Protect and reward on the Internet

With a third of the world’s population now on the internet and billions of devices interconnected via myriad wireless and wired networks, the risks of so-called cyber attacks are more apparent than ever. Espionage, denial-of-service, malware and so-called cyber war and terrorism represent significant risks to individuals, corporations, institutions and governments at various levels.

Writing in the International Journal of Management and Decision Making, researchers in Germany have proposed a novel approach to network protection that could reduce the risk of cyber attack by rewarding those organisations that bolster the security on their networks to prevent the spread of malware and other problems. Because internet and computer-based systems today communicate more and more with one another, mostly as anonymous partners, they are becoming increasingly vulnerable to cyber harassment and cyber attacks, the researchers explain.

Annette Hofmann of the University of Hamburg and Hidajet Ramaj of the Humboldt-Universitaet zu Berlin explain that international or national agreements could be used to build coordinative reward systems and to subsidise high-exposure organisations. Improving network security on vulnerable sites and systems would, they suggest, hinder the rapid spread of malicious software that is commonly used to create bot-nets for attacking corporate and other networks. Because internet and computer-based systems today communicate more and more with one another, mostly as anonymous partners, they are becoming increasingly vulnerable to cyber attacks.

The researchers explain that currently, only some parties invest in protection against cyber attack, which adds to their costs, but benefits them in terms of their own protection and has some benefit to the entire community. With a reward system in place everyone from small-town travel agents to multinational credit card companies could become involved with a scaled reward system that reduces those overhead proportionately and benefits the community as a whole to a much greater extent by motivating them all to ensure that their systems are secure.

The team adds that, formal contractual agreements between different parties that specify their data and information exchange and other interactions would also have to be implemented to reduce inefficiency and improve network protection. “Such agreements may serve to commit the parties to their cyber risk protection strategy,” the team concludes.

“Interdependent risk networks: the threat of cyber attack” in Int. J. Management and Decision Making, 2011, 11, 312-323

Fending off founder frustration in tech start-ups

A new study of more than 440 technology entrepreneurs reveals that wealth does not necessarily bring happiness. According to research published in the International Journal of Entrepreneurial Venturing, long-term employment growth in a new technology-based company correlates with the founder’s satisfaction with their rising income, but is negatively related to their overall happiness.

Arndt Lautenschlaeger of the University of Applied Sciences Jena in Germany analysed data on 441 entrepreneurs in several fields of high-technology as well as technology-based services. The aim being to empirically analyses the relationship between personal happiness and employment growth in new technology-based firms. Personal happiness is measured by the company founder’s satisfaction with life, work, financial situation, and leisure time.

The founder of a business might speak of success in terms of achieving company goals, although these can vary wildly between individuals and companies. Some founders equate success with profits and their becoming rich, while others value self-fulfilment and being their own boss more. From the perspective of the company itself, success can be defined more objectively based on sales, efficiency and profits. Lautenschlaeger suggests that it is unfortunate that personal indicators are all but ignored in economic studies of high-tech start-ups, where development and growth are often considered the only relevant factors.

“I found that in an early firm stage performance and individual satisfaction go hand in hand with a few exceptions,” Lautenschlaeger says, but satisfaction with life correlates negatively in the long run with company growth despite rising income. He points out that to some extent this counteracts the aspirations of promoting start-up firms as a panacea for fighting unemployment and the generation of wealth. He adds that, his findings challenge the traditional view that company growth parallels personal success of the founder.

The study has important implications for individual entrepreneurs but for the ongoing success of countless high-tech start-up companies. Founder exit from a business is often neglected in corporate discussions, but it might be necessary to address the issue of how the boss feels as a company grows and so help the management team avoid the potential for company failure in the long term if founders are allowed to continue in their role despite growing personal dissatisfaction.

“Personal happiness and employment growth in new technology-based firms” in Int. J. Entrepreneurial Venturing, 2011, 3, 359-374

Bad eggs and oil slicks – making corporate crime pay

If courts were able to award appropriate punitive damages that punish wrongdoers at a level tied to a company’s financial worth, then businesses big and small would be at risk of being put out of business by punitive damages unconscionable offenses and would be deterred from bad behavior in the first place, according to Judy Feuer Zimet of the Phoenix School of Law in Phoenix, Arizona.

Writing in the International Journal of Private Law, Zimet points out that in many legal cases over the last two decades, companies have repeatedly been fined for breaking environmental and other laws, but have not suffered losses to their profit line that were adequate to deter them from repeating offences. She cites the case of Wright County Farm Eggs and owner Jack Decoster’s long list of repeated violations that culminated in 2010 with a national salmonella outbreak. She also cites the oil company BP, which since 2005 has been held to account for a staggering 760 safety violations that resulted in a mere $373 million in fines.

Meanwhile, BP’s annual profits are in the double figure billions of dollars. The serious oil spill in the Gulf of Mexico in 2010 forced the company to create a $20 billion victims’ compensation fund. Zimet suggests that had fines for the 759 prior violations been sufficiently punishing, BP might have been more effective in addressing the problems that led to the 2010 spill.

“A punishment that successfully deters future wrongdoing requires an amount sufficient to impact a defendant’s financial condition,” says Zimet, Current factors used to assess the amount of punitive damages should be reassessed. Courts can better punish and deter wrongdoing by calculating punitive damages based upon a defendant’s wealth rather than the relationship between compensatory and punitive damages.”

Zimet discusses two cases in which appropriate punitive damages had the desired effect on changing corporate behavior. Two successive cases against motor vehicle manufacturer BMW of North America saw the company accused of fraud after a customer discovered that it had repainted a car yet withheld that information when the car was sold. In this first case, the trial court awarded a mere $4600 in compensatory damages and BMW made no changes to its behavior. A second case saw BMW North America forced to pay $4 million in punitive damages. The company immediately thereafter changed its policy and began reporting refinishing work to new car purchasers. This shows that when the risk of liability is substantial, companies will reform bad behavior.

“No longer should compensatory damages steer punitive damages,” asserts Zimet. “The Supreme Court should replace this factor by a formerly existing factor: determine the financial position of the defendant and its ability to pay.”

“Bad eggs and oil slicks: a defendant’s wealth is an important factor in properly assessing punitive damages” in Int. J. Private Law, 2011, 5, 1-21