Author: Lee N. Katz, The Turnaround Authority

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CEOS Behaving Badly

Just like my many stories of fraud, there will never be any shortage of stories about CEOs behaving badly. I’ve witnessed several notable incidents myself during my career as the Turnaround Authority and include many of the more salacious ones in my book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes” in the section called The CEO Can’t Keep It Zipped. You can figure out what those stories are about.

It’s not just philandering that gets CEOs in trouble. The latest tale comes from the CEO of T-Mobile, whose mamma apparently neglected to inform him that you don’t go to parties to which you have not been invited. Claiming he was a fan of the band Macklemore, John Legere crashed a private concert party in Las Vegas hosted by competitor AT&T with whom he’s been engaged in a public battle after AT&T offered T-Mobile customers $200 in credit to switch. He was barely there for 20 minutes, long enough to have his photo posted on Twitter, before he was escorted out of the party.

Of course, the flashy CEO attempted to turn the event to his advantage, and milked his expulsion for everything he could on social media, making himself the talk of the International Consumer Electronics Show.

Jason Goldberg founded Fab.com, an online shopping site. He took to Facebook to express his dissatisfaction with a fellow passenger on a flight from Stockholm to Newark who had the audacity to turn down his offer of $100 to switch seats with him. The other passenger’s lame excuse? He wanted to sit close to his family. “Who does that? … Grrr.” Goldberg posted, exposing both his arrogance and disdain for people who seem to care about their family members.

Tumblr founder David Karp managed to alienate his entire workforce when he attended the Cannes Lion International Festival in June. He went there to talk with advertisers, but apparently became impressed with the crowd he was addressing. “You guys are more talented than anyone in the Tumblr office or in Palo Alto or Sunnyvale. We’re constantly in awe. Constantly in service.” I doubt he got much of a welcome back party on his return.

The CEO of Barilla Pasta Company found himself in very hot water. (Sorry, couldn’t resist that one.) For some reason, Guido Barilla felt it was important to let the world know that he would never have gay people in his ads. “We won’t include gays in our ads, because we like the traditional family. If gays don’t like it, they can always eat another brand of pasta.” He later claimed he “simply wanted to highlight the central role of women in the family.”

I didn’t read much response from women, many of whom may not feel that their central role is to boil noodles, but one gay person politely responded. Aurelio Mancuso, president of Equality Italia, said, “We accept his invitation to not eat his pasta.”

Meanwhile Barilla US fought the huge PR crisis he dumped on that division by apologizing profusely on Twitter and Facebook.

CEOs who behave badly may enjoy the resulting publicity or just may not have anticipated how widely news of their antics would be spread. Whatever the reason, it’s a dangerous game. They risk alienating their customers, who may also invite themselves not to use their products or services.

It’s a good reminder that when you are a CEO or business owner and are interviewed or go on social media, you are always representing the company, not just yourself.

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5 Tips to End Family Feuds

There are around 5.5 million family businesses in the United States, employing 63% of the workforce, according to Family Enterprise USA, a non-profit advocacy organization. In any business, you’ll have conflict but that conflict can be magnified several times over when the emotional entanglements of family members are involved.

Let’s say a fight has started in the business, one that threatens to derail morale throughout the entire company and possibly impact productivity and profitability. How do you handle it?

Here are a few tips to get the business, and the family back on track.

1. Discuss the situation when everyone is calm

This rule applies to any conflict in your life. Nothing much productive will be accomplished when emotions are running high. Wait until the seas appear calm and people can engage in problem solving in a more rational way.

2. Allow everyone to air his or her thoughts and concerns

Make sure every member of the family has an opportunity to express their thoughts. Sometimes those who don’t speak up at a meeting are the ones who are escalating the conflict with others. And if people don’t feel that they have had a chance to speak, they become resentful. The problem will not be resolved and will resurface at a later time.

3. Define what the real issue is

This can be the most complicated part of any conflict resolution efforts, particularly in a family business. You may start solving the issue that has seemingly caused the conflict, for example that Uncle Roger has not been meeting his sales quota and the other salespeople are resentful.

