opportunism article - week 3
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8/10/2019 Opportunism Article - Week 3
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The Self-Interest Orientation of Managers and the Nature of
Business
Chris Lonsdale and Glyn Watson
(Pre-puli!ation "rti!le #raft$ The %ni&ersity of Bir'ingha'$ ))*+
Over the past 30 years, there has been a heated debate within economics as to how
managerial behaviour should be characterised. In this debate, many factors have been
advanced that are believed to influence such behaviour. These factors have been
divided into two sub-sets, something that reflects the distinction between behavioural
disposition and behavioural action. Behavioural disposition refers to the behavioural
preference of an individual manager. Behavioural action, by contrast, is the result of
that manager considering whether his or her behavioural preference is feasible, given
the particular transactional contet in !uestion.
In terms of the influences on the behavioural disposition of managers, five factors are
deemed within the literature to be particularly significant. The first factor cited is
national culture, a controversial notion "#lar$, %000&, understood here as beliefs,
learned behaviour patterns and values shared, to differing degrees, by a significant
proportion of the citi'ens of the same nation. (ational culture is often referred to as a
)thin*, )universalistic*, )impersonal* or )macro* influence on managerial behaviour
"+illiams, / eutsch, 13/ 2hapiro, 1&. One economist who has discussed
the relationship between national culture and managerial behaviour is rrow "14&.
rrow argued that capitalist societies )in their evolution have developed implicit
agreements to certain $inds of regard for others, agreements which are essential to the
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survival of the society or at least contribute greatly to the efficiency of its wor$ing*
"rrow, 14, p%5&. 6e terms this agreement )a generali'ed morality*. rrow*s
argument was very much in line with the earlier wor$ of 7arsons "8& and
ur$heim "33&, who identified the notion of )solidarity* as an eplanation for
behaviour.
6ofstede, however, has been more specific than rrow, arguing that such )implicit
agreements* are more li$ely in societies that are characterised by collectivist attitudes
than those that are characterised by individualist attitudes "6ofstede, 0&. 9any,
although not all "for eample, 6innings et al, 14&, argue, therefore, that managerial
behaviour will be different in different parts of the world "Trompnaars, 4/
+illiamson, 5/ (ooteboom, %00%&. The #hinese )guani* and the :apanese
)$ieretsu* systems, for eample, are often contrasted with nglo-2aon business
methods ";ee, 1/ +omac$, :ones and <oos, 0&.
second factor cited is business theory, particularly that relating to business ethics.
+hilst national culture and values have certainly been an influence on business
theory, this is not the whole picture. =or eample, within societies that 6ofstede*s
model would consider to be strongly individualist, the two aforementioned strands of
business ethics > simple self-interest see$ing and self-interest see$ing with guile "or
opportunism& > compete within business schools and economics departments. The
idea of simple self-interest see$ing tends to dominate the teaching of traditional neo-
classical economics and strategic management, whilst the idea of self-interest see$ing
with guile tends to dominate the teaching of managerial economics and business
finance "It may seem curious to many, but arguments have !uite happily been
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constructed by some economists and management commentators "#arr, 5/ 2hell,
/ 2tal$ and ;achenauer, %004& as to why the latter type of behaviour is ethically
?ustifiable&.
Business ethics is now commonly covered on business education programmes.
#learly, whether such education is informed by one or the other of the two positions
outlined above "or, indeed, any other& is potentially going to have an impact on the
managers who receive such education. Indeed, in recent years, there has been some
soul-searching in the @2 as to whether management education in the @2 contributed
to the rash of corporate scandals that were revealed at the turn of the century
"Ahoshal, %003/ 2chiller, %008&.
third factor is organisational culture, again something influenced by broader
national influences, but again not synonymous with them "(ooteboom, %00%&.
Organisational culture has been defined as )a collection of relatively uniform and
enduring values, beliefs, customs, traditions and practices that are shared by an
organisation*s members, learned by new recruits and transmitted from one generation
of employees to the net* "6uc'yns$i and Buchanan, %00&. Through formal "for
eample, codes of practice& and informal "for eample, de facto incentive structures
and socialisation& mechanisms, companies impose very different attitudes on their
employees as to what types of behaviour should attract censure and reward "7eters
and +aterman, %/ (ooteboom, %00%&. The most obvious recent eample of this is,
of course, nron. The internal culture of this company encouraged ruthless and
ultimately illegal behaviour, something that was only discovered due to a financial
oversight by the company*s accountants "#urver, %003&.
