What the CEO Knew or Should Have Known
By George Anderson
The conviction of former WorldCom chief executive Bernard J. Ebbers by a federal jury in New York on charges of fraud and conspiracy appears to take the “I didn’t know” defense off the table for others currently facing similar charges or those that may find themselves in court in the future.
Salina Strong, juror No. 4, told The Wall Street Journal, “I think Ebbers pretty much hung himself. How could he be up that high in a company that he started and then he says I didn’t know anything?”
If given the maximum for the crimes on which he was found guilty, Mr. Ebbers could face a sentence up to 85 years. The actual term is likely to be much less although, at the age of 63, it is possible Mr. Ebbers may spend the rest of his life in jail. He is expected to appeal.
Jacob Frenkel, a former enforcement attorney for the Securities and Exchange Commission who is now in private practice said, “This verdict is devastating for any other CEO or senior executive who intends to use the defense that ‘I did not know.’ ”
Moderator’s Comment: What effect will Bernard Ebbers’ conviction on federal fraud and conspiracy charges have on how other chief executives do their
job?
Jacob Frenkel, said the jury’s return of guilty charges against Mr. Ebbers was like “a missile blowing that (‘I didn’t know’) defense out of the sky.” –
George Anderson – Moderator
For today anyway, we are reminded of the importance of good ethics in the corporate world and we take note. What tomorrow will bring is another question but, if history teaches us anything, not a lot will change. The good, the bad and the ugly will mostly all remain what they are.
Yet another example proving that checks and balances are critical to any large human enterprise with multiple stakeholders – whether in government, management or labor, profit or nonprofit. Since one can never know what is really in the gut of a person with influence, the old cold war maxim still rings true: “…trust, but verify….”
One thing that became evident during the Ebbers trial is that CEOs can’t commit this level of fraud by themselves. They require conspirators, and conspirators will testify against them when the time comes, if only to preserve their own skins.
So this modern Caesar has fallen, during the middle (ides) of March, done in by one of those closest to him.
I don’t think it should end here. Any board of directors that has hired (or has failed to fire) a CEO who says “I didn’t know” should be sued for negligence. And accountants that were complicit in the scheme should be unemployed, have their CPA certification removed, and probably be facing legal problems as well.
Heck with the ethics training. Let’s give them something with teeth to worry about – the criminal justice system and the torts!
The “Aw, shucks, I didn’t know what those guys were doing” defense was buried yesterday. Mr. Ebbers was the man in charge at WorldCom. It’s hard to believe he didn’t know what was going on. If an executive is rewarded with millions annually for running a public company, he is responsible for knowing what’s going – and what’s not going – into the company’s books, particularly if he is the founder. The most unfortunate thing about the verdict is that it throws a cloud of suspicion the hard-working, honest and effective corporate executives.
It just amazes me how many CEOs plea “I don’t know” in light of all the corporate scandals. Corporate board members should be liable also–since many of them are cronies of CEOs.
If the “I don’t know rule” is used to compensate them for how much “they know,” one will be very surprised how much each one knows.
CEOs should be compensated for customers’ satisfaction also, rather than using stock prices as the yardstick. If a company’s stock is doing well, despite a lot of unhappy customers, the company is not going to be around too long. All compensations should be structured for long term, since all these guys jump ship regularly before bad news surfaces.
In a nutshell, I don’t buy the defense of “I don’t know.”
Thanks to mfbenson for being the first to touch on what I consider the root cause of all of these scandals, which is the effective subordination of Boards of Directors to company management. It should be the first responsibility of the Board to ensure that the company’s financial accounting to the shareholders is accurate, but if management effectively controls the composition and activities of the Board–as is the case in far too many companies–then the only thing preventing fraudulent manipulation of earnings to the benefit of management is ethics of the managers. Everyone asks, “where were the auditors?” But the truth is that, if the Board is subordinate to management, then the auditors are answerable to management and not the shareholders, so it is not in their interest to disagree with the company’s accounting decisions because that would threaten their relationship with management. What is needed is an overhaul of corporate governance, to include both legal and regulatory reform, that ensures that every Board of Directors is required to perform not just as a group of advisors to management but as true fiduciaries to the shareholders. One important element of such a change would be that the Board, not management, would select and supervise the auditing firm, so that the auditors are truly performing a service to the shareholders and not to management. (Another important change would be that CEOs would no longer be able to shamelessly set their own ridiculous compensation packages, but that’s another subject.) Personally, I feel that the position of Director should ultimately be established as its own profession, with educational and certification requirements, codes of conduct, etc., as is the case for lawyers, doctors, and accountants.
PT Barnum is famous for saying “there’s a fool born every minute.”
The corollary, of course, is that there’s a trickster born every minute willing to take advantage of the fools.
