We talked about theft a couple of years ago but it’s on my mind, again. I still struggle to come to terms with it, despite overwhelming, conclusive evidence that it is true: A small percentage of the population will steal, simply if given the opportunity.
They won’t even need the stuff. They may not even want the stuff. They’ll steal for no other reason than they can. Like a vestigial appendage, it seems to be some sort of genetic adaptation left over from the nomadic days of humanity, when scavenging and hoarding resources undetected resulted in an increased chance of survival.
There is a meaningful gender difference by country. The evidence indicates that, in the United States, women are twice as likely to embezzle from a work environment as men, but this could be explained by the fact that women tend to take jobs that have access to the cash, providing greater temptation and opportunity (the Bureau of Labor Statistics shows that 91% of all bookkeepers are female), though that seems doubtful as females display a greater preference for theft in general – e.g., moms are more likely to steal their kids’ halloween candy than dads, so there is probably some neurological basis. The figures are different in the United Kingdom. For whatever reason, when it comes to the British Empire, it is male middle managers who feel like they haven’t gotten their due that are the most likely culprit when it comes to embezzlement; the motive is not greed or financial gain, but revenge. Ergo culture and ingrained expectations of fairness, not simply genetics, must play some role.
Non-profits and religious organizations are more likely to be the victims than their overall presence in the economy would indicate, though, again, this isn’t surprising given that people who regularly attend Church are more likely to steal things like newspapers as found by Austrian economists Gerald Pruckner from the University of Linz and Rupert Sausgruber from the University of Innsbruck in their 2008 paper, Honesty on the Streets – A Natural Field Experiment on Newspaper Purchasing.
We’ll get to all of that in a moment. For now, let’s retrace what was discussed back in 2011 when the topic was first raised on the blog.
My Acceptance of People’s Propensity to Steal Began Almost Ten Years Ago
In the autumn of 2004, I was a 22 year old college student a semester away from graduating with a liberal arts degree in music. I was completing an internship at a $5 to $6 billion insurance company in New Jersey that the President of the University had helped me secure due to my desire to understand the economics of the property and casualty markets, and about to start another internship at record label Warner Music Group’s headquarters in New York City. Periodically, I would meet with the CEO, who was one of the most helpful, honest, and wonderful men I’ve ever encountered – he had grown up working class, decided he wanted to make money, and became the first in his family to go into law. He chose the company by identifying which employers treated their employees best, then found a way to get hired. A couple of decades later, he ran the place. He’s now retired.
[mainbodyad]When I was digging around through the business, meeting with new hires, lower level managers, and reinsurance executives, I was regaled with stories about how this man had touched their lives; things like, “I was in the delivery room in the middle of the night after my wife gave birth. He called the hospital, got through to me, and congratulated me. I still don’t even know how he knew or that he paid attention to someone as far down the rung as I was.” I decided that this was the type of man I wanted to be. High integrity. Kind. Brilliant.
During one of these meetings, I asked him a question: “What is the single most important thing that you think I should learn from this experience? If I forget everything else, and it’s the only idea that sticks with me for life when I someday run my own businesses, what would it be?”
And without hesitation, his usual joviality disappeared for a moment. He answered forcefully, looking me straight in the eye: “Internal audit”.
That was not the response I expected. It took me completely by surprise.
“Joshua,” he said, “there are a lot of people who are otherwise good. You would like them. They do their work well, they raise their families with affection, you enjoy being around them. When faced with temptation, such as seeing easy money that they can get away with stealing, they can’t help themselves. They will give into that temptation and cost your business real cash. When and if you finally catch them, even if you recover the money, you now have a responsibility to the other shareholders or policyholders to handle it responsibly, which will inevitably ruin the life of the otherwise decent person. It may cause them to get divorced. Their kids may hate them. They will have a hard time getting hired, again. They may even go to jail. The fascinating thing about it is that they won’t even think of it as stealing – in almost all cases, they will begin by thinking, “I’m just going to borrow this for awhile”, or “It’s so small it won’t matter”. They almost never, at least in my experience, actually plan on taking as much as they end up taking. Most fully intend to pay it back before anyone notices.”
The Implications of This Caused Me Significant Emotional Distress
I had a very hard time accepting this. I grew up in a household where there were only a few rules. The most important, above all others, was “don’t lie”. The next was, “don’t steal”. If we were to walk through a grocery store and take a grape, eating it as we shopped, I think it would have resulted in Armageddon. That stuck with me – if I find a pencil that I borrowed from someone years ago buried in a box from college, I’ll mail it back to them. The idea that a large part of humanity would willingly steal from others because they had the opportunity caused a significant amount of emotional distress. I didn’t want to believe it because the implications were painful.
A few months later, I flew back to Kansas City and drove up to Omaha to the Berkshire Hathaway shareholder meeting. It was the first year Charlie Munger’s writings had been made available for sale in Poor Charlie’s Almanack. Returning to New Jersey to finish the last few things I needed to wrap-up before being handed my university degree, and shipping off the manuscript for my first book deal, I spent the next couple of weeks in my bedroom on the third floor of the apartment, sitting in a white reading chair that I had bought at Nebraska Furniture Mart, staring out over the fountain in the pond below as I read, re-read, marked up, scribbled upon, and called both Aaron and my father to discuss the ideas Munger espoused.
