Flying the company jet too close to the sun

Residents of C-suites and boardrooms who exhibit the “Icarus complex” often initially soar but ultimately plummet from lofty heights and take their companies with them. Here’s how organizations can identify them in the hiring process and prevent disaster.

In Greek mythology, Daedalus and his son, Icarus, escaped imprisonment on the island of Crete by fashioning wings made of feathers glued together with wax. Daedalus taught Icarus how to fly with the wax wings, but he cautioned his son not to soar too high or the sun would melt them. But Icarus ignored his father’s wise counsel and began flying higher until the wax began melting under the heat of the sun. His wings quickly fell apart, and he plunged into the sea and drowned.

Another literary tragic figure is Captain Ahab in Herman Melville’s “Moby Dick,” who’s consumed with one mission: the white whale. Ahab is a most dangerous kind of leader. His narcissistic carelessness and destructive determination defeat him as he takes the whaling ship Pequod and her crew (except for Ishmael) down with him — the maritime equivalent of flying too close to the sun.

More than ever before, organizational leadership demands not just accomplished functional skills, experience and knowledge, but also personality and psychological stability. Emotional and influential illiteracy still plague many C-suites and boardrooms as do examples of recklessness, defiance of limitations and personal overambition. Executive instability leads to fraud.

The figure below illustrates a simple model of destructive leadership behavior and its relationship with subordinates and an organization. (See The prevalence of destructive leadership behavior, by Merethe Schanke Assland, et. al., British Journal of Management, volume 21, 2010, pages 438-452.)

Icarus complex

Harvard psychologist Henry A. Murray coined the term “Icarus complex” to characterize a specific type of hyperambitious personality that includes elements of narcissism, ascensionism (love of flying and heights) and extreme imaginary cognitive states. (See “Dostoyevsky’s Stalker and Other Essays on Psychopathy and the Arts,” by Michael Sperber, University Press of America, 2010, pages 165-166.) The person with an Icarus complex initially soars but ultimately plummets precipitously from lofty heights.

The Icarus complex shares many traits of personality disorders with “dark psychology.” Individuals who consciously take advantage of others exhibit characteristics known as the “Dark Triad of Personality.” These traits include the tendency to seek admiration and special treatment (narcissism), to be callous and insensitive (psychopathy) and to manipulate others for one’s personal gain (Machiavellianism). (See Shedding light on psychology’s dark triad, by Susan Krauss Whitbourne, Ph.D., Psychology Today, Jan. 26, 2013.)

While a modicum of narcissism can be healthy for some charismatic leaders, excesses of dark psychology have given rise to “dark leadership.” Such undiagnosed disorders in corporate leaders can be dangerous to an organization’s financial and emotional health. A 2010 study of the Norwegian workforce found that destructive leadership behavior varied from 33.5% to 61%, which indicates that “destructive leadership is not an anomaly,” according to Merethe Schanke Assland’s British Journal of Management article.

Flying too high in the C-suite

C-suite executives harboring Icarus complexes are a hazardous game changer for everyone in an organization, especially when risky decisions or fraudulent actions jeopardize employees’ livelihoods and those with financial stakes. “Our most important corporate regulation,” writes University of Pennsylvania law professor and author, David Skeel, “has always been enacted in the wake of stunning Icarus Effect collapses.” (See “Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From,” by Skeel, Oxford University Press, 2005.)

C-suite executives harboring Icarus complexes are a hazardous game changer for everyone in an organization, especially when risky decisions or fraudulent actions jeopardize employees’ livelihoods and those with financial stakes.

The media and Hollywood have romanticized the notion of personable and charismatic but ruthless executives running large organizations as in “The Wolf of Wall Street,” “Wall Street” and “Boiler Room.” The congenial outward appearance often masks emotional coldness, exploitation, unethical and manipulative behavior, and grandiose self-importance that wreak havoc on management and employees. Such polish, charm and even-keel decisiveness often are mistaken as leadership qualities when they can just be the outward-facing appearance of darker personality traits.

Corporate executives harboring an Icarus complex with other dark tendencies often make decisions in isolation without input from others. Managers and other subordinates quickly realize that the Icarian exec doesn’t value their counsel. They become disengaged as the work environment becomes toxic.