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fourth factor concerns the psychology of business managers. <esearch in this area
has suggested that a significant proportion of business managers, particularly senior
business managers, have personality traits that are conducive to opportunistic
behaviour "Babia$, 8 and 5/ oren, 1&. 9uch of this research has focused
upon eplaining very etreme forms of management behaviour, such as the actions of
many senior @2 eecutives in the late 0s to early %000s. The actions of nron*s
9ichael =astow, +orld#om*s Bernie bbers and 2unbeam*s l unlop, for eample,
have been deemed so etreme as to re!uire psychological eplanation. The result has
been terms such as )toic leaders* ";ipman-Blumen, %008&, )corporate psychopath*
"6are and Babia$, %005& and )successful psychopaths* ";ilienfeld, / ;ynam et al,
&.
6owever, consideration of psychological factors should not merely be confined to
etreme forms of management behaviour. 7ersonality characteristics can also eplain
less dramatic eamples of opportunistic business behaviour. The $ey to this is the
adoption of a dimensional approach to personality classification. +hilst some
psychologists believe that behaviour patterns resulting from personality disorders are
!ualitatively distinct from )normal* behaviours > a categorical approach "9illon,
/ merican 7sychiatric ssociation, 4& > others argue that the difference is
!uantitative > the aforementioned dimensional approach "9orey et al, 8/ #lar$
and +atson, &. =or eample, Board and =rit'on "%008, p& commentC )+ith
mounting evidence that strongly challenges the presumption that personality disorders
represent discrete, natural classes, there are good grounds to argue for an approach
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that observes characteristics of personality disorders as simply eaggerated forms of
normal behaviour*.
The significance of this )dimensional* approach is that it puts individuals on a
continuum of behaviours, rather than in categories. This means that diagnosis
becomes less of a case of all or nothing. 7eople are seen as being at different places
on a continuum of behaviours. 2o, whilst )toic leaders* may be placed on the end of
the continuum, other managers ehibiting anti-social, but less dramatic, behaviours
can be observed within the scale as well.
This dimensional approach was recently applied by the two aforementioned
psychologists to managerial behaviour. Their research found that even senior
managers that would not be placed alongside the aforementioned category of
)corporate psychopath* had very high scores with respect to narcissistic, compulsive
and, particularly, histrionic personality traits "Board and =rit'on, %008&. These traits
are etremely relevant to the study of opportunism. 6istrionic personality
characteristics, for eample, include manipulation, deception, self-regard and
superficial sociability "Board and =rit'on, %008&.
+hat the research also found was that the scores achieved by the senior managers in
this respect were a good deal higher than the average found within the population.
This is important to the study of business philosophy as it means that economists are
not re!uired to believe that society is highly populated with the opportunistic to
believe that business "or certain parts of business > a study by e7aulo and e7aulo
"& showed that salespeople showed an unusual lac$ of emotion when lying& is. It
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can be argued that self-selection is at play, that certain roles within business attract
managers with certain personality traits.
The final factor thought to affect a manager*s behavioural disposition concerns the
social relations between managers involved in relationships containing repeated
interactions "7rovan, 3&. Aranovetter, for eample, has argued that views of
managerial disposition that characterise it as opportunistic are flawed as they
constitute an )undersocialised* perspective. That is, they are views that disallow )any
impact of social structure and social relations on production, distribution or
consumption* "Aranovetter, 8, p43&. Aranovetter argues that, in reality, )social
relations often become Dover timeE overlaid with social content that carries strong
epectations of trust and abstention from opportunism* "Aranovetter, 8, p40&.
Therefore, for Aranovetter, the previously stated influences on managerial disposition
miss the point. behavioural disposition is not fied, it can change over time as a
relationship develops. (ooteboom "5, pp1-& develops this perspective further
by saying that managers are easily capable of recognising the changing nature of a
social relation over timeC )It is reasonable to say that prior to transaction one is
uncertain about the partner*s potential opportunism, and hence should ta$e
opportunism into account. Once one ta$es time into account, in ongoing transactions,
it is unreasonable to ignore the formation of perceptions about propensities towards
opportunism and the possibility of building trust*.
