The public does not react to any crisis until it is big enough and far-reaching to affect their daily lives. When business news gets on Page 1 of every day’s newspaper and every evening TV newscast, then the public notices and cares.
Business and organizational stories do not hit the public consciousness until there is a crisis. People decry the scandals and rest assured that such doings are not happening in their companies. Often, it is assumed that some protector or regulator will adequately address the issues. When the outcomes are of high magnitude, the outcry becomes larger. As people see the events as having a direct effect on the economy and their livelihood, they take notice and follow the stories more thoroughly.
The recent years succeeded in exploding a great many myths and presumptions about business. Formerly sainted icons went down in disgrace. Tactics deemed as ‘standard operating procedure’ for some companies were exposed and ridiculed by others. A few whistle blowers were lauded in the efforts, though others were attacked as the perpetrators of the chaos shuffled aside.
One must ask many simple and pertinent questions about a seemingly unsettling business future:
- How did business get this far?
- Why did the scandals and corporate disrepute occur?
- What are the implications of Enron and other corporate scandals upon business?
- Where are the next trends and opportunities?
- How do we cope in the new environment?
- What beacons of opportunity do we look for?
- What will it now take to succeed and fail?
- How do we react to and benefit from changes, rather than become victims of them?
- Do we still take band-aid approaches (such as buying enterprise software)? Or, do we now see the need and importance to embrace longer-term approaches?
- How far will we go to excel?
- How creative must we become in the New Order of Business?
- How far-reaching are business practices?
- How much further should we extend ethics?
- Where will the pendulum swing next?
Business in the 21st Century is real and dangerous. People suddenly feel lost. They are no longer in a safe port. They don’t know how to cope. Yesterday’s strategies simply do not work anymore.
Many of the old assumptions which business previously held have proven untrue and unworkable. We really must examine what we assumed before and what we can assume now. Business is at a juncture and needs new focus.
The victims’ fear and the public’s apathy enabled the crises to occur. This is the perfect climate for unethical people to have gotten away with murder. Sadly, many of the perpetrators did not see lapses in ethics… it was legal and just business to them.
It takes tragedies occurring in order for the system to stand back, take focus and fix what is wrong. It’s a whole new world. This chapter talks candidly about recent trends. Other chapters will discuss the need for and exciting opportunities for adaptability. By maintaining an awareness of further changing environments, there are further opportunities to be successful, ethical and move ahead of the competition.
The term CEO has recently been held in disfavor. We decry CEOs for the same reasons that we formerly sainted and canonized them. People are envious of the power, status and wealth of company heads. Yet, most CEOs were never trained on how to be CEOs, with all the responsibility, people skills, leadership and ethical management that must go along with the job.
The game of duping and fooling shareholders, customers and employees has ended… as well it should. We cannot ignore or compartmentalize board members, stockholders, employees and stakeholders anymore. We cannot fool them. We must listen to them and respect them.
Every organization in the world must reexamine how we will keep score in the New Order of Business. Continuing to justify blind spots will blur accountability. Having maintained too much of a myopic focus is what got so many companies in trouble already.
Thinking that we dodged the bullet while others got caught is a mentality that will still bring many other companies down in value and defeat. The scandals are not all aired in public yet. Up to 25% of our businesses are in peril and must take corrective actions, lest they be brought down in disgrace too.
Most of the downfalls, stumbles, false starts and incorrect handling of situations stemmed from business’ lack of focus on the macro… and over-emphasis upon certain micros, to the exclusion of other dynamics.
This chapter puts business events of the last two years into perspective… covering a broader scope of subjects than has been reported and discussed. This book states the case for more of a macro-focused approach to management. An analysis of business encompasses much more than accounting fraud and stated values of stocks.
What we do with fear and uncertainty determines who we are. It is time for fresh thinking, heightened ethical behavior and a shift to a macro focus. Rules and responsibilities within each sector of companies are changing. Each of us must ask what we can contribute and our roles in adapting to the crises.
High Costs, Learning Curves.
