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Stanford & Madoff - SEC Treated Them Equally

Monday, April 19th, 2010

The SEC just came out with their report regarding Allen Stanford’s Ponzi Scheme. And guess what, it mirrors that of Bernard Madoff’s encounters with the SEC. In each case, the SEC acted like blundering idiots.  It makes one wonder if the SEC didn’t order their investigative license from an online diploma university for the price of $14.95. Because what has surfaced over the past couple of years reveals, the SEC has been incompetent on some of these matters!

As reported by the Wall Street Journal, The report (The SEC releashed a report on Friday) lays out a series of missteps by the SEC ignoring red flags being raised by the examiners in its Fort Worth office, who were “aware since 1997 that [Stanford] was likely operating a Ponzi scheme.” In four separate instances in 1997, 1998, 2002 and 2004, examiners concluded that Stanford’s businesses were either a Ponzi scheme “or a similar fraudulent scheme.” “The only significant difference in the Examination group’s findings over the years was that the potential fraud grew exponentially, from $250 million to $1.5 billion,” the report said.

In my entry, Blinded By A Dim Light earlier this year regarding Bernard Madoff, I state, How long does it take to catch a Ponzi scheme operator? Well, according to the report released yesterday titled “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” 16 years!!! And that’s 16years from from the date the first red flags were raised about Bernard Madoff.  During those 16 years, the SEC opened five inquiries, and hundreds of red flags were raised.

The truth around stories like Madoff, Stanford and others scare me. And they should scare you too. They reveal that broad swaths of government are likely totally incompetent. Rules and regulations don’t matter. The leadership of these institutions are suspect. And most important, we, the American citizens and the US Economy is taking a hit due to these lapses. Ponzi schemes will always exist, how and when we shut them down determines the true cost of them. Here, we have failed. Madoff and Stanford were allowed to exist for years after the first signs of Ponzi started to surface.

Yes, these were silent problems that resulted into Without Warning events of immense magnitude.

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Toyota’s Silent Problem Crisis

Saturday, February 6th, 2010

The opening paragraph in the Wall Street Journal captures the essence of Toyota’s problems, but more importantly Toyota’s silent problems. The article A Crisis Made in Japan by Jeff Kingston, director of Asian Studies at Temple University states,

In Japan there is a proverb, “If it stinks, put a lid on it.” Alas, this seems to have been Toyota’s approach to its burgeoning safety crisis, initially denying, minimizing and mitigating the problems involving brakes that don’t brake and accelerators that have a mind of their own. President Akio Toyoda, grandson of the founder, was MIA for two weeks and the company has appeared less than forthcoming about critical safety issues, risking the trust of its customers world-wide.

The article further states: It is not surprising that Toyota’s response has been dilatory and inept, because crisis management in Japan is grossly undeveloped. Over the past two decades, I cannot think of one instance where a Japanese company has done a good job managing a crisis. The pattern is all too familiar, typically involving slow initial response, minimizing the problem, foot dragging on the product recall, poor communication with the public about the problem and too little compassion and concern for consumers adversely affected by the product. Whether it’s exploding televisions, fire-prone appliances, tainted milk or false labeling, in case after case companies have shortchanged their customers by shirking responsibility until the accumulated evidence forces belated disclosure and recognition of culpability.

Japanese firms often seek to cover up or fudge the facts and the people communicating with the media and public often do not have the information they need to do their job. The absence of a structure to quickly get accurate information to top management hampers an accurate and adequate response. That leaves management unprepared to deal with media questioning and conveys an image of stonewalling and indifference.

This article by Jeff Kingston is a must-read if you want to get your arms around how Toyota’s crisis started, how it grew, and eventually how it exploded. It also points to why Toyota’s problem might be far from over and why its aftermath may continue to linger into the future. In my book, Without Warning, I write, There is little doubt that participating in and winning in a world that is connected, mobile and increasingly transparent can be challenging, creating a multitude of problems for political and business leaders alike, and their organizations. The problems one is expected to solve arrive with risks attached. The potential for faulure is real. At times, the opportunity for a happily ever after ending appears remote at best. Yet this is the sandbox where most political and business leaders play, and at times are asked to leave. It’s also this same sandbox where many followers find themselves, contemplating whether to follow their leaders in the games they play or to pursue a different path, one they believe they can truly make a difference.

