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Corporate Misconduct and Manager Visits

By Jonas Heese and Gerardo Pérez-Cavazos
June 1, 2021

Regulators and business alike continue to struggle with corporate misconduct, which makes it a big issue for society.

 

In our quest to understand the determinants of corporate misconduct, we conducted a study to examine whether management’s visits to facilities affect misconduct rates (see “When the Boss Comes to Town: The Effects of Headquarters’ Visits on Facility-Level Misconduct,” The Accounting Review, November 2020).

 

Because shadowing managers across the country for their inspections is difficult, we studied how facility-level misconduct changes after the flight from company headquarters to facilities shrinks by at least two hours one way. Shorter flight times mean that it’s less costly to visit a given facility and are our measure of visits. The average business in our sample records 23.4% fewer penalties for violations, most of which are for workplace safety and environmental issues, and the average company stands to collect 7.9% more net profit. Our results highlight the importance of in-person visits by headquarters’ managers to reduce misconduct within an organization.

 

Little was known about how management’s visits to facilities affect misconduct rates. On one hand, visits from headquarters’ managers can facilitate monitoring, help identify potential violations, and improve compliance. On the other hand, visits could increase pressure and incentives to cut corners. For example, Jack Welch was known for making surprise visits to General Electric’s facilities and for implementing a policy whereby the lowest-performing 10% of staff were fired. Local GE managers felt the policies put undue emphasis on short-term results, and critics questioned if they contributed to some of the scandals GE experienced at the time.

 

TRACKING VIOLATIONS

 

In our study, we searched for data on violations that had occurred at facilities for the period 2000 to 2017 inclusive. Facilities include regional offices, manufacturing or power plants, stores, distribution centers, refineries, mines, shipyards, and so on. Using the Violation Tracker data set constructed by Good Jobs First, we learned the geographical location of facilities that recorded violations and the penalties that more than 44 federal agencies had issued to these facilities.

 

During our study period, workplace safety or health issues accounted for 73.5% of violations, but just 12% of the penalties by dollar value. Environmental violations were 10.1% of the total, but led to 59.2% of the penalties. One can see environmental misconduct hits the bottom line for companies.

 

BIG DOLLARS ARE AT STAKE

 

Our sample focused on 1,165 companies that had a total of 21,268 violations. The average company had one violation recorded per year, with a mean penalty of $128,925. Yet only 2.5% of all facilities had one violation recorded against them that racked up a total of $2.43 million in penalties. Among them were 80% of Fortune 100 and Fortune 500 companies.

 

We analyzed two samples: those facilities at risk of violations and the full sample. The at-risk sample included only those facilities that recorded at least one violation during the sample period (10,556 facilities). The full sample included 423,599 facilities. As expected, the vast majority of facilities don’t engage in violations. To enrich the analysis, we also added:

 

  • Facility characteristics: number of employees and annual sales;
  • Company characteristics: size, leverage, and return on assets; and
  • Local economic characteristics: labor force and unemployment rate.

 

We then needed to add another layer—how long were the flight times between each facility and its respective headquarters? Did they become shorter at any point over the 18-year study period?

 

A QUESTION OF TRAVEL

 

We had hypothesized that executives from headquarters are more inclined to travel if there’s a direct flight from near their headquarters’ location to their facilities. We brought in U.S. flight routes data from the Department of Transportation, which gave us the number of flights for each airline by routes, total passenger numbers, as well as the ramp-to-ramp time.

 

This raw data allowed us to work out the travel time between each facility and its headquarters for each of the 18 years to 2018. We calculated the travel time in more than seven million hypothetical trips; that is, one trip per year between each of the 423,599 facilities and their respective headquarters for each of the 18 years in the sample.

 

The goal with these calculations was to see if travel time had decreased between a specific facility and its headquarters in a given year. Assuming passengers would spend an hour in each airport, including origin, destination, and layovers, they’d probably drive about 30 miles per hour to get to and from the tarmac without having to change airports during their layover. Our sample only included routes with at least 15 flights per month.

 

For example, consider a company with headquarters in Philadelphia, Pa., and a facility in Portland, Ore. When U.S. Airways introduced a direct flight between those cities in 2006, it saved two hours’ travel compared to when airplanes previously went through Denver, Colo.

 

Wrestling with those airline route changes over the 18 years of the sample period gave us richer insights, rather than being problematic. We were able to zero in on the dollar value of penalties or the number of violations before and after the air route changed. Importantly, we compared these with non-Portland facilities of the same company and other companies with Portland facilities without Philadelphia headquarters.

 

It might sound counterintuitive for managers to travel to monitor their facilities—think of the time away from headquarters and the costs of flights, meals, hotels, and transit. And the patchwork of COVID-19 restrictions across the country adds another disincentive. Yet our research has shown it’s more efficient for the average company to have a manager visit a facility rather than check in remotely to keep staff and systems compliant.

 

We expect the magnitude of the gains may change depending on how remote the facility is, but the principle should hold no matter where the facility is on the globe. Chances are that companies’ cost-benefit analysis will echo our findings.


This column is a collaboration between Strategic Finance and the Management Accounting Section (MAS) of the American Accounting Association (AAA). It describes recently published management accounting research studies from top academic journals and summarizes them for the benefit and use of practitioners.

 

Jonas Heese is the Marvin Bower associate professor at Harvard Business School. Jonas can be reached at jheese@hbs.edu.
Gerardo Pérez-Cavazos is an assistant professor at Harvard Business School. Gerardo can be reached at gperezcavazos@hbs.edu.
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