Family-run businesses vulnerable to ‘bribery paradox’

Family-run companies that frequently bribe government officials to get around perceived barriers only end up creating more obstacles for themselves, says a University of Calgary researcher.

“I am not saying this because I’m a moralist, although good morals and values are important,” says Dr. Alain Verbeke, PhD, who holds the McCaig Chair in Management at the Haskayne School of Business.

“This is about self-preservation within the capitalist system. You had better follow some basic norms, and if you don’t, it may be beneficial to you in the short run, but reality will ultimately catch up to you.”

Findings can be applied to political donations

Verbeke is the co-author of a study on what he calls the bribery paradox. “Firms that bribe more frequently — in other words, it becomes a habit of bribing — aren’t making life easier for themselves,” he says. “They are actually creating an environment that ultimately becomes more and more difficult for them.”

The study’s findings, which were recently published in the Journal of Management Studies, run counter to previous assumptions that bribes give companies a competitive, if unfair, advantage. The paper instead argues they create a “new normal” of institutional obstacles for businesses, especially for family-run firms, says Verbeke.

Although the study is based on data from Eastern European countries following the breakup of the Soviet Union, its findings can be applied to such Canadian practices as politicians who accept legal donations from businesses to fund increasingly expensive election campaigns, he says.

“The message to politicians is just be very careful when you accept money from the business community,” he says. “It may certainly help you get elected, but they’re going to want something in return, and this creates a new normal of corruption.”

The study is based on surveys conducted during the early 2000s by the World Bank. It looked at 302 companies in 22 countries ranging from Albania and Croatia to Russia, which were transitioning from Communist to Western-style market economies.

“These are firms with a maximum of 250 employees, so we are not talking here about oligarchs or multi-billion-dollar companies,” says Verbeke, who is also a professor of international business strategy at Haskayne.

Bribes create ‘cascade’ of corruption

Although things such as government institutions were still in flux, the market economies in these countries were largely working by this point, he says. The data included matched pairs of bribing and non-bribing firms, allowing researchers to examine the problem, he says.

Verbeke’s study found that frequent payment of bribes to obtain basic government services, such as business licences and permits, harms companies partly because they develop a bad reputation. It also results in a cascading effect that corrupts the entire system, he says.

“If you are my competitor and you see that I am getting a number of things by bribing that you don’t get, you’ll start bribing, too, so there is a horizontal cascade,” he says.

“You start to get vertical cascading because it is going to incite bureaucrats to start asking companies for bribes for all kinds of things, and they become more corrupt. There is a downward cascade from these government officials that ultimately infects the firms that weren’t bribing, so there is this vicious cycle of cascades that causes bribing to become a way of life.”

Practice make problems 'more severe'

Family-run companies are particularly vulnerable to this problem because their “family lens” tends to distort their behaviour, says Verbeke, pointing to things such as family-run crime syndicates. Such owners tend to see their bribes as something that’s needed to manage a hostile business environment, a perception that eventually produces the reality they dread, he says.

“Once they engage in corrupt behaviour, it infects the entire family — no one can escape from it,” he says. By contrast, the study found non-family firms tend to simply see their bribes as reducing business obstacles, he says.

The study was able to empirically show that family-run companies that frequently engaged in bribes failed to perform as well as those that avoided bribes, says Verbeke. “The problems they had tried to eradicate with bribes had actually become more severe than they were at the outset — a sad outcome,” he says.