Toyota’s problems are real, and everyone must ask, “Are there more surprises in the grass?”  Time will tell.

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Tiger Woods vs. Toyota Motor Company

Thursday, January 28th, 2010

What do Tiger Woods and Toyota Motor Company have in common?

a. Both have throttles that can stick open?
b. Both were No. 1 before their fall?
c. Both have had their images and brands severely bruised?
d. Both held silent problems that eventually surfaced with a vengeance?
e. All of the above?

The answer of course is “All of the Above.” Okay, “a.” was maybe a little off base, but I’m certain you catch my drift. However, there is no doubt that Tiger and Toyota are equally guilty of b, c and d.

Over the past year, I’ve repeatedly stated in this blog that Toyota has a serious problem relative to the “Silent Problems” (problems that are being avoided, neglected, going unnoticed, or being intentionally silenced) inside its organization. And as is the case with silent problems, if not dealt with early, they will emerge with a vengeance, which is exactly the case with Tiger Woods and Toyota.

Today, a story by Tom Krisher (AP) titledd “Can Toyota rev back from crisis?” gets to the heart of silent problems as relates to Toyota. Krisher writes,

Crisis managers say the issues with the pedals likely surfaced early on at lower levels of the organization, but no one wanted to deliver bad news to the boss.

“The story just kind of drags on. That’s just deadly for a reputation,” said Brenda Wrigley, chair of the public relations department at Syracuse University’s School of Public Communications. “It just spirals into a big situation that’s probably going to have long-term financial impact for the company.”

In March of 2007, Toyota started getting reports of gas pedals being slow to rise after being depressed for acceleration. Engineers fixed the problem in the Tundra pickup early in 2008.

But troubles persisted in other models, eventually leading to last week’s recall and the plans to suspend sales and shut down six factories while Toyota tries to fix the problems.

The time has come for the concept of Silent Problems to take center stage. 12 months ago, Toyota appeared invinciple, today it is struggling to survive. All because a silent problem inside the organization was allowed to germinate, grow and eventually explode. In the process, billions of dollars of brand equity has been lost. And my guess is, Toyota will never fully recover.

If you’re a business leader or manager, I have a couple of suggestions.

  1. You must read the book Without Warning. It will provide the context around Silent Problems and why they are so dangerous. And the book will provide a path on how to surface and eventually solve Silent Problems.
  2. If you have concerns that Silent Problems reside inside your organization, conduct a Silent Problem Audit.
  3. Get out there and start looking, hearing and questioning - What really is going on that you’re not aware of.  Do the WalkAround.

Today, its easy to focus on strategy, efficiencies and innovation. However, one thing can trump them, this being the Silence that resides in your organization. If it can happen to Toyota, it could also happen to you.

If you have a Silent Problem concern, give me a call at 651-436-3962, I’d be delighted to discuss the process with you further.

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Another High Profile Whistleblower Suit

Friday, January 15th, 2010

In recent posts, I’ve discussed how silent problems can become whistleblower lawsuits. The few we hear about are generally high profile, with names like ADM, Toyota and  Pfizer attached to them, which I discuss here, here and here. A few of the points I raise include:

 

  1. I’m convinced that whistleblower protections and rights will continue to gain in stature and strength under this administration. 
  2. I believe the whistleblower will become a primary tool for law enforcement in the future. In effect, the whistleblower becomes the low cost alternative to the investigative task force. 
  3.  The whistleblowers role of exposing silent problems in organizations will grow in importance in the future.

Well, another high profile whistleblower suit surfaced today, this time aimed at Johnson & Johnson, a large pharmaceutical company. The Huffington Post reports, Federal prosecutors said Friday that health care giant Johnson & Johnson paid tens of millions of dollars in kickbacks so nursing homes would put more patients on its blockbuster schizophrenia medicine and other drugs.

