Helsinki (17.06.2012 - Timo-Erkki Heino*) More than one out of five, 22 per cent, of the board members and the CEOs of Swedish listed companies has been convicted of a crime resulting in fines or in custodial or suspended prison sentences.
The most common crime among the boards of directors and chief executives has been drunken or reckless driving. But also crimes endangering life and health, such as assault, were committed, as well as fraud and insider trading.
The findings were revealed in two research reports connected with the Sustainable Investment Research Platform SIRP at the Umeå School of Business in Sweden and headed by economics professor Lars Hassel.
Out of a total of 3,373 board members 727 (21.6%) were found to have criminal convictions. Among the 580 CEOs the figure is 182 (31.3%) and among CFOs the number of convictions is 78 (21.4%) out of 364.
Almost 90 per cent of the Swedish listed companies have at least one board member who has been convicted of a crime. And, incredible though it may seem, there are listed companies in which every member of the board has a criminal record.
The Swedish researchers studied how the board members' and CEOs' personal characteristics affect the way they are running their companies. It was presumed that prior criminal convictions are evidence of excessive risk-taking as a character trait, which could mean more risky managerial decisions, resulting in negative consequences for the company and its shareholders.
These presumptions were proven to be correct. The researches discovered that companies which had senior executives who had been convicted of crimes, engaged, for instance, in more risky, and hence often less successful acquisitions, in lower accounting quality and in short-term oriented business decisions often resulting in higher earnings volatility. These companies also reported lower earnings on average, which suggests that their excess risk-taking is not compensated by higher earnings.
In another study it was revealed that boards with a higher proportion of members with criminal convictions seem to focus less on environmental concerns and expose their firms to greater environmental risks.
Convicted individuals can be appointed to senior posts because their convictions often go undetected. In informal discussions with listed companies' representatives and head-hunters, the researchers found that during the selection of senior management vetting procedures are less than rigorous and criminal records rarely checked.
Another reason for appointing persons with criminal records is that many of these criminal convictions are not viewed as being of the sort that would impair one's ability to exercise sound business judgment, driving under the influence of alcohol being the most common example of this kind of thinking.
However, the researchers point out that criminology literature clearly shows that criminal convictions, regardless of the nature or seriousness of the crime, indicate overconfidence and a tendency to take risks. Appointing such persons to senior corporate positions is likely to increase the overall risk.
Sweden is one of the very few countries in the world where this kind of research can be conducted. It is based on comprehensive data collected by The Swedish National Council for Crime Prevention and made available for research purposes.
The researchers decline to draw conclusions concerning the degree of senior management with criminal convictions in other countries, but they do state that appointing board members who have been convicted of crimes is surprisingly common among listed companies in Sweden, a country where the rule of law is strong and the general level of crime lower than in many other Western countries.
Read also:
Eli Amir, Juha-Pekka Kallunki, Henrik Nilsson: Personal character and firm performance. The economic implications of having fraudulent board member, SIRP working paper 09-2008
*Timo-Erkki Heino worked at the Finnish Broadcasting Company YLE from the early 1970's until 2011 producing investigative documentaries on economics. - In 1994 and 2011, he received the Public Information Grant (the Finnish equivalent of the Pulitzer prize) for his documentaries on South Africa and on economic policy. - In 1997, 2002 and 2011, Timo-Erkki Heino received the annual award of the Association of Investigative Journalism in Finland.