Monday, September 27, 2010

The New Ugly American?

Renee Ordeneaux and Fred Warga wrote an insightful article, “Trust But Verify,” for the latest issue of The Bottom Line, the company newsletter of RBZ, LLP (a Los Angeles-based accounting firm).  They highlighted the latest report of the Association of Certified Fraud Examiners (ACFE): 2010 Report to the Nations on Occupational Fraud and Abuse

The topic of “risk management” is on everyone’s agenda, from auditors to boards of directors and regulators.  We noted earlier that one of the most important parts of the Dodd-Frank Act was the heightened whistleblower provisions.  The ACME study provides the foundation for this note:  40.2% of all fraud schemes studied were detected by a tip, whereas 4.6% were detected by external audit, 13.9% by internal audit and 15.4% my management review.  Contrary to most discussions which allege that “it’s the board” or “it’s the CEO,” fraud is far more likely to be perpetrated by some desperate rank-and-file drone or middle management supervisor who lost his/her moral compass.

“Fraud perpetrators often display warning signs that they are engaging in illicit activity. The most common behavioral red flags displayed by the perpetrators in our study were living beyond their means (43% of cases) and experiencing financial difficulties (36% of cases).”

The blame-game loves to focus on those evil-doers in the corporate boardroom, or those CEO’s who are packing in exorbitantly excessive executive compensations.  But, a closer look at today’s headlines begins to reveal just how “Ugly” average American business people have become -- without the help of those at the top.

Let’s take a look at a selection from recent headlines.  Were these the directors? or were these Jane and Joe Does?

1.      Hewlett-Packard Co. agreed to pay $55 million to settle Dept. of Justice allegations that the company paid “influencer fees” to systems-integrator firms in return for recommendations that federal agencies purchase HP products; other charges alleged that a 2002 contract with the General Services Administration for computer equipment and software was defectively priced because HP provided incomplete information to contracting officers during negotiations. EMC Corp. paid $87.5 million to settle similar charges in May 2010.

2.      Intel derivative litigation settlement alleged the company violated a host of antitrust policies and practices since 2004; the agreement mandated 18 new compliance committee, general counsel, training and audit changes from the board level all the way down to sales and marketing.

3.      For-profit universities discover their recruiters encourage applicants to lie on their requests for loans.  Federal government support of student financial aid is at risk of insolvency because 75% of loans are not being repaid.

4.      Workers and managers on the BP oil rig and at the Massey Energy mines intentionally shut off or closed down safety valves because the protections “got in the way” of business as usual, which included resulting catastrophes and death.

5.      Mortgage brokers allegedly allowed or encouraged “liar loans” from applicants who provided fraudulent information on mortgage loan applications.  Mortgage bankers today report they still must be vigilant to ensure that applicants do not file fraudulent information even after everything we’ve learned from the subprime mortgage crisis and bailout. Mortgage "refis" are questionable at best.

6.      Lenders are discovered to have paid appraisers for inflated property valuations to overstate mortgages contained in mortgage backed securities.

7.      Widespread increase in so-called “strategic defaults” on mortgages where the property value has dropped below the mortgage principal, although the property owner has the capacity to pay the mortgage. Bankers today report an increase in “bad buys” where a homeowner, preparing to do a “strategic default,” attempts to buy a new home without reporting the existence of the old, under-water loan, in order to have a safe haven prior to bailing out.

8.      Insurance companies found to have paid agents under-the-cover fees to win business.

9.      State pension fund board member alleged to have received payments from investment managers in exchange for an inside track as a contractor to buy/sell securities to the pension fund.

10.  Pension fund board members reportedly neglect to file financial disclosure documents – not just once, but repeatedly in spite of fines.

11.  Municipal representatives allegedly not domiciled in the districts where they were elected to serve. Council members receiving sweetheart loans and excessive compensation. Municipal representatives reap astounding compensation and pension benefits, under cover.

12.  Credit ratings agencies found to have inflated bond valuations in order to win business from companies whose bonds or securities they rated.

