Speaker 1: Bloomberg Law with June Grosso on demand via our Bloomberg
Speaker 1: Radio Plus app free for iPhone and Android devices. You've
Speaker 1: seen the stories and the headlines and in the courts
Speaker 1: over and over again. Corporate executives who already have wealth
Speaker 1: and status committing financial crimes. Do they do it for
Speaker 1: the money or just because their ego tells them they
Speaker 1: can do they feel remorse about their victims. A new book,
Speaker 1: Why They Do It Inside the Mind of the White
Speaker 1: Collar Criminal explores what turns corporate executives into corporate criminals.
Speaker 1: It's based on the author's interviews with close to fifty
Speaker 1: well known white collar criminals, from Bernie made Off to
Speaker 1: Dennis Kozlowski. The author, Eugene Saltis, is a professor at
Speaker 1: Harvard Business School and joins me, now, how did you
Speaker 1: get these close to fifty white collar criminals to talk
Speaker 1: to you? Well, I think many of the individuals, as
Speaker 1: they left their fields in finance and business, the lonely
Speaker 1: and they don't have the people to engage in the
Speaker 1: business community anymore. And being a financial economist, I was
Speaker 1: able to develop a relationship with them by connecting by
Speaker 1: talking about the world that they once loved and were
Speaker 1: passionate about, but obviously have now left that community. So
Speaker 1: I connected with them talking about the technical stuff that's
Speaker 1: in the papers on a day to day basis. But
Speaker 1: I was also fortunate being an academic, that I could
Speaker 1: spend time with them, not just popping for one conversation,
Speaker 1: but I committed that I would spend as long as
Speaker 1: it took to really get to know them in their perspectives.
Speaker 1: So some people this might be weeks, months, and in
Speaker 1: some cases I actually spent years speaking with individuals over
Speaker 1: the course of this project. These people were wealthy, privileged people.
Speaker 1: Was it pure greed the need for more and more
Speaker 1: that made them do it? I think it's a little
Speaker 1: bit more complicated than that. We're all driven by incentives,
Speaker 1: and to the extent that money can play some role
Speaker 1: around incentence. But what I explore is trying to think
Speaker 1: of why would these individuals who are really quite strategic
Speaker 1: and smart, I mean it really are titans of industry.
Speaker 1: To make sense, they could gain a little bit more
Speaker 1: money or prestige, they wouldn't risk their freedom for that.
Speaker 1: They wouldn't risk everything. And I think that's the humbling
Speaker 1: question to ask, because why would someone that seems to
Speaker 1: have it all seem to want to push it a
Speaker 1: little bit farther, And so I explore in the book,
Speaker 1: should we be thinking of this as a rational calculation
Speaker 1: so many economists and regulators and prosecutors see it, or
Speaker 1: should we think of this as maybe a different type
Speaker 1: of failure, a different type of process that's causing these
Speaker 1: executive failures? What type of failure? So, what I hypothesize
Speaker 1: and argue in the book is that it doesn't look
Speaker 1: so much like of a failure of that careful, analytical,
Speaker 1: deliberative reasoning of comparing the expected benefits against the expected costs,
Speaker 1: which is how people often type see this and and
Speaker 1: think executives would make these kinds of consequential decisions. But
Speaker 1: rather when one actually looks at some of the cases,
Speaker 1: it looks I think it's much closer to a failure
Speaker 1: of manual intuition. They don't act, we see the harm
Speaker 1: associated with their actions at the time these decisions are
Speaker 1: being made. So I can give an example, Sam Waxel,
Speaker 1: the former CEO of m Clone Well no executive because
Speaker 1: it's also the case that ended up in snaring Martha
Speaker 1: Stewart and leading to her obstruction of justice charges. Sam
Speaker 1: Waxel's brilliant, quite brilliant executive, but he also found out
Speaker 1: about some adverse test results coming back from the FBA
Speaker 1: that they weren't going to give the approval of his
Speaker 1: drug as expected, and so that evening he called his
Speaker 1: daughter and told her to dump her two million dollars
Speaker 1: worth of shares. Now, this isn't a particularly good white
Speaker 1: teller crime. I mean, this is actually about his stupid
Speaker 1: as they come. I mean, this isn't hard for regulars
Speaker 1: to pick up this kind of misconduct. So you're almost
Speaker 1: certainly going to get caught. And so if you think
Speaker 1: of well, why would Sam Waxel tell his daughter to
Speaker 1: dump these shares, It's really hard to think of that
Speaker 1: as a careful cost benefit calculation. You're almost certainly going
Speaker 1: to get caught. But rather, at the time he was
Speaker 1: thinking about calling his daughter and telling her this. I
Speaker 1: see that as a failure of intuition. He didn't act.