But once you communicate that Uncle Roger’s largest client went under and he is slowly building his sales back up, people are still unhappy. You dig a little deeper and find out that they really resent him because he just got an expensive new office chair and the other salespeople feel they deserve one too.

Now that you’ve determined the real problem, you can begin to problem solve effectively.

4. Get buy-in on any solutions

Deciding on a solution without family members agreeing to it pretty much guarantees failure.  Make sure everyone involved has come to an agreement on what the resolution to the problem should be.

The concept of buy-in for any business is so critical that I devoted a chapter to it in my book, “How Not to Hire a Guy Like Me: Lessons Learned From CEOs’ Mistakes.” Along with communication, it’s one of the keys to success.

5. Make sure the roles for each family member for enacting the solution are clearly defined

Once a solution has been reached, if action is required, make sure each person clearly understand their role and when the action should be completed. Have someone present at the meeting write down what steps were decided on, who is going to complete them, and what the deadlines are. Have it circulated in an email, with a note thanking the staff for their participation in the problem solving process.

Despite all your best efforts, sometimes a conflict just can’t be resolved within the family. At this point, it can be beneficial to bring in a third party to mediate the real issues between the family members. A third party can often bring a different perspective and develop a creative solution, one that family members who are immersed in the issues aren’t able to do.

Some of the most successful businesses in this country are family ones. Good conflict resolution is one of the keys to help your family business thrive.

 

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You Work Together, You Play Together: Surviving the Holidays

I saw a funny card recently that read, “My family is temperamental. Half temper and half mental.” The actor Jim Carrey once said, “Maybe there is no actual place called hell. Maybe hell is just having to listen to our grandparents breathe through their noses when they’re eating sandwiches.”

Yes, we love our families. But sometimes the holidays can mean a little too much togetherness, bringing more opportunities for family conflict. A recent survey on the travel website Hipmunk showed that 18% of people travel during the holidays to avoid their families.

Keeping peace on earth during the holiday season can be particularly challenging when you own or work for a family business. Problems can arise when difficulties around the conference table make their way to the dining room table and tensions emerge during family get-togethers. It can be tough to leave the working world behind.

Here are a few tips to keep the holidays merry and bright and ensure you enjoy your family, even those you see every day at the office.

1. Agree to Keep Certain Topics Off the Table

The last week before the holidays, during a meeting or through an email, suggest that the family agree to not engage in certain discussions until work resumes in the new year. Acknowledge that while some pending issues may be important, the holidays are a time to take a break from work.

If anyone attempts to bring up potentially divisive topics, defer them. Food is always a good distraction. Say something like, “Let’s discuss that in the office on Monday. How about we get a slice of Aunt Martha’s coconut cake?”

2. Plan Outdoor Activities or Group Games

If you have a large family and everyone is stuck inside for long periods of time, people may become irritated from the close quarters. If possible, take the action outside where kids can run around and the adults are able to move freely without knocking over a plate of appetizers. Buy a small fire pit and gather people around that for warmth. We all feel better if we can spread out a bit and engage in physical exercise if possible.

If the weather is not conducive to going outside, try some group games like charades or one of my new favorites, Telestrations. This one is guaranteed to get the group laughing. Rather than griping over the sloppiness of Uncle Fred’s expense reports, you can laugh at his sloppy drawings during the game.

3. Spend Some Time on Home Improvement

No, I don’t mean head to Home Depot and start working on those shelves in your basement. This suggestion comes from a quote by businessman Bo Bennett, who said, “Spend some time this weekend on home improvement; improve your attitude toward your family.”

You may not be able to change your family, but you can resolve to change how you react to them. Try not to let their annoying habits or complaints get you down. One thing is for certain, every family dinner eventually comes to an end and you’ll be able to go home again.

Remember what Lee Iacocca said: “The only rock I know that stays steady, the only institution I know that works, is the family.

