Ted Audio Collective.
Hi, everyone. You're listening to HBS After Hours.
I'm Yungmi Moon, and tonight, I'm so excited to be here with my colleague, Eugene Soldis.
So Eugene, you're ostensibly an accounting professor, which sounds not that interesting.
Well, I don't know if I'm going to say thank you to that, but accountants don't have the best rep for being the kind of people you want to, well, spend time after hours with.
I'll give you that.
But Eugene does some of the most fascinating research here at HBS.
Eugene studies corporate misconduct and fraud, and so he hangs out with criminals, with convicted felons who are, in many cases, still in prison.
So you hang out with Bernie Madoff and people like that.
I do. I spend probably more time with people that are incarcerated than probably any other business school professor in the country.
His most recent book is called Why They Do It, Inside the Mind of the White -Color Criminal.
So talk to us, first of all, about what got you into this topic.
It actually began when I was finishing up grad school, and as a good PhD student, I'm up at three in the morning running some regressions.
And trying to stay awake, I was flipping through the TV channels, and I came across a show on MSNBC called Lock Up, still on, you could say after, after the after hours at three in the morning.
And they sent a camera crew around prisons around the country, and they're interviewing people who've been incarcerated, by and large, for violent offenses, murder, assault, nasty things.
And they're talking to them about what led them there.
And not surprisingly, things like drugs and broken homes and gangs.
And I'm watching this show three in the morning and thinking about a different group of people.
I'm a financial economist by training, so when I'm starting to think about people that are incarcerated, I wasn't thinking about the drug dealers, but I was actually thinking about people from, like, Enron and Bernie Madoff.
And so I was imagining, while watching the show, if I had 30 minutes with them and just got to bounce a couple questions by them, how would they respond?
And so that night, the first 10 questions that came to the top of my mind, this is not academic research, this is just Eugene, as someone that reads the Wall Street Journal, like everyone else that's followed a number of these cases, just throwing a couple questions out there.
But what did you do with the questions?
So you wrote down 10 questions that you would ask some of the most notorious white -collar criminals out there, and then what did you do with the questions?
Oh, you can actually look people up once they're in federal prison very easily.
We have a very nice online database where you just click people's name in and it gives you a mailing address.
And the following day, I just literally sent them off.
A couple people from Enron, Dennis Kozwalski, the former CEO of Tyco, not really expecting anything, went back to, you know, running the regressions.
You just mailed them letters.
It was, let's just say, a very kind of gut, you just run with it, throw them off and see if anything happened.
Then approximately six weeks later, our PhD supervisor said, Eugene, you have smell.
Coincidentally, I had two letters that day, one from the former global head of sales from computer associates and Dennis Kozwalski, the former CEO of Tyco.
So you opened these letters and?
And the letter from Stephen Richards was eight pages, beautiful penmanship describing really in detail some of the challenges that he faced.
That's a letter that I ultimately used to write my first case.
So let me stop right there.
So my first encounter with you was from reading this case, which I thought was astonishingly powerful.
And the case study was simply called a letter from prison.
And it was simply the letter that this guy wrote you from prison and a little bit of context and what got him into prison.
But I found it to be such a powerful teaching tool for our students.
But go on. So you get this letter.
And I should note, though, the other letter received from Dennis Kozwalski was more of a short note saying, you know, he had actually a lot to speak about.
But if I would come visit him, he was in a prison in Upstate New York, he'd be happy to speak.
OK, so you fast forward to today and you have now spoken with or corresponded with or hung out with dozens and dozens of these folks.
What have you learned?
I think many of the perceptions when we read about one of the big cases in the Wall Street Journal or the New York Times, it gives us very perception of calculation.
Well, there may be cases like that.
I don't think that actually generally represents what happens in a lot of these instances.
How I generally would describe it is it looks like much more of a failure of managerial intuition.
They don't feel what they're doing is harmful at the time they're engaged in these offenses.
Where the key critical word here is feel rather than a kind of a strategic decision where they failed.
So is this from a lack of empathy on their part and inability to be in touch with the potential harm that they could be doing?
Exactly. I mean, what's odd or I'll say troubling about most corporate misconduct is it doesn't have that sense of immediacy.
So normally if you engage in some type of street crime, you're going to have to be physically near the person.
You're psychologically close.
But in most instances of corporate misconduct, the actual harm is both physically and psychologically abstract, distant.
I mean, take something like insider trading.
In most instances, we can't even identify the victim.
We say it's the integrity of the market that's undermined.
So it's very easy to get in the impression that, yeah, I know I technically shouldn't do that.
But it's not going to resonate really deeply in one's gut as having been really that egregious.
