Volume 3, Issue 3
ă 2001 Hopkins and Company, LLC
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Trust and verify
The business and popular press were full of stories in recent weeks about broken trust. An FBI agent is arrested on charges of selling U.S. secrets to Russia. More major companies are questioned on their accounting practices, and accountants are challenged on their “going concern” opinions, or the lack thereof. Banks are accused of looking the other way on money laundering. Most of us extend trust to others and assume that the intentions of those with whom we associate are positive and honorable. Every executive we know will firmly declare his or her personal integrity if asked or challenged. Trust is built over time, and is reinforced by the many ways in which trust becomes the foundation of relationships. How should executives go about verifying trust? How do you balance the costs of ongoing verification versus the high cost of surprises when trust is breached? What approach do you take to inspecting your organization, its employees and your business partners? How do you confirm the integrity of the inspectors? As you read about the situations of other executives and their organizations, think about what changes you can make to reduce the risk to you and your organization of breaches in trust. Consider the areas in which your organization may be vulnerable to breaches of trust and how prepared you are to anticipate and control such breaches.
When FBI Director Louis Freeh announced the arrest of Special Agent Robert Hanssen on charges of selling secrets to Russia and the former Soviet Union, the words that stood out for us were, “the trusted insider betrayed his trust without detection.” It came as a surprise that one of the largest and most capable investigative organizations in the world overlooked employee espionage for over fifteen years. While the CIA performs routine polygraph testing of employees, the FBI does not because Freeh has resisted such action. As more of this story unfolds, we’re learning that even after Hanssen was caught breaking into someone else’s computer files, a thorough investigation was not performed (The New York Times 2/23/01). At the same time, Hanssen was scanning the FBI computer records to check to see whether or not he was under investigation. We’re likely to hear more about weaknesses in the controls and processes used by the FBI in monitoring its agents and employees. We can certainly expect changes in FBI practices in the future.
What employee behavior triggers investigations within your organization? What random checks do you make to ensure that things are really as they appear to be? Does the trusting nature of your organization expose you to an unacceptable degree of risk when someone abuses that trust? Do you fear invading the privacy of employees and therefore avoid actions that could be an appropriate verification? If you were director of the FBI, what would you do?
Never too late to ask?
We read recently in The New York Times (February 21, 2001) about an employee reference check that Lucent Technologies made long after hiring an executive. In fact, the company pursued references only after the executive died, and the company was conducting an investigation into irregularities involving billing by the dead employee’s department. The late James R. Baughman was director of recruiting at Lucent, responsible for hiring thousands of workers. According to The Times, while working in the San Jose school district in the early 1990s, Baughman admitted to lying when he stated he had received a doctorate from Stanford University. He also served prison time during the 1980s for stealing funds when he was a high school principal. The San Jose school district confirmed that no one from Lucent contacted them prior to hiring Baughman. While there’s no evidence of any wrongdoing by Baughman at Lucent, attention to the company’s loose hiring practices comes at an inconvenient time for the company.
What approach do you take in checking references before hiring new employees? Beyond the names provided by the applicant, what other contacts do you make? Do you confirm the veracity of educational credentials? When phoning references, how do you overcome the reluctance of reference providers? Is a public records check a normal part of your hiring process? How do you deal with employees who lie on their application or resume?
Full service laundering
One of our favorite financial reporters, Kathleen Day of The Washington Post, called our attention to a minority report from the U.S. Senate permanent subcommittee on investigations, titled “Correspondent Banking: A Gateway for Money Laundering.” After a yearlong study, the members concluded that banks largely overlook the activity of their correspondent banks and create vast opportunities for money laundering globally. Here’s a quote, “Correspondent accounts in U.S. banks give the owners and clients of poorly regulated, poorly managed, sometimes corrupt foreign banks with weak or no anti-money laundering controls direct access to the U.S. financial system and the freedom to move money within the United States and around the world.” Day reports that four banks closed accounts studied by the subcommittee after the banks became aware of “suspicious” activity. The report came out just before The Wall Street Journal (2/14/01) reported that $1 billion is missing from a failed Russian bank.
