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11 June 2012updated 26 Sep 2015 6:32pm

Ostentatiously wealthy CEOs more likely to run problematic companies

Remind you of anyone?

By Alex Hern

A new working paper (pdf, £) from the American National Bureau of Economic Research finds that while ostentatious displays of wealth by CEOs don’t make them more likely to commit crimes, the companies they run are more problematic:

We examine . . . executives’ behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”) . . . We do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.

So “unfrugal” bosses run a “loose control environment” with “high probabilities of unintentional… errors”. If only there were some story this week that neatly illustrated the theory:

Jubilee stewards boss led ‘champagne lifestyle’ while guarded by trainees

  • Trainees used as “bodyguards” while she hit the town
  • Treated as VIP while she shopped, wined and dined
  • On one trip bought Hummer car worth £30,000+

Director of Jubilee stewards firm had five companies “struck off”

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The director of a security company who forced unpaid jobseekers to sleep rough before assisting at the Jubilee pageant has had a string of previous companies “struck off” by regulators after a failure to submit accounts.

Manager at Jubilee stewards firm and “illegal access to police files”

A senior manager for Close Protection UK — the firm at the centre of the Jubilee stewards scandal — was passed highly sensitive information from the police national computer, it has been claimed.

 Oh yes, that’s right. Well, don’t say we weren’t warned.