Okay. But then I look at, well, Bernie Madoff, for example, Bernie Madoff, the largest Ponzi scheme in history, $65 billion Ponzi scheme.
He's sitting in federal prison right now.
And a lot of his victims were his buddies, were his friends, were part of his social circle who said, Bernie, take my money, invest my money for me.
And he perpetrated this crime year in and year out, even though the people he was hurting, he was simultaneously socializing with.
Bernie is anomalous by almost all accounts, both the size of his crime, but also his intimacy.
I mean, these were family members in most instances.
I mean, I spent a lot of time with Bernie.
Every Wednesday night, 7 p .m.
for several years, we would basically speak on the phone.
And at least what I would describe, he's cordial.
He's very, very smart.
But he just has an inability, a complete inability to empathize and relate to other people.
No matter what, I would kind of throw at him.
I mean, I spoke to victims that were both individuals, institutions, some of our alumni, some of the large charities that he defrauded.
And he has a rationale for everything, which gives him a degree of comfort.
The only reason that the charities, they lost maybe $100 million, but the only reason they had $100 million in the first place is because of the fraudulent gains from their grandparents.
I've heard him say this, actually.
Just an utter lack of sympathy or empathy.
And I mean, some of these people are very close.
I mean, even his sons paid a very, very heavy price for their father's actions.
So he had two sons, his wife, of course.
One of his sons ultimately committed suicide after Bernie was convicted.
And not that long afterwards, his other son died of cancer.
Did he ever speak to you about that?
Only once. Only once, actually.
After a son, a second son actually passed away.
I was actually reading the obituary on my office computer from Reuters.
So this was right? This was right when it happened.
And it was mid -afternoon, and I remember picking up the phone and it said, this call is from a federal prison.
Do you accept this call?
I said, of course, yes.
Bernie called you? It was Bernie.
And he actually just heard about his son's death on the radio and asked if I could read the obituary.
And I'll say, wow, I've been very fortunate in my life that I have not had to convey this kind of difficult news.
I mean, this is where you take off, you're not a researcher anymore.
You're just another person talking to another person, and you're conveying this incredibly difficult news that someone's son just passed away to read it.
So I actually, I read him the obituary, and I remember after finishing it, I don't know what to say to him.
So, but I said, is there anything you want me to do?
It's kind of one of those things instinctively you just say.
Yeah. Not really that much I can do, but his response was, I remember, I'm fine, I'm fine, I'm fine.
And then there was a pause for probably around 15 seconds.
And then immediately said, well, last Wednesday, we were talking about Swiss interest rates.
And for the next 11 minutes of that call, we discussed, or I'll say, I was probably, it seemed like more in shock than he was.
And at least in my view, this was not a father that was overwhelmed, which could be the case where you just start talking about something else and you're kind of in a different place.
Right. But rather, this was how Madoff ultimately saw the world, that for those four or five minutes, we discussed his son.
He maybe felt something or thought about that, but that was done and there's nothing more that can be done.
So now we move to the next thing and he could seamlessly move to the next area.
So, of course, as you put it, you never know what's going on with people's inner lives.
So you don't know what he was feeling in that moment, but having spent so much time with him, did you come away with the general impression that there was something sociopathic about his personality or that this is just someone who is incapable of experiencing empathy?
I did take the psychopathy course because actually while I was doing the conversations, I'll say I remember it's a three -day long course.
You sat down and they start the introduction.
The first slide they showed was Saddam Hussein.
The second was Jeffrey Dahmer, the person who was like a cannibal.
And who was the third slide?
It was Bernie. Obviously, that was the instructor, their assessment.
But he seems to have characteristics associated with psychopathy.
So though I don't think these binary distinctions, and I'm certainly not a psychiatrist to be able to make such a distinction, but he does have some characteristics that are different than anyone else I've ever interacted with.
My wife and I were going to go on our honeymoon into Africa.
So I was going to miss our Wednesday night conversations.
And I remember describing to Bernie, you know, I'm getting married next week.
I'll unfortunately miss our conversations.
And, you know, we were just starting to chat about life and marriage a little bit.
And I remember he sent to actually a note, actually a very nice note addressed to me, about how to be a good Jewish husband.
My wife's Jewish. I'm not.
And this describes the degree of just irony that I have someone who arguably has done more damage to the Jewish community than anyone else in the country telling me how to essentially become a better Jewish husband.
But not recognizing the disconnect.
Exactly. And in fact, probably perceiving it as a kind gesture to write you the note.
And it was in a way, but it just, I mean, I'm sitting there just...
Yeah. It's just surreal.
