5 Business Decision Traps to Avoid

One way or the other, we all get paid to make good business decisions. Those who make more good decisions than bad ones likely will have longer, more successful, and happier careers.

business-trapThere are plenty of reasons bad decisions get made. Often, decisions that look good at the time made, turn out to be terrible decisions. Changes in markets, tastes, and technology trip us up. Or, we just can’t obtain all the information needed for a good decision.

Other decisions are bad ones at the moment they are made. These bad decisions are most often caused by cognitive traps. A good defense is to know and avoid the five biggest business decision traps lurking to sabotage your thinking. You may avoid some obvious bad choices, and importantly, be able to help co-workers, subordinates, and even bosses avoid them too.

 Avoid decision fatigue: One famous study demonstrated that judges were more likely to grant prisoners parole in the early morning and early afternoon, after lunch, than they were in late morning or late afternoon. But you don’t need a study to know for yourself that during the course of the day there are times you feel better rested and well fed, and other times you are tired and hungry.

Be alert to your body’s rhythms. If possible, defer decision making when your blood sugar is low. Be aware that there is something known as cognitive fatigue. Long periods of serious thinking or intense concentration does impair decision making. Don’t make important decisions after long periods of hard mental work.

Don’t ignore your gut: Researchers have proven that decision making has both a rational cognitive component, and an emotional one. Both are necessary in all decision making, but in the proper proportions. There are times we are fooled into thinking a decision should be made only on the facts and figures. But a little voice in the back of our mind is telling us something different. That’s the emotional side of decision making trying to get a word in. Pay heed to it. Sometimes the numbers get it wrong, and your gut gets it right.

 Steer clear of conflicted self-interest: Self-interest is a powerful force, and a reason mankind has survived and thrived. But there are times self-interest corrupts decision making, and we are not even aware of it. A cardinal rule: When we have a personal stake in the outcome of a decision, we are wired to make decisions that favor our interests. This can be a big danger, especially if stakeholders in our decision making are parties to whom we owe a fiduciary duty.

Don’t get weighed down by anchors: Good salespeople and negotiators all understand the power of anchors. The human mind tends to attach disproportionately great significance to the first piece of information it processes in decision making, even if the information is obviously irrelevant or unverified.

Study participants shown a low number, such as the number 10, before being asked to make a numerical estimate of something, say the price of a certain automobile, will always estimate a lower number than study participants shown a high number. Of course those numbers have no relevance to the price of the car, but the mind is influenced in its judgment by merely seeing the numbers.

Don’t get framed: When shopping at the grocery store, have you ever purchased a product advertised as 10% fat? The answer is no. But you don’t think twice about buying the same product if it is advertised as 90% fat free. Of course both products contain the same amount of fat, but the framing of the facts dramatically influences your decision making.

In a business context, how decisions are framed is critically important. Research has shown that years ago executives at Ford deciding whether to recall Pintos with potentially defective gas tanks were presented with the problem as a cost accounting issue, rather than as an ethical or reputation management issue. This framing influenced the outcome of the decision making. Likely, Toyota and GM executives have more recently fallen into the same trap.

This is only the tip of the iceberg on decision making traps. To learn more, here is a short reading list: Think Again, by Sydney Finkelstein, Jo Whitehead, and Andrew Campbell; How We Decide by Jonah Lehrer; Predictably Irrational by Dan Ariley; Blind Spots by Max Bazerman and Ann Tenbrunsel, and Thinking, Fast and Slow by Daniel Kahneman.

 

 

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Trader Joe’s v. Pirate Joe’s: Another Legal Food Fight, Another Bad Decision

It seems like everyone loves grocery store chain Trader Joe’s. With over 400 stores in the U.S. carrying sometimes quirky low-priced snacks and other groceries, the company has developed a fanatically loyal following. And the happy crew of Hawaiian shirt clad employees generally show the love to customers, too.

Except for the chain’s best customer. Rather than thank him, Trader Joe’s banned him from some stores, and sued him.

Mike Hallatt of Vancouver Canada told the CBS Sunday Morning Show on April 12, 2014 that he estimates spending over $800,000 at Trader Joe’s. So why did Trader Joe’s ban him from stores, and sue him to boot?

