How cocky money managers are secretly destroying the planet

By Stephen Beech

Overconfidence in finance bosses leads to potentially catastrophic environmental rule-breaking, according to a new study.

Researchers found that firms are more likely to break green laws when those who control the company finances are overly confident in their own abilities.

The environmental violations damage the company’s long-term performance, especially when it comes to credit ratings, suggests the study published in the journal European Management Review.

The research, which looked at nearly 600 US companies over 17 years, found that those in states with laws that require them to consider the interests of all stakeholders, not just shareholders, are better at avoiding such issues and protecting their financial health.

Most previous studies have focused on CEOs, but the new one looked at Chief Financial Officers (CFOs), the top financial decision-makers at companies.

The study was conducted by researchers at the University of East Anglia (UEA) and Heriot-Watt University in Edinburgh, along with colleagues at Coventry University, Bangor University and the University of Aberdeen.

Dr. Yurtsev Uymaz of UEA’s Norwich Business School said: “What’s new here is that we show CFOs’ personalities - especially if they’re overconfident -can lead to risky decisions that harm both the environment and the company.

“We also show that certain state laws can help keep those risks in check."

Patrycja Klusak of Heriot-Watt University said: “This matters because it connects executive behavior with real-world outcomes like pollution and financial damage.

"It suggests that paying attention to the personality traits of company leaders - especially CFOs - is important.

"It also shows that stakeholder-focused laws can help prevent bad behavior and protect both the public and investors.”

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Given the important role of senior executives’ overconfidence bias in shaping firms’ environmental actions, the researchers say there is a need to strengthen internal control and oversight of high-impact decisions, with the active participation of all stakeholders.

Dr. Uymaz said: “Constraining managerial overconfidence through regulation can improve investor confidence and trust, as it helps counter the tendency toward short-termism driven by this overconfidence bias.

“In particular, firms with overconfident CFOs may benefit more from stakeholder-oriented laws while also incurring higher penalties for environmental violations.

“Our findings are also valuable to stakeholders such as employees, customers, investors, and local communities, whose trust and well-being might be at risk.

"If the cognitive and psychological biases among management play a critical role in firms’ environmental decisions, addressing these biases can shift managerial and organisational incentives, with far-reaching implications not only for financial markets but for society.”

The findings show that the distinct roles of board members should not be underestimated, as they can amplify firms’ environmental impacts.

While managerial overconfidence can drive growth, it can also be detrimental to environmental performance if not properly balanced and controlled.

The researchers say that is "particularly important" at the firm level, as environmental misconduct can lead to significant reputational and litigation costs.

The team looked at financial data, executive behavior, and records of environmental violations for US firms from 2006 to 2022.

They then analyzed how those factors were connected and how the introduction of stakeholder laws affected outcomes.

The sample included air transport, manufacturing, petroleum, technology and telecom firms.

The researchers found that "brown" industries - air transport and petroleum alone - violated environmental rules around 62% of the time, compared with 10.6% in green industries.