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How the New Science of Happiness Can Change Your Company for the Better

This chapter presents and analyzes an example of an "unhappy" company before presenting the key to running a "happy" company that responds to crises with positive solutions.
This chapter is from the book

What follows, with only a touch of dramatic license, is a true story. The details have been changed to protect the not-yet-indicted.

Three days remain in the quarter. You stare at the clock as if pure concentration can reverse the ticking of the minutes and hours until the reporting period closes. The cold, hard lump of dread settles in your belly: You will not make your numbers. This is not a fact that Wall Street will want to hear, not after your optimistic projections just six months ago that shot up the stock price four and a half points. Bad results now, barely halfway into the fiscal year, and the Street will hammer the stock. Never fool Mother Nature, or stock analysts.

But Wall Street will not be the worst problem. The board will ask probing questions. Your hard-won performance bonuses will be out the window. The board’s executive committee might dig into the sales analyses and realize that not only have sales not been increasing, but they also have been on a slight decline. Truth be told, you made your numbers the first quarter of the fiscal year only because of the heroic efforts of the sales staff. But those efforts to bring sales forward have left the pipeline empty. No amount of haranguing the vice president of sales or his staff will generate any more bookings.

Your head hurts. You feel a fluttering in your chest, a bit of constriction when you breathe. Just a little stress-related hypertension. ("Nothing serious," the doctor said, "at least not in the short term.") You go to the executive washroom and splash cold water on your face. There are dark circles under your eyes.

This is what it’s like at the top, you think. The loneliness of leadership. Just at the point when you have achieved your dream of running a company, at the point when all your striving and sacrifice have finally paid off, the tail end of the recession is going to cost you everything. To come this far and end up the victim of a lousy sales environment (or so you tell yourself). You look out the window. It’s a beautiful day, but the campus lawn could be a wasteland for all that you can appreciate it. Your mind is whirling and blank at the same time. Neither a cloud in the sky, nor an idea in your head. 30 years in the business, and you see no way out. Except one. A little trick you used a time or two when you were in sales. A little trick that you suspect your VP of sales has used a time or two himself. Why ‘fess up to the shortfall when you know you can turn things around, given enough time? Why let some other schmuck come in and take credit just at the moment when things would have turned around for you? You have worked too hard, come too far to lie down and quit. You are going to fight for your job and your company.

You get the VP of sales on the line. And the chief financial officer. They are both long-time associates. Their careers are as much on the line as yours.

*   *   *

24 months later

Three days remain in the quarter. Your VP of sales is in your office, along with the CFO. When they’re not yelling at each other, they’re yelling at you. You will not make your numbers this quarter. The nothingness you felt—it seemed like only a few weeks ago—has turned into a brick wall, one that you’re hurtling toward at a hundred miles an hour. A couple of months before, several unidentified employees alerted the board to potential "irregularities" in the financial reporting. The board has launched an investigation. The problems began with your "trick," when you called up a couple of big customers and sweet-talked them into placing orders in exchange for hefty discounts. That saved one quarter’s results. But in succeeding quarters, the discounts became more common and grew larger. Funny how fast the customers caught on. Just delay orders until the last week of the quarter and the customers would get a call offering the latest "one-time-only special." Then it took discounts plus extremely lenient credit terms. Then it took off-the-books deals with distributors (another form of discounts) to keep the sales flowing.

When those tactics were not enough, you began to book sales that were not quite "done," back-dating documents as needed. "What harm was there in advancing a real sale by a few days on the books?" you had thought. First it was a few days, then it was a few weeks, and then it was creating entirely faux sales to cover the ever-widening deficit. By now, the discrepancy between the reality of sales and the fiction of the financial statements has become what the CFO calls an "arbitrarily large number." The results of the board’s investigation will not be known for a few more weeks, but you know in your heart the game is over. Check and mate. The issue is no longer the stock price or bonuses or even keeping your job. It is the hope that the board will not turn over its findings to the authorities.

"What are we going to do?" the VP of sales asks. "They’ve got all of the records. It’s only a matter of time." He suggests another set of transactions that will put off the reckoning until you all can come up with a better plan.

Your CFO observes his shoes as if they have disappointed him in some way. "It’s over," he says. "There’s no more robbing Peter to pay Paul. Peter is broke. Peter and Paul are both going to jail."

You feel the urge to go over by the window, to find relief in the scenery. But you’re wound so tight that it’s an effort to stand. One quick move, you think, and you’ll pull every muscle in your body. The two others take your movement as a decision. They look to you for advice, for a way out. You’ve never failed them before. You are the leader, but this time you have taken your troops down a blind alley. Before you turn to them, a phrase pops into your head: survival of the fittest. This is what the game has always been about.

