Scandals, Corporate

Scandals have been a part of the commercial landscape at least since the inception of the corporation. Corporations are created to generate wealth by concentrating economic power and directing it to achieve corporate purposes. Corporate scandals emerge when individuals attempt to seize this power for personal purposes and from their abuse and misuse of it. The form of scandal is shaped by the economic nature of the modern corporation.

The British economist Ronald Coase observed that modern economies are dominated by large corporations run by managers rather than by traditional systems of individuals and small organizations selling goods and services primarily to each other. These managers seek to control their firm's transaction costs (i.e., to manage the costs incurred in acquiring resources and in coordinating processes such as marketing and manufacturing). In The Modern Corporation and Private Property, Adolph Berle and Gardiner Means argued that the essence of a corporation is the fragmentation of accountability among its various managers and other [Page 1859]related actors. In the modern corporation, professional managers are not necessarily the owners; stockholders and other investors are not generally in charge or even legally liable; and the boards of directors are rarely sufficiently informed or adequately empowered to control their firms. This fragmentation and lack of control tend to encourage an open grab for corporate power as individuals who are involved with these organizations seek to acquire for themselves some of the available resources connected with corporate transactions. There are both morally acceptable and morally unacceptable ways of doing this. In Western societies we tend to praise those who acquire power and wealth by ethical means. But actions that are born out of greed, hubris, narcissism, or arrogance and that abuse corporate power are morally unacceptable. They offend many people's sensibilities.

A scandal materializes when untoward actions are alleged and publicized whether they ultimately prove to be valid or not. The publicity harms some people, if not many. Meanwhile almost everybody is tainted, bringing about general public disgrace. Comparing scandal to robbery, Lord Chesterfield once observed that the victim is generally thought as bad as the thief. Accordingly, it is the very fact that some untoward incident is made public that makes it a scandal. Social systems tend to agree with Molière, the French dramatist who claimed that to sin in secret is no sin at all but to be accused of sin made a scandal.

Corporate power can be abused scandalously in many different ways: using corporate resources for personal gain, excessively hyping an unsound business deal to an uninformed investing public, using false and deceptive advertising or selling methods, indulging in insider trading, paying bribes, making use of influence peddling, paying early investors out of later investors' contributions rather than from income (pyramid or Ponzi scheme), selling a phony or nonexistent product, manipulating or colluding on prices, overcharging for products or services delivered, and failing to respond adequately to an accident or natural disaster. Organizational forms that have been used to concentrate power unduly include trusts—units for which the real control of a company is transferred to an individual or small group by an exchange of shares of stock for trust certificates, which are issued by the individuals seeking control—and cartels—organizations formed by producers whose purpose is to allocate market shares, control production, and regulate prices.

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