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WorldCom’s Ebbers conviction matters

I get back online after the roundtable this morning and see that Bernie Ebbers has gone down on all charges, which I didn’t expect. We’ve gotten clear guidance: The jury (and by implication, shareholders large and small) hold the top guy responsible for running the ship. In a way, it’s a return to nautical mores, where the captain is responsible for all that took place during his watch. This code was so strong that it was the ship’s captain who was disciplined for a mutiny by the crew, a concept that I found murky until I examined it from a management perspective.

It is of course the responsibility of the leader (once they accept the responsibility) to keep things together. A mutiny is a failure of leadership. Between them, Sullivan and Ebbers did well here: they kept the crew together, as testimony of Troy Normand and Betty Vinson, reluctant accounting fraud particpants, showed. At the same time, it’s interesting to think that Ebbers was brought to trial not for where the ship ultimately headed, but as a question his level of direct involvement. That says something about our culture of corporate governanace, how we have evolved. As an investor (not as a leader or member of the board), it’s an obvious truth that the chief executive is to blame for failures of the corporation, and we see it in the periodic sackings. And that seems right and appropriate - “bring in the new team”.

However, looking at it from the point of view of the fallible humans at the helm (executives) or their advisors (board), you recognize that it’s the effort of the team that moves the business along. Ebbers’ defense that Sullivan masterminded the fraud is, at face value, plausible. Individuals can play that great of a role in times of change or crisis, and determined ones can methodically amass enough power to be able to control the course of the firm over the longer term. The case remains that Ebbers, as the boss, had the job to know what was going on, whatever its complexity.

Does it make me want to run a public company? No. Be on the board? Not with WorldCom’s board sweating that $12M (what in the hell was I thinking?) $55.25 M decision. And what it is doing to public companies themselves? As I left NEC, they were bringing in new accountant helpers to rigorously go over every small detail. But that scrutiny doesn’t mean that the business itself would behave with more fiduciary responsibility. It just means you know where they spent the money. It doesn’t invite bets on new innovations or even new business lines, just cost containment and papertrails. As a shareholder, I want to know not that expense reports are completely documented or chargebacks properly allocated, but rather that companies are paying attention to the important value-creating activities.

But that’s a daily grind of a different sort, and hard to quantify. How do you balance responsibility with the reckless necessary to get a jump on new markets?

As a part of my ongoing project (as yet unposted, slacker) to put online my strategy repository, I share this delightful peek into how crazed and misguided the pursuit of growth can be. In a vintage 1997 piece from the estimable Fortune, no greater authority than Gary Hamel, strategy guru and professor, wrote an article entitled “Killer Strategies that Make Shareholders Rich” (June 23, 1997 pp. 70-88) in which he praises the novel strategies of a scrappy energy trading firm, Enron (in a way reminiscent of other journalists discussing Google). The whole piece is piquant; all the more that it was handed out in a circa-1998 b-school strategy class. Hamel captures Kenneth Lay as remarking:

“I think the one lesson probably all CEOs need to learn — at least I certainly needed to learn — is, you have to be very reluctant to tell somebody they shouldn’t do something. Quite often someone will come up with an idea, and I have to keep myself from saying, ‘We just don’t want to go in that direction.’ By doing that, I’ve learned that a lot of the things that initially looked to me to be unrealistic, undoable, or maybe even unwise, turned out to be brilliant after a lot of work. And I think if you start shutting down some of those ideas early, well, then, of course, your employees won’t come to you at all.”

Now there’s fostering the creative impetus, and letting people lead, but as is obvious now, the people at Enron weren’t doing the right things — or rather the things they were doing ended up being precisely as Ken first assessed. Unwise.

So how do you incent positive change? That’s what we talked about this morning - incenting the salesforce to sell the right stuff. Because it was tangential to our topic, I agreed that it was “easy” to do, when the accurate statement is that it is “obvious”. What’s not easy is structuring the comp plan to account for the relentless comp-maximizing instincts of your salesforce. So you have to think, and rethink as you turn over whatever incentives you offer for positive change. You have to think like a rep, or a trader, or whatever agent we’re talking about so that you can understand what they are going to see as the easy/low risk routes to success in the game you’ve structured. Because what you’re doing is creating an environment that will foster the activities desired.

I’ve been mulling leadership over the last few days as we flock to gain direction on this chick conference thing. As we decide the important questions of culture, values, mores, and behavior that will drive the agenda, I’m struck by how unruly things are in the vacuum, how complex the issues are and how divisive the issues of entitlement are. We’re trying to figure out what kind of environment will be productive, looking forward to the future as we look at the now and choose our constituents. We’ll figure it out and the airing of comments helps, but today I’m left with the awareness that it’s not the idea that’s important and online chatter, but the execution. That the leaders must create a suitable environment and act to prevent things from going astray. All these voices on the web will inform, validate, criticize and moot the idea of a chick conference, but the thing that matters is the decisions must be made.