Another reason not to speed or buy that flashy car

spring2015 fast It has long been known that stopping a driver for a traffic violation like speeding, jumping a red light, road tax or insurance evasion can sometimes lead easily to an arrest for much more serious activity, such as stolen goods in the boot or worse still... That’s why it makes sense for police forces to resource their traffic divisions well.

Now research also suggests that leopards in the business world do not tend to change their spots either. Recently, Abbie J. Smith, the Boris and Irene Stern Distinguished Service Professor of Accounting at Chicago Booth was the keynote speaker at the Global Leadership Series in Brussels. She addressed an audience of Chicago alumni and friends and spoke about Corporate Behavior and Performance: The CEO factor.

Professor Smith is doing research on corporate governance and transparency – in other words, why corporations do what they do. Her recent research is zooming in on the role of the CEO. She and her team analyzed whether there was a relation between the behavior of CEO’s off-the-job and on-the-job.

In order to do so, she looked at the criminal records of CEO’s (16% of them had a police record) and at their ownership of luxury goods (59% had expensive cars, boats or luxury houses) and the relationship with fraud in their companies.

The results were strikingly strong and consistent. The data supported the hypothesis that even minor legal violation such as speeding tickets were a good predictor of behavior in the CEO role. People with a record were 2.3 times more likely to commit fraud. And people with a criminal record were also twice as much using their position to commit inside trading.

As an explanation it can be said that people who bent the rules in their private lives are more likely to do so in office.

Frugal CEO’s had less reporting errors, had low inside trading activities and had strong risk management procedures in place. By the same token, it can be said that managers who are using their money and supplies in a very careful way in their private life, will probably do the same with the company’s money.

Professor Smith foresees a good future for a combined approach, where neuroscientists work closely together with accounting specialists in order to define the right tools to predict ‘fraud’ and to make companies safer for the shareholders.