Volume 3, Issue 8
ã 2001 Hopkins and Company, LLC
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True to You in My Fashion
Most successful executives learn when to speak and when to be silent. The masters of spin can often coach executives to communicate in ways that seem to be open and direct, but often obscure facts and issues, or manipulate data in ways that lead listeners to preferred conclusions. Auditors are trained to ask the right questions, and managers are advised to answer only the questions asked by auditors, not to lead the auditor toward the questions that should be asked. Each executive decides what secrets to keep and what facts to disclose every time an opportunity to open a mouth occurs. Some executives use each message delivered as a chance to sell something, and can be perceived as way too smooth. Other executives deliver messages clogged with detail that can confuse or bore listeners. Few executives pride themselves on their skills at creative lying, but often celebrate getting out of tight spots through verbal acuity. For some executives, alternative versions of truth eventually emerge, and confidence in the executive and their organization wanes. As you read the pages that follow about the experiences and behavior of certain executives, think about your own approach to what you and others think of as truth. What makes you decide to speak out, and when do you remain silent? In your many roles, what do you do to discern the truth?
The Resume Gap
We admit to feeling a baffling amazement when we read reporter Floyd Norris’ disclosure in The New York Times (7/16/01) (http://www.nytimes.com/2001/07/16/business/16DUNL.html) that former Sunbeam CEO Al Dunlap had an important resume gap. According to records Norris obtained from the National Archives, Dunlap had been fired for accounting fraud at two companies more than twenty years ago, and erased those jobs from his resume. “No one who checked his background discovered the omissions.” Since Dunlap was fired by Sunbeam for accounting fraud, the behavior from twenty years ago was material and significant. Norris says, “Like virtually all major companies seeking a senior executive, Sunbeam relied on an executive search firm to find the best person for the job. Daniel Margolis, a spokesman for Korn/ Ferry International said his firm ‘conducted an exhaustive search that resulted in the Sunbeam board selecting Dunlap.’ When asked how the firm had missed the holes in Mr. Dunlap's employment history, he said, ‘It is our policy not to comment on our clients' business issues.’ Spin masters will applaud Margolis’ failure to answer the question, and we expect search firms to improve their diligence in examining employment history.
When you rely on others to examine the employment history of job applicants, do you check the quality of their work? When hiring, how do you approach conversations with former employers? How likely would you be to uncover a resume gap? Do you have one in your resume?
Whistle Blows to Announce Oncoming Train
Former Xerox assistant treasurer James Bingham prided himself on applying accounting principles in ways that helped improve the company’s results. According to The Wall Street Journal (6/28/01) (http://interactive.wsj.com/archive/retrieve.cgi?id=SB993674133642973302.djm), Bingham balked when he was pressed to go further than he thought appropriate in making the company’s performance look better than it really was. “He started badgering top Xerox executives about the aggressive accounting, which he believed was being used to hide larger problems. Late last summer he was fired. But rather than disappear, he went public and filed a lawsuit accusing Xerox of firing him for objecting to ‘accounting fraud.’ He also became a star witness in a Securities and Exchange Commission investigation of his former employer.” Based on the accounting restatements by Xerox, it seems that Bingham was right: creativity in accounting had gone too far. Instead of listening to Bingham, the company moved deeper into accounting madness. According to The New York Times (7/15/010 (http://www.nytimes.com/2001/07/15/business/15ETHI.html) Johnson & Johnson studied what went wrong after a whistleblower at the company’s LifeScan unit alerted the Justice Department to a product defect in a diabetes diagnostic device. J&J pleaded guilty and paid a $60 million fine. From the investigation, J&J CEO Ralph Larsen learned that executives at LifeScan (all of whom left the company voluntarily) “had a complicated device. They felt it was the best on the market. Their interpretation was that the problems weren't serious enough to have to report them. The sad thing is they were probably right, but they should have gone to the F.D.A. and told them they had a problem.” J&J is now using the case to reinforce its corporate credo, and has highlighted procedures where employees are encouraged to go to Larsen directly if they feel a defective product is going to market.
How well do you listen to things you don’t want to hear? How likely are you to listen to someone you feel is badgering you? Are dissenting voices listened to within your organization? How comfortable would any employee feel in talking to you about trouble in your organization? How vulnerable are you to someone blowing a whistle on you?
Many executives decide what level of scientific evidence, or what extent of fact, is adequate to support a company’s actions. When it comes to product safety, many of those decisions involve weighing evidence and deciding what level of risk is acceptable. We read in The New York Times (7/9/01) (http://www.nytimes.com/2001/07/09/business/09GRAC.html) that W.R. Grace & Company promoted its Monokote fire proofing spray as asbestos-free, when a version of the product in the 1970s and 1980s contained low levels of asbestos. Grace claims that the level of contamination was insignificant and “says that it fully informed regulators of the contamination, and that the asbestos content always remained within legal limits.” Internal documents reviewed by The Times tell a different story. It was lobbying efforts by Grace that led to setting asbestos tolerances at levels that included Monokote. The company relied on this legality to call the product “asbestos free.” “The company was brought to the brink of disclosing the asbestos content of Monokote more than two decades ago, in 1977. With builders and architects hearing ever-louder rumors of ‘a tremolite problem,’ Grace officials met secretly at company offices in Cambridge, Mass. There, documents show, they weighed the risks and stayed the course. While silence increased the danger of being sued, they calculated, disclosure could have meant the end of Monokote. So, they decided, customers who inquired if Monokote contained asbestos were to be told that it did not.” Workers who installed the product used little protection, relying on claims of safety. Grace declared bankruptcy in April, resulting from the costs of litigation on products other than Monokote.