In a complaint filed Friday, prosecutors said J&J paid rebates and other forms of kickbacks to Omnicare Inc., the country’s biggest dispenser of prescription drugs in nursing homes. Prosecutors allege Omnicare pharmacists then recommended that nursing home patients with signs of Alzheimer’s disease be put on the powerful schizophrenia drug Risperdal, which was later found to increase risk of death in the elderly.

The allegations are in a complaint filed by the U.S. Attorney in Boston, whose office has joined two whistle-blower cases. One was filed in 2003 by a former Omnicare pharmacist in Chicago, Bernard Lisitza, who alleges he was fired after he challenged the Risperdal kickbacks and other improper practices at the company. The other was filed by former Omnicare financial analyst David Kammerer in 2005, after he resigned from the company.

The source of most whistleblower lawsuits eminate from silent problems, which are problems that have been avoided, neglected, gone unnoticed or are being intentionally silenced. Unless these problems are caught and dealt with early, silent problems eventually become toxic and can become game changers. The potential impact on the organization - huge. Even large corporations like Johnson & Johnson are not immune from its wrath.

Bottom Line: As the economy rebounds, many companies will simply be unable to participate in the recovery due to the silent problems inside their organization.

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Too Big To Succeed?

Wednesday, December 2nd, 2009

The “Too Big To Fail” debate has been rampant for well over a year now as institutions like GM, CitiGroup, AIG,Chrysler and numerous others have essentially failed, only to be rescued by the US Government. Lack of leadership. Ineffective risk management. Rogue teams with few controls. Bloated cost structures. These are a few of the reasons why they failed. But what isn’t being offered up as a reason is this:

Were These Companies Were Too Big To Succeed?

Earlier this year The Hacket Group reported:

Most Companies Have Failed Agility Test; Three out of Four Global 1000 Companies Cannot Drive Cost Reductions That Match Declines in Revenue, Profits.

The world’s largest companies have for the most part failed in their efforts to reduce the cost of functions such as Finance, IT, HR, and Procurement over the past year, exacerbating the impact of dramatic declines in revenue, profits, and earnings, according to new research from The Hackett Group, Inc.

Hackett’s analysis of the latest financial results of nearly 200 of the 1,000 largest public companies in the world that have reported Q2 2009 financial information showed that only one company in four was able to manage their Selling, General, & Administrative (SG&A) costs in line with revenue reductions over the past 12 months.

While these companies saw average revenue reductions of 23.7 percent, they were only able to cut SG&A costs by 6.7 percent. As a result, SG&A costs as a percentage of revenue for Global 1000 companies have risen significantly over the same period, going from 12.6 percent of revenue to 15.5 percent of revenue. Hackett’s research found that typical Global 1000 companies (with $26 billion in annual revenue) are losing out on up to $1 billion in annual cost savings as a result of this lack of agility.

Yes, agility is an important component fo every company, especially during an economic upheaval. However, as you look at companies like CitiGroup, GM and others that have become exposed in this economic downturn, what words come to mind? Personally, words like inept, clumsy and bloated come to mind. And as I’ve written many times before, large companies are ripe for “silent problems” (problems that are avoided, neglected or go about unnoticed) to germinate, grow and potentially explode into a Without Warning event. The only way for large organizations to remain healthy is for them to be vigilent in the prevention of silent problems in the first place and the discovery/solving of them if they’ve already occurred.

Bottom Line: The Too Big To Fail debate should also include a debate about Too Big To Succeed. Only when the counter weight in this debate occurs can wise decisions be made before they become Without Warning Events.

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Chrysler & its Silent Problems

Sunday, November 1st, 2009

Cash for Clunkers. Automotive Bailouts. Clean Car Technology Investements. Saturn Fails. Everyone knows the domestic automotive industry has been in a turmoil for many years, but I have to wonder, “Is there anyone steering the ship at GM, Toyota, & Chrysler?” I have mentioned repeatedly that GM, Toyota & Chrysler have been huge silent problem sinkholes for years. They’ve had cultures where problems were avoided and their silence embraced. This is a huge challenge in today’s marketplace.

