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The Wall Street Journal wrote that the giant Japanese tech firm, SoftBank and some others, are investing  a billion dollars in a three year old Silicon Valley firm. That part does not sound unusual. What is unusual is that the firm receiving the funds is Katerra who is in the factory produced construction business. Katerra describes themselves as a “technology company” who believes they can revolutionize housing and commercial buildings by using an assembly line to design and control everything. They have stated that by the end of 2018, they can build a house in 30 days versus a year conventionally.  Wow!

And Tesla, some year, will be selling tens of thousands of their cars once they learn how to make them! Sorry, that’s another ongoing blog.

So far, Katerra does not report actual financial results but it claims over a billion dollars in “bookings” (not sales) to date but much of that has been with an affiliated developer. Hmm.

As readers may recall, we have seen and written about this circus before. My old company Donn lost a lot of money on this approach decades ago. I also wrote last year how Marriott Corporation is focusing on this as a way to lower construction costs and speed up the timetable to open new properties.

The article does point out some of the issues to making factory produced construction a reality. The construction industry is still very, very local in nature. Construction building codes vary, state by state, county by county and even city by city. Unions are a very complex factor as they are potentially losing work for their people. And although there are more national builders today, there are still a lot of small, local builders.  And that doesn’t cover the cyclical nature or interest rate sensitivity of construction, etc.

Having been in the building materials/construction industry most of my career, I would remind SoftBank that this is a very tough business that doesn’t change much or very quickly. But, then again, so was the taxi cab business. I am just not sure that “technology” is going to change construction in the same way or in the near term future.

The Wall Street Journal recently ran a story about the government’s watchdog, the SEC, having concerns about the quality of audit reports issued by one of the Big Four CPA firms, KPMG. This resulted in an indictment of several people. What the government noted was poor audit quality based on their review. Big 4 CPA firms have also been charged with fraud in other high-profile cases. In fact, government test audits of all the Big Four firm’s work show that about 25% of all audits were what they call, “deficient”.

The issue is that investors rely on the outside auditors to check the accuracy of a firm’s financial reports. The SEC and the federal government has focused on this since the bankruptcies and accounting scandals involving Enron and World-Com in the early 2000s. And the Big Four CPA firms audit almost all the public firms in the Standard and Poor’s 500. So, this is not a good thing, no matter how you look at it.

As a former CPA in public accounting and a former CFO who worked with auditors for  decades, I have some thoughts for the Big Four CPA firms.

Training is first. Accounting firms send their new staff to a couple week training program. This is nowhere near enough. When I was an entry level staff person, I understood very little about internal controls, proper procedures, and really the whole auditing process. It took into my third or fourth year before I felt comfortable. More hands on training ever few months would have helped even though this is expensive.

Supervision is next. CPA firms have a very clear hierarchy of command where each layer above supervises and reviews the work of those below. The Senior on an audit might have a handful of staff reporting to them which does not sound unreasonable. But the Senior auditor also has work only they can do, like taxes, and rarely has enough time to supervise and help train their staff. Managers supervise Seniors but a bunch of them at once on often very different types of audits. More time needs to be allocated for review and supervision so that audit quality can improve.

Finally, we need a clear and mutually agreed understanding of what an audit is and what it is not. Audits are not meant to detect fraud yet many people believe they are. If fraud is found, however, it must be reported. As the government completes all these test audits perhaps the expectations versus the deliverables of an audit can become less fuzzy.  We also have whole new issues these days with technology,  cyber crimes and data security that did not exist that long ago. The responsibility of the auditor needs to be re-defined.

All of these items will take more audit time and thus audits will cost more. That will  become a reality. Historically, audit clients put constant pressure on their auditors to lower their fee. Going forward, if we want to improve audit quality and significantly reduce deficient work, audits will cost more. The investing public deserves it.

