Eugene Soltes | Harvard | Managing the Gray Area - The Fine Line Between Puffery & Lying | Part 1

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1:25welcome marketers advertisers and those who love them the chief marketing officer confidential cmo confidential is a program that takes you inside the drama the decisions and the politics that go with being the head of marketing at any company in what is one of the most scrutinized jobs in the executive suite i'm mike linton the former chief marketing officer of best buy eBay, Farmers Insurance, and Ancestry.com. Here today with my guest, Dr. Eugene Soltis. Today's topic, managing the gray area, the fine line between marketing and lying. Now, Eugene is a professor at the Harvard Business School where he has been teaching for nearly 16 years.

2:08He also authored a book titled, Why They Do It, and here it is. It's Inside the Mind of the White Collar Criminal. Now, I picked up this book, and I couldn't put it down. I finished it in less than three days. And we thought it'd be great to hear what Eugene has to say about marketers who often find themselves in the gray space. And he has graciously accepted our invitation to join the show. Welcome, Eugene. Thanks, Mike. Real pleasure to have a chance to join you and discuss an interesting topic. I won't say a fun one, especially if you're on the other side here. It's fun to read about, though.

2:52It's probably not so interesting to be involved in your book, but fun to read about it. So before we even go into the topic, ground our listeners in what you teach and the book you wrote. Just give us a writ large overview of the whole space of this whole white collar crime thing. Yeah. I mean, any of us that reads like the newspaper, we see these giant cases on the front page of the Wall Street Journal. And I think we're curious, what happened? How did you get there? We read most recently, you know, the Theranos, the FTX, these huge cases. Back, I mean, it's, you know, 16, 17 years ago at this point, I had that same question, and I maybe went one step further than most people do.

3:41It's pure personal curiosity. I just started writing some of the people whose cases I'd been following the news, asked to speak with them. Turns out when you're a former executive that's now incarcerated, you have a bit more time on your hands. and several were gracious enough to make themselves available to become pen pals or literally meet them in prison. And that's what started my, I'll say, journey into this whole area. So I just want to make sure I hear this right. While other people were immersing themselves in, say, fantasy football or something else, you decided, you know what I'm going to do?

4:19I'm going to write Bernie Madoff a letter and have a chat with him. Is that right? Yeah, I mean, it really, it wasn't that much more thought out. I was actually watching a TV show, like three in the morning while I was actually finishing my graduate school degree and running some regressions and frankly was flipping through the TV channels and was inspired by this like, called lockups, this cross between a reality TV show and a documentary. and watching that show where they're interviewing people that are generally convicted felons of generally a medium security prison. I was saying, hey, the guys that I've been following, people from Enron and WorldCom, soon enough, Bernie Madoff, how did they get there?

5:01They didn't come from gangs or broken homes, drugs. They had these amazing backgrounds. What happened? And so, yeah, that was just my curiosity got the best of me, you could say, to start this journey off. And so this becomes a something you decide to teach. How do you even think about structuring it and then teaching it? Yeah, well, I should be very careful because oftentimes I'm introduced and it says, Eugene teaches white collar crime. And so I want to be very clear. I don't teach white collar crime. In fact, most of the work that I do now is how we try to prevent such those things from occurring.

5:38But I think to understand how to prevent it from occurring in the future, we need to first understand how it occurs. So we want to get into the mindset of people who engage in these offenses. And I will say, by and large, the people in my book, they're thoughtful, reasonable, strategic people that made a series of errors. And that's what led them down to the slippery slope that ultimately had these extraordinary consequences. But But I mean, the preface in the second edition of the book was called Why We Do It, because we're all susceptible to certain kinds of biases and pressure that can lead us down this path.

6:15So really what I'm focused on with our participants in our exec ed programs and our students in our MBA programs is trying to understand, like, how do people succumb to these environments that ultimately lead to these extraordinary ramifications? And why don't they see it earlier and manage to stop before it upsets both everything that they've built, their companies, and obviously the huge externalities this has on investors and other stakeholders? And so before we even get into the root of this interview, what is the structure of that kind of class or that kind of teaching? because what I hear you saying is almost anybody can fall down this road if you don't have a little bit of awareness, you know, sturdiness or whatever.