In today’s paper I couldn’t help but read an AP article titled, “Why so quiet Chrysler execs?” Its a silent problem expose at its finest. Here are few of the excerpts.

Chrysler has been sending its dealers back to class, reminding them about the importance of courtesy and communication. Always return phone calls. Limit wait times. Open doors for customers. But the automaker isn’t following its own advice.
Dealers are left to wonder what they’ll be selling this time next year, even as they struggle to unload unpopular models from their lots.
The lack of communication is a symptom of an automaker so focused on its grand plan that it may be overlooking the basics of running the business. The lack of information is compounded by frequent shuffling of managers.
Dealers are impatient for details of Marchionne’s five-year plan - to be announced on Nove. 4. Many say calls to headquarters have gone unreturned…
The silence is a sign that Fiat was unprepared to take over Chrysler, said Aaron Bragman, an auto industry analyst  with IHS Global Insight.

This story simply reinforces what I and many already knew, “Chrysler is in Trouble!” The reason they’re in trouble is multifold, especially the lack of leadership. I however am convinced that a major source of their demise relates to the silent problems that have been allowed to fester and morph and multiply over weeks, months and decades. Silent Problems are the equivalent of the hemlock tonic being passed around and consumed in too many organizations.

The way out of the woods is dfficult. The means to staying out of the woods is to complete a Silent Problem Audit, and begin to address the silent problem issues before they turn into a Without Warning Event.

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We’re Not Running Out of Whistles - Part 2

Sunday, October 4th, 2009

As a child, I was afraid of the boogeyman, a make believe character often used to make children behave. Well I’m wondering, are you afraid of the whistleblower? If you’re a business leader and you aren’t, you should be. After all, the whistleblower is growing in stature and potentially more dangerous to our businesses as we speak. A decade ago, the whistleblower was a lonely spot indeed, however that is not the case today. In Part 1, I noted,

  1. I’m convinced that whistleblower protections and rights will continue to gain in stature and strength under this administration. 
  2. I believe the whistleblower will become a primary tool for law enforcement in the future. In effect, the whistleblower becomes the low cost alternative to the investigative task force. 
  3.  The whistleblowers role of exposing silent problems in organizations will grow in importance in the future.

If I’m correct, business leaders must put in place systems that prevent whistleblower lawsuits from occurring in the first place. In essence,businesses must put in place systems that address silent problems  early in their evolution, because whistleblower lawsuits eminate from silent problems. Yes, the problems that are being avoided, neglected, are going unnoticed or are being intentionally silenced are the source of all whistleblower lawsuits! Therefore, companies must put in place systems that identify silent problems. Here are a few ideas to go down that road.

  1. Educate your employees about silent problems, and how they impact business performance, culture, communication… 
  2. Create a feedback system where employees, customers and vendors can report the occurrence of silent problems.
  3. Create a silent problem task force that is responsible for identifying, following up on and solving silent problems before they become toxic.
  4. Work with an independent 3rd party vendor where silent problems can be submitted and dealt with anonymously.
  5. Create a culture where silent problems become “Job 1.”

The role and relevance of silent problems in organizations is growing in importance every day. On occassion, they may be a mere distraction. Most of the time, they have a direct and negative impact on business performance. And every once in a while, they can throw a mighty blow, which could become a fatal Without Warning event. At the very least, silent problems are dangerous and cannot be overlooked.

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Silent Problem - Lehman Style

Friday, September 18th, 2009

 It’s been a year since Lehman Brothers fell - hard. Now the stories are beginning to surface, many of the “silent problem” type that I present in my book, “Without Warning.” What is now surfacing is not a surprise, nor is it surprising. The story is simple. Smart people were “locked in” to pursue a path of increasing risk as a means of increasing profits and revenue. And individuals that didn’t buy in were asked to leave or shut-up. For instance, a recent article over at the New York Times titled, Tales From Lehman’s Crypt tells part of the story.