13.  Research analysts receive bonuses for favorable buy-sell stock recommendations of companies that do business with the financial firms who employ the analysts. From approximately mid-1999 through mid-2001 or later, ten of the nation’s largest  investment banking firms engaged in acts and practices that created or maintained inappropriate influence over research analysts, thereby imposing conflicts of interest on research analysts that the firms failed to manage in an adequate or appropriate manner. In addition, the regulators found supervisory deficiencies at every firm.

14.  Accounting firms are now prohibited from providing management consulting services to companies whose financial statements they audit because of the perverse cross-payments.

15.  Compensation consultants to be required to disclose fees they received from companies where they provide executive compensation advisory services to prevent preferential treatment.

16.  Violations of the Foreign Corrupt Practices Act accelerate.  The FCP Act prohibits bribery payments to any foreign official in order to win business overseas.

17.  Sales personnel at technology firms reportedly provide off-book retroactive rebates to buyers to win business through the fabrication of fraudulent revenue-recognition practices.

18.  Accountants and general counsel at high tech start-ups back-date option grants to artificially increase stock bonuses for employees and management.

19.  Banks on both sides of the Atlantic, based on input from legal and tax advisors, conspire to establish phony off-shore entities as conduits and safe havens for tax evasion.

20.  Banks manipulate “Repo” balances just before the end of month or quarterly financial statements are released in order to inflate earnings reports.

21.  Medical doctors and insurance brokers reportedly collude to defraud the health reimbursement funds by fabricating illnesses, accidents, treatments and medical conditions.

22.  Papers and dissertations are for sale on the Internet.

23.  Surveys of students reveal alarming levels and tolerance of cheating “as a way of life.”

24.  Widespread use of steroids in sports. 


Why is there such extensive personal corruption in the American way of life, today?

Why do we so delight in gawking at the carnage of crashes on the highways of our lives (BP oil slick disaster, the Katrina flooding, Shirley Sherrod firing, Boston Police v. Harvard Professor confrontations) rather than mind our own ethical behavior and morality?

Why is there such righteous indignation and sanctimonious expectations of “socially responsible” behavior among entrepreneurs, corporations or government, yet so very little social conscience in our own personal economic and financial choices and behaviors?

Why is there such a great willingness to blame others for failings and to demand others’ take responsibility – but little or no individual personal accountability for performance? Do we really think that more “rules” alone will address these problems?  And are we sure that “boards of directors” are the ones ultimately responsible for this tsumani of unethical behavior inside companies -- at the employee, worksite and management levels? Have American employees and management forgotten how to compete fairly?  Do they believe that the only way they can succeed is by perpetrating fraud on each other?

Sources:

Wednesday, September 22, 2010

Tilt!

I am unabashedly an advocate of Elizabeth Warren and acknowledge her insight and contributions to formulating the original idea of a Consumer Protection Agency.  Her role as head of the Congressional Oversight Panel (COP) also won her great respect both for her dogged pursuit of the truth and her willingness to take on top financial challengers.  I sense, however, that the "pocket appointment" of her to the assistant director position advising Timothy Geithner, responsible for formulating the shape and charter of the CPA, was not handled in a manner that will give her the respect she deserves.  By avoiding the Senate confirmation hearings, President Obama probably ensured she will be able to hold the job, but she will have lost much of the credibility that she will need from within the financial community if she wants the CPA to function effectively. 

We cannot expect some of our leaders to hold positions of public responsibility by taking advantage of an easy street or a back door route.  Side-stepping the real world path to leadership carries with it a stigma that maybe she could not make it on her own merits or that she cannot play by the same rules we expect everyone else to follow.  What if we had "pocket appointments" of our female Supreme Court Justices? Would that imply that we believed they could not stand up to the rigorous Senate confirmation hearings?  If they could not do that, then how can we expect them to do the right thing on the job in the face of challenges inside, deliberating over specific decisions?

