Inside the Mind of a White-Collar Criminal

“You never really understand a person until you consider things from his point of view-until you climb into his skin and walk around in it.”…Atticus Finch, To Kill a Mockingbird.

As the global Sales head at Computer Associates, Stephen Richards backdated contracts that were signed by clients after the quarter ended. His actions inflated earnings and temporarily propped up the stock price. When the deception was revealed, 8 execs, incl Richards, were convicted. Richards’ letter became an HBS case study. Some of us harshly criticized Richards for succumbing to institutional and mkt pressures easily. Others imagined themselves facing similar dilemmas in their own careers. It was easy to rationalize why Richards deserved to be punished for breaking an accounting rule, but whether a sales contract was dated Fri or Mon didn’t create a strong feeling of anger among many students. There was an eerie disconnect between what we all intuitively felt and what we intellectually believed was right and wrong.

No student graduates with a plan to become successful and then, later, to engage in some unethical behavior that could lead to jail time and ruin. Yet, even at HBS, where every student has the intellectual capacity to successfully resolve and avoid decisions that could lead to prison, there have been many grads who’ve engaged in white-collar crimes.

Something must have happened along the way.

1. Stealing money from another’s pocket involves a high degree of intimacy. The perpetrator sees the victim, physically touches his property, and sees his immediate reaction after being robbed. But manipulative corporate conduct lacks all these sensations. Executives never need to get close- physically or psychologically- to their victims. Instead, they often remain distant and amorphous. Proximity deeply affects our instinctive ability to sense and react to harm. As distance grows, our ability to empathize with others shrinks. In business, where many transactions occur at “arm’s length” among unrelated parties, there is often no natural tendency to empathize with individuals on the other side of a transaction. Modern commerce has made it perilously easy to stray into the penumbra— that “gray zone” between right and wrong.
2. Other factors include relying on faulty intuition, not engaging in deliberative reasoning, and lacking exposure to differing viewpoints. Classroom dilemmas differ from real life in that they’re resolved through argumentation among people with different opinions and viewpoints. Being exposed to varying and conflicting ways of seeing problems provides an opportunity to reason about, and revise, one’s initial intuitive judgment. However, there are often fewer dissenting viewpoints in actual settings where decisions are made. In day-to-day life, people rely on their initial and often unsatisfactory intuitive judgments. If these executives had been exposed to alternative perspectives, they would have made different choices. Their failure was one of relying on faulty intuitions rather than engaging in poor deliberative reasoning. All people, even those most senior within an organization, need other people who can probe their judgments and advise caution when they see trouble approaching. These warnings might come from a spouse, friend, or a trusted colleague outside their immediate circle. It takes some kind of uncomfortable dissonance, an external influence or event that conflicts with your intuition, to motivate a behavioral change. People naturally try to disavow and dismiss information that contradicts their worldview. They often continue as if nothing is wrong even when something is seriously amiss. This continues until eventually “they come across a piece of evidence too fascinating to ignore, too clear to misperceive, too painful to deny . .. forcing them to alter and surrender the worldview they have so meticulously constructed.”
3. Some firms have created hotlines that employees can call to discuss dilemmas they face. However, many who would benefit most from such discussion don’t call because they don’t identify the moral dilemma in the first place. Almost every one complained that it was not he who was the true villain— it was always someone else. Once individuals become more senior within an organization, they tend to be more susceptible to overconfidence and trust their own ability to successfully navigate challenges when they arise. So if someone takes actions that threaten to paint them as a bad person, they are more likely to change their opinion of what’s right and wrong, rather than change their opinion of themselves.
4. Constructive argumentation engages the reasoning process and improves the quality of reasoning itself. It’s when beliefs go unchallenged because they are shared among like-minded individuals that judgments are most likely to reflect naive or ill-suited intuitions. Unfortunately, executives all too often surround themselves with sycophants who do not seek to deeply challenge them. Kennedy’s invasion of the Bay of Pigs is regarded as one of the biggest flops in American foreign policy. That such an absurd plan was ever agreed upon is astounding. All of the assumptions that spoke in favour of invasion were erroneous. And yet, Kennedy and his advisers were among the most intelligent people to ever run an American govt. What went wrong? Psychology prof Irving Janis concluded that all fiascos share the following pattern: members of a close-knit group cultivate team spirit by (unconsciously) building illusions. One of these fantasies is a belief in invincibility: ‘If both our leader [Kennedy] and the group are confident that the plan will work, then luck will be on our side.’ Next comes the illusion of unanimity: if the others are of the same opinion, any dissenting view must be wrong. No one wants to be the party pooper who destroys team unity. Finally, each person is happy to be part of the group. Expressing reservations could mean exclusion from it. In our evolutionary past, such banishment guaranteed death; hence our strong urge to remain in the group’s favour. The Calamity of Conformity!
5. Many say the best way to reduce the incidence of white-collar crime is thru vigorous enforcement. Through lengthy prison sentences and large fines, execs ought to be dissuaded from engaging in illicit conduct. A survey by Yale Law School found that judges agree that deterrence is the most important goal of white-collar sentencing. Although there is much enthusiasm about the supposed deterrent effect of jailing execs who commit wrongdoing, evidence is elusive. As the Univ of Chicago prof Ray Ball pointed out, it’s costly to deter fraudulent activity, and at some point it simply becomes uneconomical to create further deterrence and enforcement mechanisms. China once doled out the death penalty for white-collar convicts, but even with this ultimate punishment looming execs continued with corporate mischief. It is only when the sanctions begin to influence everyday norms that avoiding certain types of undesirable conduct becomes ingrained within business culture. For example:

• When a member of the Orthodox Jewish community is sanctioned by a rabbinical court, the sanctions are enforced not only by a regulatory body but, more critically, by other members of the Orthodox community. Members are asked to avoid socially interacting with or even supporting the business of the offender. By calling on the entire community to act, these norms are reinforced within members of the community while simultaneously punishing the offender. Execs engaging in misconduct may be castigated by the press, but they often receive far less criticism within their own social communities.
• Although there is “no soul to be damned and no body to be kicked,” corporations can be held criminally responsible for the misconduct of their employees in the US and other countries. Corporate offenders can be fined heavily for their misdeeds, but unlike people, they do not face incarceration or the life-long effects of being a felon. For instance, the day after settling criminal charges with federal prosecutors for helping wealthy folks evade taxes, Credit Suisse execs held a conference call to reassure analysts that the criminal conviction would have “no impact on our bank licenses nor any material impact on our operational or business capabilities.” And then fines levied on offending firms are ultimately paid by shareholders rather than by the execs or employees who actually engaged in the misconduct.
• Companies that demonstrate better culture and conduct and whose employees avoid malfeasance ought to have some advantages relative to those that don’t. One such advantage could be the firms’ ability to attract and recruit the best talent. Suppose that firms that are felons in the eyes of the law were not permitted to recruit on univ campuses. This could be voluntarily implemented by individual schools and enforced during the time that the firms are implementing better systems. While this might appear to be a small penalty, temporarily banning these firms from campuses—a choice instituted by schools, not regulators— could instill an urgency to better address the roots of misconduct that might exceed even the largest fines. Capturing the attention of students on campus would no longer be a preordained right but, rather, would represent a privilege that firms earn.

A fine distinction exists between being confident and displaying hubris. Lloyd Blankfein and Bill Ackman believe their firms are doing “God’s work.” Even if stated jokingly, this belief and the lack of any sense of fallibility is precisely the sentiment formerly held by many execs prior to faltering.

Nitin Nohria, the former HBS dean, gives an assignment to new CEOs to complete during a training program for senior leaders. The CEOs are asked to rank a list of 10 responsibilities setting their firm’s strategy, getting a new management team, and working with the board of directors, among others—from the item they feel most to least prepared to take on as they begin leading a multibillion dollar organization. Invariably, the new CEOs rank “setting the right moral tone” as one of the easiest aspects of management. “They all feel deeply secure in their own moral compass. They have a sense that they are a people of extraordinary moral character and that it is very unlikely that they are going to do anything in their organization to lead either the organization astray or do something that will get them in the front pages of the newspapers.” Yet, it’s exactly many of these same leaders who later appear on the front pages for engaging in precisely the egregious conduct that they once insisted they would never do.

Most of us think that we are better and more moral than we actually are. It’s only after faltering that people humbly ask, as noted by the psychologist Max Bazerman, “How could that have happened?” It’s only when we realize that our ability to err is much greater than we often think it is that we’ll begin to take the necessary steps to change and improve.