Corporate Turkey Governance

News headline - Revenue Up by X%! EPS 1 cent above analysts' expectation, so on and so forth. Most (if not all) corporate executives' income are tied to how well the company's stocks perform. As one can imagine, there is tremendous pressure from shareholders to outperform previous years' revenue or profit - and when financial shenanigans are busted, the shareholders blame management executives for misleading (or defrauding) the shareholders, especially minority shareholders.

I personally feel that the shareholders are partially to be blamed (if not fully). If the company reports better revenue or profit, the management must therefore be doing their job and hence, rewarded accordingly. No shareholder will value an executive telling the truth that the company is making losses. Are you kidding? The share price will plummet. I still remember about 10 years ago, there was a Canadian company which claimed that it has stumbled upon a gold mine (literally) in Indonesia, in fact, the largest gold mine in the world. Shares were trading under 50 cents before that but shot up to over 200 dollars in a matter of months. Then, things turned bad, one of its engineer was murdered in Indonesia and in fact, there were only minimal gold to be found. Every insider sold their shares before the news got out. Let's see, if the management had come clean much earlier, by explaining they had made an honest mistake and none of them sold their shares before the news were published - would that have made any difference? Seriously - think about it - what would have been different?

The truth is the minority shareholders will still suffer as much loss. The only difference is the insider trader wouldn't have made the monies they did and would have suffer the same losses as the minority shareholders.

Let's face it - playing the stock market is like playing the musical chairs, you hope that either the music won't stop or that you will have a chair to sit on when it stop. How can the minority shareholders then blame the corporate executives for allowing the music to play a little longer? In fact, the minority shareholders ENCOURAGED the executives to do everything within their power to prolong the music. This is what I call Corporate Turkey Governance.

What happens if the executives who are responsible for false/misleading financial reporting do not have enough money to repay the shareholders after the civil proceedings? Thank god there are deep pocket auditors :)

Shy Turkeys.....

Every Head of Department in a corporation should be given a Human Resource Handbook or Human Resource FAQ that provide some guidance on "How to Handle Delinquent Employees", especially "what you should NOT do". Not many people are aware of the principle of condonation. Even with the highly publicised Enron's story on how Andrew Fastow became the CFO of Enron, I am surprised to see many corporate leaders did not learn from the mistakes of Ken Lay or Jeff Skilling.

Here's the story...Eddy is the Head of Department of our local unit of a multinational corporation. He has been working in the same company for over 30 years. He is seen to be a great leader by many other high power executives in the company. However, he has several huge flaws, which I consider them to be fatal, if left uncontrolled. One of it is the inability to handle and manage delinquent employees under his charge.

One of his employee, Arthur, has been working in the company for the past 15 years. Intelligent, swarve, highly qualified professional, groomed by Eddy personally. Arthur has the ability to exploit just about anyone's weakness. He knows that Eddy has a huge ego (then again, which corporate leader doesn't). Arthur will use every opportunity he has to fan and feed Eddy's ego. In a few years, Arthur is one of Eddy's trusted lieutenant, so much so that Eddy will refuse to see or acknowledge Arthur's flaws. He has been warned by various executives in the company about Arthur's integrity but refused to acknowledge them. He would brush them off as people who are jealous of Arthur's position.

Sometime last June, the CEO, Keith, discovered that Arthur has requested for a huge amount of unjustifiable advance. He asked the Finance to conduct an investigation on all expense claims made by Arthur. Finance reported that Arthur has made few hundred outstation mileage claims in the past 2 years, all of which were unsupported by any document. Keith directed Finance to pass the report to Eddy for his further action.

For the sake of complying with Keith's order, Eddy passed the report to Arthur and asked him to submit a written explanation, to which Arthur did, on the next day. His explanation was basically the senior management of clients are aware of the trips he made and that the clients have all paid the bills without raising any issue. Eddy then passed Arthur's reply and Finance report to Arthur's 3 immediate supervisors and instructed them to speak to Arthur. Why couldn't he speak to Arthur directly? Is it because he is not the confrontational type?

Anyways, the 3 supervisors did not really do anything about it. About 10 months later, Eddy proposed Arthur to be promoted to be the Head of a new department. What??? Keith remembered the issue about his claims and confronted Eddy about it. Keith put Arthur's promotion on hold until Eddy close the loop on that. So what did Eddy? he passed the file to the HR department and instructed Finance to work with HR to get to the bottom of this. No, Eddy doesn't want to get his hands dirty.

After 2 more months of investigation (that is 1 year after Eddy was instructed to deal with this), the company found that Arthur has made few hundred fictitious mileage claims amounting to a few hundred thousand dollars, purporting to be expenses incurred in the course of work, when in fact he had not made any of those trips. Phew! Isn't the company lucky to have someone like Keith? Imagine, had Keith not confronted Eddy, one day, this crook, Arthur, may even be the CFO or even CEO of the company.....and it will be Enron or Tyco all over again.

Arthur has been sacked just a few days ago. When Eddy passed the letter of termination to Arthur, Eddy said it wasn't his decision. Of course not! If he is capable of making difficult decision, Arthur wouldn't have been able to gone this far. Apparently, Eddy knew that Arthur has been siphoning off monies as far as back in 2001! When HR insisted on reprimanding Arthur, not only that he did not reprimand Arthur, he had given Arthur assurance that the incident will not have any impact on his future in the company.

Question is, why is Eddy still around? Shouldn't he be removed from his position as he has proven himself to be an incompetent leader? Last I heard, he was still thinking of competing for the CEO position when Keith retires next year. God bless the company!

Turkeys can't fly.....

My definition of Corporate Turkeys? These are the people who cause the downfall of great corporations such as Enron, Arthur Andersen, Tyco, WorldCom etc. They are financial shenanigans - financial parasites. These "Turkeys" think they can fly like eagles and if they tell themselves enough number of times, they will not only convince themselves but also the public at large.

No, they are not stupid...most of them are sophisticated and well-educated business men who are blinded by money and lost their way. Corporate Turkeys are people who are smart enough to manipulate rules in their favour but foolish enough not to figure out what those rules are for.

Here is my theory. Corporate scandals nowadays are, by far, more juicy than any other stories. Sex sells but in my view, not as much as books on finance, day-traders, fund managers, stock speculation and books like "How I make a Million Dollars in the stock market". Disagree? Walk into any medium to large size bookstores and you will see what are the featured books. And because of this heighten public interests in personal finance (i.e how to retire rich), it is so much easier for fund managers to lure unsophisticated people on the street into the stock market dungeon. When all these monies keep pouring into the stock market, bubble will burst, which invariably lead to corporate scandals being discovered.

You see, it is always easier to spend other people's money than your own. If one owns 100% of the company, every cent that you spend literally comes from your own pocket. When one owns only 30% or less of the company, every dollar you spend, 70 cents or more belong to other people. It is only human for most Corporate Turkeys to have this mentality. Because of this mentality, Corporate Turkeys believe that they have god's given right to abuse every ounce of their corporate power. It is just too tempting for Corporate Turkeys.....Corporate Turkeys can't resist putting other people's money into their pockets - the easy way.