We did not like the way some Representatives used their positions of power to facilitate access to funding for large or small banks.  We did not like the way that too many Congressmen earmarked funding for favorite local projects.  We constantly hear the argument that "If they can do it, why can't we?"  The answer is that we know better -- we do not have to stoop to that level to "make it."

In her conversations on the Hill and among financial leaders, perhaps Ms. Warren and her supporters were persuaded that she could not win approval in Senate hearings.  Probably they also heard more specific objections to the CPA functions.  We, the public, will not know the reasons behind her decision, the objections from the Senate or anything about her views of what the CPA should do.  That lack of transparency is upsetting – especially from an administration that argued vehemently for the principles of disclosure and clarity. It suggests, again, the erroneous proposition that "once I get into office, I am no longer accountable."

Just because President Obama has the power to "tilt" the odds in favor of his choice does not mean that his choice should be unexamined and unchallenged. Elizabeth Warren will have to face the heat of examination, ultimately, and she must accept the consequences of her prior positions and the decisions as head of COP. She showed she was willing to face her challengers, then, and earned our respect for doing so.  Why, now, would she not want to earn our greater respect by taking on the challenge of building that office she so sincerely desired?

This action sends a mixed message to all of those truly dedicated women who played by the rules, did it the hard way, met their challengers, faced the consequences, and achieved positions of leadership.  It is unlikely that they would advise those who would follow them to look for some easy way, some back door path to leadership. Yet, this appointment advocates exactly that message.

This is the very same issue women directors face as some argue for "an easy path" or "a side door" into the corporate boardroom, as if the position were an entitlement rather than the culmination of a worthy career. The achievements and credentials of women candidates must be adequate to steel them to the challenges they will encounter inside the boardroom. If they want the respect of their peers and their constituencies, they too will have to avoid the appearance of been shooed in under the guise of some preferential quota system.

If we believe that Elizabeth Warren is the right choice for this position, the most capable person for the job, then we should be willing that she stand tall and walk through the front door of that office like everyone else in this democracy.  

Tuesday, September 7, 2010

Women of the Directorship 100

The National Association of Corporate Directors (NACD) Directorship magazine for September 2010 highlights the 4th annual "Directorship 100 . . a veritable who's who of the American corporate governance community ... the most renowned boardroom influentials."

The actual headcount is 184 people, of whom 36 are outstanding women in governance. Today's 19.6% of the top people in corporate governance is impressive in its own right, but also because we are hearing and reading about these women every day. Congratulations to all.

Accounting firms:
Sharon Allen, Deloitte LLP
Catherine L. Bromilow, PricewaterhouseCoopers
Beth Brook, Ernst & Young
Mary Pat McCarthy, KPMG ACI

Proxy advisors:
Carol Bowie, ISS Governance Services
Martha Carver, ISS Governance Services

Pension funds:
Amy Borrus, Council of Institutional Investors
Ann Yerger, Council of Institutional Investors
Hye-Won Choi, TIAA-CREF
Anne Sheehan, CalSTRS
Anne Simpson, CalPERS
Anne Stausboll, CalPERS

International Corp. Governance:
Christianna Wood, ICGN

Executive search:
Julie Hembrock Daum, Spencer Stuart
Bonnie W. Gwin, Heidrick & Struggles

Directors:
Dina Dublon, director at Microsoft
Bonnie G. Hill, director Home Depot, AK Steel, Yum! Brands
Mellody Hobson, director Starbucks, Dreamworks Animation
Blythe J. McGarvie, director Accenture, Viacom
Maggie Wilderotter, director Procter & Gamble, Xerox

Corporate:
Margaret M. Foran, Prudential Financial
Ellen J. Kullman, DuPont
Amy W. Schulman, Pfizer
Jean K. Traub, Capital One Financial

Compensation:
Pearl Meyer, Steven Hall & Partners

Law firms:
Holly L. Gregory, Weil, Gotschal & Manges

Politics:
Valerie B. Jarrett, the Obama Administration

Regulators:
Kathleen L. Casey, SEC
Meredith B. Cross, SEC
Mary L. Shapiro, SEC
Elisse B. Walter, SEC

Media:
Carol J. Loomis, (Hall of Fame), Fortune
Joann S. Lublin, The Wall Street Journal
Gretchen C. Morgenson, The New York Times
Becky Quick, CNBC
Louise Story, The New York Times

Had I picked up the counterpart issue when the Directorship 100 first came out in 2007, I would have seen just 100 names, and a grand total of 16 women, half of whom also are on the 2010 list.  However, CalPERS and the PCAOB also were among the top 100, and women were prominent at those entities as well.

