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Who Can Stop Psychopaths from Ruining Companies? Insurers

Top execs devoid of consciences cost insurers big money. Tests could weed them out.

Mitchell Anderson 20 Nov

Mitchell Anderson is a frequent contributor to The Tyee. Read his previous articles here.

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Regulating rogue bankers isn't working. Instead, insurers could require tests to bar psychopaths from boardrooms. CEO image via Shutterstock.

Have bankers gone psycho? It seems hardly a week passes without another example of corporate fraud, rogue traders, rate fixing, and money laundering. Five years after the 2007 economic meltdown that wiped out $14 trillion of U.S. household wealth, the world's financiers seem to be behaving badly as ever and don't care who knows it. Perhaps expecting normal human behavior from many of these individuals is unrealistic because they are not normal -- they are psychopaths.

Corporate corruption linked to personal psychopathy presents both a problem and an opportunity. Rather than further futile efforts at regulation, solving the creditability crisis of global financial institutions may instead involve psychological screening to exclude certain individuals from occupying positions of trust they are medically unqualified for. And if so, cleansing of the capitalist Star Chamber will not be lead by government, but by the private insurance industry -- guided by the invisible hand of Adam Smith.

Let's start with the fascinating and frightening subject of psychopathy. This condition is neither insanity nor a treatable mental illness. It is instead linked to physical abnormalities in the amygdala region of the brain and is perhaps best described by experts as "emotional deafness." While psychopaths can often convincingly feign normal human reactions in order to manipulate others, inside they feel nothing but shark-like self-interest.

This ancient scourge has likely plagued humankind since the dawn of time, undermining our ability to trust each other and build cohesive societies. While sometimes glamourized by Hollywood as a super power, psychopathy shows little evidence of evolutionary advantage even though the condition has a strong genetic signature. After 100,000 years of human history, only one per cent of the general population exhibits this affliction -- indicating that it is more parasitic than powerful.

A threat that can be screened

Only recently have scientists developed reliable screening methods to reveal people with this emotional disability, and such tests have been widely adopted in the criminal justice system. And while our jails are filled with people exhibiting this frightening trait, Dr. Robert Hare, a leading researcher in the field warns, "not all psychopaths are in prison. Some are in the boardroom."

Some researchers have directly linked the global financial crisis of 2007 to a growing prevalence of psychopaths in senior management of the financial sector. Dr. Clive Boddy believes that increasingly fluid corporate career paths have helped psychopaths conceal their disruptive workplace behavior and ascend to previously unattainable levels of authority. Boddy points out psychopaths are primarily attracted to money, status and power -- currently found in unparalleled abundance in the global banking sector. As if to prove the point, many of the world's money traders self identify as the "masters of the universe."

What little research has been done in field indicates that individuals with psychopathic traits are five times more common in senior management than the general population. And while psychopaths are tireless self-promoters, they are in fact poor performers and toxic managers. A study by Dr. Paul Babiak of 203 senior managers found those with psychopathic scores on screening tests scored lower on leadership, team building, performance and effective management. They are also 25 times more likely to engage in workplace bullying than normal humans.

How psychopaths get in

In spite of evidence to the contrary, employers often misjudge psychopaths as having strong characters that are "cool under fire." Babiak's study concluded, "our finding that some companies viewed psychopathic executives as having leadership potential, despite having negative performance reviews and low ratings on leadership and management by subordinates, is evidence of the ability of these individuals to manipulate decision makers. Their excellent communication and convincing lying skills, which together would have made them attractive hiring candidates in the first place, apparently continued to serve them well in furthering their careers."

Most importantly, besides being lousy leaders prone to risky or criminal behavior psychopaths fundamentally lack the ability to act in the interests of anyone but themselves. So how can they credibly act on behalf of their clients? Why do we tolerate a disproportionate number of people with this pathology being in charge of large aspects of global financial systems?

The banking sector has done little to address this issue, and may actively be making it worse. According to a first hand account by Brian Basham of The Independent, a banking colleague once confided to him, "At one major investment bank for which I worked, we used psychometric testing to recruit social psychopaths because their characteristics exactly suited them to senior corporate finance roles."

