Business & Commerce

The £1 billion falling-out: A tale of two dotcom millionaires - Independent Online Edition > This Britain

Fri, 13 Jul 2007 12:11:12 +0100

Linked article

YouTube - Clip LBO English version

Tue, 03 Jul 2007 14:01:07 +0100

Linked article

This made me laugh

CEO Crime & Punishment

Thu, 28 Jun 2007 09:22:42 +0100

Linked article originally from blog.pmarca.com

[This is a guest post from my business partner, and co-founder and CEO of Opsware Inc., Ben Horowitz. Ben has been CEO of a US public company since March 2001.]

As CEO of a public company who grew up in the People's Republic of Berkeley, one question I get from a lot of my old buddies is, "Why are there so many criminals in corporate America?"

Given the high-profile scandals that led to massive securities law reforms such as Sarbanes-Oxley, and the more recent stock option accounting imbroglio, this is a good question indeed.

Warren Buffet once said that "marrying for the money probably isn't a good idea in any case, but if you are already rich, it makes no sense at all." The variation that applies to CEOs is "robbing investors probably isn't a good idea in any case, but if you are already rich, it makes no sense at all."

So, why all the fraud? Are CEOs just natural crime bosses who have found a better hustle?

To find the answer, we'll first take a look at regular old run-of-the-mill corporate crime; you know, the Enron, WorldCom, Qwest variety. Then, we'll delve into the very special case of stock option accounting.

What were Bernard "Bernie" Ebbers, Kenneth "Kenny Boy" Lay, and Joe "this guy doesn't even need a nickname to sound like a crime boss" Nacchio thinking? What motivated such legitimately rich and powerful men to risk and ultimately lose everything?

To find that out, we have to examine what motivates CEOs in general. Is it pure greed -- the burning desire to have more money than Bill Gates?
Surprisingly (at least for anyone who watches TV or movies made in Hollywood), the answer is: not necessarily.

What motivates most CEOs is some combination of winning and, as a result, building something great. Building a great institution, a great place to work, a great place to do business with, and a great investment. This is what's most motivating and what's most gratifying. And what they'll fight to hold on to most dearly. And this is where the crime comes in.

So if winning and building motivate CEOs, how does this lead to crime?

Let's use as an example the case of Bernard "Bernie" Ebbers and his motivation to build a huge company. In case you aren't familiar with Bernie's crime, accounting fraud at WorldCom during Bernie's tenure led to the largest bankruptcy ever. And Bernie got sentenced to 5 nickels hard time.

But the really curious thing about Bernie was that he didn't sell any of his WorldCom stock while he was committing this fraud. In fact, he got himself into massive personal financial crisis by borrowing $366M against his WorldCom stock to avoid selling it. If Bernie committed this crime out of personal greed, how do you explain that?

Bernie was the classic American success story. He came from humble beginnings. He dropped out of college twice prior to graduating from Mississippi College. He began his career as a high school physical education teacher. He worked as a milkman by day and a bouncer by night. He built himself up from nothing to arguably the most important and powerful man in the multi-trillion dollar telecom industry.

As WorldCom grew at a rapid pace, Bernie set expectations high. This led investors to give him advance credit, thus boosting his stock, which was the currency he used to build his company. When Bernie saw that WorldCom wasn't going to meet those high expectations, and that thousands of shareholders to whom he had promised great performance would lose their money, and thousands of employees who he had hired would lose their jobs, he was willing to do anything to make things right. Even if it meant doing things that were wrong.

Like a killer committing his second murder, the decisions to commit fraud must have come easier as Bernie gained experience. In addition, the stakes continued to get higher. He continued to commit fraud, because if he hadn't, there was a 100% chance that he would let everyone down who mattered to him and he would no longer be the person that he had worked so hard to become. He wouldn't be Bernie Ebbers #11 in Time Magazine's Cyber Elite; he'd be Bernie Ebbers, former milkman, bouncer, and disgraced CEO.

By committing the crime, he was taking a chance that something much worse would happen (i.e. jail), but he was willing to take that risk. He very likely talked himself into thinking that he wasn't taking much of a risk at all. Bernie's conversation with himself probably went something like this: "The accounting is complex and I can argue the accounting treatment either way. I am a good person. I have donated enormous amounts of money to charity and done outstanding work with my church. I care more about others than I do myself. Since a good person would not commit accounting fraud and I think that this is a reasonable approach, I am not committing accounting fraud."

