Journal of Case Research in Business and Economics

The Managerial Mistakes that a CEO Must Avoid

Anthony DiPrimio oly !amily "ni#ersity

Abstract
The $ur$ose of this study is to identify the managerial mistakes that CE%&s must a#oid in order not to 'ring ruin to themsel#es and to their cor$orations( The study analy)es the case histories of recent CE%&s *hose mistakes in leading their cor$orations cost them their +o's and resulted in great financial loss to their shareholders( The mistakes made 'y the CE%&s *hose cases *ere analy)ed can 'e classified according to causati#e factors( These causati#e factors can 'e incor$orated into a guide for a#oiding the unethical 'eha#ior that is associated *ith the factors and their ruinous conse,uences( -ey*ords. Cor$orate /eadershi$ Mistakes

The Managerial Mistakes, Page 1

Journal of Case Research in Business and Economics Introduction The "nited 1tates and much of the *orld&s economically de#elo$ed and de#elo$ing nations are in a $eriod economic ruin 23The 405 and the *orld economy(6 The Economist, 05578( The cause of this $eriod of economic disaster is human error, human moral and ethical failings, and an a$$alling lack of cor$orate leadershi$ kno*ledge 23Three trillion dollars later(6 The Economist, 05579 3The 'iggest 'ill in history(6 The Economist, 05579 3The $olitics of de't(6 The Economist, 05579 3Com$etiti#e failure(6 The Economist, 05579 3The $olitics of the recession(6 The Economist, 0557(8 1u$$ort for the $remise that human error and corru$tion accounted for the current financial crisis can 'e found in the recently released 'ooks titled. How Reckless Growth and Unchecked Ambition Ruined the Citys Golden Decade 'y Philli$ Augar, 2055789 Fools Gold How the !old Dream o" a #mall Tribe at $%&% 'or(an was Corru)ted by *all #treet Greed and Unleashed a Catastro)he 'y 4illian Tett, 2055789 and The #)ectre at the Feast Ca)italist Crisis and the &olitics o" Recession 'y Andre* 4am'le 205578( The $ur$ose of this study is to offer an analysis of cor$orate leadershi$ 'eha#ior:moral, ethical, and legal : that results in ruin to the chief e;ecuti#e, his<her cor$oration, the em$loyees of the cor$oration, the shareholders, creditors, and the $u'lic( Method The $a$er relies entirely on $o$ular 'usiness literature $u'lications of cor$orate e;ecuti#es 2CE%&s8 *ho made conscience decisions on ho* to lead their cor$orations that resulted in legal charges 'eing 'rought against them and their cor$orations for #iolations of #arious regulatory la*s( Based on these $u'lished accounts, the author attem$ts to classify the acts of the CE%&s into ty$es of 'ad leadershi$ 'eha#ior or leadershi$ style( How a CEO May Cause Harm to Himself/Herself and to His/Her Cor oration Des$ite all the time and effort CE%s may s$end studying management and leadershi$ he<she may still fail to $ro#ide ade,uate leadershi$ to his<her cor$oration( This $a$er is focused on understanding *hy CE%&s failed in their efforts to lead their cor$orations( =t is unlikely that a CE% deli'erately sets out to do harm to himself<herself and to his<her cor$oration anymore than a man or *oman sets out to make he<she ill( True, he<she may kno* that certain things such as e;cessi#e drinking or smoking may ad#ersely affect his<her health9 'ut, his<her intended actions are not to make himself<herself ill( is<her actions are directed to*ard gratifying his<her desire for the $leasura'le effect of smoking and drinking( 1o also is the case of the CE% *ho, for e;am$le, s$ends the resources of the cor$oration in a la#ish and e;or'itant fashion 21afer, 055>8( Another e;am$le is that of the CE% *ho influences the 'oard of directors to $ay him an e;or'itant salary $ackage that dilutes shareholder&s e,uity and creates a $oor image of the cor$oration 23Adel$hia founder John Rigas found guilty(6 055>8( The CE% looks only at his $ersonal gain and satisfaction and ignores the im$act of his actions on ho* he is $ercei#ed 'y the shareholders, and ho* this unfa#ora'le $erce$tion *ill affect his a'ility to lead the cor$oration( E#en though the harm *as not deli'erately intended:that does not e;cul$ate him from 'lame, nor does it s$are him from the conse,uences of his actions *hich can lead to the loss of his $osition and re$utation(

