HOW TO TREAT CEO’S: THE WAY THINGS OUGHT TO BE

Posted in ACTIVIST BOARD, Corporate Crisis Management, Crisis Management Response, DIAMOND FOODS, Doing the right thing, don't white wash the crisis, ETHICS FROM THE TOP DOWN, FIRING THE CEO, HOW TO SHOW THE CEO THE DOOR, MICHAEL MENDES, REPLACING THE CEO on November 28th, 2012 by mnayor

Last week I read that Michael Mendes formally resigned from Diamond Foods Inc. Mendes worked for Diamond most of his working life, serving as President and CEO  from 1997 and adding the title of Chairman in 2010. Then at the beginning of 2012 he was placed on administrative leave after an accounting impropriety was discovered involving payments to walnut growers, which artificially inflated financial results of the company.

 

The shift in payments must have been whoppers because they necessitated the restatement of 2010 and 2011 profits. As a result it appears that Diamond has lost its deal to purchase the Pringles brand from P&G, which was to have been an all stock transaction

 

It is not uncommon for companies to manipulate numbers to look good. It is also not a surprise to find that those at the top may not have been in the know. As a result of such an “event” a CEO will clean house, heads will roll and internal accounting measures tightened. But here it look like the perpetrators may have been those at the very top, including Steven Neil, the former CFO, who was also placed on leave. Why else would Mendes and Neil have been placed on administrative leave? Why else would Mendes repay $2.7 million in bonuses he received for 2010 and 2011, and return shares awarded to him in 2010. He leaves with a net retirement balance after repayment of bonuses, and will not be granted any severance.

 

In his wake, Diamond Foods is stuck with a share price that has plummeted 60%, a lot of angry shareholders who are ratcheting up class action suits against the company, and ongoing Department of Justice and SEC investigations. That’s quite a trail to leave behind.

 

The Board should be commended. In the face of a serious crisis it took decisive action. There was no attempt to white-wash the situation or cover for Mendes. Crisis management oftentimes means nothing more than biting the bullet and facing problems head-on. In this case the Board has taken steps to tighten its internal controls and has cleaned house. But in my view it has done more than that. Too often the guy who screws up, especially if he is at the top, gets a golden parachute and a pat on the backside to ensure that the door doesn’t hit him on the way out. The wheels are greased and everyone thinks the right thing is being done. But this Board obviously saw no need to reward people who created the crisis in the first place. Hopefully this Board will set a precedent for the many situations which will undoubtedly follow in the business world.

 

CEO’s should pay a price when they do something illegal, or in violation of a company’s  ethical standards. All companies should take a page from this playbook. Don’t deplete the assets of your company even more after a crisis by rewarding bad behavior. It adds insult to injury to your shareholders and other stakeholders. CEO’s and others in top management need to receive what they deserve. If they earn a walk out the door, they are not entitled to a fat paycheck. It’s one thing if the chemistry isn’t right or the results are disappointing. It’s another thing if a person has left his company high and dry, bleeding from bad decisions and actions that have done harm. It’s time to change the ugly unwritten understanding between boards and their managements that says that the upper echelon is a fraternity whose members are entitled to hop from company to company accumulating prizes while their reputations remain unscathed, regardless of their perfidy or incompetence.

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ETHICS AND CRISIS MANAGEMENT

Posted in Crisis Management, Ethics and Crisis Management, ETHICS FROM THE TOP DOWN, guidelines for ethical standards, including ethics as part of your corporate culture, problem employees, Setting ethical standards on September 12th, 2012 by mnayor

 On September 8, 2012 The New York Times ran a front page story about Marcone, a company that may well be the largest authorized dealer of appliance parts in theU.S.  it’s been around since 1932.The reason for its front page notoriety is due to one of its senior vice presidents, Carlos Garcia, buying, essentially smuggling, and reselling large quantities of a banned refrigerant for appliances such as refrigerators and air conditioners. Garcia imported the gas, HCF-22 which damages the ozone layer, without the necessary approvals, thereby violating international treaties andU.S.law. The substance has been prohibited in new appliances since 2010. In June, Garcia was sentenced to 13 months in jail.