6owever, there are counter-arguments to the views of Aranovetter and (ooteboom.
=irst, it can be argued that the influence of certain variants of national culture,
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business philosophy and organisation culture, as well as the apparent psychology of
many managers, will prevent social relations from affecting business conduct. 2ome
managers will, perhaps, call this )being professional*. The second argument concerns
the fact that many strategies of opportunism "for eample, some manifestations of
hold-up& are long-term in nature. )Traps* are set, e ante, which are specifically
designed to be eploited years after the contractual period has commenced. It can be
argued, therefore, that it is not ?ust initial 6obbesian alienation that causes
opportunistic behaviour "i.e. getting your retaliation in first&. It is something much
more fundamental about managers* behavioural disposition.
Third, it can also be argued that even when social relations do affect managerial
behaviour they can be interrupted by the individuals in !uestion leaving the scene.
7articularly in nglo-2aon economies, managers fre!uently move either within or
between companies. =inally, some companies, reputedly including @F supermar$ets
";awrence, %004&, ta$e no chances on the build-up of )inefficient* social relations and
circulate their staff as a matter of policy. Therefore, whilst it would be folly to deny
that social relations can develop and affect managerial behaviour, there are many
counter-influences that ma$e Aranovetter*s argument that social relations are the $ey
driver of behaviour somewhat unconvincing. 6is use of time to eplain behaviour is
partly, but not sufficiently, !ualified.
The five factors discussed above have all been identified in the literature as influences
on the behavioural disposition of managers. 6owever, this is not the end of the story.
s was mentioned above, there is a distinction to be made between a manager*s
behavioural disposition and his or her behavioural action. Behavioural action is
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affected not only by the behavioural disposition of managers, but also by transaction-
specific factors. =our factors, in particular, predominate within the economics
literature. The first is the principle of contingent renewal "elrod, 4/ =ran$,
/ Bowles and Aintis, &. The idea here is that behavioural action is affected
by the ability of the buying organisation to ma$e future contracts dependent on
current performance. problem, however, with this mechanism, apart from the fact
that a manager may not have any future business to offer, is that it assumes an
alignment between the interests of the company and the interests of the manager
acting on the company*s behalf. This may not always be the case > the possibility
eplored by economists researching the principal-agent problem.
The second factor is reputation "+eigelf and #amerer, / +illiamson, 5/
=it'roy et al, &. The behavioural actions of managers are deemed by some
economists to be affected by their desire to maintain the reputation of their company
in the mar$etplace for fair dealing. 6owever, there are two ob?ections to reputation
being evo$ed as a factor in constraining opportunistic behaviour. =irst, the principal-
agent problem again potentially intervenes. 2econd, there is a large amount of
evidence to suggest that many companies that have been involved in large scandals
have emerged apparently unscathed "+illiamson, 5&. (ot all companies suffer the
fate of rthur ndersen. @F and @2 financial services companies, for eample,
despite their involvement in myriad pension, mortgage, life insurance and share-
selling scandals have continued to operate unhindered and to great effect.
These two factors > contingent renewal and reputation > also need to seen in concert
with the relative epectation level on the part of the manager that his or her behaviour
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will be detected. If, on the one hand, managers are considering the potential si'e of
the cost of being revealed as opportunistic "i.e. they are considering the issues of
contingent renewal and reputation&, they are also li$ely to consider the chances of
being revealed. The chances of being caught can be understood in two ways. =irst, in
terms of the detection regime that the other party has constructed. 2econd, in terms of
the type of opportunistic strategy that is being employed. The inherent nature of hold-
up, for eample, means that it will always be obvious to the other party. This is less
the case with adverse selection and moral ha'ard.
The third transaction-specific factor addresses the possibility that a manager may, in
some transactional circumstances, be wor$ing as part of a group. ny model of
managerial behaviour must ta$e into account the possibility of this, as peer influence
within a group situation has been shown to be common "=eldman, 4&. The
possibility in this contet is that a group-level view on behavioural standards emerges.
