Why do they do it?

Harvard business professor Eugene Soltes is on a years-long quest to discover why topflight executives become white-collar criminals. His conversations with close to 50 convicted criminals so far have led to insights on hubris and humility — not just in them but in all of us.

Eugene Soltes was flipping through television channels late one night in 2008 when he came across the MSNBC reality show/documentary program, “Lockup,” which featured interviews with felons in prisons across the U.S. The inmates described their lives and circumstances — such as financial troubles, drug addiction and gang affiliation — that led to their brutal and violent crimes.

Soltes, a university business school professor, began to think about a different type of criminal — the white-collar variety — none of whom lived the harsh lives of the incarcerated who were profiled on “Lockup.” Many of these fraudsters lived extraordinarily comfortable lives, but their crimes adversely affected themselves, their families, employees, investors and companies. What would cause them to commit their crimes?

Driven by curiosity, Soltes began to write to several former executives who were serving sentences for fraud. He asked them the first dozen questions that came to mind. What were the most significant pressures they faced? How did the way they were compensated influence their decision making? What were their intentions once they were released?

A month later, he began to receive responses. One particularly poignant letter came from Stephen Richards, a former senior executive at Computer Associates (CA). “He sent this beautiful cursive handwritten letter joking how he doesn’t have Microsoft Word available in prison,” Soltes said during a recent interview with Fraud Magazine.

As global head of sales, Richards helped backdate contracts that clients signed after the quarters officially ended, Soltes says. Richards’ actions inflated quarterly earnings and temporarily propped up the firm’s stock price. Eight CA executives, including Richards, were convicted. “Unfortunately, the world is not black and white,” Richards wrote in his letter from prison to Soltes. “Senior managers spend most of their life in the gray regardless of their responsibility and that can be a dangerous and hard place to be.”

Soltes, now the Jakurski Family Associate Professor of Business Administration at Harvard Business School, eventually wrote a case study based on Richards’ letter that became a part of the MBA and executive education curriculum at Harvard Business School. (Academics at 60 business schools around the world now use the case study in their classes.)

Richards’ case history compelled Soltes to begin a quest to postulate theories about why white-collar criminals “did it.” He continued in earnest to correspond and visit with more than four dozen of the most senior executives who oversaw some of the most significant corporate failures in history, including Bernie Madoff; Andrew Fastow, Enron’s former chief financial officer; Allen Stanford, former chairman and CEO of the Stanford Financial Group; Sam Waskal, the former CEO of ImClone Systems; and Dennis Kozlowski, former CEO of Tyco.

The results of the prison correspondence and visits plus Soltes’ research on white-collar criminology resulted in his 2016 book, “Why They Do it: Inside the Mind of the White-Collar Criminal” (PublicAffairs). Soltes was a keynote speaker at the 28th Annual ACFE Global Fraud Conference, June 18-23.

Contract date pre-printing

Soltes writes in his book that Richards, the global head of sales at CA, would often sweat out the last days of each quarter because customers would wait until the last possible minute to try to get the best deals. But that would place tremendous pressure to sell millions of dollars of product in a short amount of time. Expected earnings and bonuses were riding on Richards’ efforts.

So, Richards and his sales force would prepare each impending contract by writing on the signature pages the company name, and the name and title of the person who’d be signing, and leave the signature box blank. They’d also stamp a date onto the contract, but it wouldn’t actually be the day the contract eventually would be signed.

“From my perspective,” Richards says in Soltes’ book, “the preprinting of dates was nothing more than a subtle reinforcement to the customer that something needed to happen before a particular time.” However, Soltes says, in preprinting the dates, Richards and his sales people effectively eased the end-of-quarter rush by artificially extending the quarter to include several additional days.

Eventually, millions in CA revenues were attributed to earlier quarters, earning targets were met or exceeded and the company’s stock price shot upward. “This is nothing more than a timing issue,” Richards was quoted in Soltes’ book. “I didn’t feel that I was doing anything wrong.” However, the Securities and Exchange Commission did. The agency said that from Jan. 1, 1998 through Sept. 30, 2000, CA prematurely recognized more than $3.3 billion in revenue from at least 363 software contracts that CA, its customer or both parties hadn’t yet executed, in violation of Generally Accepted Accounting Principles. In 2006, Richards was sentenced to seven years in jail. He served 44 months.

When we’re surrounded by people that have the same views and opinions, we’re less likely to actually have that dissonance.”

Uncomfortable dissonance

Soltes says that when you’re driving on the highway you might speed up to pass some cars and glance down at the speedometer and see that you’re going 75 miles per hour — 10 miles over the speed limit.