7:08The temptation is sitting there almost all the time. Is that fair? Yeah, exactly. I think well put. I taught an MBA class called Borderline. It's exactly what you think it is. It's about conduct that's somewhere in the gray zone between moral, immoral, legal, illegal. And I think what surprised many of the students that took the class is several people were prominent executives who made some pretty serious errors that led them to be in the headlines for a very different reason than they expected. And I think a lot of people have the sense that, like, I'm the good apple. These people we read about that are executives that fall from grace are bad apples, and they're going to seem really sinister.

7:52It turns out when they come to class and spend some time, they don't look very different from most of the current executives that we have as they talk about, you know, the challenges and stresses that they have. And I think that's pretty humbling and actually pretty scary to most people because you realize you can't actually differentiate it like everyone would like to think they can. And you could be, the other thing I took away from the book is you could be in a situation where there is pressure on you to cut the corner or like take a step. It could be personal. It could be your company. It could be the industry.

8:27And it's easy to take, sometimes it's easy to take that first step. Is that fair? At Publicis Sapient, we're not just talking about AI. We're delivering real results today. With Sapien AI, we speed up software development and save clients thousands of hours. We revolutionize how travelers discover their perfect getaway. And even turn a simple fridge scan into a personalized meal plan. Making AI work for you, it's what we do. Yeah, I mean, one of the people in the book actually said, we all think we know when that big ethical consequential decision will come and we'll make the right decision. But I didn't see the decision when it was in front of me, because a lot of time it's one of the hundred other decisions you're making.

9:18People are giving you similar feedback advice. So you kind of lull yourself into these decisions that sometimes have these extraordinary ramifications. Also, sometimes, as I know we're going to get into probably the line between, you know, I will say where there's potentially a lot of value created and a lot of money to be had and it will be celebrated rewarded. And then the other side of the line, which could send you to prison, oftentimes that is a very fine, it's not even a line. It's like a, it's a gray zone and people operate in that gray zone actually oftentimes quite a bit of the time. And that's murky.

9:54Well, let's talk about some of those gray zones. You know, we talked in our pre-call about regulatory arbitrage. Let's talk about regulatory arbitrage and then go into a case study about that. Yeah, I mean, this is how tech operates, a lot of tech, and it's innovative. It's where there's a regulation that someone will say it's either outdated, it's simply the regulation hasn't been created in the right way to benefit consumers. And so you ignore the law initially, and then you hope you get a large enough following that what you're doing is not illegal. And if one looks at the kind of the origins of Uber, Airbnb, businesses we celebrate today, I mean, the effective origins of their business would not pass, I will say, let's say clear muster of what the prevailing law at the time.

10:48But the idea is you build a base, you have millions of customers, and the laws will adjust and change. It's what crypto is actually, you could see, arguing now. But in the process, there were a lot of crypto people that have gone to prison, that have paid some very large fines. Some of them think that that's because the regulation is outdated. Other people think because what they're doing is simply wrongful and should be forbidden. And that's that murky area where you could say it's extremely innovative or it's really, really sketchy. and and like let's and ai has to be on the edge of a lot of this right i mean with that how they're training the models and lms and everything tell us about the risk there because that's like a real live unfolding in front of us case right yeah i mean easy easy loving example here i mean we all are learning a lot and it's extraordinary what's being accomplished with some of the gen ai But where's all the material coming from?

11:46As a lot of the lawsuits are coming out now, I mean, it's being trained on images from Getty. It's being trained on the New York Times' articles. I mean, that's required journalists like decades. It's a century of information that was gobbled up over a couple of years effectively for free. obviously if you're an AI company you're saying the copyright law is outdated and this is general use it's how we're building the models obviously if you're a photographer and you've made an entire livelihood of taking photos that are being digested now someone can literally modify and create something new in six seconds you get no proceeds from that it seems absolutely outrageous which side is right here is I will say a great example and obviously the AI companies are relying on a, you could say, a version of regulatory arbitrage.