Which of your processes and practices can create opportunities for unscrupulous partners to take advantage of your company and damage your reputation? What controls do you have in place that would enable you to recognize suspicious behavior? What are the limits of your service? Are you willing to do anything your customers want?
Hide and seek
It’s not easy to investigate close to home, especially for entities owned by members. The National Association of Security Dealers is being sued by a member firm claiming that the multiple roles of the NASD force members to disclose things that should not have to be told to an investigator. According to The New York Times (2/15/01), NASD Regulation started a criminal prosecution assistance unit in 1998, and that’s the group whose jurisdiction is being challenged. As regulator, NASD entered the offices of D.L. Cromwell Investments for a surprise audit, and photocopied documents that were then turned over to federal prosecutors. Counsel for Cromwell claim that due process was violated, and that NASD when acting as an agent of the government can’t compel the disclosure of information in the manner of a regulator, under threat of suspension from the industry if testimony were withheld. NASD created the criminal investigation unit to fight organized crime. Other entities with multiple roles, like the Chicago Board of Trade allow members to plead the Fifth Amendment when under investigation. This may be a case to watch.
What pitfalls are you likely to face when conducting self- or member-investigations? How can you minimize the risks that can arise from conflicting roles? How does your industry go about disciplining organizations that misbehave? What else can you do to improve enforcement?
Accounting conventions and rules leave lots of room for independent judgment. Usually after some form of financial disaster strikes, questions arise about questionable accounting practices. Xerox (The New York Times 2/9/01), Lucent (The Wall Street Journal 2/9/01) and Conseco (The New York Times 2/22/01) are among the companies that remain under scrutiny for questionable accounting practices. During times of change and crisis management, these challenges can become distracting to executives, especially when the accounting practices may have been directed by prior management. Investors rely on outside accountants to contain creative accounting exuberance, but often by the time the outside accountants weigh in, circumstances have changed. The Wall Street Journal (2/9/01) profiled ten publicly owned dot coms that failed last year, and found that only three of the companies had “going concern” clauses in the accounting opinions from Top Five accounting firms at the time of bankruptcy filing.
What distractions are you likely to face as a result of past or present miscalculations at your organization? What’s your plan for managing those distractions? Can you create a situation in which such distractions are less likely to occur in the future? Are your perspectives aligned or misaligned with those of outside professionals and advisors? When evaluating business partners, how confident are you in the accounting data and opinions provided?
“I missed her a lot”
As more decisions are made on a quantitative basis, some organizations question the value of relationships in business dealing. The high cost of relationship management can be difficult to justify when clients choose to do business based on other factors. Many organizations rationalize that relationships are corporate, not individual, and brand loyalty will overcome changes in personal account coverage. We read not long ago (The New York Times 2/14/01) that prolific author Michael Crichton abandoned a thirty-year relationship with Knopf and signed with publisher HarperCollins. “I felt that in a relationship of such duration you can take the publisher for granted and the publisher can take you for granted,” he said, “I was concerned that in my way of working I wasn't being as sharp. I don't want to get complacent.” It also turns out that the new head of HarperCollins, Jane Friedman, worked with Crichton from 1969 to 1998 when she left Knopf. Crichton said, “I missed her a lot.”
Which relationships do you take for granted? How do you consider the value of those employees who would be missed by important clients? How vulnerable is your organization’s success to the relationship decisions your customers make each day? Do you know what you need to know about the quality and value of those relationships?
Here are selected updates on stories covered in prior issues of Executive Times:
Ř The February 2001 issue of Executive Times mentioned the death of certain animals following the oil spill near the Galapagos Islands. A careful reader called to our attention that our booby writer and editor misstated the species. Instead of four dead penguins, we should have said “four dead pelicans.” We regret the error and welcome reader feedback to alert us to our mistakes.
