The unusual title of this blog post is from a new book called The Chickenshit Club by Jesse Eisinger. The book’s subtitled is “Why the Justice Department Fails to Prosecutes Executives.”  The writer cites several reasons why this is happening.  First, U.S. Attorneys are concerned about their conviction record and shy away from tough corporate cases they could lose, thus the nickname chickenshit. The second reason is even worse. The belief is that a far too cozy of a relationship exists between the government attorneys and the white collar defense lawyers who defend the corporate executives. The issue is that many government attorneys end up working, for far higher salaries later in their careers,  for the very laws firms they have been fighting against.

I have written before that corporate Boards of Directors and senior management are reluctant or afraid to prosecute fellow executives who commit crimes.This is true whether it is internal fraud, breaking security laws or even violating the firm’s ethics or morality code such as with sexual harassment.   Firms are reluctant because it often involves going after one of their own. Firms are afraid because to bring criminal charges because they have to follow through and maybe even testify in court!

So, when you combine the U.S. Government’s unwillingness to charge and try corporate executives and the corporations own reluctance to even report issues to the authorities, what do we have? To paraphrase James Bond, it is a license to steal and commitment securities fraud!

I Hate fraud and especially Management Fraud by those who get paid a lot already. So what is to be done? The federal government is hard to change as we all know. But, if these issues become more known they could end up being debated in law schools and maybe the next group of U.S. Attorneys will handle themselves and their responsibilities better. The corporate problem gets back to another one of my pet peeves, corporate boards.  Board of Directors have to step up and show courage and leadership in properly discipling and prosecuting executives who behave badly. None of this is easy but the present lax attitude to corporate misdoing needs to change.

To paraphrase the Nike logo, Just Do the Right Thing! People’s view of business and government may actually improve.

 

Over the years, I have often been asked by younger people starting out, what second language should I learn? A great question and one to which I have discovered the correct answer can change over time.

When I was younger and working with Donn Corporation, we had international  businesses in the United Kingdom, France, Germany and Scandinavia. Since I was traveling several times a year to these locations, I really wanted to learn a second language. As I have often done when facing a new decision, I thought I would ask the experts what they thought. We had a French President, Chris and a German President Branco. On my next trip to Europe I had the following conversations:

Brad to French guy Chris: Should I learn French or German?

French guy Chris to Brad: Learn German because you can not trust the Germans!

Brad to German guy Branco: Should I learn French or German?

German guy Branco to Brad: Learn French because you can not trust the French!

Now I had created a Real problem. I safely chose Not to learn either language.

In the last two years we have travelled to Switzerland and to Paris and Brussels. The Swiss all speak 5 or 6 languages and excellent English. This year in Paris and Brussels we noted that almost everyone we came in contact with willingly and smoothly spoke English. This was not always the case, especially in Paris, but it is today.

Why do even the reluctant French speak so much English? It is not because they love Americans and certainly not the British all of a sudden. Rather it is because wherever we travelled in Europe we ran into huge groups of tourists from Asia especially China. And how do all these Asian visitors communicate in Europe? In English, of course.

Which leads me back to the question of learning a second language. Americans are lucky and blessed that English has become the international language of both business and leisure. But if a young American asked me today what language should they learn, my answer would be Mandarin, the most spoken of the several Chinese languages.  In the retail and hospitality businesses,  a young person who speaks Mandarin can get a job wherever they want to.

But there is another correct answer to this second language question. Young people around the globe should learn the language of Coding. Coding is what allows us to create and use computer software, use apps on your mobile devices, engage in social media sites like Facebook and to explore the web and visit websites. Technology is the future and Coding is the key to technology.

So that is my final answer, lock it in, learn Coding!

Not many firms have had the continued bad press as Uber has over the past couple years. Sued on their business and employment practices and then on their self-driving car technology. Employees filing numerous sexual harassment and discrimination suits. Now the private Board throws out the Founder and CEO, Travis Kalanick. Mr. Kalanick is a self-described bad boy who admitted before his firing that he needed help managing the company. He is also the person most people believe created and encouraged the firm’s toxic culture.

Uber has fired some twenty managers and brought a couple female executives on board. But all of these measures may be too little and too late.  So what is Uber to do?

Leadership and Culture are the flip side of each other. What Uber needs is not only a new CEO but a new senior management team. Uber should also replace most of the Board, especially the long time Directors.  Mr. Kalanick is no longer CEO but he was allowed to remain on the Board, which is another mistake. Why? Because it will take a new CEO, senior team and Board to create a new corporate culture. This is not an easy or a quick thing to do. Leadership starts at the top and that is the Board. If the existing Board could not figure out the many legal problems and ethical missteps that Mr. Kalanick and his team were subjecting the firm to, they need to be replaced. Actions speak much louder than words. And major cultural change, in this and most cases, must start at the top. The Board is who everyone in a company look to for guidance.

