Executives Behaving Badly: Why Do They Do It?

For his scholarly research, Robert Davidson has employed licensed private investigators and through them purchased several thousand criminal background checks.

Davidson, an assistant professor of accounting and information systems, studies executive behavior and its effects on the firm. His articles examining CEOs and corporate governance, culture, and social responsibility have been published in the top journals in accounting and finance.

Davidson can also just as readily discuss epic poems and their resonance for researchers of executive deceit — “in ‘Inferno,’ the eighth circle of hell was reserved for fraudsters” — or fine fibers and the economics and ecological impact of cashmere production — “something as innocent as the sharpness of an animal’s hooves or the way it consumes plants can dramatically affect the environment.”

But back to executives behaving badly. Following his latest study, on the limited success of corporate mechanisms in deterring fraud (see sidebar below), Davidson is now pondering new research questions, such as how boards of directors have responded to the transgressions that gave rise to the #MeToo movement.

He thinks that boards are now more alert to consumer activism, especially about the personal conduct of senior management. He would like to test “whether this increased awareness is more consistent with the traditional shareholder view of the firm and a focus on pure profit maximization than with a broader stakeholder view that considers the firm’s responsibilities to employees, the environment, and customers,” he says.

Robert Davidson (Photo credit: Shawn Sprouse)
Robert Davidson (Photo credit: Shawn Sprouse)

“Are these responses motivated by purely economic incentives, or is it something bigger? We might agree that holding corporate leaders to a higher standard of conduct is a good thing, but it is still valuable to understand why boards have recently become much more proactive here.”

Current events and their media coverage, Davidson says, not only give researchers a strong sense of what questions captivate the public most but also offer teachers a ready source of classroom material.

“Students are really well informed about what is going on in the world. Cases like Enron may be interesting, but if they happened 20 years ago, students rightly question how relevant they are today. The media can bring attention to interesting cases that are taking place right now, and I can have students analyze and compare them to historical data, and see what has changed.”

Research Driving Change

Davidson, who grew up in Windsor, Canada, completed a bachelor’s degree in accountancy at Wayne State University in 2003. In 2011, he received an MBA and a Ph.D. at the University of Chicago, writing his dissertation on whether economic conditions and performance incentives affect the propensity to perpetrate fraud.

Organizations had less appeal as a study subject for Davidson — “firms do not commit fraud, people do,” he says, and the question of who was more likely to do wrong intrigued him.

“After you research enough cases, you realize that it is about a lot more than just ethics, though ethics are important. A lot of good people give in to pressure, or make significant mistakes, and I wanted to learn about who was more likely to commit fraud.”

The work of his dissertation advisor and another faculty member, both of whom have co-authored articles with him, helped shape his research focus — as did memories from his employment at a natural gas company in Detroit, where he did inventory accounting.

When the Enron scandal erupted, his older co-workers were worried about the consequences of a similar implosion at their firm. If that happened, he could just start over without much loss, Davidson, who was still an undergraduate then, recalls thinking.

“But people who had been working at Enron for years and had invested all their retirement savings in Enron stock were basically wiped out. Some of my colleagues were in a similar position; it wasn’t clear what they would do if they lost their jobs and savings as a result of one big shock,” he says.

“I didn’t decide to pursue a career in accounting research with this in mind, but early on, when I started thinking about questions that were worth answering, I thought that anything we can do to understand these types of frauds better and prevent a few cases or detect them earlier is important.”

Learning about the intricacies of tracking billions of cubic feet of colorless, odorless gas along thousands of miles of pipeline (“more complex than counting tangible goods in a warehouse”) wasn’t the only job experience Davidson had before heading to grad school.

He also worked for a small accounting firm that specialized in property and sales and use taxes and had the Ford Motor Company as its biggest client. Property tax, he discovered, is another thought-provoking topic.

“For firms with large manufacturing plants, property taxes are often much more important than income taxes — and they must be paid regardless of whether the company recognizes any profits.

“Manufacturing firms often apply for tax credits related to pollution control or worker safety, and the way in which heavy machinery is depreciated has important tax consequences.