Hallatt owns a small store, Pirate Joe’s, in Vancouver. Trade Joe’s has no stores outside of the U.S. Hallatt and his confederates shop at Seattle-area Trader Joe’s stores and bring the goods across the border to sell at marked-up prices in his Pirate Joe’s store in Vancouver to Canadians who crave the Trader Joe’s products.

Trader Joe’s sued Hallatt for trademark infringement. They claimed Hallatt harmed both the store and consumers. Last year a federal district court judge dismissed the lawsuit, concluding there was no harm to Trader Joe’s or to consumers. Trader Joe’s is appealing the decision.

This case presents a good illustration of irresponsible business decision making caused by overlegalization. It also provides a lesson in reputation management.

Hallatt’s Vancouver store demonstrates that there is a demand for Trader Joe’s products in that city. So much so that customers happily pay the marked up prices. Trader Joe’s could easily open a store. Hallatt himself points out that doing so would put him out of business. One has to scratch one’s head and wonder what Trader Joe’s executives were thinking when they bought the lawsuit, and again, when they filed an appeal after losing.

Most likely, this is a case of business people delegating business and reputation management decisions to lawyers. They fell into the trap of failing to identify the problem for what it was. Namely, a reputation management question, not an intellectual property question. Lawyers being lawyers saw the question as a legal question, and recommended legal action. That was not the right business answer.

This case should stand as a reminder to business leaders to remember that just because they have a legal argument does not mean they should make it. Not long ago Unilever brought a law suit against a start-up competitor marketing an eggless mayonnaise product named “Just Mayo”. Unilever claimed to be protecting the consumer, when it was clear they were trying to use the legal system to crush a competitor. The ploy backfired in a social media firestorm, and Unilever dropped the suit. (See my prior post: Food Fight Provides Food For Thought: Overlegalization And Bad Decision-Making.)

In the wake of Trader Joe’s decision to appeal, it has been the subject of unfavorable news coverage.  A key element of Joe’s reputation—an important asset—is its image as a fun, customer friendly, socially responsible business. Everything about the lawsuit runs contrary to that image, and impairs the asset. Trader Joe’s execs took their eye off the ball.

Trader Joe’s execs might want to borrow Pirate Joe’s eyepatch, to cover their black eye.

 

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Decision Making Lessons From Mrs. Clinton’s Mistakes

Sometimes decisions that you don’t think are all that important at the time you make them have a way of coming back to bite you. Just ask Hillary Clinton. My guess is that when she became Secretary of State, and decided it was more convenient to use her personal e-mail account for both business and personal e-mails, it was not a decision she spent a lot of time on. It was just one of many decisions made in the course of a day.

But it may well turn out that a great deal ends up riding on that decision: The presidency, and whether the former Secretary of State faces criminal charges. Great consequences often flow from seemingly inconsequential decisions.

Posts on this website are usually about business decisions. But there are times that decisions made by political leaders and others outside the business realm provide lessons for business decision makers. Mrs. Clinton’s decision making about her e-mail account is one of those times.

Mrs. Clinton was not required to use a government e-mail account for official business when she became Secretary of State. But it appeared to be good practice for her to do so, as evidenced both by the State Department’s policies during her tenure, and the fact that virtually all of her peers used government e-mail accounts for official business.

Lesson number one: When making a decision that runs contrary to best practices and the norm of what others do, pay heed. That is a warning signal that there may be more to the decision than first meets the eye. It is a stop, look, and listen moment. A little voice in the back of her mind might have been trying to tell her this meant trouble. Those little voices need to be listened to. Perhaps aides warned her as well. We do not know. If so, that would be more than just a little voice that should not have been ignored.

The second lesson: Business decisions involving conflicted self-interest will almost always be wrong. Mrs. Clinton claims she had the personal interest of trying to make her life easier and more convenient by having only one e-mail account to worry about. Although she may not admit it, she also had the personal interest of trying to avoid undue scrutiny, thus wanted control over all of her e-mails, both business and personal.

