Does financial wrongdoing run in the family?

Corporate scandals are typically explained by distorted incentives, weak controls or toxic company cultures. A new study suggests the roots of financial misconduct might run deeper — all the way back to executives’ childhoods.

Research by Professor Wayne Landsman at UNC Kenan-Flagler Business School and colleagues shows that top executives are far more likely to engage in financial misconduct if their parents did.

His and his colleagues at European universities, Jenni Kallunki, Juha-Pekka Kallunki, Emma-Riikka Myllymäki and Lasse Niem, share their research in “Family Matters: Exploring the Link Between Parental and Executive Financial Misconduct” in the Journal of Accounting Research.

“The key finding of our study is that CEOs and directors are more likely to commit financial misconduct when their parents have also engaged in such behavior,” Landsman says.

“Executives, in particular, are 153% more likely to commit financial misconduct if their parents have a history of committing financial misconduct,” he says.

The researchers examined Finnish court records for about 76,000 senior executives who worked at roughly 65,000 Finnish companies between 1995 and 2019, alongside the records of their parents.

The records cover all prosecuted financial crimes in Finland, from accounting offences to tax fraud. In any given year, only about three in every 1,000 executives were prosecuted for a financial offence. But having a parent with a history of financial misconduct more than doubled a top leader’s risk of being charged themselves.

The researchers tested whether the link could be explained by factors such as the executives’ education, income, prior offenses or the companies for which they worked. The link persisted even after controlling for those factors.

Severity matters

Executives were far more likely to offend when a parent had received a prison sentence than if the parent had just been fined. Landsman found the connection was about five times stronger when the parent had gone to prison — implying that seeing a parent punished does not, on its own, prevent similar behavior.

“This finding suggests that parents who engage in more serious offenses might exert stronger influence on their children’s behavior,” Landsman says. “Thus, the strong socialization effects of severe parental financial misconduct appear to outweigh the deterrent effect of seeing a parent subject to prison time.”

Misconduct appears to run in families, but mainly within the same category of offence. Parents and children tend to offend in the same way, rather than simply breaking more rules overall.

“These patterns lend support to more targeted social learning processes rather than children of parents who engage in financial misconduct developing a general tendency to violate social norms,” says Landsman.

Beyond the family home

Parents are not the only influence. Executives who grew up in places with high levels of financial misconduct — or who live with partners who have committed similar offences — are also more likely to offend.

Even so, the parental link remains the strongest. The pattern can extend to the next generation: Children of executives who engaged in misconduct were roughly twice as likely to be prosecuted themselves.

Real consequences

The penalties are severe. Nearly 80% of executives prosecuted for financial misconduct lose their jobs, and only around a quarter of those dismissed secure another executive role, typically more than three years later.

Even so, the family effect persists.

The authors stop short of claiming causality. But checks — including interviews with police and prosecutors – suggest the results are unlikely to be explained by executives being investigated or charged simply because their parents offended.

The study’s message for companies is that rules and controls might not be enough on their own, because some of the judgment that drives misconduct is formed long before executives enter the company.

“Our research indicates that executive financial misconduct often has origins that precede an individual’s time with the organization,” Landsman say. “Effective risk management goes beyond controls and procedures. It also involves cultivating a strong culture of ethics and integrity.”