The Rise of the Rogue Executive: How Good Companies Go Bad and How to Stop the Destruction

Living as we are now in a post-TARP world, I'd say these guys were ahead of the curve by a fair degree. Maybe the government could set aside some I-told-you-so money for all those folks who saw it coming. A quick and easy read, but still substantial.

The Rise of the Rogue Executive places much blame on internal procedures that jettisoned 100 years of responsible practices, and the technologies that made fraud and profiteering possible on a scale that simply wasn't possible in generations past. And sometimes, flat-out lies, as in WorldCom using a totally theoretical "what-if" spreadsheet looking at the opportunity if Internet use doubled every 100 days as the basis of its income projections! The result of this total lie was devastation in the telecom industry, which was frantically laying cable in order to keep up with this demand prediction. Another key cause was the incentive structure (eliminated by Sarbanes-Oxley in the aftermath of Enron's collapse) that turned consultants and auditors at Big Six accounting firms such as Arthur Andersen into sales staff and pressured auditors not to jeopardize the far more lucrative consulting business (the book reproduces the full text of the Anderson indictment, in fact). Can you say "conflict of interest?" And taking it further, CEOs face pressure to cook the books or look the other way when those to whom they delegate are unethical, both because of their own ludicrous compensation structures and pressure from investors for short-term growth. (The book cites bad behavior on the part of Dick Cheney during his Halliburton days, among others.) But ethical, involved leaders can surmount the challenge. The book discusses this, but this part is much weaker, mostly focusing once again on the wrongdoers. I'd have liked to see that part built up. Of course, my own award-winning sixth book, Principled Profit: Marketing That Puts People First covers that part in detail, explaining how to set up and run successful ethical companies. And one easy step companies can do is to sign the Business Ethics Pledge, so consumers know of their commitment. Shel Horowitz's award-winning sixth book, Principled Profit: Marketing That Puts People First, demonstrates how to build a business around ethics, environmental sustainability, and cooperative practices--and how to develop marketing that highlights those advantages.

Sayles states that today's threats to American capitalism come primarily from within the corporation, not like prior external efforts to monopolize markets. The threat started with modest deviations from accepted accounting practice - expensing stock options, and went from there. Soon executive compensation became obscene rising from 50 - 100 times that of average workers up to 1,000 times. Worse yet, the compensation was typically based on mythical earnings. Earnings were frequently manipulated through smoothing (use of "cookie jar reserves), capitalizing costs that should have been expenses, generous assumptions about pension fund earnings, earnings insurance, off-the-books liabilities, losses, and subsidiaries, abusive/fradulent tax shelters (from '95 to '00, more than 60% of American corporations paid no federal income tax - per GAO research), rigged trading to boost values, fraudulent sales, etc. (Would have liked more examples of abuses, though perhaps those cited covered 90%+ of the abuses.) The impact of these manipulations is more broadly felt today (with about 50% of citizens owning stock), than 1929 (about 10%), and the fact that many rely on stocks for a considerable part of their retirement funds. Business leaders have had plenty of assistance in their distortions. Useless and complicit auditors (Arthur Andersen, KPMG), complacent boards that do not want to rock the boat and jeopardize their status and easy money, investment bankers willing to muzzle stock analysts to improve participation in future stock offerings, CEOs that also serve as Board Chairmen - controlling agendas, limiting access, "picking" board members, creating overly large boards (making meaningful participation difficult), and restricting stockholders' ability to replace board members. Sayles also identifies media and academics (both entities identified Enron as evidence of outstanding management) as also less than alert. Sayles identifies pursuit of short-term earnings, combined with executive greed, as the major culprits. Large executive stock-options serve as the primary link between the two. On the other hand, Sayles also points out that stock options were introduced to cure a prior problem - motivating leaders of corporations that had stagnated over a period of years. Sayles also points out that dishonesty is not limited to today's business world - witness the Iraq prisoner abuse, professional sports use of steroids, the Catholic Church's sex scandal, media scandals (inflated circulation numbers, made-up stories), educators helping pupils cheat on proficiency tests and fudging dropout rates). What's the answer, the cure? Sayles offers a few suggestions - eg. smaller boards, limiting the number of boards that anyone serves on, requiring certification of earnings, limiting the exercise of stock options to much further in the future (Sayles even points out that Sec. of the Treasury John Snow was able to return his stock optioned-stock after the price fell),