Ř Speaking of the Galapagos Islands, you can sleep easier tonight knowing that the Kansas State Board of Education revised its science standards again in February 2001 to restore the teaching of evolution. The September 1999 issue of Executive Times called attention to unfavorable press attention following the prior revision of science standards that played down evolution in the curriculum. Unlike the prior stories, the restoration received little or no press attention.
Ř The October 1999 issue of Executive Times called attention to the early trial by fire for Maytag CEO Lloyd Ward. In December 2000, we reported Ward’s exit from Maytag where he was unable to turn the situation around. Lloyd moved to a tiny company, iMotors, an online seller of used cars. While many observers expressed concern that Ward, the second black executive to head a Fortune 500 company had moved on to such a small enterprise, Ward told The New York Times (2/7/01), “the opportunity I now have is the best opportunity of all the ones I looked at. This is the best for me.” Ward plans to build iMotors into a Fortune 500 company. Stay tuned.
Howard Clark became CEO of American Express Company in 1960 and one of the first challenges he faced was whether or not to sell the two-year-old company to rival Diner’s Club. He repositioned the company to focus on well-heeled travelers, especially business people, and the rest is history. By the time Clark retired in 1977, the company had eight million cardholders around the world. Clark died in early February at age 84. Another wise decision by Clark early in his career came when he faced a major crisis. An American Express subsidiary leased oil tanks to a company and then guaranteed loan payments by the lessor collateralized by the oil in the tanks. The lessor, Allied Crude Oil, misrepresented the amount of oil in the tanks and then defaulted under the loan. According to The New York Times, American Express “wasn’t required to honor the debt, but Mr. Clark announced that the company had a moral obligation to do so.” The wise decision to pay bond holders what turned out to be sixty cents on the dollar helped to solidify a reputation of integrity for American Express and to reassure organizations world wide that American Express could be counted on to honor its obligations. Clark established a solid foundation for the company and a tradition as a reference point for the behavior of his successors.
(Note: readers of the web version of Executive Times can click on the book covers or titles to order copies directly from amazon.com. When you order through these links, Hopkins & Company receives a small payment from amazon.com. Subscribers to the print version of Executive Times can receive the web version at no additional cost. Send e-mail to firstname.lastname@example.org with a request to be placed on the web version distribution list. Also, not all books we read make it to the pages of Executive Times. Check out http://www.hopkinsandcompany.com/bookshelf.html for other book selections. For expanded reviews of Executive Times selections and other books, visit our book review site at http://www.hopkinsandcompany.com/books/list.htm. Note the new star rating system for 2001.)
Seeking Six Sigma?
Lots of organizations are working on ways to reduce errors and eliminate costs by reducing defects. One measure of quality has been the statistical measure of six sigma, which amounts to 3.4 defects per million events, which is pretty darn good. Whatever questions you have concerning six sigma, you’re likely to find an approach toward an answer in The Six Sigma Way: How GE, Motorola and Other Top Companies are Honing Their Performance by Peter Pande and others. This comprehensive book describes what six sigma is, where and how to use the tools it provides, and what to avoid. Some brief cases seem too contrived to be helpful, but the overall approach seems practical and useful. GE has saved a fortune in expenses through its use of six sigma in many parts of the company. While Motorola has also saved money, its focus on quality didn’t help when it lost attention to the developments in digital wireless outside the company. If there’s a lesson in all this, it may be that when you pick the right areas for your attention, tools like six sigma can help you execute more effectively. Pick the wrong areas of focus, and any way you do things won’t produce the right results for your company. The chapter on how to choose the right projects is extremely helpful. This is a fine book for executives looking to come up to speed on what six sigma is and what it might do for their organizations. It will also be helpful for implementation managers, especially with the roadmap and tools included in the book. There’s good reason to pay attention to the many do’s and don’ts scattered throughout this book. For a longer review of this book, visit http://www.hopkinsandcompany.com/books/Six Sigma Way.htm. Recommendation: ••• (Recommended).
