Insecurity and White Collar Fraud
posted by Dave Hoffman
An article in Thursday’s W$J illustrates the connection between insecure corporate managers and fraud. Reporters David Gauthier-Villars and Stacy Meichtry argue that Jerome Kerviel’s insecurity about his educational status and intelligence were “motivating factors[s] behind his disastrous trading spree.” Unlike most of his compatriots at Societe Generale, Kerviel had no doctrorate in “astrophysics or nuclear science,” didn’t attend “Polytechnique, the MIT of France,” or “Ecole Nationale d’Administration,” the snobbish bureaucrat factory. His career path “made him sort of an exception”: he grew up in a small-town and graduated from a “little known university”. He has told prosecutors that he hoped to “curry favor with the people who counted” and thus narrow the status gap.
I’ve quoted extensively from the article because I think the story mirrors another large-scale corporate fraud: Enron. As I argued in Self-Handicapping and Managers’ Duty of Care, some aspects of the failure to supervise Enron’s books might be attributed to self-handicapping by its managers. Self-handicapping behaviors create obstacles to a person’s success, so that later failure can be externalized from the ego. It is most common when individuals are insecure about their status. Thus, take Andy Fastow (please!):
Andy Fastow was an “incredibly insecure man.” A graduate of Tufts and Northwestern Business School, Fastow had puffed his resume to land his first job at Enron. Although he lacked the “knowledge” to be Enron’s CFO, and was mocked within the organization for his lack of business ability, he had risen rapidly by virtue of his skill in manipulating financial instruments and betting (successfully) on the rise in Enron’s stock. Apart from his expertise in manipulating financial earnings, Fastow was not respected for his smarts: “He was a good average performer, but you weren’t held in awe of his intellect,” said a former boss.Surrounding Fastow were Ivy-Leaguers led by Jeff Skilling, who prioritized innate intelligence above all other traits. Over time, Skilling came to rely on Fastow for increasingly dubious transactions involving highly complex accounting treatment that Fastow may have lacked the skills to fully understand. Driven by disloyalty and insecurity, Fastow increasingly shirked his responsibility as a CFO, leaving the details of Enron’s global financial position to others, in favor of managing relationships with bankers.*
Don Langevoort has written persuasively about the causes of hubris in the chief executive suite. But it seems to me that much works remains to be done on the determinants and effects of manager insecurity. Where managers are insecure – by virtue of their educational status, or otherwise – temptations to shirk or cheat increase. And further, corporate cultures that promote status and educational pedigree over performance are looking for trouble. With those truths in mind, it is probably a very good thing that law professors have little control over their law schools’ budgets!
*For quotes, see McClean and Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (2003).
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February 1, 2008 at 5:30 pm
Posted in: Corporate Law
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Responses (3)
Stereotype Threat for Credentials - February 1, 2008 at 9:36 pm
Perhaps this is a silly question, but why wouldn’t insecurity lead to overperformance?
dave hoffman - February 1, 2008 at 10:34 pm
It might! I imagine it would depend on the situation, the target of the insecurity, etc. I don’t think there is terrific experimental work out there on corporate managers responses to psychological stimuli (for obvious, sample-finding, reasons).
A.J. Sutter - February 3, 2008 at 10:02 pm
For those who read French, there is an uncannily prescient novel that appeared during the seasonal literary tidal wave last autumn: “Cendrillon” by Éric Reinhardt (Stock 2007), which was one of the most talked-about of the 600-plus books released that season. All of the characters are “avatars” of the author and, like Kerviel, are similarly insecure about their educational and social background; but one of them aspires to be rich, and after a chance meeting with a college classmate, becomes co-founder of a hedge-fund during the 1990s dot-com boom. Much of the second half of the book is set in the world of finance. Ultimately the character is driven to fraud, though in that case on account of his partner’s dogmatically contrarian bets. All of the avatars are psychological examinations of the impact of middle-class childhood, unsuccessful father, and mediocre university in French society (the premise being that the author would have turned out like one of them but for the help of the woman he married; he is the “Cendrillon” (Cinderella) of the title). The book also includes big chunks of entertaining humor and annoying self-indulgence, and is occasionally a bit of a slog. But the relevance to current events grows stronger the more we learn about Kerviel.
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