The Rise of the Rogue Executive: How Good Companies Go Bad and How to Stop the Destruction

by Leonard R. Sayles, Cynthia J. Smith

Overview

"Sayles and Smith have covered all the bases with a comprehensive, yet fascinating, analysis of what has been ailing our capital market system. A system that has given us such high standards of living. A recommended read for those who not only want to understand what is going on in the corporate world, but why it is going on. Congratulations."

—Frank Kolhatkar, Retired Chairman and Executive Director of the Global Financial Services Industries Practice, Deloitte

"This book confronts, head-on, the problems that have beset American, and world, business over the last decade. The authors boldly go to the heart of the problem; to a business culture that has lost sight of fundamentals in pursuit of the illusions of rapid growth and personal gain. This is a call for action, by CEOs, boards of directors, investors, regulators, and the public at large, everyone with a stake in our business system. Anyone worried about the future of American business and American corporate culture should read this book."

—Morgan Witzel, Editor-in-Chief of Corporate Finance Review and Columnist, The Financial Times

"The authors have provided a 'must read' autopsy of just about all that's wrong with American business today. It is a 'must read' for investors interested in why we are where we are."

—Graef Crystal, Pay Expert and Columnist, Bloomberg News

"Sayles and Smith make a compelling case that rogue business executives received a lot of help from others: economists, business schools, apologists, a compliant Congress, under funded regulatory agencies, a gullible press, as well as sleazy professional auditors and accountants—all of which contributed to the great market crash of 2000 and the persistent corporate scandals. Seeking unprecedented individual gains, many members of the business community forgot their commitment to personal integrity, which maintains an essential trust among strangers, which binds all members in the larger society."

—James Kuhn, Courtney C. Brown Professor Emeritus, Graduate School of Business, Columbia University

"We can pretend that we live in a progressive society and are protected as citizens and investors, or we can read the evidence in Sayles' and Smith's book and start to face reality. This book is a strong reminder of the breadth and depth of white collar crime and greed's piercing and pervasive impact on all of us."

—L.S. (Al) Rosen, Forensic Accountant, Rosen & Associates Limited

Billions of dollars continue to be lost by companies and investors due to the pervasive impact of manipulative, self-serving executives. Financial scandals aren't unknown in U.S. business history, but today's growing problem of executive excesses and self-serving behavior is unprecedented in both its persistence and pervasiveness. Executives continue to plunder their companies and rip off their stockholders. This book reveals the true breadth and depth of corporate corruption—including flagrant new cases that haven't received the publicity they deserve. More important, it answers the questions that matter most: Why now? And how can we stop it? The authors identify powerful forces that cut across management, finance, the economy, politics, and even psychology. They identify rarely discussed contributing factors, such as the consulting boom, new technologies used by accounting and auditing professionals, the transformation of business schools, journalism, and the media in general. This book addresses both criminal activity and the not-quite-illegal abuses that are now endemic in the executive suite—abuses that challenge the underpinnings of capitalism. Its deep insights will help both leaders and citizens understand exactly what's happened and what is needed to stem the tide of destructive behavior.

• How the tail started wagging the dog
• The unanticipated consequences of large-scale executive stock ownership
• The technology of deceit
• How information technology makes abuse easier to execute—and easier to hide
• The silence of the lambs
• How the media and academia contribute to the problem
• The mythic executive
• Overwhelming greed, excessive compensation...and feet of clay

© Copyright Pearson Education. All rights reserved.

Product Details

ISBN-13:	9780132906166
Publisher:	FT Press
Publication date:	08/25/2005
Edition description:	Reprint
Pages:	288
Product dimensions:	6.00(w) x 8.90(h) x 0.70(d)

About the Author

Dr. Leonard R. Sayles received his doctorate from MIT in Industrial Economics. He has been a professor at the Columbia University Graduate School of Business for four decades; now Emeritus.

In a series of research projects and books, he helped transform conventional views of business leadership. His widely-cited leadership studies won a number of national awards in America, and many were republished in Europe, Latin America, and Asia.

He advised the head of NASA in its formative years and published a major study of its management methods sponsored by the National Academy of Science. He also has been a consultant to major American corporations.

He lives with his wife in Dobbs Ferry, New York, and Naples, Florida.