He recalls vividly the days in early 2007 at Lehman when his financial models began to throw up more warnings showing delinquencies and defaults, and he remembers colleagues on his desk raising questions about loan quality. But he said the firm’s ranking as the top loan originator on Wall Street, not to mention the pressures put on the desk by Lehman’s growth-obsessed leadership, made it difficult for even the most senior executives to raise questions, even a senior vice president like Mr. Linton. He says he has no qualms about his work at Lehman or its economic aftereffects. “Anyone at our level who had a different view from senior management would find themselves going somewhere else quick,” he says. “You are not paid to rock the boat.”

In effect, Lehman and everyone that worked for the organization was “Locked In” to a strategy that was laying golden eggs, at least up to the point when the goose died. What are a few of the key learnings from Lehman’s fall? I’ve come up with three.

  1. If an organization is structured for compliance, in essence, it’s structured for failure.
  2. Arrogance is a dangerous attribute - for any leader. See my previous post Do They Believe Money Is Silent
  3. Previous business success is a weak predictor of future business performance.

Today, Lehman is history. Billions lost. Careers failed. Families decimated. Yes, Lehman had a multitude of silent problems inside their organization. A real leader would have encouraged these silent problems to be surfaced, heard, and possibly acted upon. Instead, they were discouraged and squeelcheed.  And eventually, it was the silent problems that eventually became a Without Warning event that killed Lehman when it was at the height of its power and influence.

Bottom Line: The lessons from Lehman’s rise and fall is applicable to any business, large and small.

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Blinded by a Dim Light

Thursday, September 3rd, 2009

How long does it take to catch a Ponzi scheme operator? Well, according to the report released yesterday titled “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” 16 years!!! And that’s 16years from from the date the first red flags were raised about Bernard Madoff.  During those 16 years, the SEC opened five inquiries, and hundreds of red flags were raised.

Okay - I’m Mad!!! I just read the report. It is possibly the most troubling report I’ve ever read. In fact, it reads like a novel, but then, there’s a difference. Fiction has to make sense, the truth often doesn’t. Here are but a few of the SEC blunders captured from the report.

One of the few points that was made in a conference call between the offices was a comment by a senior-level Washington D.C. examiner reminding the junior NERO examiners that Madoff”was a very well-connected, powerful, person,” which one of the NERO examiners interpreted to raise a concern for them about pushing Madoff too hard without having substantial evidence.

In September 2005, NERO prepared a closing report for the examination that relied almost entirely on information verbally provided by Madoff to the examiners for resolution of numerous “red flags.” One of the two primary examiners on the NERO examination team was later promoted based on his work on the Madoff examination.

 The OIG investigation also found the Enforcement staff was skeptical about Markopolos’ complaint because Madoff did not fit the “profile” of a Ponzi scheme operator, with the branch chief on the Madoff investigation noting that there was “an inherent bias towards [the] sort of people who are seen as reputable members of society.”

As the investigation progressed; in December 2005, Markopolos approached the Enforcement staff to provide them additional contacts and information. However, the branch chief assigned to the Madoff Enforcement investigation took an instant dislike to Markopolos and declined to even pick up the “several inch thick file folder on Madoff’ that Markopolos offered. One of the Enforcement staff described the relationship between Markopolos and the Branch Chief as “adversarial.”

During an interview with the OIG, Madoff stated that he had thought he was caught after his testimony about the DTC account, noting that when they asked for the DTC account number, “I thought it was the end game, over. Monday morning they’ll call DTC and this will be over … and it never happened.” Madoff further said that when Enforcement did not follow up with DTC, he “was astonished.”

When Madoffs Ponzi scheme finally collapsed in 2008, an SEC Enforcement attorney testified that it took only “a few days” and “a phone call … to DTC” to confirm that Madoff had not placed any trades with his investors’ funds.

Now here is the damning part, and excuse me for be self-serving on this part. In my book Without Warning I present a list of “7 Yellow Flag” symptoms that a silent problem might exist. For instance, here are two of the seven yellow flags.

