Conan, Leno, and a Business Moral

Nice article in the Washington Post by business columnist Steven Pearlstein, asserting that NBC’s late night troubles are an analog for what’s wrong with American Business.

Among his observations:

It starts with the mind-set that puts short-term profit over long-term value creation….

Unable to come up with something new and fresh, NBC’s fallback — like so much of American business — was simply to do more of what worked, until it didn’t. …

For NBC, the decision to move Leno to an earlier time slot had nothing to do with the desires of TV viewers. Rather, it seemed like a clever solution to the problem of having promised the “Tonight Show” to O’Brien five years earlier in an effort to prevent him from jumping to a rival network. It’s a common mistake in business — letting key decisions be driven not by market demand but by the need to resolve internal conflicts. As NBC discovered, it rarely works out for the best…..

Truly great companies see themselves as part of a business ecosystem. They understand that their long-term success depends on having financially healthy suppliers and distributors, and take pains not to share gains and avoid profiting excessively at their expense. [There’s that Golden Rule thing again! – jbm]

But NBC forgot that wisdom when it decided to go for a strategy of low-budget offerings in prime time that would maintain profitability at the expense of program quality or ratings. It turned out that the new strategy posed an existential threat to the independent studios and production houses that networks still rely on to create their entertainment programming. And the smaller audiences that NBC was willing to accept for Leno’s 10 p.m. show translated into shrunken audiences for 11 p.m. news shows that generate as much as 40 percent of the revenue for local affiliates that are already reeling from the recession and competition from Internet advertising.

There are many other lessons to be drawn from NBC’s late-night debacle — on the shortcoming of industrial conglomerates (GE), on the difficulty of old dogs learning new tricks (Leno), and surely the one about sacrificing old products to launch new ones (O’Brien). You could probably construct an entire business school class around this case study in mismanagement.

Bone at the Top

Occasionally, company leaders just do the darndest things. Things like short-term decisions that wind up wrecking a company’s reputation long-term. Things that must make the company’s efforts to build a culture of ethics internally, just seem to its employees like so much window dressing. These bone-headed decisions set a “tone at the top” you don’t want. Call them cases of a “Bone At the Top.”

I came across two of them in the news this past week.

The first is a confession from the companies that sell re-filled propane gas containers for your backyard grill, that they have been putting less gas than they used to in the same sized gas canisters. As KYW-TV (Philadelphia) reporter Jim Donovan reported:

In the past you would take your empty tank and pay to exchange it for a full one.  But starting last summer, two big propane tank exchange companies, Blue Rhino and Amerigas decided that instead of raising prices they would put less propane in the same-sized tank. “The fact of the matter, those tanks weren’t full, they were partially full,” says Attorney Eric Gibbs, adding, “so consumers didn’t realize that they were getting 15 pounds instead of 17 or 18 pounds.”

This is worse than shrinking a 50 cent candy bar — you can see that. Now, I checked today at my neighborhood Lowes, and there was a sticker on the cage of Blue Rhino tanks saying they contained 15 lbs. of propane — but for that message to hit home I would have to (1) go to the cage and look at it (when to do the exchange you instead just walk into the store), and (2) remember that when I last got a tank, months ago, it had 17 lbs in it. But I don’t do either of those things. I hand them my old, empty Blue Rhino gas tank and some money and they hand me a different tank that feels heavier. It’s supposed to be an exchange, not a down-grade.

So maybe next time I’ll take my Blue Rhino canister over to my local farm-goods store, where I keep the tank and I watch them pump it full of propane. I get what I bargained for, and Blue Rhino gets its recurring-revenue business model severed. Short-term win becomes long-term loss. This may be more evidence, as I have mused before, that short-term executive thinking is unethical. It is certainly evidence that sometimes, the most ethical and transparent thing to do is just raise your prices.

It’s also possible that, as my family’s official Griller of Meat, I take this BBQ Propane thing a little too personally.

The second case is even more of a head-shaker.

It’s now been revealed that the National Arbitration Forum (the NAF) — one of the largest alternative-dispute resolution forums — is owned in large part by an investment fund that also owns a massive nationwide debt collection agency. I’m guessing the fund leaders thought they were making a nice, pure vertical play into the consumer debt collection sector: the ability to profit by being both the “prosecutor” and the “judge.” Now NAF has been on the receiving end of some awful press (like this and this and this) and a lawsuit filed by the Minnesota Attorney General (the Journal has a link to the complaint). The AG alleges as follows:

The consumer also does not know—and the Forum hides from the public—that the Forum is financially affiliated with a New York hedge fund group that owns one of the country’s major debt collection enterprises.  Beginning in 2006 and through 2007, Accretive, LLC (a family of New York hedge funds under the control of an investment manager named  J. Michael Cline and his associates), engineered two transactions.  In the first transaction, Accretive formed several private equity funds under the name “Agora” (meaning “Forum” in Greek), which in turn invested $42 million in the National Arbitration Forum and obtained governance rights in it.  In the second transaction, three of the country’s largest debt collection law firms (Mann Bracken of Georgia, Wolpoff & Abramson of the District of Columbia, and Eskanos & Adler of California) merged into one large national law firm called Mann Bracken, LLP.  Accretive then formed and funded (partly using federal money from the U.S. Small Business Administration) a debt collection agency called Axiant, LLC, which acquired the assets and collections operations of Mann Bracken.

