Home > musing > Are small businesses less corrupt?

Are small businesses less corrupt?

August 14, 2013

I’ve had a bit of a bee in my bonnet for a while now about how we’re expected to assume that big is better when it comes to businesses. It started when I wrote this post about how women CEO’s are considered unambitious for wanting their businesses small enough to manage.

In other words, there might be some selection bias in my next few examples, so full disclosure. And yet I’ll give them to you anyhow.

First, an example of a extra corruption in a large business. I recently met HSBC whistleblower Everett Stern, profiled by Matt Taibbi here. He told me about the stuff he’d seen going on in HSBC, whereby there was rampant money laundering for terrorists (his region of interest was the Middle East). When asked why nobody’s gotten into trouble, his answer was simple: too big to jail.

Or if you’re not convinced too-big-to-jail is a real problem, just look at the state of the London Whale case: two low-level indictments and basically nothing else for lying to regulators and changing their books to pretend they had less losses.

Next, in the category of it’s-actually-good-to-be-small, you might have seen this tiny New York Times article about two email provider companies which folded rather than giving up their customers’ data. Can anyone imagine Facebook or Google doing that? The big business version of this is “hiring really fancy lawyers” I guess, but it doesn’t seem to work as well.

I’m wondering if this generalizes: in general, can we claim that small companies have less to lose and therefore have more ethics?

It’s certainly true that, at the very least, small companies live and die based on the relationship of trust that they have with their customers, so to the extent that their customers have ethics, then the companies need to consider them. Larger firms, on the other hand, can hire PR firms to fix their image after the fact if things go wrong.

What do you think? Is there research on this?

Update: First of all, sure there’s research on this, if you think accounting fraud is a good proxy for corruption. Second, now that I think about it, small companies having less to lose can also be a super bad thing, if you want to get away with bad shit. And for that matter, if you consider little subsidiaries of big companies as “small companies”, or for that matter McDonalds’ franchises, they already are.

Also, as a friend of mine pointed out over email, small companies are often inefficient (so: no unionization) and are used as a political baby seal to justify all sorts of crappy policies, as we’ve of course seen.

Categories: musing
  1. ddf
    August 14, 2013 at 8:50 am

    I don’t know about ethics but disruptive innovation, that is ultimately the source of long term economic growth, comes from small not large companies (one of the few stylized facts economists can agree on). So large corporations will do their best to protect their so called “competitive advantage”, in plain English make market entry more difficult for potential competitors. At best it involves improving the quality of their products and services; at worse buying influence in the political process. So perhaps that be could why they have more of a propensity to dishonesty than smaller firms.


    • pjm
      August 14, 2013 at 10:07 am

      Small companies may be important for disruptive innovation but I would not call it the “ultimate source of long term” growth. Disruptive innovation is the process by which new technology enters and transforms markets. I would think what economists agree on is that human capital and technology are the sources of long term growth. Technology can contribute to growth without disruption up to new point. That’s mistaking the robber for the gold.


  2. August 14, 2013 at 9:06 am

    Power and size lead to all kinds of well-known psychological phenomena.

    Power decreases empathy: http://www.digitaljournal.com/article/356229

    Being among a crowd creates a “bystander effect” in which even if some people care, they don’t act.

    So large, powerful organizations will always be as they are.


  3. August 14, 2013 at 9:12 am

    In government-funded contracting where there is a small business inclusion requirement, small and large businesses have been known to collude, evading these regulations while maintaining the large firms’ economy of scale.


  4. David18
    August 14, 2013 at 9:28 am

    I’m a little confused about why the firms had to destroy the servers as opposed to transferring them (and their ownership perhaps) to a different country — perhaps Somalia where there is no government per se. Presumably the servers and their data would be out of bounds of US seizure.


  5. A Friend
    August 14, 2013 at 10:13 am

    I don’t have proof or explicit evidence, but I think this is rather obvious. I also distinguish between publicly and privately held companies. In the former, there is much less at stake for any individual person in the long term welfare and integrity of the company, including the CEO. That’s because their commitment to the company is no longer a long term one. Each job is viewed as a stepping stone the next bigger and better one.

    This is unfortunately too often true for newly formed growing privately held companies, where the main goal of the founders is to go public. The need to establish a positive reputation leads to better integrity and quality at the start, but once the company goes public, things revert to what I described in the first paragraph.

    But if a company remains relatively small with a clearly identified long term owner or set of owners, then a long term professional and personal relationship develops between the owner(s) and the clients. This leads to much stronger accountability on both sides, and a lot more mutual trust. If something goes wrong, the client knows exactly who to go to.

    I think there is too much focus on blaming this on “power” or “greed”. To me once there is a large publicly held company, the accountability for anything that goes wrong becomes spread among too many people. A CEO can always claim that he/she was never informed about the specific actions. The others say they were just following orders. This is particularly problematic, when the actions are not technically wrong but ethically or morally questionable.

    I would add that the job of a CEO of a publicly held company is to build shareholder value. The CEO has little incentive to do anything that does not achieve this goal and is not legally mandated and has every right to defend his actions on this basis, no matter what we think of the specific actions. One can talk about morality and responsibility to society (and almost all CEO’s pay lip service to this), but in the end one’s obligation to the shareholders trumps everything.


  6. rob
    August 14, 2013 at 11:35 am

    Greene & Cohen’s classic fMRI studies show the effects of distance on moral sentiments.


    That would include bureaucratic distance in a large firm where human beings are more likely to be thrown under the bus (or trolley in the J&C literature) for the sake of more abstract goals like profit margin.

    Also large firms wield greater power, affording them more opportunities to corrupt and extort. Wal-mart recently threatened the mayor of DC to withdraw from the city if he signed the city council’s living wage bill.