Much like blue collar crime, there is no flashing sign that tells you when you enter into the world of white collar crime. When somebody has five drinks and then walks to their car to drive home, it's likely that nobody tells them they are drunk and about to commit a crime. When Bernie agreed to financial treatment that made the numbers but wasn't quite right, his team might not have pointed out that he was crossing the line.

Of course, accounting fraud and bankruptcy in the telecom sector did not begin and end with Bernie. Bernie just got the ball rolling. There were also accounting and/or bankruptcy issues -- the two tend to go together even if not publicly -- at Qwest, Exodus, and Williams Communications to name three (there were many more).

This is where the "winning" part comes in. The burning desire to win is why corporate crime becomes contagious. This will be important when we get into stock option accounting.

Once WorldCom started committing accounting fraud to prop up their numbers, all of the other telecoms had to either (a) commit accounting fraud to keep pace with WorldCom's blistering growth rate, or (b) be viewed as losers with severe consequences.

How severe were the consequences for not breaking the law? Well, like a baseball player who refuses to take steroids, CEO Mike Armstrong of AT&T did not keep pace with the cheaters. As a reward for his honesty and integrity, he was widely ridiculed in the press prior to being fired and AT&T, perhaps America's most valuable brand, was acquired for cheap. Now you see why Barry Bonds needed something to help him keep pace with Mark McGwire.

So how do CEOs avoid committing accounting fraud? There are a few important keys:

Be clear with yourself –- As CEO you must realize that every incentive for every employee in the company drives them to make the numbers. The only counterbalance to all those incentives is the law. But the law is not always crystal clear, so the company looks to the CEO to make the final call.

Be clear with others –- It's important to let the people who account for the business know that they are not responsible for making the numbers; they are responsible for reporting them accurately. I always say to my finance people: "we may whiff a quarter, but we are not going to jail." It may seem silly to have to say that, but it's critically important for everyone in the company to know that the CEO is not asking them to push the legal limits.

Stay away from the gray –- It's very tempting to be "aggressive" when making an accounting judgment, but it's also very dangerous.

Organize to stop fraud –- One of the most important things that your friendly blogger pmarca insisted upon when we started our company was to make sure that the General Counsel reported directly to the CEO and not to some other executive. When things go bad in the company, it's important that the organizational structure enables you to find the badness rather than hiding it.

Heed advice of JaMarcus Russell's mom -- she says: "trouble is easy to get into, but hard to get out of."

Let's move on from the most egregious crimes to the most common. There are at least 139 companies under investigation for stock option accounting issues. Holy crap. That's a lot of investigations. What the hell happened?

Well, for starters, 139 investigations doesn't mean that there were 139 crimes committed.

If a company has a stock option accounting issue, there are generally five possibilities:

The company had a bad policy which did not comply with the rules.

The policy was poorly administered and, as a result, options were priced inconsistently.

The policy was poorly administered and, as a result, was manipulated by employees –- employees worked around the rules and gave themselves extra money.

Executives attempted to get employees better stock prices by violating the rules.

Executives attempted to get themselves better stock prices or tax treatment by violating the rules.

Let's dive into the case of the moment.

Greg Reyes, former CEO of Brocade, is currently on trial for stock option accounting fraud. Greg Reyes is an extremely smart guy and, by almost all accounts, an extremely good guy. He has not been accused of manipulating stock options to his benefit. In fact, the only benefit that Greg Reyes got for the alleged "backdating" was better deals for some of his employees. Now, you might argue that those better deals were very valuable and helped the company, etc, but here's the issue: a CEO worth a billion dollars risked jail for what? Better option packages for a few employees? Does it make sense to you that a guy who is known for his ability to pick the risks with the highest reward would do the corporate equivalent of ghost riding? I don't think so. No, I think that it's pretty clear that one of two things is true:

Mr. Reyes, as he credibly claims, did not know this particular corner of accounting law and received either particularly poor advice or no advice.

Mr. Reyes understood the rules, but did not fully understand the consequences of breaking the rules and grossly underestimated the price of moving the date on a stock grant.

Or perhaps a little of both.