The Managerial Mistakes, Page 0

Journal of Case Research in Business and Economics The author makes the assum$tion that a $erson can learn to 'e an effecti#e and successful leader( This is no tri#ial assum$tion 'ecause there are many $eo$le *ho hold the 'elief that leaders ha#e some s$ecial ,uality that endo*s them *ith the leadershi$ skills of a 'orn leader 2Bryman, A( 1770(8( %thers may 'elie#e that a $erson either has the a'ility to 'e a leader or they do not:and if he<she does not ha#e this natural a'ility he<she *ill ne#er 'e a good leader 2Burns, J(M( 17@A8( This 'elief is utterly false and nothing is further from the truth 2Bukl, 4( 177>8( The truth of the matter is that leadershi$ like any skill is something that is learned through study, o'ser#ation, and $erfected through $ractice and trial and effort 2Bass, B(M( 17758( =t is not easily mastered, ho*e#er( =t re,uires the *illingness to dedicate time and effort and the intelligence to learn from the successes and mistakes of others as *ell as one&s o*n mistakes and successes( %ne of the reasons it is so difficult to learn the art of leadershi$ is 'ecause it re,uires a thorough understanding of the $eo$le one *ants to lead:and $eo$le are difficult to understand and are constantly changing according to the circumstances in *hich they find themsel#es 24ardner, J( 17758( !urthermore, there are so many different leadershi$ styles to learn to use and a$$ly to any gi#en situation( A leadershi$ style may 'e effecti#e and successful in one cor$orate situation, and the same leadershi$ style in another cor$orate situation may 'e unsuccessful: e#en disastrous 2 !iedler, !( 17C@8( The theoretical *ork done 'y !red !iedler 2177?8 $ro#ides an e;cellent insight into ho* #arious leadershi$ styles may 'e used in different cor$orate situations( Dr( !iedler&s $remise is that there is no leadershi$ style that is the 'est one to use in all situations( That is to say, there is no uni#ersal 'est leadershi$ style that *ill *ork successfully across all cor$orate situations( The most effecti#e leadershi$ style is the one that is the most a$$ro$riate 'ased on situational factors $re#alent in the cor$oration at that time( The im$ortance of Dr( !iedler&s *ork to a CE% is that it su$$orts the $remise that leadershi$ can 'e learned( is Contingency Model can 'e used to analy)e *hy a CE% using a leadershi$ style in one $articular cor$orate situation *as successful, *hile a CE% using the same or a similar leadershi$ style in a different cor$orate situation *as unsuccessful( By the use of the case analysis techni,ue the author of this article e;amines the mistakes made in cor$orate leadershi$ situations *ith the intent of offering an e;$lanation of *hat *ent *rong and *hat could ha#e 'een done to ha#e a#oided the failure( Po*er im$lies authority o#er others( Dithout $o*er there is no 'ase for authority( =f em$loyees can at their *ill choose to o'ey and com$ly *ith directi#es, or not to o'ey and com$ly, then the CE% is not in control and he is im$otent in his $osition( The more $o*er and authority a CE% has o#er his su'ordinates the more secure should 'e his $osition( Dhat is true of $o*er and authority is also true of force and coercion 2Destern, 1( 055A8( There is nothing inherently e#il in the use of force and coercion( !orce and coercion can 'e 'rought to 'ear to achie#e good outcomes( =ndeed, sometime nothing less than force and coercion *ill suffice to achie#e a good and necessary outcome 2Destern, 1( 055A, The leader as controller8( Dould anyone argue against the use of force to su'due a #iolent criminal or the use of se#ere $enalties to coerce $eo$le into com$liance *ith social legislationE Dould la'or unions and management negotiate and resol#e differences *ithout resorting to #iolence *ere it not for the kno*ledge that if they did not com$ly *ith the terms of the Fational /a'or Relations Act they *ould face hea#y legal $enalties 2T*omey, 05158E %f course it is not( =t is the misuse of force and coercion that is e#il and ineffecti#e and must 'e a#oided 'y a CE% in controlling his cor$oration( The misuse of force and coercion is one of the reasons that CE%&s fail and lose their $ositions( !or this reason it is more instructi#e for a CE% to understand *hy -enneth 2-en8 /ay&s career ended so The Managerial Mistakes, Page ?

Journal of Case Research in Business and Economics 'adly at Enron than it is to understand *hy Jack Delch *as considered to 'e successful at 4eneral Electric( The Misuse of !orce Cou led "ith the A earance of Arrogance # The Case of Al $unla

There is an old adage that says. 3Pride goes 'efore the fall(6 As the first e;am$le of a CE% *hose career *as ended 'y the misuse of force and authority consider the case of Al'ert Dunla$ to *hom the $ress ga#e the tag name Chainsaw Al% Dith reference to Mr( Dunla$, an a$t ,uote from the Bi'le *ould 'e. 3G for all those *ho take the s*ord *ill $erish 'y the s*ord(6 2Matthe*, 0C.H08( Among the $ersonal character fla*s that *ill cause a CE% to lose his $osition of leadershi$ is a callous and ruthless disregard for the em$loyees *ho he causes to lose their +o's( =t is *orth*hile to de#ote some time to understanding the 'ackground and career of Mr( Dunla$ to see *hat he did to lose his $osition as a CE%, and *hat, in retros$ect9 he could ha#e done to a#oid 'eing terminated( Al'ert John Dunla$ *as 'orn on July 0C, 17?@, in o'oken, Fe* Jersey to a middle class th family( e secured an a$$ointment to Dest Point and *as graduated H?@ out of a class of HH5( "$on graduation he *as commissioned a second lieutenant and ser#ed only the mandatory threeI year term 2Byrne, J( 17778( %ne of his early $ositions *as as a manager at /ilyITuli$, the $a$er cu$ manufacturer( !rom the start of his career he sho*ed a callous disregard for his fello* em$loyees( At /ilyITuli$, as $art of a restructuring $ro+ect he *as res$onsi'le for a layoff of 05 $ercent of the *orkforce( Management at /ilyITuli$ considered the layoffs necessary and Mr( Dunla$ recei#ed fa#ora'le recognition for the restructuring $ro+ect 2Dunla$, A( 177@8( e follo*ed the same $attern of costIcutting 'y reducing the num'er of em$loyee $ositions through restructuring the cor$oration at Cro*nIJeller'ach 2Dunla$, A( 177@8( /ater at the 1cott Pa$er Cor$oration he *ould again follo* the same $attern of cutting e;$enses 'y eliminating +o's and em$loyees through a restructuring of the $roduction o$erations( e instituted massi#e layoffs( During his term as the CE% at 1cott he terminated ele#en thousand em$loyees, including other e;ecuti#es( o*e#er, the restructuring ser#ed the shareholders *ell( 1cott Pa$er&s stock raised from K?A(55 a share to K105(55 a share( e negotiated a merger *ith -im'erlyIClark that enhanced shareholder&s e,uity 'y KC 'illion( By e#ery measure he accom$lished a successful turnaround for 1cott Pa$er 2Dunla$, A( 177@8( e also increased his o*n fortune 'y earning K155 million for his efforts 2Byrne, J( 17778( Mr( Dunla$ a$$arently took delight in 'eing regarded as a tough manager:so much so that he *rote a selfIaggrandi)ing 'ook titled. 'ean !usiness How + #a,e !ad Com)anies and 'ake Good Com)anies Great 2177@8( Dith such e;traordinary success at 1cott it is easy to see *hy the 1un'eamI%ster Cor$oration, a K1(0 'illion maker of electric 'lankets, outdoor grills, coffee makers and other household $roducts, *as so eager to get him as their CE%( =n July of 177C, follo*ing his s$ectacular success at 1cott Pa$er, he *as a$$ointed CE% of 1un'eam( Proof of Mr( Dunla$&s a$$eal as a cor$orate reorgani)er<turnaround e;ecuti#e *as e#ident *hen 1un'eam announced his a$$ointment as their CE%:and the com$any&s stock *ent u$ 'y almost H5 $ercent 2 ighlight of Dunla$ #( 1un'eam, 05518( There *ere a lot of ha$$y shareholders at that moment( But their ha$$iness *ould $ro#e to 'e short li#ed( 1un'eam&s stock that +um$ed H5 $ercent earlier *ould continue to go u$ in #alue until later *hen it *ould dro$ like a hanged man through a tra$ door( %n July 00, 177A, 1un'eam&s stock closed at under K7(55 after hitting a high of KH0(55 in March of the same year 2Byrne, 17778( Dhat *ent *rongE The Managerial Mistakes, Page >

