Crisis

Business and Politics: Avoiding Your Organization's Fiscal Cliffs

One of my areas of expertise is tracking how business and politics intersect in the ways they operate - and, most importantly, what we can learn from both. Over the years, I've written strategy papers on the subject as well as having advised senior members of United Kingdom political parties on how business strategy can be applied to create political party success.

With all that's been going on in US politics recently, I've decided to begin posting on the subject - only in this case, focusing on what business can learn from how politics operates, at its best and at its worst.

There are important strategic, operational and profit-related lessons to be learned and applied to your business, so, no matter where you live or what your political affiliation might be, put it aside and just look at the process.

I'll look forward to your thoughts and comments.
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On January 1st, 2013, a few minutes after 11 pm, the United States House of Representatives voted to accept the Senate's bill (approved some 21 hours earlier) averting the so-called "Fiscal Cliff."

As markets around the world opened for their first trading day of the new year, they upheld the conventional wisdom that a global economic catastrophe was averted. Markets and futures were immediately up and could well stay that way. At least until the already known next 'cliff' occurs in two to three months.

So, good for Congress. They did their job. They saved the world. For the moment.

They should also be ashamed of themselves.

The reason why they deserve real scorn is because it was this exact same Congress that agreed to the "cliff" in the first place. That was in December, 2010.

Twenty-five months ago.

Why did they create the cliff? The logic was that it would motivate the elected officials to work together to solve the debt and deficit problems the US is facing.

From then until now - while those twenty-five months passed with the cliff always looming - they weren't willing to do what needed to be done for their own country as well as those world markets and economies. Right up until the last minute - and only then because it was the last minute.

Okay, so that's the politics of it. What does this have to do with you?

Like it or not...admit it or not...but you have your version of a cliff playing out in your organization on a regular basis.

It's those things that you and your employees at every level see and know and recognize out on the horizon that you'll take care of later. Some day. Soon. You're sure of it.

Only those 'things' - both little and big - grow to outrageous proportions the closer they get to whatever time limit within which you're working.

Maybe it's when your customer needs an order filled. Or you've got a new product or service launch that needs that one more thing to make sure everything goes smoothly. Or there's an expert you know you're going to need to hire to make sure that the strategy you're currently working has a chance in hell of actually succeeding.

It's anything that escalates from knowledge to emergency - simply because you or someone in your organization let it get that far.

And it gets worse.

You may well have someone you trust who has made a success of their career swooping in at the last moment to save the day.

That's all well and good when the emergency is a true emergency - not a manufactured one. If it's the latter, then whoever is playing 'hero' is anything but. In fact that person - man or woman - is the equivalent of an organizational sociopath...allowing that particular cliff to loom and get ever closer for their own purposes, frankly, not caring how it might impact others.

Including you and your business.

Because if the 'thing' escalates far enough for long enough - at least to suit your local sociopath - even with a save, you'll lose your reputation as a trusted provider. There go the orders, customers and jobs. And there goes your business.

So, as this year begins, spend some time on your own and with your leadership team to:
  1. Take a look back over the past six to eighteen months
  2. Identify those situations that escalated into crises
  3. Determine how those crises occurred (real or manufactured)
  4. Define how long in advance the problems were known
  5. Determine in each case how long it took to get from knowledge to action
  6. Specify the outcomes in each case - including but not limited to impact on operating costs, revenues, profits, customer relations, market share, reputation, etc.
  7. Identify the specific functional areas and their respective managers/team members involved in each crisis
  8. Determine whether there is a trend of occurrences by any of the people or functions involved.
As well, if you have a Lean initiative going, take the time to review the teams' measures to identify any trends from the data that show highly risky levels of variation in your processes.

Once you have the information in hand - as uncomfortable as it might be - you'll know what to do. Do it. While you still have the time.

Because the biggest difference between business and politics is that the politicians who took the US to the edge of the fiscal cliff have at least two years before there is a remote possibility of being held responsible and accountable.

For business...for your business...you don't have that luxury. 

Figure out your cliffs now - and then manage your organization so that you're designed never to get close to them again.

Accountability and Being Thrown Under the Bus

It's fascinating.  Depressing, but fascinating.

As I sit and watch the UK Parliamentary hearings of the Home Affairs Committee, it's amazing to watch the genteel way that those who know how to play the game so willingly throw their colleagues - and others - under the bus.