How do you reconcile the letter of the law with effective disclosure? If silence is to your benefit, but customers or others would benefit from your speaking out, what are you likely to do? When facts or scientific studies present conflicting evidence, what approach are you likely to take when it comes to product safety, or to disclosure? Is legality the only standard for your organization’s behavior?
Air Today, Gone Tomorrow
Round Trip the Next Day
Executives at United Airlines and US Airways are experiencing the kind of turbulence their customers face on many flights. Their on-again, off-again merger has been covered in all the business media. The deal looks less attractive today than a year ago from United’s perspective, and it tried to exit inexpensively. Facing litigation from US Airways, United reversed itself, and said it would move forward, giving the Justice Department until early August to stop the deal for anti-trust reasons, or allow it to go ahead. We wonder if United CEO James Goodwin’s cold feet and US Airways’ CEO Stephen Wolf’s pressure to move ahead came from reading the lengthy article in Business 2.0 (http://www.business2.com/ebusiness/2001/06/failure.htm) about mergers that failed to create value for shareholders but made some CEOs wealthy. Reporter Michael Craig addresses mergers and concludes, “Most of all this money changing hands is wasted. A KPMG study of 107 large mergers between 1996 and 1998 concluded that nearly a third of the deals produced no discernable difference in value, and 53 percent actually destroyed value. A KPMG update in 2001 showed that 30 percent of the 1997-1999 mergers studied created value, while nearly 40 percent produced no difference and 31 percent destroyed value.” Craig reports that CEOs didn’t get punished for this poor performance, and most were highly rewarded, especially displaced CEO’s.
How does your situation today differ from what you faced a year ago? Have you recognized good and poor performance, and rewarded or punished appropriately? How well have your plans for this year worked out? Has value increased to the extent you expected? What else can you do to improve the likelihood of superior results? What would you do differently today if given the chance? What hasn’t happened the way you wanted, and what can you to now to move ahead?
Light Up for Your Country
We’ve gagged when we’ve watched those Philip Morris corporate image commercials showing all the good deeds performed by company employees. There’s only so much flak we can absorb in hearing messages about how much the people of the company do to improve the quality of life and carry out their civic citizenship with pride. So, it was with a smile when we received all the media coverage for the Philip Morris sponsored economic analysis by Arthur D. Little for the Czech Republic of the positive effects of smoking. Leading the list is the lower health costs thanks to the “early mortality” of smokers. According to The Wall Street Journal (7/16/01), “This is an economic-impact study, no more, no less,” said Robert Kaplan, a spokesman for Philip Morris's international tobacco unit in Rye Brook, N.Y. “We're not trying to suggest that there would be a benefit to society from the diseases related to smoking.”
How credible are the messages from your organization? How consistent are those messages with your corporate image?
Here are selected updates on stories covered in prior issues of Executive Times:
Ø The August 2000 issue of Executive Times reported that Bank One CEO Jamie Dimon studied operations of First Card and WingspanBank.com from April to August last year and decided not to sell or close the operations. We read in The Wall Street Journal (6/29/01) (http://interactive.wsj.com/archive/retrieve.cgi?id=SB993742031496871086.djm) that the company has declared the costly WingspanBank.com a failure, and will fold it into its own site, bankone.com.
Ø The September 1999 issue of Executive Times called attention to a $1.6 billion settlement by Metropolitan Life for deceptive sales practices, a settlement that was meant to put the issue behind the company. We read a page one feature in The Wall Street Journal (7/24/01) (http://interactive.wsj.com/archive/retrieve.cgi?id=SB995921450486615509.djm) that MetLife records show the company’s active use of racial profiling in its underwriting practices continued well past 1960, which it said last year was when it completed a phase out of the use of race in underwriting. It seems that not all major problems have been put to rest at MetLife.
Rising to the Occasion
Katharine Graham never expected to become a corporate executive. Born to a life of privilege, she found herself in charge of The Washington Post following her husband’s 1963 suicide. Her father, Eugene Meyer, bought the company out of bankruptcy in 1933, and while its fortunes had improved thirty years later, it was still a local paper. Not knowing what to do, she asked lots of questions of people who knew more than she. Under her executive leadership, the company achieved stupendous results, both in return on equity and share price growth. After he acquired 10% of the company, Kay invited Warren Buffett to join the board of directors, and it was from Buffet that she learned many financial lessons. Graham slowly grew the business, and expanded into other media, all the while protecting and growing investors’ capital. When it came to making decisions, Graham acted clearly and courageously, especially in publishing the Pentagon Papers and in supporting the Watergate investigation. Graham died in July, following a fall at a meeting in Idaho. According to one account of the eulogies at her funeral service, “Mrs. Graham was remembered not only for having altered the course of politics, journalism and women, but also for having done so with gracious modesty in a city often given to boast.” Executives who act with courage, acknowledge what they don’t know, and who act in the interest of shareholders can do well to follow the example of Kay Graham.
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Only One Book
A total of 25 book reviews were added during July 2001 at http://www.hopkinsandcompany.com/books/list.htm. Pick something to read from that list.
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