If this view is in conflict with the behavioural preference of the manager in !uestion,
then that person may well modify his or her actions, for fear of the disapproval of the
other group members. This will particularly be a possibility if the group contains that
person*s line managers "sch, 8&.
The fourth transaction-specific factor is the potential si'e of the gain from
opportunism. +hen managers consider their company*s reputation and the potential
future business being offered by a customer, it is done against a consideration of the
short-term gains available. s (ooteboom "5, p& concedesC )Aolden
opportunities of defection are tempting, even to the trustworthy*. s a result,
managers within buying organisations, when considering li$ely supplier behaviour
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need to consider the nature of the transaction in !uestion and the short-term
opportunities for eploitative gains it provides.
Characterising Managerial Behaviour: A Calculative Model
=or the authors, it is necessary to synthesise all of the aforementioned factors in order
to possess a comprehensive model of managerial behaviour. The synthesis, which
assumes both parties are ris$-neutral, ta$es the form of a trade-off between the costs
and gains from opportunistic behaviour. It is, in other words, a calculative model
"+atson, %004&. In terms of the cost side of the model, the first element concerns the
possibility of personal dissonance. The model states that different managers will, to
differing degrees, incur a personal cost from acting in an opportunistic manner.
On the one hand, this will be a function of the manner in which they have been
socialised, through national culture, business theory and organisational culture. =or
eample, it is argued that managers from nations that possess a predominantly
individualist political culture are li$ely to feel less dissonance when acting
opportunistically. On the other hand, it will be a function of their personality traits >
although there is considerable evidence that there is a lin$ between national cultural
influences and personality formation ":ames, %003&. It has already been noted that
certain personality traits are highly conducive to business opportunism and that they
are commonly found in particularly senior business managers.
The second element of the cost side of the model concerns the depth of the
relationship under consideration. #learly, the betrayal of well-established
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relationships will be more significant, and provide a higher barrier of dissonance, than
the betrayal of recently-formed associations. =or some, although not all, this barrier
will be insurmountable. 6owever, having said this, the earlier point about the long-
term nature of some strategies of opportunism needs to be ta$en into account here.
2ocial relations are less li$ely to affect opportunistic behaviour if that behaviour has
been carefully planned over a long period of time and is epected to unfold over a
long period of time. It is surely illogical to argue otherwise.
Third, managers will also, when considering their behavioural actions, consider the
commercial costs that could potentially be incurred as a result of an act of
opportunism. Two concepts were noted hereC contingent renewal and reputation, the
former relating to the specific customer in !uestion and the latter to the customer
mar$et in general. 9anagers will need to consider the potential long-term costs to
their company of their short-term actions. 6owever, two caveats are needed here. The
first caveat is the issue of detection. 9anagers will consider the issues of contingent
renewal and reputation in concert with their views on the chances of revealed as
opportunistic.
The second caveat is the issue of the principal-agent problem. If this management
problem is factored into a model of managerial behaviour, as it must be, it tells us that
not all managers will concern themselves to the same etent with the potential impact
of opportunism on their company. The etent to which they do will depend again on
the cultural, educational and personality factors referred to above "not all managers*
attitudes to their companies will accord to the characterisation enshrined within the
principal-agent model&, as well as a managers* intended tenure at his or her company.
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=ourth, managers will consider the cost of peer disapproval, something that
particularly arises if they are wor$ing within a group on a particular contract.
9anagers will not want their behaviour to affect their prospects within the
organisation. 2o, it is possible that they will modify their behaviour if the group has
epressed disapproval of that type of behaviour. Opportunistic behaviour or a refusal
to act opportunistically could both potentially attract group disapproval.
6aving dealt with the cost side of the model, attention now needs to turn to the gain
side. @nder the model, all of the potential personal and commercial costs from
opportunism will be considered by managers against the si'e of the li$ely short-term
gain from opportunism, both on a company and a personal level. It goes without
saying that, in different relationships situations, the gains from acts of opportunism
will be different. On some occasions they will be substantial, either in real terms or as
a proportion of the contract value, and on others they will not. This refers bac$ to
(ooteboom*s observation about )golden opportunities of defection*. (ooteboom
argued that )golden opportunities* would tempt even the trustworthy. @nder the model
being presented here, it would be tempting to the degree that it counter-balanced the
personal and commercial costs.
