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      Lawful but Corrupt: Gaming and the Problem of Institutional Corruption in the Private Sector
      02 Feb 2011Working Paper Summaries

      Lawful but Corrupt: Gaming and the Problem of Institutional Corruption in the Private Sector

      by Malcolm S. Salter
      In the business world, "gaming" refers to the act of subverting the intent of rules or laws without technically breaking them--a skillful if unsavory way to achieve private gain. Harvard Business School professor emeritus Malcolm S. Salter explores how gaming the system can lead to institutional corruption, citing examples from Enron and early efforts by some banks to game the implementation of the Dodd-Frank financial reform act. Key concepts include:
      • A Rule-Making Game involves influencing the writing of societal rules such that deliberate loopholes, exclusions, and ambiguous language provide future opportunities for sneaky behavior. A Rule-Following Game involves the actual exploitation of these gaming opportunities. Enron's story includes both types of games.
      • The paper explores three hypotheses. First, extensive lobbying by business interests during rule-making sessions aims not only to minimize regulatory constraints, but also to ensure future gaming opportunities for the firms. Second, the gaming of rules is often fueled by the short-term goals and incentives of both corporate executives and investment managers, ignoring possible long-term consequences.
      • Third, corporate boards become complicit in gaming when they allow gaming to take root and persist as an acceptable organizational norm, and fail to identify and monitor behavior that threatens compliance with socially mandated rules and regulations.
      • Remedying rule-making gaming likely will require policies that address both lobbying efforts and campaign contributions. Meanwhile, extending the decision-making time horizon for investment managers and corporate executives should help to diminish rule-following gaming.
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      Author Abstract

      This paper describes how the gaming of society's rules by corporations contributes to the problem of institutional corruption in the world of business. "Gaming" in its various forms involves the use of technically legal means to subvert the intent of society's rules in order to gain advantage over rivals, maximize reported earnings, maintain high credit ratings, preserve access to capital on favorable terms, and reap personal rewards-just to mention several possible motives. It is one of the most corrosive forms of institutional corruption in business. "Institutional corruption" refers to company-sanctioned behavior and relationships that may be lawful but either harm the public interest or weaken the capacity of the institution to achieve its primary purposes. The most salient consequence of institutional corruption is diminished public trust in the governance of the institution. In this paper, I describe the twin phenomena of gaming and institutional corruption-and how the former contributes to the latter, often with the support of professional advisors at law and auditing firms. I illustrate these phenomena with examples from Enron, which (apart from outright fraud) pursued one of the greatest gaming strategies of all time. I also point to the implementation of the Dodd-Frank Act as an excellent source of clinical data pertaining to gaming in a more contemporary setting. I then discuss how gaming and other trust-destroying behaviors have been encouraged by the short-term decision-making horizons of both corporate executives and managers of large investment funds, how those time horizons are largely driven by ways in which the performance of operating executives and investment fund managers is measured and rewarded, and how the directors of these entities become complicit in the gaming of society's rules and the spreading of institutional corruption. I end by suggesting possible remedies for curbing the ill effects of continued gaming of society's rules and restoring much needed public trust in the offending institutions.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: December 2010
      • HBS Working Paper Number: 11-060
      • Faculty Unit(s): Negotiation, Organizations & Markets
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        Malcolm S. Salter
        Malcolm S. Salter
        James J. Hill Professor of Business Administration, Emeritus
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