Such a closed-loop approach can have costly corporate implications, says Don Hambrick, Evan Pugh Professor and the Smeal Chaired Professor of Management at the Smeal College of Business at Penn State. “… [N]arcissism in the executive suite can be expected to have effects on substantive organizational outcomes, potentially including strategic grandiosity and submissive top management teams,” he says. (See Why narcissistic CEOs kill their companies, by Eric Jackson, Forbes, Jan. 11, 2012.)

These often are self-destructive personalities because they ignore their own limitations and other boundaries. They’re flames that burn twice as bright as others but only half as long.

Case study: Marvell Technology Group

Congress created the 2002 Sarbanes-Oxley Act to protect investors from corporate accounting fraud by strengthening the accuracy and reliability of financial disclosures. One company with a history of governance and compliance problems is Marvell Technology Group (the author’s former employer for eight years).

The U.S. Securities and Exchange Commission (SEC) fined the company, run by its husband-and-wife co-founders, for $10 million for an employee stock-options backdating scheme. (See SEC charges Marvell Technology Group for stock option backdating.)

A patent infringement lawsuit with Carnegie Mellon cost the company $750 million. (See Marvell agrees to pay record-breaking $750M to university to end patent lawsuit, by Joe Mullin, Ars Technica, Feb. 18, 2016.) The SEC also fined Marvell $5.5 million for running an undisclosed revenue management scheme. (See SEC fines Marvell Technology $5.5M in revenue manipulation scheme, by Robert Friedman in CFO Dive, Sept. 16, 2019.)

NASDAQ threatened the company with delisting for non-compliant report filing. (See Marvell receives delisting warning from Nasdaq, by Tomi Kilgore, in MarketWatch, March 8, 2016.)

In April 2016, the Marvell board dismissed the co-founders. (See Ousted Marvell founders invest in Las Vegas condos after moving there, by Cromwell Schubarth in Silicon Valley Business Journal, Dec. 1, 2016.) Marvell stock soared 14 percent in pre-market trading the day after the announcement of the co-founders’ departure from the company. (See Marvell’s stock soars after CEO, president said to leave company, by Tomi Kilgore, Fox Business, April 5, 2016.)

Marvell leaders, who resorted to — or were willfully blind to — problematic accounting and regulatory practices caused turbulent times at the expense of shareholders. The company laid off hundreds of employees and closed several technology design centers between 2012 and 2016 to preserve and redirect capital. (See Marvell looks at layoffs, asset sales in restructuring, Lightwave.com, Nov. 3, 2016.) This was unfortunate because both billionaire founders were smart, prominent and respected businesspeople in the Santa Clara high-tech community. They were widely recognized for their local and global philanthropic causes. But this type of public persona is the narcissist’s mask.

Narcissists and behavior rationalizations

If a situation deteriorates, narcissists will likely try to explain how everything is working exactly as intended. In fact, they often rationalize their own questionable behavior if the means serve the ends. Marvell’s leaders used these types of classic rationalizations to pass off its corporate behaviors and actions: “slippery slope” (options backdating: “everyone’s doing it”), “king’s pass” (public achievements and philanthropy should overshadow the ethical errors in judgment), and “Hamm’s excuse” (patent infringement and revenue mismanagement: “it wasn’t my fault”). (See The unethical rationalization list: 24 and counting, by Jack Marshall in his blog, Ethics Alarms.)

In an interview with Fraud Magazine, David Cotton, CFE, CPA, chairman of Cotton & Company, tells how some in the C-suite succumb to the power of position. “[It’s a ] given that pretty much everyone wants more money,” Cotton says. “And executives with ‘chief’ in their job titles are almost always in a position to override or circumvent internal accounting and fraud controls. So, pretty much every senior executive inherently already has two legs of the Fraud Triangle.” [Cotton was chair of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Fraud Risk Management Task Force and one of the principal authors of the COSO/ACFE Fraud Risk Management Guide.]