Once again, you stare at the clock. Once again, you wish you could turn back time. You collect your thoughts, face them, and begin to speak.

"Let me understand what you are saying. You’re telling me that for the past two years you’ve been taking shortcuts to run up the value of your stock options? All because you thought we could make up for the shortfall with additional sales? Are you crazy? Cooking the books—what am I supposed to tell the board?"

"You’re kidding, right?" the VP of sales says, frozen in place by your words.

"So you’re going to leave us holding the bag?" the CFO says. His eyes follow you with the coldness of a snake’s. "You think you can get away with that?"

"I have no idea what you are talking about," you say. "Get out of my office, both of you, before I call security."

Cooking the Books a Common but Deadly Recipe

This day-in-the-life rendering is the slightly cloaked story of an actual accounting fraud involving a small manufacturer in the American South. A handful of people have pleaded guilty to various offenses; other people are standing trial. All of the accused face jail terms. Even those who escape legal censure will have lost their jobs, sullied their reputations, and humiliated themselves and their families. Fortunately for this company, scrupulous employees alerted the board of directors. Unlike other boards of directors, this one launched a serious investigation before the "cooking of the books" boiled over into bankruptcy. It was a close call, however. Another year of such behavior and the company would have gone out of business, costing hundreds of people their jobs. The criminality not only stained the company and its innocent employees and board members, but also adversely affected many others connected economically to the company. Customers remained wary for some time of buying products from a "bad" company. It took more than a year for the firm to recover its momentum, not to mention its repute.

Because of its size, this particular company and its felonies have not been splashed across the front pages of any national newspapers, or warranted coverage by the major news networks, or raised the ire of the Internet gossips. If this scenario seems familiar, it is because it is a template for the behavior of senior executives at companies such as Enron, Arthur Andersen, HealthSouth, WorldCom, Global Crossing, Adelphia Communications, Italian-based Parmalat, Swedish-Swiss Engineering, ABB—these and all the others, the corporate transgressors you have heard about. This particular series of actions has been repeated over and over again in the corporate world for many, many years. Next to direct employee theft, cooking the books is the most common white-collar crime behavior in the business world. It is particularly insidious because, whereas employee theft consists of people stealing from the company, cooking the books consists of the company stealing from everybody: employees, investors, and consumers.

The number of dollars involved and the complexity of the accounting shell games vary according to the size of the enterprises, but the conduct is the same: a rash act to cover a shortfall triggers another rash act to cover a bigger shortfall, eventually setting off an avalanche of fraud that takes the company to its knees. Sometimes, as at Enron, the participants become so caught up in the make-believe that they not only inflate sales, but they also siphon off sizable funds from the company for themselves. Andrew Fastow took $60 million from Enron; the Rigas family took hundreds of millions from Adelphia. The primary motivator is an unwillingness to face up to immediate shortfalls in the business plan: to face the consequences of a bad month or quarter, to deal with hard times, and to admit failure.

Corporate wrongdoing has wrought serious damage to the economy as well as to many personal lives. Various mismanagements have caused bankruptcies and collapses that cost tens of thousands of people their jobs. About 20,000 people lost their jobs at Enron alone. Close to 40,000 people nearly lost theirs as the result of the $11 billion accounting fraud at WorldCom. Many innocent people have lost college funds, retirement funds, and sometimes, entire life savings. Years of hard work and future prosperity for thousands and thousands of people evaporated, not just at the individual companies but also in the business networks of which they are a part. As just one example, about six months after Enron collapsed, a business author gave a speech in Tulsa, Oklahoma, in the heart of oil country. In casual conversations with many of the attendees, followed by a question from the podium, the author discovered that every one of the people among the 300-plus attendees, representing a hundred or so businesses, had suffered because of Enron. Some had been Enron employees who lost their jobs. Some had been employees of successful businesses bought by Enron, only to have Enron fail and take their unit down with it. Others were suppliers to Enron, left with unpaid invoices and unsold goods and no way to pay for them, or people who provided professional or other services and were never paid. Others were customers who, having lost access to Enron energy sources, had to pay inflated prices elsewhere. Still others held company stock that was worthless or bonds that were nearly so.