Dr. Cynthia J. Smith is an anthropologist who has conducted numerous field-based studies of businesses. She is co-author of Inside Arthur Andersen: Shifting Values, Unexpected Consequences. This book is an analysis of events deriving out of the Enron collapse that led to the fall of Arthur Andersen. The book traces the decades-long shifts in values of the firm, with emphasis on changes in leadership over time. Dr. Smith was a member of Arthur Andersen's Management Development Group during the 1980s.

During the 1990s, Dr. Smith spent several years collecting field-based data on three Silicon Valley-based, "new economy" companies. She was inside each of these organizations for one to two years, which makes the data distinctive from typical academic studies or journalistic access. These primary research materials are used in our analysis.

Dr. Smith is a lecturer at The Ohio State University.

© Copyright Pearson Education. All rights reserved.

Read an Excerpt

Introduction

As in everyday life, we often worry about the wrong things. The predictions that the new millennium would bring catastrophic computer failures proved wildly exaggerated. Instead, the new millennium brought unanticipated, massive failures in our business system. We have learned that the illicit practices that deceived investors, cost so many jobs, and tarnished the reputation of American business had begun at least a decade earlier.

Enron and what followed deserved an explanation. That has been our obsession for four years. Our focus was why and how American business developed vulnerabilities and distortions that were more ingrained and worrisome than the deflation of the infamous stock market bubble. And then, what were feasible changes that would strengthen American business to cope with the tough challenges of globalization? We hope that more honest and broader recognition of the problems will be a constructive force for change in American business.

Following is a brief description of our game plan; a preview of this book. Business has a profound impact on all our lives. Everyone seeking to understand the trials and tribulations of the contemporary business world will find much to reflect upon in the forthcoming chapters. Ours is the "story" behind the "stories," those surprising headlines of the past few years. The analysis and conclusions should be especially helpful to anyone evaluating a company as a possible investor or employee or executive or board member.

Chapter 1, "The Tipping Point: How Good Companies Go Bad and Executives Become Rogues," uses a number of case examples to help the reader understand how so much that has happened to hurt business (and investors and workers) is an "inside job." There are not the traditional "villains," such as government interference or intractable trade unions or even a few criminal types who have wormed their way in. Now, deep-seated problems lie inside the prestigious executive suite and those with whom executives work.

Chapter 2, "American Business at Risk: Picking Up the Pieces and Looking Ahead," discusses American business and how its management had enormous prestige at home and overseas. Here is an overview of the last half century; a kind of rise and fall from grace. Remember our shocks at the depravities of Russian oligarchs? That sense of American superiority is chastened by the embarrassing revelations of corporate misdeeds and executive hubris.

The powerful influence of the stock market and corporate stock prices on decisions made in the executive suite is the focus of Chapter 3, "The Stock Market and Executive Decision Making." Included are the unanticipated consequences of more executive stock ownership. There is a good deal of "tail wagging dog" here. Desired stock price drives the creation of ever more fanciful and sometimes fraudulent financial "engineering."

Many have observed, correctly, that most modern companies could not operate effectively and efficiently without the power of computers. But these powerful technologies tempt and facilitate financial mischief. Chapter 4, "Black Boxes and Big Black Lies," discusses the techniques by which managements can use the power of computers to fool, deceive, and even cheat.

With Enron's demise, the auditing world's gold standard, Arthur Andersen, completely fell apart. Its unprecedented collapse was almost inconceivable and is still not understood by most Americans. Chapter 5, "The Shocking Destruction of Arthur Andersen, Auditing's Gold Standard," is based in part on research by those who worked at Arthur Andersen and provides a vivid picture of how the unthinkable occurred.

The Security and Exchange Commission (SEC) is responsible for the fair operation of our markets for securities, the vehicles by which investors' money get channeled into corporate treasuries. Public auditing, overseen by the SEC, is the linchpin of our market system. Chapter 6, "Auditing the Public's Auditors," deals with this crucial oversight mechanism. Continuing discussion of Arthur Andersen, as well as other auditing firms, highlights lingering issues that must be resolved if the public's auditors are to function effectively.

