journal, Journal of Business Research, Journal of Managerial Issues, and Journal of Product and Brand Management. Dr Williams’ current research interests include top management teams, organizational governance structures and structural change issues. [E-mail: [email protected]] Dr J. Douglas Barrett is an Assistant Professor of Quantitative Methods in the College of Business, University of North Alabama. His publications have appeared in Technometrics, IIE Transactions and Journal of the American Statistical Association. His research interests include statistical process control, engineering statistics and probabilistic alternatives to fuzzy methods. [E-mail: [email protected]] Dr Mary Brabston is Assistant Professor of Management Information Systems at the University of Manitoba (Canada). Dr Brabston’s research interests include organizational decision making, information system design and group dynamics. [E-mail: [email protected]]