Journal of Case Research in Business and Economics During his term as CE% at 1un'eam, Mr( Dunla$ shut do*n or sold off C out of 1A $lants and terminated 10,555 em$loyees:a massi#e restructuring of the cor$oration( e seemed to dolt on his re$utation as a callous manager 2 ighlights of Dunla$ #( 1un'eam, 05558( The traits of arrogance and ruthless indifference to*ard his su'ordinates *ould e#entually suck him into a #orte; dra*ing him ine;ora'le to*ards the destruction of his career( At least this is ho* some of the media *ould descri'e *hat *as to ha$$en to Mr( Dunla$ 2Titans of !inance, 05518( But, if it *as not the trait of arrogant, callous indifference to*ard the em$loyees he terminated that 'rought him do*n, then *hat *as it 2Titans of finance, 05518E Perha$s a factor that caused his failure at 1un'eam *as:ironically:his success at 1cott Pa$er( e 'uilt his cor$orate re$utation on restructuring com$anies and laying off em$loyees( Fot +ust a fe* em$loyees, 'ut thousands of em$loyees including senior officers and closing do*n $lants( e had e#ery reason to 'elie#e that 'ased on his $re#ious e;$erience this a$$roach *as *orka'le( =n trying to understand ho* a CE% can ha#e a successful reign in one cor$oration and then ha#e a disastrous term in another cor$oration, it is hel$ful to 'ear in mind that cor$orations differ in significant *ays( Dhat *orked *ell in one cor$orate setting may not *ork as *ell *ithin a different cor$orate setting( More significantly, a CE% changes o#er the $eriod of his tenure in that $osition( 1ome CE%&s gro* more efficient and their success is more lasting( %ther CE%&s, those *ith character fla*s, make the mistake of 'elie#ing that circumstances that came a'out 'y chance *ere not due to chance, 'ut 'ecause of something they did that *as right( This may ha#e 'een the case *ith Mr( Dunla$( e thought that his callous style of leadershi$ *as the reason that 1cott Pa$er *as a'le to reduce its o$erating costs and to 'e merged *ith -im'erlyIClark to the 'enefit of their shareholders( But there may ha#e 'een other factors 'eyond *hat Mr( Dunla$ did that contri'uted to the fa#ora'le outcome( 1o, $erha$s 'eing callous in one&s leadershi$ style and reducing costs 'y massi#e layoffs might not ha#e 'een the reason that 1cott Pa$er&s stock a$$reciated( !urther analysis is needed 'efore +um$ing to conclusions as to *hy the #ery same tactics that Mr( Dunla$ used successfully at 1cott Pa$er did not *ork as *ell at 1un'eam 2 ighlights of Dunla$ #( 1un'eam 05558( Could it 'e that there *as an outrage at 1un'eam o#er his callous elimination of $eo$le&s +o's that did not occur at 1cott Pa$erE %r could his arrogant selfIaggrandi)ement and selfIenrichment at the e;$ense of other em$loyees ha#e contri'uted to his do*nfallE The $ersonal fla*s in Mr( Dunla$&s character of arrogance, selfIaggrandi)ement, and indifference to*ards other em$loyees *ere only contri'uting factors( =n order to understand *hat caused Mr( Dunla$ to 'e relie#ed of his res$onsi'ilities, it is necessary to look further into the cor$orate situation at 1un'eam( The ans*er is that he used a financial maneu#er that $ro#ed to 'e fatal to his career and ruinous to the cor$oration( The financial maneu#er is called bill and hold( 1un'eam, at Mr( Dunla$&s direction, entered into deals *ith its retailers *here 1un'eam&s $roducts *ould 'e sold at large discounts to its dealers and held in thirdI$arty *arehouses for later deli#ery( According to 1un'eam&s auditors this *as not an illegal transaction, ho*e#er the #olume *as e;cessi#e( By this maneu#er, Mr( Dunla$ o#erstated re#enue 'y a significant amount( =n 177@, 1un'eam had 'ooked an 1A $ercent increase in sales that actually had not 'een deli#ered 2 o* Al Dunla$ 1elf Destructed, 177A8( %n March 17, 177@, 1un'eam ackno*ledged that its firstI,uarter earnings *ould 'e 'elo* Dall 1treet analysts& estimates( At that $oint things 'egan to unra#el ,uickly( By A$ril ?, 177A, 1un'eam&s stock had fallen 0H $ercent to a little o#er K?>(55( Mr( Dunla$ tried to make corrections admitting that some 'ad deals *ere made *ith e;cessi#e discounts to dealers( But matters did not im$ro#e 2Titans o" Finance( 055@8( %n June 7, 177A, he made a final fatal The Managerial Mistakes, Page H

