In response to the accounting scandals that rocked America two decades ago, lawmakers passed the Sarbanes-Oxley Act (SOX). Their intent was clear: Protect the American public from companies that defraud investors out of billions of dollars through accounting misdeeds. Among the provisions of SOX was a requirement that executives attest to the veracity of firms’ financial disclosures. Knowingly or willfully misleading the public could land executives in prison for up to 20 years.
If the government had the ethical competence to similarly self-regulate, the US would be headed toward financial solvency. The Wall Street Journal recently mocked California’s government dysfunction, due in part to the $20 billion EDD fraud that occurred under the current administration. But Californians have the opportunity to put a check on government spending by electing Lanhee Chen to the independent role of state controller, essentially the watchdog for voters’ money.
Malia Cohen’s Conflict
Agency conflict routinely arises when firms’ management teams—their “agents”—act in their own self-interest rather than those of the owners they represent. It’s called a principal-agent problem and it’s why auditing bodies exist. A state’s taxpayers are no different from a company’s shareholders because they invest in and finance the activities of their state. So why should the government be held to different standards, especially in California, where they control the world’s fifth-largest economy?
Virtually the only reliable advocate for voters who can constrain government excess is its controller, who, like corporate auditors, should be independent. By default, Chen’s opponent, Democrat Malia Cohen, is conflicted out of the controller role because California is a virtual one-party monopoly.
The Implications of Cohen’s Record on Future Performance
Cohen’s management of her personal finances compounds the troubling picture. She claims that Chen, a Stanford educator who spent the bulk of his career teaching and mentoring students and who’s never held elected office, is an unknown quantity and thus a risky proposition because he does not have a record.
The challenge for Cohen is that she has a record.
As the LA Times reported, Cohen foreclosed on her home over 15 years ago after taking on twin adjustable-rate mortgages with no money down. Many California voters understandably fell on hard times and couldn’t keep up with their payments during this time.
But Cohen was not among them. In fact, she insisted that her failure to make payments was not because of financial hardship. Rather, it was a negotiating tactic.
In other words, it was intentional. She could pay but she chose not to.
While banks should shoulder the blame for predatory lending practices with well-meaning victims, it was not uncommon then–or now–to be upside-down when purchasing homes with no money down.
What is unusual is Cohen’s boasting of her ability to pay—even over a decade later. She explains her actions as a deliberate choice rather than a difficult circumstance, even with the benefit of hindsight, demonstrating a stunning lack of reflection and personal growth.
It is this lack of moral maturity and its implications on future performance, rather than her past, that disqualifies Cohen from the office she seeks.
Ethical Competence and Leadership
Cohen’s ethical competence—defined broadly by behaviorists as conscious decisions and actions within a situation in which one bears responsibility—predicts a troubling future tenure if she is entrusted with oversight of voters’ money. Research has shown that self-control is the key attribute that puts character into action, resulting in the practice of moral behavior.
This is especially true for those who control massive sums of the public’s money, as the framers of SOX understood two decades ago. Moreover, organization science research links executives’ ethical competence to external contexts. That is, regardless of the quality or stages of their internal development, situational contexts often alter their judgment and behavior when in power. Power can, and does, corrupt.
Chen’s Fortitude as an Outsider
SOX also spawned various streams of whistleblower research because of its protections for those who courageously report accounting misdeeds. As a Republican, Chen is a California outsider. His decision to run can be explained by looking at the characteristics of whistleblowers. Studies show that people who are empathetic and proactive tend to blow the whistle, but often lack the authority to stop wrongdoing. They tend to take on the status quo because of their moral intensity and sense of responsibility.
However, outsiders tackling powerful systems do so at great personal risk because of systematic retaliation from insiders who control large and well-funded institutions. Retaliation may include anything from termination to reputation-undermining campaigns. Cohen has already tried to link Chen, whose parents immigrated from Taiwan, to anti-choice Republicans, despite his support for women’s right to choose and despite her acknowledgement that Chen lacks a record.
To distract from scrutiny of her own financial record, Cohen claims to know better than Chen what is in his heart and mind. In fact, she ardently argues that because Chen is a Republican, voters must draw inferences about his future performance where no record exists. But her past financial mismanagement is prologue.
Cohen claims that she has fiercely “stood up to large corporations,” but California voters also want to know if their next controller can stand up to the most powerful entity in the state – its government. And since she has not conjured up the fierceness to debate Chen, voters from both sides of the political aisle are forced to conclude she cannot.
