|Charismatic Execs or Would You Golf w/a CEO?||AllisonHayes|
Jun 27, 2002 6:11 AM
|As a CEO, I have $10M in bonuses and stock options riding on my company's performance. I direct my CFO to make a "minor adjustment" to my financial reporting. Hey, its simply an accounting change, all I need to do is classify these expenses as capital expenditures and then depreciate them over several years. I show profitability, I am a hero and I get paid a ton of money to boot. No one gets hurt; we all profit. Aint it grand to be a CEO? I am so clever... |
All I have to do is "charm" some key players into going along with my scheme: my CFO, my board of directors, my senior execs, my accounting firm:
...The board of directors is happy and they don't want to ask any hard questions because times are tough out there and we now turning the corner. Besides, they will get a nice set of perqs as well.
...My external accounting firm doesn't want to dig into the books too deeply because "we" have this "understanding." wink wink wink.
...and so on...
The Rogue Rhinoceros Syndrome?
So, how did we get here? A friend of mine said this all started 20 years ago when companies began to eliminate seasoned middle managers. A whole class of ambitious & bright people suddenly had free reign to energize the corporation.
Which they did and the money and rewards rolled in; which led to excesses--and there was no tempering of their behavior because the sage mentors were all gone. Like an underground coal fire, it spread across companies, engulfing any checks and balances--until it finally erupted into a capitalistic inferno of excess--exposing egregious corporate greed and leaving in its wake the vacuous charred remains and bankrupt dreams of the fallen workers, the lost pensions, the small investor.
These charismatic execs, these rogue rhinos, have wrought a plague not unlike locusts.
So, my questions are:
1. What needs to be done to correct this situation?
2. What is the near term & long term price we must pay for these excesses?
3. Who should be held responsible; who is accountable?
4. What kind of restitution can/should be made to those caught in the maelstrom?
|No answers but a sad sight||mickey-mac|
Jun 27, 2002 6:38 AM
|Working in the telecommunications industry, I was following WorldCom's plight before the Sullivan announcement. After hearing of the accounting "errors" and Sullivan's sacking, I went to the Yahoo finance board for WCOM and read the messages that were being posted there. It was fascinating but very sad and depressing. Normally WCOM's board will produce a message every 5 or 6 minutes. On Tuesday night, 7 or 8 messages were being posted every minute. Despite increasing turmoil in the weeks leading to the announcement, WCOM employees were in a state of shock and expressing it on the Yahoo board. Many people fully expected (for good reason) to be given pink slips when they arrived at work the following morning. Others were saying (I hope jokingly) that they were bringing guns or baseball bats to the office the next day. Like Ken Lay and Jeff Skilling, Bernie Ebbers and Scott Sullivan will probably be looking over their shoulders for the remainder of their lives, even if they avoid prison time. |
The current situation will only be corrected by the passage of time without another Global Crossing, Enron, or WorldCom. The market won't recover until confidence in accounting practices is restored. I hope that by this point, CEOs and CFOs have discontinued the practice of denying accounting irregularities, knowing that the books are a ticking time-bomb. As for restitution, every effort should be made to recover all gains acquired by people like Ebbers and Sullivan and return them to employees and shareholders. Realistically, however, this is unlikely to happen when we consider, for example, that WCOM loaned Ebbers something like $300,000,000 to cover margin calls.
Jun 27, 2002 6:48 AM
|You are either ethical or you aren't. There isn't much that can be done to make someone ethical.
Therefore, the solution is to make the punishment so harsh, even the worst crooks will think twice. We need the white collar crime equivalent of the death penalty:
- Serious prison time. 10 years minimum in a real prison. The kind where you don't pick up dropped soap.
- Serious fines. Triple the amount of any direct gains through options and bonuses. Fines cannot be forgiven via bankruptcy proceedings.
- SEC Banishment. Can no longer be an executive, board member, insider, or advisor of any public company.
The nice thing about #2 is that unless you are extremely wealthy, you will likely lose your own home and most of your possessions. Since you can't get out of it with a bankruptcy, you will spend the rest of your life paying it off. If the little people who lose their 401(k) have to suffer, you and your family will suffer just as much.
Maybe this will keep things honest.
