Praised in print? Must be ripe for fraud

If the directors have big share options, the chief executive is lionised in the press and the corporate governance is praised, bail out now: these are among the biggest predictors of corporate fraud, according to an analysis of 25 recent scandals.

The chief executives of the fraud-hit companies - including WorldCom and Enron - had an average of eight times as many options as those at comparable companies, according to research by Kees Cools, professor of corporate governance in the Netherlands and an adviser to Boston Consulting. These were worth an average of $172 million (£91m) in 2000.

These bosses were also promising to expand their companies much faster than rivals: the average growth target was 230 per cent over five years, compared with 40 per cent for their peer group.

Not surprisingly, analysts were also forecasting superior growth rates for the firms. The chief executives were also hitting the headlines: Cools calculates that they were rated three times more favourably than the comparator group, based on the number of mentions in the Wall Street Journal , the Financial Times and Fortune magazine.

The study also found that many of the fraud victims had high standards of corporate governance - Enron was said to have one of the five best-governed boards in the US in 2000, a year before it collapsed, while Xerox had a separate chairman and chief executive, unusual in a US company.

'Think of the problem as the "dilemma of the successful CEO",' said Cools. 'When a CEO is successful, he gets a great deal of money and becomes celebrated and famous. Driven by this, he is tempted to set unrealistic targets. Then the problems start; the organisation starts cooking the books and engages in fraudulent practices.'

The granting of share option has fallen sharply in recent years, partly because of the public outcry over excessive rewards in the boom years - nine executives cashed in more than $100m in 2001 - but also because investors no longer believe they are an effective way of stimulating management.