Journal of Case Research in Business and Economics error:he lost control of his com$osure at a 'oard meeting:an unforgi#a'le error( e accused a ma+or shareholder, 'illionaire Ronald Perelman of a cons$iracy to dri#e the $rice of 1un'eam&s stock do*n so that he 2Perelman8 could 'uy out the com$any( Mr( Dunla$ then uttered the fatal *ords. 3Either *e get the su$$ort *e should ha#e or LChief !inancial %fficerM Russ and = are $re$ared to goG( Just $ay us6 2Byrne, 177A8( The im$ression that Mr( Dunla$ made on the directors *as de#astating( Their leader, Mr( Dunla$, had 'ecome undone:he no longer held their confidence( A fe* days later the 'oard recon#ened and $laced a conference call to Mr( Dunla$( Their message *as 'rief, as it al*ays is. 3All the directors ha#e considered the o$tions $resented to us last Tuesday, and *e ha#e decided that your de$arture from the com$any is necessary(6 The e#ents leading u$ to the 1un'eam Cor$oration 'oard meeting on June 7, 177A are recorded in an article 'y John Byrne that *as $u'lished in !usiness*eek, 2177A8( That marked the end of Mr( Dunla$&s term of CE% at 1un'eam and most $ro'a'ly his career as a CE% 2Mc4eeham( 05518( The lesson to CE%&s is sim$ly this. A CE% must ne#er lose control of his emotions in the $resence of anyone in the cor$oration, and most certainly ne#er at a meeting *here either senior officers or 'oard mem'ers are $resent( A CE% must al*ays a$$ear to 'e in control of e#ery situation and to ha#e a $lan for addressing *hate#er $ro'lems may 'e $resent at that time( There is certainly a reasona'le $ro'a'ility that if Mr( Dunla$, instead of a$$earing emotionally u$set and making a statement indicating that he *as ready to a'dicate his res$onsi'ilities, had offered a $lan for addressing the $ro'lem of declining share $rice 'ecause of the o#erstatement of sales, he *ould not ha#e created the im$ression that he *as no longer to 'e trusted to lead the cor$oration( =n essence, Mr( Dunla$ resigned( That *as a fatal and irre#ersi'le mistake( Perha$s his arrogant nature led him to 'eha#e as he did:to his detriment( =n his case the Bi'le ,uote *as reali)ed. 3Gfor all those *ho take the s*ord *ill $erish 'y the s*ord(6 Case %uestion Dere there signs or markers that Mr( Dunla$&s *ay of dealing *ith $eo$le *ould ultimately result in ma+or $ro'lems to the cor$orationE =f you *ere a mem'er of the 'oard of directors of the cor$oration and you o'ser#ed those signs *hat action could you ha#e takenE Corru tion and !raud& The Twin Charges !atal to a CEO's Care There ha#e 'een se#eral CE%&s *ho ha#e suffered the destruction of their careers in the last ten years( The cor$orate *orld has changed significantly in the $ast ten years, es$ecially since the ado$tion of the 1ar'anesI%;ley Act that im$oses strict regulations on cor$orations( =n addition to stricter regulation 'y regulatory agencies, there is more attention focused on cor$orate dealings 'y the ne*s media than e#er 'efore( This closer scrutiny and *ideIs$read co#erage of cor$orate acti#ities has made it more im$ortant than e#er for CE%&s to 'e on guard and to 'e a*are of their cor$orate leadershi$ $ractices( Dhat may ha#e sli$$ed 'y the attention of regulators and the ne*s media a fe* decades ago is much more likely to 'e disco#ered and 'rought to light in today&s cor$orate en#ironment( The Case of (en )ay and the Enron Cor oration Perha$s the most hea#ily $u'lici)ed case of cor$orate fraud and corru$tion since the start of the year 0555 *as that of -enneth 2-en8 /ay, the CE% of the Enron Cor$oration( -en /ay The Managerial Mistakes, Page C