Replacing the hostile environment in 2016 probably was the best change for the company when Marvell’s C-suite executives were rationalizing repeated compliance dodges and questionable ethics. No longer would C-suiters regularly fire executives for expressing differing opinions from one of the founders. Gone were the founders’ hand-picked directors — “yes men” — whose autocratic leadership style forced the departure of talented professionals.

One reporter opined an all-too-familiar refrain: “And Silicon Valley has once again been reminded that placing people on a pedestal too high can make their fall even more painful to watch.” (See The shocking fall of Marvell’s Weili Dai, long hailed as a role model for women in Silicon Valley, by Chris O’Brien, VentureBeat.com, April 7, 2016.)

Warning signs are there if you know what to look for

Evidence of fraud or improper reporting goes beyond the entries on a spreadsheet. When auditors and fraud investigators are taught what to look for, they can be well-positioned to identify the signs of the Icarus complex (excessive risk, over-confident demeanor), and its attendant narcissistic behaviors (exaggerated sense of self-importance, need for admiration, lack of empathy) in the C-suite.

A savvy auditor or fraud investigator can observe odd personality displays that might influence risk assessment and set off audit risk alarms. A study found a potential relationship between organizations led by a narcissistic CEO and higher audit fees, which were the result of additional audit work required and/or charging higher risk premiums. There might also be some connection between narcissistic CEOs and weak internal controls. (See How do auditors respond to CEO narcissism? Evidence from external audit fees, by J. Scott Judd et. al, Accounting Horizons, volume 31, issue 4, 2017.)

Here are some other indications, when taken together, which suggest that closer audit or investigative scrutiny might be in order. (See Auditor perceptions of client narcissism as a fraud attitude risk factor, by Eric N. Johnson, et. al., pre-publication manuscript.)

• Narcissistic CEOs are inclined to speak and write using the first person singular (“I” and “me”) versus third person plural (“us” and “we”).
• Narcissistic CEOs are often pictured alone or positioned more prominently in group photos.
• Narcissistic CEOs tend to have lengthy and stylish signatures (conveying and signifying their self-importance).

The Narcissistic Personality Inventory, known as the NPI-16 (a concise version of the 40-item NPI-40), could be offered as a proactive tool during pre-audit planning discussions with key corporate executives. (See The NPI-16 as a short measure of narcissism, by Daniel R. Ames, et. al., Journal of Research in Personality, vol. 40, 2006, pages 440-450.)

What about after-hours CEO lifestyles and behavior?

It’s not just on-the-job actions and decisions that should trouble boards and stakeholders when they look at CEO behaviors. Several studies suggest leaders’ lifestyles and off-the-clock activities correlate with actions back at the office. (See Idea Watch, Harvard Business Review, January-February 2020.)

Insider trading

A study identified companies that simultaneously hired at least one executive with a criminal record (misdemeanors, felonies) and one without a record from 1986 to 2017. Researchers examined trades of company stock and found that executives with a prior record made more on those trades than those executives without a record. The difference was greatest among executives with multiple offenses and more serious violations, which implied that privileged information was used. (See Executives’ Legal Records and the Deterrent Effect of Corporate Governance, by Robert H. Davidson, et al., September 2019, Wiley Online Library.)

Despite their organizations’ “blackout” policies to deter improper trading, executives with the more serious past offenses were the worst policy violators and were more likely to miss SEC reporting deadlines.

While governance policies can instruct executives with minor offenses (traffic violations, for example), they appear largely ineffective for those with more serious infractions (legal judgments, restraining orders). Part of the problem lies with boards performing only superficial due diligence as reflected in comments to researchers, such as, “I don’t care what they did, especially if it was a long time ago.” The executive who oversteps legislative controls, corporate policies and ethical boundaries — and who engages in risky behavior — is soaring too high with feathered wings.

Fraudulent financial statements

Another study identified 109 companies that had submitted fraudulent financial statements to the SEC. When compared to CEOs of companies with no statement infractions, 20.2% of the leaders in the fraudulent reporting group had records compared to just 4.6% of the other group.