Shareholders are also supposed to be protected by corporate directors. They represent the shareholders, who "elect" them, by having the power to select or fire CEOs and approve compensation and big money executive decisions, such as mergers or acquisitions. Why their abysmal failures have been frequent in financially scandal-ridden companies is the subject of Chapter 7, "Directors: Why the Weak Oversight."

In a huge, dispersed country like the U.S., we depend on the broadcast and print media to provide much of our information about what is happening and what may occur in the future. To be sure, the wealthy have personal advisors and money managers (and some people, hopefully not many, may even have seers). Our research in Chapter 8, "Too Silent Critics: Journalism," suggests that the media failed to provide its audiences with any hints that popular, well-regarded companies were showing signs of financial failure and executive mischief before they crashed and burned.

Business school professors, at least those with tenure, don't have to worry about being punished by writing unpopular, counter-cultural books and articles. Other than their peers, they don't have to please any interest group. Yet business faculty with the expertise to evaluate corporate behavior and corporate financial issues, like the media, did not "get on the case" of wayward corporate executives and their accounting and finance mischief. Regrettably at times, fawning was more in evidence than objective evaluation. The reasons for their failure to predict or study and expose emerging problems are the subject of Chapter 9, "Too Silent Critics: Academe."

Draining the treasuries and shareholder equity in many corporations that failed or became financial cripples were the fees they paid. Most of these companies were the truly happy hunting grounds of investment bankers and consultants. Chapter 10, "Fees Galore," provides an overview of how these services multiply and how big these numbers can get.

"Free enterprise fundamentalists" say not to worry. Executive and board failure to exercise responsible leadership and prevent financial misdeeds are nothing new. Both the incompetent and the dishonest get washed away in the flushing action of the market place. Free markets self-regulate, and the well-run companies win. Chapter 11, "How We Nearly Lost American Capitalism," takes issue with some of these unrealistically optimistic reassurances.

At the heart of many of the corporate misdeeds and their financial crises are the cosseted CEOs, many overpaid and under-responsible. With the arrival of the new century came a new class of culture hero: the mythic executive. Almost single handedly, they were boosting share prices, or so it was believed. Who cared about their overwhelming sense of entitlement and indulgent compensation excesses? Chapter 12, "The Mythic CEO: Why Real Leaders Became an Endangered Species," assesses their leadership shortcomings and the costs of having them appear to displace shareholders as the real owners of the business. CEOs who require extraordinary compensation, who want to "pig out" at the corporate trough, are likely to have little patience to lead in the tough, painstaking task of building a robust business that can maintain sustainable economic growth. Excessive compensation demands from a CEO candidate should have been a clear warning signal to boards.

Chapter 13, "Seeking and Valuing Real Leadership," examines the style and performance of those we call "real leaders," whose focus is on building businesses, not family fortunes. Most of these seek to learn about and take an interest in company operations and underlying constraints on efficiency and growth. They demonstrate personal involvement, not well-guarded isolation, and a sincere belief in personal and corporate integrity. They are less obsessed with short-run stock market evaluations and their public persona than "mythic leaders." Robust, adaptive, high morale organizations that build and sustain shareholder value over time are the result they seek.

Chapter 14, "We Can Do Better," is more than a traditional conclusion, a summing up of preceding themes. We seek to provide a more realistic frame for twenty-first century American management decision making.

It used to be said pridefully that the business of America is business. Strong companies provide jobs, job satisfaction, challenging executive roles, and good investor returns. Our standard of living depends on companies that can be globally competitive and durable. We wanted our research to contribute to those goals. Our strategy has been to identify the underlying "fault lines" that first appeared when Enron unraveled...and the challenge for executive leaders in American business today.

The demands of a global economy, volatile technologies and consumer tastes conflict with some well-embedded executive values and corporate practices. Our studies convince us that survival demands will trump the past practices and self-serving approaches that have hurt business flexibility, competitiveness, and integrity. American business hopefully has had its fill of mythic, iconic leaders and making financial engineering a major corporate strategy.

© Copyright Pearson Education. All rights reserved.

Table of Contents

Acknowledgments.

About the Authors.

Introduction.

