Revolt Against Directors

Publications

Revolt against Directors

Shareholders and investors are up in arms against their directors. They find their directors have let them down. Companies worldwide are trying to transfer powers to a new breed called non executive directors. Non executives will become an oxymoron. They will be the real executives. Despite being rank outsiders, with no connection with the company they are now being asked to perform a superior role than the executive directors. Unfortunately, directors themselves have to blame for this fall from grace. As Thomas Newkirk of New York’s Security and Exchange Committee’s Enforcement Division stated while indicting founder of Waste Management a Chicago based recycling firm which held the record of a fraud of 3.5 billion dollars:

“Our complaint describes one of the most egregious accounting frauds we have seen. For years, these defendants cooked the books, enriched themselves, preserved their jobs and duped unsuspecting shareholders.”

This was in 1998, well before Enron, Wordlcom and Tyco. Directors have been pocketing egregious sums of money even when their companies are perishing. About the same time while US Security and Exchange Committee was indicting Waste Management’s boss another chief – Dennis Kozlowski of Tyco International bought a new home in Boca Raton, Florida, a 15000 sq foot, Mediterranean style water front mansion complete with pool, tennis court and fountain paid with a $19 million no interest loan from Tyco. Two years after, the loan was waived. The entire money for the home including £6000 for a shower curtain all paid by shareholders money while the company was facing bankruptcy. Even the world’s most celebrated CEO, Jack Welsh has been caught with his pants down while US’s Security and Exchange Commission has ordered an enquiry into his retirement perks as reported in a divorce case filed by his ex wife.

One can argue why we are getting so uptight about the dishonesty of directors. Just as, language is often used not to expose but conceal one’s thoughts, accounting since South Sea Bubble and even before has been used not to state earnings but either to inflate them or conceal them. An accountant when asked during an interview with a potential employer “How much is 2 + 2”, replied “depends what you have in mind”. Its not for nothing, we invented the phrase “lies, dam lies and statistics”. While George Bush’s sermons (rarely applied to himself) and the Sarbanes-Oxley Act are very useful, we must be wary of embedding a culture of compliance. Corporations are in a muddle today not because of accounting frauds but the management failures. Tighter legislations can hamper the speed of decision making and make it difficult from companies to compete in today’s world.

The basic principle of corporate governance is to maximise creation of wealth for all its shareholders. There is no way the disclosures and compliance are going to improve company’s performance. The real reason for recent market collapse is not accounting frauds. Accounting frauds were resorted to because of the poor business performance. The real reason is the gravitational pull of obsolescence. For far too long businesses have shown utmost lethargy in innovation. New economy is going to punish companies that lack innovation in a way that has never happened before.

A contrarian view is that Enron was rated by Gary Hamel as the world’s most innovative company. So, what went wrong? Innovation has to be accompanied with transparency. The problem is that practice of both innovation and transparency requires a common trait. It calls for a very high degree of courage which our educational system does not prepare us for. That is why though we have such highly qualified people among us, we rarely come across cases of real courage and transparency. The general principle on which companies operate is, “thou shalt not be found out”. What we do not realise that in the new economy when you are designing new models you simply cannot have a winner all the time. Thousands of failures have been hidden behind the success of an incandescent lamp. Obsessed by quarterly results our most important concern is how to show double digit growth. Our CEOs simply cannot handle the shortfalls. So, we drew up accounts and resort to innovative and creative accounting to bolster earnings and profits. Hence, the resistance to proposals for expensing stock options even from people like Andy Grove of Intel.

We, therefore, have to start from our schools and teach our children the power of courage and the strength that comes from owing failures. As the ignominious fall of America’s iconic enterprises proves disowning failures is a recipe for disaster.

Publications

Revolt against Directors

Shareholders and investors are up in arms against their directors. They find their directors have let them down. Companies worldwide are trying to transfer powers to a new breed called non executive directors. Non executives will become an oxymoron. They will be the real executives. Despite being rank outsiders, with no connection with the company they are now being asked to perform a superior role than the executive directors. Unfortunately, directors themselves have to blame for this fall from grace. As Thomas Newkirk of New York’s Security and Exchange Committee’s Enforcement Division stated while indicting founder of Waste Management a Chicago based recycling firm which held the record of a fraud of 3.5 billion dollars:

“Our complaint describes one of the most egregious accounting frauds we have seen. For years, these defendants cooked the books, enriched themselves, preserved their jobs and duped unsuspecting shareholders.”

This was in 1998, well before Enron, Wordlcom and Tyco. Directors have been pocketing egregious sums of money even when their companies are perishing. About the same time while US Security and Exchange Committee was indicting Waste Management’s boss another chief – Dennis Kozlowski of Tyco International bought a new home in Boca Raton, Florida, a 15000 sq foot, Mediterranean style water front mansion complete with pool, tennis court and fountain paid with a $19 million no interest loan from Tyco. Two years after, the loan was waived. The entire money for the home including £6000 for a shower curtain all paid by shareholders money while the company was facing bankruptcy. Even the world’s most celebrated CEO, Jack Welsh has been caught with his pants down while US’s Security and Exchange Commission has ordered an enquiry into his retirement perks as reported in a divorce case filed by his ex wife.

One can argue why we are getting so uptight about the dishonesty of directors. Just as, language is often used not to expose but conceal one’s thoughts, accounting since South Sea Bubble and even before has been used not to state earnings but either to inflate them or conceal them. An accountant when asked during an interview with a potential employer “How much is 2 + 2”, replied “depends what you have in mind”. Its not for nothing, we invented the phrase “lies, dam lies and statistics”. While George Bush’s sermons (rarely applied to himself) and the Sarbanes-Oxley Act are very useful, we must be wary of embedding a culture of compliance. Corporations are in a muddle today not because of accounting frauds but the management failures. Tighter legislations can hamper the speed of decision making and make it difficult from companies to compete in today’s world.

The basic principle of corporate governance is to maximise creation of wealth for all its shareholders. There is no way the disclosures and compliance are going to improve company’s performance. The real reason for recent market collapse is not accounting frauds. Accounting frauds were resorted to because of the poor business performance. The real reason is the gravitational pull of obsolescence. For far too long businesses have shown utmost lethargy in innovation. New economy is going to punish companies that lack innovation in a way that has never happened before.

A contrarian view is that Enron was rated by Gary Hamel as the world’s most innovative company. So, what went wrong? Innovation has to be accompanied with transparency. The problem is that practice of both innovation and transparency requires a common trait. It calls for a very high degree of courage which our educational system does not prepare us for. That is why though we have such highly qualified people among us, we rarely come across cases of real courage and transparency. The general principle on which companies operate is, “thou shalt not be found out”. What we do not realise that in the new economy when you are designing new models you simply cannot have a winner all the time. Thousands of failures have been hidden behind the success of an incandescent lamp. Obsessed by quarterly results our most important concern is how to show double digit growth. Our CEOs simply cannot handle the shortfalls. So, we drew up accounts and resort to innovative and creative accounting to bolster earnings and profits. Hence, the resistance to proposals for expensing stock options even from people like Andy Grove of Intel.

We, therefore, have to start from our schools and teach our children the power of courage and the strength that comes from owing failures. As the ignominious fall of America’s iconic enterprises proves disowning failures is a recipe for disaster.