Is Your Business Harboring Rogues?
Do you sometimes wonder if strange goings-on in the next office or on an upper floor by hotshots—who in reality don't know squat—could bring down your business?
I find astonishing the number of rogues who make decisions not knowing the rules, not understanding their business model and, worse, worse, worse, not testing small.
Instead—convinced they know it all—they roll out big. When things don't go their way, they double-down. And everybody gets clobbered—fellow employees, stockholders and the public.
1. Nick Leeson and the Barings Bank Disaster
From "Nick Leeson: The Real Rogue Trader, A Timeline in Quotes”:
Barings Plc, the 233-year-old British investment bank [and personal bank to HM The Queen] that helped finance the Napoleonic wars and the Louisiana purchase, is broke after one of its Singapore traders lost more than $1 billion.
The trader, Nick Leeson, got in over his head with "massive unauthorized" trades including an exotic bet called a "short straddle." He fled Singapore to Kuala Lumpur where he checked into the 5-star Regency Hotel with his wife Lisa. After an international manhunt, Leeson was picked up in the Frankfurt Airport and wound up spending four years in what he called "a gang-ridden Singaporean jail, in conditions that defy belief."
On Leeson's website he glories in calling himself "the original Rogue Trader whose unchecked risk-taking caused the biggest financial scandal of the 20th century" and reports that he "continues to be in-demand around the world for conference and after-dinner speaking."
In 1995, after much gnashing of teeth and wailing in the streets, Barings was sold to ING for £1. In 2004, ING sold Barings to Mass Mutual and Northern Trust.
2. The Geeks in the Back Room, Dick Fuld and the Crash of Lehman
I have two good friends who worked at Lehman Brothers, 158 years old and Wall Street's fourth largest investment bank with $640 billion in assets.
My friends showed up for work on Monday, Sept. 15, 2008 and discovered the company was bankrupt. Along with 25,000 employees worldwide they were not only out of work, but also their stock and retirement savings were dust.
Back to square one at age 40.
A couple of years later I ran into one of these ex-Lehman friends and asked if he had any kind of warning—an inkling—that Lehman was in trouble.
"I was part of a very profitable division and I assumed everything was running like a well-oiled machine," my friend told me. "It was a total surprise."
How could this have happened? A group of nerdy Ph.D.'s in Wall Street's back offices—they were known as "Quants"—came up with a magic mathematical formula that proved it was hugely profitable to persuade millions of families to borrow money from lenders for the purpose of buying homes they could not possibly afford.
These mortgages were immediately sold to aggregators who combined them into tranches and sold them by the slice as funds to investors.
Neither buyers nor sellers had a clue what the hell they were doing.
Both the mortgages themselves and the funds derived from them were extremely toxic.
According to the quants, the odds of the entire system collapsing were less than minuscule because 1) everybody would not default and 2) the housing market would never go down.
According to Lawrence G. MacDonald—author of "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers"—the CEO of Lehman Brothers, Dick Fuld, was a dreadful human being:
Colleagues named [Fuld] The Gorilla, and his brutality was legendary. He ruled by intimidation, and he conceived of Wall Street as a war, his staff a great fighting force manning a battleship, its guns permanently trained on even bigger rivals. His "never surrender" attitude meant that he rejected offers from potential buyers for Lehman Brothers earlier in 2008, when outsiders were saying the bank was too weak to survive on its own.
Fuld blamed "rumours, speculation, misunderstandings and factual errors" for the collapse. "I want to be very clear. I take full responsibility for the decisions that I made and for the actions that I took based on the information we had at the time," he said, but there was nothing he would have done differently.
In 2009, Portfolio magazine ranked Dick Fuld the worst CEO in the history of American business.
The greed and utter lack of common sense by Dick Fuld and his counterparts at Bear Stearns, Merrill Lynch, Bank of America, AIG and others—all conned by the geeky quants in their back rooms—brought the U.S. economy to its knees.
Quite simply a business model based entirely on customers that cannot pay their bills is nuts.
3. Carly Fiorina and the Near Destruction of Hewlett-Packard
In 1998, Carleton S. (Carly) Fiorina was president of AT&T spin-off Lucent Technologies and responsible for one of the most successful IPOs in American history, raising $3 billion.
That year in its ranking of the 50 most powerful women executives, FORTUNE's editors wrote of Fiorina, "It may surprise you that our No. 1 woman is someone you've never heard of."
One-year later Fiorina became the first woman to head a FORTUNE 100 company when she was hired to be CEO of Hewlett-Packard, which had 40 percent market share of the computer printer business.
Her six-year tenure was a disaster, and she was ousted in 2005.
• Over serious objections by the Hewlett and Packard families, in 2002 she engineered the merger of HP with Compaq. As described by FORTUNE's Carol Loomis:
The fundamental and overpowering problem here is that HP's shareholders paid $24 billion in stock to buy Compaq and in exchange got relatively little value ...To sum up the damaging mathematics: In the beginning, the old HP shareholders owned 100% of the printer business. After the merger, they owned only 63%.
• Fiorina was insensitive. "When people whispered, she didn't hear," wrote management guru Erik Gordon of Johns Hopkins University. "When people tried to give her advice, she ignored them. When people started to shout, she put her hands over her ears and screamed 'na-na, na-na, na-naah.'"
• The granddaughter of Hewlett-Packard co-founder David Packard, who had a long running feud with Fiorina, wrote in a letter to three politicians who supported Fiorina's 2010 run for the Senate in California:
I know a little bit about Carly Fiorina, having watched her almost destroy the company my grandfather founded. So, allow me to disillusion you of a few of your stated reasons for supporting her. Most business commentators consider Fiorina's tenure at HP to be a disaster. The stock price dropped by 50% only to rally 10% on the announcement of her firing. She fired 28,000 people before she herself was fired, departing with the $21 million golden parachute that is financing her campaign.
Portfolio magazine labeled Carly Fiorina the 19th worst CEO in American history.
P.S. Ex-CEO Carly Fiorina left behind a mess for the new CEO, Meg Whitman. From the Aug. 24, 2012 New York Times:
Between Tuesday morning and the close of trading on Thursday, H.P. lost some $4.8 billion in market capitalization, which in its current state was about 12 percent of H.P.’s total value. Since February, the company’s stock market value has fallen 41 percent.
Takeaways to Consider
- Do you sometimes wonder if strange goings-on in the next office on an upper floor by hotshots—who in reality don't know squat—could bring down your business?
- For starters a business model based entirely on customers that cannot pay their bills is nuts.
- As a study in rogue management, check out "Carly Fiorina's Seven Deadly Sins" by Forbes magazine publisher Rich Karlgaard.
- Always test—and back test. That is, never roll out an offer or an unproven business model without continually re-testing the old, successful one against it.
- In my first 12 years in business I had nine jobs and was fired from five of them. Check out one case history of mine, "I Was Peter Possum." It broke my heart.