As recently reported in the Wall Street Journal, Warren Buffett just announced a new management structure for Berkshire Hathaway. This occurred, in part, to prepare for succession once Mr. Buffett is gone. When discussing one of the new leaders, Ajit Jain,  Mr. Buffett stated that if he, his longtime partner Charley Munger and Mr. Jain were stuck in a sinking boat, the most important person to save would be Mr. Jain!

This is not the first time I have heard of the Life Boat Theory of management.

Gene, my old boss and mentor from USG Corp., had a theory and a story about everything. And most of these contained valuable lessons about leadership.

After my company, Donn, was acquired by USG, they combined us with their similar businesses to form USG Interiors. Nothing about this merger or combination was going smoothly especially the people part. So, USG’s Chairman decided to move Gene in as Interior’s CEO which made him my direct boss.

The Donn business and its managers were still headquartered in Ohio at the time.

Gene decides to fly to Ohio for a day to meet Donn’s key people and see our operation. As the CFO of the former Donn and now Interiors, I am asked to organize this important trip. No problem.

I create a detailed agenda. I will pick Gene up at the airport and spend a little time. Gene will then meet, in half hour intervals, the other key Donn people and tour our facilities. By late afternoon back to the airport.

Except Gene decided to spend the entire morning with me which forced the whole agenda to compress.

Although I knew many of the senior USG people from their purchase of Donn, I had never meet Gene. Apparently, he had heard a lot about me! During the couple of hours that we were alone, we had a very frank conversation about everything that was going good and mostly not good with this new Interiors business.

By the time we rode back to the airport, Gene and I had gone from relative strangers to sharing mutual respect and even trust. Gene then ask us to move to Chicago where I could best handle the Interior’s CFO role. We made the move and never regretted it.

But what about the Life Boat Theory?

After we moved to Chicago,  Gene and I were working very well together.  One day I ask him why he spent all that time with me that first day in Ohio.

Gene smiled and said it all goes back to his training as an officer in the Navy. If your ship is sinking, each officer is assigned to be in charge of a certain life boat. Whatever roles the crew played in normal times are now dramatically changed. And as the officer in charge of a life boat, you need to decide not only who you want on your boat but also which order you will try to save them from drowning. And again, the skills one had on the main ship may mean very little in this new crisis.

So,  that first day that Gene and I spent time in Ohio, he was trying to figure out if I should be the first one he wanted in the Interiors life boat with him.

I was always grateful that I passed that test.

And, as with many things I learned from Gene, I used this several times in my career.

It does not just apply to a management crisis but to any major transition that occurs.  A major financial restructuring or downsizing could cause you to re-evaluate your priorities and your team. In USG’s financial crisis, a whole new group of senior business and financial managers were chosen. Starting a new job at a new firm can also lead you to quickly evaluate and rank the team you inherited. When I was hired as the CFO at IMC Global, I had to orchestrate a major bank and bond financing without a Treasurer in-place.

Just like in Gene’s Navy life boat story, at times in business and life, you need to quickly choose the best team for the situation that can help save you and your firm!

Gene never met Warren Buffett, but they would have gotten along very well!

The Journal of Accountancy (yes, there really is such a publication) had an article about the Securities and Exchange Commission (SEC) bringing and enforcing fraud cases over the last decade. The largest cases involved either improper financial reporting or violations of the Foreign Corrupt Practice Act which deals with bribes to international officials. Not surprisingly the financial services industry had, by far, the most cases and fines followed by natural resource and energy firms (think mining and oil and gas).

But what was very surprising, and more than a bit disturbing to me, was who the SEC prosecuted and fined.  Corporations themselves were at the top of the list which made sense. But, what did not, was that Chief Financial Officers (CFOs) were second followed by a firm’s Chief Executive Officer (CEOs) as a far distant third. Worst of all was that the Board of Directors were barely fined at all! Now, I know I was a practicing (and never indicted CFO) and I know CFOs certainly play a major role in a fraud of any kind. But, let me tell you this: nine times out of ten when a CFO does something bad, his or her CEO not only knows about it but probably pressured the CFO to cook the books in the first place! I could understand if CFOs were fined a bit more than CEOs, but not ten times as much in this study. CEOs are always responsible and often behind what goes on, period.