Aftershocks continue years after the original crimes. At WorldCom, CEO Bernie Ebbers was sentenced to 25 years in prison for 9 counts of fraud and agreed to turn over more than $40 million to investors, former CFO Scott Sullivan was sentenced to 5 years in prison, 290 of the top 300 executives lost their jobs, WorldCom directors agreed to pay $18 million out of their own pockets, and J.P. Morgan Chase paid $2 billion to settle claims that it did not adequately research WorldCom before marketing company bonds. At Enron, CFO Fastow pleaded guilty on conspiracy charges and faces 10 years in prison, treasurer Ben Glisan pleaded guilty and is serving 5 years in prison, Enron faces $1.7 billion in fines for fixing energy prices in California, and the president and CEO are awaiting trial at the time of this writing. Arthur Andersen, Enron’s accounting firm, collapsed because of the scandal, throwing many hundreds of people out of work, and also paid $25 million because of its involvement with Global Crossing. CitiGroup, Global Crossing’s banker, agreed to pay $75 million. Adelphia’s John Rigas was sentenced to 15 years in jail, his son Timothy was sentenced to 20 years in jail, and the family was fined more than $750 million. Tyco International CEO Dennis Kozlowski and CFO Mark Swartz were convicted of looting more than $600 million from their company, sentenced to 25 years each in jail, and between them ordered to pay $134 million in restitution and $105 million in fines.

The dubious behavior that brought on the convictions, fines, and lawsuits is in no way limited to high-growth or freshly deregulated industries where a "cowboy" mentality might prevail. In the past few months as of this writing, a financial services company paid an $850 million fine for fixing prices and taking kickbacks. A major computer company, a major pharmaceutical company, and a major insurance company piled up hundreds of millions of dollars in fines and dozens of lost jobs for overstating revenue, and a doughnut purveyor’s internal audit found similar problems. A music company paid a $10 million fine for paying radio station programmers to play songs. A well-known lobbyist was indicted on fraud charges involving his purchase of a fleet of gambling boats. A newspaper executive pleaded guilty to hiding million-dollar payments to himself. The KPMG accounting firm paid $456 million in fines related to questionable tax shelters, and eight former executives were indicted. Time Warner agreed to set aside $3 billion to settle lawsuits over its merger with AOL, which was financed by overinflated AOL stock.

These and other miscreant behaviors have repercussions far beyond the individual company. Such misdeeds have put entire business sectors out of favor with the stock market and have stoked distrust of corporations in general. For several years after such debacles, senior corporate executives would not identify themselves to strangers as "CEOs" because of the virulent response by average citizens, who assumed that they too were criminals. Cumulatively, corporate wrongdoing in the past decade has caused more total economic harm than terrorist attacks against the United States. Only the direct human death toll of 9/11 makes the terrorist actions more grievous or horrifying.

After the fact, ordinary people—consumers and businesspersons—scratch their head and wonder how anyone could get caught up in such self-destructive acts. The easy answer is, "These guys are crooks." And, of course, they are. But to label the people responsible for these events as "greedy" or "arrogant" does not provide insight into the complexities behind these debacles. Unless we understand what motivates that crooked behavior, no number of ethics courses in school or ethics seminars in the workplace will ever stand a chance of correcting it. What emotions and dynamics drive the already rich and powerful to behave with such destructive actions? Although not overtly evident to the casual observer, the driving factor is maladaptive coping strategies of misplaced fear. Fear is a great actor. It appears in many forms, expresses itself in many ways: greed, arrogance, anger, short-sightedness, and insecurity. These are some of the masks of fear. However different they look on the surface, these external behaviors track back to the fear centers in the brain, the result of a person feeling threatened. The threat may be real or imagined, may be the result of lifelong behavior or behavior learned in business. However it originates, the fear is real. The fear drives human behavior in predictable, unhealthy ways.

What triggers crooked behavior in business, then, is the oldest human emotion, the one most connected to survival. However much they may posture or strut, these guys are scared. That much may be obvious in retrospect. What may not be obvious is how deeply fear is rooted in human behavior, how deeply that behavior is rooted in the biology of the brain, and therefore how quickly fear can be activated in the business environment—or in any social context for that matter.

As we will show, this pattern of behavior is nothing more than a modern expression of a survival behavior, the fight, flight, or freeze response done up in pinstripes. Although biologically simple, this fear response is so compelling that it can override the moral and ethical conduct of the people involved. The fear is also contagious, in a cultural sense that is strongly driven by biology. Fraud at a big company requires complicity of many people. At least 15 people were involved at HealthSouth, including 5 different chief financial officers. Fear can also make people delusional. HealthSouth initially fabricated $50 million in earnings to meet profit projections in 1996, with expectations of erasing the shortfall later. Instead, quarter after quarter the deficits piled up. Each time, the company convinced itself that next time would be better. The company ended up creating $2.7 billion in fraudulent bookings before being unmasked. Three decades earlier, Ford’s fear of missing the small-car market created the delusion among a dozen executives that they could hide the fact that rear-end collisions caused its Pinto sedans to explode.

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