I mean, the only thing, and my wife is sitting there just can't believe this is a note that we've received.
Yeah. So I have to say, when I look at your work, you know, there are the Bernie Madoff -like stories.
But if you regard that as being one end of an extreme behavior continuum, equally compelling are the cases that are at the other end of the continuum, where you have people convicted of crimes that to this day, they defend as having existed in that gray area between what's legal and illegal.
So for example, when I read your case, a letter from prison, it involves this gentleman, Stephen Richards, who's essentially his crime was backdating contracts.
The date on which a sales contract closed, he would change that date to make it appear that it had closed earlier in order to meet quarterly targets.
And to this day, he challenges anyone to identify who was harmed by this, because the sales contracts themselves were completely legitimate.
They were not false.
They were real contracts.
And this was real revenue that was recognized.
The only thing he did was he backdated those contracts.
Can you talk about these gray area cases when you talk to people who have just gone down this slippery slope, that feels to me more, for lack of a better word, accessible.
Like, I can imagine the conditions being such that you slide into this situation where you end up doing something that you deeply regret later.
There's a lot of activity that operates similar to this, where it's actions that don't strike us in the world of someone, you know, making up returns or literally making up numbers, but are on this kind of gray world between what would be permissible and what would be not.
I think a lot of laypeople might not quite understand the extent of which a lot of executives spend a lot of time managing revenue, particularly at the end of the quarter.
And the pressure that exists in that last week before the quarter closed is to hit those numbers.
And there are many things you can do as an executive to massage that outcome, some of which are actually considered legal and some of which are not.
And so, as a researcher, when you talk to individuals who have crossed that line into illegality, do you find that they are markedly different in any way from those who don't?
So I would say this is much more the psychological view of the world, which is it's much more situational.
It's the situations that people face.
It's the pressure, the opportunity, but it's also the surrounding norms.
The surrounding norms kind of lead one in a certain direction which isn't always appropriate.
So give me an example of contextual things in a corporate environment that are likely to move people in the direction of behaving inappropriately.
Well, can I give a – I'll give a start with a non -corporate one.
We all think that knowing the difference between right and wrong is sufficient to stop us going forward.
I suspect you drive.
I do drive. I won't ask what speed you go when you're driving home on the highway, but I'm guessing, like most people, including myself, you might occasionally go a couple of miles over the speed limit.
Never! Never! I'm never ignoring me.
I know you're the one person.
Yes. But I'll say we see a sign every couple of minutes, and we almost – all of us – we all speed.
What I often tell my wife is that actually on the highway, speaking with 65, going 75 is actually even safer because everyone else is going 75.
So if you go 65, cars are zooming by, and it's actually – You're not wrong, Eugene.
I use the same argument, and it's for safety reasons.
You have to go with the flow of traffic.
Go with the flow of traffic?
You do. You have to go with the flow of traffic.
We've just – basically the same logic that is not so different than some people do in a firm context.
But we've said we clearly see what the rule is, but we found some way within this context, which is the traffic that's surrounding us.
This is the speed that we ought to go.
There is a lot of instances that actually resemble that.
Again, not at all. But these are the ones that a surprising number of people get into, I think, a difficult position because of this blurriness that oftentimes exists in their minds, objectively.
Not necessarily outside of it.
But if you cheat, where does the accountability lie if the whole system starts to become corrupt?
So if everybody's cheating on their taxes, if everybody's engaging in a little bit of insider trading, or if – I think the Wells Fargo case is a fascinating one, where at least my impression is that all of the conditions were put in place for the rank and file to behave in ways that were completely
illegal and opening false accounts.
But there was pressure to do so.
Everybody started doing it, and it became a systemic problem.
You fast forward today, and it's hard to blame the individual rank and file employees who were caught in this system where they were put under enormous pressure to do things that were wrong.
On the other hand, who then do you blame?
If I look at that case, I don't think anyone's – no one's been charged with anything, have they?
There's been some clawbacks, but that's all.
In fact, I think they all were able to kind of go off into the sunset quite comfortably.
And so this is what I'm trying to reconcile.
On the one hand, the researcher in me can see how context can drive behavior.
But on the other hand, if we don't come down hard on these people, then what we're doing is we're perpetuating a system that becomes increasingly corrupt.
I think this is the hard part about what are the appropriate – if we want to have sanctions guide norms.
I don't think the fines, the multi -billion dollar fines, have become just very expensive speeding tickets for a lot of banks.
Because they're not at all a deterrent is what you're saying.
I'm fairly skeptical of fines being a deterrent.
I actually think for Wells Fargo, to your point, they were immediately fined.