=inally, it is important that one more concept is incorporated into the model. This is
the concept of bounded rationality "2imon, 81&. ll of the calculations vis-G-vis the
commercial elements in the model will be sub?ect to a manager*s inherent bounded
rationality. On both the cost and gain side of the model, a manager*s calculations may
simply be wrong, especially in comple relationships, something that could push a
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manager in either direction > towards or away from opportunistic behaviour >
depending on the nature of the error.
Applying the Model to the UK Context
This constitutes, therefore, a model that ta$es into account nation, educational
influences, organisational influences, personality type, group dynamics, time,
managerial capabilities and commercial circumstances. It incorporates both the
contingency demanded by Aranovetter "i.e. it does not assume that all people or all
circumstances are the same& and the variety of personal and commercial influences
demanded by the overall literature.
The view of the authors is that, in the @F, the model points very much towards a high
proportion of managers > not all and not all to the same degree > possessing an
opportunistic disposition. The authors believe this for four reasons. =irst,
individualistic cultural influences are prominent in the @F. 2econd, the evidence on
the previously discussed psychological factors is persuasive. Both of these two factors
will have the effect of reducing the personal dissonance associated with opportunistic
actions "whether that is in relation to the manager*s echange partner or his or her
own company&. Third, fre!uent changes to personnel in companies are common
within the @F. This factor will reduce the number of occasions when long-term social
relations are formed. =ourth, although not specific to the @F, many opportunistic
practices are long-term in nature, so, for the reasons discussed earlier, relationship
longevity is not always going to provide protection.
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6owever, despite this analysis, it needs to be reiterated that whether or not
opportunistic actions will follow in any particular case where a manager has an
opportunistic disposition will depend on the contingent commercial circumstances.
The distinction between preference and action always needs to be at the forefront of
any assessment of managerial behaviour.
In terms of the customer response re!uired given this characterisation of the self-
interest orientation of @F managers, the authors adopt the position of +illiamson
"3&. 6e argued that, given the perceived prevalence of opportunistic tendencies,
and given the inherent difficulties of distinguishing between the opportunistic and the
non-opportunistic, caution is advised. This is especially the case, of course, in
relationships where the sta$es are high.
Therefore, this article has briefly put forward a model for interpreting managerial
behaviour. +hen applied to the @F, it has indicated that opportunistic behaviour is
li$ely to be commonplace. Before proceeding to present evidence of business
opportunism within the @F, it is necessary to ma$e two further comments. =irst, this
article is concerned with supplier opportunism. 6owever, this should not be ta$en as a
sign that the authors believe that buyers are not capable of such behaviour. 2econd,
Aranovetter argues that models from transaction cost economics based upon an
assumption of opportunism are )undersocialised*. This may or may not be fair
comment. 6owever, even if it is fair, it does not mean that all models that are based
on opportunism are necessarily similarly )undersocialised*. It is possible to come to
the same conclusion through more or less satisfactory routes.
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,&iden!e of Business Opportunis' in the %
The authors have argued that business behaviour in the @F is, to a large degree,
characterised by opportunism. This is a bold, although hardly uni!ue, point of view.
s such, it needs to be bac$ed up with evidence. To provide such evidence is the role
of this part of the article.
The tas$ of providing evidence on the eact level of opportunism within an economy
is net to impossible, especially for independent academics. =or a start, there is the
distinction between disposition and action. But even if one settles on ?ust monitoring
actions, there is the sheer scale of the tas$. +hat this section of the article aims to do,
therefore, is merely provide evidence that, to all reasonable readers, emphatically
dismisses the idea, clearly supported by the li$es of (ooteboom "%00%& and
Aranovetter "8&, that opportunism is very much the eception rather than the rule.
