Study: Telltale Signs that a CEO Is Lying

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Frederic Cirou

Public confidence in big business is in bad shape, not least because so many CEOs have been caught lying to investors and the public. It’s hard to know who to believe anymore. So two researchers from Stanford’s Graduate School of Business analyzed transcripts of thousands of earnings calls — focusing on CEOs’ answers to analysts’ questions — to find out if there were telltale signs of lying. There were. (More on Top 10 Crooked CEOs).

David Larcker, a professor of accounting at the Stanford Graduate School of Business, and Ph.D. student Anastasia Zakolyukina identified three red flags [PDF] that signal a corporate executive who might be lying. The first indicator is obvious: CEOs who answer questions in an opaque way, evading direct questions, are probably hiding something. NPR reports:

For instance, in 2002 NPR interviewed Computer Associates CEO Sanjay Kumar, who later went to prison for securities fraud, about his company’s auditing practices.

Here’s what he said: “There’s no one out there today in the world of public companies who has the former chief accountant for the SEC running their audit committee. We do. There’s no one out there who has the pre-eminent governance leader, professor [Jay] Lorsch, for example, running their governance committee. We do.”

In other words, Kumar was asked, “Can your books be trusted?” And he replied by saying, “We hire the very best auditors.” Larcker says that can be a big warning sign.

Other warning signs? Beware the CEO who describes the state of his business as “fantastic,” “fabulous” or “perfect” — words that are all hype, but little substance. (More on Why We Strive for Money Over Time — and Why It’s a Mistake).

Executives who overuse terms like “we” and “our team” instead of “I” also tend to be lying. These words deflect responsibility to other officers in the organization, which could be a strategy to spread the liability around.

“If I’m saying ‘I’ or ‘me’ or ‘mine,’ I’m showing my ownership of the statement, so psychologically I’m showing I’m responsible for what I’m saying,” Zakolyukina told NPR.

To be sure, honest CEOs are guilty of superficial patter too, but it’s worth keeping our sensors tuned for patterns of half-truths among business leaders.

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