Another Silicon Valley Reckoning Is Coming: “Star Entrepreneurs” and Way Too Much Money

Another Silicon Valley reckoning is on the horizon.  We have seen cyclical events like this before, the 2001 bubble burst being the most recent memorable reckoning. The talk in 2001 was about too much “dumb money.” The coming reckoning, however, is on a massive, unprecedented scale, fueled by the same excess of global capital that has fueled the bubbles in housing markets in attractive locations around the World. The problems with Uber, Travis Kalanick, and the now obvious difficulty of the Uber Board of Directors to exercise meaningful governance should have been the “canary in the coal mine.” CNBC’s reporting on the excessive Silicon Valley “unicorn” valuations and media reports that New Enterprise Associates would divest $1 Billion in startup investments that cannot be made liquid has now made the situation blatantly obvious. After a long silence, the Wall Street Journal has finally joined the reporting on the crisis. What more does one need to take to the exit?

 

Source: In ‘Founder Friendly’ Era, Star Tech Entrepreneurs Grab Power, Huge Pay – WSJ

In ‘Founder Friendly’ Era, Star Tech Entrepreneurs Grab Power, Huge Pay

Silicon Valley financiers are losing leverage to star entrepreneurs

Two brothers who are co-founders of online payments startup Stripe, John Collison, left, president, and Patrick Collison, chief executive, have supervoting shares in the company, which was valued at $9 billion in its latest round of fundraising. PHOTO: DAVID PAUL MORRIS/BLOOMBERG NEWS

The Wall Street Journal

By Rolfe Winkler and Maureen Farrell

May 28, 2018 4:25 p.m. ET

Founders of highflying startups are increasingly wresting control of their companies from venture-capital backers and extracting huge pay packages tied to going public.

Venture capitalists had long called the shots in startup boardrooms and continue to be the primary backers of private companies. But in recent years they have had to compete against new classes of investors including mutual funds, sovereign-wealth funds and now Japan’s SoftBank Group Corp. , which has a $92 billion Vision Fund investing in startups.

That has reduced their leverage, shifting power toward star entrepreneurs and adding pressure on VCs to cultivate “founder friendly” reputations that will help them get a piece of the next hot startup. The flood of capital also gives entrepreneurs the ability to pick not just their investors but also when and whether to go public. An initial public offering is the primary way in which VCs cash in on their gains from startup investments.

VCs say empowering founders—through special voting shares, governance rights and other tools—frees them to follow ambitious long-term strategies once their companies go public without having to worry that poor performance will bring pressure from activist investors that scoop up stock. They point to founder-controlled tech companies such as FacebookInc., where founder Mark Zuckerberg had power to make bold moves and resist early pressure to sell the company. Facebook, which went public at around $100 billion, is now valued at roughly five times that.

Venture-capital backers of Stripe Inc., whose software is used by businesses to accept and track digital payments, recently gave the company founders an incentive to go public: special supervoting shares. The move was meant partly to assuage the founders, brothers Patrick and John Collison, that they would keep significant control of the company they founded in 2010 if it went public, people familiar with the matter said.

Many of Stripe’s investors say the founders have earned the right to control the company because it has performed so well. It was valued at $9 billion in its last fundraising round. Until March, when Stripe added its first independent director, the Collison brothers’ only fellow director was Michael Moritz, a partner at Sequoia Capital, one of the company’s earliest investors. Stripe and Sequoia representatives declined to comment.

Glenn Kelman, the longtime chief executive of online real-estate brokerage Redfin Corp.that went public last July, said that in the run-up to the IPO he was pushed to be more disciplined with expenses by two big investors who traditionally buy public-company stocks but also back later-stage private companies. Redfin’s shares are up about 50% since the IPO.

“There is a new world of VCs who really can’t perform their governance functions on boards because they want to preserve their relationship with you,” Mr. Kelman said of the venture-capital industry.

Star founders of private companies often get to pick their own investors, but as public-company CEOs they can’t. Supervoting shares—typically a second class of stock held by insiders that have 10 votes per share—give founders more power to elect directors and approve other items up for shareholder vote and protect them from investors who may have different priorities.

Last year, 67% of U.S. venture-backed tech companies that staged IPOs had supervoting shares for insiders, according to Dealogic, up from 13% in 2010. The proportion of non-tech U.S. venture-backed IPOs with supervoting shares has stayed between 10% to 15% every year over that period.

The proportion rises as tech companies get larger: 72% of founders of U.S. tech startups valued over $1 billion that had IPOs over the past 24 months have supervoting shares, according to a Wall Street Journal analysis.

Empowering a founder has risks. Uber Technologies Inc. co-founder and former CEO Travis Kalanick built a ride-hailing juggernaut valued at $68 billion with a pugnacious leadership style, but that approach ultimately contributed to a series of scandals. His supervoting shares and de facto control of the board made it more difficult for investors to push him out.

They did so last year, and then abolished supervoting rights and adopted a “one share, one vote” policy ahead of a planned 2019 IPO, something Mr. Kalanick ultimately voted in favor of.

Spotify Technology SA’s shareholders issued special “beneficiary certificates” to its founders in February, in part because co-founder and Chief Executive Daniel Ek wanted to maintain control, a person familiar with the arrangement said. The certificates boosted Mr. Ek’s and his co-founder’s voting control to a combined 80.5%, double their economic ownership. Spotify listed its shares in April. A Spotify spokesman declined to comment.

Snap Inc., whose two co-founders control about 90% of its voting power, sold shares with no voting rights in its 2017 IPO, meaning public-market investors don’t have any say on corporate matters.

Evan Spiegel, co-founder and CEO of the Snapchat parent, received a $625 million stock package that vested with the IPO as an incentive to get it done, people familiar with the deal said.

Drew Houston, co-founder and CEO of online-storage company Dropbox Inc., in December got his own stock package worth potentially $590 million partly tied to his company’s March IPO, according to offering documents. The stock vests based on Dropbox’s share price, among other milestones, and he can earn the full amount only if shares reach $90, triple their current value. Mr. Houston already holds nearly $3 billion of Dropbox’s shares.