Her employers (the government, with all of us as “shareholders”) had a different interest. It is in the public interest to have access to all official communications of government officials in the event of an investigation. Clearly, there is a conflict of interests, as often happens.

Here is the important thing. We are all wired in ways that make it impossible for us to think objectively when our interests are in conflict with those of others, even if the others are ones we owe a duty to, such as our clients or employers. There is a lot of science on this point. And many sad stories, some recounted on this website, to serve as prove of the fact that conflicted self-interest makes for bad decisions.

Mrs. Clinton would have done well by recognizing the conflict, and understanding that her decision would not be an objective one.

Fast forward from the time she became Madame Secretary to the day the first subpoena for her official e-mails arrived. According to news reports, Mrs. Clinton hired lawyers to do keyword scans, and then ultimately read every line of e-mails deemed purely personal before deleting them. The balance of the e-mails were thus determined to be official business, and were turned over to the State Department for compliance with subpoenas. Mrs. Clinton has in so many words stated that she believes everything regarding the separation and deletion of personal e-mails was done legally because she relied on lawyers to handle it.

The third lesson: Don’t delegate decision making to lawyers. You can’t count on them to make the right decision. Not that they aren’t smart and careful, but the lawyers approach many decisions in a very narrow fashion. Often they think only in terms of arguable positions they can advocate. And they are notoriously bad, as are all experts, at predicting the outcome of future of events.

Destroying documents, including e-mails, which may have the result of making an investigation more difficult is flat-out a crime. Destroying even one e-mail this way is a crime. Mrs. Clinton destroyed 32,000 of them. Her lawyers may have predicted that federal prosecutors would not be interested in her seemingly innocent destruction of purely personal e-mails all vetted by legal counsel. That could well be one of those predictions about future events lawyers are so bad at making.

Only time will tell whether or not Mrs. Clinton will face prosecution. For her sake, I hope not. But one thing is certain. Mrs. Clinton made bad decisions by not listening to a little voice in the back of her mind. She trended into waters of conflicted self-interest. And she delegated decision making to lawyers, and doing so at the very least caused her to do things that make her look bad.

She may well survive the current quicksand of her e-mail scandal and go on to become president. Or she may not. But either way, there is a whole mess that could have been avoided by better decision making. Hopefully others can learn from her mistakes.

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The Cost Accounting Of Corporate Social Responsibility

Companies would like us to believe that when they behave in a socially responsible manner they do so because it is the right thing to do. They hope we don’t pull back the curtain to find an accounting wizard sitting at a desk calculating the costs and benefits of social responsibility.

No doubt, some companies do the right thing because it is the right thing. Behaving ethically and responsibly becomes part of the business model, and corporate culture and character. But many companies don’t make social responsibility part of the business model. It is only an initiative or program, driven by the math. They make socially responsible decisions only when the cost accountants tell them to do so.

That certainly appears to be the case for the Washington NFL team, the Redskins, and its major corporate sponsors.

As everyone probably knows, in recent years there has been an increasing chorus of complaints about the offensiveness of the team name being disparaging to Native Americans. Over the past decade or more countless high schools, colleges, and universities have dropped or changed names that made insulting references to Native Americans.

But the noise has not been loud enough, nor the price tag costly enough, to cause the Washington NFL team to consider a name change. In fact, quite the opposite. Team owner Daniel Snyder has repeatedly stated that he has no intention of changing the name, which has been with the team since the 1930s.

Last year, the U.S. Patent & Trademark Office revoked trademark protection for the team’s name because of its derogatory nature. The agency cited laws that preclude trademark protection for disparaging terms. The team then sued the Patent Office to regain its trademark. And the American Civil Liberties Union joined the fray, filing an amici curiae brief siding with the team. The ACLU argues that while the name is no doubt racist, it is nevertheless protected speech by the First Amendment. The case is still pending.

The legal battle should serve as a reminder that just because something is legal does not make it right. CEOs are too quick to delegate social responsibility questions to the legal department. They do so because they confuse ethical issues with legal issues. But that is a separate topic.

