Joe’s Journal: On Booms and Crooks

“It is easy to look good in a boom. But also, every boom — and I have lived and worked through four or five — puts crooks in at the top. In January 1930, my first assignment as a young journalist was to cover the trial of the top management of what had been Europe’s biggest and proudest insurance company, who had systematically plundered their company — and so it goes after every boom. The only thing new is that the last boom considerably increased the temptation to fake the books — the exclusive emphasis on quarterly figures, the overemphasis on the stock price, the well-meant but idiotic belief that executives should have major financial stakes in the company, the stock options (which I have always considered an open invitation to mismanagement), and so on. Otherwise there’s no difference.”

— Peter F. Drucker

This quote is from an interview with Peter Drucker in 2003 when he was 94. It was after all of the Sarbanes-Oxley issues, but that still didn’t change anything. History repeats itself.  But this would not have surprised Peter; he knew a great deal about history. It was his resource, his strength. The new scandals he was referring to were the 2002 system meltdowns with companies like Tyco, WorldCom, Enron, Halliburton and so on. The question is: Are there a few bad apples that spoil the others, or is there something the matter with the barrel? I think it’s the latter. It’s human nature, and yes, “It is easy to look good in a boom.” Peter had worked for well over 65 years at this point in time and had a longer perspective on history and so that’s what he saw, “crooks at the top.” He saw the tricks that these companies were using like off-balance sheet entities and encouraging employees to tie up retirement funds in company stock. Bernie Ebbers at WorldCom was practicing accounting tricks to make the company’s profile look good, and they were not even very sophisticated tricks. He received a 25-year prison sentence, and the Congress passed Sarbanes-Oxley Act of 2002.

[EXPAND More]As we got into the 2008 credit meltdown we were reeling from the effects of unbelievably poor decision making from households on up to the banking system, government agencies and the Federal Reserve. It’s hard to call people crooks in print, but Goldman was charged with fraudulent behavior for the way it dealt with financial instruments that were products of packaging and re-packaging mortgages. The firm ultimately settled without admitting any wrongdoing, so we cannot say Goldman was guilty. The government had to respond to the situation, and in a typical fashion when there is a problem, we think the answer is another set of rules — in this case, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. We never think the answer is to fix the crooks. Moral rules are subordinate to moral attitudes. We can make all the rules we want, but if you’re dealing with people of questionable character they’re going to find ways around the rules. Drucker knew that rather than focusing on moral rules, we should work on integrity in management. That is why he called it the essence of management. He also knew that he and we have to be realistic; that we as human beings struggle with our angelic and not so angelic sides.  We would do well to educate ourselves about history and human nature, and then we will not be surprised when the next major scandal breaks upon us.

— Joe Maciariello[/EXPAND]