Jun 27, 2002 9:55 AM
|they don't just hangs 'em, they gives 'em a fair trial and then theys hangs 'em.|
|Ingrained in the culture; hold your breath for W. to speak up...||cory|
Jun 27, 2002 7:41 AM
|This is one of the few areas in which I feel no hope at all. Change would have to come through legislation, and there's no appetite for that even without the huge contributions big biz makes to politicians. Certainly Bush and the bunch aren't going to rock the boat any more than is absolutely necessary to appear credible and concerned--witness his repeated insistence on "voluntary compliance" (translation: Business can do what it wants, but only if it wants to). Normally I feel at least some sense that the Democrats would be more reasonable than the Repubs about stuff like this, but in this case I think they're only making noise to put pressure on the Repubs. When they had a chance to do something about it, they didn't|
|On PBS: Arthur Andersen Ethics Tapes||Me Dot Org|
Jun 27, 2002 8:31 AM
|Yesterday on PBS news there was a segment about Arthur Andersen. They used to have a division that advised other companies on (get ready) business ethics. They interviewed the woman who ran the division. She said the execs at Anderson never availed themselves of the services that they offered other companies.
One of the tapes shows an executive, Stew Leonard, says "People who look for the short cut, the prisons are full of them."
Two years after making that tape, Leonard was convicted in the largest embezzeling scandal in Conneticut history, skimming $17 million in profits. He was sentenced to 52 months in prison.
PBS's commentator, Paul Solomon: "Today, Leonard is out of jail and Stew Leonard's chain is expanding. If any stigma remains, it hasn't seemed to hurt business. But the biggest surprise may be that anyone did jail time at all, because according to Justice Department data, U.S. Attorneys prosecuted only 187 defendants over the last decade for white- collar crimes.
And while 142 were found guilty -- a healthy 76 percent conviction rate -- only 87 did time, usually at a minimum security, so-called "Club Fed." Attorney Jake Zamansky believes lenient sentencing has helped create the current climate.
Here's the link to the on-line article:
I agree that one place to start is to send executives to tougher prisons.
But this is much more systemic problem. Many companies are willing to sacrifice long-term viability for short-term profit. They will cut staff to the bone, which minimizes overhead, and makes their profit looks good.
Three quarters later, when the company is hemorraging customers, and their revenue flow is being decimated by cancellations due to inadequate staffing, the finger-pointing begins. The finger rarely points to the executives that cut staffing to make a good quarterly profit margin in the first place.
I think a lot of this is fueled by unrealistic expectations in the marketplace. When one company makes giant profits, the pressure is on everyone else to do the same. The 90's were full of dot coms and telecommunications companies whose growth was fueled by a belief that markets would get bigger than was possible.
The Market is like an emotional greedy child, it wants MORE! NOW! The market does not have patience for companies with slow growth rates and steady profits, which are some of the best-run companies, and the best places to work.
Jun 27, 2002 9:46 AM
|Great post, thanks. |
It seems that the system has run amuck. We asked companies to police themselves by allowing deregulation. Instead, what we got was not unlike the wild west--the first participants were those who saw they could make a quick buck by exploiting the rules, followed by the prostitutes and outlaws.
You are right, we have a systemic problem. So how do we bring about an institutional restructuring of business, markets, legislative process, oversight and accounting rules that redefines the meaning of appropriate corporate behavior which rings out the excesses of greed?
|Systemic Reformation?||Me Dot Org|
Jun 28, 2002 5:49 AM
|Sorry I'm a little late in replying. Actually went for a bike ride...
The short answer is I don't really know the answer.
What needs to be done is to get brokerage houses, shareholders and executives back on a track of realistic growth. I'm not exactly sure how to do that.
One thing I think could be done is to require executive compensation packages that involve stock to the long term viability of the company. If an executive gets stock options, make it a requirement that the executive has to hold on to that stock for X number of years. That would help take the incentive away for short term profit at the expense of long term viability.
As an aside, whatever happened to that plan to let people pull money out of Social Security so they could invest in the stock market and retire rich?
|Your friends theory is wrong.||Len J|
Jun 27, 2002 8:45 AM
|Some experiential observations:
1.) These situitations are the result of the Confluence of a number of factors, not the least of which are Deregulation driven by the Republicans begun seriously during the Reagan years, increased tying of Senior Officer compensation to stock market performance thru the use of Options, Broader participation by small investors in the stock market which resulted in "Chasing" the hot stock, the dot-com effect which encouraged "Betting on the come" investing and got small investors believing that 20+% returns were normal and reduced prosecution by the regulatory agencies during the 90's due to political pressure.
2.) The majority (Over 99.9% IMExperience) of CEO's & CFO's are highly ethical, motivated, and trying to due the right thing for all their constituants, their shareholders, employees and communities. Unfortunitly the actions of a few reflect terribly on the many. I personally know that the vast majority of Arthur Anderson's 85,000 employees are as honest as the day is long.
