Gangloff, Ashley

Schnatterly, Karen

LSE Research Online

Why	CEOs	misbehaveSometimes	CEOs	misbehave.	This	misbehaviour	has	terrible	consequences	for	the	CEO,	the	organisation	andsociety,	yet	still	–	they	do	it.	Recent	estimates	suggest	that	fraud,	a	specific	type	of	wrongdoing,	results	in	a	loss	of	5per	cent	of	sales	for	a	typical	company	every	year	and	a	global	loss	of	about	$3.7	trillion.	With	such	clearconsequences,	why	do	CEOs	misbehave?Wrongdoing	is	defined	as	a	behaviour	judged	as	going	from	right	to	wrong;	a	fine	line	separates	the	two.	Wrongdoingincludes	misappropriation	(e.g.,	theft,	embezzlement,	inappropriate	use	of	company	resources),	market	manipulation,fraud,	and	other	illegal	activities	as	well	as	earnings	management	and	lying.Management	scholars	have	been	interested	in	understanding	why	CEOs	misbehave	for	decades	and	have	workedhard	to	dissect	the	antecedents	of	such	behaviours	in	ways	that	could	help	us	predict	its	occurrence.	With	so	muchevidence	of	significant	predictors	of	CEO	wrongdoing,	there	have	been	few	attempts	to	synthesise	it	in	its	entirety.So,	we	decided	to	catalogue	and	draw	conclusions	from	this	body	of	literature	to	have	a	better	view	of	what	we	knowabout	why	CEOs	engage	in	wrongdoing	and	why	it’s	so	persistent.We	used	the	Fraud	Triangle,	a	model	often	used	by	auditors	to	assess	the	likelihood	of	misconduct,	to	structure	ourreview	of	the	literature.	The	Fraud	Triangle	explains	that	three	key	characteristics	are	influential	in	facilitatingmisconduct:	pressure,	opportunity,	and	rationalisation.LSE Business Review: Why CEOs misbehave Page 1 of 5		Date originally posted: 2018-07-18Permalink: http://blogs.lse.ac.uk/businessreview/2018/07/18/why-ceos-misbehave/Blog homepage: http://blogs.lse.ac.uk/businessreview/Fraud	Triangle	illustration	by	David	Bailey,	under	a	CC	BY-SA	4.0	licencePressure	is	the	necessity	to	commit	wrongdoing	(‘have	to’).	Opportunity	is	the	ability	to	commit	wrongdoing	with	theexpectation	that	it	will	not	be	detected	or	punished	(‘can’).	Finally,	rationalisation	is	the	ability	to	explain	an	act	ofwrongdoing	as	morally	justifiable	(‘it’s	okay’).	Pressure	and	opportunity	are	different	than	rationalisations,	which	are“mental	strategies”	that	individuals	use	to	justify	their	wrongdoing.	In	organising	all	recent	management	literatureabout	wrongdoing	within	the	Fraud	Triangle,	we	highlight	what	we	know	about	what	precedes	CEO	wrongdoing	andwhere	our	understanding	falls	short.In	figure	1,	we	summarise	the	common	antecedents	of	CEO	wrongdoing	from	the	Fraud	Triangle	using	managementpublications	since	2005.	Both	internal	(e.g.,	organisational	culture	or	compensation	structure)	and	external	factors(e.g.,	industry	rivalry	and	macroeconomic	factors)	contribute	to	the	pressure	the	CEO	faces,	the	opportunity	he	orshe	is	afforded,	and	his	or	her	ability	to	rationalise	away	misconduct.	For	instance,	scholars	have	found	that	maleCEOs	are	more	likely	to	engage	in	wrongdoing	than	female	CEOs	and	that	firms	that	are	more	diversified	provideCEOs	with	greater	opportunity	to	engage	in	wrongdoing.	These	are	separate	findings,	but	when	considering	allempirical	results	across	the	last	thirteen	years,	we	can	begin	to	paint	a	big	picture	of	CEO	wrongdoing	and	why	itoccurs	so	that	we	can	create	or	refine	organisational	processes	such	as	recruitment	and	selection,	compensation,decision-making	policies	and	organisational	structures	to	mitigate	it.Figure	1.	Antecedents	of	CEO	wrongdoingLSE Business Review: Why CEOs misbehave Page 2 of 5		Date originally posted: 2018-07-18Permalink: http://blogs.lse.ac.uk/businessreview/2018/07/18/why-ceos-misbehave/Blog homepage: http://blogs.lse.ac.uk/businessreview/As	they	say,	knowledge	is	power.	So,	based	on	what	we	know	about	the	antecedents	of	CEO	wrongdoing,	weencourage	organisations	to	create	or	refine	practices,	policies,	and	structures.	Here	we	provide	examples	oforganisational	prescriptions	based	on	our	understanding	of	CEO	wrongdoing.	