Corporate corruption refers to crimes of corruption carried out by a corporation or by individuals who are identified with the company. A corporation is defined as a business entity that has a separate legal identity from the individuals that manage the activities of the business.
In the beginning of the 21st century, many executives in America were skimming millions of dollars off the top of the corporations they were heading by inventing fictitious revenues. The outcome of this behavior was huge corporate losses. What led to such a phenomenon? The obvious answers are arrogance, greed, dishonesty or just plain human frailty. After all, corruption at the top is an age-old problem.
The excesses of the 1990s were another reason that led to this particular form of corruption. The economic boom and the ease with which new capital could be raised, along with extravagant compensation schemes, played a part in the surge in corporate fraud. These factors, while important, do not entirely explain the unprecedented nature, scale and scope of the financial thievery that took place.
Since the mid-1990s, brand names, software, patents and other intangible assets became large components of a company's assets. All the while, complicated derivative instruments were adopted and globalization fueled fast and complex growth of corporations. These movements, while having their positive aspects, also helped to create confusion in the corporate balance sheets. They wreaked havoc on standard accounting practices and laid open the opportunity for managers to use this confusion to "cook the books" to show higher profits and thus cash in on large bonuses. The fine line between legal and illegal activity became too simple and attractive not to cross.
Financial derivatives made the books nearly totally indecipherable. In the 1990s, due to the popularity and intricacies of derivatives, they grew at such a fast rate that the regulators, chief executives and analysts could not grasp the financial effects on their bottom lines. Overwhelmed executives had no choice but to believe in the stated value of what the financial officers reported.
Globalization also added to the growth in corporate corruption. In the 1990s, it was easy for corporations to work in foreign countries. Assets and cash were easily transferred from one foreign entity to another with no real oversight. Currency fluctuations created a situation where financial officers had a free hand in inflating assets, inventory and profits. The drive to equal or surpass Wall Street's earnings expectations along with the "everybody is getting rich doing it" attitude frequently often meant that rigging the books was too enticing to resist.
After the economic bubble burst and the forbearance for excesses changed to resentment, perpetrators of corruption were prosecuted and stiff penalties were put in place to deter a new round of corporate avarice from emerging. Stricter regulations still may be called for.
There are two important factors that play a significant role in a corporation's compliance with, or its violation of, the law: the corporation's own ethical and cultural climate and the behavior of its top executives. On June 9, 1995, in a New York Times Business Section article it was reported that too many companies were ignoring the issue of corporate morality and promoting corporate cultures that are devoid of any ethical values. Each corporation builds its own cultural history over the years and it becomes part and parcel of the corporation's image and standards. Critical factors include the corporation's competitive practices, the ethical standards of the top management and the emphasis on developing and maintaining a good corporate reputation. Also critical are the degree of concern for employees and customers, and the attitudes and values in regard to reporting true figures to stockholders.
Just as a general pattern of respect for law permeates the corporate culture, law-breaking can also become a pattern regardless of the economic conditions and with or without pressure for profits. Some corporations take pride in maintaining and protecting their reputation more than others. A corporation's history often starts from the original founder and his or her ethical standards prevail from the beginning. But other corporations develop a way of doing business unethically and it takes a lot of effort at the top to change it.
Top management can either directly involve the corporation in illegal activities or it can create a climate favorable to law-breaking. An expert on the notorious Equity Funding case, in which company fraud resulted in a $2 billion loss, concluded that the men who run the company set the moral tone so that their own wrongdoings then quickly corrupted everything else. In a survey of retired Fortune 500 middle management executives, nine out of 10 stated that top management sets the ethical tone for compliance with government laws and regulations. Three-quarters of those surveyed believed that top management knew about significant improper conduct either before it occurred or soon thereafter.