Using Cafrs to Estimate the Costs of Corporate Misconduct on Society a Framework for Civic Action

By Hunter, Shirley A. | Journal of Legal, Ethical and Regulatory Issues, January 1, 2016 | Go to article overview

Using Cafrs to Estimate the Costs of Corporate Misconduct on Society a Framework for Civic Action


Hunter, Shirley A., Journal of Legal, Ethical and Regulatory Issues


(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

What is the cost to society when corporations misbehave? At what level of the corporate hierarchy is management deemed accountable for third parties' agreements which violate the public trust? This study provides a framework which government officials and accounting and legal professionals could use to estimate the costs of corporate or any misconduct on society. Public records, such as the Comprehensive Annual Financial Reports (CAFRs), provide detailed financial and statistical information on local, state, and federal governments operations which are publish annually on their websites. This is the first study to empirically use statistical data disclosed in the CAFRs to measure the effects from a guerilla marketing campaign on society. Guerilla marketing (Levinson, 1984) is defined as the art of being able to execute marketing activities, using unconventional tactics to elicit consumer interest at minimum costs to the advertisers. The majority of guerilla marketing is stage in public places (Cova and Saucet, 2014); hence, if sites are not properly researched (Zuo and Veil, 2007) before execution, pandemonium could result.

On January 31, 2007, a guerilla marketing campaign financed by the Turner Broadcasting Company, a subsidiary of Time Warner Company, created mayhem in Boston and its surrounding communities when an advertising hoax was classified as a suspected terrorist threat. Following immense media coverage and finger pointing, a deal was announced in which Turner Broadcasting agreed to pay $2 million to reimburse state, federal, and local law enforcement agencies for the cost of responding to the threat (Zuo and Veil, 2007). As part of the settlement, the Turner Broadcasting Company was resolved of all criminal and civil claims.

The ordeal surrounding the Turner Broadcasting Company's advertising hoax is the object of this study. This research uses the event study methodology to demonstrate how citizens access to public and emergency services in the affected areas were severely compromised. It shows that Turner Broadcasting Company paid a reasonable settlement of $2 million in retribution to Massachusetts to offset remediation expenses incurred of $1,999,341. Thus, this study has practical application for policymakers and the general public; it presents a framework which can be used to estimate the social costs for corporate as well as individual acts which are detrimental to society.

Corporate governance is increasingly becoming a topic of interest by scholars and practitioners in public administration (Becht, Bolton, and Röell, 2005). The term corporate governance is derived from an analogy between the governments of cities, nations or states and the governance of corporations (Becht et al., 2005). Corporate governance refers to a framework of rules, processes, or laws controlling an entity's operations (Becht et al., 2005). Governance policies are designed by internal and external stakeholders and senior management is responsible for their enforcement. Corporations should ensure that their employees and third parties doing business with them adhere to a code of professional conduct which supports their governing philosophy. This study, involving Turner Broadcasting Company's guerilla marketing campaign, demonstrates that a corporation deemed to have a high standard of corporate social responsibility may knowingly agree to a deceptive practice to promote a brand.

Levinson (1984, 1999) coined the term guerilla marketing and defines it as designing unconventional systems of extreme advertising that rely more on time, energy, and imagination to target consumers at minimal costs to the promoters. He further states that the innovative approaches to guerrilla marketing utilize cutting edge technologies to create a memorable brand experience. Typically, guerilla marketing campaigns are interactive and consumers are targeted in unexpected places. …

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