Opportunism Article - Week 3

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



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



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&.



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



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



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,



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



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



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



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



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.



=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



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.



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.



,&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.



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&.



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, &.



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



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



#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



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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Opportunism Article - Week 3

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