Picking up the pieces

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Picking up the pieces…

In an excellent article in Chief Executive Magazine (http://www.chiefexecutive.net/depts/management/190.htm) entitled Picking Up the Pieces: It takes a special breed of CEO to repair the damage caused by corporate implosion, Erik Sherman discusses the issue of how a new CEO should deal with the problems of taking over a company whose former management appeared to be guilty of, er, creative accounting.

Mr. Sherman noted “Rather than try to ferret out the problems directly, the best approach according to L. Burke Files, vice-president of New York risk management consulting firm The LUBRINCO Group and an expert in forensic accounting and asset recovery, is to develop a standard for critically evaluating the past. “You have to take a baseline assumption of what should have been going on and then test it against what was going on,” he says.”

While this is true as far as it goes, we would like to expand on this and say that the job of the new CEO is in reality tri-fold.

The first is to run the company, to make sure it survives and is profitable. In this respect, the job of the new CEO is not unlike that of any other CEO.

The second is to assure that whatever went wrong under the former administration is discovered. However, discovering what went wrong is not the job of the new CEO, largely because the office, and not just its former occupant, is under a cloud, and it is never appropriate for suspects – even retrospective suspects – to officially investigate their own potential crimes. While the new CEO has to ensure that it gets done, and must stay involved to ensure that what was wrong is eliminated and has no lingering effects, the job of figuring out what went wrong (and who done it) should be handed over to some independent group. He, not the independent group, will of course be the conduit to the outside world for the information discovered.

The third is to be the decision maker – or at least the one who makes the recommendations to the board – about what should be done with the information that is uncovered. The first instinct is to try to go after the bad guys once they are identified, but remember that the money may be, in fact, gone. If the Feds are pursuing a criminal case and there is money that can be recovered, then it is wise to engage asset location specialists as early as possible to ensure that any leads are followed up on promptly. The Feds are interested only in prosecution, not in recovery of assets and the longer the time between the crime and the initiation of a search, the less the chances of recovery. However, if there is no money to be recovered, then the case should be carefully explained to the board, the shareholders, the employees, and the analysts, and a decision should be made to move forward to a profitable future, and leave the past to the Feds.

It is important to keep in mind that while theft on the part of those in charge is hard to stop if they have the inclination to steal and the cooperation of those in charge (including, in some cases we have seen, the active failure of legislators in restricting auditing abuses), it is still rare that the losses will bankrupt a major company. (One estimate is that in a successful company run by a greedy CEO, the figure approaches 10% of the operating budget.) Nonetheless, it is important for boards of directors to decide how much greed they will tolerate, and then to put into place and enforce audit measures designed to detect and put a stop to actions that might constitute a betrayal of the shareholders and employees.

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