Journal of Case Research in Business and Economics *as the CE% and Chairman of Enron from 17AC until his resignation on January 0?, 0550, 2Achman, 05508( e *as 'orn in Tyrone, Missouri, attended the "ni#ersity of Missouri, *here he ma+ored in economics, and earned a Ph(D( in economics at the "ni#ersity of ouston in 17@5( e started his career *ith the E;;on Mo'il Cor$oration( e also *orked as a federal energy regulator and mo#ed u$ to undersecretary for the De$artment of the =nterior in the 17@5&s Cra*ford, -(, 055>8( =n 17AH he 'ought the ouston Fatural 4as Com$any and changed the name to Enron( e 'ecame one of the highest $aid e;ecuti#es in the "nited 1tates *ith a com$ensation $ackage of o#er K>0 million a year( e *as #ery *ell connected *ith $eo$le at the highest le#els of go#ernment 2%sterDo*Jones, 05558( Dho *ill Bush $ick to run treasuryE 0558(( !rom this high $innacle of cor$orate success, he *as to fall to ruin taking *ith him other mem'ers of the Enron cor$orate leadershi$ team, the cor$oration itself, and thousands of Enron em$loyees *ho *ould lose much of their retirement sa#ings held in Enron stock 2Pasha, 1( N 1eid, J(, 055C8( Dhat *ent dreadfully *rongE %n July @, 055>, -en /ay *as indicted and charged *ith 11 counts of securities fraud, and making false and misleading statements $ertaining to the colla$se of the Enron Cor$oration( Earlier, in Decem'er 0551, Enron filed for 'ankru$tcy, the largest com$any to file for 'ankru$tcy in the "nited 1tates at that time 2"1 # 1killing and /ay, 055>8( =n#estors lost 'illions of dollars and 05,555 em$loyees lost their +o's:and many lost their retirement sa#ings, a catastro$he of record $ro$ortion in all res$ects( During his trial, Mr( /ay claimed that almost all his *ealth, a$$ro;imately K>5 million *as in#ested in Enron stock, and that he also had suffered se#ere financial losses 2Can&t the !eds 4et /ay&s Money, 055CE8( e claimed during his trial that Enron&s colla$se *as caused 'y a cons$iracy among short sellers, fello* e;ecuti#es, and the ne*s media 2/ay #ictim of lynching( The Chica(o Tribune, 055C8( The +ury, ho*e#er, did not 'elie#e Mr( /ay&s account of the e#ents that led u$ to the colla$se of the Enron Cor$oration( %n May 0H, 055C, Mr( /ay *as found guilty of cons$iracy and making false statements( Before he *as scheduled to 'e sentenced, he suffered a fatal heart attack, 2Cra*ford, 055>8( =t is interesting to note that unlike Al'ert 2Al8 Dunla$, -en /ay *as not uni#ersally held in contem$t 2 -en /ay&s memorial attracts $o*er elite( 'oney( 055C8( True, the em$loyees *ho lost their +o's and sa#ings felt no remorse o#er his death, 'ut many others felt that he had 'een singled out 'y o#er)ealous federal $rosecutors to sho*case their dri#e against cor$orate corru$tion( They accused the ne*s media of #ilifying him and of character assassination 2Enron&s -enneth /ay defended at his memorial ser#ice( !loomber(, 055C8( Clearly, the colla$se of Enron *as a catastro$hic tragedy *ith its im$act on all those $eo$le associated *ith it( Dhat can 'e learned from an analysis of the e#ents leading u$ to its filing for 'ankru$tcy in Decem'er 0551 and Mr( /ay&s indictment in July of 055>E To 'egin *ith, Mr( /ay had no a$$arent character fla*s that made him detested or des$ised( There is no e#idence that he *as cruel or insensiti#e to*ard his em$loyees( Certainly, there *as clear e#idence that he mislead em$loyees and others regarding the true financial condition of the cor$oration( But his moti#e could ha#e 'een, as he claimed, to a#oid $anicking in#estors into a sell off of Enron&s stock( Trying to determine a $erson&s moti#ation is al*ays difficult and the results are at 'est inconclusi#e( This ha#ing 'een stated, *hat is kno*n is that Mr( /ay had an im$ressi#e list of accom$lishments that indicate he sa* the im$ortance of demonstrating a commitment to social and ci#il ser#ice( 1ome of his a*ards and honors include. The Torch of /i'erty A*ard of the AntiIDefamation /eague, the 1u$er ero onoree A*ard for Child Ad#ocates, A*ard of Distinction from the March of Dimes, and the Brotherhood A*ard from the Fational Conference The Managerial Mistakes, Page @