3.) The correction that will be instituted will be regulatory. This will increase compliance costs for all in order to make sure that the small % that will cheat are discouraged. Stock Option gains will be deducted in determining profits which will more fairly reflect the cost of these programs. This will result in more realistic option issuances.
4.) The pain we will bear for this will be slower growth in the economy. Wary investors coupled with tight lending will reduce the available funds for legitimate companies to invest in growing their business. Long trm this will be a good thing as the pendulem will swing back to the center balancing regulatory restrictions with growth enabling investing in an atmosphere of belieivable results. It will take time to accomplish this resoration of trust, but there are too many people with much to gain by a trusted economic backround. Politicians, Capitalists, Lenders, Accountants and investors will work hard to restore this faith recognizing that the alternative is economic collapse. They won't let it collapse.
5.) Unfortunatly, everyone is responsibe to some extent. Investors who didn't take the time to truly understand the financial reports but rather basked in their paper gains (and spent as if the gains were real), politicians who allowed the lack of regulatory enforcement that set the landscape upon which these abuses occured, Public Accountants that had inadequate internal checks and balances that allowed unethical partners to reflect on all of them, and the Executives that took advantage of this for their own gain.
6.) It is easy to point the finger at the executives and recoup all of the gains they made as a result of the manipulations, this is a no-brainer. Beyond that, I think everyone involved has already paid a steep price for what happened.
As in most things, we would like to have a simple, tangible, person (or persons) to blame, unfortunatly, responsibility runs deep on this one.
|Everyone is responsible; no one is accountable?||AllisonHayes|
Jun 27, 2002 9:19 AM
|I agree, it is a confluence of factors. I think that what my friend was saying was that avarice became the driving force across the board. I also agree that most execs are ethical. |
However, in these high stakes games, someone should be held accountable. Will that occur? Probably not. Milken spent a few years in jail but still had hundreds of millions in the bank. Did he have to pay restitution? A pittance.
I agree that we will all bear the pain; I also feel it will be a long time before all the excesses are wrung out of the system and we are able to fully recover. Unfortunately, there are those who will never recover. That is the ultimate tragedy of all of this.
I disagree that, just because it is easy to point the finger at executives, it is a no-brainer. Examples need to be made, and it needs to be painful to the perpetrators--so that these events are not repeated. Will that happen? Probably not.
Thanks for your thorough treatise on the subject--there are many, related matters that you expanded on.
|Everyone is responsible; no one is accountable?||Len J|
Jun 27, 2002 9:23 AM
|Never said no one is accoutable. I just think that in our haste to find "A" responsible party, I am afraid that we will miss all of the contributing things. Let's face it, part of this is the price that we have been called to pay for all of the economic gains of the 80's & 90's. We all benefited from that, should we all not pay for this?
|Reminds me of...||mr_spin|
Jun 27, 2002 9:45 AM
|I'm sorry, but this reeks of the idiotic arguments that the USA deserved 9/11 because its policies have pissed of so many people.
You talk in generalizations, but those do not apply to Worldcom or Enron. These are situations where there is clear responsibilty, because there are clear attempts by certain executives to deceive investors and effectively STEAL money through false performance.
WE are not responsible. The environment is not responsible. A CFO signed off on this stuff. An Andersen partner signed off on it. All of the other finance and audit people at Worldcom and Andersen who worked on this stuff and didn't think to report it are responsible.
These things don't happen in back alleys. Lots of people knew about these "irregularities" and said nothing. There is responsibility here without question. The problem is that there will be no accountability, unless you were one of the 17,000 who is being laid off and Andersen being dismantled. Some Andersen partners have been banned by the SEC and thus can never work for public companies again, which is a start. I want to see jail time and fines that serioulsy hurt these criminals.
|I agree but......||Len J|
Jun 27, 2002 9:53 AM
|If we were only talking about Enron & Worldcom then only "Pusishing" the specific people incolved would be the correct approach. However the problem is much deeper than those two instances. While we are not responsible for the specific acts of these individuals, I think we all share some responsibility for the environment within which these abuses occured. People have been predicting these things for years & no one paid attention because everyione was making outrageous gains in the market & no one wanted to rock the boat.
