Letters from Prison
Why do senior business executives engage in misconduct that ends with prison? Eight years ago, Jakurski Family associate professor of business administration Eugene Soltes began to wonder what led wealthy, successful corporate leaders, many with families and sterling reputations in the business community, to commit white-collar crimes. “These are people we celebrate, invite to speak at commencements,” he says. One night, after watching an episode of the MSNBC show Lockup, he decided to ask some of them why, staying up into the morning hours writing letters to inmates who had been leaders at Tyco, Computer Associates, and Enron. A few months later, responses began to trickle back.
What he learned became, first, a case study—“A Letter from Prison,” taught at Harvard Business School (HBS) in the traditional first-year M.B.A. class on financial reporting—and then expanded into a book, Why They Do It: Inside the Mind of the White-Collar Criminal, published in October. Soltes has spent years corresponding with his subjects, meeting them and their families before, during, and after prison. The result is a complex account of the individual perpetrators, the shifting backdrop of cultural and legal norms governing ethical business conduct, and the competitive corporate contexts that can lead to ethical lapses ultimately deemed illegal.
Few of Soltes’s subjects express remorse; some never saw prison coming, and still don’t understand why they are there. Soltes clearly empathizes with their plight—but not, he says, as the result of any inclination to write a hagiography. These guys are no saints. He deliberately avoids judgment, he explains, because he wants to convey their perspective: that business conduct is not always black and white. Take the CEO of a bank faced with a liquidity crisis who reads an internal report showing that customers are hurriedly withdrawing money. “We could say that an entirely forthright leader would tell investors, ‘We are deeply concerned that we are experiencing a run on the bank, and if this continues, we’ll go bankrupt,’” says Soltes, but that could easily become a self-fulfilling prophecy. On the other hand, if the executive tries to reassure investors that everything is okay, and the bank later fails, those reassurances could be seen as deceptive and perhaps even fradulent. Knowing how to navigate such situations, he argues, not the inclination to see the situation as right or wrong, is the mark of successful executive.
This is what he tries to teach at HBS, where ethics is now a component of many courses (see “An Education in Ethics,” September-October 2006, page 42). In his classes, “There is always a cohort of students who confidently say, ‘I would never manipulate earnings.’” Backdating contracts to inflate a prior quarter’s earnings is a clear violation and can lead to jail—but what about holding contracts over into the next quarter to boost results then? “What happens if it’s the final Thursday in a quarter, and you have already hit your quarterly target, and your fax machine comes through with a couple more contracts that were just signed? Do you need to process those now or should you just go out, have some drinks with friends, and celebrate, and wait to process those on Monday to start the next quarter out strong? In the real world,” reports Soltes, “most people wait until Monday.
“You don’t blow past your targets,” he continues, conveying student reactions, “that just raises expectations and creates more work. Most people want to take it easy. That is manipulation in the same way, but now instead of overstating earnings, which everyone recognizes as wrong, you are understating performance.” There are legal ways to manage earnings—accelerate a release, postpone a writedown, reevaluate a pension assumption—and there are others deemed illegal by courts, such as backdating a sale from a Monday to the previous Friday, which landed eight people in jail at Computer Associates. Soltes says he tells these stories to teach his students humility. Many of the people he writes about went to the Business School, the Law School, or the College. They are more like than unlike the students he sees every day.
But Soltes does identify patterns of misconduct that could help his students avoid similar mistakes. In many of these crimes, the perpetrators don’t perceive the harm. Operating on intuition, often under pressure to make quick decisions, with no apparent victim in view, they miss the significance of signing a document or approving a strategy that on reflection might seem questionable.
He also advocates strategies for avoiding such mistakes. His favorite example involves venture capitalist Ben Horowitz, who routinely consulted an outside legal adviser whom he trusted—a practice that saved him from jail. For a software company he’d founded, Horowitz hired a talented CFO who suggested that, to be more competitive, the firm ought to backdate options as part of executive compensation, a practice that had become common among technology companies in the 1990s. Her previous employer’s legal counsel and their auditors had designed the process and said it was acceptable, whereas Horowitz’s adviser from outside Silicon Valley told him, ‘I’ve gone over the law six times and there’s no way that this practice is strictly within the bounds of the law.” (A few years later, the CFO briefly went to prison for her involvement in backdating options at the previous company, Soltes reports.) Horowitz believes he avoided prison only because he had good counsel, good luck, and “a good compliance system,” says Soltes. That story “has resonated with me more than any other,” he continues, “because it shows that staying on track is not always about one’s moral compass or having ‘good values.’ Instead, avoiding consequential mistakes is sometimes simply knowing where we might unexpectedly go astray, and putting in a place a system—like review by an outsider—to prevent missteps.”
Uber offers another kind of example that reflects how technology sometimes outruns regulatory frameworks. The company, which Soltes calls “a remarkable firm that upended the transportation market,” and “one of the most valuable” of the twenty-first century, “clearly skirted laws and regulation in the United States and abroad,” he points out: “two of their executives in France” have been convicted of violating transport and privacy laws and fined. “Sometimes being innovative and skirting the law will make you an Uber,” he says, “and sometimes being too aggressive will lead to the same end as Enron and Jeff Skilling [M.B.A. ’79], who has been sitting in prison for nearly a decade. Figuring out which side of that line you’re on, students learn, is sometimes hard.”