In	this	table,	each	antecedent	category(e.g.,	internal	pressure;	external	pressure;	internal	opportunity,	etc.)	is	listed	in	the	left	column	and	recommendationsfor	addressing	each	antecedent	is	provided	in	the	right	column.LSE Business Review: Why CEOs misbehave Page 3 of 5		Date originally posted: 2018-07-18Permalink: http://blogs.lse.ac.uk/businessreview/2018/07/18/why-ceos-misbehave/Blog homepage: http://blogs.lse.ac.uk/businessreview/In	our	review,	we	also	uncovered	gaps	in	our	understanding	of	CEO	wrongdoing.	For	instance,	we	know	very	littleabout	cross-level	interactions.	Identifying	cross-level	interactions	allows	us	to	understand	how	variables	at	differentlevels	(individual,	such	as	the	CEO;	firm,	such	as	firm	performance;	and	industry,	such	as	industry	dynamism)	mightwork	in	combination	to	predict	CEO	wrongdoing.A	second	significant	gap	in	our	understanding	is	related	to	opportunity	and,	specifically,	with	regard	to	externalfactors	that	provide	an	opportunity	for	misbehaviour.	We	also	have	a	lot	to	learn	about	how	external	forces	mightencourage	or	foster	CEO	rationalisation.	As	scholars	continue	to	dig	deep	into	their	research,	answers	to	thesequestions	will	become	clearer	and	provide	practitioners	with	sound	conclusions	for	building	or	refining	organisationalpolicies,	practices,	and	structures.Several	questions	reflect	the	agenda	we	recommend	for	future	research	—	a	subset	of	these	questions	is	listedbelow.	Scholars	have	yet	to	address	these	questions,	but	we	think,	if	answered,	will	ultimately	help	to	decrease	thefrequency	of	CEO	wrongdoing	by	informing	organisational	practices.What	is	the	effect	of	CEO	status	on	wrongdoing?Does	product-market	competition	create	pressure	for	wrongdoing?What	kinds	of	“distractions”	can	a	CEO	create	that	allow	the	opportunity	to	misbehave	without	detection?Do	external	stakeholders’	idealized	portrayal	of	firms/CEOs	provide	opportunity	for	CEO	wrongdoing?What	is	the	relationship	between	uncertainty	associated	with	organisational	events	such	as	an	M&A	and	CEOLSE Business Review: Why CEOs misbehave Page 4 of 5		Date originally posted: 2018-07-18Permalink: http://blogs.lse.ac.uk/businessreview/2018/07/18/why-ceos-misbehave/Blog homepage: http://blogs.lse.ac.uk/businessreview/wrongdoing?How	do	changes	in	rules	or	regulations	effect	CEO	wrongdoing?How	does	the	political	environment	influence	CEO	wrongdoing?Our	assessment	of	recent	management	scholarship	about	the	antecedents	of	CEO	wrongdoing	provides	aspringboard	for	practitioners.	Through	this	work,	we	aim	to	inform	organisations	and	their	leaders	as	they	create	andrefine	policies,	practices,	and	structures.♣♣♣Notes:This	blog	post	is	based	on	the	authors’	paper	CEO	Wrongdoing:	A	Review	of	Pressure,	Opportunity,	andRationalization,	Journal	of	Management,	Vol	44,	Issue	6,	2018.The	post	gives	the	views	of	its	author(s),	not	the	position	of	LSE	Business	Review	or	the	London	School	ofEconomics.Featured	image	credit:	Photo	by	Rene	Böhmer	on	UnsplashWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	Policy.Karen	Schnatterly	is	the	Emma	S.	Hibbs	Distinguished	Professor	of	Management	at	the	University	ofMissouri.	She	was	previously	on	faculty	at	the	University	of	Minnesota.		She	is	a	member	of	theAcademy	of	Management	and	the	Strategic	Management	Society.	Her	teaching	and	research	interestsinclude	white-collar	crime,	boards	of	directors	and	institutional	owners	(corporate	governancegenerally).		As	a	result	of	her	research	in	white-collar	crime,	she	has	been	quoted	frequently	byvarious	news	organisations.	She	has	published	in	top	journals	has	authored	several	book	chapters.	She	is	also	an	associate	editor	of	the	Journal	of	Management.Ashley	Gangloff	is	an	assistant	professor	at	the	University	of	Missouri.	She	is	a	member	of	theAcademy	of	Management.	Her	teaching	and	research	interest	include	strategic	leadership,	ethics,	andcorporate	governance.	She	has	published	articles	in	several	peer-reviewed	journals.		LSE Business Review: Why CEOs misbehave Page 5 of 5		Date originally posted: 2018-07-18Permalink: http://blogs.lse.ac.uk/businessreview/2018/07/18/why-ceos-misbehave/Blog homepage: http://blogs.lse.ac.uk/businessreview/

Why CEOs misbehave

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Why CEOs misbehave

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