And, the Directors in these firms should have know something was going on! I have written on several occasions about the often limited involvement or usefulness of many members of Boards of Directors. But remember the corporate officers from the CEO to the CFO all report to and are responsible to the Board. The buck, and on average, $250,000 per year of bucks for large company directors, stops with the Board.

As many readers know, I hate fraud and especially fraud committed by senior managers who are paid a lot of money. So I am all for prosecuting and fining those who commit fraud. But if the SEC and the U.S. Government focus the bulk of their efforts on CFOs and almost ignore CEOs and their Boards, the occurrence and magnitude of fraud will only continue and probably get worse.

Think of this like a National League Football team. When a team, like my Cleveland Browns go winless, they fire the coach. When the team only wins a few games in several years, you fire the General Manager, the Director of Player Personnel and everyone but the Owners. So, in corporate terms, when major fraud occurs, fire the Board. This is how you send a message and how things might have a chance to improve in the future.

A most usual title for my blog but I will try to explain.

We recently returned from New Orleans where we were fortunate to tour the relatively new World War II Museum. It is located just a short walk from Canal Street and the French Quarter. The Museum consists of several buildings, was financed by private funds and has quickly become one of the most visited museums in the U.S. As a history fan, I willingly signed up for our group’s tour but I was totally blown away by the experience. We walked through interactive, multi media rooms that traced the war in Europe and then the war in the Pacific. We ate lunch in their Canteen hall listening to three women singing both popular and patriotic songs from the forties. We ended our tour by watching a large screen movie narrated by Tom Hanks titled Beyond All Boundaries. Here are some of the takeaways.

Geography involved: Germany and Italy conquered most of Europe and Northern Africa. Japan conquered most of the Pacific Rim including the coastline of China and all the islands just north of Australia and New Zealand. This really was a world war versus the regional conflicts of more recent history.  The color maps at the Museum are amazing.

Casualties: 65 million people, military and civilian, died in this war. The most casualties were our allies, at the time, Russia and China with well over 10 million each. Germany and Japan, mostly from bombing by the U.S. and our allies, lost about 10 million in total. But beyond human deaths, entire towns and countries where destroyed.

Race: Both Germany and Japan believed that they were a superior race to those they fought. Japan’s Emperor was considered God. Germany not only executed Jews but also a number of other ethnic groups. The U.S. locked our own West Coast Japanese citizens in interment camps or allowed the young men to fight, often heroically in Europe. Our African-American troops were segregated and fought with honor when given the opportunity, such as the famed Tuskegee Airmen. Wars are fought for many reasons, such as economic gain,  but race or religion are often used to motivate people to this day.

Patriotism: In every exhibit you learn remarkable stories of the men and women who participated in the war. Women, like my mother who was a WAC, trained men and flew planes and supplies to our troops. In Europe, the Battle of the Bulge was Germany’s last major offensive campaign that almost worked. In the Pacific, critical island battles like Midway and Iwo Jima turned the tide for the U.S. and its allies. Heroes emerged everywhere.

But maybe the most fascinating thing happened at our lunch in the Museum Canteen. There three young ladies sang the Star Spangled Banner, America the Beautiful and each of the military services theme songs. EVERYONE stood up the whole time and applauded.

In conclusion, a couple thoughts. Go to New Orleans and see the WWII Museum. Take your kids and grandkids from high school age on. And, to quote several of my friends on the tour, if you know any NFL football players, encourage them to go as well!

 

 

 

One of the business blogs I follow is the Leadership Freak by Dan Rockwell. Dan had a post about the importance for Leaders and Managers to learn to say No. He cites the fact that saying Yes is much more popular in corporate America, as it tends to please people, while showing a willingness to try new things, etc. But No can be equally powerful.

So this got me to thinking about my own career and the power of Yes and No.