  1. When the risk of making a decision for employees inside the organization is considered to be greater than the benefit of making one. Symptom: Slow and indecisive decision making.
  2. When information that should be readily available is difficult to access, appears incomplete or doesn’t make sense. Symptom: Information is delayed or incomplete, and parts often held in secrecy.

Actually when I examined the report and the list of seven symptoms, all seven yellow flag symptoms applied to the Madoff case. This is telling on several points. For instance, if silent problems aren’t caught and resolved early, they will morph and become more toxic over time - in this instance, $65+ Billion toxic. Secondly, it’s imperative that businesses and public agencies (like the SEC) become knowledgeable about silent problems, how to identify them, and how to act on them. Lastly, the book Without Warning should become required reading.

The Madoff Ponzi Scheme is a story about what can happen if the warning signs of silent problems aren’t heeded. If you don’t, it’s amazing how dim a light can be, to be blinded by it.

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Snippets from Book Reviews

Saturday, August 22nd, 2009

In recent weeks, sales for the book Without Warning have taken off. I contribute part of the success to the independent book reviews received (below are five independent book reviews discussing the book, complete reviews can be found on my website under the “Media Kit” tab). Independent book reviews provide the critical eye essential in determining whether or not you might want to purchase a book. In addition to these reviews, you can also click on the “Learn More” tab, where the first two chapters are available for free. Enjoy, and I look forward to continuing the discussion on Silent Problems and why they’re so important in today’s business environment.

From Lead on Purpose: Without Warning is a fast read with excellent real-world applications and pertinent information for leaders who are striving to move their organizations forward without the barnacles of silent problems.

From Corporate Eye:  The identification of silent problems is a key leadership skill: a good leader will be constantly looking out for them. Rodney Johnson offers 7 symptoms and 5 areas where the problems are likely to be lurking.

Without giving away the list, I can tell you that some of the symptoms could be easily missed in the hurry and scurry of actually doing business. This is why a silent problem is a leadership problem: someone needs to be working at enough of a strategic level that they are working ‘on’ the business not ‘in’ the business - that way they have a chance of spotting the problem.

The book offers a structure for resolving these problems, and this, together with the case studies, is very thought-provoking (as well as entertaining), but it seems to me that the most important element here is identification of the problem. And that, of course, is the nub: the very thing that makes these silent…

 From the magazine, Baltimore SmartCEO: What are your biggest problems right now? What’s the biggest? Go ahead, take a moment and think about these two questions. According to author, consultant and CEO think tank leader Rodney Johnson, it’s highly unlikely that you listed your biggest problem. Johnson says that the biggest problems facing businesses today are “silent problems,” and as a result are much harder to solve.

 Without Warning: Breakthrough Strategies for Solving the Silent Problems Taking Aim At Your Organization takes readers through a unique viewpoint of the problems that may be getting in the way of results.

 From Deon Binneman on Reputation: You’re the manager: how do you know if there is a silent problem? Or do you wait for a whistleblower or until the Media conducts an investigation?

This extract really made me think - Do we wait until reputation risk manifest? Or do we deal with issues whilst they are small? Are we prepared as Dr Roger von Oech wrote in the book, A Whack on the Side of the Head, to slay some sacred cows. To ask, which sacred cows or hidden problem can destroy our hard-earned and carefully crafted reputation?

From Kraig Kramers CEO Tools Blog:  Ever notice how things sometimes suddenly sneak up on us?  Like running out of cash, like your bank isn’t honoring the agreed-to credit commitment, like this recession we’re in, and like dozens of other “creepers” coming up through the cracks?  Finally, there’s a book on spotting the silent problems and solving them!  Rod Johnson, Vistage Chair and speaker and business consultant/coach, has authored “Without Warning” - a fabulous easy-to-read book on breakthrough strategies for seeing and solving those silent problems before they leap in front of you.  A must-read, get it today!

Note: Without Warning is available from most online book retailers - simply click on the “Order Info” tab for a list.

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