I couldn't agree more that the individual purpatrators need to be punished severly, I just happen to believe that more needs to be done than that.
|you know, LenJ is quite right||weiwentg|
Jun 28, 2002 2:32 AM
|it's more than an individual problem; if I read you right this is what you are saying. though the individual is ultimately responsible, the environment plays a great part.
have you heard of the Stanford prison experiment, done by Phillip Zimbardo? it's a famous experiment, and though I haven't looked you should be able to find reports easily enough on the Net. the gist is this. Zimbardo set out to recreate the conditions found in a prison using ordinary students. half of the volunteers were randomly selected to be guards and half were prisoners, and the volunteers were carefully screened for any psychological abnormalities. they were totally normal students, all psychologically healthy and all. the only difference was that half had been assigned to the 'guard' role. those half turned out to be authoratitive bullies. the other half, the 'prisoners', also performed their submissive roles exactly. I'm basically condensing a lot of information from several sources into one soundbite. but, in short, the system proved to be more powerful than the individual.
and this is what is happening with corporate America. otherwise normal individuals become corrupt because of the imperative to maximize profit. this is why you can't get health care without insurance, and why you have to be rich to get a good education - it's the whole profit thing. and it accounts for the obscene behavior of a large number of corporations. I'm sorry if I sound Marxist, but that's the way it is.
what's the solution? well, you could switch to a communist economy and do it properly this time around, but that wouldn't work. don't worry, eventually the Western world will find a just and workable solution. of course, that solution might come too late.
finally, no nation could possibly deserve to have a 9/11 happen to them no matter what the provocation, not the way I see it. but the US' policies did, probably, lead to 9/11. the arguments are not idiotic, as you say.
|I'm sorry I missed most of this one,||TJeanloz|
Jun 28, 2002 4:29 AM
|It's too bad I missed the meat of this thread, but I was out of town meeting with some of the new low caste, CEOs.
My viewpoint is that things are being blown out of proportion. Of course, the boom was out of proportion, so the bust might as well be too. In regards to the accounting 'frauds' that are now being alleged, it has more to do with the practice and goals of accounting than it does with fraud. Enron built a house of cards, that if the economy had stayed the course, would have eventually been shored up from the bottom up, and nobody would know about the means by which the ends had been reached. It was a big gamble that they took with a lot of debt that didn't pay off.
With WorldCom, Qwest, and Global Crossing (et. al.), I think the situation is quite different. They had truely new products and they didn't really know how to account for the revenue from these products. The first person to the table set up the rules, and other companies that joined in had to follow the rules, because if they had been more conservative, the market would punish them. If MCI/Worldcom had booked expenses the right way, they would have been bankrupt four years ago. In retrospect, it's easy to see that how they chose to book revenues and expenses was not the most conservative method. Things aren't always so clear in present time scenarios. It's a difficult question, if you replace old, slow routers or lines with new, fast routers or lines, is that maintenence, or a capital improvement? I'm inclined to agree with WorldCom that it's a capital expenditure. Current media outlets seem to agree that it's definitely maintenence. I don't think it's so clear. These issues are (mostly) far too complicated for the media to understand, and CEOs are being villified in the press for things that are truely borderline. The media has simplified things so that it seems obvious, but things aren't that simple.
But to actually answer your questions:
1. Force more board competence and independance. CEOs should not be taking so much heat for the present situation, boards and auditors should. Corporate governance knows that CEOs have an incentive to lie, and has in place checks and balances, the CEOs lived up to expectations, the board and auditors failed us.
2. 'We' don't need to pay any price, unless we worked for one of these companies, or had a large stake in any of them. But if we had a large stake in them, shame on us for not diversifying our portfolio.
3. Auditors and audit committees of BOD's should be held equally responsible as executives. We pay executives to run the company as profitably as possible, we pay directors to make sure the executives are doing everything aboveboard- the directors failed.
4. No restitution should be made. Investing is inherently risky activity. If you can't take the heat of losses, stay out of the stock market kitchen.
Jun 28, 2002 5:50 AM
|Let me play devils advocate here. |
If I understand what you are saying:
i time ran out on the house of cards because the economy turned sour.
Excellent point! I remember reading about Domino's Pizza. In the mid-seventies, Domino's made some risky bets to expand quickly and took on enormous debt. They nearly went bankrupt dozens of times and could barely make expenses and several times required bridge loans. This lasted for about three years while they built their infrastructure. They did not want to go public to raise capital. After two years, they took off and became one of America's most successful privately held companies.
i Technology is so complex today that accounting rules cannot appropriately determine whether it should be capitalized or expensed.
I find that argument very hard to accept. This borders on incompetence. Although I do believe that corporations were challenged to perform and therefore took greater accounting risks. Of course, with those risks came the rewards. Rewards for the execs, for the brokers, for the board of directors, for the legislators. I still assert that greed was a prime motivator in the decisions that were made.
i More board competence and oversight is needed
Couldn't agree more. In addition, execs and board members alike need to understand finance. What did Enron execs know about finance when the company went from an energy services company to a financial arbitrage company overnight? Did they understand the vageries and implications of hedging, of covering options on futures, of position keeping, of spreads, of energy strips and swaps, of broken date calculations?