Bankers and lawyers who work on IPO deals say there is little precedent for big stock packages offered to founders ahead of public offerings, a reflection of venture-capital firms’ decreasing leverage. Snap and Dropbox representatives declined to comment.

Some star founders may even be emboldened to overstep boardroom norms.

WeWork Cos. co-founder and Chief Executive Adam Neumann, who has 65% voting control, is one of two members of his board’s compensation committee, along with longtime company investor Benchmark, according to WeWork’s recent bond-offering documents. Public companies aren’t usually allowed to have their executives on compensation committees—which set executive pay—to avoid conflicts.

A WeWork spokesman said Mr. Neumann takes $1 a year in salary and declined to comment on whether he receives stock compensation or recuses himself from committee discussions of his pay. It is unclear when WeWork will tap the public markets, but the company’s $4.4 billion investment from SoftBank in 2017 was seen as pushing out its need for a public offering potentially for years.

WeWork bond documents show that in 2016 and 2017, the company paid more than 1.3 million shares of class B stock compensation, worth more than $50 million at the company’s current valuation. Mr. Neumann controls 78% of class B shares, which come with supervoting rights.

—Eliot Brown contributed to this article.

Write to Rolfe Winkler at rolfe.winkler@wsj.com and Maureen Farrell at maureen.farrell@wsj.com

Uber’s Aggressive, Unrestrained Culture Destroys It’s Own Goals

How Corporate Culture Can Trump Strategy For the Worse

As Uber suffers blow after blow to its reputation, users are deleting the app. 

UPDATE: As if to underscore the point of this post, only days after the New York Times published the story below, Uber CEO Travis Kalanick was captured on an Uber driver’s dash cam, engaging in a heated argument with the Uber driver over lower pay that has driven the driver into bankruptcy. Kalanick has today issued a formal apology to all Uber employee’s saying that he needs to “grow up” and get “leadership” help.  

See the video here: Kalanick Loses It With Uber Driver

 

Suffice to say, people are angry with Uber, and things aren’t getting better. This is actually deja vu all over again. We have seen this before in Silicon Valley. The hubris of a company founders or founders creates an ugly overly aggressive and unrestrained culture in its employees and before long things begin to unravel.  This has been quietly observed at Uber for some time, and can be gleaned by its own actions as reported in the press.  Now, new self-inflicted cracks are appearing. More than 200,000 people have deleted the UBER app off their smart phones in the past month. After former employee Susan Fowler Rigetti published a detailed blog post about the sexual harassment and discrimination she allegedly experienced at the company, people began deleting the ride sharing-app again. As more and more employees have spoken out about the alleged poor working conditions, Uber’s customer base is dwindling … and the company is getting desperate.

A few weeks ago, people boycotted the company after Uber provided rides at New York’s JFK airport during a taxi strike over President Donald Trump’s immigration ban. More than 200,000 people got rid of the Uber app and the #DeleteUber hashtag began trending on Twitter. Then, anger boiled again over Uber CEO Travis Kalanick’s position on Trump’s advisory board. He eventually quit the board.

SAN FRANCISCO — When new employees join Uber, they are asked to subscribe to 14 core company values, including making bold bets, being “obsessed” with the customer, and “always be hustlin’.” The ride-hailing service particularly emphasizes “meritocracy,” the idea that the best and brightest will rise to the top based on their efforts, even if it means stepping on toes to get there.

Those values have helped propel Uber to one of Silicon Valley’s biggest success stories. The company is valued at close to $70 billion by private investors and now operates in more than 70 countries.

Yet the focus on pushing for the best result has also fueled what current and former Uber employees describe as a Hobbesian environment at the company, in which workers are sometimes pitted against one another and where a blind eye is turned to infractions from top performers.

Interviews with more than 30 current and former Uber employees, as well as reviews of internal emails, chat logs and tape-recorded meetings, paint a picture of an often unrestrained workplace culture. Among the most egregious accusations from employees, who either witnessed or were subject to incidents and who asked to remain anonymous because of confidentiality agreements and fear of retaliation: One Uber manager groped female co-workers’ breasts at a company retreat in Las Vegas. A director shouted a homophobic slur at a subordinate during a heated confrontation in a meeting. Another manager threatened to beat an underperforming employee’s head in with a baseball bat.

Until this week, this culture was only whispered about in Silicon Valley. Then on Sunday, Susan Fowler, an engineer who left Uber in December, published a blog post about her time at the company. She detailed a history of discrimination and sexual harassment by her managers, which she said was shrugged off by Uber’s human resources department. Ms. Fowler said the culture was stoked — and even fostered — by those at the top of the company.

“It seemed like every manager was fighting their peers and attempting to undermine their direct supervisor so that they could have their direct supervisor’s job,” Ms. Fowler wrote. “No attempts were made by these managers to hide what they were doing: They boasted about it in meetings, told their direct reports about it, and the like.”

Travis Kalanick, Uber’s chief executive, has taken several steps since a former employee’s accusations of discrimination and sexual harassment by managers. CreditMarlene Awaad/Bloomberg

Her revelations have spurred hand-wringing over how unfriendly Silicon Valley workplaces can be to women and provoked an internal crisis at Uber. The company’s chief executive, Travis Kalanick, has opened an internal investigation into the accusations and has brought in the board member Arianna Huffington and the former attorney general Eric H. Holder Jr. to look into harassment issues and the human resources department.

To contain the fallout, Mr. Kalanick also began more disclosure. On Monday, he said that 15.1 percent of Uber’s engineering, product management and scientist roles were filled by women, and that those numbers had not changed substantively over the past year.

Mr. Kalanick also held a 90-minute all-hands meeting on Tuesday, during which he and other executives were besieged with dozens of questions and pleas from employees who were aghast at — or strongly identified with — Ms. Fowler’s story and demanded change.

In what was described by five attendees as an emotional moment, and according to a video of the meeting reviewed by The New York Times, Mr. Kalanick apologized to employees for leading the company and the culture to this point. “What I can promise you is that I will get better every day,” he said. “I can tell you that I am authentically and fully dedicated to getting to the bottom of this.”