According to Forbes, the Washington team is consistently one of the most valuable and profitable franchises in the NFL. Native Americans do not appear to be a substantial enough constituency, or to have enough buying power, for the team, the NFL or team sponsors to be concerned about offending them. Native Americans account for only about two percent of our population, a distinct minority. Their economic power may be even less.

The largest source of sports team revenues derives from sponsorships. Washington’s largest sponsors include FedEx, Bank of America, and Coca-Cola. In a very real sense, the buck stops with the sponsors. If they decide the name should be changed, you can be sure the name will be changed. But so far these companies, which hold themselves out as socially responsible corporations, have been busy starring at their shoes when the team name issue has come up.

It is interesting to contrast the muted reaction among the NFL, the Washington franchise, and the sponsors on this issue to that of the NBA last year when the then Clippers owner Donald Sterling voiced racist remarks. Sponsorships were yanked, rightly so, in a heartbeat. That was the responsible thing to do, but also overwhelmingly the right thing to do from a cost accounting perspective. But those same numbers don’t come into play for the NFL or the Washington team. So they take no action.

Most worrisome is that the real calculus at work here is one not just one of insensitivity, but is one feeding the roots of racial hatred. Could it be that the team and sponsors fear that if they change the team name they will anger a part of their core base, who actually harbor ill-feelings to Native Americans? I hope not, but it is hard not to worry that such is the case.

In any case, it is clear that regardless of the debits and credits, for the NFL, the Washington team, and the businesses that are the major sponsors, social responsibility is about cost accounting, and not about doing the right thing for the sake of it. While we may not expect any more from the NFL, we should expect more from the likes of FedEx, Bank of America, and Coca-Cola.

Perhaps the social responsibility executives at those firms should have their offices moved a little further away from the accounting department.

 

 

 

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Ferguson Police Racial Bias And Lessons About Tone At The Top

The scathing Department of Justice Report last week on racism in the Ferguson Missouri police department underscores the importance of tone at the top.

In the wake of officer Darren Wilson’s shooting of unarmed eighteen year-old Michael Brown, and the rioting following the Grand Jury’s decision to not prosecute Officer Wilson, the DOJ conducted an intense investigation. The upshot of the 102 page report: The conclusion that the Ferguson police department has long engaged in a demonstrated pattern of racial discrimination. Also uncovered were numerous obviously racist police emails over a long time span.

An initial reaction by the city, upon learning of the offensive emails (including some that called President Obama a chimpanzee,) was the termination of the authors of the offending emails. While that is an appropriate and long overdue action, it ignores the fact that a culture of racial bias does not start at the bottom, but rather at the top. The old saying is that a fish rots from the head down. The same is true with cultures in corporations, not-for-profits, and government agencies.

It would be easy for business leaders to read about the Ferguson abuses and shake their heads in disgust, but never make a connection to what might be going on in their own companies. Business leaders need to think more broadly than about police departments and racial prejudice. What is the tone from the top at your company? What does it say about racial and gender equality, humanity, and respect for others? What does it say about customer care and quality? And what does it say about corporate responsibility and good citizenship?

Individual officers in any police department may well have prejudiced racial views, just as they have personal political and religious views. But if the tone set at the top of a police department makes it clear that discrimination is not tolerated, it is likely personal racial views will get checked at the police station door. The tone at the top can assure that police work is done in a prejudice-free manner.

If tone at the top suggests that racial discrimination is expected or encouraged, then even those officers not holding prejudicial views will tend to act in discriminatory ways on the job. Think of cases where tone at the top of companies encouraged fudging the books to make a company look more profitable than it is. Lower level employees, who were honest and ethical in their personal lives, find themselves slipping into doing what is expected of them at work.

It shouldn’t take a government or corporate disaster in the headlines to cause board members and business leaders to evaluate the tone from the top at their organizations. But if they’ve not done so recently, this is as good as a time as any to take a good look within.

 

 

 

 

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Sunny Forecast For ARCP; Storm Warning For Ex-Boss Schorsch

This week American Realty Capital Properties (ARCP) revealed in filings with the SEC that it has completed its internal investigation into an accounting scandal at the company. The good news: the firm’s underlying real estate portfolio, once valued at $30 billion, is sound. The bad news: founder and former Chairman Nicholas Schorsch was apparently receiving payments, if not under the table, close to it.