1. The Tipping Point: How Good Companies Go Bad and Executives Become Rogues.

2. American Business at Risk: Picking Up the Pieces and Looking Ahead.

3. The Stock Market and Executive Decision Making.

4. Black Boxes and Big Black Lies.

5. The Shocking Destruction of Arthur Andersen, Auditing’s Gold Standard.

6. Auditing the Public’s Auditors.

7. Directors: Why the Weak Oversight.

8. Too Silent Critics: Journalism.

9. Too Silent Critics: Academe.

10. Fees Galore.

11. How We Nearly Lost American Capitalism.

12. The Mythic CEO: Why Real Leaders Became an Endangered Species.

13. Seeking and Valuing Real Leadership.

14. We Can Do Better.

Endnotes.

From the Authors.

Addendum: Supreme Court Overturns Arthur Andersen.

Conviction.

Index.

Preface

As in everyday life, we often worry about the wrong things. The predictions that the new millennium would bring catastrophic computer failures proved wildly exaggerated. Instead, the new millennium brought unanticipated, massive failures in our business system. We have learned that the illicit practices that deceived investors, cost so many jobs, and tarnished the reputation of American business had begun at least a decade earlier.

Enron and what followed deserved an explanation. That has been our obsession for four years. Our focus was why and how American business developed vulnerabilities and distortions that were more ingrained and worrisome than the deflation of the infamous stock market bubble. And then, what were feasible changes that would strengthen American business to cope with the tough challenges of globalization? We hope that more honest and broader recognition of the problems will be a constructive force for change in American business.

Following is a brief description of our game plan; a preview of this book. Business has a profound impact on all our lives. Everyone seeking to understand the trials and tribulations of the contemporary business world will find much to reflect upon in the forthcoming chapters. Ours is the "story" behind the "stories," those surprising headlines of the past few years. The analysis and conclusions should be especially helpful to anyone evaluating a company as a possible investor or employee or executive or board member.

Chapter 1, "The Tipping Point: How Good Companies Go Bad and Executives Become Rogues,"uses a number of case examples to help the reader understand how so much that has happened to hurt business (and investors and workers) is an "inside job." There are not the traditional "villains," such as government interference or intractable trade unions or even a few criminal types who have wormed their way in. Now, deep-seated problems lie inside the prestigious executive suite and those with whom executives work.

Chapter 2, "American Business at Risk: Picking Up the Pieces and Looking Ahead," discusses American business and how its management had enormous prestige at home and overseas. Here is an overview of the last half century; a kind of rise and fall from grace. Remember our shocks at the depravities of Russian oligarchs? That sense of American superiority is chastened by the embarrassing revelations of corporate misdeeds and executive hubris.

The powerful influence of the stock market and corporate stock prices on decisions made in the executive suite is the focus of Chapter 3, "The Stock Market and Executive Decision Making." Included are the unanticipated consequences of more executive stock ownership. There is a good deal of "tail wagging dog" here. Desired stock price drives the creation of ever more fanciful and sometimes fraudulent financial "engineering."

Many have observed, correctly, that most modern companies could not operate effectively and efficiently without the power of computers. But these powerful technologies tempt and facilitate financial mischief. Chapter 4, "Black Boxes and Big Black Lies," discusses the techniques by which managements can use the power of computers to fool, deceive, and even cheat.

With Enron's demise, the auditing world's gold standard, Arthur Andersen, completely fell apart. Its unprecedented collapse was almost inconceivable and is still not understood by most Americans. Chapter 5, "The Shocking Destruction of Arthur Andersen, Auditing's Gold Standard," is based in part on research by those who worked at Arthur Andersen and provides a vivid picture of how the unthinkable occurred.

The Security and Exchange Commission (SEC) is responsible for the fair operation of our markets for securities, the vehicles by which investors' money get channeled into corporate treasuries. Public auditing, overseen by the SEC, is the linchpin of our market system. Chapter 6, "Auditing the Public's Auditors," deals with this crucial oversight mechanism. Continuing discussion of Arthur Andersen, as well as other auditing firms, highlights lingering issues that must be resolved if the public's auditors are to function effectively.

Shareholders are also supposed to be protected by corporate directors. They represent the shareholders, who "elect" them, by having the power to select or fire CEOs and approve compensation and big money executive decisions, such as mergers or acquisitions. Why their abysmal failures have been frequent in financially scandal-ridden companies is the subject of Chapter 7, "Directors: Why the Weak Oversight."