 

Faced with a tempting or risky issue, a powerful person, a powerful company, a powerful country is most likely still to believe that there is a good chance of getting away with something. Lie low and time will make the issue recede into history. Put a band aid on and no one will dare to pierce your impenetrable shell. This is what happened to Wal-Mart in April of this year when its Mexican subsidiary was exposed as having engaged in  pervasive bribery as a normal course of business. What would have happened if Wal-Mart had entertained a genuine independent internal investigation when it had the opportunity, and made those findings known to the Justice Department and to the State ofMexico? There would have been a much smaller story. Wal-Mart would at least have been accused of being honorable. Its reputation for integrity would have been burnished. It would have paid a price but perhaps not as steep a price as it will now pay.

Why don’t people get it? Because there is a gambler in all of us, even when the odds are poor. Is there a chance we can get away with something? Let’s give it a try. What do we have to lose? Ask Richard Nixon. Ask Bill Clinton. Ask all those who have tried to wheedle their way out of messes only to get caught. Ah but then again there is always that other guy, the guy who got away with it. We should follow him. He’s a smart guy. He knew the angles. If he could do it, we can too. Right now things are calm. Let’s not rock the boat. But in the long run the straight-shooter almost always wins.

What’s the lesson for CEO’s of organizations? It’s simple really. Every organization has  a “culture”. An integral part of that culture should be a requirement for high ethical standards, communicated from the top down. Transmitting the idea of winning at any cost will most likely ensure that some manager or employee down the chain will misconstrue the message and take ridiculous liberties in order to be noticed. Turning a blind eye to actions that are suspect bears the same message, even if it takes a little longer to filter down. Excessive emphasis on the bottom line can put extraordinary pressure on executives and managers to wring blood out of a stone and look for routes that will pay huge rewards, oftentimes the risk be damned. Johnson & Johnson has certainly paid a huge price to its reputation under the leadership of William Weldon, who retired as CEO just a few months ago. Under his guidance J&J’s wonderful standing in the eyes of the public has plummeted. The number of recalls, dirty facilities and end-runs around regulations over the last several years have contributed to the erosion of its sterling reputation of putting the consumer first as it did in the Tylenol scare of 1982.

 

What can a CEO do? First establish a no tolerance rule for non-ethical behavior. Anyone whose conduct exceeds the bounds of propriety is gone. Second, very careful employment screening is a must. Thirdly, establish ethical standards. Easier said than done? Perhaps but the effort should be made. Obviously if certain conduct is illegal, then it clearly has no place in the organization. beyond that if conduct is egregious enough to create the valid claim of negligence or breach of contract it should not be tolerated. Finally, if conduct would offend any one class or more of your stakeholders then it should be carefully considered. No organization should take an action that has the potential for angering its customers or clients, its investors, suppliers, employees, government officials, the public at large or the media. Of course, angering your competition is a different story, unless it angers the public at large and boomerangs.

 

No organization can protect itself against the errant employee who may jeopardize its reputation, legal standing or success. Nevertheless, it is imperative that the CEO and the board of any entity establish the rules of conduct by which it wishes to be known and respected.

 

 

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GO FOR THE LOW MAN ON THE TOTEM POLE

Posted in Doing the right thing, Ethics and Crisis Management, Honesty and directness in dealing with a crisis, Penn State, Protecting the organization at any cost?, Sacrifice the Little Guy, Throw an employee under the bus, Uncategorized on November 19th, 2011 by mnayor

(Or What I learned from Abu Ghraib)

Watching TV commentary and reading newspaper and internet accounts of the awful Penn State story, I am puzzled. Yes, there has been some effort to uncover what occurred, but very little in the way of reporting why the sexual abuse lasted so long, with so many people in authority knowing about it. And yes, Joe Paterno was fired and two other officials at the University indicted for perjury. But very little has been made of the responsibilities these people had, except for one person.

I’m not anti Joe Paterno. He’s probably a great guy and obviously a great coach. However, I have seen comments in defense of Joe that he had done what he was legally required to do. Not a very high bar for sure. What I am against is shining a spotlight on the low man on the totem pole. Throw him or her under the bus. The reputations of the organization itself and its various chiefs are much more important to preserve than that of the little guy who nobody ever heard of. Among reputable high-minded individuals, it puzzles me indeed that reputation preservation always trumps honesty – especially when honesty would do more to preserve reputations than buck passing.

