The Effect of Institutional Pressures and Business Incentives on the Level of Corporate Compliance System Implementation

Abstract

The risk of noncompliance with societal requirements, internal policies, and industry standards can damage a company's reputation and image. There may be institutional pressures and firm incentives and characteristics that drive the implementation of a compliance management system (CMS). To observe the effect of institutional pressures on CMS implementation, several cultural factors—mimetics, collectivism, femininity, power distance, uncertainty avoidance, tolerance, and long-term orientation—are analyzed. Meanwhile, the firm's incentives are examined through the characteristics of the board of directors and the company that could encourage implementation. Finally, the joint effect of these aspects is considered. Tobit regression analysis was conducted on a sample of 5471 observations from 814 international firms listed for the years 2007–2014. Tobit analysis using panel data was used to examine the effect of the variables over time and obtain consistent and efficient results in the presence of censored variables. Tolerant and individualistic societies influence CMS implementation. Regarding the characteristics of the board of directors, the board's independence encourages CMS implementation. The size of the board shows a curvilinear relationship, and attendance at the boards of directors—contrary to what was expected—decreases CMS implementation. This study addresses the gaps in the literature on the determinants that lead companies to implement a CMS. Moreover, it shows that, although institutional pressures and company incentives are important, their interaction could impact its individual effectiveness.