Munger constantly reminded the reader that human nature being what it was, employee theft was inevitable so it was the moral responsibility of the owner to protect both the shareholders and the employees from their own worst nature. He talked about John H. Patterson, who suddenly discovered that a cash register, which made it difficult for his employees to steal, turned an unprofitable retail store in to a profitable venture. (Patterson went on to launch the famous National Cash Register Company, which has a remarkable history. He was smart enough to know a good opportunity when it appeared).
Munger hammered home that it was your responsibility to prevent it if you could, saying things like, “If you carry bushel baskets full of money through the ghetto, and made it easy to steal, that would be a considerable human sin, because you’d be causing a lot of bad behavior, and the bad behavior would spread.” (Interestingly, Munger also has spoken on his belief, which he shared with John D. Rockefeller, that if you catch someone stealing like this, it isn’t necessary to totally destroy them for the sake of vengeance. He is a fan of summarily dismissing them and taking your losses. I’m not sure how I feel about that if it creates a problem that is kicked down to the road to others without creating a warning signal, such as a conviction, that might allow them to make better informed decisions.)
This was, again, difficult for me to accept. In a span of a few months, two of the people I respected most had reiterated this same idea, with strong conviction. I decided that, though I hoped they were wrong, I would proceed in life as if they were correct, opting for humility in the shadow of their considerable combined accumulated experience. If they were correct, I’d be protected. If they were wrong, there was no real harm but for a bit of expense on the compliance side.
Life Experience Has Now Taught Me These Two Men Were Correct
It’s been almost a decade since that time and I realize now that both of these men were correct. I watched one employee of a family business – a beloved volunteer firefighter who was a deacon at his church – rob the company blind through embezzlement, while still believing he had done nothing wrong.
[mainbodyad]I witnessed a mentor of mine, a music teacher who founded one of the largest art institutes within 500 miles, fume over the discovery that her long-time friend and secretary had been stealing donations by establishing a second checking account, steam-opening the bank statements, and modifying them so no one would discover the checks she had deposited into what became her personal slush fund.
I’ve heard stories of friends and relatives having their identities stolen by their parents or siblings; credit cards opened in their names without their knowledge.
I had lunch with one self-employed gentleman who went from earning $1 million a year to near bankruptcy because of employee theft, which was discovered when the cash went missing and made it impossible to cover the bills of the otherwise profitable enterprise. (He ended up rebuilding and is back up to the seven-figures a year mark the last time I checked, though it took awhile.)
One would think, by now, I would have become accustomed to it but no matter how hard I try, I still have difficulty grappling with this, the same way I can’t understand envy. I was reading a thread on Reddit titled, “What’s the luckiest thing that’s ever happened to you?“. And one of the top answers, with 2,100 net upvotes is this disgusting comment:
One time I ordered a PS3 online after debating because money, I ended up receiving 3 PS3’s..was expecting to get struck by lightning for a week after that.
It is almost as popular as the guy who randomly caught a toddler falling 20-25 feet from the upper level of a mall.
I’m normally a very cool, calculating, rational man. When I read that, though, I feel what I can only describe as bewildering mixture of rage, contempt, and pity. Receiving three of something you ordered isn’t luck. If you keep it without notifying the company, it’s theft. It makes you absolutely no better than someone who pickpockets a wallet or snatches a purse. I don’t understand how a human can go through life being restrained solely by the mechanisms in place that make it difficult for him to take something. And the thing that gets me most is the fact that once someone engages in this behavior, they actually believe – they convince themselves – that “everyone does it”. They truly, deep in their core, think their behavior is normal, despite representing a minority of the population. They can’t accept that most people are honest. They create all sorts of justifications instead of detaching themselves from their own behavior and analyzing it rationally from a third-party perspective to the degree such a thing is possible.
You should value yourself, and believe yourself sufficiently worthy, to demand excellence in both behavior and speech. You should be your harshest critic. You should set standards and expectations for yourself that far exceed what your parents, family, friends, coworkers, or society think appropriate.
What Should a Business Owner Do In Light of This Information?
There are a few things we can do when faced with this unfortunate reality:
- No matter how much you trust people, design your business processes around mechanisms that require verification, have safeguards, leave audit trails, and have periodic review schedules. Vendors, employees, owners – nobody should be above scrutiny. It’s not personal. It’s the only rational way to proceed.
- Recognize that the thief is almost never who you think it is going to be.
- When dealing with personal wealth, going stealth may be the most effective strategy for prevention.
- Decide how you are going to deal with it before it happens. Are you the, “let it go quietly” type or are you the, “I’m going to destroy your life” type? Will your response differ depending on who it is? For example, if your parents were to steal thousands of dollars worth of your computer equipment, a car, or some other possession, sell it, then pocket the cash without telling you, would you call the police and have them arrested? What if it was a friend? A stranger?
In our business, theft is almost impossible as practically everything is digital, with redundant monitoring systems. No cash is handled – it’s all numbers on a screen. The only hit we’ve suffered has been the occasional end-customer who refuses to pay a bill, which we almost always recover even if it involves legal action. By accepting a fact that I still find emotionally unpleasant, I’ve saved us a lot of potentially expensive lessons. And that itself is a lesson – never refuse to act because you have a hard time believing something you’d rather not believe.
If you own a business, I would put this on the top of your agenda. Do an audit – even if it’s monitoring the inventory in the freezer at your restaurant so the employees aren’t walking out with free steaks.