In case you did not follow the story, or don’t remember, ARCP was a high-flying real estate investment trust (REIT.) In the first quarter of 2014 the company overstated cash flow in its financial statements, apparently due to an innocent error. In the second quarter of 2014, after the first quarter errors were discovered, cash flow was again overstated, this time intentionally to cover up the first quarter error.

After news of the accounting scandal first broke, shareholders were punished. The stock price lost about a third of its value. Several executives were fired. And after the sacked former accounting chief filed a retaliation lawsuit claiming Schorsch ordered her to cover up the accounting error, Schorsch himself was sacked.

It should be noted that this accounting scandal is not ARCP’s first brush with trouble. It has had a history, under Schorsch’s leadership, of accounting problems. But now, based on the SEC filings, the company appears to be putting its house in order.

ARCP is setting a tone of responsibility and transparency. It needs to if it wishes to repair its reputation. If ARCP’s board and executives keep their eye on the ball, and remain transparent, committed, and sincere, they should be able to get the train back on the tracks.

The forecast for former Chairman Schorsch is not so rosy. Both the SEC and U.S. Attorney’s offices are investigating the situation. And the SEC filings reveal that the company was making questionable payments to the tune of about $8 million to a company Schorsch controlled. Schorsch’s company has since prepaid ARCP.

But the problem is, all of this may become too appealing to an eager prosecutor. Schorsch might get lucky, and the dark clouds forming on the horizon may drift off to sea. But the odds of that are not great. Schorsch’s decision making, flawed by conflicted self-interest, over-confidence, and lack of independent review, could turn out to cost him dearly. Only time will tell. Stay tuned.

 

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Note To Decision Makers: People Do What You Pay Them To Do

How do decisions by senior executives in the ivory tower of the C-suite affect the quality of the judgments made by the troops at the front lines of a business? An obvious but overlooked answer: People do what you pay them to do.

Consider the example of consumer lending. Credit scores are used as an important measure of a prospective borrower’s credit worthiness. Lenders and credit card companies rely on credit scores to give assurance that loans will be repaid. The top end of the credit score scale is 850. Scores less than 640 are considered subprime.

Subprime scores indicate prospective borrowers with sketchy debt repayment history, and a greater risk of default. Despite the risk to lenders, plenty of subprime loans are made. Today subprime loans account for 40% of all new loans, a near-record high. The last time the subprime percentage was that high was just before the Great Recession.

Obviously, a loan applicant with a credit score of 800 is a much better credit risk than one with a score of 670. But is a loan applicant with a score of 650—just above the subprime cutoff—a materially better risk than another applicant with a score of 630? It is a close judgment call. And just the kind of “hard to tell” judgment rank-and-file employees make in a variety of industries—from health care, to investment advice, to lending—every day.

How does a company’s compensation structure influence these kind of judgments?

Imagine the following hypothetical scenario, which takes some liberties with reality to make a point. You are a senior executive of an auto loan company. The profitablity of your business is based on how many loans you can make, especially in a low-interest rate environment.

You are under pressure from shareholders and the board to increase loans made without increasing expenses. One way of doing so is to provide bonuses to the loan processors—the people who evaluate and approve the loans—so that those who process the most applications get paid the most. This way you will get more production out of your workforce without hiring new employees.

In structuring the bonus plan, you have a decision to make. You can reward total production, both loans rejected and those approved, or you can reward only approved loans. After all, your company only makes money from loans made, not from loans denied, so there is a rational for compensating based on loans actually approved.

Hopefully you will chose to compensate total loan applications processed. Increasing the total number of loans processed will increase the number of loans approved. The loan processor’s judgment on approval decisions should be unimpaired by the financial incentive, except to the extent they may be making quicker judgments by handling more applications in the same amount of time.

If you set compensation based on approved loans only, you are paying people to approve, not reject loans. Loans will be approved that perhaps should be rejected, because it is what you are paying people to do.

