Clockwise from left: Allen Stanford, Dennis Kozlowski, Sam Waksal, Andrew Fastow.
What drives some of the highest-profile financial crooks to commit their fraud? Eugene Soltes, a Harvard Business School professor who spent countless hours talking to and corresponding with them, concludes that for many of them, it wasn’t always a coldhearted calculation of what they thought they could get away with.
Instead, he writes in his book, “Why They Do It; Inside the Mind of the White-Collar Criminal”: “They put little effort into these decisions because they never deeply felt that the decisions were harmful to themselves or others. And because they didn’t perceive this harm, they had little reason to pause and reconsider their course of action.”
Soltes says his curiosity was sparked by a television show featuring interviews with felons. So he wrote to white-collar criminals, and to his surprise, many responded. In the end, he communicated with more than four dozen senior executives, including Bernie Madoff, who was sentenced to 150 years in prison for a Ponzi scheme that cost investors tens of billions of dollars in losses, including paper gains, Allen Stanford, another financier who was also convicted of running a Ponzi scheme, Dennis Kozlowski, who was convicted of looting nearly $100 million from Tyco International when he was CEO, Andrew Fastow, the former chief financial officer at Enron Corp. who was convicted of fraud and other charges, and Sam Waksal, the founder of biotech firm ImClone Systems Inc. who was convicted of insider trading.
Soltes discussed his book with MarketWatch. Answers have been edited for length.
Q: What surprised you the most about these men? Did anything shock you?
A: The remarkable lack of remorse for their actions. There were times I came home and spoke to my wife about how frustrating it was to see their inability to relate to their victims. Just take insider trading, and try imagining how your trades actually victimized someone specific. It’s an abstract crime with no readily identifiable victims. Once I began to understand this, it was no longer all that shocking to speak to someone new and see their ambivalence to the harm associated with their conduct.
Q: Is there something different about those that do choose to engage in misconduct?
A: Failures are not because these individuals are aberrant people. Rather, by and large, they are like us, with the same foibles and limitations. However, given their leadership positions, their errors in judgment are far more consequential than ours.
In our own small way, none of us are perfect or ethical all the time. For instance, most people know that speeding is wrong, but do it anyway. We don’t see it as consequential until something happens, and then we appreciate that we ought to have slowed down and gone 25 miles an hour rather than 40 mph on the road.
We might err without even fully realizing it at the time. Ben Horowitz is a successful venture capitalist who nearly participated in an options backdating scheme, which very likely could have landed him in prison — had it not been for him designing a system of seeking advice when he signed off on new accounting and finance policy. It’s this kind of personal preservation framework that we all need.
“When the CEO is in the room, directors — even independent directors — tend to want to try and please him.”
Dennis Kozlowski, to Eugene Soltes
Q: What’s the answer to preventing white-collar crime? You are skeptical that it can be addressed just with more enforcement and longer prison sentences. Can you elaborate?
A: I found most high-level executives, even when they are engaging in illicit activity, see the probability that they could ever actually go to prison as essentially nonexistent. As a result, the longer sentence isn’t serving as an effective deterrent.
We need to focus on the underlying business norms and improve people’s intuitions. If managers have an implicit feeling that something is wrong, they never even consider it as a potential option. Policy — both within firms and at the regulatory level — needs to focus on changing the norms to effectively address this kind of executive-level crime.
Q: Others would say more people — and more people higher up at firms — should have gone to jail over some of what happened during the financial crisis. Your response?
A: The billions of dollars in fines levied on firms during the last financial crises have been largely ineffective in my opinion. In many instances, the same leaders who oversaw these firms and designed the cultures and incentives that helped this misconduct flourish are still there. Even worse, the financial penalties assessed on these firms are not paid by those who engaged in the wrongdoing, but instead by shareholders like you and me who had nothing to do with the misconduct.
When someone does something unethical that causes the destruction of lives, this deserves incarceration. At the same time, I accept that our prosecutorial system is not about punishing people for unethical conduct, but for breaking specific rules and laws. Regulators need to design better laws that would help hold executives accountable when they do things that fit the wider public notion of fraud and misconduct.
Q: What about more ethics classes? Are we too focused on bright-line rules instead of principles?
A: The problem is that ethics classes are actually too “easy.” The real word is far more complex. Unlike in an ethics class, no one neatly isolates the moral dilemma from the hundreds of other decisions an executive makes. In the real word, you’re not usually surrounded by a group of individuals who express different views and opinions to help resolve the dilemma. Decisions in practice are made quickly, among like-minded individuals, and without special attention to those choices that are potentially more consequential.
Compliance systems are generally about following rules and regulation — the kind of things that protect firms. But what we really need is a personal preservation framework that protects ourselves. This is the kind of system we should all be encouraged to make since staying out of trouble isn’t always about having a good moral compass.
Ethics classes are too “easy.” The real world is far more complex.
Q: Few of us start out intending to do wrong, as you point out. How can we make the right decision when the big moral challenge comes?
A: Find an outsider who we respect and can speak openly to. This might be a spouse, a friend, or maybe even a co-worker as long as they view the world differently than you. The problem in much of business is that the individuals who surround leaders are not really there to give actual disagreement even when that’s their expressed duty. As Dennis Kozlowski, the former CEO of Tyco expressed to me, “When the CEO is in the room, directors — even independent directors — tend to want to try and please him.”
Q: As you note, women are conspicuously absent from the ranks of prominent white-collar criminals? Is it a matter of fewer opportunities? A stronger sense of right and wrong?
A: Large sample studies clearly show that the propensity of females to become executive-level offenders is simply lower. It doesn’t seem plausible that it’s because there aren’t women in executive-level positions. While women still hold fewer leadership positions than men, there are still many who could engage in wrongdoing if they so choose. It also doesn’t seem particularly likely that women are “better” at committing crime — that is, doing it and not getting caught — or prosecutors are less likely to target women. Women might be innately less inclined on average to engage in the choices that lead to harming others. A plethora of research supports the idea that women are more empathic than men.
Q: Among all those former executives you talked to, who stands out for you and why?
A: Scott Harkonen. He led a biotechnology company that was developing a treatment for a debilitating fatal lung disease known as IPF. After the first set of trials came back, his firm issued a press release noting that the results “demonstrated” improved patient survival. [Trial evidence cited by the Justice Department showed the trial nonetheless failed.] Although all the description and statistics in the release were technically correct, prosecutors went after Harkonen for fraudulently using the work “demonstrate” in the opening of the release when “suggest” probably would have been more appropriate.
At trial, Harkonen was found guilty and prosecutors sought a 10-year prison sentence. Ultimately, the judge only sentenced him to probation since it was difficult to identify who was specifically harmed by the press release. But Harkonen lost everything — his career, wealth, even medical licenses — in the process.