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.
Getting to the Heart of the Matter
The ownership of luxury goods is a little trickier since it’s illegal to ask about a candidate’s financial status in an interview. However, by presenting the luxury goods question as a hypothetical one, you may get some helpful information about candidate preferences. For example, you could ask, “If you suddenly inherited a million dollars, what would you want to do most of all?” Would they prefer to buy two new sports cars, or would they first want to invest in their children’s college education?
It’s also in your best interest to probe candidates (and references) for other behaviors related to poor impulse control, such as gambling. Just be prepared for some push back from candidates (and references) who question the relevance of the discussion.
After you’ve hired an individual, you are usually permitted to delve more deeply into the employee’s financial situation. Talk with your business’s lawyer. Especially if you’ve hired someone into a critical position or as a successor and plan to trust her with your livelihood, keeping close tabs sooner rather than later is a good move.
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Alexandra Levit is a former nationally syndicated business and workplace columnist for the Wall Street Journal and the author of Blind Spots: The 10 Business Myths You Can’t Afford to Believe on Your New Path to Success. Money Magazine’s Online Career Expert of the Year, she regularly speaks at organizations and conferences on issues facing modern employees.