When companies commit fraud, lawmakers and regulators usually start at the top when looking for problems in the corporate culture. US senators excoriated former Wells Fargo CEO John Stumpf personally in a September hearing on the banks’ widespread practice of opening fraudulent customer accounts. “It’s gutless leadership,” senator Elizabeth Warren told Stumpf. “This is about accountability. You should resign.”
Researchers have looked at all kinds of CEO metrics—from pronoun usage to their personal finance management—to determine which leaders are likely to encourage deception on their watch. Yet establishing a direct relationship between behavior in the C-suite and shady financial reporting has been difficult.
Stronger indicators, it seems, can be found farther down the organizational pyramid. A team of researchers from theHong Kong Polytechnic University and George Washington University studied feedback that 1.1 million employees of some 4,000 companies left on the job site GlassDoor between 2008 and 2015, and found that the lower these employees rated a firm’s “culture and values,” and their own job satisfaction, the more likely the company was to be the subject of a Securities and Exchange Commission fraud investigation or a securities fraud class action lawsuit.
Job satisfaction and culture/values rankings dropped consistently in the year a fraud investigation or action happened, as well as in the year before. As the researchers see it, these numbers tell a story in which managers push employees to reach unrealistic targets, leading to a dissatisfied workforce. And if the managers aren’t doing a good job of motivating employees—which they’re probably not, given that the employees are unhappy—and can’t hit their targets in legitimate ways, they may resort to fudging the numbers instead.
This was the case at Wells Fargo, where employees were relentlessly pressured to make sales, according to an internal review (pdf) released this month. The fraudulent accounts were opened from 2011 to 2015. During those years, turnover in the divisions responsible was at least 30% every year, with some years reaching as high as 42%; even on the low end, that’s significantly higher than the industry average during that time, according to the US Bureau of Labor Statistics.
The argument is backed up by previous research which found that corruption thrives in companies obsessed with hitting targets, and more concerned with ends than means. The tone at the top matters. But when it comes to predicting risk, the grumbling in the cubicles may be more important.