12:32They think the copyright law is simply outdated. And as Gen AI gets enough use, the copyright law will adjust. I don't think a lot of people, let's say the New York Times and Getty are saying the same thing, though. Yeah. We're going to talk about how companies make these decisions, but I want to unwind a couple more of the gray areas. One of the favorites for marketers and agency, puffery versus fraud or lying. Tell us about that and the gray area there. Yeah, I mean, puffery is supposed to be the idea that statements that we all believe to be untrue, they're just a pure form of advertising. Now, it gets interesting when there was a famous oil company that once had an advertisement that said, buy our gas.

13:22It's like putting a tiger in your tank. Oh, yeah, sure. And I think we can all appreciate that if you go to the gas station, they weren't physically going to take like a live tiger and jam it in your tank. OK, that's a good example of Huffery. Now, there's another case. And actually, I bought a box. It's amazing how you can get off eBay. It actually emptied a 10-year-old empty cereal box from Kellogg. And on the cover of the cereal box, they had Boost Your Immunity. I think it was for Rice Krispies. Oh, yeah. And I will say the question is, will eating Rice Krispies actually boost your immunity?

13:59Tiger in the Kink, we kind of all know. Now, Boost Your Immunity, I will say, I mean, I have two young kids at home. I mean, they get, like the winter, they get cold. Anything that could get them a little bit less cold, I mean, my wife and I will buy. I don't know. Maybe that could motivate me. it probably motivated someone. Is that fraud or is that puffery? And I think the world where we operate right now where information and disinformation, what's real news is fake news, is even more complicated or nuanced. I think that line is even murkier. And a lot of it doesn't look like the tiger. A lot of it looks like really subtle information that's really hard to know the basis of.

14:35But this puffery versus fraud, I'll give one other context. A number of companies have actually been sued in the last several years for making statements, which when investors go back, they look at their code of ethics or code of conduct and say, you literally said you would not do that. And then you engage in that. So it's fraud because you told us you would not do that in your code of ethics. And what have companies said? And I appreciate the legal defense here, but it also kind of offends my soul a little bit at the same time, is that companies have then said, well, our code of conduct, our code of ethics is also a puffery.

15:10It's not actually. Wow, that's awesome. And your reaction is exactly like mine. I mean, I see why. I mean, it's not it's a general statement, but should we really think the code of ethics is like a marketing document? I genuinely hope for all our sake. That's not how employees see it and read it. And are courts upholding that as puffery? Yeah, I will say they've had success. They've had success with that argument, which, again, I find on one hand, I can see why, because you're parsing every word in a very technical, legalistic sense. But we can't intuitively see it like that. I mean, I will say that's deeply prominent.

15:47I don't know what we're doing in our compliance programs if employees are supposed to see that like a marketing document. Right. Okay. Okay. Give us a time where the marketer has crossed from puffery into fraud or into lying. Oh, this is, well, I'll give someone, I will say not a, it's someone in a leadership position. There was a well-known executive at a pharma company named Scott, sorry, Harkadon. So he was actually the CEO of the company, obviously, but with his other leadership at the company. They were excited about the results from a trial, a new trial they had for a disease which had no cure.

16:26And literally they wrote one line about a potential finding that they had, which was a secondary endpoint. It's actually something that actually the government went after. It's actually alleging fraud because they said, hey, patients would see this and actually not draw the subtle statistical conclusion. but instead run out there and try, and it's government fraud, they would run out there and try to get the government to pay 50 grand or whatever the medicine cost, even though it was unproven. They went after with the criminal law after both the leadership of the company around this. I think it's a really interesting example because on one hand, from a commercial side, and you can say all the things the company wants to share in a positive way result for something that could be pretty exciting and actually pretty transformative in people's lives.