(ot that even doing this is straightforward. =irst, there is the ris$ of litigation. +hilst
many actions that come under the heading of opportunism are legal, it is not a term
that managers li$e to have publicly associated with their organisation. 2econd, whilst
many managers will tell you about the opportunistic actions of their organisation in
private, they will rarely allow that data to be made public. =ortunately, commercial
opportunism within in the @F economy is monitored by various agencies of the @F
government and parliament. vidence is available from many sources, including
select committee reports, the (ational udit Office "(O& and the Office of =air
Trading "O=T&. These sources of data are used in this part of the article and
supplemented by evidence uncovered by business and political ?ournalists.
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The evidence in this article is organised on the basis of mar$et sector. 2uch is the
prevalence of opportunism in the @F economy, any number of mar$et sectors could
have been chosen for inclusion in this article. =or eample, an O=T study found that
nearly %8H of @F small to medium si'ed enterprises "29& across all sectors had
encountered anti-competitive practices such as cartel price fiing, bid-rigging and
collusion > ?ust one aspect of opportunism "Office of =air Trading, %008a&. Bearing in
mind that the Fompass @F #ompany Information <egister "%008& contains 43,000
companies, most of which are 29s, this means a very large number of acts of
opportunism, ?ust in this particular respect. 6owever, limitations of space mean that
this article will limit its attention to ?ust si sectors. 6owever, each of the cases
reveals actions that are in no way )eceptions to the rule*. Indeed, some of the actions
are fundamental to the modus operandi of the industry concerned.
Financial services
The only place to start in any study of the eistence of opportunism is the financial
sector, where opportunism is common-place. Opportunism is a prominent feature of
many products areas within the @F financial sector. =our are touched upon here. =irst,
endowment mortgages. =or many years in the 0s and 0s, these were sold
without customers being fully informed about their ris$ potential, their unsuitability
for customers with certain financial and employment profiles and the commissions
that the sales people were earning. The 6ouse of #ommons Treasury #ommittee
reported in 9arch %004 that it believed between 80H and 50H of endowment
mortgages were mis-sold, at a cost to the consumer of about 40 billion ":ones and
Inman, %004&.
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Pharmaceutical industry
number of charges of opportunism have been laid at the door of the pharmaceutical
industry "including @F pharmaceutical companies&, another industry central to a
modern economy. Three will be mentioned here. =irst, the industry has been accused
of )ghost-writing* academic ?ournal articles in order to have aired favourable findings
on their products "Barnett, %003&. The @F academic, avid 6ealy, has commentedC )I
believe 80H of articles on drugs in the ma?or medical ?ournals are not written in a way
that the average person would epect them to be M The evidence I have seen would
suggest that there are grounds to thin$ that a significant proportion of articles M may
be written with help from medical writing agencies* "Barnett, %003&.
2econd, there have been persistent accusations that pharmaceutical companies
manipulate and withhold the results of drug trials. vidence published in the :ournal
of the merican 9edical ssociation showed that 3H of independent studies on new
drugs reached unfavourable conclusions. This figure was only 8H for studies funded
by the industry itself ";aurence, %004&. Third, the @F government is about to ta$e to
court si @F-based drug companies because of the belief that they were involved in
price-rigging to the tune of 00 million "Aibb, %008&. This belief arose following an
investigation underta$en by the 6ouse of #ommons 2elect #ommittee on 6ealth in
the late 0s. The committee concluded that clear mar$et manipulation had ta$en
place in many areas of the generic drug mar$et "6ouse of #ommons 6ealth 2elect
#ommittee, &.
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Car servicing and repair industry
In %000, the O=T conducted an investigation into the practices and performance of the
@F car servicing and repair industry. It summed up its conclusions by stating that the
industry should )clean up its act* "Office of =air Trading, %000&. This conclusion was
based upon the fact that the practices of the industry were, according to their research,
causing consumers about .3 million problems per annum. The O=T calculated
furtherC )Identified costs Dof the industry*s practicesE of 10 million a year may be
only the tip of the iceberg* "Office of =air Trading, %000&. 9any of the problems that
the O=T identified were, not surprisingly, related to moral ha'ard.
