Leadership Renewal

               In the wake of unprecedented failures of entities, some of which used to be giants in their respective business arena, the role of the board has come to the spotlight than ever before. Enron in 2000 had $ 100 billion annual revenue and was valued by the stock market at nearly $ 80 billion. It was ranked seventh in Fortune’s list of the largest US firms. (Tricker 2011).

In many of the corporate scandals, it is clearly seen that following an international governance code does not necessarily insulate a corporate from an eventual failure. The board of Lehman Brothers Inc. had ten independent directors, half aged over 70 with two in their 80s. At Enron the role of CEO and chairman were split, and the audit committee was chaired by a leading independent accounting academic and a raft of eminent independent non-executive directors (Tricker 2011).

Leadership - Clutch or Choke

                The aim of any business leader is to steer the organisation to new heights by taking an acceptable level of business risk. The prize for taking such calculated risk is the return generated for the shareholders and retained for the future growth. In fact, many businesses have been successful because their leaders do a better job of taking risks and not because they do a better job in avoiding risk. Reaching the pinnacle of success may be achieved through decent execution of carefully conceived strategies in a conducive economic environment. However, when the business environment is shaken by shock-waves such as financial crises or when ramifications of short sighted decisions made by leaders unfold, keeping the momentum going becomes insurmountable and are at stake. When the volatility and uncertainty threaten the survival, the pride of being at the top inhibits the ability of some leaders to make responsible realistic decisions. Such leaders very often dig a hole for themselves by denying the reality. Paul Sullivan, in his book ‘Clutch’- Why some people excel under pressure and others do not - explains “Clutch”. Clutch simply put, is the ability to do what you can normally do under immense pressure. According to Paul Sullivan, most people fail under extreme situations. They may be able to do what they do just fine under everyday conditions, but when the pressure mounts, their ability leaves them. They choke. Paul Sullivan argues that if you failed in some way, admit it and take responsibility; your client will respect you more. Simply say, “I tried and made a mistake.”

In its last financial statements in 2000, Enron had reported a revenue of approximately $ 101 billion which is a 153% increase from the previous year. CEO, Jeffrey K. Skilling had hailed the solidity of the leadership in the annual report under the heading “outdistance the competition” and asserted that Enron’s performance in 2000 was a success by any measure, as they continued to solidify their leadership in each of their major businesses. In making this statement with collaborating numbers generated through a masterpiece of manipulation, he would not have envisaged the twenty four years jail sentence and the payment of $ 45 million restitution six years later.

Figure 1 - Excerpts from Enron 2000 annual report

Figure 2 - Levels of Morality Development

Olympus- Financial Jiggery -Pokery

After a decade from the demise of Enron, a bold British business leader in a 92 year old Japanese corporate giant challenged the chairman who had promoted him for the financial Jiggery –Pokery involving $ 1.7 billion. Michael Woodford was made president of Olympus—the company to which he had dedicated thirty years of his career—he became the first Westerner ever to climb the ranks of one of Japan’s corporate giants. Woodford learned about a series of bizarre mergers and acquisitions from an investigative journal called Facta and he was incredulous. Woodford was made aware of over-priced acquisitions and exorbitant consultancy fees to recover losses that Olympus had made in investments in the years of Japan’s bubble economy of the 1980’s which subsequently went bad. In the series of suspicious transactions an advisory fee of $ 687 million had been paid to boutique U.S. financial firm for the $ 2 billion acquisition of British medical equipment firm Gyrus in 2008 which is at a third of the purchase price.

Taking the matter forward, Woodford commissioned an external report by PwC into the fees paid to the company’s advisers and it revealed a shameful catalogue of errors. Presenting the report to the board, he requested the resignation of Kikukawa and Hisashi Mori, the executive vice president. At the board meeting on 14 October convened ostensibly to discuss concerns over governance, Kikukawa announced that the agenda had been altered and the only thing to discuss was the termination of the Woodford contact (Julian Ryall, 2012). The Olympus board of directors could simply not give him an answer and sacked him.