Uber is often cited as an example of industry disruption as taxi cabs are disappearing. But Uber has other capable competitors like Lyft. These competitors may find a way to gain an advantage while Uber tries to rebuild both its Leadership and Culture. We will see if Uber can truly change and survive.

Two recent articles in the Wall Street Journal raised some new thoughts about Boards of Directors. This, often little understood group, technically manage the biggest public companies. I have written before on the lack of attention and professionalism of some corporate directors and I keep hoping this governance area will improve! Here are a couple ideas that might help.

One article dealt with the growing trend of large investors, like hedge or private equity funds, who buy a block of a firm’s stock and then trying to force the company to elect a number of their nominees as directors. On the surface the concept sounds good and a way to shake up underperforming  firms. But here is the catch. The people nominated by the outside investor are not subject to any review or disclosure of their positions on critical matters that might impact the target firm. They are just listed as part of the slate of directors that the investor wants. So the shareholders who are asked to vote for the new directors do so with very little useful information. The Journal article suggests that these nominated directors appear at public forums with independent moderators or even some of the current directors to debate views. To make this work the very large institutional equity owners like Fidelity or the California Pension funds would have to insist on this additional step before voting. I really like this idea!

The second article rethought the current trend of having only one corporate officer like the CEO on the Board with all outside independent directors. The concerns here are twofold.  First, in large and diverse businesses the entire board might benefit from more internal knowledge especially during a crisis or new initiative. For example if the firm is about to launch a huge capital or technology project, another corporate officer on the Board might add a lot.  Second, if the Board has only one insider and something happens to that person-health or an unexpected dismissal- the other outside directors may be at a loss as to name their replacement. So the thought is on a board of 10-12 directors having 2 or 3 inside officers might be best. Again this seems like a worthwhile idea.

So as I have said before, the buck stops with the Board of Directors. All the officers report to them and the Board represents the mass of shareholders. The more knowledge shareholders have about directors the better and the more directors know and are comfortable with the senior officer group the better as well.

Linkedin just had an article about the best places to work today. The usual suspects are listed: Google,  Facebook and Amazon and some newer, and surprising  ones to me,  Uber (lots of bad press and legal issues)  and Tesla (who makes no profits and may run out of money, not gas.)

But was really struck me was how few of the top companies even existed 25 let alone 10 years ago! The ones that remain have changed a lot: Time Warner (magazines to cable), JPMorgan (a dozen mergers later started as Chemical Bank) and Disney which looks like it may be around forever and never age like Mickey Mouse!

Fortune magazine had an article that stated that 88% of their 500 largest firms from the 1950’s are gone and predicted that 40% of today’s largest firms will be gone in 10 years.

Since I constantly advise graduates and young people where to work, this got me thinking. People used to get a job right out of college and then retire there 40 years later with a good pension. None of this is true today for millennials.

In my book, I stressed that as one moves up in their careers, they needed to study beforehand the leadership and culture of the next company they wanted to work for to try to gauge their personal fit and thus improve the chance to succeed. Now I believe that even graduates and young working people need to do this plus reading all they can about their targeted potential employer. What is their overall strategy, how sophisticated are they on technology and social media, are they well financed? And is their own business model sustainable or will they be the next industry subject to what we increasingly call disruptive innovation, like Uber to taxicabs?

Even though young graduates may work for a half dozen or more organizations in their career, they need to try to look down the road to try to figure out if their next employer will even be around! I believe this new group of millennials are better equipped and more comfortable, than my generation ever was, to research and analyze all the available, on-line information that now.  After all it is their future world. This may also be one of those few areas where most well meaning parents are just not able to help. Looking for your first job or your next job has always been difficult and in this rapidly changing world it just got harder!

USA Today had an article about the world’s largest hotel company, Marriott, using factory produced modular construction to build up to 50  of their hundreds of new hotels this year.  The guest room and/or the bathrooms are produced in a factory on a production line and then transported to the prepared construction site where they are erected by cranes. The plumbing, electrical and finish work then occurs. The theory is that this method of construction can reduce the time it takes to build a new hotel by several months. Thus, the hotel opens sooner and can make a higher return for its owners.

Is this new, you might ask? No, like most things in this world it is not new. In my book, The Business Zoo, I tell a similar story that occurred forty years ago. My old company, Donn, signed a deal to build one of the first modular hotels for the world’s largest hotel company, Holiday Inn. Our U.S. government even got involved to promote low cost housing  through the new department of Housing and Urban Development which was headed by a George Romney, father of, you guessed it, Mitt. The belief was that factory produced,  modular construction would revolutionize and change conventional, on-site construction forever.