The former Commissioner of the Metropolitan Police (aka Scotland Yard), Sir Paul Stephenson, did so by implicating - but never directly, of course - two of his former subordinates and, oh, possibly, the Prime Minister's senior staff.  Which, of course, keeps that key question alive of what the Prime Minister knew - and when - about those whom he chose to surround himself.

Next came Dick Fedorcio, the Director of Public Affairs and Internal Communications for the Met.  He's not famous or powerful so the Committee members felt free to make sure he stayed under the bus under which he had already been thrown.

Now, we have the previously highly regarded John Yates (aka, in his heyday, Yates of the Yard!) saying that he was no more than a "post box" in order to take himself out of the firing line from the previous two witnesses.

So much for having been seen as a hero.

In Britain, their use of the language is an art form.  Argumentation and debate, in particular.

But it doesn't matter.  Because throwing under the bus is throwing under the bus - and that's what everyone is doing to everyone else right now.  Which doesn't serve justice at all.

The phone hacking allegations against Rupert Murdoch and his News International organization are bad enough.  They caused this hearing to be necessary.  As a result of their reported too close relationship with the police, everyone is implicated.

Granted, a lot of people who should have known better made bad decisions - both public and private sector players.  But the decisions were made - and they're the ones who made them.

It's a sad fact that in the guise of "remorse," "hindsight," and "lack of knowledge" what we're really seeing is a lack of accountability by everyone involved.

And that makes trust harder to establish and maintain than ever.

The Dangers of China - Critical Insight from @thereformedbroker

The following piece, written by Josh Brown, is one of those periodic posts that goes beyond deserving attention.  It's a critical warning for anyone currently doing or thinking about doing business with China.

It follows in its entirety.

The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations.

We are under attack.

Chinese corporate criminals and their US-based enablers are committing Capital Genocide against American investors.  We're not talking about "a few bad apples" or "a handful of exceptions", we're talking about a full-blown epidemic.  Subterfuge and malicious avarice are simply the tools of the trade when many Chinese companies do business with outsiders.

This undeniable Red Collar Crime Wave is larger in scope and financial consequence than any other international criminal enterprise in the history of the world.  We are talking about hundreds of millions of dollars, possibly billions should the Yahoo - Alibaba revelation prove itself to be a harbinger of shocks to come.

At the low end of the spectrum, corrupt representatives of sketchy or even non-existent Chinese companies are conniving their way onto US exchanges via backdoor IPOs, reverse mergers and SPACs.  They are slithering through every exchange and regulatory loophole they can find to raise money and establish their fraudulent beachheads here.  The penalties for Chinese nationals fudging numbers on a local exchange could range from exile to imprisonment to disappearance.  The penalties they face for pulling that stuff here in the US?  I don't know, a letter in the mail?  "Don't ever do it again"?

Mainland Chinese fraudsters are untouchable, they can only be barred or banned from US exchanges once caught, and so they will get away with whatever they can as long as there are investors here who are stupid enough to capitalize them.  And so the ownership of one factory in China becomes the ownership of three for the purposes of a quarterly balance sheet calculation.  The ticker symbols will be cutesy and clever while the names of the companies will almost always include the word "China".  After all, let's not forget that the name of this game is the exploitation of Americans who "want to play the growth".

It has become an absolute free-for-all.

For a nation that was so economically backwards and pathetic that it could barely feed itself 15 years ago, China's executives have certainly come a long way.  They're employing every scam and dirty trick in the book against American corporations and investors while we say thank you and send even more opportunity and cash their way.

I've held my tongue for the last 9 months, watching one scam after another appear on our exchanges.  I've said nothing as these financial landmines have been detonated beneath the feet of whichever unfortunate shareholders happened to find themselves in the wrong place at the wrong time.  No longer.

We'll limit the scope of my rage here to corporate fraud.  For the purposes of this post I'll leave out the Chinese poisoning of America-bound toothpaste, pet food and toys at their manufacturing operations.  I'll also leave out the FoxConn factory at which all the Apple products are assembled, a workplace so abusive and abhorrent that the employees must take an oath that they won't kill themselves.

But no, let's not get distracted here, we should simply focus on the accounting chicanery and falsified filings with which Chinese companies are daily relieving US investors of their capital.