Some Uber employees said Mr. Kalanick’s speedy efforts were positive. “I am pleased with how quickly Travis has responded to this,” Aimee Lucido, an Uber software engineer, wrote in a blog post. “We are better situated to handle this sort of problem than we have ever been in the past.”

As chief executive, Mr. Kalanick has long set the tone for Uber. Under him, Uber has taken a pugnacious approach to business, flouting local laws and criticizing competitors in a race to expand as quickly as possible. Mr. Kalanick, 40, has made pointed displays of ego: In a GQ article in 2014, he referred to Uber as “Boob-er” because of how the company helped him attract women.

Document: Internal Memo From Uber’s Chief, Travis Kalanick

That tone has been echoed in Uber’s workplace. At least two former Uber workers said they had notified Thuan Pham, the company’s chief technical officer, of workplace harassment at the hands of managers and colleagues in 2016. One also emailed Mr. Kalanick.

Uber also faces at least three lawsuits in at least two countries from former employees alleging sexual harassment or verbal abuse at the hands of managers, according to legal documents reviewed by The Times. Other current and former employees said they were considering legal action against the company.

Liane Hornsey, Uber’s chief human resources officer, said in a statement, “We are totally committed to healing wounds of the past and building a better workplace culture for everyone.”

Uber’s aggressive culture began with its 2009 founding, when Mr. Kalanick and another founder, Garrett Camp, created a start-up that would let customers hail a cab with little more than a few taps of their smartphone — bypassing many of the headaches people had with the taxi industry. Mr. Kalanick also started putting into place what eventually became Uber’s 14 core values, inspired by the leadership principles at one of the biggest public tech companies, Amazon.

To grow quickly, Uber kept its structure decentralized, emphasizing autonomy among regional offices. General managers are encouraged to “be themselves,” another of Uber’s core values, and are empowered to make decisions without intense supervision from the company’s San Francisco headquarters. The top priority: Achieve growth and revenue targets.

While Uber is now the dominant ride-hailing company in the United States, and is rapidly growing in South America, India and other countries, its explosive growth has come at a cost internally. As Uber hired more employees, its internal politics became more convoluted. Getting ahead, employees said, often involved undermining departmental leaders or colleagues.

Arianna Huffington, an Uber board member, was brought in to look into harassment issues and the human resources department.

Workers like Ms. Fowler who went to human resources with their problems said they were often left stranded. She and a half-dozen others said human resources often made excuses for top performers because of their ability to improve the health of the business. Occasionally, problematic managers who were the subject of numerous complaints were shuffled around different regions; firings were less common.

One group appeared immune to internal scrutiny, the current and former employees said. Members of the group, called the A-Team and composed of executives who were personally close to Mr. Kalanick, were shielded from much accountability over their actions.

One member of the A-Team was Emil Michael, senior vice president for business, who was caught up in a public scandal over comments he made in 2014 about digging into the private lives of journalists who opposed the company. Mr. Kalanick defended Mr. Michael, saying he believed Mr. Michael could learn from his mistakes.

Uber’s aggressive workplace culture spilled out at a global all-hands meeting in late 2015 in Las Vegas, where the company hired Beyoncé to perform at the rooftop bar of the Palms Hotel. Between bouts of drinking and gambling, Uber employees used cocaine in the bathrooms at private parties, said three attendees, and a manager groped several female employees. (The manager was terminated within 12 hours.) One employee hijacked a private shuttle bus, filled it with friends and took it for a joy ride, the attendees said.

At the Las Vegas outing, Mr. Kalanick also held a companywide lecture reviewing Uber’s 14 core values, the attendees said. During the lecture, Mr. Kalanick pulled onstage employees who he believed exemplified each of the values. One of those was Mr. Michael.

Since Ms. Fowler’s blog post, several Uber employees have said they are considering leaving the company. Some are waiting until their equity compensation from Uber, which is restricted stock units, is vested. Others said they had started sending résumés to competitors.

Still other employees said they were hopeful that Uber could change. Mr. Kalanick has promised to deliver a diversity report to better detail the number of women and minorities who work at Uber, and the company is holding listening sessions with employees.

At the Tuesday all-hands meeting, Ms. Huffington, the Uber board member, also vowed that the company would make another change. According to attendees and video of the meeting, Ms. Huffington said there would no longer be hiring of “brilliant jerks.”

Canadian Startup Case Study Underscores Canada’s VC Challenges

UPDATE: It is worth noting that this 2012 case study on a company in British Columbia, Mobile Data International, and its CEO Barclay Isherwood, attracted the ire of followers of Werner Erhard, prominent San Francisco New Age cult leader, with similarities to L. Ron Hubbard, founder of Scientology.  It is a lens into New Age cults at that time.  In the same way that Scientology reacts to attacks on itself. Erhard’s followers attacked this post in a frenzy of irrational hatred. 

I can only hope that this is a serious effort to reverse this national problem of short-term thinking.

I have seen the problems with Canadian investors first hand, and have the following case study to share here.

Many light years ago, I worked for a pioneering wireless data company, Mobile Data International, in Richmond, BC.   I thought this company was so promising, I came from the UK to join it.  Regrettably, the Board of Directors and the Canadian investors were more interested in making a quick profit than in building the company to potentially be the company that established itself as a global leader in wireless data.  The CEO of MDI, Barclay Isherwood, was an avid follower of California new-age guru, Werner Erhard  aka Jack Rosenberg, of erhard seminars training, better known as “est”.  Erhard’s career has been marked by allegations, controversy, and legal disputes.  Leading academics have raised serious questions about Erhard’s qualifications, his businesses, and the highly authoritarian style of his organizations.

Finding that MDI was influenced by Erhard was a supreme irony. Years before, while in university, my housemate was also infatuated with Erhard.  My housemate eventually quit university and joined “est” as one of Erhard’s trusted senior lieutenants. I got to see “est” up close and very personally. I was brow beaten by my friend, who tried to convince me how important it was to take “the training” as they called it, at a price I could not afford. I was disturbed enough from what I saw from outside the cult, that nothing altered my view that est was extremely dangerous. Since that time, Erhard has run from his critics, and reincarnated himself and “est” into a new group called “The Forum” and another group called “Landmark.”