Speaker 1: We see the harm associate with that at the time.
Speaker 1: So one about the victims. I remember interviewing victims of
Speaker 1: the Enron scandal who were older and lost their retirements
Speaker 1: and didn't know how they would cope did any of
Speaker 1: these white color criminals that you spoke to think about
Speaker 1: the victims and feel sorry about what they've done. One
Speaker 1: of the parts that I was initially surprised but then
Speaker 1: became quite used to over time is the lack of remorse,
Speaker 1: and the remorse that I tend to see was around
Speaker 1: the loss of their family, those privileges, they missed their
Speaker 1: child's graduation, but not really for the victims. And I
Speaker 1: think the reason why, going back to this notion that's
Speaker 1: the failure of intuition, is that much of the harm
Speaker 1: associated with white color misconduct, the victims aren't close. Their
Speaker 1: psychologically distant, they're physically distant, and so it doesn't create
Speaker 1: that same visceral feeling that you're actually harming someone specifically.
Speaker 1: Take something like insider trading the easiest example. It's really hard,
Speaker 1: if not impossible, in some circumstances, to actually identify who
Speaker 1: the victims are in those cases, so it doesn't create
Speaker 1: that natural, instinctive, visceral response that you're actually hurting someone specifically.
Speaker 1: But even the case of financial fraud, as you point
Speaker 1: out with Enron, I mean, at the time the executives
Speaker 1: were actually engaged in the misconduct and the fraud that
Speaker 1: would ultimately lead to the devastation for the people at
Speaker 1: Enron's the time they were actually getting awards, Andy Fast
Speaker 1: out one CF of the Year award, at the same
Speaker 1: time he was actually engaged in and arguably the most
Speaker 1: severe conduct that led to undermining the firm and leading
Speaker 1: to its failure. So there isn't that connection the time
Speaker 1: that you're actually hurting someone while you're actually doing it's
Speaker 1: actually delayed in years away, so it doesn't have that
Speaker 1: negative distance while you're actually engaged in the mouth season.
Speaker 1: I've been talking to Harvard Business School professor Eugene solved
Speaker 1: Us about his new book Why They Do It Inside
Speaker 1: the Mind of the White Color Criminal. Bernie made Off
Speaker 1: seems like one of the more unsympathetic of the people
Speaker 1: that you spoke to. He stole from people he knew,
Speaker 1: and he told you it's like a comedy of errors.
Speaker 1: Did he have any remorse at all? Bernie made Off
Speaker 1: is different than the other executives I spoke with and
Speaker 1: find large different from the bath majority of people that
Speaker 1: engage in white collar crime. That he knew his victims.
Speaker 1: I mean, intimately, these were family, these were friends, These
Speaker 1: are members of the Jewish community, and he doesn't express
Speaker 1: remorse for this, even to those that he knew well.
