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Obsession with Performance Leads to Scandals
25-Feb-05 [ by Larry Chao ] 15014 Read and 378 Comment

The corporate accounting scandals now flooding headline news are not exceptions to the rule‚ but rather the natural outcome of a runaway capitalist economy that demands performance at all costs‚ writes Larry Chao.

Greed seems to be the common denominator underlying the recent string of corporate accounting scandals. Incidents at WorldCom‚ Enron‚ Global Crossing and elsewhere suggest tampering to boost profits and personal gain. Even the watchdogs of the system - the Arthur Andersens of the world - turned a blind eye to steroid-enhanced earnings‚ reluctant to jeopardize client fees. Indeed‚ finding clever loopholes in accounting rules and regulations has become the benchmark for excellence. Controlling this greed offers a partial solution. But the real problem is far more acute. It lies at the very heart of Corporate American Culture: The pressure to perform and fear of failure.

Demanding performance is nothing new. Successful companies have always cultivated a culture of performance. Managing change‚ continuous growth and survival of the fittest were mantras that guided successful companies such as General Electric through decades of economic turbulence.

Japan realized the importance of this Darwinian philosophy far too late. Only after years of flatline growth has it begun to shed its grip on performance inhibitors such as lifetime employment‚ blanket consensus management and rigid management protocol. Even so‚ Japan Inc.'s reluctance to put individual and business performance ahead of traditional management practices has stifled its renewal.

The problem occurs‚ however‚ when the pressure to perform reaches stratospheric levels‚ fueled by intense competition‚ demanding investors and‚ of course‚ huge personal incentives. Moreover‚ despite the rhetoric about learning from failure‚ in reality‚ there is virtually zero tolerance for failing to perform. Miss your quarterly budget and you're already under scrutiny. Miss your budget again and you will be lucky to get a third chance.

Ask former chief executive officer Richard Thoman of Xerox‚ who was ousted after only a year of poor performance. With revenues stalling and earning plummeting‚ the Xerox board did not hesitate to pressure Thoman into resigning. The company didn't care whether factors beyond Thoman's control such as the Y2K scare or currency devaluation contributed to dismal performance. The bottom line was that Thoman did not perform.

"Very few executives refuse to accept corporate targets set for them by head office‚ even if they are too stretching‚" said one president of a multinational operating here in Thailand. "If you persist in complaining that your budget is unfair and not achievable‚ headquarters will find somebody else to do the job." And so the pressure to perform mounts‚ as does the temptation to do what it takes to achieve objectives.

WorldCom Inc.‚ America's second largest long distance telephone carrier‚ is a case in point. Through improper shifting of funds‚ $3.8 billion of operating costs was booked as capital expenditure. Each shift enabled WorldCom to hit scheduled profit projection targets. As a result‚ rather than reporting negative earnings for the past year and first quarter of this year‚ WorldCom had a positive story to tell Wall Street.

Enron's creative accounting practices produced a similar mirage of success - erroneous earnings that painted a rosy picture of a company going bust. Not only did it appear that Enron delivered on financial promises‚ people such as former chief executive Jeffrey Skilling made huge personal profits at the expense of unsuspecting investors.

In a culture where successful performance is critical and linking performance to extraordinary personal gain provides the ultimate carrot‚ it is not surprising that certain individuals have tried to bend the rules and blur the distinction between right and wrong. Because it is unlikely that we will lower our performance expectations and settle for less‚ at the very least we need to rewrite the rules and regulations from the perspective of investors‚ employees‚ lenders and other stakeholders who stand to lose the most.

Most importantly‚ the fear of breaking the rules and being caught must be greater than the fear of failing to perform. Otherwise‚ executives will continue to risk bending the rules hoping to escape unscathed‚ rather than playing it straight and failing.

The writer is managing director of Chao Group‚ a strategic organization change and executive training firm (chaogroup.com)


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