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Discovering Fraud By Walking Around

Have a fraud story to share? Send me yours for a chance to win a copy of my book! See details below.

I’ve had a front row view of more instances of fraud than I could have imagined when I first began my career. In my work as the Turnaround Authority™, I’ve seen hundreds of millions of dollars stolen from the companies I’ve worked with. Almost half of my clients have encountered some type of fraudulent situation.

You may think that I uncover fraud by going over the books and discovering something wasn’t quite right. And in many cases that is what has happened. I have plenty of those stories, of accounting personnel setting up dummy companies and payroll accounts, and embezzling hundreds of thousands of dollars.

My favorite story of uncovering fraud this way was when I sat myself down at the CFO’s computer, one I suspected of stealing. He was so organized that he had created a folder on his desktop with an entire spreadsheet detailing all the money he had stolen from the company. It’s so handy when thieves do a lot of my work for me.

But I’ve also found out about many cases of fraud from other employees in a company by employing a form of MBWA, management by walking around. Popular in the 1980s, MWBA really just means walking around and talking to people, face to face, and getting a sense of what is really going on in the office. (For more on MWBA, read my previous column about it, “Get Out of the Corner Office and Hit the Front Line.”)

In one instance of a twist on MBWA, I hosted a midnight barbecue for people working the nightshift. You could call it MBGH, management by grilling hamburgers. As I was grilling and we were all standing around chatting, the employees opened up to me and we began swapping stories. And boy, did I hear a doozy. One of the guys mentioned that he had a concern about excess inventory purchasing. Of course I made a mental note of that. Turned out to be a case of multi-million dollar fraud, which I uncovered because the employee felt comfortable chatting with me in the informal atmosphere.

I uncovered another case of fraud when I learned that a payroll clerk had returned to work the day after an appendectomy. That raised a red flag for me, as it seemed to be an extreme example of devotion to a job. After casually chatting with some other employees about her dedication, I learned they were in awe of sweet “Aunt Tess” because she had not missed a single payroll day in 25 years. Isn’t that something? Why yes it is, and that something is criminal. Aunt Tess was there every payroll day so she could handle the paychecks for the fake employees she had created, allowing her to steal up to $100,000 a year.

One of the best ways to uncover fraud in your company is to create an open door policy, a feeling of camaraderie where communication is encouraged. Generally, if fraud is occurring, someone in the company knows about it or is suspicious that something not quite right is going on. You want to encourage them to share their concerns with you so you can follow up.

I have plenty more stories about fraud and ways to prevent it in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.” One of the most rewarding parts of writing this book has been hearing from readers who share their stories of fraudulent activity with me.

Do you have a story of fraud? Please share it with me at lnkatz@aol.com. I’ll print the stories here, and the best story will win a copy of my book.

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Creative Ways CEOs Communicate

One of my favorite features in my hometown paper, The Atlanta Journal-Constitution, is the “5 Questions for the Boss: Lessons Learned by Georgia’s Top Executives” that runs in the Sunday paper.

As readers of this blog know, I’m all about lessons learned. In fact, my book is called “How Now to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.”

A few weeks ago the reporter, Henry Unger, interviewed Phil Horlock, the CEO of the Blue Bus school bus company. Based in Fort Valley, GA, the company has 1,500 employees with sales reaching nearly $800 million this year.

Previously an employee at Ford, Phil was asked what he learned from Ford chief Alan Mulally, who is credited for that company’s remarkable turnaround. Phil’s response? “He taught me and others that you can’t manage a secret.” Phil said he learned that a company needs an open environment where people feel they can communicate what the issues are.

Every Thursday morning from 8 a.m. to noon all the leaders at Ford from all over the world would gather in a room or join by video conference and take turns discussing all the issues they were facing.

Phil says he brought that strategy to Blue Bird, cancelling a lot of the other separate meetings to hold one meeting on Thursdays. He noticed that productivity started to improve and he felt confident he knew what issues they were facing each week.

