On May 24, "The Boston Globe" reported that Kurzweil Applied Intelligence, Inc. had fired its Vice President of Operations. In addition, the President/Chief Financial Officer, Vice President of Sales, and Vice President/Treasurer all resigned.
May 2003 |
Author: Dr. Laurence J. Stybel and Maryanne Peabody
Source: Software Magazine
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| How To Spot Corporate Shenanigans |
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Whether you’re a job seeker or an IT buyer, it pays to ask a few questions about the companies you do business with.
When securities analysts arrived at Enron, the company set up an elaborate charade to convince them that the company was busy: an empty floor was set up with “busy” computers and “busy” employees taking “orders” that never existed.
Did the charade fool these sophisticated Wall Street analysts?
What do you think?
You could easily be a victim of corporate shenanigans if you are a job seeker or an in-house buyer of IT products/services. Our mission is to provide you some questions to ask to protect yourself and your company.
An Example of Shenanigans
All companies put on “shows” for job candidates and sales prospects. In its benign form, it is called “putting one’s best foot forward.” In its illegal form, it is called deception. Legal-but-deceptive practices are what we call shenanigans. The following is an ethically dubious but legally appropriate example of shenanigans:
A global conglomerate was in negotiations to sell a division to that division’s major competitor. Because of the nature of the technology, there was only one qualified buyer for this strategic business unit. The buyer was interested in the brand name and the intellectual property. Successful sale would mean the elimination of all jobs. An unsuccessful sale would mean that the firm would continue as an operating entity of the conglomerate until a new buyer was found.
While the conglomerate mergers and acquisitions group was talking to a potential buyer, the strategic business unit president was instructed to develop cost-cutting measures on the assumption that the division would continue as an operating entity. One of those measures was to be the relocation of division headquarters and from Boston to Raleigh, N.C. The move made good economic sense, since labor was less expensive in Raleigh and the move put the division closer to its customer base as well.
The president recruited current employees to move. Those who accepted the job offers were fired within a month of relocation. New employees received one week of severance for every year employed, no outplacement and no assistance to return to Boston.
What Types of Companies Are Susceptible to Shenanigans?
Howard Schilit, president of the Center for Financial Research and Analysis in Washington, D.C., has identified some warning signs for the company prone to engage in shenanigans. It is important to remember that these warning signs don’t necessarily indicate that shenanigans are taking place, but a number of such warning signs indicate fertile soil for such actions.
Weak Controls. Are there control systems in place to insure proper management? One questions to ask would be: “If there is a board of directors, tell me about the qualifications of external Board members.” Another question: “Tell me about the General Counsel and his/her level of respect in the company.”
CEO Personality. Is there a history of the CEO running companies with sudden business reversals? These reversals can be from bad to good or good to bad. It could be that the individual used fraud as a way of triggering the reversal and then bailing out. You can begin to get the answers to these questions by getting a Dunn & Bradstreet credit report. It is available at www.dnb.com.
Narrow Base for Success. Is the company overly dependent on one or two individuals? Is the company too dependent on one or two product lines or one or two customers? Questions to ask might include, “What is the most important product as a percentage of total sales revenue?” and “Who is the most important rainmaker? Why is this person the most important rainmaker? Tell me about this person.”
Compensation System. Does the bonus system create a dangerous short-term focus on quarterly or half year results? If venture capitalists are on the board, get a sense for how long they have invested in the company and how impatient they are they for a liquidity event. The presence on the board of three or more venture capitalists from three different firms can also force a dangerous short-term perspective on meeting financial goals at the expense of customer service.
Convoluted Financial Structure. Is the company’s financial and legal structure overly complex for its size and industry? If so, it might be possible to hide shenanigans through untraceable patterns of intercompany borrowing. Are there special covenants with investors and creditors that might give them more influence over business operations than is customary? Check out the SEC 10K for public companies (www.sec.gov or www hoovers.com). For private companies, get the D&B credit report.
Profits Out of Line. Unusual profits relative to industry standards may indicate a well-run company. It may also point to accounting gimmicks, such as shifting expenses to next year. Go to your local commercial bank to browse through the RMA Directory. Published by the Risk Management Association (www.www.rmahq.org), RMA has summaries of 350,000 financial statements broken into SIC code and sales size. Using RMA allows you to make specific comparisons between your target company and a larger group.
Shifting Vendors. Look for recent switching of consultants and other vendors as a diagnostic sign. Examples would involve recent switching of banks, CPAs, or law firms. The question to ask would be, “How long has the company had its relationship with its present outside legal counsel, bank and CPA firm?”
Forewarned Is Forearmed
Most companies are ethical in the conduct of their dealings. The few who engage in shenanigans do irreparable harm to their employees, to their customers, and to their strategic partners. You are responsible for managing your career and managing your department.
Do your homework!
Larry Stybel is CEO of Stybel Peabody Lincolnshire. Since 1979, the firm has assisted companies in reducing the risks associated with sensitive transitions involving corporate leaders and senior professionals. Services include maximizing leadership effectiveness in current roles and rapidly moving leaders to new assignments. There are 112 Lincolnshire offices around the world. Larry is a contributor to The Harvard Business Review on Managing Your Career (Harvard Business School Press, Boston, 2003).
Maryanne Peabody & Laurence J. Stybel
Stybel Peabody Lincolnshire
Sixty State Street, S. 700
Boston, MA 02109
Tel. 617 371-2990
Email:
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