Executive materialism and reporting risk

Researchers used property and tax records to determine personal consumption habits (expensive cars, boats, homes) of CEOs. They found a correlation with lavish/extreme lifestyles and careless operations when reporting errors and financial misstatements were widespread. The effect was enhanced during C-suite changes associated with increased fraud risk, such as appointing avaricious CFOs, increasing equity-based incentives to misreport and lax board monitoring. (See Executives’ ‘off-the-job’ behavior, corporate culture, and financial reporting risk, by Robert Davidson, et al., July 2015, Journal of Financial Economics.)

Tendency for risk taking

A study of materialistic banking CEOs found they more readily embrace risky practices for their institutions, such as higher outstanding loans, more non-interest income and dicey mortgage-backed securities as components of total assets.

Such bank CEOs also had less stringent risk management practices, which suggests a tendency to operate their institutions under very flexible policies and procedures. Non-CEO executives in banks with materialistic CEOs traded on insider information more aggressively around government bailouts during the 2008 financial crisis. (See Bank CEO materialism: risk controls, culture, and tail risk, by Robert Bushman et al., Harvard Business School Journal of Accounting & Economics, February 2018.)

Corporate social responsibility

Companies led by materialistic CEOs have lower corporate social responsibility (CSR) scores. While there’s no correlation to profitability in such companies, there’s a corresponding decrease in CEO influence when CSR scores are low. There’s also an inverse relationship between a CEO’s materialism and CSR scores. In other words, as a CEO’s materialism increases, that associated CSR score decreases. CSR scores in firms with non-materialistic CEOs are positively associated with accounting profitability. (See CEO materialism and corporate responsibility, by Robert H. Davidson, et al., abstract, The Accounting Review, January 2019.)

It’s unrealistic to believe that legislative controls and corporate policy will have a deterrent effect for all employees because these studies reveal how different individuals have varying degrees of risk tolerance and relative levels of compliance to rules, ethics and governance.

How can boards better vet external CEO candidates?

The No. 1 pitfall for boards that threaten a company’s success is selecting the right CEO. (See “Governance, Risk Management and Compliance: It Can’t Happen to Us — Avoiding Corporate Disaster While Driving Success,” by Richard M. Steinberg, John Wiley & Sons, page 166, 2011.) Boards can help limit their exposure to external (and potentially problematic) CEO candidates by looking for previous patterns of questionable behavior during the candidate’s tenure in similar positions and perhaps those leading up to it. Third-party entities that specialize in full legal background investigations, which require the candidate’s consent, are best equipped to conduct the inquiries.

Most boards are concerned about extravagant spending by their CEOs while on the job. However, as the previous studies reveal, boards’ failure to check off-the-clock behaviors and ignore red flags associated with dark-personality disorders could spell disaster.

Willful blindness plays a role — in some cases

We turn a blind eye to truths, situations and facts every day. We create a false sense of “blissful ignorance” when we try to avoid blame, pain or accountability. Whenever contradictory evidence confronts our beliefs, the “backfire effect” further entrenches them. (See The backfire effect, by Dave McRaney.) It seems that our brains prefer the path of least resistance when we stick to our beliefs in “uninformed obedience”— instead of applying critical thinking to people and situations.

Board members should know how willful blindness has a strong connection with avoiding unpleasantries and pleasing others. They must enter the CEO vetting process with a stronger level of due diligence and deeper self-awareness that allows them to not succumb to the influence of a powerful personality.

Some narcissistic CEOs might never have read Greek tragedies or Melville, or perhaps they failed to learn the lesson from the narratives. Others might have been willfully blind to events in their organizations. However, David Cotton believes there’s another reason: “Sociopaths and psychopaths do not need two of the three legs of the Fraud Triangle … they just need one: opportunity.”

Relating the fate of Icarus in 21st-century parlance, such individuals might have soared skyward initially, but eventually they all flew their company jets too close to the sun.

Donn LeVie Jr., CFE, is a staff writer for Fraud Magazine, a speaker, consultant, and award-winning author. He’s president of Donn LeVie Jr. STRATEGIES, LLC and the creator of Influential Intelligence™ corporate programs and Executive Leadership Alchemy™ virtual strategic mentoring programs. His website is donnleviejrstrategies.com. Contact him at donn@donnleviejrstrategies.com.