Why Do Leaders Of Good Firms Do Bad Things?

An exceptional study of 194 firms that were part of the S&P 500 between 1990 and 1999 just published in the Academy of Management Journal attempts to answer that question. The data allowed the researchers to examine how strong pressures to maintain high relative performance affects the risk-seeking behavior of the leadership of a company.

The results showed companies that performed significantly better (ROA and stock price) than expected with respect to related companies in their industry were more likely to engage in corporate illegality, while those that performed below expectations and related firms were less likely to engage in illegal behavior. The propensity to engage in illegal behavior was magnified by the prominence of a firm, such that higher profile firms with larger “audiences” were even more likely to get themselves in trouble. In the words of the study authors:

Our results demonstrate that internal performance aspirations, external performance expectations, and firm prominence interact in particular ways to predict illegal behavior. Our analysis suggests that seemingly “good” firm attributes, such as strong performance and prominence, can bring with them differing incentives and pressures that can lead to decisions that may ultimately be detrimental to the firm. (p. 718).

Success and fame put tremendous pressure on leaders to deliver for themselves and their companies increasingly more of the same. Hubris leads leaders to believe they are beyond reproach and incapable of failing. Financial success lures leaders into the “house money effect” where they perceive themselves as gambling with the profits from prior winning bets instead of their own capital. This escalating aversion to risk is perilous.

Prominent and high performing firms are the most likely to take illegal actions that can damage the organization and its stakeholders. If you sit on the board of directors or invest in one of these firms, you should be aware that the constant pressure you put on executives for increasingly better relative performance contributes to the problem.

If you work for a prominent and high performing firm, be aware that you may be expected to collude with the potentially illegal behavior of your senior leadership.  If your leaders are demanding results but don’t want to be informed how you make it happen, that’s a very bad sign. You can be certain that if you work in an environment like that, despite the rhetoric, your leadership does not really care about you.

Let them go to court or to jail alone. Only you can surrender your dignity and integrity.

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About the Author: Bret L. Simmons