September 2005

“…I have a reluctance to say much about temptations to which I myself am not exposed.”—C. S. Lewis

“…the threat of substantial prison time has become a more real danger for executives.”—Wall Street Journal, June 20, 2005  

WHAT CAN WE LEARN FROM CORPORATE CRIMINALS?

By Tony Mulkern

              That overused word “tragic” seems the best one to characterize the news images of Bernie Ebbers leaving the courthouse tearful and shattered after being given a virtual life sentence of 25 years for his role in an $11 billion fraud while CEO of Worldcom.

              Ebbers is one of many CEOs and executives from Enron, Tyco International, Adelphia Communications and others who face jail terms.  Those convicted have been found guilty essentially of betraying not only their professed values but also their companies, their employees, and their stockholders—who in many cases lost entire retirement funds. Numerous other companies such as AIG, Bristol-Myers Squibb, Computer Associates, Monsanto, and Time Warner operate under deferred prosecution agreements with the Justice Department.  Most recently, eight executives at Marsh & McLennan, the nation’s largest brokerage firm, have been charged with felonies connected to price fixing and bid rigging in the insurance industry.

              While some of the convicted assert their innocence, the natural question to ask at this point is, “How could so many talented, very bright, successful, and wealthy individuals end up this way?”  But instead of trying to deeply discern their motivations, it might be more appropriate to ask, “How can I ride the rocket of success and avoid ever ending up in jail—or at least on some district attorney’s hit list?” 

              Too often when executives want to provide protection against unethical action they are thinking of how to prevent others in the firm from misbehaving.  But it would be the height of arrogance for any of us to assume that we are immune from the same sort of self-destructive behavior that led to the downfall of so many at the top of their careers and companies. The demise of Arthur Andersen, the pending fraud settlement with KPMG, and financial scandals in the recent past involving church and not-for-profit leaders show that pride in one’s own ethics can be delusional and that no one in any profession can afford to be smug.

              A safe bet is that if you experience significant financial or professional success you will eventually encounter some of the same temptations experienced by those executives facing trials and prison.  Great lawyers, a top notch accounting firm, a Board composed of heavy hitters—none of these alone or together—have proved to be protection enough.

              The suggestions below are offered in what I hope is the start of a conversation on this vital topic.  Readers are invited to submit their own thoughts by e-mail, and a select number will be shared in future editions of this ezine.

              There is no guarantee that any of us will always do the right thing; the fundamental issue is to prepare ourselves to resist those inevitable impulses to do the wrong thing.  While greed and ego are doubtless sometimes the motive, they seem to be less often the issue than fear of failure or of ruin or appearing soft, or fear of disappointing stock analysts, stock holders, or one’s family.  If so, preparing to avoid wrongdoing is largely a matter of managing fear.  How does one do this?

Act on Principle with Boldness. 

              Most entrepreneurs and top executives are bold thinkers.  They articulate unheard of possibilities and then persuade others to transform the ideas into realities. If circumstances threaten the accomplishment of agreed upon objectives and numbers, they will strain their creativity and expect others to do likewise to overcome the challenges rather then abandon agreed upon targets. 

              Yet some of the same tough minded executives, who have publicly committed to sound ethical values for the firm,  quickly lose conviction and are the first to suggest abandoning those values, when they get in the way of the numbers.  This is sometimes justified as being “flexible” or “realistic.”  But if a CEO is to maintain his or her integrity, then at as least as much mental effort and creativity must go into preserving ethical standards as goes into preserving the annual objectives. 

              The classic example of this kind of integrity was demonstrated by Johnson & Johnson when several people died from Tylenol that had been maliciously laced with cyanide after it reached stores.  In deliberating on the appropriate course of action, senior management appealed to the company’s values statement which put the customers’ health and welfare first.  In light of this, they incurred enormous losses by taking back all product on store shelves, even though they were not legally obligated to do so.  And they did this not knowing whether this would bankrupt the company. As it turned out, the financial risk they took for the sake of the public interest actually increased the public’s trust in the company, and they quickly rebounded and went on to even greater success.  

Review Your Priorities.

              A few years before his death at age 85 in 1974, the famous Texas oil pioneer and entrepreneur H. L. Hunt, gave an interview in which he reflected over his lifetime of success.  Forbes Magazine had earlier declared him the richest man in the U.S., but now, he said, he sometimes toyed with the idea of divesting himself of his billions and starting over flat broke, just to enjoy the challenge of gaining it all back.  J. Paul Getty, of Getty Oil, whose origins were much less humble, reflected in his later years that he would have traded all his wealth for one successful marriage. 

