Smokescreen: Does Your Company Have Something to Hide?

One of the important insights from the financial
fiascos of the last few years is that senior managers and their company can’t
always be trusted to act openly or ethically. The consequence of that is writ large: a
huge number of people lost their jobs. Indeed, on several occasions, employees
who lost their jobs have expressed their frustrations to me about their firm’s
practice, telling me that they would never have guessed that of their firm’s
leaders.But then, as the conversation
went on, they emphasized that a person at their level couldn’t possibly know
what’s going on behind closed doors. Duhhhh. Sometimes we have to be shocked to
see what was there all along. 
The status of a firm and its
managers is not nearly as obscure as many employees think. Furthermore, there
are a number of clues to various kinds of financial difficulty or hanky panky that
employees at any level can pick up.Bankruptcy?Here’s how I got educated on
potential corporate bankruptcy. Back in the early ‘nineties, I had a number of
long-term, development projects at Sunbeam in Boca Raton. Since a part of my
development program involved 360 interviews, I occasionally got unsolicited
information, including rumors about a possible bankruptcy. Corporate
bankruptcies are not just about company finance. They inevitably involve job
loss.Recognizing that my client,
the CIO, couldn’t and wouldn’t be willing to answer a direct question, I
reframed an innocent request.  “I’ve got
a hypothetical question,” I said to him. Suppose the leadership of a firm was
considering a bankruptcy. How would the average Joe figure that out?”  He smiled, reached into his bookshelf and
handed me a copy of Strategic Bankruptcy, by Kevin Delaney.  Although his action was telling of itself, I
went through the book with a fine comb and laid out a template of questions
that would enable this consultant—and any other employee—to get a fairly clear
set of clues indicative of a possible bankruptcy at any firm.. . . .My conclusion? It was obvious that Sunbeam was going into bankruptcy. I sold a
couple thousand shares of Sunbeam stock—and six months later the firm declared
Chapter 11. Everything I did was completely on the up-and-up. I broke no rules.
My template made it possible for me to pay more strategic attention to what was
happening at the firm. With a bit of discipline, most anybody can learn to do
this.Bottom line: Bankruptcies in organizations are essentially political actions to gain control over various constituencies. Judges approve them to keep companies afloat and maintain corporate and employee livelihoods. The historical “mass tort” bankruptcy of Dow Corning was a means of keeping lawyers from suing and destroying the firm for health problems. Corporate America uses bankruptcies to avoid cleaning up toxic waste dumps, eliminate unions, keep competitors at bay, escape overpriced contracts, settle takeover disputes and transfer underfunded pensions to the government-backed agencies. Corporate collusion?But the recent recession
surfaced still another problem: corporate collusion. In an intriguing piece of
research entitled Smokescreen: How
mangers behave when they have something to hide, the authorsanalyzed more than 200 US firms listed
in the cartel database. Cartels are groups of independent companies that attempt to increase their joint profits
through explicit illegal agreements, such as pacts that control prices and
restrict supply, usually at the direction of middle or top managers.Typically, the cartels
thrived when in collusion and were more typical of non-colluding firms when not
in collusion.  But here’s a quick summary
of distinctive clues:               . . . colluding
firms tend to plow extra earnings back into hiring and expanding of property
facilities and equipment.               .
. . colluding firms have directors resigning or retiring more frequently than
non-colluding firms.               .
. .colluding firms have a large proportion of their directors serving on three
or more boards at once.               .
. . colluding firms have very little auditor changes. (Think Enron)               .
. .colluding firms have managers exercising stocks options more rapidly—indicating
managers’ concern that cartel might not be sustained.               .
. .colluding firms tend to hide information, like capital investments,
expenditures on new product development, more than non-colluding firms.Bottom line?Colluding firms employ a
range of strategies to hide their activities. They are less likely than non-colluding firms to replace departing
board members and typically turn to busy or foreign outsiders when they do.
They smooth out their earnings numbers, issue more restatement of financial
reports, and are reluctant to switch auditors.So how does the ordinary Joe
get at this information? First, pay close attention to the rumor mill. Rumor is
a primary means for individuals to cope with the inequities of organizational
life. So the question is more about why they are gossiping, than about the
literal content. The why suggests fears—and when you get redundant information
from several (5 to 8 people), something is going on. Make certain you
understand your firm’s basic strategy and check to see the results of the
strategy from company financials on a monthly basis. Read the quarterly
business reports, including facts sheets, economic data, etc. Compare your firm
with others in the industry.  If you don’t like what’s
going on, it may be time to look for the exit sign.Flickr photo
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Smokescreen: Does Your Company Have Something to Hide?

