September 15, 2019

According To This Paper, It Takes Cojones To Commit Fraud

No, really, that's actually what the paper says.

The abstract:

What factors explain the behaviors of corporate leaders who engage in spectacular frauds? Is it greed? Is it power? Are these leaders, as some critics allege, simply psychopaths? Or is something else going on? In this Essay created for a symposium on the “agency problem,” Professor Barnard explores the greed, power, and psychopathy theories. She also suggests that a hormonal phenomenon – an overabundance of testosterone – may explain these men’s behavior. In many animal populations, success in competition leads to an elevation of testosterone. Repeated successes – accompanied by increasing levels of testosterone – often lead to rash, ill-considered, and dangerously risky behaviors. Animal biologists call this progression “the winner effect.” Barnard suggests that a similar progression may be seen in human competitors, both in athletic environments (think Lance Armstrong) and in business environments (think Jeff Skilling, Richard Scrushy, and Rajat Gupta). She concludes that some agency problems may be physiologically driven.

Surely the temptation of men in power to abuse said power has nothing to do with their access to aforementioned power. No, no, it has to be a raging flood of testosterone pressuring them to "compete," even at the expense of their freedom.

The paper seeks to answer the age-old question: what compels an otherwise reasonable person in a position of power to behave in an unreasonable way?

One would think that those men and women privileged to work at the highest levels of the economic pyramid, as corporate chief executives, would treat their work as a profound gift. After all, the work of a senior executive, unlike the work of most people in the world, is not boring, humiliating, or physically punishing. It is stimulating, empowering, and financially rewarding. Some people spend their entire careers longing for—and jousting for—the position of CEO. So why do some of the elite executives who have won their respective tournaments debase their work—and themselves—by squandering their gift?

This Essay offers four possible explanations: (1) the obstinacy of self-interest, (2) the influence of power on one’s inclination to take risks, (3) the often toxic feedback loop of organizational and financial success, and (4) some form of mental derangement.

Though the paper briefly mentions well-known bad guys such as Dick Fuld of Lehman Brothers and Jon Corzine of MF Global, it focuses instead on lesser-known Russell Wasendorf Sr., former CEO of Peregrine Financial Group; Lee B. Farkas, former CEO of the mortgage firm Taylor Bean & Whitaker; Albert “Jack” Stanley, former chairman and CEO of KBR Inc.; Gilbert Fiorentino, former group CEO of Systemax, Inc.; and Jeffery S. Fraser, former CEO of NIC, Inc.

As endless as the jokes about balls could be here, this is actually a good read and you should check it out if you're interested in fraud, CEOs gone wild, and the animal urges at the heart of everything we as human beings do.

Shirking, Opportunism, Self-Delusion and More: The Agency Problem Lives On appeared in the Wake Forest Law Review, Vol. 48, 2013 and is available for download at SSRN.

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