Isherwood was spending company money to have Erhard’s people “hang out”  at MDI, and he kept his girlfriend, Evi Truu on the payroll, supposedly reporting to me, but via “pillow talk” apparently also reporting to Isherwood himself. The Board took no action, employees were asking questions among themselves, and morale was suffering.  I brought Intel’s legendary Marketing VP, Bill Davidow to MDI for a speaking engagement.  I was flabbergasted to be told that no one liked Davidow, as he was too “arrogant.”  Ironically, they got their assessment backwards: they were too arrogant to get Davidow.   The company was floated on the Toronto exchange much too early, and as a consequence, MDI was eventually sold for a relative pittance to Motorola Canada in a hostile takeover. Isherwood has tried to take credit for selling out to Motorola, but the truth is otherwise.

The investors made a modest return, but Canadian investors don’t seem to think like Silicon Valley.  In a strikingly similar startup situation in Silicon Valley, the CEO, actually an Intel sales organization alumni, had become infatuated with the alleged “supernatural powers of crystals” and his belief system became part of the company culture. The investors quickly became deeply concerned about their investment and their fiduciary duty. The question was, “How could this have happened?” and “We need to move to fix this immediately or face consequences.” My former Intel boss, Barry Cox, was brought in by the Board of Directors to fire the CEO, take drastic action and turn the company around. Obviously, nothing like this happened with MDI.

In the years since, I have seen offers in California in the hundreds of millions turned down flat, and million dollar cheques thrown back across the table.   The MDI employees were mostly laid off and MDI’s doors were eventually shuttered.  The MDI building, an excessively elegant structure that would have raised eyebrows in California, sat idle in Richmond for 20 years, until it was finally leased again as the security headquarters, ringed in barbed wire, for the 2010 Olympics.

Let’s hope that this new realization of the need to build innovation in Canada strikes a chord, and that Canada doesn’t repeat the mistakes that occurred at Mobile Data International.

http://www.techvibes.com/global/category/start-up

The Rules of Sewage

This is a metaphorical essay on personal ethics, worthy of a serious read and contemplation. When I saw the title I was intrigued but suspected it had something to do with Andy Grove’s colorful adage, “sewage flows downhill,” which means “if anything bad happens it will eventually flow down to you.”  This is about ethics. The points made here are particularly apt in light of  the huge number and sheer scale of recent business frauds: the Volkswagen fraud, LIBOR, Lehman Brothers, Bernie Madoff’s pyramid scheme, Conrad Black in Canada, Olympus in Japan, Bernie Ebbers and Worldcom, Tyco International, stretching back all the way to Enron, Michael Milken’s junk bonds, and the 1980’s savings & loan debacle.

This is only a small selective list and many will be able to think of many other well-known scandals. The problem is that there are no easy answers in many situations. How much do we risk by taking an ethical stand on an issue, and the fact that the bigger the issue the bigger our personal risk?  It is very existential.  At the same time appear to have learned nothing from all these recent scandals, tightened regulations or changed personal behavior. A recent study of Wall Street brokers suggests that most would still commit fraud, if they benefited substantially, and believed that they would not be prosecuted for it.

Read more: 10 Biggest Corporate Frauds In Recent U.S. History

 

Source: The Rules of Sewage

Reblogged via WordPress

David Hunt, December 8, 2013

December 8, 2013Uncategorizedessay, original

Some years ago I heard an analogy that resonated with me.  It was a description of learning something – some piece of information about a person’s character – that was so negative, so vile, that no matter what else you knew about that person, you instantlyunderstood the core of the person in question.  There is, in fact, a folk-wisdom saying that illustrates this concept, which I first heard on a talk radio show: “That tells me everything I need to know about him.”  Ironically, the talk radio host from whom I first heard this expression was revealed to have done something I consider so vile that, even before he was taken off the air, I realized that deed (plus his “Yeah, so what?” attitude) told me everything I needed to know about him – and I stopped listening… and having stumbled across his new broadcast home while channel-surfing, I still refuse to listen to him.

Before I dig into this, I want to be clear – nobody is perfect.  We all have our flaws, being human beings, and need to be forgiving and tolerant.  We all struggle with weaknesses and sin, and while Jewish I’ve found I like the instructional concept of the Seven Deadly Sins (and the other side of the coin, the Seven Cardinal Virtues), and am convinced that while all these are human weaknesses, each person has their “one sin” with which they wrestle as their dominant weakness.  And in that struggle with and – hopefully – victory over it do we demonstrate that we are more than a collection of chemicals and cells, but sentient creatures striving to improve ourselves.

So… this analogy goes as follows:

Imagine you have two cups.  One contains the purest, clearest, most wonderful water possible.  The other, raw sewage.  When you mix the two, you get sewage.  The same for a cup of sewage and a pitcher of water, or a barrel of water.  Regardless of the size of the pure water container, the sewage contaminates it.

This became the root of what I refer to as “The Rules of Sewage” in regards to a person’s character.  This one is the First Rule of Sewage, The Non-Proportional Rule of Sewage.  It means, as the saying above goes, that you can sometimes learn a thing about a person that taints the entirety of their personality – e.g., a person beats their spouse.  It doesn’t matter what else they are, what acts they do, they are polluted by that one thing.

This simmered in my mind over a couple of years, and I started to formulate other Rules of Sewage.  Each was based on the same base concept – mixing water and sewage.  Thus far I’ve come up with six.

The Second Rule of Sewage is the Non-Compartmentalized Rule of Sewage.  You cannot pour a cup of sewage into a container of water, and have it only remain in the place you poured it.  Bad character leaks into other elements of character.  E.g., a person who cheats on their spouse – thus breaking a sacred oath – cannot be counted on to keep an oath in any other part of their life.

The Third Rule of Sewage is the Immersive Rule of Sewage.  Imagine an edible fish taken from that pure water, placed in sewage, and somehow surviving – no matter the fish’s immune system and other defenses, it will become contaminated.  No matter how pure you are to begin with, if you are surrounded by bad people or bad content, it will start to affect you.  E.g., a good, honest person who goes to work in a place with bad ethics and stays there – for whatever reason – will sooner or later find they are making compromises to their own character and standards, and rationalizing their doing so.  (And this is, of course, the root of the proverb “Birds of a feather, flock together.”)

