Did Bernard Madoff just wake up one day and decide to steal $50 billion from his investors? Probably not. Other figures in the growing pantheon of white-collar criminals -- names like Dennis Kozlowski (Tyco), Jeffrey Skilling (Enron, pictured) and Bernard Ebbers (WorldCom) -- most likely didn't decide to start their evil schemes overnight, either. No, the path from good to bad likely involved progressive steps -- 12 to be exact, if you believe new research published in the International Journal of Business Governance and Ethics.
After examining court records and drawing on their expertise in clinical psychology, the Canadian researchers who wrote the report say the road from riches to ruin is awfully similar for many infamous corporate crooks. Step one involves acquiring a position of power, followed by step two, in which the perpetrator becomes fully aware of that power. For instance, it was Ebbers taking the helm of the company that became the notoriously failed telecom WorldCom in 1985 that ultimately set into motion his $11 billion accounting scam. "You end up sliding down the slope one step at a time," says one of the study's authors Ruth McKay, a professor at Carleton University's Sprott School of Business in Ontario, Canada.
How could someone like Ebbers, a former milkman and high-school basketball coach before becoming CEO, fall so hard? Well, for starters, he and others like him rarely act alone. Step three involves "drivers," or other high-level execs in the organization, who either turn a blind eye to the malfeasance or even condone it.
Also key is step four, when "passive participants," usually lower-level peons, essentially support their wayward leader because they want to keep their jobs, even if they don't understand what he -- it is most often a man -- is doing. "If there is one area that is most important, it is the setup in that just like a play, you have to have the players," says McKay. "Finding them and getting them in place is the key."
Consider the case of Enron, where a "rank-and-yank" system kept underlings eager to please Chief Operating Officer Skilling and other managers (on Oct. 14, the U.S. Supreme Court decided to consider Skilling's claim that his conviction was flawed). The once high-flying energy-trading giant's culture -- like in many big companies -- was one in which questioning management was never exactly encouraged.
At the top, of course, sat the man who the researchers identify as a "driver," Chief Executive Officer Kenneth Lay. Lay, who died in 2006, was aware of what was happening, but was not directly responsible for the financial wizardry that eventually drove the company into the ground, the Canadian researchers say. "White-collar crime is opportunity-driven," says McKay. "That opportunity is in part a product of the culture you're around and, most obviously, the corporate culture."
As you can imagine, things continue to go downhill as the steps progress. In steps five through eight, the perpetrator and his supporters labor to hide the truth of their escalating illegal activity. And in steps nine through 12, outsiders or insiders challenge the perpetrator's actions, and the white-collar crime is eventually revealed. (See below for a complete list of all 12 steps to becoming a white-collar criminal.)
In the last step, the perpetrator either denies everything or admits his guilt and begs for forgiveness. Tyco's Kozlowski, who was convicted in 2005 of crimes relating to millions in unauthorized bonuses (apparently used for things like $6,000 shower curtains), has maintained his innocence. Skilling was less defiant, but still pompous, saying "Obviously, I'm disappointed," after his guilty verdict, researchers say.
It's true that the circumstances for each crime may be different, but researchers say such actions have one major thing in common. All these crooks seem to have addictive behavior, which explains why the researchers' 12-step paradigm is inspired by the one used in Alcoholics Anonymous and other addiction-recovery organizations (Step 1: we admitted we were powerless over our addiction -- that our lives had become unmanageable).
"There is an addictive component or thrill associated with making such large sums of money," says McKay. "Once you do it once, there is a desire to do it again." That may be true for lots of us, but McKay adds that execs-gone-bad frequently have a fault in their personality -- insecurity, say, or weakness -- that they strive to cover up by gaining ungodly amounts of money.
With news that the Supreme Court will consider Skilling's appeal, the study entitled "A 12-step process of white-collar crime" warrants some scrutiny. To prevent massive conspiracies like the one at Enron from occurring again, companies have to be more thoughtful about the corporate cultures they develop and promote, say McKay and co-authors Carey Stevens, a clinical psychologist, and art therapist Jae Fratzl. Among their recommendations? Establish whistleblower hotlines. Remember, if it were not for Enron Vice President Sherron Watkins who warned about the fraud in 2001, the crimes at Enron may have gone on for much longer.
Other fixes? Institute recruiting practices and corporate transparency that don't give shady behavior an opportunity to flourish. "It's not as simple as having a hiring policy," says McKay. "You have to think about giving people lower down in the organization a voice." Of course, that's assuming those cogs will have a strong moral code.
The 12-step path to white-collar crime
Step 1: The perpetrator is hired into a position of power.
Step 2: Personality and life circumstances affect the perpetrator in such a way that he recognizes his power.
Step 3: "Drivers" who turn a blind eye or condone certain activities come into view.
Step 4: Passive participants recognize an opportunity.
Step 5: Reluctant participants are drawn into the web of deceit by the "leader."
Step 6: Distrust of people involved emerges.
Step 7: The perpetrator recognizes he has the accomplices in a vulnerable position and begins to exploit that position.
Step 8: Bullying tactics become increasingly common as illegal goals are aimed for.
Step 9: The crime continues but the perpetrator, trapped in an insatiable addiction, becomes more brazen, taking bigger risks and seeking more lucrative exploits.
Step 10: An undeniable paradox becomes apparent as the participants' values and their behavior are now obviously in conflict.
Step 11: A whistleblower steps up to the mark, and the leader loses control.
Step 12: Blame is laid at the feet of the perpetrator at which point he either denies everything or admits guilt and seeks forgiveness.
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