Corporate aspirations and irresponsibility

Corporate aspirations and irresponsibility

4 minute read

Corporate responsibility has never been more on the public mind than it is now, but for those managing these organisations, the incentives to improve their returns can sometimes outweigh the risk of breaching ethical or regulatory boundaries.

New research from the ANU College of Business and Economics (CBE) explores whether a company’s performance, relative to its aspirations, affects its likelihood of engaging in irresponsible and illegal behaviour.

Dr Di Fan from CBE’s Research School of Management explains, “the behavioural theory of the firm posits that the further a firm performs above or below their aspirational level, the more likely they will be to engage in risky behaviours, whether that risky behaviour is changing the strategy; investing in new technology; or breaching environmental, health, and safety regulations.”

Di partnered with Associate Professor Frank Wiengarten (Universitat Ramon Llull), Professor Mark Pagell (University College Dublin) and Associate Professor Chris K.Y. Lo (Hong Kong Polytechnic University) to investigate whether these predictions are supported empirically.

Consistent with theory, their study confirmed organisations performing far below their aspirational levels, and those far exceeding them, are most likely to breach regulations.

In the case of the former, testing suggests managers are less likely to protect the status quo and more likely to take risks.

“Firms with poor absolute performance are also more likely to break the law, breach environmental regulations, and experience higher accident rates,” Di said.

While the motivation for high performing firms to engage in unethical and illegal behaviour is less intuitive, Di says it is driven by managerial hubris with managers becoming corrupted by pride and arrogance and discounting the weight they apply to risk. The success itself is seen as evidence that the managers are smarter than their competition, and therefore less likely to be found in breach.

“Hubris can explain the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. At the time of the incident, BP was not struggling to survive. Quite the opposite: in the decade prior to the spill BP had been highly profitable and grown to the second largest company in the oil industry.”

Di’s research has many implications for managers in organisations trying to prevent irresponsible and illegal behaviour. Understanding the possible motivations to engage in risky decision making makes it easier for organisations to avoid it.

The College is always keen to explore research collaborations with the public and private sector and to reconnect with alumni. Please get in touch if you would like to know more about research collaborations.