Journal of Case Research in Business and Economics of Christians and Je*s 2/ay $raised 'y family and friends( Houston Chronicle, 055C8( e *as also remem'ered for his su$$ort of $ro+ects in the ouston 'lack community( The a*ards, honors and ci#ic $ro+ect *ork are mentioned 'ecause it is im$ortant for a CE% to 'e noted for his su$$ort of social, ci#il, and community $ro+ects( This may hel$ s*ay the 'alance in fa#or of a CE% *ho is getting a lot of negati#e $ress co#erage( =t can only 'e s$eculated as *hether his good *orks might ha#e led to a fa#ora'le outcome during a $rolonged a$$eal of his con#iction had he not died 'efore sentencing( Many of the $ro'lems *ith Enron *ere caused 'y it taking on too much de't( That *as the root of the $ro'lem:Enron o#er e;tended its financial resources 2Ackman, D( /ay lays an egg( Forbes( 055C8( =t had used a *e' of $artnershi$s and other cor$orate entities to 'orro* and conceal more than a 'illion dollars in de't( Additionally, it misre$resented its true $rofita'ility 'y recording inflated $rofit figures( =ts 'alance sheets, income statements, and other documents *ere deli'erately misre$resenting the cor$oration&s financial condition( The "(1( Justice De$artment in its in#estigation charged that Enron&s management mani$ulated Enron&s 'ooks( !urthermore, that Enron&s management including Andre* !asto*, Chief !inancial %fficer and e;ICE%, Jeffrey 1killing lied a'out Enron&s finances to go#ernment regulators, the financial community 2including Bank of America8, its em$loyees, and the $u'lic including its in#estors 2Judge #acates con#iction( -ew .ork Times, 055C8( During the $eriod from August through %cto'er 0551, Mr( /ay sold 71A,555 shares of Enron stock( During this $eriod he told 0A,555 em$loyees that the cor$oration&s li,uidity *as fine( Additionally, Mr( /ay *as accused of defrauding three 'anks including the Bank of America to o'tain its lines of credit, 2Peters, 055C8( e claimed that the sale of his Enron stock *as done to meet margin calls( =n essence, an analysis of the cause of Enron filing for 'ankru$tcy *as that it had taken on too much de't, had hidden the e;tent of its de't through fraudulent accounting $ractices, and other misre$resentations( Dhen Enron *as una'le to o'tain any further credit and it *as una'le to meet its de't o'ligations, it had no alternati#e 'ut to file for 'ankru$tcy 2"nited 1tates # Asset( U# Courts, 055C8( Regarding the fatal mistakes made 'y Mr( /ay they seem to 'e related to his attem$t to co#er u$ the fraudulent accounting $ractices and to mislead e#eryone concerning the true condition of the cor$oration( e tried to $rotect his cor$oration *hen its condition *as such that it *as 'eyond sa#ing( Dhat could he ha#e done to ha#e sa#ed the cor$oration 'efore it got into such dire straitsE %f course, in retros$ect anything said as to *hat he could ha#e done must seem like an e;ercise in 05<05 hind sight( But, most financial analysts *ould agree that the conditions leading to Enron&s de't situation could ha#e 'een caught earlier than they *ere, and remedial $lans could ha#e 'een set in motion 2/ay, 1killing guilty in Enron scandal( M1FBE, 055C( Perha$s a lesson, in retros$ect, is that it is 'est to 'e o$en *ith one&s creditors sooner than later, and not to try to decei#e them in e;tending more credit than can 'e re$aid( But his more serious mistake *as in $ermitting his chief financial officer to $roduce fraudulent accounting statements, and then lying to e#eryone a'out the true condition of the cor$oration( The loss of one&s cor$oration is difficult to 'ear:'ut to face the $ros$ect of $rison is e#en more un'eara'le( Mr( /ay $aid dearly for his mistake as did the em$loyees and the shareholders( That is $roof that the $enalty for fraud is dear and not *orth the risk of a $rison sentence( As Dilliam Po*ers, dean of the "ni#ersity %f Te;as 1chool %f /a* $ut it. 3A fundamental default of leadershi$ and management L'eginsM at the to$, *ith the CE%(6 2Ackman, D( 05508( The Managerial Mistakes, Page A

Journal of Case Research in Business and Economics Case %uestion Do you think that *hen a cor$oration&s financial $osition has reached the $oint *here it faces a high $ro'a'ility that it may not 'e a'le to reco#er, that the CE% should make this clear to the 'oard of directorsE As a mem'er of the 'oard of directors, *hat signs or markers in Mr( /ay&s actions offered clues that he *as acting im$rudentlyE Dhat a$$roach *ould you take to $rotect the cor$orationE Crimes That CEO's Commit That )ead to $isaster for Themselves and for Their Cor orations # The Case of *ohn +igas and the Adel hia Communications Cor oration =t is a regretta'le failing in the nature and character of some CE%s that cause them to succum' to the tem$tation to use their $ositions to enrich themsel#es 'y illegal means( An e;am$le of a CE% *ho made this fatal error is John Rigas, the founder of the Adel$hia Communications Cor$oration( An analysis of the facts and the e#ents leading to the con#iction of Mr( Rigas for cons$iracy, 'ank fraud and securities fraud *ill $ro#ide a #alua'le lesson on the danger of resorting to the misa$$ro$riation of cor$orate funds and the attem$t to hide the misdeed( Perha$s a clue as to *hy some CE%s ha#e the regretta'le $rocli#ity to*ard the misa$$ro$riation of cor$orate funds is that they regard the cor$orationOs assets and resources as their o*n assets and resources( They seem to think that since they ha#e control o#er the cor$orationOs assets and funds they can access and use them as though they had e#ery legal right to use them as they $lease( This $rocli#ity seems to 'e more $re#alent *here the CE%&s *ere the founders of the cor$orations they 'uilt u$ to 'ecome ma+or cor$orations( Did Mr( Rigas, *ho founded and 'uilt u$ the Adel$hia Communications Cor$oration, feel he *as entitled to use the cor$orationOs assets and funds as though they *ere his o*n and not the $ro$erty of the shareholdersE Do CE%s *ho *ere accustomed to the free use of their cor$orationOs resources *hen they *ere the sole cor$oration o*ner as *ell as the leaders of their cor$orations 'elie#e that after they *ent $u'lic and sold shares to the $u'lic they could still 'eha#e as though the cor$orationOs assets *ere still solely their o*n, and that they *ere not accounta'le to the shareholders *ho *ere no* the ne* o*nersE To use an analogy, does someone *ho sells his house to a 'uyer 'elie#e that he can still ha#e access to the house and to its contentsE Dhy of course not( Continuing *ith the analysis of Mr( Rigas& failed leadershi$ of the Adel$hia Communications Cor$oration, it is hel$ful to understand something a'out him, his career, and ho* he came to 'e the head of one of the largest ca'le com$anies in the "nited 1tates( Mr( Rigas *as 'orn in 170> in Dells#ille, Fe* Bork( e ser#ed *ith the "(1( Army during the 1econd Dorld Dar and sa* com'at in !rance( e earned a B1 in Management Engineering from Rensselaer Polytechnic =nstitution( e started the Rigas Ca'le Tele#ision Com$any that had the TP ca'le franchise for his hometo*n in Calders$ort, Pennsyl#ania( e then formed a $artnershi$ *ith his 'rother 4us to form the Adel$hia Cor$oration( e started to 'orro* hea#ily to 'uy su'ur'an ca'le com$anies and Adel$hia 'ecame one of the largest su'ur'an ca'le $ro#iders *ith H(C million customers in ?5 states( Adel$hia also $ro#ided longIdistance tele$hone ser#ice to 115,555 customers in 0@ states and highIs$eed ca'le =nternet ser#ice 2Rigas, J( li#ing$rimetime, 177A8( Mr( Rigas *as regarded as a successful entre$reneur and recei#ed many honorary degrees( Dhere did Mr( Rigas go from rags to riches to ruin, and *hat can 'e learned from his misfortuneE The Managerial Mistakes, Page 7