Your loan processors will still reject the obviously creditworthy applications. But what about those close judgment calls? When you are paying people to approve and not reject, they will do what you pay them to do. The close calls will be decided in favor of approval. The short-term result will be an increased loan business. The long-term result, however, likely will be more loan defaults, which will be bad for the business, the customers, and the economy. But you will have increased profits, short-term.

You might think that between the two compensation structures the one that rewards only approved loads would be so obviously a problem it would never be used. But history suggests that time and time again companies create incentive structures, often unintentionally, to reward behavior that produces long-term harm, at best, and sometimes unethical and even illegal behavior at worst.

In the late 1990s many of the major accounting firms, law firms, and banks set up businesses selling aggressive tax shelters to wealthy individuals. Compensation structures were aimed at incenting an increasing amount of sales. As the shelters slid over the line from overly-aggressive shelters to illegal shelters, the firms’ employees continued to sell the tax shelters. They did what they were paid to do. Because of the close nature of some of the judgments they were making, it was easy to rationalize bad judgments because the end result—getting more sales—is what they were being paid to do.

Recently, federal regulators announced plans to tighten standards for investment advisers who make investment recommendations for retirement accounts. The new rules will require investment advisers to disclose their compensation for the investments they are recommending.

The proposed regulation recognizes that an investment adviser who is paid more for selling an investment that returns 5.5 percent per year than one that returns 6.0 percent per year is more likely to sell the lower-yielding investment rather than another that returns slightly more for the investor. This is another example of people doing what they are paid to do.

A final example: a recent investigation by The Wall Street Journal discovered that long-term medical care facilities hold or release patients based on a complex compensation scheme set up by Medicare. The facilities can earn much more from Medicare by releasing a patient from care on the 24th day of care as compared to the 23rd day. Guess what? Release dates on the 24th day of care are much greater than on the 23rd. The medical facilities are simply doing what Medicare is paying them to do.

So decision-makers need to be very mindful of the messages they are sending employees or vendors by the incentive structures they set up. Be careful what you pay for, because your wish may come true.

 

 

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Flying Drones Through Loopholes: Questions of Business Ethics and Responsibility

           Risk managers, reputation managers, directors of corporate communications, chief ethics officers, CEOs, and board members of at least a number of household name companies are either asleep at the switch, or having sleepless nights. We can’t be sure which it is. But a story reported by The Wall Street Journal today should get them, and their shareholders, thinking about responsible and ethical decision-making.

            The story, “Drone Ban? Corporations Skirt Rules” tells how corporate giants like Rio Tinto PLC, Barrick Gold Corp., Wal-Mart Stores Inc., BMW AG, General Mills, Inc., and Nike Inc. all used drones in violation of FAA rules. Those companies and others have outright ignored FAA limits on commercial use of drones. One executive likened his company’s actions to driving a little over the speed limit: Everyone does it. Others have justified their violations on sketchy loopholes.

            A number of firms seek to skirt purposed FAA limits on use of drones for the simple reason that it saves money, and they have insurance to cover any problems.

            Granted, drones are cool, can cut expenses, and provide aerial photographic and film images without having to hire a helicopter. It is also true that we’ve not seen drones cause any serious public safety problem. At least not yet. But the topic raises serious business ethics and corporate responsibility questions. It should be a topic where the prop blade meets the air for corporate ethics and responsibility officers.

            Even if one is convinced of the safety of how one’s company is using a drone, what message is being sent about ignoring or skirting government rules the company does not agree with, or finds inconvenient? Does some of the justification offered by offending companies remind us of Pintos and exploding gas tanks? While finding loopholes to avoid regulation is a normal, maybe necessary, business practice, should there be second thoughts when public safety is involved? And are business executives making faulty decisions because their thinking is colored by the fact there is no history of drone safety problems? Are they ignoring the unthinkable, because the unthinkable has not happened?

            It will be interesting to see how some of the companies that brag about their high ethics and corporate social responsibility reconcile those standards with their actions on drone regulatory compliance. Maybe it is a simple matter of people failing to see the ethical aspects of the issue.

       One can only hope that it does not take a tragic avoidable corporate disaster to change the thinking about drone use and compliance with regulations.

