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Executive Times |
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Volume 4,
Issue 7 |
July, 2002 |
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ã 2002 Hopkins and Company, LLC Note re: links---certain
hyperlinks assume that you are registered as a subscriber to the site. If you
are not a subscriber to certain sites, the links will fail. If you register,
the links should work. Also, certain hyperlinks expire and may not be
available when you try to go to the site. Storm Clouds and FireWe’ve spent the past few
weeks observing major and minor natural disasters throughout the United
States and around the world. Major fires continue to rage out of control in
several states, while some areas have experienced record-setting floods. In
rhythm with the natural world, some executives have headed for cover as
almost every newspaper and business magazine calls attention to one form of
malfeasance after another by a familiar set of companies, and the occasional
new entrant. Practices or actions that seemed acceptable and reasonable a few
months ago are now facing new scrutiny. Some executives are following the
example of fire fighters, and are trying to lead by grabbing a tool and
trying to make a difference. As you read this month’s selections about what
individual executives are doing, think about the storms in your life and how
you are taking appropriate steps to weather those storms. Fifteen new books are
rated in this issue, beginning on page 5. We awarded four-star ratings to Bob
Kerrey’s memoir, When I
Was a Young Man, and to a debut novel from Ann Packer, The Dive
From Clausen’s Pier. Several well-promoted beach reading books barely received
a single star, so you may want to turn to the reviews before you pack for
vacation. Barometer Falling “A
Prime Example of Anything Goes Executive Pay” The New York Times, 6/4 http://www.nytimes.com/2002/06/04/business/04DENN.html “Turn
Off the Scandal Turn On the Lights” The Wall Street Journal 6/4 http://online.wsj.com/article/0,,SB1023136419965905480.djm,00.html “The
Imperial Chief Executive Is Suddenly in the Cross Hairs” The New York
Times, 6/24 http://www.nytimes.com/2002/06/24/business/24CEOS.html “CEOs
Silence Isn’t Golden” Business Week 6/26 http://www.businessweek.com/bwdaily/dnflash/jun2002/nf20020626_9554.htm “CEOs'
Paid-For, Plush Pads Are Often a Perk of Office” The Wall Street Journal
6/12 http://online.wsj.com/article/0,,SB102381944269816560.djm,00.html During a June 20 closed-door
White House session, according to Business Week (6/21) (http://www.businessweek.com/bwdaily/dnflash/jun2002/nf20020621_6674.htm)
President Bush asked members of the Business Roundtable to
“take a stronger role in restoring public confidence in wise corporate
governance. ‘I want you fellows to lead,’ Bush told the execs, according to
participants.” Some executives seem more aware of the gravity and impact of
the current situation than others. Here’s an excerpt from a Business Week
interview (http://www.businessweek.com/bwdaily/dnflash/jun2002/nf20020617_8675.htm)
with Bush economic advisor Larry Lindsey titled, “Lawrence Lindsey on
Wall Street’s Sins”: “Q: Do CEOs recognize the
gravity of the situation? Pay attention to headlines
over the next few months to see if there’s any change in prevailing sentiment
about business and CEOs. Watch and see which executive leaders step forward,
exert moral leadership and begin to reverse the current trends. How do you
read and interpret the sentiments and mood of constituents? When sentiments
are more negative than you’d like, what actions can you take to reverse
trends? What early indicators let you know about emerging problems? How can
you improve the accuracy of those indicators? How will you lead to restore or
improve the confidence and trust of others? In what ways are you a moral
leader? How ‘Bout Them Apples? “The answer, put simply: A
stock-market bubble magnified changes in business mores and brought trends
that had been building for years to a climax. The victims: the very
shareholders the executives were supposed to be serving. One culprit was
stock options, which gave executives huge incentives to boost near-term share
prices regardless of long-term consequences. No CEO pay package seemed to
strike any board of directors as too big. These incentives helped turn the
widely practiced art of earnings management - making sure profits meet or
barely exceed Wall Street expectation - into a gross distortion of reality at
some companies. And the institutions that were created to check such abuses
failed.” Wessel contrasts Treasury
Secretary Paul O’Neill’s view that there are “a few bad apples”
with former SEC enforcer Stanley Sporkin’s quip: “A few bad
apples? Looks like we've got the whole peck here.” Our favorite quote came
from Harvard professor Richard Tedlow, “Some of what was going
on was people doing exactly what the incentives suggest that they do: Give me
a lot of stock options, and I'll make the stock go up. But something is
missing. Life is lived on a slippery slope. It takes a person of character to
know what lines you don't cross. That part of the equation of corporate
management hasn't had the emphasis it should have had in the last decade or
two.” Fired and Shocked A new face joined the
media’s executive rogues gallery on June 25 when WorldCom said (http://www.worldcom.com/about_the_company/press_releases/display.phtml?cr/20020625) that it fired CFO Scott Sullivan. “As a result of an
internal audit of the company’s capital expenditure accounting, it was
determined that certain transfers from line cost expenses to capital accounts
during this period were not made in accordance with generally accepted
accounting principles (GAAP). ‘Our senior management team is shocked by
these discoveries,’ said John Sidgmore, appointed WorldCom CEO on
April 29, 2002. ‘We are committed to operating WorldCom in accordance with
the highest ethical standards.’” According to the company, the amount of these