What happened to this bold experiment those many years ago? It did not turn out so great. The timetable took just as long as conventional construction. The idea of just hooking these up on the site was a disaster with a lot of additional work required. And my old firm, Donn, lost several million dollars when that was a lot of money in general and specifically for a small, private business. The big company, Holiday Inn, did end up with a nice hotel, but having learned a few lessons, stayed away from modular construction. Modular construction never totally disappeared but it certainly did not replace or change the way hotels or apartments were built.

Will this new attempt be more successful? I am not sure. Construction  is one of our most localized industries. Local zoning and building codes vary by community and can offset some of the anticipated factory produced savings.  Construction is one of those businesses that are still highly unionized which can also impact costs and building codes.

What I do find fascinating is how sometimes business, like other things in life, goes around in a circle. Modular hotel construction in the 1970’s repeats four decades later. Sometimes the patterns and the results are similar and sometimes things change. The space shuttles of the 70’s now are replaced with Elon Musk’s rockets aiming for Mars but we really have not gone very far in space in all that time.

The famous writer George Santayana said, “those who do not learn from history are doomed to repeat it.”  Mark Twain said, “history doesn’t repeat itself but it does rhyme”.

I say,  there are a lot of Circles in both business and life so be careful out there!

The Wall Street Journal recently reported that my city of Chicago has the most tower construction cranes (56) in use anywhere in North America. This was a result of a survey by the Crane Index (Yes, there is such a thing. If there is a Duck Dynasty why not this!). But what is also interesting is that over half of those Chicago construction cranes are building residential apartments and specifically luxury residential apartments.

And just who are these luxury rental units aimed at? Millennials, of course. This trendy group of young adults, aged 18 to 34, have the lowest percentage of home ownership of any generation since these types of records have been kept. Why is that? Experts comment that the reasons include the high cost of homes, tighter credit rules and the fact that many Millennials still live at home. But an overriding reason seems to be that Millennials do not view owning a house as a required or good, social or financial investment. So they rent.

And what kind of luxuries do these luxury rentals offer Millennials? One of the newest places is called Wolf Point and is on the Chicago river. On the 46th top floor, is a sky deck and lounge, an outdoor kitchen, a fire pit, sauna and steam room, outdoor tv and a state of the art fitness center. On the main floor is a large pool, a river front lounge and gallery, golf simulator in the club room, a business center, a dog run and spa, and a bike room with a wash area and a workshop! I know what you are thinking 1. Why is he writing so much about this? (I will get to that) and 2. Where can I sign up!! Well there is a catch or two. Because the building offers you so much wonderful stuff there are trade offs. A one bedroom is 678 sq. ft. with two small closets and very small rooms and goes for $2,555/ month. But you won’t be spending any time in your small apartment, you will be having fun somewhere else in the wonderful building!

One of our friends is involved in the financing of these new high-end apartment buildings. He told me that those in his industry are getting increasingly worried. What if the Millennials decide to get married and have kids and move to the suburbs like earlier generations? Older, downsizing seniors will not find much about these units appealing since their favorite couch and king size bed will probably not fit. The result is a lot of empty luxury apartments!

So why did I write this blog? First, I find Millennials fascinating. There are more of them than my Boomer Generation and they are the future of our country, not us. Second, figuring out long lasting trends in critical areas such as housing is very important to our economy. But is this a true long term trend or just a short term passing fancy? Third, for those who know me and my background in construction, you know what comes next. Every time we have a boom in any type of construction-schools, offices, apartments- it is followed with a long bust. And because construction, building materials and related furnishings are such a large part of our economy it really worries me that Chicago has all those cranes right now because I know the sky will be free of them in a couple years as the construction cycle swings,  the economy slows and the stock market drops.

And lastly, my Boomer group owned homes well before age 30. If the Millennials do not start with a first home soon they will never get to the point in life where they will want a second home. Then what happens to all the weekend second homes in Michigan, Indiana and Wisconsin? And what about all the seasonal, second homes in Florida, Arizona and Vegas? The result is again a lot of empty and unsold second homes. Again bad for the economy.

Note to readers: We just sold our second home in Florida and not to a Millennial!

The Wall Street Journal had an article recently about the former CEO of the “doomed brokerage firm” MF Global testifying that his firm relied on their auditors, Pricewaterhouse Coopers to “make sure its finances were accurate.”

The former CEO is Jon Corzine, who was the former Governor of New Jersey and before that the former head of that famed Wall Street firm, Goldman Sachs. Mr. Corzine agreed to pay a $5 million fine to settle his role in MF Global’s collapse. For a person whose net worth is estimated at around $300 million, this is not even a slap on the wrist.

A number of articles from Vanity Fair to the New York Times have been written about the collapse of MF Global, and the fact that neither Mr. Corzine or any other officers or directors were charged with a crime. It has been suggested, by others, that it may be due to the fact that Mr. Corzine was a major contributor to President Obama and the Democratic party. But I will not venture into politics, but rather just stay with business.