For those executives who like to listen to made-up stories, one of the latest in the fable genre of business writing is Patrick Lencioni's Obsessions of an Extraordinary Executive: The Four Disciplines at the Heart of Making Any Organization World Class. While we don't usually care for the fable genre (like Who Moved My Cheese), Lencioni makes up a business situation that can resonate for many executives, and while we may not like to call attention to obsessive behavior, we think many of the best leaders pay focused attention to just a few areas of concern and impact. So, it's with some reluctance that we recommend this book. The fable takes up around 150 pages and Lencioni follows it with 30 or so pages on how to implement these disciplines in your organization. Executives who are looking for analytical support behind this approach won't find any. HR executives who are pressured over finding reasons for high turnover or are dealing with dysfunctional workplace behavior may find some stimulating conversation starters through using this book. Whether statistically supported or not, the four disciplines Lencioni recommends make sense. The four disciplines are: create a cohesive leadership team; create organizational clarity; over-communicate organizational clarity; and reinforce organizational clarity through human systems. You’ll have to read the book to find out what Lencioni means by these disciplines. For a longer review of this book, visit http://www.hopkinsandcompany.com/books/Obsessions of an Extraordinary Executive.htm. Recommendation: ••• (Recommended).
Had A Painted House been John Grisham’s first novel, he’d still be a lawyer. Unlike his previous novels, this story is set in rural Arkansas during the early 1950s, and chronicles the experiences of a seven-year-old boy during his last two months in the South. The struggles and joys of life on a small farm become heightened when migrant workers from both the Arkansas hill country and Mexico arrive to help pick the cotton crop. Young Luke Chandler observes life-transforming events and keeps secrets better suited to adults, and he grows up quickly as the chapters unfold. While previous Grisham thrillers exuded action and mediocre writing, this book has a pervasive sadness that either permeates events described, or remains in the shadows, ready to strike at a moment’s notice. Perhaps the use of a seven-year-old narrator helped soften and improve Grisham’s writing style. As with most Grisham works, the plot is clear, the language strained, and the writing leaves a lot to be desired. There’s much nostalgia in this novel for the lost simplicity of rural life. Grisham loyalists will buy this book because it’s been about a year since his last one, so it will be a best seller. Had this been a first novel, it would not be noticed. For a longer review of this book, visit http://www.hopkinsandcompany.com/books/A Painted House.htm. Recommendation: •• (Mildly Recommended).
This is an annoying and irritating little book that found us disagreeing with the author on almost every page. Every once in a while, it’s probably good to read such a book. Happily, this one is mercifully short. Morris Berman’s The Twilight of American Culture posits that American culture is in decline, and recommends what some individuals could do about it. We don’t concur with the premise of the decline, and found this to be a gloomy book written by a cranky author. Occasionally, a quote was fun: “How precarious real intelligence is in the world of Oprah & Chopra, in a world where the dumb and the titillating have become the standard of value.” Berman describes the target audience for this book early on: “This is, then, a book for oddballs, for men and women who experience themselves as expatriates within their own country.” If that describes you, give this book a try, and think of it as a chance to play oddball. To read the first chapter of this book, visit http://www.nytimes.com/books/first/b/berman-culture.html. Recommendation: • (Read if your interest is strong).
ă 2001 Hopkins and Company, LLC. Executive Times is published monthly by Hopkins and Company, LLC at the company’s office at 723 North Kenilworth Avenue, Oak Park, Illinois 60302. Subscription rate for first class mail delivery of the print version is $60.00 per year (12 issues). E-mail subscriptions are $30.00 per year. Single issues: $10.00 print; $5.00 electronic. To subscribe, sign up at www.hopkinsandcompany.com/subscribe.html, send an e-mail to , call (708) 466-4650, or fax to (708) 386-8687. For permission to photocopy or e-mail Executive Times, call (708) 466-4650 or e-mail to . We will send sample copies if requested. The company’s website at contains the archives of back issues beginning in the month after the issue date.
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