transfers was $3.055 billion for 2001 and $797 million for first quarter
2002. Sullivan took the position that maintenance costs increase capacity and
therefore could be capitalized. Few, if any,
auditors would agree with the CFO. At press time, trading in WorldCom
stock was suspended, and pundits forecast bankruptcy. Prior WorldCom auditor Arthur
Andersen claims its 2001 audit met all professional standards. The SEC
filed fraud charges against WorldCom. Could a $4 billion error miss your attention? Does your
commitment to ethical standards get carried out in the day-to-day decisions
made by all employees? How do you know? What’s the process in your
organization for evaluating judgments and decisions? Are you likely to be
shocked by the actions of someone in your organization? Are you someone who
might act in a way that will shock your colleagues? Patriotic Fireworks Stanley Works CEO John M. Trani came under fire,
especially from the press and politicians, when he called a shareholder vote
to move corporate headquarters from Connecticut to Bermuda to save $30
million in federal taxes and thereby close the cost gap with foreign
competitors that pay less tax. While shareholders approved the move in May,
some investors claimed they were misled about the impact of the move on them
(capital gains taxes). Trani and the board agreed to a revote later this
Summer. In the meantime, here’s Trani’s answer to questions from Business
Week (6/10) (http://www.businessweek.com/bwdaily/dnflash/jun2002/nf20020610_8709.htm): “Q: People are saying some
pretty rough things about you -- that you're immoral, that you're
unpatriotic. What's your response? Watch for
the results of the next shareholder vote to see if Trani gets what he wants. Is doing the
patriotic thing important to your organization? How do you determine what
that is? For the unlevel playing fields on which your organization competes,
what’s your plan to improve competitiveness? Will a competitor’s advantage
extinguish your company? Follow-upHere are selected updates
on stories covered in prior issues of Executive Times: Ø
In the November 1999
issue of Executive Times, we
called attention to the $1.2 billion in damages State Farm Insurance
had to pay for substituting non-OEM parts on auto repairs without customer knowledge.
We caught a short article in The New York Times (6/21) (http://www.nytimes.com/2002/06/21/business/21INSU.html)
that reminded us that State Farm lost $5 billion in 2001, and has now halted
or limited homeowners coverage in the 20 states where it’s loss experience is
skyrocketing. Ø We mentioned in the January 2001
issue of Executive Times that
even large companies can act quickly and decisively when opportunities to
hire key talent come up. One of the situations we described was Home
Depot’s selection of former-GE executive Bob Nardelli. Fortune
presents a long profile of Nardelli in its June 24 issue (http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=208332).
We learn that Nardelli was so stunned when Jack Welch told him he
wouldn’t be the next GE CEO, he said, “I want an autopsy.’ Read the article
and find out why. Ø An affirmative answer is emerging to a question we
asked about Tyco CEO Dennis Kozlowski in the March 2002
issue of Executive Times, “Is
Dennis a Menace?” Since March, Kozlowski resigned from Tyco, was indicted
first for sales tax evasion on personal purchases of artwork, and recently
for a felony level crime of tampering with subpoenaed documents. LegacyMasterworks
J.
Carter Brown worked for
just one full-time employer: the National Gallery of Art. He spent 32 years with that
organization and served as its director from 1969 until 1992. More than any
other individual, Brown transformed museums from ivory towers to popular public
attractions. His leadership in creating successful, dramatic, blockbuster art
exhibits has been copied worldwide, and the quality of the collection at the
National Gallery and its physical space improved dramatically under Brown’s
stewardship. The operating budget had increased from
$3.2 million to $52.3 million per year. He led the growth in the Gallery’s
endowment from $34 million to $186 million. Brown and Chairman Paul Mellon commissioned
architect I.M. Pei to design the East Building, that doubled the museum’s
gallery space. During Brown’s tenure, the collections had increased by some
20,000 works of art. J. Carter Brown died in June at age 67.
An unlikely populist, J. Carter
Brown was the son of John Nicholas Brown, called “the richest baby in America” around 1900
when his father and uncle died within weeks of each other, and a large
inheritance came to young John. The family traces its roots to the Browns of
Rhode Island who founded the university. Carter grew up in the one of the
oldest houses in America, and lived in one of the finest cottages at Newport.
He was raised with polo and yachting, and went to the best schools. Veteran Washington
Post art critic Paul Richard ended his eulogy about Brown by addressing how few people know Brown intimately,
because he was often distant, quiet and aloof. “But we, the public, knew him well. And we knew him by his
works. Brown, through his long service, to the Commission of Fine Arts, did
much to preserve the splendor of his city. As innovator, connoisseur, showman
and executive he was one of the best, most influential, art museum directors
of his generation. He filled our eyes with beauty.”
Latest Books Read and Reviewed: (Note: readers of
the web version of Executive Times can click on the book
covers to order copies directly from amazon.com. When you order through these links, Hopkins & Company
receives a small payment from amazon.com.
Click on the title to read the review or visit our 2002 bookshelf at http://www.hopkinsandcompany.com/bookshelf.html).
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ã 2002
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.
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