Journal of Case Research in Business and Economics Mr( Rigas li#ed the life of a successful, *ealthy cor$orate e;ecuti#e( =ndeed, e#idence introduced at his trial $ainted the $icture of a man *ho s$ent money la#ishly( e 'uilt a $alatial K?5 million Adel$hia head,uarters 'uilding in Calders$ort Pennsyl#ania( e $urchased ?C55 acres of tim'erland outside his home in Calders$ort at a cost of K0C million 24reekFe*s,177A8( %ther e;am$les of e;cessi#e s$ending *ere also introduced in the court&s records( According to the court&s record, Mr( Rigas& son Timothy *as so concerned *ith his father s$ending of cor$orate funds that he $ut a limit on his fatherOs *ithdra*s of cor$orate funds at K1 million a month 2Adel$hia founder John Rigas found guilty, 177A8( The $attern *as clear9 Mr( Rigas *as s$ending cor$orate funds *ith total disregard for the interests of the shareholders, a serious mistake for a CE%( The more serious mistake, ho*e#er, *as resorting to a com$le; scheme to lie on financial filings and to attem$t to hide massi#e cor$orate de't in the magnitude of K0(? 'illion( Mr( Rigas and his son Timothy *ould end u$ 'eing con#icted of cons$iracy, 'ank fraud, and securities fraud( They decei#ed in#estors, financial institutions, and stole the funds of the cor$oration to enrich themsel#es:the most serious and fatal mistake of all( And for this mistake John Rigas *as sentenced to 1H years in $rison and his son Timothy *as sentenced to 05 years in $rison 2Adel$hia founder John Rigas found guilty, 055>8( The Adel$hia Communications Cor$oration *as $laced in 'ankru$tcy and its assets sold off( Philadel$hiaI'ased Comcast Cor$oration and The Time Darner Cor$oration agreed to ac,uire Adel$hiaOs ca'le assets and some lia'ilities for K10(@ 'illion in cash and 1@ $ercent of the common stock of Time DarnerOs cor$orate su'sidiary, Time Darner Ca'le, =nc( 2Adel$hia Cha$ter 11 Bankru$tcy, 055C8( Adel$hiaOs longIdistance 'usiness *as sold to Pioneer Tele#ision for K1(0 million 2Adel$hia Communications to sell long distance $hone ser#ice, 055H8( The mistake of the father, John Rigas, sadly caused the end of the Adel$hia Communications Cor$oration, and the loss of 'oth his freedom and that of his son:a crushing 'lo*( Dhat is the lesson to 'e learnedE Perha$s, the lesson to CE%s is 'est e;$ressed in the *ords of E$ictetus as e;$ressed in the Enchiridion/a 'anual0. 3 1o remem'er Lif you treatM *hat is othersO LasM your o*n, you *ill 'e hindered, you *ill mourn, you *ill 'e distur'ed, and you *ill 'lame 'oth gods and humans, 'ut if you think only yours is yours, and anotherOs, +ust as it is anotherOs, no one *ill e#er com$el you, no one *ill hinder you, you *ill not 'lame anyone, nor accuse someone, not one thing *ill you do un*illingly, no one *ill harm you, you *ill ha#e no enemy, for you *ill suffer no harm from anyone6 2E$ictetus, 055?8( Perha$s, if Mr( Rigas and his son had read and learn from E$ictitus they *ould not 'e ser#ing their sentences in $rison( Case %uestion The Rigas case has t*o factors that should of 'een of concern to mem'ers of the 'oard of directors, creditors, and shareholders( The first factor *as that John Rigas *as the founder of the Cor$oration and *as still in a $osition to s$end large sums of the cor$oration&s money( The second factor *as that his son *as running the cor$oration( Dhat signs or indicators *ere there in this case that the t*o factors *ould 'e the underlying causes of the cor$oration&s financial $ro'lemsE

