During the course of PSYCHOLOGY TODAY readers' careers, there will be many opportunities to link your career and/or your company with shenanigan prone companies: vendor, employment, alliance, or acquisition relationships immediately come to mind.
Do you want to link your reputation with a Shenanigan prone company or person?
"Shenanigan" is a term that refers to practices that are not illegal. They may touch the line that separates legal from illegal. Shenanigan may refer to legal but ethically questionable practices as well.
The purpose of this article is to help readers make such decisions using a systematic framework.
In this article, I will examine nine factors to consider: weak control systems, CEO personality, narrow base for success, compensation system focused on short term performance, convoluted financial structures, profits out of line, shifting consultants, law suit patterns, and vendor payments. In each category I will discuss specific questions you can ask and web-based resources you can access.
Are there control systems in place to insure monitoring over how investor money is spent? The place to focus attention is on the Audit Committee of the Board of Directors. Ask, "Tell me about the people on the audit committee?"
Public companies are required to have external members on the audit committee. Private companies are not under the same requirements. I have seen situations where a member of the audit committee turned out to be the CEO's college roommate.
Another question to ask is, "Tell me about what Board meetings are like?" Be on guard when the response is, "Everybody gets along." Getting along is a great idea for couples on an ocean cruise. But it is not necessarily the best thing on a Board. I prefer to hear phrases like "spirited debate."
One important component of a corporate control system is the General Counsel. Ask, "Tell me about the general counsel." Be wary if you hear words like "well liked." That is not the General Counsel's job. You hope to hear words like "respect" and "integrity."
When you ask, "Tell me about the Chief Financial Officer," you don't want to hear the phrase "nice person." You do want to hear words like "tough" "fair" "strategic."
2. CEO Personality
Check out the CEO in LinkedIn.com. Google the person's name in "investing businessweek" if the CEO is on a public company board. Purchase a D&B credit report at www.dnb.com. Does the CEO have a history of sudden business reversals? How long is the average tenure? Short tenure with sudden business changes, even from bad to good, might not necessarily be good signs. There are ways to create short term shareholder value yet leave long term investors in the lurch.
"Accessories" is a term often used to describe not essential wearing apparel. What are the non essential items the CEO "wears" to present him/herself to others? For example, does the CEO's office look more like a den at home than a business office? Are the photos around the office mostly of the CEO with famous personalities? Does the CEO have the most prominent parking spot near the front door and what is the automobile like? These are the signs of a potentially narcissistic leader. They may be charming during initial meetings, but they can have fuzzy boundary issues: business/nonbusiness relationships; legal.nonlegal; ethical/nonethical.
3. Narrow Base for Success
If a service company, is it overly dependent on one or two individuals? Is it too dependent on one or two product lines, or on one or two customers? Questions to ask might include, "What is the most important product as a percentage of total sales revenue?" and "Who are the top producers in terms of revenue?"
4. Compensation System
Does the bonus system create a dangerous short-term focus on quarterly or half-year results? If venture capitalists are on the board, get a sense for how long they have invested in the company and how impatient they are for a "liquidity event."
5. Convoluted Financial Structure
For a private company, examine the Dunn & Bradstreet credit report. If the company is public, look at the 10K. You can find the 10k at www.sec.gov. Is the financial and legal structure overly complex given size and industry? If so, it might be possible to hide shenanigans through untraceable patterns of intercompany borrowing. Are there special covenants with investors and creditors that might give them more influence over business operations than is customary?
6. Profits Out of Line
Unusual profits relative to industry standards may indicate a well-run company-but may also point to accounting gimmicks, such as shifting expenses to next year. Go to your local commercial bank to browse through the RMA Directory. Published by the Risk Management Association (www.rmahq.org), the directory has summaries of 350,000 financial statements broken into standard industrial classification (SIC) code and sales size. Using it will allow you to make specific comparisons between your target company and a larger index based on sales volume and industry grouping. Some libraries offer the RMA Directory online. It is called RMA E Statement Studies. Ask your librarian.
7. Shifting Consultants
Look for recent switching of consultants and other vendors as a diagnostic sign. Examples would involve recent switching of banks, CPAs, or law firms. The question to ask would be, "How long has the company had its relationship with its present outside legal counsel, bank, and CPA firm?"
Most attorneys subscribe to Lexis Online. Banks and CFOs often have access to Dunn & Bradstreet credit reports. Both services will show lawsuits filed against the company, and the reasons why. One or two lawsuits should be no cause for alarm. You are seeking a pattern of law suits around similar issues.
9. Vendor Payments
Look at the relationship between the company's current ratio and the average days late on vendor payment. The current ratio is the corporate assets that can be converted into cash within twelve months or less divided by the amount of money owed over the next twelve months. A current ratio below .80 combined with a history of late payment may simply indicate a company in a difficult financial situation with respect to cash. We have also seen companies with a history of late payments to vendors where the current ratio was 1.2 or higher. This means that there is $1.20 of potential cash for every $1.00 that is owed. That combination often suggests a culture of not treating vendors well. Companies that do not treat vendors well often have a similar philosophy with other stakeholders: employees, alliance partners, and even customers.
Forewarned Is Forearmed
These nine steps should apply equally to profit and nonprofit companies. President Ronald Reagan often quoted a Russian proverb that makes sense for anyone thinking about putting a reputation into the hands of others: "Trust, but verify."
You are responsible for your reputation. Assume nothing. Use the nine step framework in this article to structure your verification.
Psychologist Dr. Laurence J. Stybel is cofounder of Stybel Peabody, an Arbora Global Company. The company provides "smooth leadership change" services for companies: retained search, helping high potential leaders reach the next level of effectiveness, and career management consultation. He also Executive in Residence at Suffolk University's Sawyer Business School.