Corporate scandals of each of the last 10 years cost the U.S. economy more than $200 billion in lost investment savings, jobs, pension losses and tax revenue. The scandals resulted in one million job cuts. 401(k) plans dropped $13 billion as a result of these events alone. Recent corporate scandals have cost good businesses in reputation, credibility and support, by virtue of being lumped with some bad apples. Thus, consumer confidence dipped, and it will take years to fortify the trust in business.
Losses from 401(k) investment accounts alone totaled $175 billion, making them worth 30% less than they were two years ago. Public pension funds nationwide lost at least $6.4 billion as the stock market plummeted, amid a crisis of investor confidence. More than a million workers lost their jobs at the affected companies, while company executives cashed out billions of dollars of their stock.
This demonstrates the impact of accounting failures at high-profile companies. There has been $13 billion in lost federal tax revenue from companies with questionable accounting practices under-reporting their profits to the IRS. Twenty-three companies under investigation have laid off 162,000 workers.
We have been subjected to the second longest bear market in history, the longest being that of the Great Depression. The stock market is down 25%. We are now $7 trillion poorer than we used to be, thanks to Wall Street over-valuing of companies. Sweeping reforms by Wall Street and the Securities & Exchange Commission (SEC) are needed, forcing firms to separate their investment banking business from their stock advisory business.
There are 25 million small businesses in America… all affected in some way by corporate scandals. The healthcare industry is the primary business sector that is most expanding right now.
Steroid scandals periodically rock the sports world. The public decries the use of steroids but secretly supports the results that they yield (athletic records being set). The steroids usage norm in some team sports has the effect of institutionalizing breaking the rules, even though the health of some is seriously endangered. Temptations to break the rules for the hope of future financial gain are at the heart of corporate arrogance, greed, deceptions and double-dealings, as well as in the minds of some sports promoters.
One out of every 12 businesses fails. 90% of all e-businesses will fail. 99% of all internet websites do not make a profit.
Retailers make 70% of their earnings in the fourth quarter of each year. That is why holiday sales are vital to their bottom line and, thus, the economy.
There have been 53 peacekeeping missions from 1948-2000, 40 of those from 1988-2000. Spending on peacekeeping peaked in 1994 at $3.2 billion, and is estimated at $2.2 billion for 2000. Successful peacekeeping missions include El Salvador, Namibia, and East Timor. Less successful include Somalia and Bosnia where there was less local support for their presence. A major report to the United Nations Millennium Summit calls for changes in the way in which peacekeeping operations are organized and financed. It also recommends they do not remain neutral when one side initiates aggression.
Airport screeners fail to detect fake bombs and guns 24 percent of the time.
52% of all high school students know someone who brought a weapon to school. 61% of those students did nothing about it. 52% of all high school students know someone who made a weapon-oriented threat. 56% of those students did nothing about it.
The Pentagon says that it cannot account for 25% of what it spends.
Shoplifting costs American business $10 billion per year.
Airlines say that delays caused by air traffic controllers cost them a combined $4 billion per year. For every 1-cent reduction in the cost of jet fuel, the airlines save $170 million.
Cargo theft costs the U.S. economy $6 billion per year. The victimized companies pass their recoveries from losses along to the customers. For example, $125 of the cost of each new personal computer goes to reimburse companies for previous thefts.
Consumers are cheated at gas pumps of self-serve marts each year in excess of $1 million because of faulty computer chips.
On any given day in the United States, over 100 convenience stores are robbed. Every day in the U.S., people steal $20,000 from coin-operated machines.
The average bank teller loses about $250 every year.
One third of our nation’s Gross National Product is spent in cleaning up mistakes. Yet, only 5.1% is spent on education, which is the key to avoiding mistakes on the front end.
Fires cost more than $150 billion per year in damage. Most fires are caused by carelessness: overloading electrical sockets, smoking in bed, failure to turn off kitchen burners, malfunctions with space heaters, allowing trash to accumulate, failure to repair electrical wiring and electrical breaker explosions. Electricity-related incidents account for half of all fires.
Learning the Lessons and Moving Forward.
The U.S. Congress enacted the Sarbanes-Oxley Act, corporate reform legislation, in 2002. The bill delineated new regulations, in response to the accounting scandals at WorldCom, Enron, Tyco and other large companies which left thousands of employees without retirement savings and investors with worthless stock shares.
