No Man is an Island: How the “Cult of Personality” Can Lead to Fraud and Abuse

February 2012

IN THIS ISSUE

— Tone at the Top Can Be Altered by a Strong Personality
— Tone at the Top and Corporate Governance

GREETINGS!

Welcome to the February edition of our newsletter! in this issue, we’ll examine how a powerful persona at the top of any organization, large or small, can create blind spots toward fraudulent activity, and suggest ways to navigate around such concerns.

TONE AT THE TOP CAN BE ALTERED BY A STRONG PERSONALITY

Much is made among fraud examiners and business consultants alike about “tone at the top” — a respect for and adherence to the rules of law and decency among a company’s top management that should, in theory, set a standard for everyone on the rungs of management below. Often, strong tone at the top can prove to be a deterrent against fraud, especially in smaller organizations, where the potential for a fraudster to feel shame and embarrassment if his scheme was exposed can be a means of prevention before any crime occurs. But what if the fraud itself originates from, or is condoned by, those at the top?

The most recent prominent example of high-level officials “looking the other way” involved not a financial fraud, but the sex-abuse charges against former Penn State University assistant football coach Jerry Sandusky. Many observers, including those with intimate knowledge of and a strong interest in the goings-on of the university, said that the former football coach Joe Paterno’s “turning a blind eye” to the allegations not only allowed them to continue for nearly nine years after “JoePa” first learned of them, but it strengthened the denial of the most stringent supporters — “JoePa would never condone such a thing” — and also has made it that much more difficult for the university, of which Paterno was among the top management ranks during his legendary tenure, to begin recovering its image and reputation.

TONE AT THE TOP AND CORPORATE GOVERNANCE

Examples of strong leaders creating insular cultures where there values are not called into question have also helped create the breeding ground for some of the greatest financial collapses and frauds, especially in the early part of the 20th century. Many accounts of the 2008 fall of Lehman Brothers, for instance, noted that CEO Richard “Dick” Fuld created an aura of dominance that extended to his board of directors, which is supposed to be one of the most independent checks on a CEO’s power. “To say he was surrounded with a cult of personality would be an understatement,” one report noted. “He was the textbook example of the command and control CEO. Fuld inspired great loyalty and, on occasion, great fear. Those closest to him slaved like courtiers to a medieval monarch, insulating him from trouble – from almost anything he might not want to hear.” While many professional fraudsters use charm, wit or intimidation to pressure “marks” into acquiescing, these tactics also occur in the corporate world, and can often blind otherwise knowledgeable people from challenging the unlawful acts a forceful leader might take or approve, tacitly or explicitly.

Fortunately, both those inside management and those outside, like shareholders, have tools at their disposal to expose the coziness that often permeates such “cults of personality.” In the vast majority of instances, a public records-driven background check of the top management and the board of directors will identify commonality of cause among them, whether it’s something as simple as sharing the same alma mater, giving to the same political candidates or one party investing his private funds in another party’s side venture. Reviewing public records, including litigation and SEC filings, for related party transactions and shared interests, can help outsiders (and often even insiders) understand the culture within a company, and help identify how it might need to change in order to prevent a scandal from being swept under the rug until it is much too late to be addressed.