Small Business Startup News

Unethical CEOs Hurt All Of Us

Written by Tim Morral
Published: 8/28/2015

From options backdating to financial statement fraud, there are a litany of unethical business practices. Root cause is often an unethical CEO, finds one academic study.

Are you aware of any business executives who lack personal integrity and commit loads of ethical transgressions to advance their own personal interests?

Unethical CEOs

Unfortunately, you can find them under just about any rock in the business world -- pathetic, greedy folks who are willing to lie and cheat to enrich themselves at the expense of shareholders, employees and society.

A noteworthy academic study, Suspect CEOs, Unethical Culture, and Corporate Misbehavior, looked into what causes a business to purposely mislead investors and undertake unethical actions that make a small group rich but ultimately lead to the misallocation and destruction of scarce societal resources.

The results of their analysis are quite interesting.

It's Often the CEO Who Sets the Stage for an Unethical Corporate Culture

The authors of the study -- Lee Biggerstaff, David Cicero and Andy Puckett -- point their collective fingers at the CEO, writing that "our recent research suggests that it [corporate unethical behavior] may be driven by the actions and attitudes of those at the very top level of corporate leadership -- in particular the CEO."

In other words, when a company is unethical, odds are the CEO is unethical.

Options Backdating Provides Insights on Unethical CEO Behavior

Published in the Journal of Financial Economics, the study looked at CEOs who had personally benefited from options backdating.

This is the unethical and illegal practice in which public company executives grant themselves stock options in a deceptive way.

Rather than use the actual date the options were granted, they instead put a date on the options that corresponds to a previous day, sometimes weeks or months back, when shares were trading at a low point.

Years later, when the stock is up, the executives receive a windfall because the shares have ostensibly risen so dramatically from the day the options were granted. Crime complete, shareholders ripped off and nobody is the wiser.

Quick Aside: My Cousin Rick's Study

Options backdating is much more common than people realize. In fact, my cousin Rick Edelson did an a clever statistical analysis that determined that only one-third of all companies that backdated were investigated or caught.

It's not entirely germane to this story but the SEC basically ignored Rick's findings. My sense is that when the SEC ignored this smoking gun, Rick decided to give up on his new interest in fighting white collar crime and return to astrophysics. He realized the deck was stacked in favor of the criminals, and that the SEC was compromised, incompetent or both.

Back to Unethical CEOs

Study authors Biggerstaff, Cicero and Puckett found that firms that committed these options backdating crimes, which require a complicit CEO with high probability, are more likely to engage in other corporate misbehaviors, suggestive of an unethical corporate culture.

They tend to be more likely to overstate earnings through the use of financial fraud. Over time these firms experience larger stock price declines during a market correction and are more likely to replace their CEOs.

The authors conclude that "integrity -- in particular, executives' integrity -- matters for corporate outcomes" and that "the ethics of corporate leaders is an important determinant of the ethical cultures of the firms they manage."

What You Can Do

For those of us in the trenches the conclusion is perhaps this: the more we can work together to prevent unethical executives from rising to the top, the better.

And, silence is consent. Looking the other way means you are complicit in the CEO's crimes.

So, as they now say on my train car every day: if you see something, say something.

Maybe Albert Einstein said it best: "The world is a dangerous place, not because of those who do evil, but because of those who look on and do nothing."

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