              The lesson is to ask ourselves, what is really most important?  The collective wisdom of prophets and sages across the ages tells us that if our number one priority is wealth, fame, or power, we are sowing the seeds of our own destruction.

Learn to Manage Wealth.

              We have all heard stories of winners of multi-million dollar lottery jackpots who are broke again in a couple of years.  Many newly wealthy executives seem to exhibit the similar lavish spending habits, at the expense of ever becoming financially stable and independent.  Leveraged to the utmost, they continue to live on the edge of ruin.  To avoid feeling compelled to take desperate steps in a business or financial downturn, create what is sometimes called a “moral cushion” of financial security.  Better yet, find a good financial advisor to provide advice on how to achieve this while still enjoying and sharing your new wealth.

Prepare Against Panic.

              As a licensed pilot, I learned in flight training that the greatest danger in the cockpit is panic. Responding to emergencies with calm and deliberate action requires training and mental discipline.  I practiced repeatedly working through a checklist of what to do in the event of engine failure or if turbulence from a larger aircraft turned the small plane upside down on final approach.  Absent this training, if the real thing happens, you spin nose first into the ground. 

              What is your check list for a worst case business or financial scenario?  Would it include, a) cook the books; b) lie to the SEC; c) defraud stockholders, as it did for so many of the convicted?  Let us hope not. These are the pathetic actions of the panic stricken and unprepared.

              After becoming accustomed to affluence and success, the prospect of financial ruin or career failure can terrorize any of us.  In preparing for worse case scenarios, it might be worthwhile to ask, what would you do if you went broke?  Not a pleasant thought, but probably your worst case scenario will include more comforts and liberties than are found in the average federal prison.  For what it’s worth, I became a more effective pilot and enjoyed flying a lot more after I knew I was well prepared for the worst.

Beware of the Downside of MBO.

              Over the many decades since Management by Objectives was introduced it has proven itself as a powerful tool for organizing high performing teams around measurable, key results and clearly delineated roles.  The danger is obsession with the numbers at the expense of unforeseen priorities and fundamental values.  When the numbers seem especially challenging, managers are sometimes told to “do whatever it takes.” Taken literally, as it sometime is, this is a formula for ruthlessness, that is to say, acting without principles, ethics or any defensible standards of behavior.  This cavalier attitude is encapsulated in the title of a best-seller on advice for business success, First Break All the Rules.  My advice: “First Ignore this Title,” if you want to stay honest.

Trust, but Verify. 

              This was President Ronald Reagan’s formula for disarmament treaties that worked.  Much of the management wisdom of the past 15 years extolling trust, delegation and empowerment needs to be balanced with “Blind trust is dangerous.”  Assume as fact that as CEO you will be held responsible for any fraud and malfeasance of subordinates. Hire for character and fit, as well as competence, and get rid of those whom you know to be untrustworthy, however productive they may be.  A book whose title is worth taking to heart is by Andrew Grove, founder of Intel: Only the Paranoid Survive.

Remember the Phoenix. 

              The successful person differs most from the “loser” in having failed more often—and then having learned from those mistakes, sometimes over and over.  It is possible to arise again from the ashes, like that mythical bird the Phoenix.  A number of convicted executives have even done well after prison terms.  Imagine how much farther ahead they would be it they had not had to endure that traumatic interruption. 

Prepare Your Family. 

              Fear of losing or disrupting one’s family through a financial or career crisis can be a powerful motivator to cut corners.  But any negative repercussions for family life are bound to be worse if you are indicted, imprisoned, or ruin your reputation.  Perhaps your family should be given more credit for fortitude and loyalty.  You would not wish crisis upon them, but it can be used to strengthen a family and teach everyone what counts the most.

Finally, Broaden Your Sense of Purpose. 

              We in the U.S. are the beneficiaries and guardians of the greatest wealth creating system humankind has ever known, and one which tends to thrive in and promote a context of civil liberties, civic virtues and educated populations.  This is a rich legacy indeed, and we betray it and threaten its existence when we undermine public trust in it through dishonesty.  Perhaps some of the convicted executives would ask, “Why should I take a big hit financially just to help preserve this system?”  The question is outrageous while Americans are taking real hits and dying everyday in the Middle East to help preserve our way of life.  At the sentencing portion of his trial, Ebbers’ remarkable philanthropy was noted, and my experience is that entrepreneurs in general tend to be very generous by nature, which is indeed admirable.  But if we want to help make a better life for the less fortunate, the best place to start is to preserve and strengthen the integrity of the system which makes possible opportunities for all.

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Copyright, Mulkern Associates, 2005