The fallout from the Worldcom fiasco has been playing itself out recently with the trial of Bernie Ebbers. I've been fascinated to watch because in my own venture career I've had the unfortunate (but important) experience of working with failed companies. In situations like Worldcom, the question always gets asked: Was the CEO devious or was he duped?
Ebbers is arguing the latter. He's portrayed himself as a patsy led astray by those he trusted who were smarter and more cunning than he was. It's a story every crooked CEO has used since the beginning of time.
In these situations the pattern is always the same. A strong-willed CEO and a Casper-Milquetoast finance officer pair up and forge a partnership that works for a time. "Mr. Outside" stirs things up and "Mr. Inside" is there to make sure someone's around to pick up the pieces. In Worldcom's case, that meant Ebbers over-paying for unprofitable service businesses and Sullivan figuring out a way to get them financed.
But there's inevitably a moment when the model begins to show signs of strain. And in that moment, management is tested like it has never been before. When confronted with these situations, strong management teams stop what they're doing, re-assess their situation and go to their boards with a recommended course of action to deal the situation. Often, the medicine is bitter in the short-term, but offers hope over a longer horizon.
Weak managements do the opposite. Typically, they find a short-term solution (like capitalizing line costs) and convince themselves it's okay because things will get better next month. All they'll have to do is reverse the bogus entries and everything will be back to normal. No one will know and the shareholders will have been spared from a momentary blip in performance.
When the momentary blip turns out to be a trend, it's much easier to continue obfuscating the truth than admit what happened before. This continues until the accumulated value of the false entries is too big to hide, or until somebody blows the whistle. Either way, one thing is clear: if a sub-set of management engages in a concerted effort to deceive the board and shareholders, they will be able to do it successfully for some period of time. Equally clear, however, is that they will eventually get caught. The only unknowns are "when" and "how much": when is the deception revealed and how much money has been lost.
Now, to the question of Mr. Ebbers and whether he's complicit. Again, there are consistent patterns in these situations. When a CFO engages in financial chicanery on an individual basis, it is almost exclusively by inappropriately steering funds to his or her own (indirect) account. I'm not aware of a single situation where a CFO acted on an independent basis solely for the purposes of propping up a stock price or maintaining a bonus level, which is what you would have to believe happened if Mr. Ebbers is telling the truth.
On the other hand, there are countless examples of CFO's doing just that in conspiracy with and at the direction of the CEO's of their companies. The argument is that it's all for the greater good of the shareholders while the company rides out tough patch. In reality, it's all for the greater good of management while they avoid the repercussions of poor business choices and a changed market. When all of that comes home to roost, the CEO's response is always the same: "I got framed." Don't believe it.
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