Jeffrey Skilling held high-level posts in Enron until a few months before it filed for bankruptcy at the end of 2001. When he was a master's degree student at Harvard, one of his professors asked him what he would do if he knew the company he worked for were selling products harmful to its customers' health. Skilling apparently answered: 'Td keep making and selling the product. My job as a businessman is to be a profit center and to maximize return to the shareholders" (Fusaro and Miller 2002, 28). Even if this is nothing more than an MBA student's opinion, it is making the "right" point "to a certain extent": companies are not philanthropic societies and raising profits is one of an entrepreneur's main targets. However, when we look at the question, Skilling's answer is rather disturbing. Whether the hypothetical company his professor referred to finally went bankrupt or not, the undesirable consequences' which would have resulted in the meantime raise the familiar question of trust in the operation of the market. That is: how far should laissez-faire be expected to generate desired results? The invisible-hand principle underlying economic policy over the last two decades provides a clear answer: collective good is achieved through agents pursuing their self-interest, on the assumption "they will not choose to break the rules of the market" defining "what behavior is proper or what is improper" (Fusaro and Miller 2002, 147-8). However, the question still stands: if our trust in the market depends on assuming that agents behave "honorably," does the logic of the market guarantee that most agents will in fact behave so?
To discuss recent cases of corporate malpractice in light of this question, this paper focuses on norms. However, the aim is not to reassert the already known conclusion that the numerous accounting scandals that have come to light in recent years are the result of either breaking or stretching the rules--be they legal norms or unwritten moral ones. Although it may at first glance seem paradoxical, this paper has the opposite goal: it attempts to provide a possible explanation of these cases of business malpractice in terms of norm-based behavior by agents.
In broad terms, there are two possible interpretations of recent misbehavior in corporate America. The first could be called the "rotten apples" theory. In this view, problems stem from a few executives taking advantage of shareholders' trust and damaging the reputation of their peers. That is, the corporate realm faces an agency dilemma because of a few "rotten apples." No general problem exists in relation to the operation of the corporate governance system--which includes executive officers, accountants, directors, auditing and consulting firms, investment banks, securities analysts, and shareholders. The only weakness of this system is that it has some legal flaws that certain agents have used to their advantage. According to this interpretation, the solution lies in correcting the flaws, giving exemplary punishments to the cheating executives, and improving the incentives system. In this way, public trust in financial markets would be restored and market competition would still guarantee outcome efficiency (Securities and Exchange Commission (SEC) 2003A, 1). In brief, corporate malpractices are exceptions stemming from legal loopholes. They do not call into question the "renewed faith in the efficiency and stability of market structures" (Hake 2005, 595) governing the interpretation of economic events and the liberalization policies adopted since the 1980s.
The second possible interpretation does not entirely contradict the previous one: there is no doubt the corporate management system has flaws that need to be redressed. The 2002 Sarbanes-Oxley Act constitutes the most ambitious legal reform in this regard. However, the number of scandals, their scale and the amount of money involved are so huge that what has happened in the corporate realm can be interpreted as a systemic failure. In other words, the second interpretation--to be developed below--suggests that corporate misbehavior and the crisis of confidence it has engendered could be understood in terms of a system-wide explanation grounded in how the market itself operates. Under this approach, the straightforward relation of causality, which in principle can be established between loopholes in accounting law and deceitful behavior becomes more complex. In this regard, it seems advisable to embed the explanation of widespread deception in how agents interact with each other within the marketplace.
In order to develop this second interpretation, the workings of the market will be analyzed in terms of a critical reconstruction of Hayek's ideas built on the notion of "spontaneous norms." Two points are noteworthy in this regard. First, Hayek is a complex and often contradictory author. Accordingly, this theoretical reconstruction does not aim at being "the" interpretation of his thoughts. Indeed, it is a critical interpretation of his "implicit economics" (Vaughn 1999). Second, since Hayek has been one of the most influential advocates of the free market economy, the possibility of using his conception of the operation of the market process to interpret corporate misbehavior is nothing short of ironic. This implies an unconventional consequence: his writings may enable us to understand what could be considered the opposite of what they were written for. That is, they can help explain why market forces sometimes bring about undesirable results, thus raising doubts about the liberalization policies of the 1990s to which Hayek helped give theoretical support.
Interpreting corporate malpractices in terms of spontaneously-arising norms of behavior does not require the existence of "unhampered markets" (Butos and Koppl 1997). Specifically, the fact that accounting and financial practice are regulated activities does not undermine the explanatory capacity of this interpretation. Since legislation is rarely exhaustive in any human activity, there are always totally or partially unregulated areas where norms can emerge through spontaneous processes. As Raines and Leathers said in reference to Veblen's evolutionary conception: "current practices are often not fully recognized in legal rules" (1996, 139n). Furthermore, as a result of what Hake (2005) calls "intentional design," the last twenty-five years have witnessed a broad deregulation process. Thus, restrictions hindering the spontaneous appearance of "undesigned" or endogenous norms have been weakened since the beginning of the 1980s, particularly in the financial industry. In addition, more economic activities have become vulnerable to the spontaneous emergence of openly fraudulent norms of behavior due to the combination of two events: insufficient funding for monitoring agencies--and therefore, slacker oversight--plus legal reforms resulting in greater immunity from prosecution for fraudulent or negligent behavior.
The intended result of these policies is a more liberalized less interventionist economy. In his analysis of financial instability, Minsky (1986) underlines the intrinsically destabilizing nature of this noninterventionist version of capitalism (Rima 2002; Whalen 2002; Wolfson 2002). Using the notion of "spontaneous norms" critically, to explain corporate malpractices is an attempt to show one more of the destabilizing factors characterizing the endogenous operation of the market. This approach complements alternative institutionalist interpretations of recent corporate scandals, and may provide some insights into the discussion of institutional problems in contemporary economies (see e.g., Deakin and Konzelmann 2003; Hake 2005; Leathers and Raines 2004). The singularity of this approach is that it provides an' understanding of the stock crisis that recent corporate misbehavior helped provoke as a failure based on agents following norms. Within the legal institutional framework of the 1990s these norms emerged, spread and were maintained without the intervention of any governing authority. They were an outcome of agents involved in the system of corporate governance pursuing their own interest. Therefore, the logic itself of the liberalized markets of the 1990s caused the norms governing generalized deception to emerge. Among the agents who contributed to the spontaneous appearance of these norms, those considered the "biggest losers" when scandals came to light--i.e., shareholders and, among them, workers who lost their retirement funds--must be included.
A norm-based approach to recent corporate malpractices also emphasizes that the economic growth achieved through liberalization policies might be groundless. The liberalization policies put into practice over the last twenty-five years have stimulated norm-based corporate deception. This widespread corporate deception helped provoke a crisis of confidence at the beginning of the 2000s, but it also contributed to the wealth creation of the 1990s. In other words, since deception relates the latter crisis of confidence to the former wealth creation process, a norm-based approach emphasizes the lack of foundations of some of the mainstays of the economic growth of the 1990s.
The fact that norms engendered by the endogenous logic of the market were governing corporate deception highlights the fragility of our financial system and the risks of deregulation. These risks lead us to discuss the problem and possible solutions in terms of the level of trust to be placed in the self-regulatory capacity of the market. The question is whether the arrangement that results from the reform of the corporate governance system may fail again in the future if subjected to similar pressures. That is, although they may take different specific forms, analogous norm-constituting malpractices could emerge spontaneously again if economic policy and regulatory institutions are still...