When I was a young, senior financial person at the private firm, Donn, I worked  with many older, operating people and the firm’s owner and his family. I found myself almost always saying Yes to try to please or impress these important peers or superiors. Of this group, one of the most famous and demanding was Branco, Donn’s European President. In my book, The Business Zoo, I tell a story about how skilled and smooth Branco was at getting his way. That story illustrates that Branco was a Grand Master at wining and dining, which was his preferred way to get things done.

After a while, Branco and I became friends and although he was always insistent on getting his own way, at times he gave me some advice. One day he told me that my problem is I cannot say No to anyone! An ironic comment from him, but very true.

I started to look at the world in a much healthier and useful light. I learned that there were times that, for the company or my own mental or moral well-being, I had to say No. But most importantly I learned how to say No without getting people upset, perhaps by suggesting an acceptable (to me) alternative approach. That made me a much better manager and leader. The Yes and No’s need to be in a balance that works for you.

And Branco? Sadly, after he retired he asked me for something and I said No. After that he quit talking to me. Branco will return in a story or two in my second book. Stay tuned!

The Wall Street Journal had an article called “AT&T to Keep Time Warner’s Culture.” This refers to the proposed acquisition of the media firm by the  telecommunications firm. The deal is currently being challenged by the Justice Department. The article goes on to quote the CEO of AT&T saying he is “not a media tycoon” and he does not want to “screw it (Time Warner’s culture) up” by bringing them “a telephone company culture”.

Then the Journal had an interview with Amazon’s second in command, Jeff Wilke. In talking about their recent acquisition of Whole Foods, he said that Amazon “works hard to respect cultures that have been successful,” but that perhaps they can “help” Whole Foods with “resources, ideas and maybe IT services that Amazon has.”

This all sounds very smart and maybe even noble, but sadly, it will probably not play out this way for one or both companies. The larger, acquiring firm almost always screws up the leadership and culture of the smaller firm they spent a lot of money to buy. AT&T has offered $85 billion for Time Warner; Whole Foods cost Amazon $14 billion.

In most acquisitions, within three years two-thirds of the senior management of the acquired firm are gone. The Chairmen/CEOs go first, sometimes immediately with a huge payout for their stock and retention bonus (often equal to three years total pay.)   Sometimes they hang around a couple years to collect an additional bonus. But Chairmen/CEOs go fast followed by their key reports. With these people goes some of the knowledge and value that the acquiring firm paid for. And after the senior leaders are gone, the culture of the company starts to fade away as well. Leadership and Culture are, after all, the flip side of each other.

Why do smart companies willingly or sometimes subconsciously change the successful culture and leadership of the firms they spend a fortune to buy?

First, the acquiring firm, by definition, is the winner in the deal. Thus, they believe that their systems, procedures, people and business strategies are far superior to the firm they just acquired. When the accounting firm PricewaterhouseCoopers took over the legendary consulting firm Booz, the PWC people felt they were in charge, regardless of the rich 100 year history of Booz.

Second, the acquiring firms have lots of staff that are dying to “help” the firm they just took over. From Information Technology to accounting to Human Resources to legal, etc. etc., there are plenty of people who just want to “help.” The building material firm, USG Corporation, acquired my old Donn Corporation which was one tenth its size. USG setup 24 committees to “help” integrate Donn into USG. Donn was a loosely structured, oral culture company with few charts and procedures. USG was much the opposite. A few years later only three of the top dozen Donn leaders remained.

Third, strategies and circumstances change rapidly in business. An old friend said that large firms can change core businesses and strategies faster than people change their underwear. Honeywell just announced that they will spin off two large business groups with $7 billion of sales, so that they can focus more on their core businesses, the remaining $30 billion. Ironically, the original Honeywell business, thermostats, will be spun off with a number of businesses that were acquired in more recent years.

In closing, having been both an acquirer and one who was acquired, I would like to wish the Time Warner and Whole Foods leaders and their culture the best of luck! Things will never really be the same. It will help if you keep in mind that your firm sold and those other guys bought. There are winners and losers in deals just like in everything.

 

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.