One may now be interested to know, having lost his job, the top position in a global multinational, where Woodford, is today? Is he jobless or worried? Had he paid scant attention to the issue and kept his mouth shut, he would have saved his job and still continue to be the President.

Woodford immediately fled the country in fear of his life but was bold to go straight to the press—making him the first CEO of a global multinational to blow the whistle on his own company. Four national newspapers for first time in history honored him as the businessperson of the year. It is interesting and astonishing to see his response to the below two questions in an interview:

How has your life changed, both personally and professionally, since the Olympus scandal came to light?

Totally. I now spend my time speaking around the world, as I care passionately about sharing the lessons of the Olympus scandal and dedicating my time to my human rights and road safety charities. I’m busier than ever before!
He had been offered two board level positions which he refused as he has now realized, life is more than the corporate life. He has chosen to help those who are desperately in need.

Business Tycoon in Jail- can their leadership be renewed

Jeff K. Skilling former Enron CEO is currently serving 24 years jail sentence. Ken Lay, former Enron Chairman and CEO, was convicted of fraud and conspiracy but, following his death from a heart attack in 20016, had his guilty verdict wiped out as he had not been able to challenge the conviction. In the case of Tyco International, two former executives, CEO and his second in command were both sentenced in 2005 to between 8 and 25 years in prison for stealing hundreds of millions of dollars from the manufacturing company. The US telecoms giant admitted a $ 11bn fraud in July 2002. Bernie Ebbers, former CEO, was convicted of fraud and conspiracy and given a 25 year prison sentence. (Christopher Alken 2012).

History provides evidence of survival and success for ethical behavior at tough times, although such decisions may not been fruitful in the eyes of stakeholders whilst sooner or later society may punish the unethical behavior and eventually sub consciousness will continue to punish until death. The paragraph above provides evidence of ramifications which arose from reckless and unethical behavior of individuals who once were supposedly business leaders.

An asset that is priceless

Financial reporting standards have now been evolved to value any item that an entity could control and bring economic benefits to an entity. It may not be an exaggeration to state that the one of the most valuable assets which is priceless are the leaders with higher level of moral development. Such leaders’ inevitably set the tone for a culture of honesty and create a sustainable and socially responsible business. According to Professor Lawrence Kohlberg at the Center for Moral Education of Harvard University, Ethical behavior of an individual can be analyzed into 3 broader levels.  As depicted in Figure 2 People who are in Level 1, will drive their behavior based on self-interest or punishment. An unethical behavior could emerge for a financial benefit which has been the case in many corporate frauds. People in Level 2, in contrast, tend to characterize behavior based on others’ expectations which means unethical behavior may be judged as right because it is a request of the boss and he/she justifies the wrong act to be right. People in Level 3 (universal ethical principle) have the courage to make autonomous making to ‘what is morally right’ without being influenced by external pressures. Such individuals in the business world know when to say ‘no’ to unethical act and have the courage to lose the job for human dignity and for the well-being of the society. The fundamental question before us is do we have business leaders of Level 3?

 References

Alkan, C. (02/2012). Unhappy 10th Birthday. Accounting and Business International, 20-22.

Ballinger, B. (2011). How to Become Clutch. REALTOR.

Commitee, T. P. (2011). Olympus Investigation Report.

Enron. (2001). Annual Report.

Kohlberg, L. (1975). The Cognitive- Development Approach to Moral Education.

Ryall, J. (2012). Limited Exposure. Accounting and Business International, 24-27.

Ryall, J. (2014). Business as usual, but not for Olympus whistle-blower Michael Woodford. BCCJ ACUMEN.

Tricker, B. (2012). Corporate Governance- Principles, Policies and Practices. UK: OXFORD UNIVERSITY PRESS.

Woodford, M. (2012). Inside the Olympus Scandal.

Bruce, R. (2010). Repo reverberations. Accounting and Business , 25-26.