Curiouser And Curiouser
The headline: CDI executives investigated for falsifying financial records.Some background: John, the president of CDI, created this company from nothing. His vision for CDI was so compelling that he was able to acquire stakeholders at every level in the marketplace. At one point CDI stock was so hot that its growth performance was unprecedented. Everybody wanted to own a piece of CDI - individual investors AND institutions - and they did. But CDI had a dark secret.
The headline: Authorities launch probe of possible fraud by top management at SSC.
Some background: Harley, the founder and president of SSC, saw a marketing opportunity that would work based on new laws favorable to his venture. Armed with those changes, SSC's business model was seen as a visionary bold stroke by everyone in the marketplace. SSC became the quality standard for equity investors and one of the most widely held of all stocks by both amateur and professional investor alike. Unfortunately, SSC had a skeleton in the closet.
With all of the bad press big businesses have received lately, I'm sure these stories sound familiar, but you probably don't recognize the company names. It may seem that I am reporting real stories but changing the names for some literary effect, or to protect the guilty.
The Rest Of The Story
The headlines I made up. But the companies were real; the stories are true; both businesses actually operated at the same time; and both went down in a blaze of ignominy in The Year Of Our Lord, 1720.
CDI stands for Compaignie de Indies (in English, Company of the Indies) the French firm concocted by English expatriate, John Law, which resulted in what became known as The Mississippi Scheme. SSC stands for South Sea Company, the English venture invented by Harley, Earl of Oxford, which created the South Sea Bubble.
As history shows, the business models of both companies were founded on lies, perpetuated by greed, operated through fraud, and only prospered as long as their creators were able to maintain their respective ruses. Ultimately, as is the wont of any house-of-cards, both collapsed, impaling the schemes, and the men who created them, on pikes at the gates of infamy, forever.
The Nouveau Infamous
Alas, lately it seems things haven't changed much in 280 years. On the front page of a single recent Wall Street Journal (I'm not making this up) you could have read reports about the alleged and actual illicit conduct of principals of eight (count them - 8) different publicly held, high profile companies. Specifically: WorldCom, Qwest, Adelphia, General American, Enron, Arthur Anderson, Martha Stewart, and Imclone.
Curiouser And Curiouser
As Alice's body was being distorted in Wonderland, her circumstances got "curiouser and curiouser." As a small business owner watching these corporate distortions, they get curiouser and curiouser. Not because I think small business owners are all honest and square dealing, but because the consequences of bad behavior aren't the same for managers of big businesses as they are for small businesses. I'll take a few of the above examples to demonstrate what I mean.
Example 1
WorldCom - The number two U.S. telecom company admitted to fraudulently overstating revenue and under-reporting expenses to the tune of almost $4 BILLION, thus overstating operating performance, a key indicator for investors. Here's the curious part: Even though the CEO was sent packing, his ignominy was at least somewhat assuaged by a huge golden parachute; the fired CFO got a $10 MILLION bonus; and the company may well live to telecom another day.
Small Business - Fraudulent financial reporting in Smallbusinessland lands, like a dropped plate at a picnic, squarely into the lap of the owner, regardless of who prepared the numbers. Every record a small business owner delivers to a bank or other stakeholder is attended by that owner's signature. Not the signature of a company official, but HIS or HER personal endorsement.
When cooked books are discovered in a small business, there is no place to run or hide. And if the bank extended credit based on those invalid numbers, the resulting fall-out will likely close the business, and if, as in the case of WorldCom, fraud is admitted or proved, the owner could be sent up the river.
Example 2
Qwest - One of the Baby Bells, Qwest is being investigated for showing $1.4 BILLION in sales that it had not yet realized, resulting in profits it didn't earn. The CEO was fired and investor confidence has eroded. Here's the curious part: Such falsifying financial records probably won't mean the end of the company.
Small Business - Actually, this happens all the time in small businesses, except in our case, the inaccurate financial statements are usually accidental. Typically, only the owners are fooled into thinking they're more successful than they are. Sadly, by the time the truth is learned (if it is ever learned), the incorrect profit picture has seduced the owner into making ill-advised distributions, like paying himself too large a bonus, with cash presumed available from phantom profits. If this condition lasts long, the company won't.
Example 3
Adelphia - The sixth largest cable concern in the U.S., Adelphia is being investigated for what is being alleged as the most egregious self-dealing in corporate history, when the company participated in a loan that helped founding family members buy back company stock. Here's the curious part: The company, even though now in bankruptcy, has actually secured a $1.5 BILLION loan to help it through Chapter 11.
Small Business - Self-dealing also happens in small businesses, like when family members are given positions they haven't earned or are favored on payday. Sometimes family even receives compensation for work not performed. It's not good business, but it happens, and may or may not take down the business. BUT, I've never heard of a small business in bankruptcy, regardless of how it got there, get a loan.
So Much Corruption - So Little Space
Enron - where do I start? Officials created offshore partnerships where they moved corporate obligations so as not to appear on the company balance sheet. My old employer, Xerox, has admitted to overstating performance $2 BILLION higher than the WorldCom number. Martha Stewart and the CEO of Imclone are embroiled in an insider trading scandal. Unfortunately, there are others and there will likely be others.
There is one big business example that approximates what would happen to a small business found guilty of the offenses discussed here. Arthur Anderson was the biggest of the "Big 5" audit firms upon whom investors were supposed to be able to rely for honest and accurate financial reporting by publicly traded corporations. After decades as the most elite in what was presumed to be an elite field, Arthur Anderson Accounting let everyone down, and is now history.
One of the many reasons the general public doesn't invest in small businesses is because the financial reporting is typically not dependable enough. If big business loses that advantage, why would the general public invest in those companies? Indeed, that's a prime issue today with the decline in stock indexes, and the pullback by disillusioned international investors is one of the reasons the dollar is weakening against other currencies.
If You Take The Pay, Sign The Statements
There is much hand-wringing going on about this latter-day spate of corporate corruption, and well there should be. There is talk of beefing up enforcement at the Securities and Exchange Commission. Others want more independent corporate board members. Still others want to throw the book at the people who committed the infractions and send them to jail. All good ideas.
But if you REALLY want to stop corporate corruption, take a lesson from small business: Make the top officials - those who draw multi-million dollar compensation packages and accrue those golden parachutes - sign their names to company numbers. Not Kenneth Lay, Chairman of Enron, or Bernard Ebbers, President of WorldCom, or Joseph P. Nacchio, CEO of Qwest, but just Ken Lay, and just Bernie Ebbers, and just Joe Naccio signing for themselves. That's what small business owners do when we give our financial and operating information to banks and other stakeholders.
Write this on a rock... There is just something about putting it ALL literally on the line that makes doing the right thing tell your greed to shut up and sit down. Yet another example of how big business could learn a thing or two from small business.