2010    Directorship 100 - 2007
Yes      Sharon Allen, Deloitte & Touche
Yes      Catherine Bromilow, PricewaterhouseCoopers
Yes      Julie Daum, SpencerStuart
Yes      Holly Gregory, Weil, Gotshal & Manges
Yes      Joann LublinThe Wall Street Journal
Yes      Pearl Meyer, Steven Hall & Partners
Yes      Gretchen MorgensonThe New York Times 
Yes      Ann Yerger, Council of Institutional Investors
Laura Berry, ICCR
Carolyn Kay Brancato, The Conference Board
Margaret “Peggy” Foran, Pfizer
Barbara Hackman Franklin, Barbara Franklin Enterprises
Mindy Lubber, CERES
Nell Minow, The Corporate Library
Ann Mule, Sunoco
Carol Ward, Kraft

One other item: at their latest Director Professionalism training session in Laguna Beach, CA, the NACD reported that 29.8% of the attendees were women (31 out of 104). Outstanding!

Thursday, September 2, 2010

New Drucker on Leadership

Peter Drucker is an amazing teacher, whether you read or hear his original works or tap into this new book by William A. Cohen, Ph.D.:  Drucker on Leadership: New Lessons from the Father of Modern Management  (Jossey-Bass: 2009).  There’s always something new to be learned from the master of management. 

One small example is the book’s chapter on “applying segmentation to leadership.”  If we substitute “segmentation” of the workplace personnel for “diversity,” we get some new, truly out-of-the-box thinking. Segmentation tells us that personnel have differences that we could acknowledge, just as we recognize customer differences, market segments or economic preferences.  By understanding the different ways customer or personnel make value decisions, we improve out ability to respond to or acknowledge those differential values.

The chapter on Segmentation discusses how leaders “learn more about those you lead” while at the same time that leaders “must be careful not to let [followers] take your focus away from the organization’s main mission.” 

Dr. Cohen provides interesting insight into why leaders “manage by walking around.”  Most people assume that leaders are attempting to get close to workers and to make them feel more comfortable.  When magazines produce company listings of Best Places to Work, it’s as if the focus is on all the perquisites of being an employee. 

But Dr. Cohen tells us that such interactions with staff in meetings (whether inside the company or outside in off-duty sessions) are really an important part of the leadership review process.  These encounters all represent situations that allow one-on-one segmentation, giving the leadership “an opportunity to observe your people in action and see how they perform as leaders.”

Even social occasions and ceremonial events inside companies demonstrate whether “someone” can step up to the challenge, organize the event and run it in a manner consistent with the company mission.  By extension, creating things such as “women’s leadership networks” inside corporations also gives companies a view on who can lead, how well they lead, how well they organize others, and whether they understand the fit of that subgroup or network within the company mission.

A very interesting “case study” toward the end of the book (page 247) discusses how a new leader took over a group that had become known for its failures to perform.   The new leader repositioned the organization to “think about itself differently.” Rather than focus on how “unlucky” the group was, instead it became “unstoppable.”  The new leader built up a change of perception of the organization BY the members of the organization to hold themselves accountable for their own success.

If women’s leadership networks inside corporations focus primarily on perceived disadvantages, discrimination or other “unlucky” fortunes of women in the workplace, that will convey one type of message to management.  If these networks, instead, focus on building leadership talent among women as a workplace segment, that will convey a different and far more interesting impression.