Experts say CEOs’ entrepreneur traits may lead to trouble

Adelphia, WorldCom, Enron, Homestore, Waste Management and HealthSouth have more than bad accounting in common: All were run by their founder when the alleged misconduct occurred.

By Matt Krantz, USA TODAY

The recent wave of corporate scandals has made some experts increasingly wary of entrepreneur CEOs, since the same traits that give them the vision to create — such as tenacity and egotism — also could make them willing to bend the law.

"When you’re the founder, you think you can do anything and that the rules don’t apply to you," says Mark Cheffers, CEO of AccountingMalpractice.com. That "can lead to behavior that is inappropriate," says Joseph Carcello, professor of accounting at the University of Tennessee.

The founder or original CEO was the top executive at the time of the misconduct in 45% of the 303 fraud cases studied between 1987 and 1997 in a report co-written by Carcello.

Entrepreneurs who cross the line of acceptable behavior are the exception. "There are millions of entrepreneurs who open up shop early and close late, create jobs and are good corporate citizens," says Dan Danner, senior vice president of public policy for entrepreneur group NFIB. "They’re the heart blood of America."

Yet, these traits can lead to trouble for founders:

* Greediness. The desire to get rich is a remarkable motivator behind many of the USA’s great innovators. But the temptation can get perverted thanks to gratuitous stock options and bonuses, says Jack Ciesielski, president of R.G. Associates. "They have every incentive to get richer," he says.

Consider Enron’s Ken Lay, who was CEO for 15 years until January 2001, during which a bulk of the company’s alleged fraud occurred. Lay sold 1.8 million shares of Enron stock between Oct. 19, 1998, and Nov. 27, 2001, bringing him proceeds of $101 million, according to a shareholders lawsuit.

* Personal attachment to the business. Founders often pour so much into a business, they become the business. "The founder’s ID and the company become intertwined," Carcello says. "They become the company."

Nell Minow, analyst at the Corporate Library, says that’s what happened with the founding Rigas family and Adelphia Communications. The Rigas family is accused of using the company as a "personal piggy bank" in the complaint filed by the government.

* Cultlike following. Entrepreneurs often take on hero status and reward the yes-men, Ciesielski says. "No one is going to say to a founder, ‘Go to hell,’ " he says. That might help explain the guilty pleas of five former chief financial officers at HealthSouth. CEO Richard Scrushy is the founder federal officials suspect orchestrated HealthSouth’s $1.4 billion in overstated earnings.

While the acts of a few in no way mean all founders are suspect, the frequency of problems is hard to ignore, Carcello says. "It’s clearly a risk factor," he says.

http://www.usatoday.com/money/companies/management/2003-05-12-founders_x.htm