You probably won’t take your foot off the accelerator unless your spouse reminds you you’re speeding, you pass an accident or a police car is parked on the side of the road up ahead. It takes some kind of uncomfortable dissonance — an external influence or event that conflicts with your intuition — to motivate a behavioral change, Soltes says.

Executives, like freeway drivers, need to experience some dissonance “to stimulate a reevaluation of their initial intuitive judgments,” he says. Dennis Kozlowski, the former CEO of Tyco, was convicted for embezzling nearly $100 million by inappropriately forgiving loans owed to Tyco. In Soltes’ book, Kozlowski described how infrequently he experienced such dissonance as chief executive.

“When the CEO is in the room, directors — even independent directors — tend to want to try and please him,” Kozlowski says. “The board would give me anything I wanted. Anything.

“We believed our own press. … With myself and others — even the board — you become consumed a little bit by your own arrogance, and you really think you can do anything,” Kozlowski says.

Soltes believes that executives — actually anybody — would do well to periodically take the “spouse test.”

“Find someone that you respect deeply and that you can have an open conversation on a regular basis … to just describe what you’re doing, what you are working so hard for day-to-day,” Soltes says. “And if that person is able to say that’s the kind of person I respect, and I’m applauding what you’re doing — that’s the best check. You need someone that can push back on you.”

Barring the spouse test, executives need to be surrounded by people of diverse backgrounds and viewpoints, Soltes says. “When we’re surrounded by people that have the same views and opinions, we’re less likely to actually have that dissonance,” he says. “And therefore, we’re going to comfortably proceed without really taking a step back. That dissonance, when it rises, forces us to take a second look at something.”

Ben Horowitz reaches outside the bubble

In his book, Soltes focuses on Ben Horowitz, a prominent venture capitalist in Silicon Valley, and how he’d have become complicit in a backdating scheme had it not been for a discussion with an outsider — a little uncomfortable dissonance.

Moral hubris is a remarkably easy trait to acquire and not realize when one actually has it.

Hubris and humility

Soltes says that many of his students ask themselves if they could ever succumb to the kinds of bad decisions and fraud that executives at Enron, WorldCom and Tyco committed. And most of them believe they could never do such things.

“But that’s not the right question to ask oneself,” Soltes says. “Instead, you have to consider the situation surrounded by their norms and incentives as well as growing up in a culture in which you were encouraged to behave in a particular way.

“Maybe the better question is why would I not behave as they did in that particular circumstance? Edwin Sutherland, the father of modern criminology, approached this in his theory of differential association — that we pick up the attitudes and values to engage in white-collar crime from spending time around others who engage in misconduct.

“If we approach the question of why by genuinely placing ourselves in their shoes, I think it leads to greater moral humility. We’re forced to think more deeply about the cultural environment that can subtly encourage misconduct,” Soltes says.

“This is something I think I took away personally from this project,” Soltes says. “I became a lot less confident about how I’d respond to every difficult situation. I think I’m more humble now that I’ve realized I have limitations much like anyone else, and I need to be diligent to watch those. Moral hubris is a remarkably easy trait to acquire and not realize when one actually has it.”

Fortunately, he says we wouldn’t necessarily behave the same way these top-flight fraudsters did if placed in their situations. “However, in our own small ways, we are all susceptible to making the same kinds of ethical oversights as these former executives.”

Soltes writes, “If we humbly recognize that we might not always even notice the choices that will lead us astray, we are more likely to develop ways to identify and control these decisions. But 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.”

Dick Carozza, CFE, is editor-in-chief of Fraud Magazine. His email address is: dcarozza@ACFE.com.

Read an excerpt from "Why They Do It: Inside the Mind of the White-Collar Criminal," by Eugene Soltes.

Toward greater humility

By Eugene F. Soltes, Ph.D.

Nitin Nohria, dean of Harvard Business School, described an assignment he gives to new CEOs to complete during a training program for senior leaders. The CEOs are asked to rank a list of ten 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, 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,” Nohria explained. “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, as Nohria pointed out, it is exactly many of these same leaders who later appear on the front pages of newspapers for engaging in precisely the egregious conduct that they once insisted they would never do.

The simple fact is, most of us think that we are better and more moral than we actually are. No one, especially those who have achieved success, believes that they are likely to stumble and err. It is this sense of invincibility that has felled leaders across a range of fields—including the cyclist Lance Armstrong, the writer Jonah Lehrer, and the NBC news anchor Brian Williams. It’s only after faltering that people humbly ask, as observed by the psychologist Max Bazerman, “How could that have happened? And why didn’t I see that coming?”