The Fourth Rule of Sewage is Irreversible Rule of Sewage.  Simply put, it’s a lot easier to mix the sewage in and ruin the water than reversing the process.  While people are certainly capable of change, it takes deliberate effort to do so, and usually also an ongoing awareness and maintenance of that change to avoid slipping back to whatever factor is being avoided.

The Fifth Rule of Sewage is the Odiferous Rule of Sewage.  Sewage, to put it bluntly, stinks like sh*t.  Bad odors like that can be covered up or contained, but not forever.  Sooner or later the malodorous item in a person’s character will out, and be readily apparent.  This actually ties in with…

The Sixth Rule of Sewage, the Reactive Rule of Sewage – when faced with a tank of sewage, normal people react negatively.  And while a person learning something about another (ref: Rule One) won’t physically turn their head away and scrunch up their face in disgust, I believe the plain truth is that upon learning of such a think will cause a decent person to dissociate – to whatever degree possible – from the other.  Failing to do so, or worse expressing approval, could be considered an example application of Rule One about them too.

In putting this concept “out there” it will be interesting to see if other Rules of Sewage develop in the comments.

Four KPMG Senior Execs Arrested on Tax Evasion Charges

Reported by The Financial Times (UK), CBC News and the Guardian (UK), November 27, 2015

Four senior executives from the Belfast office of international accountancy firm KPMG have been arrested on tax evasion charges.

Read more: KPMG Calls In Outsider In Northern Ireland Tax Fraud Investigation

Read more: KPMG Offshore Tax Sham Deceived Tax Authorities CRA Alleges

Read more: KPMG Tax Sham Used By At Least 25 Wealthy Canadians Document Says

KPMG acknowledged in a press release that four of its top executives in Northern Ireland were arrested Wednesday.

“Pending further information and enquiry, we can confirm that four partners in our Belfast office are on administrative leave. As the matter is ongoing, KPMG is not in a position to make any further comments at this stage,” the company said in a news release.

The four men who were charged and released are:

• Jon D’Arcy.
• Eamonn Donaghy.
• Arthur O’Brien.
• Paul Holloway.

From left to right: Eamonn Donaghy, Paul Holloway, Tom Alexander (not arrested or implicated), and Jon D’Arcy of KPMG Northern Ireland. Arthur O’Brien is not shown.  

New criminal offences that allow charges against people who help clients with tax evasion came into effect in the U.K. last March.

The Financial Times reports, “The arrests are the latest blow to Northern Ireland’s tightknit business community, which has been hit by a scandal surrounding the £1.2bn sale of a portfolio of property loans to Cerberus, a US private equity company. This year allegations emerged that some Northern Ireland politicians stood to gain from a £7m “fixer’s fee” linked to that deal.

The purchase of the loans is the subject of criminal investigations in the UK and the US.

As well as working together at KPMG, the four men are investors in a property company called JEAP Ltd. The company is registered in County Down and has a trading address at 17 College Square East in Belfast — the same address as KPMG. They are listed as JEAP’s directors and shareholders and its articles of association describe its purpose as “to engage in property development activities.”

It is not clear if the arrests are linked to the activities of that company. Property development was a popular investment among professionals on both sides of the border during Ireland’s property boom, which ended in 2008 when the global financial crisis hit.

An island-wide collapse in property prices triggered Ireland’s financial and banking crisis from 2008 to 2010, which reverberated almost as loudly in Northern Ireland as it did in the Republic. Many investors lost heavily in the crash.

The arrests of four such senior staff is a blow to KPMG’s presence in Northern Ireland. Its operations in Belfast are among the biggest of any professional services firm. It is understood that senior staff from the Dublin office have been sent north to ensure the office is able to carry out its day-to-day functions.” End

 

CRA alleges KPMG ‘tax scam’

Meanwhile in Canada, KPMG is fighting the Canadian Revenue Agency over tax arrangements that allegedly hide money for wealthy clients.

The CRA alleges KPMG has used “deceptive practices” that hide the money of wealthy clients in Canada..

In February 2013, a federal court judge ordered KPMG to turn over a list of multimillionaire clients who placed their fortunes in an Isle of Man tax shelter scheme created by the accountancy firm. KPMG is fighting that court order and has yet to identify the wealthy people involved.

The case is scheduled to return to court in 2016.

Legal action against the firm for violations of tax laws and links to tax shelters have been mounting in recent years.

Files leaked from Luxembourg earlier this year show KPMG among the advisers of some multinationals who have successfully shifted money to the low-tax region.

In 2005, the firm paid fines in the U.S. of $456 million US for creating illegal tax shelters to help rich clients avoid tax.

UBS Back In The News: Tax Evasion Scheme, LIBOR, and Arbitrage Fraud

UBS has confirmed it is being investigated by US authorities into whether it helped Americans evade taxes through investments banned in the US.

Former UBS wealth management executive, Raoul Weill, currently on trial in U.S. Federal Court, charged with bank fraud

Former U.S. Senator Phil Gramm, and former UBS bank Vice Chairman, suspected of probable knowledge of UBS involvement in LIBOR, currency manipulation and U.S. tax evasion schemes

The Swiss bank said US regulators were investigating potential sales of so called “bearer bonds”.

These bonds can be transferred without registering ownership, enabling wealthy clients to potentially hide assets. Bearer bonds are literally cash, and therefore attractive as untraceable financial instruments. Think Eddie Murphy in Beverly Hills Cop explaining that he found “bearer bonds” in Victor Maitland’s warehouse.

“We are cooperating with the authorities in these investigations,” the bank said.

The fresh investigation by the US Attorney’s Office for the Eastern District of New York and from the US Securities and Exchange Commission comes after UBS paid $780m (£512m) in 2009 to settle a separate Justice Department tax-evasion probe.

And it comes as authorities in a range of countries are considering examining HSBC’s actions in helping more than 100,000 wealthy individuals avoid paying tax.