    Large-scale benefits come with large corporations, but also large-scale dangers. Wal-mart relies on the very low-wage customer that it creates through its low wages — it’s an impoverishment model, designed to lower and widen the bottom. When the corporation becomes large enough, it can drive an entire local economy downward. On the other hand, Wal-mart supplies low-cost goods to its low-wage customers. The “dismal” in the “dismal science.”

    Large corporations are more mobile, so they can easily decamp to shift their capital where it benefits them, often abandoning and ruining a locality that it had previously sustained. Small businesses are less mobile, so they often have to take the hit on local regulations, taxes, mnimum wage raises. Sometimes that’s a disaster for the small business, but not always. http://savethelowereastside.blogspot.com/2013/07/the-future-of-government-policy-making.html


  7. August 14, 2013 at 11:52 am

    This blog post touches on some of these issues: http://michaelochurch.wordpress.com/2013/07/09/three-capitalisms-yeoman-corporate-and-supercapitalism/
    My own opinion is that the culture of small businesses tends to be more personal, while that of large businesses tends to be more stable and uniform. Small businesses have to take risks, or they will simply disappear. Big businesses are bigger targets, have deeper pockets, and have more to lose, so they tend to be more cautious. I would not call one of the other more ethical; their ethical strengths (and lapses) are just of different types. Small businesses can cut corners; as one start-up founder said to me, “If there is no short term, then there is no long term,” which in his mind justified any tactic necessary to keep his company alive. Big businesses rely on established systems, and bad ones misuse them, sometimes strategically.


  8. James Marsh
    August 14, 2013 at 3:04 pm

    If accounting fraud and corruption go hand in hand than the US government is the worst offender. no coincidence that it is massive


  9. quasihumanist
    August 14, 2013 at 4:40 pm

    I think an important factor is how competitive the market the company operates in is. Also, we should be careful to remember the effect of selection pressures.

    In a competitive market, any ethical company will be at enough of a disadvantage (from being ethical) in the short-to-medium term to go out of business. If all your competitors are saving millions of dollars by dumping toxic waste in lakes or by defaulting on their pension obligations, then your competitors can set lower prices (incidentally benefitting all consumers except those living near the lake). Now you have to lower your prices or lose your customers, and lowering your prices means selling your products at a loss or dumping toxic waste yourself.

    It might not be that businesses are inherently unethical in someway, but that ethical businesses don’t survive.

    One prediction of a theory that ethics is selected against would be that, the more competitive the market a business operates in, the less ethical it is likely to be.

    Now, it is likely that the competitiveness of a market has some correlation with the size of businesses in the market, which makes it harder to tease out the difference between a ‘size effect’ and a ‘competitiveness effect’.


  10. rethinkecon
    August 14, 2013 at 6:27 pm

    When large corporations started outsourcing their work, they often chose small sweatshops because there was almost no accountability — suing them doesnt get you very far because a small sweatshop owner can just close their shop and open another one. And because these small shops have such a small profit margin and the competiton between small sweatshops is so fierce, it was easy for large corporations to ruthlessly push down what they’d pay for work while keeping their hands officially clean from any of the unethical or corrupt decisions these small margins would encourage.

    Similarly, a friend who worked on SEIU’s Justice for Janitors campaign told me he’d met a number of small business owners who said they wanted the janitors to win and raise the bar so that their business wouldn’t be forced to compete in ways that they felt were unethical (which, BTW, turned out to be the key to organizing victory — rather than organizing one shop at a time, they got owners to sign an agreement saying that when a large percent of owners has signed the agreement, the signees would recognize and bargain with the union).

    I like small businesses — I used to run one — but I think our side often gets trapped by Small is Beautiful. Small can be just as corrupt, sexist, racist, anti-union and otherwise evil as big. We need to focus more on justice, not on size.


  11. rethinkecon
    August 14, 2013 at 6:53 pm

    My two cents with on too-big-to-jail: the problem isn’t that these businesses were too big, it’s that Occupy Wall St was too small.

    If OWS had gotten big enough to put the Fear of God into politicians, if they were worried it’d cost them their seats, I seriously doubt they’d have let all these a-holes slide. The intricacies of a lot of financial reform can be pretty hard to understand. TBTJ? That’s a basic peasants-with-pitchforks kinda issue.

    Mind you, I’m not criticizing OWS. Most great social movements — eg, the Civil Rights Movement — took many rounds before they got big enough to move mountains. But if you want to take on people with a lotta power, you need a lotta people.


  12. August 14, 2013 at 10:17 pm

    I’d guess that corporate stakeholders protected by limited liability might be a bit more willing to tolerate and engage in unethical behavior. Less skin in the game. Very few people will blow the whistle if they fear the survival of an important organization is at stake. Most don’t want to be responsible for lots of people losing their jobs or relationships.

    Unlimited liability partnerships and sole proprietorships would seem to have more to lose and some might self-regulate bad behavior. Since most large companies offer limited liability protections and smaller organizations don’t, it might be hard to tease out whether size or liability protection drives unethical corporate behavior.


  13. Guest2
    August 15, 2013 at 8:47 pm

    Yes! Scaling and the differentiation of roles (division of labor, the wealth of nations, remember?) have consequences — cognitive scaling, or what Zygmunt Bauman calls the social production of moral indifference (hierarchicalization, then compartmentalization).

    There was a paper out not too long ago, “It’s lovely at the top” that zeroed in on the disconnect between layers. Emergent scaling properties occur in human social systems, too.

    I’ll risk this hypothesis — systems of production / distribution can reap efficiency gains through intensive differentiation (Adam Smith), but structural corruption runs rampant. Even establishing control mechanisms does nothing more than over-differentiate a particular social system. So, you cannot have your cake and eat it too.


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