But ultimately, nothing really changed.
The Federal Reserve did something pretty extraordinary, which they effectively said, this is – what we've seen now is an example of ineffective leadership at the board level.
Something needs to change, but until then, you can't grow.
Right. In that case, that was unprecedented for them to do that, for sure.
Having said that, again, if I'm a layperson and I'm not as soaked in the corporate world, and I'm just watching all of this unfold, it feels like everybody's just getting off without the kind of accountability that the public would expect.
It's a struggle. I think the hard part is most of the time, most of the most senior executives are pretty well insulated.
What we see, and I think which is really frustrating, is in many instances, we see lower -level people being prosecuted because they send stupid emails with – that conveys information.
Right. But their bosses, two levels above them, only hold conversations in private rooms.
So there's just no evidence of actually wrongdoing.
I think President Obama, when he was actually put on the defensive once around this, actually put it very well.
He said, in regards to the financial crisis, there were a lot of things that were unethical but not illegal.
That summarizes our justice system, I think, pretty well.
Getting back to this point about how context drives behavior, a lot of these kinds of behaviors seem to me to come out of high -pressure environments where people feel like they're under so much stress to hit a certain number or to perform at a certain level.
On the other hand, these high -pressure environments are also high -performance cultures, and so they are demanding, and part of what makes them great is they are demanding places.
So let me give you an example that's very close to home.
So here at HBS, we will occasionally have someone who cheats.
It doesn't happen very often, but it does happen.
They are students at HBS.
The world is their oyster.
It's almost impossible to flunk out of HBS.
Once they graduate from HBS, no one will ever look back at their grades.
So from the outside looking in, you think, under what circumstances does it make sense for them to take a risk like that, and yet if you speak to these young people, they'll say, I just felt incredible pressure to do it.
The analogy is when you look at someone in the corporate world, and they are talking about, oh, I'm under so much pressure, and I had to hit this number, on the one hand, yes, there's pressure.
On the other hand, it's not the kind of pressure that the world would necessarily call pressure, you know what I mean?
Because these are people— It's a privileged pressure.
It's a very privileged pressure.
That's a great way to put it.
It's a privileged pressure.
At least I think of a lot of misconduct, whether we're talking about students cheating or the kinds of egregious things that happen in corporations.
It looks a lot more like what I would almost call mindlessness than this kind of sinister wrongdoing.
I mean, the student that's cheating, if you were able to just figure out at the point they were about to do that and actually pull them out and say, hey, give them that argument, it would be unimaginable that they would seemingly continue to go ahead.
If we could have those, that would, I think, would solve so many of these things.
But it's hard because managers, much like students are under, making hundreds of decisions every day.
But I also think if we feel that there's actually some harm associated with what we're doing, this is when we don't even need these kinds of conditions put in place.
I think you're so right about that in particular.
I mean, if I think about companies, for example, my guess is a lot of people cheat on small things when they feel like they're just, you know, sticking it to the company.
So cheating on your expense report, I bet that happens all the time.
Do employees steal from each other?
Probably very little because there's an immediacy to that particular con.
Okay, so let's move into prescriptive mode.
I once read something that you wrote about how companies are spending millions of dollars on compliance and ways to get people to behave the right way, and a lot of that money is being completely wasted.
I'm kind of putting words in your mouth.
Well, that's pretty well put.
I might just say billions rather than millions.
Oh, okay, that was the only correction you would say.
So what's wrong with the programs that companies put in place to keep their employees in line, and what should they be doing instead?
What's the most common way that firms evaluate whether their training is effective?
What would be a metric?
Whether or not people complete the training.
I think they just sort of check the box and say, 80 % of our employees went through this online tutorial and they've signed their signature, and so we're 80 % compliant.
Yeah, we're there. It's effective.
I always think this would be a lot like if our dean actually looked in my classroom and actually at the end of the semester said, Eugene this semester got 99 % of the exams back.
He did an awfully great job this semester.
Good job, Eugene. I mean, that would be a certain way of evaluating faculty performance.
How are we evaluated as teachers?
What did they begin?
What were they expected to learn and what did they gain from the experience?
But training isn't viewed like that.
It's percent completion.
Same thing, codes of conduct.
These very pretty looking documents that people get to the end.
They sign that they acknowledge that anything they see, they'll report and they'll abide by it.
And I think at the time someone signs that, they probably mean it, they're not going to think about that when they are under pressure down the road.
So, I think ultimately what we need to do is kind of rethink what's the point of all this money that's being spent.
What do you do instead?
Let's go back to what are we trying to achieve.
So, for example, let's go bribery.