UBS made the announcement as it revealed a better-than-expected 13% rise in fourth quarter net profit to 963m Swiss francs (£683.9m).

However, it warned the increased value of the Swiss franc relative to other currencies, following the Swiss National Bank’s decision to abandon the cap on the currency’s value against the euro, would “put pressure” on its profitability.

“The increased value of the Swiss franc relative to other currencies, especially the US dollar and the euro, and negative interest rates in the eurozone and Switzerland will put pressure on our profitability and, if they persist, on some of our targeted performance levels,” it warned.

UBS results for the full year, were hit by more than $1bn to settle past scandals. In November, it was one of six banks fined by UK and US regulators over their traders’ attempted manipulation of foreign exchange rates, paying 774m Swiss francs in total.

It also paid $300m in the second quarter to settle charges it helped wealthy German clients evade tax.

The US Department of Justice (DOJ) is continuing to investigate UBS over currency manipulation allegations.

“Culture of arrogance” felled Nortel, anti-climactic Ottawa U study concludes. Was RIM any different?

Former Nortel CEO John Roth

Former RIM CEO, Jim Balsillie

This is another on my series on industry analysis.  The recent University of Ottawa study on the demise of Nortel Networks, tells us what many of us already knew. The researchers should be congratulated for their work and their conclusions, in what is an important case study of Canadian corporate mismanagement, which will help Canadian business avoid a deja vu.  But many of us in the high tech industry already knew the answer in our guts. The most important constructive criticism of this study is that it should have been done years ago.  The Nortel collapse was followed by a surprisingly similar scenario at RIM, now Blackberry. Mike Lazaridis, who served as RIM’s co-CEO along with Jim Balsillie until January, 2012, are generally considered to have failed to respond adequately to the market encroachments of Apple’s iPhone and Google’s Android phones, as Blackberry’s market share plummeted. There seems to be a pattern here for students of Canadian innovation and management. I recently showed my undergrad and graduate strategy students a video of a very recent Charlie Rose interview with John Chambers, CEO of Cisco Systems. In that interview Chambers emphasized the acceleration of the Adizes corporate life cycle, in many cases to less than ten years, and the need for constant reinvention to survive in this challenging and rapidly changingnew world.  This is now also true about the teaching of Information Technology to management students and to all undergraduate students for that matter.

Cisco System’s CEO, John Chambers discusses the acceleration of the corporate life cycle: Chambers Interview

Read more: Management in the Brave New World

Read more: Strategic inflection points: when companies lose their way

TECHNOLOGY

‘Culture of arrogance’ felled telecom giant Nortel, study finds

JANET MCFARLAND

The Globe and Mail

Published Monday, Mar. 17 2014, 2:16 PM EDT

Last updated Tuesday, Mar. 18 2014, 7:16 AM EDT

The collapse of telecommunications giant Nortel Networks Corp. was caused by “a culture of arrogance and even hubris” that led to numerous management errors and weakened the firm’s ability to adapt to changing customer needs in a fast-paced industry, according to a new in-depth analysis of the company’s final decade of operations.

A University of Ottawa team of professors, led by lead researcher Jonathan Calof, released a detailed analysis Monday of Nortel’s failure, outlining a litany of complex factors that caused Nortel’s collapse in 2009, when the firm filed for bankruptcy protection and was disbanded.

The report is based on three years of research and dozens of interviews with former employees, executives and top customers to try to understand what went wrong at the company. The project was launched after former chief executive officer Jean Monty approached the research team and offered to contribute to the financing of the project.

The study concludes that Nortel lacked the internal “resilience” to cope with a changing external marketplace, and missed key opportunities between 2002 and 2006 to retrench as it struggled to survive. In the end, customers said they could not stick with Nortel as a “black cloud” formed over the company, raising doubts about its long-term future.

Prof. Calof said in a release Monday that the findings are “more than a Nortel story” and present broader lessons about preventing further failures of large companies in Canada.

“It’s our hope that this research will aid in educating tomorrow’s leaders,” he said.

The report says Nortel in its early days was a model of deep technological expertise through its Bell Northern Research (BNR) laboratories and its strong connection to customers, enabling the company to maintain a “first-mover” advantage in many markets. At its peak in 2000, Nortel was Canada’s largest public company, accounting for a third for the value of the S&P/TSX composite index, and employed more than 93,000 people worldwide.

But the authors concluded that Nortel’s growing dominance in its markets in the 1990s “led to a culture of arrogance and even hubris combined with lax financial discipline. Nortel’s rigid culture played a defining role in the company’s inability to react to industry changes.”

While Nortel doubled its revenue between 1997 and 2000 through a spree of expensive acquisitions – and tripled its share price in the same period – the company lost focus on profitability and was in a “precarious position” when the market for technology companies crashed in 2001, the report says. The report says its acquisition spree was a “complete departure” from Nortel’s established skills base and from its tradition of developing its own products.

“This approach proved to be a failure because ill-chosen and poorly integrated acquisitions defocused and overcomplicated the organization,” it concludes. “The company’s high cost structure and lack of financial discipline eventually led to financial ratios that were among the worst in the industry.”

The company also made a series of poor product-related decisions in the same period, including deepening its focus on the declining market for land-line technology and in the increasingly competitive optical market, while missing opportunities in the exploding wireless technology market, where it once had an early lead.

The researchers also concluded that Nortel made operational mistakes, including dismantling the centralized research and development platform from BNR “that was culturally and structurally optimized to create, innovate and develop telecommunications products using co-operative teams.”

From the era of John Roth’s leadership as CEO in the late 1990s onward, “it was felt by many R&D staff that management rarely listened to the engineers and that, when they did, they did not appear to understand.”

In the same era, Nortel gave more power to individual business teams, “which resulted in increased internal politics and fruitless competition.”

The report also says Nortel could have solved its problems in 2002 by retrenching and selling business units, but missed the opportunity, and again missed an opportunity in 2005 and 2006 to sell units and retrench in key business sectors.

“As difficult as it is to consciously reduce the size of a business by selling units, this study concludes that, in the case of Nortel, this option may have been the best and only alternative.