17:17The question is, how do you share scientific results? And there was actually nothing fraudulent. There was nothing lying or deceptive. But the government alleged because it was placed there, it could convince people in some way that wouldn't read all the scientific paper that it was fraudulent. So the government put it in the context of the user versus the context of the truth of the statement and looked at the puffery as a lot more than puffery, given the user was desperate for a cure. I know that's in your book. Yeah, but I guess the question is, how much information are people digesting? thing.

18:01There was a study that just came out in the last couple of weeks I read about that the average person, before they make a decision to buy a stock, the average individual investor, spends something on the order of like, it's like 10 seconds. Yeah. I was in the Wall Street. One Robin Hood. Yeah, they spend more time ordering a hamburger. But I mean, on one hand, I would say all the allegations of fraud that one is making against companies, if the average person is only spending 10 seconds making a decision, the best defense a company would have is that the investor hasn't read actually anything about our company.

18:30They've read the name and they see the price. They don't even know our business does. I mean, that's obviously a kind of a caricature, a perverse caricature, but people are not digesting the depth of information. Now, the question is when people digest just little snippets, if they draw the incorrect inference, is that the fault of the company for not laying it out more or the marketer of not giving it more transparently, or that is the fault of the consumer or the investor for not, frankly, just taking their time and doing the appropriate due diligence that you would expect. I will say that's what makes this puffery versus fraud distinction so hard.

19:08I guess sometimes it's not even clear whose fault, you know, ultimately it is. So when I'm sitting there in the company, I'm looking at this gray area. how do I even think about it as a company? Like, do I actually understand it? Or am I really aware of it? Like, talk about the gray area and how companies should play in it. I mean, there's two areas that I think of. And when I think of all my work, there's both the legalistic and regulatory. And there's also the reputational. I suspect actually on a marketing side, I will say in those two are increasingly closely connected. If you have a lot of reputational scrutiny, that's when regulators or enforcement agencies start looking at you.

19:54So actually, the reputational test is actually a pretty good first pass to have. If this is on, like what I call the TikTok of the world and being traded on LinkedIn is something that's controversial, sure enough, someone else is going to look. Is it simply offensive or does it go one step further and it was deceptive? Yeah. I mean, ultimately, from the regulatory enforcement side, they're looking at was this deceptive, not just was this this offensive? I mean, every year there's always one Super Bowl ad that I don't know what happens because it costs a lot of money and they go through a lot of people's hands.

20:27But every year there's always some some ad that manages to set the world ablaze for being offending seemingly everyone. And the question is, well, I mean, where does, I guess, presumably inside viewed as very edgy. That edginess went so far as to offend people. Generally, it hasn't gone to the deceptive, but actually the crypto companies are pretty interesting here because you have a big star go online, a big football player, someone with a huge following. and they say, I'm buying CoinX. Or when those NFTs were all the rage, I'm going to sell you an NFT and it's going to be a big hit. It's going to go up a lot of value.

21:09Obviously, why did you buy that thing? Because your influencer is selling it to you, not because they frankly know anything about it. And I think that's where it's starting to get beyond just informing people, which you could say in the best case, what is marketing doing? It's helping inform people about the aspects and the quality of the products and why that's a good fit for them. It's not trying to trick them into something that's not true about that product. So if I'm sitting there in the company and I'm looking at some of these, because I think the crypto is an excellent one, like Fortune favors the brave.

21:44And, you know, Curry is selling, you know, is talking about this. And, you know, everyone's saying they're going to you're going to miss out if you don't do this. And also, I think betting is another area that is really super interesting here in terms of the money back you get from betting and we'll stake you with this. How do I look, how do I even see the reputational risk or cliff if I'm in these discussions? And how do I get a good feel for where I'm, when I'm on the edge and when I'm not on the edge? Yeah, I'll give you, I'll give an example that we ran into. I ran into recently, and I will say this one, I will say, was so far over the edge.