Speaker 1: And I think this is what raises some interesting and
Speaker 1: I think difficult questions about him as an individual, and
Speaker 1: that he's just simply not empathetic even when the evidence
Speaker 1: has put directly in front of him, which is one
Speaker 1: of the things I described and discussed in the books,
Speaker 1: putting the evidence in front of him of some of
Speaker 1: the people that were harmed. He sees ways much like
Speaker 1: we all do, but just in a much greater extent
Speaker 1: of rationalizing. For example, the family Foundations which many of
Speaker 1: us have heard that lost just extraordinary mounts when the
Speaker 1: Ponte scheme collapsed, he sees it as well. Many instances
Speaker 1: these foundations wouldn't have ever been set up in the
Speaker 1: first place had it not been for the gains that
Speaker 1: the parents had ten or twenty years ago. And so
Speaker 1: to the extent that the foundations ended up collapsing when
Speaker 1: the Ponte scheme ended, he sees is that well, those
Speaker 1: family foundations would have never existed had it not been
Speaker 1: for the artificial gains ten or twenty years earlier. So
Speaker 1: it's really kind of no harm, no foul, which I
Speaker 1: think we can all step back and and find a
Speaker 1: little bit terrifying. One of the more surprising stories was
Speaker 1: Dennis Kozlowski, the former chief executive of Tycho. He said
Speaker 1: the board would have given him anything he wanted, So
Speaker 1: why did he arrange for tens of millions of dollars
Speaker 1: in unauthorized bonuses? It's an important question. I mean he
Speaker 1: at the time when he was actually engaged in, ultimately
Speaker 1: what would be the embezzment that would lead to his conviction.
Speaker 1: I mean, he was one of the highest paid CEOs
Speaker 1: in the country and still in the last twenty years, still,
Speaker 1: I mean it was over a hundred million dollars of
Speaker 1: compensation per year. And I think the challenge in a
Speaker 1: case like his is that whether the board, I mean
Speaker 1: we talk a lot about corporate governance and independence of directors,
Speaker 1: whether the board was providing the appropriate level of accountability
Speaker 1: or not is almost even besides the point if an
Speaker 1: executive in his position subjectively believes that they would give
Speaker 1: him anything he wanted, and so to the extent that
Speaker 1: there was, I mean, ultimately these loans were being forgiven
Speaker 1: but not appropriately, and that's what he was convicted for. Basically,
Speaker 1: forgiving himself and other executives hundreds of millions of dollars
Speaker 1: and loans. Didn't feel you had to go through the
Speaker 1: same checks and balances as ought have been done. And
Speaker 1: I think it's that type of feeling of I'm in
Speaker 1: the position of power and not going through the appropriate
Speaker 1: channels that ultimately led to his failure because to the
Speaker 1: extent that the board if they would have given him more,
Speaker 1: which I think there's actually some evidence the board would
Speaker 1: have actually given him more conversation had he actually asked
Speaker 1: for it. I mean, he was a rock star CEO
Speaker 1: at the time, actually doing very well, but that doesn't
Speaker 1: excuse is not going through those those appropriate channels. Did
Speaker 1: most of them think they would get away with it.
Speaker 1: One of the things I did find really pretty extraordinary
Speaker 1: is that no one thinks, even when you're doing the
Speaker 1: most platent types of misconduct, that you're ever going to
Speaker 1: face criminal sanctions. And I don't think this is because
Speaker 1: some people have argued that regulators are not being effective
Speaker 1: or not seeking to punish people. I think this is
Speaker 1: just a matter of no one in a position of
Speaker 1: privilege and power could ever really see themselves behind bars.
Speaker 1: We all do things that are wrong, But no one
Speaker 1: ever thinks that if you do something wrong like that,
Speaker 1: that you ever faced criminal sanctions and be behind bars.
Speaker 1: That's for other people. That's for other bad people, not
Speaker 1: for me. And I think that's one of the real
Speaker 1: challenges we face with regulation is that oftentimes what we're
Speaker 1: doing is making the safety is harsher if you do
Speaker 1: crime X, rather than giving someone a six months since
Speaker 1: we're now going to give you a ten year sentence.
Speaker 1: And to think people were doing a careful analytical calculation
Speaker 1: doing this kind of deliver cost benefits calculation that actually
Speaker 1: should have some grit because people see that the expected
Speaker 1: costs are going up. The problem is that these executives
Speaker 1: at the time they're actually making decisions, never think they're
Speaker 1: ever going to face any sanction. It doesn't matter whether
Speaker 1: it's one week in prison or ten years in prison.
