The paper is brilliant work in its own right. It focuses on what CEOs say in investor conference calls and how they say it. How they say it provides psychological linguistic clues into whether they are lying or not.
But that is not what immediately struck me about this paper. What struck me is that the described behavior also happens in a thousand staff meetings throughout the organizations. And is encouraged. Now that is not to say that in organizations such as big banks the use of such lying is pervasive. The subtleties of the question have to do with what is versus what is becoming.
Almost every big organization is run as if it were the sum of its component internal financials. Since management is inspecting these results just as closely as investors inspect the firms consolidated numbers, draw their perceptions and dole out the rewards on that same basis, would not the same deceitful dynamics occur in those contexts as well? In fact, would certain organizations that were more likely to make judgements and determine rewards on the basis of such internal financials be more likely to have deceit in the ranks, effectively making it viral? Might this be part of the answer to the great “WHY” of the financial crisis?
In the classic investor conference call, the CEO and CFO and perhaps on or two others are clearly in charge of the call and dispense the right to question to specific reporters much like the President at an East Wing press conference. Lower in the organization, in the hypothetical staff meeting, the meeting CEO is the inquisitor. They ask the question about divisional performance and have the opportunity to cross-examine, should they choose to do so. In this format the requisite skill is exactly the same. If a divisional manager is skilled at producing deceitful numbers and skilled at lying about the substance behind those numbers, they are rewarded with a higher personal “share price”. The actual deceit can take many forms. In the case of a BP, the on site managers might have adopted deceitful practices that were not officially sanctioned by upper management, but were unofficially mandatory with the financial reviews being the mediating mechanism. Cutting corners, dumping fluids, falsifying reports, taking risks…. When the project financials rolled up these things would have created better numbers than otherwise, and if the manager could declare it was their excellent management practice that produced such better results, then they have achieved the same as the lying CEO has attempted.
Work such as this analysis, properly used, might provide the foundation for correction of certain behavioral aspects of systemic risk by deconstructing the dysfunctional corporate management systems in place today. Elizabeth Warren and other regulators should take note of the need to address such matters in their Financial Regulation implementation.