The reverse mergers are by far the most insidious manifestation of the contempt that Chinese companies have for our exchanges and rules.  Working with American law firms and shameless stock promoters, these companies have found a financial engineering solution that lets them steal on our shores.  They've been able to subvert the more highly scrutinized public offering process that would normally have weeded them out.  By "cleaning up" shell companies, which should not be trading or available to begin with, the disease gets a foothold first on the pink sheets and then onto the American Stock Exchange where the real grifting can begin.

White Collar Crime columnist Walter Pavlo has collected a slew of recent examples on his blog at Forbes, including:


  • China Electric Motor – Shareholders lawsuit filed claiming underwriters violated federal securities laws by issuing materially false and misleading information.
  • China Natural Gas – Class action lawsuit alleges directors and officers issued materially false and misleading statements.  CFO of company resigned in late 2010.
  • Duoyuan Printing – SEC investigating company for fraud, NYSE delisted April 4, 2011
  • China MediaExpress Holdings, Inc. – Deloitte quit as auditor because “no longer able to rely on the representations of management”.  CFO resigned. Stock trading halted March 11
  • China Agritech – Shareholder lawsuit pending.  Dismissed its auditor Ernst & Young.
  • China Sky One Medical – Under investigation by SEC.
  • Orient Paper, Inc. – Reauditing previous financials due to license issues with previous auditor (Davis Accounting Group).

The full list is actually quite larger, it includes some of the higher profile blow-ups you may remember with stocks like RINO International and China Green Agriculture - spectacular flame-outs complete with massive insider selling prior to the denouement.

Where are the regulators, you might ask?  They are finally getting involved.  The SEC's Mary Schapiro is aware of the epidemic and is now on the case...

From Barron's:

Since March 2011 alone, she noted, more than 24 China-based companies have disclosed auditor resignations, accounting problems or both – following the auditors' inability to confirm the amounts of cash or receivables shown on the companies' balance sheets. The SEC has recently suspended trading in three Chinese businesses that "reverse-merged" into U.S.-traded shell companies.

The smarter thing to do would be to halt the entire shell company process in its entirety right this minute until we can get the rules up to a standard that will protect investors outright from these foreign liars and thieves.  Capital formation can wait fifteen minutes while we get our act together and crack down on this disgusting shell syndicate.

An even more disturbing development of late is taking place in the large cap arena, in full view of the world's media and the global investor class.  With the success of Baidu and Sina, Chinese technology companies are now finding themselves as the Belles of the Ball.  In at least one case that we are aware of, they are also finding that they can easily mislead their Western partners and shareholders.

Here in the deep end of the pool, newly-minted billionaire Chinese executives are violating contract law, globally accepted corporate best practices and fiduciary responsibility to shareholders.  They are disclosing things when and as they choose.  They are "on the level" in their own government's eyes so long as they are playing fair with their fellow Chinese investors.  This isn't a brand new phenomenon but as the companies involved get bigger, the danger grows.

This week's still-unfolding fiasco involving Yahoo being tricked out of their Alipay subsidiary by Alibaba, a company in which they hold a 43% stake, is just the latest and most outrageous example of what we're dealing with.  Here's what Jacob S. Frenkel, a former SEC enforcement lawyer who is an expert in securities law matters and a partner at Shulman Rogers in Potomac, Maryland had to say (via iChinaStock):

"Yahoo! is a victim, plain and simple.  With all the negative attention that US-listed Chinese companies, this action by Alibaba only makes worse an already difficult situation.  It creates the unfortunate appearance that executives in China may totally disregard their contractual and fiduciary obligations to shareholders.  The important message to US partners and owners is to review the effectiveness and enforceability of contracts under both US and Chinese law."

Yahoo will attempt to sue, but they have lost the asset at the end of the day, an asset whose potential was a big part of the investment thesis for the company to begin with.  US shareholders were pummeled over something that took place in secret seven months ago, escaping everyone's notice.  If major shareholders like Yahoo and Japan's Softbank can be scammed in front of everyone, what chance have any of us got?