Strategy: Growth At What Cost?

I have offered my own Management Strategy and Entrepreneurship students my views on growth, from my career experience. My personal rule of thumb is that the ceiling for manageable growth of an established company is 25% per year. First or second year exponential growth rates do not apply here, and will quickly settle down.  Growth approaching 20% is increasingly chaotic and nearly unmanageable.  Growth over 25% is a recipe for a major management crisis or business failure. This article also focuses in on the issue of culture, which is now being seen as a fundamental driver of strategy, by leading academics like Professor Joel Peterson, at the Stanford Graduate School of Business, and not simply an outgrowth of good strategy and execution.

Professor Joel Peterson, Stanford Graduate School of Business

The following is a WordPress reblog from Methods Frameworks and their LinkedIn group page, Strategy & Corporate Strategic Planning Xchange.  I strongly recommend joining this group on LinkedIn.

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Many startup companies are pushed and prodded by impatient investors or parent companies to achieve year-over-year growth targets…or else. When results from growth strategies do materialize, business leaders should celebrate the moment, reflect on the concentrated efforts their management team spent to accomplish the goal, then go back to work. At the first signs of success, it is not the time to abandon the methodology that led to the results…the hard work, the focus the organization maintained in the lean times and the painful lessons learned and applied along the way. The sweet taste of success in a company’s expansion strategy can tempt the business to become more brash in seeking out faster avenues for the next stage of growth – even before the foundational concrete of the current wave has fully set. This article takes a hard look at the cost of growth so that business leaders can develop growth strategies with their eyes opened to the risks and understand the costs that accompany accomplishing expansion.

The Price Of Growth

Growth is a bi-product of success and success is a bi-product of effective planning, diligent hard work and excellent management. While achieving growth is arguably the point of being in business, the terms of success in business expansion must first be defined and the risks well understood in order for them to be managed. Only then can expansion strategies provide lasting beneficial outcomes for the business. There is a common misperception that business growth means that the organization’s management team will be grappling with the same problems they’ve encountered in the past…but on a larger scale. That is hardly the case. Instead, the reality of successful growth means understanding, adjusting to and managing a whole new set of challenges—in essence it boils down to learning to manage a very different business.

In Andrew J. Sherman’s 1997 book The Complete Guide to Running and Growing Your Business, he stated: “Growth causes a variety of changes, all of which present different managerial, legal, and financial challenges. Growth means that new employees will be hired who will be looking to the top management of the company for leadership. Growth means that the company’s management will become less and less centralized, and this may raise the levels of internal politics, protectionism, and dissension over what goals and projects the company should pursue. Growth means that market share will expand, calling for new strategies for dealing with larger competitors. Growth also means that additional capital will be required, creating new responsibilities to shareholders, investors, and institutional lenders. Thus, growth brings with it a variety of changes in the company’s structure, needs, and objectives.” Sherman went on to say, “the need of the organization to grow must be tempered by the need to understand that meaningful, long-term, profitable growth is a by-product of effective management and planning.”

Not only can price of growth be high, the odds are stacked against fully satisfying growth expectations. For this reason, businesses must assiduously put to full use their planning and management disciplines in carefully targeting growth opportunities and follow through with them when executing expansion strategies.

Are We Ready To Grow?

Business growth is about finding opportunity. Unfortunately, identifying growth opportunities is not as easy as it sounds. Thomas Edison once said, “Opportunity is missed by most people because it is dressed in overalls and looks like work”.

Define Success and Understand The Risks To Be Managed

Business growth opportunities take on many dimensions and the success criteria for expansion should be defined in advance in order to plan towards accomplishing growth targets. Among other metrics, growth may be measured in terms of profits, revenues, market share, brand, stock valuation as well as political, community and industry influence. Regardless of the measurement used, business expansion is a stage of a company’s life that is fraught with both opportunities and perils. It is a pivotal point that tests the business model, the management team and the organization’s culture.

So how does an organization know when it is ready to take on a growth strategy that is more aggressive than organic expansion? Organic growth comes by offering strong value to customer markets — and that is the key to evaluating opportunities to expand through more energized growth strategies. Will the expansion opportunity lead to increased value creation for the market segments the firm is serving or targeting? Can the business execute on the plan?

Are the market segments viable for profitable growth to occur? This question is key, as high cost growth in a declining market is always a bad strategy. Look at Borders Books and Blockbuster Video as examples of companies with failed expansion strategies launched in the midst of significantly shrinking markets.

The Cultural Requirement

A business must also have its house in order and be on a path to continuous improvement for the seeds of growth to have fertile ground to take hold. Having the house in order includes having a culture that is passionate about quality, value and improvement. Andrew Grove, former CEO of Intel Corp, created a culture within Intel that allowed innovation and growth to flourish. As CEO, he wanted his managers to always encourage experimentation and prepare for changes, making a case for the value of paranoia in business. He became known for his guiding motto: “Only the paranoid survive,” and wrote a management book with the same title. According to Grove, “Business success contains the seeds of its own destruction,” believing that success breeds complacency and complacency breeds failure. Grove urged senior executives to allow people to test new techniques, new products, new sales channels, and new customers, to be ready for unexpected shifts in business or technology. Biographer Jeremy Byman observed that Grove “was the one person at Intel who refused to let the company rest on its laurels.”

The German philosopher Friedrich Nietzsche proposed that civilizations that were placid and predictable were in the last throes of their existence, while highly contentious and dynamic cultures were entering their growth phase. The same premise can be applied to businesses. Those experiencing complacency are likely in decline, whereas more dynamic organizations that consistently challenge the status quo are more likely to begin growth. Nietzsche’s point was that “while most civilizations pander to the former, the future belongs to the latter”.

Approaches To Achieving Growth

There are many viable routes that can be taken to grow a business. Growth may be accomplished by acquiring or merging with another existing business. Alternatively, growth may be realized through the development of new products, solutions or services. In other cases, franchising a successful business model or licensing intellectual property can propel growth. Growth opportunities most likely exist within the business itself through process improvements and innovation networks within the enterprise’s functional areas. Therefore, the search for opportunity should begin from the inside of the business and work outwards in a quest to optimize value creation. Build a successful business through the development of increased capability and capacity, then build again upon that successful platform.