George Alvorson, chairman and CEO of Kaiser Permanente, has been sending companywide emails to close to 200,000 employees for six years. He termed them “Celebrations” and intended to continue the Friday afternoon practice for just a year. But as an article in the Chicago Tribune reports, he got a strong response to the emails and felt that writing them made him a better manager.

The emails contain data and information about what they are doing well in an effort to make the employees feel good about the company, but are based on absolute honesty, Halvorson said.  (If you’re interested you can read several of them in the book “KP Inside: 101 Letters to the People of Kaiser Permanente.”)

There are 6,500 employees of Epic Systems Corp., a privately held medical records company in Verona, Wisconsin with $1.5 billion in revenue in 2012. Most days, many of the employees are traveling around the world for installation or training on its software system. But once a month, every employee is on the 800-acre campus for the monthly meeting run by Founder and CEO Judy Faulkner. They enjoy free soft drinks and popcorn as they meet in the huge auditorium to be updated on company news.

Good communication is not just about making employees feel good about the company and about themselves, although those are worthy goals. Good communication also equals higher productivity.

According to an article written in 2011 by David Grossman, “The Cost of Poor Communications,” the total estimated annual cost of employee misunderstanding in the U.S. and the U.K in companies with more than 100,000 employees is $37 billion. On the flip side, companies with leaders that are effective communicators had 47% higher total returns to shareholders over the last five years compared with firms that have leaders who do not communicate as effectively.

I see ineffective communication all the time in my position as the Turnaround Authority. In fact it’s one of the common denominators of the companies that I work with. In addition to experiencing financial difficulties, just about every company I am brought in to turn around also suffers from poor communication among its management and employees.

One of the first things I do when I take over as CEO is to gather all the employees together and tell them exactly what is going on. I hold my own town hall meeting to quickly squash the negative effects of the rumor mill.

Is your company suffering from ineffective communication? I suggest you work on improving it. Or, well, you may just have to hire a guy like me.

 

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Giving Thanks for Giving Companies

As the newspapers grow heavy with inserts and our inboxes fill up with email ads for shopping on Black Friday, it can seem that our country suffers from a massive case of rampant materialism. As I read recently, “Black Friday: Only in America, people trample others for sales exactly one day after being thankful for what they already have.”

We are a consumer society. No doubt about it. But we are also the most generous people in the world. In 2012, Americans gave $316.23 billion to charity, according to Charity Navigator, an increase of 3.5% over 2011.

Last Thanksgiving I wrote the column “Feeling Thankful for CEOs, Companies That Get it Right.” Following what I am now declaring a Thanksgiving tradition for my blog, I would like to give kudos to many of those generous businesses that spend millions to make their communities, and the world, a better place.

Every year the Chronicle of Philanthropy newspaper asks 300 of the top revenue-producing companies in the world about their charitable giving. For 2012, more than 100 companies responded.

One trend noted in corporate donations was the increase in product donation over cash, according to an article in Forbes.com, which reported that when cash and product donations are counted, the total from 2011 rose by 20.2% to $18.6 billion.

Here are a few of the more interesting initiatives and donations from corporations last year.

In an interesting twist to responding to the disaster in the Philippines caused by Typhoon Haiyan, Coca-Cola Philippines and its bottling partner, Coca-Cola FEMSA Philippines announced that they would suspend advertising there. That money budgeted for advertising the brand would instead be used to support relief efforts. Coca-Cola is donating more than $2.5 million in cash and in-kind contributions. My hometown soda company is generous, with donations through its Foundation and company of more than $690 million between 2002 and 2010.

Wells Fargo took the top position as the most charitable company in 2012 according the list in the Chronicle of Philanthropy, with cash donations of more than $315 million. The company leapt to the top with a $77 million donation to partner with NeighborWorks America to launch the NeighborhoodLIFT initiative to help educate and assist homebuyers in particularly hard-hit areas.