An accumulation of psychopaths in upper management would go a long way to explain the rash of reckless behavior and corporate fraud in the last decade. It also indicates that efforts by regulators to impose normal morality and lawfulness on the financial sector will continue to be futile.

Likewise, the legal tools available to shareholders or internal HR departments are also largely useless. Refusing to hire someone on the basis of psychopathic screening would be considered "prohibited discrimination" since it is unlawful to presume in advance that someone will commit a crime. Few companies would dare to internally screen senior managers for psychopathy, especially if there is no legal recourse to fire them.

A risk insurers can't afford

Which brings us to the insurance industry. Every company requires a variety of underwriting policies including, for directors and officers, liability insurance or fidelity coverage. Insurers are rightly fixated on risk management since they (and their shareholders) are on the hook when executives they underwrite go the way of Gordon Gekko.

Senior managers of financial companies have what is called "fiduciary duty" -- a legal obligation to act in the best interests of their clients and investors rather than themselves. Here's the rub: psychopaths simply cannot do that. They are medically impaired from acting in good faith on behalf of others.

Why isn't the insurance industry already insisting on psychopathic screening of senior managers for the companies they are covering? The rationale would be straightforward: psychopathy is a leading indicator of illegal or reckless behavior. Psychopaths should be excluded from positions that legally require fiduciary responsibility in the same way that blind people are not allowed to be airline pilots.

Insurance companies taking the lead on weeding out corporate psychopaths would also avoid a number of thorny legal issues that would face shareholders, employers or regulators seeking the same goal.

Any psychopaths identified through insurance pre-screening would not be denied employment, they would simply be deemed uninsurable. The result would be the same -- these dangerous individuals would need to find another, less influential line of work. But since insurance policies are simple legal contracts between two parties, there would be no recourse for psychopaths to launch costly legal challenges against employers based on wrongful dismissal.

Free capitalism to function rationally

This solution would also negate the need for government intervention -- a nightmarish scenario by anyone's yardstick. No right-thinking person would support regulation based on aberrant brain chemistry. That said, if psychopaths were weeded out of critically important roles in the global banking sector, governments and taxpayers would be a primary beneficiary. Public institutions the world-over have been mopping up the mess made by reckless bankers since 2007, and beyond. These massive bailouts have crippled the real economy and inflicted untold economic hardship on those that actually create wealth, not merely accumulate it.

Rather than regulation, insurance screening would be guided by free market capitalism. Insurers have a strong self-interest to limit risk, and a clear legal obligation to act in the interests of their investors. Shareholders of insurance companies should be demanding answers as to why the companies they are investing in are not using the most up-to-date science to limit exposure to costly risk.

A 2012 study by the Association of Certified Fraud Examiners found that companies lose fully five per cent of revenues to employee fraud each year, totaling $400 billion in the U.S. and $3.5 trillion worldwide. Scams perpetrated by executives or owners were three times more costly than those by managers, and nine times more than employees. Fraud in the banking and financial sector was more common than any other industry surveyed.

These rates are also rising. A survey of 500 Certified Fraud Examiners found that between 2008 and 2009, workplace fraud incidents increased by 55 per cent, and losses by 49 per cent. Almost 90 per cent of these experts felt that fraud levels would continue to rise in the future.

There will of course be inertia within the insurance industry to address this issue, especially amongst early adopters who do not want to be put at a competitive disadvantage. Yet until psychopathic screening becomes the industry standard we will continue to build our global financial house on sand -- an obvious risk to the world at large and insurers in particular.

They say there's no free lunch in this world. Yet a small number of abnormal individuals feigning free market ideals have racked up a towering tab that future generations will struggle to pay off for decades to come. This is both unacceptable and unsustainable. We have the tools to start excluding people incapable of behaving responsibly from some of the most powerful positions in the world.

We need to stop ignoring this problem and start solving it. The world will be a far better place for it.  [Tyee]

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