 

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Ethics And Responsibility Warning: A Vocabulary Of Risk

At the cutting edge of what it calls “proactive compliance”, tech company Digital Reasoning sells software services to large banks and investment firms. The company’s software scans emails, instant messages, and memos seeking out words used in a context that predicts potential unethical or possibly even illegal behavior before it happens. What a nice idea: Find out who is thinking of bending the rules, and prevent bad behavior before it happens.

In just the past few days we’ve learned that HSBC admitted helping customers avoid taxes, and UBS is accused of pressuring brokers to sell bonds they knew were not worth selling to clients. Digital Reasoning should do a good business.

But we don’t need sophisticated software to scan all of our written communications to trigger warnings. All we have to do is listen to our colleagues, and ourselves, to pick up hints that we may be veering toward an unethical, irresponsible, and possibly illegal decision, even if we don’t intend to.

Some words that should cause us pause:

Side agreement: While side agreements may be a normal part of business, and lawyers may be happy to write them, if an understanding between parties can’t be stated as part of a main agreement, extra scrutiny should be applied. Think twice, maybe three times, about use of anything resembling a side agreement. If you are a lawyer, caution against side agreements. Find ways not to write them. If you are an accountant, audit side agreements extra carefully.

Workaround: Unless the term is being used to solve a computer problem, it likely denotes an attempt to get around a rule or regulation. Better to figure out how to make compliance part of the business plan, than to figure out clever ways to avoid compliance.

Creative accounting or creative anything: While creativity is an important skill in business and problem solving, it can easily become a dangerous one. Creativity is a double-edged sword. It should never be used in a context involving compliance, safety, or financial disclosure, at the very least. There are times that businesses need to think about rewarding uncreative thinking. The world needs more uncreative accountants.

Narrative: Beware when told to develop a narrative. Any story or narrative is one that needs to be completely honest. If it is a company lawyer advising the need for a narrative, extra caution is required. Lawyers have extra liberty, called litigation privilege, to bend the truth.

Anything in quotation marks: Quotation marks other than a direct statement attributed to a speaker or writer is problematic. In most contexts quotation marks suggest the words in the quotes do not mean what they say.

This list is by no means all inclusive. Please share any additions you may have.

 

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UBS And Puerto Rican Bonds: Short-Term Profits Vs. Long-Term Reputation

Recent new stories recount how in 2011, UBS management pressured brokers to sell shares in Puerto Rican bond funds about which the brokers had serious misgivings. (For example, from Reuters, “Exclusive: Recording shows how UBS drove reluctant brokers to sell high-risk Puerto Rico funds”.)

The brokers had good reason to have misgivings. In fact, they prepared a list of 22 reasons why the funds were not suitable for their clients. But that did not matter to the UBS executives overseeing those brokers. He told them to sell the funds or “…go home, get a new job…” according to a secret recording of a sales meeting.

Of course, we know how this story goes. The brokers did their jobs—what they were paid to do—and sold the stinky bond funds to their clients. Their clients lost a lot of money. The UBS clients, (by then, former-clients) hired a lawyer and sued UBS. The executive left the company in a restructuring, and a whistleblower lawsuit was filed.

This kind of story, in different flavors, seems to play out often in the banking and financial services industries. I had personal experience with it in the late 1990s when most of the large accounting firms, and many large banks and law firms were selling tax shelters to wealthy clients. But variations occur in other industries as well. And of course, the basic story line was central to the subprime crisis and financial meltdown of 2008.

Despite ongoing cautionary tales, these stories will continue, and history will repeat, unless those at the top of companies take a leadership role in defining corporate culture. Part of that culture is listening to those in the trenches. The UBS brokers, for example, had the right idea: Don’t sell an inferior product to your customer. Another part of the culture is to stress quality over sales and profit goals. And, perhaps most difficult, embedding in the culture an overriding skepticism that places a higher value on the enterprise’s long-term reputation than its short-terms sales or profits.

None of this is easy to do, especially when the Street judges business leaders by the quarter, and executive compensation is heavily tied to share price. But ensuring a responsible corporate culture is the most important responsibility of those who live in the C-suite. Boards and investors need to be more demanding. Perhaps the message should be, build responsible cultures, “or go home, get a new job.”

 

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