Target, which is number 9 on the list of top ten most charitable companies with donations of more than $223 million in cash and products, recently formed a partnership with Feeding America, the nation’s larges domestic hunger-relief charity. The company launched a collection of limited-time only FEED USA + Target products with 10% of sales from June through mid-October being donated to Feeding America. The goal is to provide more than 10 million meals to children and families.

Number five on the list, with more than $215 million in cash and product donations, is Exxon Mobil. One of the company’s initiatives is to fight malaria. Since 2000, the company has donated more than $110 million towards that effort. In 2012 alone, Exxon donated $12.4 million to 20 organizations for 24 different projects. Those projects benefitted 16.7 million people in 10 countries.

So while we may be a consumer society, I give thanks that we are also a generous one. And while I’m in the giving thanks mode, I will also give thanks that come Black Friday I’ll be far, far away from the nearest mall.

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Sales Were Up, Profits Were Down: What Happened?

In my last blog, “Big Sales Don’t Mean Big Profits,” I told the story of two companies I worked with that had increasing sales but declining profits. They both had problems with their product mix.

It was too late for one company — the owners didn’t want to make the investment needed to keep it running after we identified the problem so they closed it down after 30 years.

We were able to save the other company, although it shrunk from a $600 million company to a $350 million company.

What could both of these companies have done differently? What could have kept them out of this situation, which caused one of them to go out of business completely and the other to shrink to almost half its size?

Although the circumstances related to the issues with their product mixes were very different, the root cause of the problem in both cases was the same: a lack of communication.

Company A, which was a $2 million company that manufactured and distributed products, ran into trouble when their lower-profit sales to big box stores increased, pushing their margins down until they were no longer profitable. The operations and sales manager knew that the percentage of the lower profit sales to the big box companies was increasing — it went from 20% to 80% — yet no one discussed it.

The chief financial officer must have recognized the situation because the profitability of the company was severely impacted, but also didn’t raise the issue. Because no one talked about it, no one attempted to fix it. As Peter Drucker said, “The most important thing in communication is hearing what isn’t said.” You can’t fix what you don’t acknowledge. So the situation just got worse.

With Company B, whose management assured me they did not have a problem with their product mix, we found that even though the company had spent millions on computer systems to make sure they knew exactly what their costs were, there was still a breakdown in the system.

We found that there had been a lot of turnover in one of the key positions responsible for the accuracy of the data going into the computer systems. The new people taking over were not being properly trained. So the company had been selling products based on inaccurate cost structures. Again, there was a failure in communication.

In this case, I was reminded of a quote by George Bernard Shaw, “The single biggest problem in communication is the illusion that it has taken place.”

Communication is one of the keys to the success of any business. In my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes” I discuss the value of honest and open communication. In the case of Company A, the management of the company should have noticed the drastic change that was taking place in their product mix and discussed the situation. Together they could have determined what the effect on the business would be and taken steps to deal with the inevitable decline in profits.

As for Company B, it had a breakdown in the quality of training new staff. The duties of people in a key position were not being adequately communicated so the job was not being performed as it should have been.

Good communication at all levels of an organization can alert you to ways to improve your company while also providing early warning signs if things are starting to go wrong. Open communication will not only help steer your company through hard times, it can prevent them from occurring in the first place.

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Big Sales Don’t Mean Big Profits

I want to share a story about two companies that I worked with, one with $2 million dollar of revenue and the other with $600 million per year. Although they were vastly different in size, they both shared the same problem. I was able to help save one, although it shrunk to almost half its size. The other one liquidated after being in business for 30 years.

Both companies had increasing sales volume over the years. So what happened? It’s all about the product mix.

Company A, the smaller one, manufactured and distributed products, selling those products at a 50% gross margin for many years. Then they began selling to big box companies, which negotiated to a 20% gross margin. But with 80% of their business still at the 50% gross margin, the company was still profitable. Life was good for many years for the owners.

The big box customers then drove the margin down further, from 20% to 12%. Again, because of the increased volume, it remained profitable because 80% of their sales were at the higher margin.

Sales are up - great! But profits are down. What happened?

Sales are up – great! But profits are down. What happened? Here is the story of two companies that experienced that situation.

