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How Competition Can Encourage Unethical Business Practices

Competition can have a serious negative impact on consumers and society

A fundamental belief in our free enterprise capitalistic society is that competition is good because it benefits the people, the consumers. Rarely do we question that belief or display a willingness to look at the dark side of competition. Recent research has done just that.

First, take a look at competition among educational institutions for the best students, which is becoming increasingly an issue.  According to Carmen Nobel, writing in the Harvard Business Schools’ publication, Working Knowledge, a senior admissions officer at Claremont McKenna College resigned after admitting to inflating reported SAT scores of the incoming class for 6 years in order to boost the school’s rankings in the U.S. News and World Report’s annual report of the U.S.’s top colleges and universities. Nobel argues that the scandal, which is not the first of its kind, “questions the value of competitive rankings, and the value of competition in general.”

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In an unrelated context, but much on point, Victor Bennett of the USC Marshall School of Business, Lamar Pierce of Washington University’s Olin Business School, Jason Snyder of the UCLA Anderson School and Michael W. Toffel of Harvard Business School echoed the questioning of the value of competition in a research report entitled, Competition and Illicit Quality. They contend many companies in highly competitive industries are likely to bend the rules to keep their customers.

“Competition is generally thought to be good for companies because it keeps prices low and quality high. But when meeting customer demand is bad for society at large, then competition has a flip side, “ says the lead researcher, Victor Bennett. The research was based on a study of 11,000 New York vehicle emission test facilities. The researchers found that companies with a greater number of local competitors passed cars with considerably high emission rates, and lost customers when they failed to pass the tests. Bennett and his colleagues concluded “in contexts when pricing is restricted, firms use illicit quality as a business strategy.”

The study reflects other data, which raises the shadow of business ethics. For example, Ernst and Young’s 12th Global Fraud Survey (2012) of more than 1,700 senior executives in 43 countries, including CFOs and heads of legal and compliance audits, showed that 15% were willing to make cash payments to win or retain business.  The corruption perception index of Transparency International, a multinational organization dedicated to curb corruption in business, ranked countries according to its level of corruption. The U.S was ranked 24th with New Zealand first and Canada 10th in terms of the absence of corruption.

Malcolm S. Salter, writing in the Harvard Business Review, argues business’ short-term focus invites corruption. Citing examples like Wall Street’s mortgage banking fiasco, he defines it as “institutionally supported behavior that while not necessarily unlawful, undermines a company’s legitimate processes and core values. In the private sector, institutional corruption typically entails gaming  society’s laws and regulations, tolerating conflicts of interest, persistently violating accepted norms of fairness and pursuing various forms of cronyism.” Salter contends that the excessive focus of executives on short-term results discourages long-term investments and weakens the economy.

Salter’s perspective is reflected in a Harvard Business School Working Paper by Nelson P. Repenning and Rebecca M. Henderson, entitled, “Making the Numbers? ‘Short Termism’ & The Puzzle of Only Occasional Disaster.” They argue “a vigorous tradition in the accounting literature establishes that firms routinely sacrifice long-term investments to manage earnings and are rewarded for doing so.”

In research conducted by the U.S. Business Roundtable Institute for Corporate Ethics CEOs were asked to identify the most pressing ethics issues facing the business community. “Effective company management in the context of today’s short-term investor expectations” was among the most cited concerns. The report identified an excessive focus on short-term results because of intense competition as a factor in some executives’ willingness to engage in unethical practices.

So it seems that competition is not always good for consumers and society as a whole, particularly if it is driven by questionable ethical and short-term practices.

Ray Williams is the author of Breaking Bad Habits and The Leadership Edge.

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