The Red Collar crime wave is beguiling American investors both large and small.  These crooks are laughing at our securities laws and manipulating their own.  None of us are immune:

Not the savviest and most seasoned asset managers - see Glickenhaus & Co watch $4 million evaporate as China Agritech blows up.  (Bloomberg)
Not Yahoo, a player in Asian web properties since the late 90's - listen as Alipay's Jack Ma regales us with his tale of how he bitch-slapped the "declining" web portal company.  (iChinaStock)
Not even the diligent Warren Buffett can sleep soundly with his Chinese investments - see how the car company he invested in there (BYD) is essentially a counterfeiter playing games with the rules of the Chinese court system to get away with it.  (Reuters)

Can American investors trade and hold Chinese stocks?  I suppose they can...but they can also practice juggling with live hand grenades and roaring chainsaws...just because you can do something, doesn't mean you should.

I've disagreed with almost everything Donald Trump has had to say during his part-Presidential run, part final humiliation speech circuit this spring.  But where Trump and I do find common ground is in our distaste with how the Chinese do business and the lack of regard they show our companies and investors from almost every perspective.

As long as Chinese corporate officers and executives are going to blow cigarette smoke in our faces as they take advantage both here and on their home turf, I'll gladly sit out.  Until I get the sense that they have an ounce of respect for our investors, I'll watch the pickpocketing from the sidelines and focus my capital and attention elsewhere.

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The Anti-Fear Motivation: the Lessons of Lady Gaga and the Dixie Chicks

"A little bit of fear is a good thing."

That comment is neither new nor novel.  But, whether you're talking the "War on Terror" or creating corporate sales, it has become a staple for ostensible motivation - whether of your employees or society as a whole.

It's a sorry state when it's the voices of pop and country stars - from yesterday's Dixie Chicks anti-war comments to today's Lady Gaga rallying her audience to peacefully protest Arizona's SB1070 - are not only needed but simultaneously vilified for trying to remove fear from the equation.

Because, while fear may create a short term win, it decimates long term success.

My first time hearing the statement in a corporate setting was from a senior Sales executive in a division of a Big Pharma organization.

His problem?  His sales force wasn't making its numbers and that was knocking his bonus off track.  His solution? "Motivate" his sales force by making clear that they needed to make their numbers or they could lose their jobs.  Be summarily dismissed.  Be walked out the door.  Have their Blackberries confiscated.

Possibly.  But not absolutely.  (Because that would have been against both the law and corporate policy.)

So, what they needed to do was make sure that they didn't get themselves into that position by performing. That's all.  Just sell the product.  Go team!

And they did.  They made the numbers he needed - in volume.  But to get there, they cut deals with their customers that did more financial damage to that division than anyone had ever seen before.

But our smiling executive got his numbers.  And his bonus.  Until he lost his job - and deservedly so.  (The division was later spun off as a stand-alone company.)

Fear is a despicable strategy.  It works against any organization's long-term goals simply to fulfill an individual's short-term needs.  It is, in fact, the tactic of cowards.

There is too much research on empowerment and the importance of collaboration to innovation, improved operations and financial success to ignore.  And, consistently, within that research, we find that the more that executives create a culture without fear, the more successful - and sustainable - their organization is.

That doesn't mean that you don't or can't tell employees the truth.  You have to tell them the truth - whether things are going well or not.

That's why there is such a sense of betrayal even by employees today who have jobs.  They've given in on everything from salary increases to cutting their hours and, as a result, their ability to financially sustain themselves, because their executives told them that the company would go bust if they didn't.

So they took the hit - and now they're seeing those companies' profits soar.  Yet their salaries and hours aren't improving.

Because those executives are still maintaining that things could go wrong.  There might be a double-dip recession.  Consumer confidence isn't what it needs to be.  While they're taking their bonuses.

You can't have it both ways and win.

Remember, your people really are your most valuable asset.  They are the ones who know how to make things happen in your organization.  They are the ones that work within the effective and ineffective systems by which your organization works.

They are not easily replaceable - even in a downturn.  Nor by contracting.  Because when your people walk out the door, they take all their knowledge and experience with them.  And they bring it to your competitors.

So, small business or large.  Entrepreneurial venture or legacy organization.  Across sectors and industries, pay attention and don't make the core long-term mistake that can make or break your company.

Fear is a bad thing.  If you see it being perpetuated in your enterprise, get rid of the person who's doing so - because that person's goals are not the same as yours.  At least not if you want to keep your job - and your organization - for long.

That's not fear-mongering.  That's fact.
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For more on how to create a High Quality culture and bring innovation to your organization, click here.