Antecedents and Consequences of Cronyism in Organizations

Abstract

Crony capitalism, the granting of economic favors to friends and privileged associates, is widely regarded as a key factor contributing to the Asian financial crisis of 1997 (Asiaweek, 1999; Dale, 1999). Along with collusion, corruption, and complacency, endemic use of cronyism is one of the “four Cs” believed to have allowed the business, government, and finance sectors in several Asian countries to conspire and undermine meaningful competition (Husted, 1999; Vogl, 1999). For instance, cronyism was involved when executives in Asian financial institutions extended excessive credit to customers with whom they held personal connections (Economist, 1998). Until the recent business malfeasance in the USA, the practice of cronyism in Western countries has drawn relatively little attention. However, the Enron debacle illustrates its practice in full form:

Americans who came to see their free-market economy as largely immune to the cronyism that plagues many foreign countries were shocked to see how Enron’s cozy ties with its own accounting firm inoculated it from scrutiny. (Business Week, 2002a, p. 110)

(The company) “not only cooked its books. It used its extensive political influence to cook the regulatory system itself. When a public-minded chairman of the Federal Energy Regulatory Commission stood in Enron’s way Chairman Kenneth L. Lay paid a call and the offender disappeared” (Business Week, 2002b, p. 20).