Collusion 2
One of the important insights from the financial fiascos of the last few years is that senior managers and their company can’t always be trusted to act openly or ethically. The consequence of that is writ large: a huge number of people lost their jobs. Indeed, on several occasions, employees who lost their jobs have expressed their frustrations to me about their firm’s practice, telling me that they would never have guessed that of their firm’s leaders.

But then, as the conversation went on, they emphasized that a person at their level couldn’t possibly know what’s going on behind closed doors. Duhhhh. Sometimes we have to be shocked to see what was there all along.

The status of a firm and its managers is not nearly as obscure as many employees think. Furthermore, there are a number of clues to various kinds of financial difficulty or hanky panky that employees at any level can pick up.

Bankruptcy?
Here’s how I got educated on potential corporate bankruptcy. Back in the early ‘nineties, I had a number of long-term, development projects at Sunbeam in Boca Raton. Since a part of my development program involved 360 interviews, I occasionally got unsolicited information, including rumors about a possible bankruptcy. Corporate bankruptcies are not just about company finance. They inevitably involve job loss.

Recognizing that my client, the CIO, couldn’t and wouldn’t be willing to answer a direct question, I reframed an innocent request.  “I’ve got a hypothetical question,” I said to him. Suppose the leadership of a firm was considering a bankruptcy. How would the average Joe figure that out?”  He smiled, reached into his bookshelf and handed me a copy of Strategic Bankruptcy, by Kevin Delaney.  Although his action was telling of itself, I went through the book with a fine comb and laid out a template of questions that would enable this consultant—and any other employee—to get a fairly clear set of clues indicative of a possible bankruptcy at any firm.

. . . .My conclusion? It was obvious that Sunbeam was going into bankruptcy. I sold a couple thousand shares of Sunbeam stock—and six months later the firm declared Chapter 11. Everything I did was completely on the up-and-up. I broke no rules. My template made it possible for me to pay more strategic attention to what was happening at the firm. With a bit of discipline, most anybody can learn to do this.

Bottom line: Bankruptcies in organizations are essentially political actions to gain control over various constituencies. Judges approve them to keep companies afloat and maintain corporate and employee livelihoods. The historical “mass tort” bankruptcy of Dow Corning was a means of keeping lawyers from suing and destroying the firm for health problems. Corporate America uses bankruptcies to avoid cleaning up toxic waste dumps, eliminate unions, keep competitors at bay, escape overpriced contracts, settle takeover disputes and transfer underfunded pensions to the government-backed agencies. 

Corporate collusion?
But the recent recession surfaced still another problem: corporate collusion. In an intriguing piece of research entitled Smokescreen: How mangers behave when they have something to hide, the authorsanalyzed more than 200 US firms listed in the cartel database. Cartels are groups of independent companies that attempt to increase their joint profits through explicit illegal agreements, such as pacts that control prices and restrict supply, usually at the direction of middle or top managers.

Typically, the cartels thrived when in collusion and were more typical of non-colluding firms when not in collusion.  But here’s a quick summary of distinctive clues:

               . . . colluding firms tend to plow extra earnings back into hiring and expanding of property facilities and equipment.

               . . . colluding firms have directors resigning or retiring more frequently than non-colluding firms.

               . . .colluding firms have a large proportion of their directors serving on three or more boards at once.

               . . . colluding firms have very little auditor changes. (Think Enron)

               . . .colluding firms have managers exercising stocks options more rapidly—indicating managers’ concern that cartel might not be sustained.

               . . .colluding firms tend to hide information, like capital investments, expenditures on new product development, more than non-colluding firms.

Bottom line?
Colluding firms employ a range of strategies to hide their activities. They are less likely than non-colluding firms to replace departing board members and typically turn to busy or foreign outsiders when they do. They smooth out their earnings numbers, issue more restatement of financial reports, and are reluctant to switch auditors.

So how does the ordinary Joe get at this information? First, pay close attention to the rumor mill. Rumor is a primary means for individuals to cope with the inequities of organizational life. So the question is more about why they are gossiping, than about the literal content. The why suggests fears—and when you get redundant information from several (5 to 8 people), something is going on. Make certain you understand your firm’s basic strategy and check to see the results of the strategy from company financials on a monthly basis. Read the quarterly business reports, including facts sheets, economic data, etc. Compare your firm with others in the industry.  

If you don’t like what’s going on, it may be time to look for the exit sign.

Flickr photo:

 

 

 

 

 

 

 

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