They could only see the upside; there was an absymal and abject blindside to see the downside. Maybe they were like kids in a candy store only this time instead of candy lying around, there was visions of lots of money to be made. I assert they too became greedy; and through their naivete, they killed the goose that laid the golden eggs in the process. (sorry to mix metaphors.)
i no restitution should be made
Someone is making money shorting the market. Is it the small investor? Is it the people with the 401ks? No! I assert it is the individual who was duped big time, got sucked in through individual investing, through pensions, through IRAs and through 401ks. I find that phrase, "If you can't take the heat of losses, stay out of the stock market kitchen," tiresome and patently arrogant. (No offense to you.)
It ignores the travesty of those whose savings and retirement hopes have been wiped-out and now have nothing to look forward to. The "smart" money players can be smug because the know they can take the heat all the while shorting the market waiting for the bottom to hit so they can cover.
Jun 28, 2002 6:28 AM
|On Accouting rules:
Deciding whether to capitalize or expense costs has a lot to do with how a system is going to be used in the future, how it will depreciate, and how it will be used up in the course of doing business. A lot of these things, like depreciation, and how the technology would be used, were unkown when the accounting rules were made. Assumptions were made, and they didn't necessarily err on the side of conservatism (as they should have). But the problem was compounded, because people had to jump on the aggressive rules bandwagon or be left behind.
On losing money in the stock market:
I'm apathetic to people who suffered large losses in the market, except for the people who were genuinely misled by their brokers, and certainly there were a FEW of those. Greed ruled the day in the late 1990s, people strayed from diversification formulae hoping to get rich quick. It was gambling, and they lost. As an industry professional, I didn't take huge portfolio losses, because for every share of Qwest I owned, I had 100 in other companies. It wasn't like the street was telling people to put all of their money in Techs- quite the contrary, every decent broker was saying "diversify, diversify, diversify" and every greedy individual investor was saying "but I might miss out on pets.com". People were blind to the risks inherent in the market- not because they weren't told, but because their own greed blinded them. I have little patience for people who want to somebody else to pay for their gambling losses (including Messers Lay and Ebbers). The stock market is no place for individual investors. Period. Just like I wouldn't go into a lion's den alone, I wouldn't recommend that a lion trainer go into the stock market alone.
This isn't to say that I don't think any CEOs did anything wrong, but the buck stops with the shareholders, period. If they aren't smart enough to do their diligence in investing, they aren't smart enough to be investing in the first place. That's what mutual funds and savings accounts are for.
Jun 28, 2002 8:05 AM
|'First thou shalt arrive where the enchanter Sirens dwell, they who seduce investors. The imprudent investor who draws near them never returns, for the Sirens, lying in the flower-strewn fields, will charm him with sweet song; but around them the bodies of their victioms lie in heaps.' |
|not the point||ColnagoFE|
Jun 28, 2002 10:28 AM
|the real question is why accounting needs to be so complicated? Basically to stay afloat you need to have more cash coming in than going out--who cares how you account for it? If the well is going dry you are in trouble. Those accountants are highly trained to know what they are doing and i'd suspect they did this intentionally to hide debt hoping things would improve in the meantime and everyone would be too stupid to realize how they were conned. the sad thing is that the employees of these companies only had what the company and the street told them to go on as far as their financial position. the accountants and upper execs should be held accountable. if they were truly that ignorant of what the moneymen were doing then they were guilty of gross negligence at the minimum. i think we do pay a price...maybe not $ from lost investments, but a moral price...one that paints all corporations and ceos with the same broad brush--that we think they are all crooks when i'm sure there are plenty of them with the highest standards of integrity.|
|I agree 100%,||TJeanloz|
Jun 28, 2002 10:34 AM
|Why does accounting need to be so complicated? One reason is taxes, and how the U.S. calculates them. The other is that making accounting simple would put a lot of accountants out of work.
I'm all for a cash in-cash out system of accounting and taxation. It would make everything clearer, but it would be harder for the government to give hidden subsidies and tax breaks.
Jun 28, 2002 11:04 AM
|It's not enough to say screw 'em to all the investors who got burned. Sure, some were just along for the ride, but many were in mutual funds that do massive amounts of research. Intelligent investing is not supposed to be a pure game of chance. It's impossible to do due diligence when executives are intentionally reporting false information. If you want to compare it to gambling, then this is the equivalent of the casino shaving the dice or loading the deck. It's not a fair playing field.
Plus, some of the supposedly reckless investors were private pension funds and state and city governments. Think you didn't lose anything? I hope not, but I doubt it. We ALL got ripped off.