As an investment banker with Goldman Sachs, Mr. Corzine certainly understood what role auditors perform for all his many clients. The role of an outside auditor or CPA firm is to examine the books and records of a firm and issue an opinion on the fairness of the financial statements taken as a whole. To perform that work, the outside CPAs rely, in large part, on the expertise of the firm’s Board and senior management. Others have stated that it was Mr. Corzine and his team that made the huge bets, with their clients’ money, on sovereign debt instruments that caused his firm to fail. And, in this case, the CPAs were relying on the former head of Goldman Sachs, a man that Joe Biden called “the smartest guy he knows, in terms of the economy and finance.” (That was not meant as a political comment as I actually like Joe!)

In my book, The Business Zoo, I cite a lesson I learned from investment bankers- “share the pain”- which means all parties to a bad deal should participate in cleaning up the mess. I am guessing that may be what is motivating Mr. Corzine as he is testifies against Pricewaterhouse Coopers or PwC. Poor PwC is having a hard year already with the Oscars and now this $3 billion lawsuit.

Jon Corzine and his team took a huge gamble with their clients’ money and lost. The PwC auditors  provided his firm with accounting advice not investment advice. Boards of Directors, the Chairman/CEO and Senior Management should be the responsible parties when a firm fails.

So, Corzine, the former CEO, pays a nominal fine, but then tries to stick it to anyone else who came near his bad deal. Sometimes, capitalism and our legal system punish the wrong people. Not fair.

News Flash! The Wall Street Journal now reports the lawsuit against PwC was settled out of court for an undisclosed amount. In my opinion, any amount over Mt. Corzine’s meager $5 million fine is still not fair.

Most of this blog’s readers know that I am an Accountant. Trained in school as one, practiced as a CPA, and willing to proudly explain, at the drop of a hat or visor, the difference between finance people and accountants (which ranges from golf skills to dealing with details).

Over the years, my blog has touched on various aspects of accountancy. These have included the need for accountants to become more strategic and big picture oriented. And the fact that accountants get hired out of college at a much higher rate than general marketing or communication majors. I even advise young people going to college to consider accounting as a career.

But now there is a major crisis! The Wall Street Journal reports that there is a major shortage of accountants for firms to hire. Obviously the young people going to school have not been listening to me. Companies, such as Johnson and Johnson, took a year to fill a junior accounting position. The unemployment rate for experienced accountants and auditors is listed at 2.5%, about half of the unemployment rate for all workers.

But the news is not all grim. Schools, not just me, are pushing accounting as a career and recently the number of accounting graduates hit a record level, which was up 7% from a few years ago. Major accounting firms like PwC are encouraging high school students to enter college accounting programs. PwC probably has a couple job openings due to their “performance” at the Academy Awards this year!

But, in all seriousness, accounting is a great career for any young person to consider. Some people ask me, don’t you need to be great at math? Answer, no. Accounting is more about understanding concepts and how to view numbers, than it is to work with numbers. And, as I have said before, all businesses need accountants-small, private ones; big, public ones; even government and not-for-profits. All organizations have budgets, financial records and reports and thus need accountants.

Go for it!

 

 

The Wall Street Journal just published a new article on this subject. A huge money manager, State Street announced it would vote against corporate Board members who are part of company’s nominating committee and do not add women to their Boards. State Street is also placing a statue of a young girl on Wall Street where she will stare at the famous Bull. (I did not make this up!)

In a review of the Russell 3000 index of companies, a quarter of firms have no female directors and over half of the firms have under 15% of women on their Boards.

In my book, The Business Zoo, I commented on what I called the One Third role of Board members. One third of Board members should not be on Boards at all due to lack of valuable background, age or being too busy on other Boards. The second One Third had the potential to be qualified and contribute but for a number of reasons did not; not reading the Board materials ahead or ever making a worthwhile comment. The final One Third led the Board and did a great job.

In my day we only had one or two women on a typical Board of 10 to 12. The women Directors were always in the best One Third category.  Why was this? Did they consider it an honor and a duty to service a firm which was paying them a lot of money? Were they younger and had much more energy and focus? Did they, as women, just work with other people better when given a chance? Of course all of these reasons are true. In fact, State Street’s research shows that in the last five years, Boards with at least three women Directors outperformed those companies with no women Directors. No surprise to me.

So how do we end up with more women on corporate Boards? I am not big on the statue. I do agree that voting pressure on companies and their Boards can help. Boards all have committees to nominate and elect new directors. Most of the committee members are men who nominate other men who they know. The existing women on Boards need to exert some pressure themselves and get on these nominating committees. Then not be shy about suggesting other women. And they can point to studies that show that Boards with more women directors can drive success and higher stock values!

Add on note: I really appreciate everyone who reads this blog and who bought my book on Amazon. I have received some wonderful feedback and am now starting on a second book!

Brad