Magazine article Risk Management

Smart Executives, Dumb Decisions

Magazine article Risk Management

Smart Executives, Dumb Decisions

Article excerpt

Recent media coverage on corporate malfeasance often attributes improper financial activities to greed, but until recently there has been little actual psychological insight into the executives engaging in such fraud.

Yale Psychology Professor Richard Sternberg, author of numerous articles and books on the subject, has taken a scholarly approach to the corporate malfeasance phenomenon by identifying four problems in thinking--egocentrism, omniscience, omnipotence and invulnerability--that cause otherwise intelligent executives to behave improperly.

Egocentrism. Serious legal and ethical trouble often begins when executives make risky decisions based almost exclusively on their own interests, wants and needs without considering those of others, such as employees, patients, directors or investors. Manipulating financial audits may be one way of satisfying their strong egos. Those who have worked with egocentric, high-level executives probably have a few horror stories of the damage done by their ethical blind spots and out-of-control personalities. If it is all about "me," it can not be about anyone else.

Omniscience. Well-educated executives may believe they know everything. Often on the cutting edge of finance, such executives may generalize their intellectual command of finance to other corporate areas but may be blind to their own ignorance. Moreover, being widely perceived as a financial authority may create unrealistic beliefs in their own executive omniscience. Staff members working with (or reporting to) such executives may believe that the self-proclaimed expert executive has almost superhuman business skills, especially if the executive is also a media celebrity.

By engaging in corporate "groupthink," they cannot accurately or objectively evaluate the executive's financial strategies. Because the entire financial team (including the accounting firm) is thinking the same way, they go along unquestioningly, accepting the executive's possibly flawed view of reality. As a result, it is no surprise that billing fraud is often publicized by individual whistleblowers instead of an entire financial staff or the company's accounting firm. …

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