So, who is that one person who is getting all the attention? Mike McQueary, who witnessed Jerry Sandusky in the showers with a boy, was a 28 years old graduate assistant at the University. Granted he wasn’t a youngster but he certainly wasn’t a seasoned member of the staff. There were certainly older and more entrenched members of the Penn State coaching staff. In fact, everyone else must have been an authority figure to him. Not easy to tell someone older and more powerful than you to cease and desist. In a perfect world yes Mike McQuaery might have stopped the actions of Sandusky and called the police. In a more realistic world Mike McQueary was brave enough to report the incident to Joe Paterno. A lesser human being might have forgotten what he had seen. Instead we read headlines like McQueary Action Drags Penn State to Shame. Every accusation that has been leveled at McQueary can be leveled at Joe and everyone else on up the line. What we have is clearly an attempt to scapegoat a very important matter instead of confronting and dealing with it head on.

You can hear on the sidelines of any Penn State game coaches yelling frantically to players to MAN UP. Penn State, heed your own advice.

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FACING A BUSINESS CRISIS OR A COST OF DOING BUSINESS

Posted in Anticipating A Crisis, Business Crises of our own making, Business Crises We Create, Crisis Management Consulting on November 2nd, 2010 by mnayor

A Company admits that it erroneously charged millions of customers for services they never ordered or used. The Company plans to credit current customers and refund former customers to the tune of anywhere from $30 million to $90 million in total. Most companies would consider this a crisis, especially since the regulatory commission with jurisdiction over it says it hasn’t finished with these guys.

Well, not so fast. The Company had been notified at least two years ago that they were overcharging, and did nothing about it. After all, customer service is expensive. Why dig into this messy situation if by ignoring it, customers might give up and go away. The loss to an individual consumer may be a pittance, but the possible refunds may be huge, thereby justifying the gamble that the situation won’t come to light. Even if the Company is caught, things like this happen all the time. The adverse publicity, if there is any, will blow over, and this is a business risk the Company is willing to take.

The Company in this case is Verizon. The Federal Communications Commission continues its investigation and may start a formal proceeding. But Verizon may have already calculated this into the bottom line cost. More and more U.S. companies are consciously deciding to take on bigger and bigger risks. Stated another way, more and more companies are deciding to be dishonest, whether by design or by simply ignoring facts. Some start out to cheat – inferior raw materials, child labor, the list is endless. Others don’t set out to be dishonest but decide not to correct mistakes because of the expense. In today’s environment most companies feel they can weather the storm.

It was recently reported that GlaxoSmithKline, PLC (GSK) agreed to pay $750 million to settle charges that between 2001 and 2005 they distributed adulterated drugs made at its now-closed manufacturing facility in Cidra, Puerto Rico. Authorities said a corporate whistleblower had filed a lawsuit against GSK under provisions of the U.S. False Claims Act. A GSK spokesperson stated that “We regret that we operated the Cidra facility in a manner that was inconsistent with current Good Manufacturing Practice requirements and with GSK’s commitment to manufacturing quality.  GSK worked hard to resolve fully the manufacturing issues at the Cidra facility prior to its closure in 2009 and we are committed to continuous improvement in our manufacturing processes…”   The GSK Puerto Rico subsidiary, SB Pharmco Puerto Rico Inc., will plead guilty to a crime and pay a $150 million fine, including forfeiting assets of $10 million. Under a separate agreement, GSK will pay $600 million to settle federal government and related state claims under the False Claims Act. The guilty plea and sentence is not final until accepted by the U.S. District Court in Boston.

In other lawsuits pharma companies have been accused of paying money to doctors to prescribe their brand-name medications and, in some cases, telling physicians to push “off-label” uses of the drugs which is prohibited by federal law. In the last few years pharma companies have paid up to $7 billion in settlements, criminal and civil fines, and have pled guilty to misdemeanor and sometimes felony charges.

While making these admissions, many continue to assert that they use the highest ethical standards in conducting their businesses, or they are in full compliance with FDA requirements and regulations, or that they continue to operate in the best interest of the public.

It is difficult not to read or hear news almost daily about companies getting caught doing something indifferent to the public interest or unethical in one way or another. The stories no longer appear to be the exception but rather are beginning to constitute business as usual and most people really don’t care unless they are directly involved. Have we come to the point that American business is expected to be dishonest? Is bad behavior so common that a case like these don’t even get a second glance?  Are responsible decisions being replaced by risk analysis? And is crisis management being relied on to merely cover one’s tracks?

Is it possible to revert to the good old days when companies tried to do what was right most of the time, and crisis management was a tool relied on to protect and respond to the public interest, as well as enhance and protect reputations.

Portions of this article were published in Bernstein Crisis Management: http://www.bernsteincrisismanagement.com/nl/crisis-manager-101101.html

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