In a huge, dispersed country like the U.S., we depend on the broadcast and print media to provide much of our information about what is happening and what may occur in the future. To be sure, the wealthy have personal advisors and money managers (and some people, hopefully not many, may even have seers). Our research in Chapter 8, "Too Silent Critics: Journalism," suggests that the media failed to provide its audiences with any hints that popular, well-regarded companies were showing signs of financial failure and executive mischief before they crashed and burned.

Business school professors, at least those with tenure, don't have to worry about being punished by writing unpopular, counter-cultural books and articles. Other than their peers, they don't have to please any interest group. Yet business faculty with the expertise to evaluate corporate behavior and corporate financial issues, like the media, did not "get on the case" of wayward corporate executives and their accounting and finance mischief. Regrettably at times, fawning was more in evidence than objective evaluation. The reasons for their failure to predict or study and expose emerging problems are the subject of Chapter 9, "Too Silent Critics: Academe."

Draining the treasuries and shareholder equity in many corporations that failed or became financial cripples were the fees they paid. Most of these companies were the truly happy hunting grounds of investment bankers and consultants. Chapter 10, "Fees Galore," provides an overview of how these services multiply and how big these numbers can get.

"Free enterprise fundamentalists" say not to worry. Executive and board failure to exercise responsible leadership and prevent financial misdeeds are nothing new. Both the incompetent and the dishonest get washed away in the flushing action of the market place. Free markets self-regulate, and the well-run companies win. Chapter 11, "How We Nearly Lost American Capitalism," takes issue with some of these unrealistically optimistic reassurances.

At the heart of many of the corporate misdeeds and their financial crises are the cosseted CEOs, many overpaid and under-responsible. With the arrival of the new century came a new class of culture hero: the mythic executive. Almost single handedly, they were boosting share prices, or so it was believed. Who cared about their overwhelming sense of entitlement and indulgent compensation excesses? Chapter 12, "The Mythic CEO: Why Real Leaders Became an Endangered Species," assesses their leadership shortcomings and the costs of having them appear to displace shareholders as the real owners of the business. CEOs who require extraordinary compensation, who want to "pig out" at the corporate trough, are likely to have little patience to lead in the tough, painstaking task of building a robust business that can maintain sustainable economic growth. Excessive compensation demands from a CEO candidate should have been a clear warning signal to boards.

Chapter 13, "Seeking and Valuing Real Leadership," examines the style and performance of those we call "real leaders," whose focus is on building businesses, not family fortunes. Most of these seek to learn about and take an interest in company operations and underlying constraints on efficiency and growth. They demonstrate personal involvement, not well-guarded isolation, and a sincere belief in personal and corporate integrity. They are less obsessed with short-run stock market evaluations and their public persona than "mythic leaders." Robust, adaptive, high morale organizations that build and sustain shareholder value over time are the result they seek.

Chapter 14, "We Can Do Better," is more than a traditional conclusion, a summing up of preceding themes. We seek to provide a more realistic frame for twenty-first century American management decision making.

It used to be said pridefully that the business of America is business. Strong companies provide jobs, job satisfaction, challenging executive roles, and good investor returns. Our standard of living depends on companies that can be globally competitive and durable. We wanted our research to contribute to those goals. Our strategy has been to identify the underlying "fault lines" that first appeared when Enron unraveled...and the challenge for executive leaders in American business today.

The demands of a global economy, volatile technologies and consumer tastes conflict with some well-embedded executive values and corporate practices. Our studies convince us that survival demands will trump the past practices and self-serving approaches that have hurt business flexibility, competitiveness, and integrity. American business hopefully has had its fill of mythic, iconic leaders and making financial engineering a major corporate strategy.

© Copyright Pearson Education. All rights reserved.

Editorial Reviews

Renowned business professor and consultant Leonard R. Sayles and anthropologist Cynthia J. Smith present a compelling look at the negative impact of manipulative, self-serving executives on companies and investors in The Rise of the Rogue Executive. While revealing the depth of the corporate corruption that has recently become more persistent and pervasive than ever before, the authors identify many factors that have contributed to the abuses, including the consulting boom, new accounting technologies, and poor journalism. They also present realistic solutions. Copyright © 2006 Soundview Executive Book Summaries

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