Monday, February 13, 2017

What Message are you Sending?

We have learned more about Port of Seattle CEO Ted Fick’s recent suspension amidst concerns of an unauthorized wage increase, improper gifts from Port tenants, and a potential conflict of interest involving Fick’s father’s company.

These are only allegations at this time - and last Monday, Fick offered a defense. During last week's meeting in Seattle – the Port Commissioners made one thing certain:  Tone at the Top matters.

I agree with them. Tone at the Top DOES matter. One story in particular stands out as a perfect example of what happens when Tone at the Top isn’t a consideration within an organization.

Many years ago, I assisted in the investigation of a large international parts dealer who was preparing for an initial public offering. There was just one small problem… Corporate Executives at International Headquarters were concerned that their American CEO and his two VPs had been “bending the rules” with expense reimbursements and they asked that we take a look at the problem so that they could “head it off at the pass” with regulators.

So we did. We combed through the CEO’s expense reimbursements finding that he charged everything from his daily fast food breakfast to his personal skybox suites at sports arenas to the company. Between the CEO and his two direct reports, we identified $2 million in fraudulent transactions that spanned a few years.

Given extra time and scope, we were asked to look at the five deputies who reported to the three top executives, and wouldn’t you know? Their expense reimbursements, in earlier years, were meticulously supported by receipts, names of customers and business purposes. By the time we had analyzed those reimbursements through present day, we were looking at items such as kids’ swimming lessons, wives’ spa treatments, and family vacations being run through their reimbursements, too.

The unofficial company motto seemed to be, “If the boss is doing it, then we can, too!”

Tone at the Top has a trickle-down effect. Per the ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse, poor Tone at the Top is cited as one of the primary internal control weaknesses present when fraud occurs.

Because the Port matter has not been adjudicated in a court of law, there is no clear way to classify any of the alleged actions in the case as outright fraudulent behavior or an abuse of power. But in cases such as this, the most important step is for leadership to boldly address any potential fraudulent behavior and take immediate steps to reduce risk of potential fraud in the future. You see, while there is a direct correlation to fraud and poor tone at the top, the opposite is also true: an organization with a healthy tone at the top typically has a lower risk of fraud.

What does a Company with a healthy Tone at the Top look like?

·       Standard of ethical behavior is communicated, displayed by management, and expected of employees at all levels

·       Open-door communication between management and staff

·       Hotlines or other reporting mechanisms are in place and working

·       Support programs are available for employees in need

·       Low turnover of management and staff

In light of potential difficult decisions you may be facing in your own organization, have you considered the following?

1.     What message(s) are your decisions or business practices sending to employees at all levels?

2.     Would the decision indicate that there are different rules for different levels of employees?

3.     If Tone at the Top was a primary consideration, would it change the decision you are about to make?

Don’t underestimate the far-reaching impact of the Tone at the Top of your organization. Is it sending the message you want every employee to hear?

Friday, February 10, 2017

Why Amazon's "Miss"​ Is Really Good News for Investors

We have learned that Amazon’s stock fell 4 percent after missing its fourth quarter revenue projections.

With phrases like “stock pummeled”, “disappointing guidance”, and “revenue misses”, one must surely think this story is nothing but bad news.

I see it differently.

You see, in spite of the Street’s expectations, Amazon has apparently posted the results of its 4th quarter financial operations lower than anyone had planned.

A move that is easier said than done.

Earnings Estimates, Analyst Projections, Wall Street Expectations - heady pressures for any publicly traded company. But when your name is Amazon, well, you have a reputation to uphold.

I can only imagine the hand-wringing and late-nights the accountants and C-Suite executives have contended with as they’ve headed into this recent reporting cycle.

But unlike their counterparts at WorldCom, Enron, and HealthSouth (to name a few), they took the miss on the chin. In spite of what was likely insurmountable pressure, in spite of their “status” as a Wall Street darling, in spite of knowing the significant impact on stock price, they apparently chose to report their reduced revenues accurately.

I see this as leadership. I see this as a bold move. I see this as great news for investors who want to make sure they can rely on the financial reports they’re reading.

When one sees the headlines and fallout from today’s news, one can understand how easy it would have been for Amazon to have cooked the books. To have booked 4th quarter expenses in the new year, to have recorded revenue early. You know, cut a little here, embellish a little there. What are a few more journal entries to post just to make it through the quarter, to make it through the reporting cycle, and hopefully reverse the trend in the new year?

Rationalizations are so easy to come by.

Business, like life, is messy. We have dreams and goals. We hope for the best and prepare for the worst, and we take risks (and if you haven’t watched Amazon’s “risky” and “risqué” Goliath, you should). Sometimes, we are thoroughly disappointed. And other times, our luck takes our breath away. In other words, there is no straight line to success. Why is it then, when a Company like Amazon misses its financial projection in one quarter, the reaction is so deeply negative?

It is these very negative reactions, from the “pummeling” of the stock to the undesirable headlines, that cause so many other companies to more easily arrive at those rationalizations. To make the choice to “just get through the bad times” by painting a picture that isn’t real.

I get it. One need only log into their personal social media to understand this concept. How many of us report that we gained a few unwanted pounds, that someone we loved disappointed us, or that our kids really are imperfect. Heck, no!

So too, it goes, with business.

And so today, I celebrate Amazon. I thank them for restoring a little ounce of confidence in our reliance of big-corporation financial reporting and I am hopeful they will continue to make sound business decisions and take measured risks that will return big payoffs for their investors.