The O=T notedC )Our research has confirmed that the !uality of car servicing and
repair in Britain is often unacceptable and motorists have little chance of discovering
this or how final bills are ?ustified M (ot many of us have enough epertise to chec$
whether a competent, or even ade!uate, ?ob has been done on our cars M D+Ee are, to
a large etent, at the mercy of people who are supposed to $now what they are doing
M DOurE trust Din the garages we useE is often misplaced M DThe industryE is
unroadworthy and needs a thorough overhaul* "Office of =air Trading, %000&.
Accountancy industry
The practices of the accountancy industry have received a great deal of attention
recently with the collapse of a number of large @2 companies "for eample, +orld
#om and nron& and two uropean companies, 7armalat and 9A <over Aroup. Two
charges in particular are levelled against the accountancy industry. The first is that the
industry*s relationships with its clients are pervaded by a fundamental conflict of
interest. This conflict is said to be due to the fact that the accountancy firms also sell
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consultancy services to the companies they are responsible for auditing "=T.com,
%00%&. It is argued that they are, as a result, not revealing critical information to
shareholders or potential shareholders.
recent submission by 69 <evenue and #ustoms to the new regulatory body, the
=inancial <eporting <eview 7anel, included a litany of bad practice. The ta
collection body apparently )presented the regulator with 4 eamples where one of
the big four auditors "F79A, rnst and Noung, 7w# and eloitte& had Kcleared
incorrect accounts when Kthe correct accountancy treatment should have been
obvious* "7rivate ye, %008, p%5&. It was reported that the manager in charge of
compiling the submission said that )these cases were ?ust those that his small team had
come up with off the top of their heads* "7rivate ye, %008, p%5&.
The second charge concerns the nature of some of the additional services they are
providing to their clients. particular target of their critics* attention is ta avoidance
schemes, estimated by #hristian id "%008& in a recent report to deny governments
worldwide about %10 billion per annum. The long-term critic of the industry, 7rem
2i$$a, commented recentlyC )n accountancy firm partner was bold enough to state
recentlyC K(o matter what legislation is in place, the accountants and lawyers will find
a way round it. <ules are rules, but rules are meant to be bro$en "2i$$a, %008&. n
eample of the $ind of scheme 2i$$a is referring to is provided by a PT avoidance
scheme developed by F79A. This involved a client restructuring its business so it
could be classified as a non-@F controlled company. In this instance the scheme was
brought to court. uring the case it was revealed that F79A believed that 69
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#ustoms might regard the scheme as )unacceptable ta avoidance*, but sold it anyway
"2i$$a, %008&.
Toys and games industry
The O=T has also had to ta$e action against opportunism in the toys and games
industry. In %003, the O=T undertoo$ an investigation into the actions of high street
retailers, rgos and ;ittlewoods, and the toy manufacturer, 6asbro. It found that the
three companies were operating price-fiing practices "Office of =air Trading, %008b&.
The three companies made a series of agreements on the price of 6asbro products in
the two stores. This was not deemed by the O=T to be a matter of minor importance.
s a result, the three companies were fined a total of %%.58 million, although this
was marginally reduced to .8 million on appeal to the #ompetition ppeal
Tribunal. The O=T commentedC )These were, the #ompetition ppeal Tribunal said,
the lowest penalties that could reasonably be ?ustified in the circumstances to meet the
gravity of the case* "Office of =air Trading, %008b&.
Glass-related chemicals industry
The final case concerns the glass industry. In %004, the O=T reported that a ma?or
instance of price-fiing had occurred in the industry. It concerned a chemical called
insulated glass desiccant, something used in double gla'ing manufacture to remove
moisture and prevent condensation. The O=T found that a company called @O7
;imted, had fied the price of this desiccant with four of its distributors. This was not
a minor event. @O7 is the main supplier to the @F mar$et and, together with its
distributors, supply a large proportion of the 4,000 suppliers that populate the @F
double gla'ing mar$et. =urthermore, the price fiing continued for many years. The
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Ironically, the concept of opportunism is not a product of left-wing economists, far
from it. (or does the eistence of opportunism mean that business cannot generate
beneficial outcomes. +hat the eistence of opportunism does mean, however, is that
if beneficial outcomes are to result from dealings with suppliers great care needs to be
ta$en by customers in designing procurement policies. This is particularly the case
when transactions involve asset specificity and have to potential to create information
asymmetries.
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