So why would a CEO be ignorant of the law?

Unlike the crimes committed by Bernie and Kenny Boy, it's not clear that investors either cared much or were meaningfully hurt by moving someone's grant date and the impact of the associated non-cash charge. In fact, with the introduction of FAS123R, the accounting differences between the dates in question become quite small (although the tax differences are stark).

Perhaps more importantly, there were no cases of stock option accounting irregularities until very recently. It's hard to become an expert in a law when there is no case law to motivate and illustrate.

Even if Greg Reyes was ignorant of the law, why didn't he have someone advising him who knew the law? I mean we're talking about Brocade, an important public company. Surely he had top-notch accountants and legal counsel explaining the law to him.

Well, you would think so, but stock options are compensation and compensation is in the domain of Human Resources. It turns out that many HR executives believe that they have a working knowledge of accounting and the law as it relates to employee matters. It also turns out that these same HR executives do not know what they are talking about when it comes to accounting and the law beyond a very surface-level understanding.

As a CEO, you must rely on your General Counsel to protect yourself and the company in matters of the law. You cannot defer to a HR executive who knows "best practices." Those best practices may well be illegal. As Warren Buffet says, "The five most dangerous words are: ‘Everybody else is doing it.'"

So, by running his business in the "normal" way, Greg Reyes may have gotten himself into some seriously abnormal trouble.

In any case, this alleged crime falls into a category well known by governance experts called "the price of not paying attention."

If you've been paying attention, you've probably realized that the new wave of corporate crime has been disproving the old adage that rich and powerful people don't go to jail. Sure, rich celebrities like OJ, Baretta, and Jacko commit heinous crimes and get off with no consequences, but corporate criminals such as Bernie, Kenny Boy, and No Nickname Required do hard time. Is this fair?

Well, while murder seems like a much more serious crime than stock option accounting fraud, keep in mind that corporate crime is contagious. If Greg Reyes grants in-the-money options to his employees and I don't, then I am at a competitive disadvantage. If you are a CEO, you either hate competitive disadvantage or you won't be a CEO for long. As a result, corporate crime is contagious and creates issues of systemic integrity.

Pete Rose was locked out of the baseball hall of fame not because betting on baseball was the worst crime he could have committed, but because if left unpunished it would jeopardize the integrity of the game.

When a public company CEO commits a crime, she jeopardizes the integrity of the financial markets and the competitive market. And that's no bueno.

Alcohol, Feces, Carcasses Fuel "Green" Vehicles in Sweden

Tue, 26 Jun 2007 09:43:49 +0100

Linked article

Clever way to deal with Alcohol and other waste

Plentyoffish.com Free Online Dating Service & Dating Site

Tue, 26 Jun 2007 09:23:40 +0100

Linked article

Comment from Guy Kawasaki

"Marcus spends about two hours a day in his underwear managing a free dating website that gets twelve billion page views a year. He is the only employee, and he only has one server. And by the way, he makes $5-6 million/year with Google ads."

BBC NEWS | Business | Does luck trump skill in success?

Tue, 22 May 2007 08:27:41 +0100

Linked article

33 Rules to Boost Your Productivity

Wed, 02 May 2007 17:17:08 +0100

Linked article

For want of a better category to put this in, Biz will do. Steve has some really useful information here how to boost productivity. I for one will be trying some of these points out.

The Mid Life Entrepreneur Crisis

Wed, 02 May 2007 09:55:25 +0100

Linked article originally from A VC

I have two meetings this week with guys in their early to mid 40s that are two of the best entrepreneurs I've ever worked with. Both are asking me the same thing - "what should I do next?"

There are questions of motivations, work/life balance, not needing the money, looking for a big idea, etc.

One of them asked me - do you know any 45 year old entrepreneurs?

Yes I do. But only one of the entrepreneurs in our current portfolio is older than 45. And he'll probably be starting companies until he dies. It's what he does.

But the facts are pretty eye opening. Nine of our eleven entrepreneurs are in their 30s. One is in his 20s, and one is in his 50s.

That says to me that prime time entrepreneurship is 30s. And its possibly getting younger as web technology meets youth culture.

I gotta run to catch a plane to Boston. More thoughts on this later.

Is Your Boss an Asshole?