We'll pick a very specific example.
We could train everyone, January 1st of the year, we all need to complete some anti -bribery training.
My guess is while we're all doing that training and clicking mindlessly through, probably listening to music and also checking email on a second screen, no one thinks that they're going to engage in any kind of bribery.
Maybe what we can do is actually deploy a reminder at the time they may encounter that situation.
So, if you're, let's say, traveling, overseas, and you're going to meet a minister, you're about to meet with XYZ, who is a minister, keep in mind these five things and every single part of that conversation that you have.
And by the way, here are some ways to handle it, if an awkward situation comes up.
Let's get as close as possible.
So, I know we're running out of time.
Out of all of the individuals that you've met in the course of this research, what is the most memorable conversation you've had?
Maybe I'll give two.
So, first, I'm going to give the most unusual piece of correspondence that I ever received.
This is from the second largest Ponzi schemer, Sir Alan Stanford.
A mere eight billion dollars.
He ran a bank in the Caribbean.
Ultimately, the bank was viewed as effectively a large pyramid.
And he was going back and forth explaining why this was all a big misunderstanding.
So, our last email.
Nearly the last email, but you can see why this would turn to our last email.
It starts, Eugene, I would like to know your honest and blunt opinion of the irrefutable facts that you've been presented with.
And please, Eugene, don't disrespect me by dancing around the question with a politically correct answer.
In your mind, with all that you know, am I guilty as convicted?
Or was this all a huge charade of deflection, cover up and theft of unimaginable proportions, all orchestrated by the SEC and supported and covered up by the DOJ in the courts?
There truly is no other conclusion, Eugene.
It is black or white, not gray.
I look forward to your quick and 100 % honest, no bullshit answer.
And regardless of what your true feelings are, we will always remain friends.
Alan. Wow. I have to say, that was a, he wants an honest answer, but he doesn't, there's only one answer.
And he's guilty as hell, huh?
The evidence is pretty overwhelming.
He has, I think, about 100 and some years left on his sentence.
Wow. That's suffice it to say.
Wow. And you said you had one more?
The other, which is actually one that I reflect a lot about, because both it's strange, but also kind of it's sad too, is that one of the people that I was trying to meet, a company by the name of Symbol Technologies, and you know, they engage in fraud, most of the executives pled guilty.
The CEO took a different route and actually decided to flee to Sweden, where he had dual citizenship, and Sweden doesn't extradite for white -collar crimes.
And I realize we're on radio, so I can't show this, but I'm going to show it to young me, the wanted poster.
But he actually has a wanted poster.
He has $100 ,000 reward for his capture, and they're a weird sort of— It's an extremely distinguished mugshot, I have to say.
And so, I went to Stockholm, I'm meeting a wanted fugitive.
First of all, how do you start a conversation with a wanted fugitive?
And so I thought some slight humor might break the ice.
So I did mention that if he came back to the U .S.
with me, we could split the $100 ,000 50 -50.
He did not think that was very funny.
And so I did make a full paw there.
We did have, I think, a thoughtful, productive conversation thereafter.
He can't leave Sweden.
He'll be arrested immediately as he walks away.
But kind of the sadness that, you know, his family is abroad, his kids are abroad.
He can't leave, but at the same time, staying there is like punishment and himself kind of weighing over him.
Fascinating. So certainly one of the more interesting people I met.
So the book, again, is why they do it inside the mind of the white -collar criminal.
So before you leave, I have one more question for you.
I never let a guest go without asking them for a recommendation for our listeners.
Anything that you would recommend that they read on this topic, completely unrelated, whatever you want, read, product, listen to, anything.
So I think one of the challenges I think, like many people face, is how do you learn about more things that are not in your narrow?
My favorite site for consumption is called the browser.
Every day, effectively it's curated.
There's four to five articles a day from international publications, sometimes even from a blog.
Each piece you see someone spent months on.
And every day there's four of them.
It affects my view of the world more so than probably any other site.
Wait, four pieces of content every day they post.
It's called the browser.
It's a website? A browser, right.
And I think the person who runs it, you pay $30 a year.
Is this something that says curation fee?
Yes. But he's a curator.
But it's great. Four pieces of effectively long form journalism.
That's fascinating.
But everything. Wow.
My long form one is long reads.
Have you ever tried that one?
Yes. Long reads is another great curation site that identifies, again, these long articles that people have spent months on clearly.
So really high quality stuff.
Thank you so much, Eugene, for joining.
Thank you. Thanks, everyone, for listening.
This is HBS After Hours.
See you next week. Have a great week.
Bye -bye. Bye -bye. Bye -bye.
