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 / Winter 2007 / Issue 49(originally published by Booz & Company)


Recent Research

On catching malfeasance, improving boards, priming brands, predicting negotiations, and appreciating e-mail.

Fighting Fraud
Title: Who Blows the Whistle on Corporate Fraud?
Authors: Alexander Dyck ([email protected]), Luigi Zingales ([email protected]), and Adair Morse ([email protected])
Available Online: Click here.
Photograph © Sean Justice/Corbis
The U.S. Securities and Exchange Commission (SEC) is supposed to be the watchdog agency monitoring corporate accounting activities. But have its efforts over the years — and especially in the wake of the Enron and WorldCom scandals — helped identify and reduce wrongdoing? The authors of this article examined 230 cases of alleged corporate fraud occurring in the United States
be­tween 1996 and 2004, involving companies with more than US$750 million in assets. They found that the SEC uncovered just 6 percent of the cases and auditors 14 percent, whereas the media and employees exposed 14 percent and 19 percent of fraud cases, respectively. Equally interesting was how long it took to detect fraud. Financial analysts and short sellers — who benefit from close observation of financial markets — unearthed internal hanky-panky in 9.1 months, on average, whereas the SEC needed an average of 21.2 months. Em­ployee whistleblowers sounded the alarm in an average of 20.9 months. Perhaps self-preservation slows down whistleblowers. According to the study, in 82 percent of cases in which they are named, employee whistleblowers lose their jobs, resign as a result of their actions, or are given significantly changed responsibilities.

Bottom Line: Although regulatory systems have been put in place to catch corporate malfeasance, this research casts doubts on their usefulness. We need better incentives to encourage witnesses to reveal fraud and come forward with evidence.


Boardroom Behavior
Title: Flattery Will Get You Every-where (Especially If You Are a Male Caucasian): How Ingratiation, Boardroom Behavior, and Demographic Minority Status Affect Additional Board Appointments at U.S. Companies
Authors: James Westphal ([email protected]) and Ithai Stern ([email protected])
Available Online: Click here. 
A survey of 760 board members of Fortune 500 companies examined the way directors earn appointments on multiple boards. The results demonstrated that specific behaviors have a significant influence over whether or not fellow board members will nominate their colleagues to other boards. Board members who praised the efforts of management and ingratiated themselves with other directors were often rewarded for their behavior with multiple board appointments. Di­rectors who gave honest feedback to management, provided tight oversight, and lobbied for close evaluation of executive proposals did not reap the same benefits. The findings concerning minorities and women were startling: Their attempts at ingratiation are rewarded less and their attempts at control more severely punished.

Bottom Line: So much for independent-minded boards. Companies are generally a long way from recruiting and cultivating diverse board members who offer constructive advice and responsible monitoring of executive behavior.


The Power of Suggestion
Title: How Environmental Cues Influence Product Evaluation and Choice
Authors: Jonah Berger ([email protected]) and Grainne Fitzsimons ([email protected])
Available Online: Click here. 
On July 4, 1997, NASA landed the Pathfinder spacecraft on the surface of Mars, a mission that generated huge media interest worldwide in the ensuing months. This period was also marked by an unexpected surge in sales of Mars Bars, a chocolate candy made by Mars Inc. — a curious example of a phenomenon called “priming,” according to this report. To explore the effect of priming on consumer behavior, the authors conducted a series of six surveys in stores, at universities, and in the laboratory, among other places. The results showed that consumers exposed to environmental cues — news stories about Mars, for example — are more likely to notice related products and brands. In one case, the authors asked 144 supermarket customers to list the brands of chocolate candies and soda that first came to mind. Customers mentioned items with orange packaging, such as Reese’s Peanut Butter Cups and Sunkist orange soda, more often on the day immediately preceding Halloween than one week after Halloween.
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