Why Do Some Executives Misbehave?

Why Do Some Executives Misbehave?

We do not want to give the impression that all corporate executives are untrustworthy, greedy scoundrels. Quite the contrary, we believe the great majority to be highly educated , intelligent , hardworking, ethical people. Indeed, many of the executives who have committed crimes probably started their business careers on a more ethical footing than they are finishing them. That is, people don't say, "I want to steal millions of dollars, so I think I will become a business executive!" Somewhere along the way, some of these people become thieves . How does this happen?

An ethical and moral person usually does not become unethical and immoral overnight. It is usually a slow and gradual process. The big theft often begins with a small one. For example, a manager may get a reimbursement for an airline ticket that was cancelled. He or she may decide to keep the cash as compensation for the hassle the cancelled trip caused. Or, consider managers who use a corporate plane to fly their family to a vacation spot. They may intend to reimburse the company, but they never quite get around to it. After a while, they notice that no one seems to care. Next time, they not only use the plane but also the company's apartment in Manhattan.

We've picked airline examples because it is a real temptation. The temptation was too much for a former manager at the investment bank Lehman Brothers. Douglas Spainer was fired in July 2001 for submitting 12 bogus flight invoices between November 2000 and May 2001. [21] The fraudulent behavior cost the firm $371,000, though Spainer is repaying the money.

It doesn't take long before someone convinces himself or herself that he or she deserves the extra perks. One small indiscretion leads to another ”sometimes bigger ”one. This is why monitors of executives need to be diligent in watching the little things as well as the big things. If a manager is reprimanded for a small indiscretion, he or she probably will never make a big one.

People have a way of rationalizing to themselves that what they are doing is not that bad. So, for example, a manager might think, "Other people are doing it" or "I work hard and deserve it" or "I have earned this firm a lot of money, I should get some of it." The celebrity-type status that many CEOs attained during the 1990s certainly didn't help their attitudes. When everyone is treating a CEO like royalty, he or she might start acting like it. Even though most executives held fast to their ethical footing, we desire an incentive system and monitoring mechanisms that are able to catch the few scoundrels before they can wreck too much havoc.


The behavior of many corporate executives has been atrocious. While criminal activity is disappointing, we believe those committing crimes will be punished. We are disappointed that the monitoring mechanisms put in place failed to deter and even detect the misdeeds. What were the boards of directors doing? How did the auditors and analysts miss the problems? How were the bankers involved? We explore these questions in the chapters of the next section, Part 2, "The Failure of Monitoring Systems."

Other behavior can only be classified as suspicious. We suspect that those who have acted suspiciously will not be held accountable. There may never be enough evidence to prove criminal actions. There is also simply too much ambiguity in the policies dealing with insiders. In addition to strengthening monitoring mechanisms, there clearly needs to be some better policies and rules that apply to corporate insiders to prevent activities that appear to be suspicious. We offer ideas in Chapter 13.