Volume 4, Issue 7
ã 2002 Hopkins and Company, LLC
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Storm Clouds and Fire
We’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.
“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
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?
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?
Here 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.
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.”
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