Directly (Ir)responsible Individuals

I’m sure everyone can agree that gambling with company money is a bad idea—regardless of whether someone wins or loses. Yet, the day Frederick Smith took FedEx’s last $5,000 to Las Vegas in 1974, he probably wasn’t thinking about such niceties as the “ethical implications” of gambling with employee paychecks. It was an act of survival. The company was bleeding $1 million a month, fuel costs were skyrocketing, and no investor would touch them.

When Smith returned with $27,000 in blackjack winnings—just enough to keep the company’s airplanes in the air for another week—he became a part of start-up folklore. Today, the FedEx story is often celebrated in business schools as an example of entrepreneurial grit and determination. But what if he had lost?

The thin line between business leadership and criminal behavior sometimes comes down to a simple factor: success. We tend to judge the ethical character of actions not by their nature, but by their outcome. When we see successful people who have cheated, we find ways to rationalize their actions. We reconstruct the story in a way that maintains our belief in a just world where good things happen to good people.

And, as Jonathan Baron and John Hershey explain in their 1988 paper Outcome Bias in Decision Evaluation, people may hold themselves responsible for both good and bad luck, becoming smug in their success or self-reproachful in their failure.

This cognitive bias finds its match in a world where the pressure to “fake it till you make it” has become an acceptable path to success. Entrepreneurs are expected to project unwavering confidence, even when their companies are struggling. They must convince investors, employees, and customers that the vision they are selling is both possible and inevitable—that they are the winning horse to bet on.

Down the slippery slope we go

When entrepreneurs sell their dreams to others, their approach often involves what 19th-century philosopher William James called “the will to believe.” This can become a kind of self-deception that blurs the line between optimistic leadership and outright fraud.

Faith by itself can create the conditions that bring about a CEO’s downfall. For example, during an initial pitch, an entrepreneur might slightly exaggerate a product’s capabilities. When this small embellishment goes unchallenged, it creates a psychological precedent. Each subsequent compromise becomes incrementally easier, as the CEO has convinced themselves that their actions are merely strategic necessities rather than fundamental ethical breaches. They reconstruct narratives to preserve their fundamental self-image, while gradually expanding the boundaries of acceptable behavior.

Elizabeth Holmes’s journey at Theranos illustrates this pattern with stark clarity. What began as an optimistic projection about miniaturizing blood-testing technology evolved into an increasingly complex deception. When early prototypes failed to deliver, rather than adjusting expectations, Holmes apparently began orchestrating elaborate demonstrations using traditional testing equipment that she’d kept hidden. Each layer of deception could have been rationalized as a temporary measure, a necessary step toward eventual success.

Similarly, Sam Bankman-Fried’s FTX didn’t start out as an outright fraud. The public collapse revealed a series of escalating risks and misrepresentations, each building upon the last, until the fiction became unsustainable.

Elizabeth Holmes of Theranos and Sam Bankman-Fried of FTX most likely began with genuine innovations and ambitions to change their industries. Their initial deceptions—the exaggerated capabilities, hidden problems, and creative accounting—might have been forgotten had they actually achieved their promised breakthroughs. Instead, their failures transformed these same actions from “visionary leadership” into criminal fraud.

The reality distortion field

Harvard Business School professor and author of the book Why They Do It: Inside the Mind of the White-Collar Criminal, Eugene Soltes interviewed dozens of convicted executives. Some of the CEOs described their gradual slide into unethical behavior through a series of small compromises, each rationalized by the greater good they believed they were working toward.

Soltes’s research suggests that many white-collar criminals can do just enough mental gymnastics to avoid ever having to see themselves as dishonest people, which is just as well—part of a CEO’s job is to be good at building self-serving narratives.

A chief executive’s true performance is quite difficult to measure. Unlike say, a sales representative who can point to concrete business won or an engineer who ships specific features, a CEO’s impact is often based on their reactions to external factors. Some of their most consequential decisions—like entering a new market or shutting down investments in a product line—might not reveal their true value for years. And in the absence of clear metrics, an executive will be measured by the strength of their story.

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We don’t have to go far for evidence: Leaders of the services that did well during the COVID-19 lockdown all trumpeted their foresight and innovative process—only to blame global supply chain disruptions, Federal Reserve policy, and rampant inflation when the pandemic-driven digital boom was over. During corporate layoffs, leaders often blame the economy or unforeseen circumstances—or, if possible, they might frame the event as a “strategic restructuring” driven by their visionary thinking. The economy, it seems, only becomes visible when it serves as a convenient scapegoat.

This pattern has proved consistent throughout the decades and across all industries. A comprehensive analysis of shareholder letters from Fortune 500 companies between 1990 and 2020 revealed that references to external economic factors were three times more likely in years of underperformance than in years of growth. Gary Kohut and Albert Segars found that the same executives who claimed to be “disrupting industries” and “reshaping markets” during good times would suddenly portray themselves as passive participants in an overwhelming economic tide in bad.

This kind of selective accountability is quite useful when writing quarterly reports or public statements. Corporate success becomes less about measurable outcomes and more about constructing compelling leadership narratives that satisfy our need for simple, hero-driven explanations. All things being equal, outcome bias will drive public perception, so if you’re a CEO who must do something bad—at least try to succeed at it.