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Moral Dilemma of 'What Have You Done For Me Lately?'

Becoming a captain of industry suggests you've probably sailed a bit too closely to the ethical shoals, a new study suggests.
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In business, there's little better than beating expectations.

Investors, analysts and pundits (especially now) love the pleasantly surprising corporate underdog that reports much larger than expected quarterly or yearly earnings. Often, these CEOs are subsequently lauded and profiled in Time or the Wall Street Journal as high-flying innovators or game-changers who have "injected new life" or even "resurrected" the fortunes of a struggling or startup firm.

It must do wonders for an ego to "single-handedly" direct a corporation toward fertile ground — until you're asked to do it again. And again.

That's the thing about the expectations game: Most of the time, industry watchers are only surprised once. Figuring out how to consistently outperform analysts' expectations is surely a grating (but well-paid) and mostly thankless task. One slipup, and a CEO's acquired social-capital (along with the company's stock prices) can go spiraling down. Although every decision must be measured, some calculated risks must be made. After all, doing nothing could lead to damaging results.

It's therefore not surprising that new research suggests that many of the most prominent and high-performing companies tend to engage in (and get caught) attempting risky illegal activities. After success, it seems, management feels emboldened to gamble. (Or perhaps that consequences matter less than following the letter of the law.)

The study, to be published in the Academy of Management Journal, scoured research databases, the top 50 U.S. newspapers and archived results from the Corporate Crime Reporter Web site to ascertain the number of reported illegal acts attributed to a large sample of manufacturing firms that were a part of the S&P 500 between 1990 and 1999 (the authors posited that manufacturing firms would display the greatest range of potential violations in order to increase the bottom line in the short term).

Firms were deemed "prominent" if they were listed on the yearly Fortune"Most Admired Companies" list and "high-performing" when judged against a relevant comparison group.

Out of the 469 incidents of corporate illegality found in the sample, 382 were committed by these prominent firms. High-performing and prominent firms were consistently found to be engaged much more frequently in illegal acts (which included environmental violations, anticompetitive actions, false claims and fraudulent actions) than less prominent and poorer performing firms.

Why? It's not that poor firms necessarily have more scruples or that prominent, high-performing companies are inherently evil (or that Fortune magazine is playing a cruel joke on its readers), but that management teams at more prominent firms feel more pressure to do something — anything — to increase the bottom line and maintain their preeminent position.

Previous world-beating success, it appears, breeds an aversion to future losses and, quite possibly, produces arrogance that leads to excessive (and even illegal) risk-taking. Researchers postulated that top management teams are under "heightened" pressure to "maintain their performance relative to unsustainably high internal aspirations and external expectations," so much so that the specter of losses will loom much larger than any potential gains.

Of course, this rudimentary psychological framework can be applied to much more than just desperate, audacious CEOs.

Think about it in the always-comfortable baseball hypothetical:

It's 2007. You're a good-looking mega-star who's just signed a gargantuan 10-year, $275 million contract to play for the New York Yankees. Sure, you've been a home-run slugger before — and quite possibly have dabbled in and maybe quit using steroids — but if you keep batting at even or slightly below the spectacular way you have in the past, it won't justify the ludicrous contract that's just been gift-wrapped and handed to you.

There's always the obvious, but effective, way to boost results: Shoot up. Sure, it's slightly risky (baseball is at least appearing to crack down on users), but you'd hit well and worry about the consequences later. It's better than performing poorly and being shredded daily by the relentless New York press. You could even slug your way to World Series MVP.

Put in this (enviable) position, would you consider risking steroids? Maybe just a little?

Now, the hypothetical doesn't justify any illegal decisions of a poorly gambling CEO or baseball player, but it is merely a reminder that when hubris gets in the way, those in "prominent" positions tend to take bigger, sometimes stupider and more magnified risks — it just comes with the territory. It most recently happened to General Electric when it was caught cooking the accounting books to make its financial results appear more attractive, and has certainly been a resounding theme for those favoring tighter government regulations since last year's economic meltdown.

Expectations are a tricky business.

Or as Yuri Mishina, the lead author of the study, notes about the current business climate, "The combination of prominence and strong performance leads to a specific focus on the firm's outcomes rather than the means by which those outcomes were achieved. Hence, as long as the observed outcome is what people expect, there are likely to be few questions as to how the firm was able to achieve those outcomes."

Whatever works, just don't get caught "shooting up" — in business or in baseball.

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