However, gradually over a three-year period, their product mix changed to 80% at the lower gross margin for the big boxes, which left just 20% at the 50% margin. Management didn’t notice the affect that this change in the product mix was having, as management tended to focus on increasing sales and became dependent on increasing bank financing. Large sales volumes frequently cover up a deeper problem.

In year three, the company had a healthy loss, ie red ink, and the banks didn’t want to lend money to this entity. I was called in and identified the mix problem. We came up with a 2-3 year turnaround plan that was reviewed with the ownership. The owners decided not to invest the money it would take to turn around the company and decided to shut the doors.

When I went to Company B, it had been borrowing more and more money from the bank, because the bankers liked the company and considered it prestigious. The bankers should have asked questions sooner but in any event, I was called in when they realized the company was in trouble.

The management first denied they had any issues with the pricing of their bill of materials, the BOM, or their product mix. They had spent millions on computer systems and software to track it and felt confident that they knew their costs. Because the company was in a low margin industry, they had realized that keeping track of the BOM was critical to making a profit and had made the investment to do so.

What I was able to determine, however, is that there had been a lot of turnover in a key position when it came to ensuring that the numbers management were receiving were accurate. The new people coming in had not been property trained, and had not been giving those fancy computers the right information for the correct cost structure. As a result, the company had been selling based on the wrong cost structure for years.

After identifying the problem, we were able to get an accurate view of the cost structure and change the product mix. Because of the severe losses it had suffered, the company shrunk from a $600 million in annual revenue to a $350 million; the owners came up with millions in new equity and the company survived.

Both companies suffered from a failure to recognize what was happening with their product mix. While management saw increasing sales, what they didn’t deal with was that profitability was going down.

Next column: What could they have done differently?

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Boots to Business: Veterans Succeed as Small Business Owners

As our country celebrates Veterans Day in recognition for those who have served in the military, there is good news about their unemployment rate. It has been going down in 2013 and in October was at 6.8%, compared to 7.4% in October 2012.

In honor of Veterans Day, I wanted to highlight a government program that is helping put more veterans to work and can actually benefit business by teaching veterans to use the skills they learned while serving in the military to start their own business. Operation Boots to Business is a U.S. Small Business Administration-sponsored training program to help transition service members to business ownership.

Studies conducted by the SBA concluded that veterans are more than twice as likely as the general population to start their own businesses and have those businesses succeed.

Operation-Boots-to-Business-Logo“Being in the military and being an army vet or a veteran, I have been built and trained to run my own business I think it’s a perfect fit and a perfect fit for veterans,” said Jenna Bazaric, Owner & Operator of a Tropical Smoothie Café in a video about the program. “We have the ability to react to change and to talk to and interact with all different types of people.”

Brian Iglesias served 13 years in the Marine Corps and is now President & CEO of Veterans Expeditionary Media. He credits his success to the training and education he got through the program and agrees that veterans have the skills to become successful.

“There are a lot of transferable skills that you can take from the Marine Corps and apply to your own business,” he said. “We have this take-the-hill mentality where we’re goal oriented. We don’t make comfort-based decisions. I have a dream and a vision to own my own business and my comfort comes second. And I’ll push myself and drive myself. That will to win, that will to succeed and to not surrender, to not give up has really helped me. Because it’s tough. Things go wrong. The best part about being a marine and having the military service is that we have the ability to thrive in chaos. Small business ownership is chaos. Things happen all the time and you have to be fast, smart and flexible to overcome those and continue to drive forward and succeed.”

Active duty military members and their partners or spouses are eligible for the program, which includes an intensive two-day intro at a local military installation, followed by an eight-week online course offered by the Institute for Veterans and Military Families, Syracuse University.

I’m in favor of any program that successfully helps those who served our country acquire the skills they need to succeed on their own in the world of business. I wish all the participants in this program the best of luck in their new endeavors.

Happy Veterans Day weekend to all of you and to all the veterans, thank you for your service.