Speaker 1: That's just never going to happen. And I think that's
Speaker 1: a deep challenge we face, both from a regulatory standpoint,
Speaker 1: but also from ourselves in the executive community of actually
Speaker 1: thinking about but the consequences for these types of actions.
Speaker 1: So then is there any way to stop white color crime,
Speaker 1: or at least to slow it down. So I think
Speaker 1: this goes to back to changing norms and changing the
Speaker 1: culture within instances, because I make the argument that because
Speaker 1: this harm is very distant, it's very abstract, our intuitions
Speaker 1: are not well designed to actually detect it. That's just
Speaker 1: an evolutionary fact. We're not going to be hardwired to
Speaker 1: see things that are so far away. But at the
Speaker 1: same time, what we can do is layer on new
Speaker 1: norms and new almost artificial intuitions, but create systems to
Speaker 1: help protect us from mac really proceeding down this road.
Speaker 1: One of the cases I talked about in the book
Speaker 1: that's actually I think one of the more important ones.
Speaker 1: Someone that wasn't actually convicted of white color crime actually
Speaker 1: narrowly escaped it is Ben Horowitz, the well known venture capitalist,
Speaker 1: and he actually hired a new CFO for one of
Speaker 1: his firms, and the CFO came to an idea that
Speaker 1: she used in her prior firm and others in Silicon
Speaker 1: Valley were widely doing its option back dating. You moved
Speaker 1: the option data round to make it more attractive for
Speaker 1: the executive widely being practiced at the time fifteen years ago. Now,
Speaker 1: Ben Horowitz is in one of these inspiring, innovative strategic minds.
Speaker 1: But he's not a finance and accounting guy and actually
Speaker 1: appreciates that that's where his weaknesses lie. His intuitions are
Speaker 1: not well designed to figure out, well, what should you
Speaker 1: do when you have a new financial accounting policy change,
Speaker 1: And so he routinely put into places systems saying, anytime
Speaker 1: I'm going to make one of these changes, I want
Speaker 1: to get the insight in opinion of an outsider, someone
Speaker 1: sitting outside by near a little bubble here. So he
Speaker 1: called an outside attorney that he knew and respected, passed
Speaker 1: this idea by him, and his attorney came back, there's
Speaker 1: no way. I've looked over this six different ways and
Speaker 1: there's no way that this is actually legal. I don't
Speaker 1: know how the auditors signed off in the law firm
Speaker 1: were actually comfortable with this, and all these other firms
Speaker 1: were comfortable with this, but I advise against it. And
Speaker 1: so because of this advice, Bend ended up turning this down.
Speaker 1: Two years later, the government started investigating this. The CFO
Speaker 1: actually end up going to prison for stock option backdating
Speaker 1: the taxavation associated with that, and Ben describes it as
Speaker 1: the only thing that kept me out of prison with
Speaker 1: some luck and the right organizational design. This had nothing
Speaker 1: to do with having a better moral compass, better values.
Speaker 1: This simply had to do with understanding his weaknesses and
Speaker 1: putting a system in place to intercede when he might
Speaker 1: not see the consequences associated with a particular choice. Eugene,
Speaker 1: is there one person you spoke to that stands out
Speaker 1: in your mind for some reason? Either you felt more
Speaker 1: sympathetic towards him, or he seemed more brilliant than the
Speaker 1: others are more devious. I think each of those traits
Speaker 1: I can think of an individual. I mean, one case
Speaker 1: that did make me think and reflect upon myself a
Speaker 1: lot more was the case of Scott Harkinnon. He was
Speaker 1: a CEO of a biotech company and he ran a
Speaker 1: test for a new drug for IPS, a fatal disease,
Speaker 1: and the test actually missed its primary endpoint, its main goal.