Fri, 09 Feb 2007 21:00:02 +0000

Linked article originally from How to Change the World

Question: How many bosses does it take to screw in a light bulb?

Answer: One. He holds up the light bulb and expects the universe to revolve around him.

This is the distribution of ARSE scores based on Bob Sutton’s book, The No Asshole Rule. Clearly, most of my readers either aren’t assholes—or don’t believe they are assholes. However, there’s a niche (orifice?) to fill in asshole tests: Helping people determine if they work for an asshole.

At a basic level, this determination is very easy: Is your boss rude? Asshole bosses keep people waiting; they yell and scream at people; and they are demeaning. They think they can get away with this because, largely, they have gotten away with this since society tolerates bull shiitake from the rich and famous.

I digress, but I’ve often wondered which came first: Was the person always an asshole or did accomplishing something great (probably by luck) mean that people would tolerate bull-shiitake behavior? One thing is for sure: not all assholes do great things, so there’s no causal relationship. :-)

Thinks that the rules are different for him For example, a parking space for handicapped people is really for handicapped people plus him because his time is so valuable that he can’t walk fifty additional feet. Or, the carpool lane is for cars with multiple people, hybrids, and her because she’s late for a meeting.
Doesn’t understand the difference between a position making a person and a person making a position. The vice-president of acquisitions for a big media company is a big deal, but all her power, and therefore the ability to act like an asshole, evaporates without this title. Assholes usually don’t understand that their current position affords them temporary privileges.
Requires “handlers.” This means a personal assistant, appointments secretary/lover, public relations flunkie, and chauffeur. It’s funny but if an asshole didn’t have the position/money/status, he would probably be able to answer the phone, make appointments, talk to the press, and drive himself.
Requires the fulfillment of special requests in order to be happy/productive/efficient. For example, she needs a special brand of spring water from the south of France bottled by chanting monks when she’s making a speech. This type of actions represent flexing for the sake of flexing—not because any of this crap is necessary.
Relates to people primarily in terms of what they can do for him. In other words, “good” people can do a lot for him. “Lousy” people aren’t useful. The way a lousy person becomes a good person is by showing that he can help your boss in some way.
Judges people by her personal values, not the employees’ or society’s values. Assholes judge people according to only what they think is important. For example, a boss may value only professional accomplishments, so someone who is “merely” a mom or dad with a focus on a family is therefore inferior.
Judges employees’ results and his intentions. A boss never comes up short when he juxtaposes his intentions (“I intended to do your quarterly review”) versus an employee’s results (“You didn’t finish the software on time”). Instead, a boss should judge his results against his employees’ results and never mix results and intentions.
Asks you to do something that he wouldn’t do. This is a good, all-purpose test. Does your boss ask you to fly coach while she flies first class? Does she ask you to work weekends while he’s off at a hockey tournament? I’m all for using boss time effectively (for example, not making her drop off a package at Federal Express), but were it not that your boss could be doing something more valuable for the company, would she do what she’s asking you to do?
Calls employees at home or on the weekends. Rarely, as in once per year, this is okay, but any more often and your boss is certifiable. His happiness is not your problem 24 x 7. You are entitled to your personal time and space because slavery was abolished a long time ago in America.
Believes that the world is out to get her when faced with criticism or even omission. For example, bloggers don’t write about her because they are all jealous of her. Frankly, it’s more likely that he’s not worth writing about than the blogosphere is colluding against him. This boss needs to learn that “it’s no always about her.”
Slows down or halts your career progress. One can forgive or ignore the previous nine issues, but this one is by far the worst thing an asshole boss can do. Usually it’s a matter of convenience: “How can you leave me? I need you.” For doing this, a boss should go into the anals (sic) of asshole-dom. God didn’t put you on this earth to make your boss’s life better, so don’t hesitate to abandon a boss who holds you back.

You may be concerned that only you think your boss is an asshole. For this issue I offer the “Kawasaki Theory of Perfect Information About Assholes.” It goes like this: If you think your boss is an asshole, mostly likely everyone else does too. It’s seldom true that you think someone is an asshole, and everyone else thinks he’s great.

MyMicroISV

Mon, 05 Feb 2007 11:44:05 +0000

Linked article

The book that accompanies this website was the inspiration for our start-up. Great advice and discussions here for any up-and-coming software business.