“Large firms also receive large tax breaks on occasion to build or maintain facilities in certain areas; these are often in the form of relief from property taxes.” One notable recent example, Davidson says, is Amazon’s highly publicized process of “having cities in essence campaign to have the firm build its second headquarters in their jurisdiction.”

A third position — at a non-profit organization in Wayne, Michigan, that assessed the in-home assistance needed by people with various disabilities and located appropriate service providers — was “an emotional introduction to the economic problem of scarcity.”

Davidson’s role was in finance and budgeting. “I worked with a lot of dedicated people, and the agency did a lot of good in improving our clients’ quality of life.” Still, it was sometimes “frustrating to not have enough resources to meet our clients’ needs.”

Pursuing a Ph.D. in a business discipline is a full-time commitment, he says, and he was not employed while a graduate student. He also found that though professional experience equips people “with strong institutional knowledge that may help them identify interesting research questions, it doesn’t prepare you for actually producing research.”

Davidson has made time for other pursuits. His interest in textiles — cashmere and wool as well as silk and linen — began with a contemplation of clothing prices: Why does cashmere, from goats, generally cost more than wool, from sheep? Is the former inherently better, or just better marketed?

In seeking answers, he has acquired a collection of books and considerable knowledge about the different characteristics of fibers, the problems of poaching and extinction, and the requirements for sustainable production and cultural preservation.

“Beyond science and the chemical differences among wool, fur, and hair, producing and maintaining the highest quality of wool over centuries is an art and a contributor to the culture and economies of many small, pastoral communities.”

Passion Fueling Research

As for epic poetry, Davidson says he has enjoyed the stories since childhood, before perceiving their deeper meaning. The pleasure he now takes in them may also stem from the thematic connections that he senses can be made to his scholarly work. “Both show that a lot of life takes place in moral gray areas. Dante encounters many of the presumed heroes in the ‘Iliad’ during his journey through hell.”

His favorite work is “The Divine Comedy,” “Purgatorio” specifically. “It deals more with the intentions or motives behind our actions instead of the outcomes,” he notes.

“We are skeptical when people argue that the end justifies the means, or that doing wrong for the right reasons somehow makes the behavior acceptable. Conversely, our motives have to count for something, right?

“Applied to my research, we distinguish cases of intentional manipulation (fraud) from honest errors or mistakes (negligence), and, at least legally, that distinction is meaningful.

“But from the perspective of someone victimized by fraud (or other misconduct), how important were the motives that led to the outcome?”

Such concerns imbue his research.

– Sookhan Ho

Who cheats?

In-house policies to check fraud by executives have been in place at companies for decades. How effective are they?

It depends, says new research by accounting and information systems assistant professor Robert Davidson. Such policies work when the executives have either no record of law breaking or only small traffic violations but tend to be useless against executives with severe offenses.

“Collectively, our evidence suggests that while governance mechanisms can discipline executives with minor offenses, they appear largely ineffective for those with more serious infractions,” notes Davidson’s article, “Executives’ Legal Records and the Deterrent Effect of Corporate Governance.”

The article, co-authored with Aiyesha Dey, of Harvard Business School, and Abbie Smith, of the University of Chicago Booth School of Business, is forthcoming in “Contemporary Accounting Research,” one of the top journals in accounting.

Previous studies on the subject have treated executives as a homogeneous group, “effectively assuming that they all respond to these mechanisms in the same way,” the authors note.
Theirs is the first to find that governance effectiveness varies, within the same firm, according to the “psychological type” of individual executives — personal traits that reflect the extent of their self-control and their respect for rules and laws.

Their findings may be useful to boards of directors and regulators when considering governance mechanisms to monitor and prevent undesirable executive behavior, the authors write.

The study was based on a sample of 281 firms and 1,474 executives over three decades, 1986-2017. Individual records of legal infractions served as a proxy for the executives’ personal characteristics or psychological type.

Offenses include driving under the influence of alcohol, drug-related charges, domestic violence, reckless behavior, and sexual assault.

Looking ahead, the authors note that their results raise questions about the deterrent effect of governance in other corporate contexts and open up new research opportunities.