22:25But someone brought this idea called social gambling. I suspect you and any listeners will, it'll be, I think, New York Times will be writing about this in a couple of years. It was presented as, take the best parts of crypto, DraftKings, and OnlyFans and put them all together. So you're going to have your favorite influencer, which generally, if it's something like OnlyFans, a lot of times there's a sexual attraction. They're going to run gambling tables like DraftKings and bring you in. So you'll play a game of poker with the influencer and you'll do this with crypto. Why crypto is useful is when you lose money because it's crypto, it doesn't actually have the same feeling.

23:06It's like, why do you use chips and not dollars? When you lose, it doesn't have that same feeling as losing money. And it said, we're going to bring this together. I can see how this is going to be a billion dollar business. It's taking like every human instinct and putting it all together. Now, this was a very edgy idea that what I call the gambling companies are even staying away from. The crypto companies that are much more libertarian kind of minded saying, if you want to spend your money in this way, more power to you. It also probably will help circumvent, I suspect, some money laundering laws, which is where it gets really, really sketchy.

23:39Matthew McConaughey, you'll drive up in a Lincoln with a Salesforce tower behind him. But it's going to make a ton of money and it will lobby. But I will say this doesn't pass the test where I would say I see in five years how we're going to see a pile of like 15 year olds like on these on weird sites with like, you know, older people basically that they're attracted to losing a pile of money gambling. It doesn't pass. Even if you could technically figure out some offshore way to do this legally, I know what that headline is going to look like in five years. And I wouldn't want my reputational capital to be even near it.

24:17That's an example. It's like, do I want my brand? In this case, it was presented me as a potential project to work on. Anywhere near that. And I would say the answer was no. And I think that's one easy way to start thinking about is what is the reputational capital? Because reputations are very, very easy to lose. And I think a lot of the, I will say, decisions that I've seen that are described in the book are people that are doing very, very well, and they don't know how to ever say no or ever lose. Sometimes, like, things don't go the way. The business isn't growing. You just need to sometimes – we all have setbacks.

24:52People that don't have setbacks, I will say that was Enron. Anytime they had a setback, they found a way of kind of hiding that setback under some special vehicle or some other way because they never wanted to show a loss. A little humility goes a long way. So, you know, you watch a lot of companies walk right to the edge of the existential risk, where they're going to risk the whole company. And they still take that risk. Sometimes maybe that's the only choice they have. But other times you think, why, why? And you watch companies like, you know, all the vape companies that ended up selling so much to teenagers and everything.

25:30You could kind of look back and see it. Why do they take the risk when they can even see it? Some of that's, I think, a motivated reason. I mean, I always think, so you asked at the beginning about the teaching. I mean, what case studies are really easy in a classroom, also, frankly, in a corporate training exercise is because you spend a half an hour, hour debating them. You put the one decision right in front, so it's isolated from the hundreds of other decisions. You can use a room in a room with people with different views and opinions. In practice, none of those things exist. You have hundreds of decisions in a day.

26:02You're making around people that think like you and you don't isolate that decision and you do it fast. So, I mean, you can sit around a room and you can find a lot of ways to justify and kind of rationalize your way into why things are OK. Like I will say the spirit of people can do what they want with their own bodies. I mean, sitting back, that's a, I will say a very well accepted, actually positive statement that the government shouldn't be controlling your body. You can apply that to some one context. You can then switch and say, well, let's apply that to vaping. Why should the government tell me that I can't have gummy bear flavored vapes?

26:45I think there might be some good reasons. like your 14-year-old doesn't have a lot of self-control and they're going to get access to that. Maybe that's why we need to actually intervene. But I will say you can step back from that. I'll give an example because I think it's what I see some of my friends that operate in social media. So I've been working on a project now into really kind of, I will say, challenging areas of business. One of those is arms trafficking. So I've spent some times with people that traffic in arms and what all of them describe their business models. No one says, I'm moving weapons around to dodgy people.