Speaker 1: But then in some subsequent data analysis they actually found
Speaker 1: that maybe in this one subgroup there was actually some
Speaker 1: promising results. So, as to be expected, you issue a
Speaker 1: press release, and on this press release they said, after
Speaker 1: this trial we found some results that demonstrated that there
Speaker 1: could be some benefits associated with this treatment. And then
Speaker 1: the rest of the press release described all the technical
Speaker 1: nitty gritty. Couple years later, the government actually goes after
Speaker 1: him and says that press release actually was misleading, at
Speaker 1: was actually fraudulent because you put the word demonstrate and
Speaker 1: ultimately this drug wasn't effective. And maybe you could have
Speaker 1: put the word suggest, but demonstrate wasn't the appropriate word.
Speaker 1: And when I look around and I think of the
Speaker 1: kinds of things that we see corporate leaders often saying,
Speaker 1: are political leaders often saying the choice between the word
Speaker 1: demonstrate and suggest in a press release, not in the
Speaker 1: scientific publication. We're talking about one single press release. He
Speaker 1: faced up to ten years in prison. Ultimately quote only
Speaker 1: received several years of probation. But it's pretty extraordinary that
Speaker 1: an individual because of a choice of one word and
Speaker 1: one press release, really lost everything in life. I mean,
Speaker 1: spending millions of dollars on defense, losing his license not
Speaker 1: able to run a publicly traded firm. And when I
Speaker 1: think of his case, and I think of the kinds
Speaker 1: of things that we all say in a public sphere,
Speaker 1: in terms of how carefully we choose our words, I
Speaker 1: think it's pretty humbling. The penalties for white collar crime
Speaker 1: have gone up in recent years. Do you think that
Speaker 1: they're too tough? The penalties they're they're generally around the
Speaker 1: dollar loss, and the difference between whether your action lost
Speaker 1: fifty million dollars or billion dollars in a fraud generally
Speaker 1: doesn't come down to the act itself was actually different.
Speaker 1: It comes down to that you happen to be a
Speaker 1: larger firm, and so your action simply had a larger
Speaker 1: market effect. And I think that's a little bit odd um,
Speaker 1: and I think this is why some judges have started
Speaker 1: pushing back on the sentencing guidelines, which escalate so dramatically
Speaker 1: depending on the dollars that are perceived to have been lost.
Speaker 1: I read that white collar crime was first defined by
Speaker 1: sociologist Edwin Sutherland in as a crime committed by a
Speaker 1: person of respectability and high social status in the course
Speaker 1: of his occupation. Should we stop calling them white color
Speaker 1: criminals and setting them apart from other criminals as if
Speaker 1: what they're doing is not quite as bad. I think
Speaker 1: that would go be a huge step forward. I think
Speaker 1: the part that I find most frustrating, and certainly I
Speaker 1: think we've seen some regulators express this, is that people
Speaker 1: think of white color crime in many instances just not
Speaker 1: as bad as street offenses. It doesn't seem as scary
Speaker 1: because no one's wielding a knife in the nighttime. But
Speaker 1: if we start thinking about the economic ramifications, the effects
Speaker 1: that people on their livelihood. I mean, you can look
Speaker 1: at the victims of Enron and World com Bernie made
Speaker 1: up Ponzi scheme, and you see what this has done
Speaker 1: to their retirement plan, to their life. This has been
Speaker 1: in every way just has been in some sense is
Speaker 1: much worse than many street offenses. But by setting it
Speaker 1: apart is a white color offense that looks a little
Speaker 1: bit more technical, it sometimes minimizes the effect. And this
Speaker 1: is what Edwin Southerland tried to point out nineteen thirty nine,
Speaker 1: and we've made some strides since. But in the idea
Speaker 1: of an executive going to prison for something they did
Speaker 1: in the course of business was really in a foreigner,
Speaker 1: exotic concept that wasn't crime. Crime occurred only what was
Speaker 1: on the street, not in the boardroom. And so we've
Speaker 1: been trying to fight against that concept, I think ever
Speaker 1: ever since, to change that notion. Thank you for being
Speaker 1: on Bloomberg Law. That's Harvard Business School Professor Eugene Soltice.
Speaker 1: That's it for this edition of Bloomberg Law. I'm June Graasso.
Speaker 1: This is Bloomberg