Through these transactions, the Accretive hedge fund group simultaneously took control of one of the country’s largest debt collectors and became affiliated with the Forum, the country’s largest debt collection arbitration company.  In 2006, the Forum processed 214,000 consumer debt collection arbitration claims, of which 125,000—or nearly 60 percent—were filed by the law firms listed above.

Catch that? The NAF bills itself as a neutral forum, but it allegedly got 60% of its consumer debt collection cases from its sister companies.

The Minnesota AG filed her suit on Tuesday, July 14.  Less than a week later, on July 20, the NAF settled, and agreed that it would never, ever again handle a consumer arbitration. Said the AG, “The company will permanently stop administering arbitrations involving consumer debt, including credit cards, consumer loans, telecommunications, utilities, health care, and consumer leases.”

A broad, long term defeat, arising from what someone thought was a clever win. Ouch.

Want to know why the government is so hot right now on regs and statutes that impose mandatory disclosure or mandatory self-reporting of allegations? Consider this: at the heart of both of these instances of a “bone at the top” was the failure to fully publicize some key fact, to speak publicly about “the whole truth.”

But also consider the compliance teams at these companies, and their affiliates, who in the face of this news have to continue to tell their teams to reveal all possible conflicts of interest and play by all the rules. Problem: A Bone at the Top drowns out Tone at the Top every time.

The Tiger Stands Defender

I had the great fun this weekend of attending my college reunions at Princeton. Among the many pleasures there was seeing one of my college friends, a woman known then (and now) for her unflinching social activism. When we were in school, she was the most vocal and active of all students about eliminating the vestiges of sexism and discrimination from campus. She was thought of as a rabblerouser, and by many, a disloyal troublemaker.

Princeton Reunions are annual for every class, and their centerpiece is the P-Rade: each class, led by the 25th Reunion, then oldest to youngest, walks down the lane between all the classes younger than itself, each in our own Orange and Black regalia.

Although Yale has always favored
The violet’s dark blue,
And the many sons of Harvard
To the crimson rose are true,
We will own the lilies slender,
Nor honor shall they lack,
While the Tiger stands defender
Of the Orange and the Black

You gotta see it.

As the years went by, and my friend came to our annual reunions year after year, the crowds’ reactions to her changed from jeers to cheers. For a while, the classes younger than ours welcomed my friend as a conquering hero. More recently, she has simply become accepted, and the younger classes don’t particularly seem to notice her.

And my friend keeps coming back to Reunions, year after year after year, wearing her Orange and Black.

So here’s a nugget from my Reunions for people who run compliance programs and people who run companies. Sometimes, the would-be reformers, the rabble-rousers, even the vocal troublemakers, are the ones who are most loyal to your organization. They have the greatest passion, and they wear it on their sleeve.

When they are on your case, think long-term. Consider: are they out to destroy you, or to improve you. If the latter, they will never be apathetic or back-bite. If you show them the door instead of giving them a seat at the Round Table, you will have lost one of your greatest defenders, and one of the most important allies any leader can have — someone on the inside who will tell you when you are full of it.

Till then with joy our songs we’ll bring,
And while a breath we draw,
We’ll all unite to shout and sing:
Long life to Old Nassau.

“Shareholder Value” and short-term thinking

Can short-term thinking in a business leader be ethical… at least when the survival of the business is not at stake?  Isn’t there something intrinsically wrong about sacrificing the future for the sake of the present?

Valuing the long-term over the short-term is at the heart of a lot of messages that company management gives to employees about ethics.  When we say, “Don’t approve a shipment of peanut paste that you know is tainted,” we are really saying, “We don’t want you to sacrifice the company’s future reputation and sales for the sake of filling this one, immediate order.”

So not being hypocritical about that message in the top-level business decisions we make adds a bit of a challenge in maintaining our “tone at the top,” eh?

And so it seemed ethically obvious when Jack Welch told the Financial Times on March 12, that the “obsession with short-term profits and share price gains that has dominated the corporate world for over 20 years was ‘a dumb idea.’ Welch says now that the concept of “shareholder value” that he championed was never supposed to be a be-all-and-end-all.

According to the Financial Times:

Mr Welch said last week he never meant to suggest that setting, and meeting, profit expectations quarter after quarter in an effort to boost a company’s share price should be the main goal of corporate executives.

On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.”

At least, that’s what he says now.