One of the things that I’ve found especially fascinating during my conversations with the former executives discussed in this book is how strongly people hold on to the notion that it wasn’t really their actions that were all that deceitful or destructive. Their actions are not that bad, they argue, when compared with what others have done. According to the executives who committed insider trading, it’s the ones who committed financial fraud who really damaged the integrity of financial markets. According to those who engaged in financial fraud, it’s the executives who built Ponzi schemes that lacked an underlying business who are the real culprits. And for those who created pyramid schemes, it’s the investment bankers who went unpunished during the financial crises who are the real villains. Virtually every one of the former executives I spoke with pointed out, even complained, that it was not he who was the true villain—it was always someone else.

Beneath the irony of this defense, there is an interesting truth. We all confidently believe that we would have behaved differently if placed in the shoes of an executive engaging in malfeasance. However, this confidence is artificial.

We don’t get to reevaluate executives’ decisions using our current beliefs, the norms we’re instilled with now, or our current perspectives on what matters most. Likewise, we don’t get to bring along any finely tuned intuitions that we’ve acquired in our own lives to avoid this kind of behavior when we place ourselves in these executives’ shoes. Instead, we have to imagine ourselves surrounded by their norms and immersed in their culture—not just in the present but in the past as well. We have to see ourselves as being shaped by the experiences they faced throughout their careers, not by those we face in our own.

If we see ourselves as experiencing the world as many of these former executives did, I don’t believe we can actually know how we would act if placed in their shoes. If anything, maybe we ought to humbly recognize that we might have behaved as they did. Yet, we can still hope, wish, and believe that we would act differently. Frankly, however, we just can’t know.

Perhaps Marc Dreier, the former graduate of Harvard and Yale who engineered a Ponzi scheme, actually had it right when he reflected on this conundrum. “It is easy to say you would never cross the line, but the line is presented to very, very few people,” Dreier explained. “How many could say for sure that they would never do what I did if they had the opportunity and thought they wouldn’t get caught?"

Appreciating our lack of invincibility—our inherent weakness and frailty—offers us the best chance of designing the appropriate mechanisms to help manage these limitations. If we learn to be more suspicious of our gut feelings when placed in new or difficult situations, we can acknowledge the need to create more opportunities for reflection and to bring in the viewpoints of others to question us. If we humbly recognize that we might not always even notice the choices that will lead us astray, we are more likely to develop ways to identify and control those decisions. But 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.

Excerpted from  “Why They Do It: Inside the Mind of the White-Collar Criminal” by Eugene Soltes. Copyright © 2016. Available from PublicAffairs, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc.

Bernard Madoff, unlike others, personally knew those he defrauded

Infamous Ponzi schemer Bernard Madoff “is the ultimate rationalizer,” says Eugene Soltes, the Jakurski Family Associate Professor of Business Administration at Harvard Business School and author of “Why They Do it: Inside the Mind of the White-Collar Criminal.”

Soltes has interviewed Madoff for several years — and continues to interview him — to try to answer the question in the title of Soltes’ book.

“Madoff is different from really anyone else of the executive white-collar criminals that I spent time with in writing this book,” Soltes says in a recent interview with Fraud Magazine. “Unlike the other executives, he knew many of his victims. These were members of the Jewish community. These were family and friends. These were prominent charities that he got to know over time,” Soltes says.

“In most cases, and it’s one of the underlying themes of my book, is that most of the time when we have this high-level executive or managerial fraud, it’s easy for the white-collar criminals to proceed without really feeling they’re doing harm because they don’t actually see the victims on the other side. That’s not true for Madoff,” Soltes says. He never seems to appreciate the harm he has done to his victims, he says.

“No matter what was presented to him in terms of the harm he did, he always had a way to minimize it,” Soltes says. “The smaller — or less-wealthy investors — who were wiped out because of him, he saw as people that were just simply foolish to put all their eggs in one basket and give him all the money. Or he would say they didn’t meet the minimum wealth threshold, so it’s the fault of the feeders’ funds for allowing those people to give the money in the first place but not his fault.

“With the charities he duped — he sees that these funds only had a lot of money because of the false returns they made earlier. So, it was like they gave him some money, he grew it, but then he took it away, so it’s no harm in the end. They didn’t gain or lose anything. So, he was able to have some comfort because of how he’s able to view the world in that very particular manner,” Soltes says.

“Madoff isn’t a disturbed or sinister person,” Soltes says. “Outwardly, he’s friendly, even quite cordial. He’s normal on every dimension when you’re having a conversation with him. And that’s what made him so effective in perpetrating this extraordinary act of fraud.”

Soltes says that during his conversations with Madoff through the years, Madoff never broke down emotionally or admitted to depression even though he knew he was going to die in prison.

“I think for most people that would be a very, very hard thing to take mentally. But he’s unfazed, which shows his remarkable capacity to compartmentalize,” Soltes says.