The bill was intended to prevent malfeasance, restore investor confidence and crack down on corporate cheaters. It set up new regulations for corporate auditing practices and creates strict penalties for executives who hide debt in accounting tricks. It was the largest reform since changes were made to halt the Depression-era slide into bankruptcy.
Sarbanes-Oxley instituted extensive corporate governance reforms, including standards for advisors representing public companies and their nonpublic subsidiaries. Under it, business leaders are expected to embrace both the letter and spirit of the bill and other existing laws, designed to protect investors, employees and other stakeholders.
Unfortunately, the material covered by Sarbanes-Oxley represents only two percent of Corporate Responsibility and Ethics. As one who has conducted ethics audits and put programs into practice, I know that the reform did not go far enough. Thus, the economic downtown of the past two years. A more holistic approach to ethics would have averted many of the crises.
In moving forward, one must review those junctures where leaders and their companies recognize when a business is in trouble. These are the high costs of neglect, non-actions and wrong actions, per categories on The Business TreeTM:
- Product, Core Business. The product’s former innovation and dominance has somehow missed the mark in today’s business climate. The company does not have the marketplace demand that it once had. Others have streamlined their concepts, with greater success. Something newer has edged your company right out of first place.
- Processes, Running the Company. Operations have become static, predictable and inefficient. Too much band-aid surgery has been applied, but the bleeding has still not been stopped. Other symptoms of trouble have continued to appear… often and without warning.
- Financial Position. Dips in the cash flow have produced knee-jerk reactions to making changes. Cost cutting and downsizing were seemingly ready answers, though they took tolls on the rest of the company. The overt focus on profit and bean counter mentality has crippled the organizational effectiveness.
- Employee Morale and Output. Those who produce the product-service and assure its quality, consistency and deliverability have not been given sufficient training, empowerment and recognition. They have not really been in the decision making and leadership processes, as they should have been. Team members still have to fight the system and each other to get their voices heard, rather than function as a team.
- Customer Service. Customers come and go… at great costs that are not tallied, noticed or heeded. After the percentages drop dramatically, management asks “What happened?” Each link in the chain hasn’t yet committed toward the building of long-term customer relationships. Thus, marketplace standing wavers.
- Company Management. There was no definable style in place, backed by Vision, strategies, corporate sensitivities, goals and beliefs. Whims, egos and momentary needs most often guided company direction. Young and mid-executives never were adequately groomed for lasting leadership.
- Corporate Standing. Things have happened for inexplicable reasons. Company vision never existed or ceased to spread. The organization is on a downslide… standing still and doing things as they always were done constitutes moving backward.
These situations are day-to-day realities for troubled companies. Yes, they brought many of the troubles upon themselves. Yes, they compounded problems by failing to take swift actions. And, yes, they further magnify the costs of “band-aid surgery” by failing to address the root causes of problems.
Each year, one-third of the U.S. Gross National Product goes toward cleaning up problems, damages and otherwise high costs of failing to take proper action. On the average, it costs six times the investment of preventive strategies to correct business problems). This concept was addressed in another of my books, The High Cost of Doing NothingTM.
There are seven costly categories of doing nothing, doing far too little or doing the wrong things in business:
- Waste, spoilage, poor controls, lack of employee motivation.
- Rework, product recalls, make-good for inferior work, excess overhead.
- Poor controls on quality, under-capitalization, under-utilization of resources.
- Damage control, crisis management mode.
- Recovery, restoration, repairing wrong actions, turnover, damaged company reputation.
- Retooling, restarting, inertia, anti-change philosophy, expenses caused by quick fixes.
- Opportunity costs, diversifying beyond company expertise, lack of an articulated vision.
About the Author
Hank Moore has advised 5,000+ client organizations worldwide (including 100 of the Fortune 500, public sector agencies, small businesses and non-profit organizations). He has advised two U.S. Presidents and spoke at five Economic Summits. He guides companies through growth strategies, visioning, strategic planning, executive leadership development, Futurism and Big Picture issues which profoundly affect the business climate. He conducts company evaluations, creates the big ideas and anchors the enterprise to its next tier. The Business Tree™ is his trademarked approach to growing, strengthening and evolving business, while mastering change. To read Hank’s complete biography, click here.