Most companies will not hire someone who is a convicted felon. They will, however, hire people who have received speeding tickets and citations for disturbing the peace. They will also hire people who spend money without care in their personal lives.
But maybe they shouldn’t. According to recent research from the National Bureau of Economic Research (NBER), an executive’s record of disobeying the law as well as his or her spending habits outside of work are related to on-the-job performance.
The report, “Off-The-Job Behavior, Corporate Culture, and Financial Reporting Risk,” examines how and why two aspects of CEO behavior outside the workplace, as measured by prior legal infractions and the ownership of luxury goods, are related to the likelihood of misstated financial statements and playing fast and loose with the company’s cash.
Of 110 firms that committed fraud as identified by the SEC, 20 percent of the CEOs had a record at the time of the fraud. And while the luxury-owning CEOs were no more likely than frugal peers to misrepresent financial information, they generally took bigger gambles at work.
Lawbreakers and big spenders often suffer from a lack of control, which is related to poor decision making. NBER suggests that this type of executive is more prone to engaging in spontaneous large acquisitions and less prone to investing in sensible long-term growth. He or she is less likely to manage existing assets efficiently, and more likely to go bankrupt.
Getting the Scoop … Beforehand
As a small-business owner, every hire you make has a substantial impact on your operations. Even a cashier in a fast-food restaurant has the opportunity to make accounting mistakes or liaise with customers in such a way that shows a disregard for profitability or safety. You can’t assume that employees will leave their bad behavior or poor judgment at the door when they come to work for you. In all likelihood, what they do off-the-job will have at least some impact on what they do on-the-job.
With respect to the traits discussed in NBER’s research (disregard for the law and lack of frugality), you can assess candidates before you hire them. First, make sure your background checks include not just criminal activity but other legal infringements too, and see if you can detect any patterns. For example, one parking ticket is an anomaly, but 10 unpaid parking tickets in a year should tell you something.
For other suggestions, head over to my Culture Beat column at the AMEX Open Forum.