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

Source: Malcolm S. Salter, Harvard Business School Working Papers, 11-060, December 2010

From the summary:
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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