Since there are enumerable methods to grow a successful company, how does a business pick a growth strategy? The answer depends upon the strengths and weaknesses of the organization. If innovation is a particular strength, it might be the winner. If it is not a perceived strength or is even considered a weakness – new services, solutions or product development as a means to grow is likely to be expensive and ultimately unsuccessful. In any chosen strategy, a critical success factor will be taking a realistic assessment of current-day capabilities and competencies that will be leveraged in growth planning and execution. A second success factor is to avoid compromising the successful core elements of the business that are currently working well.

To illustrate the importances of those success factors, let’s explore one of the most common growth strategies companies utilize and discuss pros and cons.

Merging or Acquiring 

In business expansion achieved through the acquisition of a smaller firm, the benefits can potentially be realized relatively quickly, making it an attractive strategy for many businesses. However, the cost of growth through this approach is certainly far higher than the M&A transaction price paid. Certainly the M&A growth avenue is one of the most common, yet it comes with a hidden price tag.

The challenge is that business playing field changes dramatically when organizations combine and the stakes are raised significantly. Where in the past the organization likely maintained a laser-like focus on the operational details of providing superior solutions / products / services, there will now be new challenges that will syphon away some of that management attention. Whether it is the revamping of the combined organization’s market and brand image, the integration of manufacturing systems, the learning curve of a new line of business or dealing with cultural clashes within the combined organizations…distractions can and will help dilute management’s focus. That can lead to problems. A poor job done in integrating the two organizations could result in process breakdowns, unsustainably high fixed costs, poor quality and lost customers.

Just as innovating requires a competency for organizations to develop and master, integrating another business into the fold of a mature organization requires skill as well as careful planning. There are significant risks associated with acquisitions, beyond simply overpaying. In fact, it is hard to name many business maneuvers that are as risky and complex as mergers or acquisitions. The statistics show a very low success rate (consider reading Mergers and Acquisitions: Examining the M&A Ecosystem).

The IBM Approach

Regardless, many companies follow an acquisition strategy to stoke the pipeline with innovative new products and services and some have defied the odds – making this strategy a success. As a colleague once pointed out, companies like IBM buy a lot of companies annually and are pretty good at integrating the innovators quickly. The point was valid. In fact, IBM’s venture capital division works with top-tier venture firms across the world and is aligned closely with its corporate development group. This group is responsible for the firm’s M&A strategy. As a result, IBM has acquired more than 100 companies in the last decade, and the firm’s venture capital group had relationships with 40 of these companies and their venture investors. Using this process of working with young, innovative companies, IBM has been able to identify new products and technologies that its R&D group hasn’t thought of yet or developed.

Other Factors To Consider

One might assume that it boils down to the classic “buy vs. build” decision, where “buy” equals acquisition of a company for its innovation capabilities or cutting edge offerings. In this case, “build” relates to developing innovation from within the existing company’s creative workforce. While it may seem that simple, it isn’t. Companies following an acquisition strategy need to have a game plan for either integrating acquired companies or leaving them as stand-alone subsidiaries from which they can farm innovative creations. The problem with integration is that can be difficult to pull off successfully. Buying a company is not like purchasing a piece of software that can be expected to behave in a precise way that will meet our specifications. Instead, we are likely dealing with the integration of two very different cultures, and the human capital element in that mix is far from predictable. You do not know going into the acquisition if the entrepreneurial spirit that led to the innovations of the target company will survive an integration effort and persist to lead to more valuable creations in the future.

For an example, look no further than the HP acquisition of EDS. As pointed out by CRN, “the cultural clash within the combined organizations has been a 24-hour-a-day, seven-day-a-week nightmare for the EDS workforce since HP paid $13.9 billion for the outsourcing business in 2008”. HP even dropped the EDS name, a one-time gold standard for outsourcing services, in favor of an HP Enterprise Services branding.

That leads to a second point. Even if acquisition is the chosen strategy, without a fundamental understanding of and appreciation for the risk-taking innovation style of the purchased company – how can they be successfully managed so as not to squelch the creativity inherent in their culture? One approach is to make sure that the acquired company is left alone to be entirely autonomous, protecting the formula for innovation they have developed and insulating it from the dominant culture and politics of the parent company. But with no attempt made to integrate the firm into the parent company, will the full benefits be realized?

That said, the purchase price and integration challenges should not be a deterrent if the following are all true:

• The acquiring business possesses the management strengths to integrate the acquired firm and so long as
• The acquiring business has the financial means available
• Due diligence suggests that the expected return on investment will ultimately be realized

Concluding Thoughts

Growth occurs naturally when value is created through a company’s offering of superior solutions / products / services. The focus on value creation through this avenue is the first step towards accomplishing meaningful growth. For this reason, maintaining or shrinking in focus is sometimes required to get the business’s offering optimized and achieve superiority to competitors in the market.

Secondly, innovation is still the key ingredient for growth. Whether innovation originates internally or is acquired from the outside, it must be present. Innovation doesn’t always mean new products, but can come by creating operational efficiencies as well.

Lastly, remember that growth must be planned, managed and paced. Sometimes a base hit is better than swinging for a home run and striking out.

Corporate Strategy: Growth At What Cost? | Corporate Strategic Planning | Strategic Planning Articles and Resources | Management Consulting Services Firm | Business Strategy Consulting.

PBS Frontline: The Untouchables…Corporate Crooks Too Big To Jail

PBS Frontline’s January 22nd broadcast will expose “The Untouchables,” the blatant criminal frauds perpetrated against us and the glaring lack of criminal prosecutions.

Watch it.

Corporate Fines Are Nothing More Than Tax Deductions

In yet another sign that applying monetary fines to corporations is nothing more than adding a “cost of doing business,” The New York Times reported Saturday that corporations routinely, not only pass on the cost of heavy regulatory fines to their shareholders and to consumers, they also write off the fines as corporate tax deductions.

http://www.nytimes.com/2013/01/13/business/paying-the-price-in-settlements-but-often-deducting-it.html