CEOs Closely Connected To Other Execs Are More Likely To Commit Fraud

by Gary Snyder

Allegations of corporate wrongdoing have peppered the headlines over the last decade capturing the attention of the public, the business community, and regulatory agencies. Likewise instances in the charity world have raised concern about the trust that should be given to nonprofits.

This increased attention has led to an increase in scholarly inquiry into how corporate wrongdoing arises and ways to deter and prevent it. The collective behavior of corporate leaders is often critical in corporate wrongdoing, and the CEO often plays the central role.

We thought that this academic paper would be useful in getting a handle on the epidemic of charity fraud. 

Closer connectedness between the CEO and lieutenants that they hire may help conceal fraud. This might happen via influencing others to fabricate or obfuscate internal records, thereby making it harder to detect or prove wrongdoing in court or by simply pressuring individuals to conceal instances of wrongdoing out of loyalty to the CEO who appointed them, or out of fear of reprisal.

CEO connectedness may also help avoid CEO dismissal upon discovery of wrongdoing. Detected frauds do not automatically lead to a forced CEO turnover. Unless a CEO is sentenced to a jail term, dismissal could be largely a firm level decision, which may be affected by CEO connectedness. More connected CEOs may be able to garner greater support from executive suites (to persuade the board of directors) to retain their positions than less connected CEOs. 

The number of executives charged with fraud is positively and significant related to CEO connectedness. 

Taken together, these results imply that CEO connectedness is something to which investors, regulators, and governance specialists should pay attention. Similarly, it should be a factor in which charity stakeholders, regulators and boards should monitor.  

Further, the results underscore the importance of network connections in the quality of governance. This study which focuses on the connections between a CEO and his top executives helps identify how connections built through personnel decisions may magnify the risk of corporate fraud

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more Nonprofits: On the Brink (2006) Silence: The Impending Threat to the Charitable Sector (2011)