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“They’re probably lining their deep pockets with ill-gotten gain”

Friday, December 6, 2013
posted by Rita Handrich

ill gotten gainsWe’ve been busy in pretrial research over the past few months–including several corporate defense cases. It’s been intriguing to watch mock jurors repeatedly assuming the worst when it comes to potential corporate malfeasance. While, oddly, the controversies over McDonald’s wages and Wal-Mart (and others) opening for early bargain shopping on Thanksgiving Day were never voiced, there was a definite tone of negativity toward business ethics, as well as assumptions of trickery and corruption. It didn’t even matter if the corporation was a non-profit to our jurors. They simply made negative assumptions and based on their imaginations alone (and certainly not on facts in evidence) came up with observations like the following:

“Well, they’re probably not a real non-profit. They’re probably going to expensive hotels, throwing $3,000 parties every week, having catered lunches, paying themselves huge salaries, and lining their pockets with ill-gotten gains. I want to know what their personal lifestyles are like.”

There was consistent concern with the “real people” who were potentially being harmed (or who would potentially be harmed) by corporate misbehavior.

“You know who’s really going to end up paying? Us. The taxpayers. Especially homeowners in these small towns. Poor people. It’s just not right.”

And in one case, involving fraudulent backdating of tax-related documents, jurors were appalled.

“Well, isn’t that also defrauding the US government? This man has no shame and he is just disgusting.”

There was also an abundance of question about conspiracy or at least collusion where the mock jurors made cognitive (aka conspiracy) leaps to fill gaps in the case narrative.

“I knew it! I told you so. Now I understand what happened here. This wasn’t those two’s first rodeo.” [Yes, this one was in Texas.]

The frustration and distrust was palpable, no matter what the case themes were and no matter what venue they were in–from one side of the country to the other. The resistance among some jurors to the prospect that the corporate Defendant was not the cause of the alleged harm was so strong for some that they admitted to difficulty in acknowledging some of the evidence. So it was intriguing to come home to a new working paper out of the University of Tennessee on just why corporate cultures go bad. They hypothesize, consistent with our mock jurors’ assumptions, that unethical CEOs are an important cause of unethical corporate behavior.

The researchers discuss the difficulty in measuring the character of top executives and propose a “novel way to identify an unethical pattern of behavior”. In short, they look at whether the CEO engaged in “systematic participation in options backdating”. This was a common practice in the late 1990s but still occurs (less frequently and less openly) today. Using data from 1992 until 2009, the researchers identified 249 suspect CEOs and then added 12 additional CEOs to their list who were identified (and disciplined) for backdating offenses.

They found a high correlation between their list of CEOs and others forms of corporate bad behavior:

Firms with backdating CEOs were about 15% more likely to narrowly “meet or beat analysts’ quarterly earning forecasts”. (This is a tendency researchers have identified as evidence of accounting hijinks meant to raise stock prices.)

Firms with backdating CEOs also make more acquisitions that have a lower market response. (This is often called “empire building” and is a practice that provides financial benefit to the executive but at the cost of the shareholder.)

And, very intriguingly,

These findings were more likely to happen in organizations that hired their suspect CEO from outside the organization rather than promoting from within.

In other words, those organizations bringing in a new external CEO hire, were more likely to hire an ethical lemon AND that CEO would engage in bad behavior that would ultimately have negative impact on the organization’s reputation (and proclivity for shady or unethical business practices).

So what does this mean for litigation advocacy? It means what it’s always meant. Character matters. In addition to the ongoing frustration and disapproval we heard from mock jurors over the past few months, we also heard another consistent theme: character matters. All it took was a witness or party seen by the jurors as ethically solid, credible, believable, knowledgeable and honest– for them to find for that party. In one case, the jurors chose an older woman witness who many of them “recognized” as like someone they knew–salty and feisty, but honest as can be. They liked her and, more importantly, they believed in her and in her recollections of events (which were disputed by the other party).

Her testimony was enough to tip the balance in a case where neither organization was viewed very positively by the mock jurors. In other words, the more ways we can tell a story to highlight signs of good character, honesty, integrity, and concern for the downstream impact on the public, the more mock jurors supported that party. They still groused about not wanting to support either party (especially in cases of one corporation pitted against another corporation) but their desire for a fair resolution and to see hope in the character of those involved would guide their decision-making.

As we have said many times, whether the lawsuit is about physical injury, a contract, or a patent– winning and losing at trial is always about the people involved.

Biggerstaff, L.,, Cicero, D., & Puckett, A. (2013). Unethical culture, suspect CEOs and corporate misbehavior. SSRN Electronic Journal. DOI: 10.3386/w19261

For the fourth year in a row we have been honored with recognition from the ABA via inclusion in their 2013 list of the Top 100 legal blogs in the country. We work hard to blog consistently even when inundated with work and would appreciate your vote for us at the Blawg 100 site under the LITIGATION category. You will have to register your email just so you can’t vote 47 times. There are many worthwhile law blogs on this list so take some time to peruse. Thanks! Doug and Rita


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