Over-paid CEOs, compliant boards, accountants who can’t count, certifications that mean nothing or less than nothing, a stock market that doesn’t want to know bad news — we are tired of all of this, but we allowed it, condoned it, accepted it, and only when we absolutely demand ethics as a prerequisite for leadership will we get a different result.
I will now go back to watching spring training, where gritty real-world issues don’t arise.
mfbenson and nova are directly on the money. The board of directors is often an unhealthy “club” of people who abrogate responsibility and seem to live on a different planet entirely. The detached “go-along, get-along” mentality is all too pervasive. Sure, put this guy in jail, but where was the board?
One thing more and more companies are learning is that 99% of these problems result from their companies being publicly held. By having the stock being so widely held, it just opens a Pandora’s box of problems with the SEC and their are too many nosey eyes keeping tabs on your company’s business.
I used to see employees rob companies I worked for right in front of the CEO’s nose. Usually it was by taking advantage of a CEO’s weakness. This seems to happen more often in companies who hire CEOs who don’t have practical business experience in the industry the company they are running. For example, hiring someone from General Electric to run a supermarket company. If a CEO is weak in real estate, his real estate VP might steer the company into high rent locations in exchange for a kickback from the landlord. If the CEO is weak in procurement, buyers might overpay for products in exchange for kickbacks. If he is weak in auditing, accountants can set up all kinds of phony expenses to be paid to themselves. If he is weak in IT or research he might have to pay outside consultants huge fees to solve uncomplicated problems with very complicated methods.
A CEO can’t be an expert at everything, although most probably say they are if you ask them. This is just part of the risk companies take when they get too big. CEOs must delegate too many tasks that they themselves don’t understand. I like what Bob Mariano did at Roundys. He brought in people he could trust, rather than more qualified people. I think its more important to be able to trust people underneath you rather than get better qualified people you can’t trust. President Kennedy did this when he hired his brother as Attorney General.
It isn’t likely to make any difference to ethically behaving CEOs but it may convince a few who were considering doing what they shouldn’t that there is indeed a risk involved. As for those who are behaving unethically, I don’t suppose a little thing like this will change them in any way other than to get even more devious in their endeavours to cover it all up.
As CEO, you accept responsibility for running an organization that complies with the rule of law and commerce, not just the mantle of leadership and growth. It is hard to believe that insisting on just making the numbers isn’t followed by why is that difficult and what is going on with the business that makes this tough to do. This will send a signal to others in the industry, just as the Sarbanes bill has to proper accounting for results.
All other corrupt CEOs are now trying to learn from this and devise a new strategy that will enable them to circumvent the law in ways that they will keep them from being caught. Honest CEOs will also worry and re-examine themselves to make certain that they are doing the right thing. This won’t eliminate corruption, but it certainly must have given many people a wake up call and ruined a lot of CEOs’ days in the short-term.
Any CEO that has no idea what is going on in their company shouldn’t be there. I believe many of them are in way over their heads, but can’t believe this defense for a minute. As John Stossel would say, “Give Me a Break!”
Speaking from a state where our recently removed governor (Rowland) is to be sentenced on Friday to 1-2 years in prison for corruption and will meet up with as many as three former CT mayors in the slammer if he ends up in a certain one, it seems to me that it wouldn’t hurt any of us — business leaders, employees, or just plain folks — to brush up on our ethics. I’m glad to see corrupt execs punished, but when will the deterrent factor kick in?
I am usually not a skeptic, but I do believe that those who are as Ryan put it “bent” will continue to think “It won’t happen to me.” I think it is a wake up call for those who are already behaving appropriately and maybe for some who are in the gray areas. I do not anticipate significant changes in behavior….
It’s a wake up call, but let’s remember it’s only a wake up call for CEOs who are inclined to break the law. I suspect the corrupt will remain bent and try to figure out new angles; the virtuous will continue on as they have; and the disengaged will need to pay a little more attention.
Great news! It should be devastating news to other senior managers. They have a responsibility to the shareholders in the company. And they should not be skimming off the top, with or with out Board approval. He and others that cheat should go to jail for a long time!
While I have to admit that I wish no ill will to the Ebbers, family or even himself, this seems to be a clear example of getting exactly what you have coming to you. I have family members who worked for WorldCom and, in the day to day lives of building the company, there is an expectation of leadership based on integrity that should be absolute. I believe the Enron, WorldCom, Tyco leadership gaps are exceptions and not the rule. It is a shame all CEOs and boards are under the cloud. But in the long run, to prevent the exposure of millions of shareholders, all senior management will need to be fully engaged and if they are in the real position of “not understanding what is happening,” then it is a clear sign for them to get out.
While the optimist says this will signal a resurgence of ethics in the corner office, the pessimist says that those doing evil will only hide their tracks better and will require unchallenged loyalty from their inner circle of conspirators.