Having been part of the Enron experience, I was very interested to read this book: The Rise Of The Rogue Executive - How Good Companies Go Bad And How To Stop The Destruction by Leonard R. Sayles and Cynthia J. Smith. It's amazing how we allowed ourselves to get to this point... Contents: The Tipping Point - How Good Companies Go Bad And Executives Become Rogues; American Business At Risk - Picking Up The Pieces And Looking Ahead; The Stock Market And Executive Decision Making; Black Boxes And Big Black Lies; The Shocking Destruction Of Arthur Andersen, Auditing's Gold Standard; Auditing The Public's Auditors; Directors - Why The Weak Oversight; Too Silent Critics - Journalism; Too Silent Critics - Academe; Fees Galore; How We Nearly Lost American Capitalism; The Mythic CEO - Why Real Leaders Became An Endangered Species; Seeking And Valuing Real Leadership; We Can Do Better; Endnotes; From The Authors; Addendum - Supreme Court Overturns Arthur Andersen Conviction; Index So many things were considered normal and were not questioned. Sayles and Smith take a look at some of the elements that led to the rise and fall of companies like Enron and Worldcom. Obviously Enron serves as a model whipping boy for most (if not nearly all) of the examples, as there was so much going on there. Rise lays out the abuses in a clear and concise manner, with a myriad of example cases to back them up. I especially appreciated the chapters on directors and journalism. I didn't realize that directors were often no more than a glamorous collection of big names put on the board to make the company look good. It's incredible that people charged with overseeing a company's direction can have so little knowledge and involvement in far too many cases. And we all know how few dissenting voices existed in the mass media pointing out the flaws of these companies. Ones that did try and raise objections were too often shut out by others and were quickly drowned out. If only we as the public had listened and paid attention... While the book is supposed to offer remedies on how to stop this abuse, it seemed like there was less of that and more emphasis on pointing out the abuses. To be sure, the first step in stopping an abuse is finding out about it in the first place. But for whatever reason, I didn't feel a strong "call to action" in terms of a series of proposed changes. I can't quite put my finger on it, to be truthful. Maybe I was just too close to one of the meltdowns, or maybe the carnage of the abuse overpowered the rest of the material. Regardless of that, it's still an important book to read. I'd like to think that what's happened in the last two or three years has allowed us to turn the corner on these types of situations. Realistically however, you know it's still happening. Rise will open your eyes and make you think twice about what's going on in the executive suite...

This book is a forthright assessment of the manner in which top executives with personal ambitions that far overshadow the long-term interests of the businesses they lead or have led, have undermined and, in some cases, destroyed companies. It examines the 'how and whys' boards have attracted and supported these rogue executives, and the complicity of academia, the media, and consultants. The authors also focus on the critical role of compensation and the inability of the free market system to correct the wrongs committed by such mythic leaders, who have been idealized as rainmakers. In contrast, real leaders serve the interests of long-term shareholders. In a nutshell, the book examines how the entire American business system has gone wrong in boardrooms and executive suites, allowing individual self interest to create a short-term business culture that threatens the long-term success of the American economy. The authors close by recognizing that new laws are not the answer; deterrence has to come from the larger business system and a culture change on the part of the public. The book is a scathing and brilliant broadside at the way the rogue executive class has been allowed to emerge and undermine the strength of the American enterprise system. It is hard-hitting and engrossing-must-reading for everyone with a stake in the future of our economy.