The Managerial Mistakes, Page 1515

Journal of Case Research in Business and Economics The Case of ,ernard -,ernie. Ebbers and the "orld Com Cor oration Bernard John 2Bernie8 E''ers *as 'orn on August 0@, 17>1, in Edmonton, Al'erta, Canada( e attended the "ni#ersity of Al'erta, 'ut later transferred to Mississi$$i College *here he earned a B1 in Physical Education( e 'egan his 'usiness career 'y o$erating a chain of motels in Mississi$$i( =n 17A?, he +oined se#eral other in#estors in the ne*ly formed /ong Distance Discount 1er#ices, =nc( =n 17AH, he took o#er as CE% of the cor$oration( The com$any ac,uired o#er C5 other inde$endent telecommunication com$anies( =n 177H, the com$any changed its name to Dorld Com 2Bernie E''ers, Time 'a(a1ine,17778( =n 177C, Dorld Com ac,uired M!1 Communications, =nc(, *hich at that time o*ned "" Fet, for K10 'illion( =n 1e$tem'er 177A, Dorld Com merged *ith the MC= Cor$oration for a re$orted K?@ 'illion( =t *as one of the largest cor$orate mergers in "1 history( =n 1777, MC= Dorld Com attem$ted to ac,uire 1$rint Communications for o#er K11H 'illion( o*e#er, the attem$ted ac,uisition *as 'locked 'y "1 and Euro$ean antitrust regulators( At this time a general do*nturn *as 'eginning to take $lace in the telecom market and Dorld Com stock $rice 'egan to decline( =n the first ,uarter of 1777, Dorld Com stock $eaked 2E''er&s highIrisk act came crashing do*n on him, 05508( Mr( E''er&s $ersonal holdings *ere estimated to 'e a'out K1(> th 'illion( e *as listed 'y Forbes maga)ine to 'e 1@> in its list of the >55 richest $eo$le( e *as honored 'y Mississi$$i College *ith an onorary Doctorate of /a*s( The merger of Dorld Com and MC= Communications 'rought fame and fortune to Mr( E''ers( MC= Dorld Com *as the num'er four communications com$any in the "1( Forbes, !usiness *eek, Financial *orld, Fortune, and other maga)ines $raised Mr( E''ers for his stellar $erformance in $ushing MC= Dorld Com to num'er A5 in the Fortune H55 2ist o" !est Cor)orations% The *all #treet $ournals #hareholders #coreboard ranked MC= Dorld Com num'er one among telecommunication com$anies in return to shareholder in#estment in 177@, 177A, and 1777( e *as among 1C outstanding CE%&s recommended 'y Financial *orld, and !usiness *eek ranked him as one of the to$ managers in 177@( Mr( E''ers *as inducted into the Mississi$$i Business all of !ame( e ser#ed as chairman of the 'oard of directors of the Com$etiti#e Telecommunications Association from 177? to 177H( %n July 1C, 0551, President Bush announced that he intended to a$$oint Mr( E''ers to the President&s Fational 1ecurity Telecommunications Committee 2President Bush Plans to a$$oint DorldCom&s E''ers to F1TAC, 05518( 2Fational Communications 1ystem(( The F1TAC is com$osed of u$ to ?5 $residential a$$ointees( =n its ad#isory role the F1TAC $ro#ides industryI'ased analyses and recommendations on $olicy and technical issues related to telecommunications, information systems infrastructure $rotection, and other national security and emergency concerns 2%&Donnell, 05508( !rom this e;traordinary $innacle of success, Mr( E''ers 'egan his descent into the lo*est de$ths of $ersonal ruin, dragging do*n *ith him the Dorld Com Cor$oration and its shareholders( Again, *hat can CE%&s learn from an analysis of Mr( E''er&s leadershi$ of the Dorld Com Cor$orationE =t a$$ears that much can 'e learned( Mr( E''ers start on the road to ruin 'egan *hen he and mem'ers of his management team 'egan to make false and misleading entries on Enron&s cor$orate statements( The magnitude of the accounting misstatements *as in the range of K?(AH 'illion to K11 'illion 2E''ers indicted, e;IC!% $leads guilty( 'oney, 055>8( %n July A, 0550, Mr( E''ers *as su'$oenaed to a$$ear 'efore the "(1( ouse Committee on !inancial 1er#ices( Mr( E''ers stated he had nothing to hide( e denied engaging in any criminal or fraudulent conduct( After making the statement he asserted his !ifth Amendment right against selfIincrimination( e *as The Managerial Mistakes, Page 1111

Journal of Case Research in Business and Economics threatened *ith contem$t of Congress charges, 'ut the charges *ere ne#er 'rought( After nine hours of attem$ting to get information from Mr( E''ers and other *itnesses, the committee mem'ers still had not gotten any sort of information concerning the accounting $ractices used to hide de't and e;$enses, and to inflate earnings 'y nearly K?(7 'illion 21choen'erger, R(, 05508( During the hearing some of the *itnesses attem$ted to 'lame Dorld Com Chief !inancial %fficer, 1cott 1ulli#an( John 1edgmore, *ho re$laced Mr( E''ers as CE% of Dorld Com, tried to defend the com$any 'y saying that he and others had in#estigated the matter to unco#er any *rong doings and had coo$erated *ith authorities( Mr( 1edgmore also 'lamed the com$any&s e;ternal auditors, Arthur Anderson, for failing to catch the accounting $ro'lems 21choen'erger, R( !ormer DorldCom e;ecs in#oke fifth, 05508( Related to the ,uestioning of mem'ers of the Dorld Com Cor$oration and the Arthur Anderson auditor, Mel#yn Dick, *as the ,uestioning of Jack 4ru'man, an analyst *ith 1olomon 1mith Barney in Fe* Bork( Mr( 4ru'man *as ,uestioned 'ecause he recommended Dorld Com stock to his firm&s in#estors:e#en *hen it a$$eared he sus$ected that the cor$oration *as in serious financial trou'le( Mr( 4ru'man&s in#ol#ement in the Dorld Com affair and his role in touting its stock to his firm&s in#estors *ere #ie*ed 'y the financial industry as a scandal in its o*n right 21choen'erger, R(, 0550( #u)ra%8( The road to ruin for Mr( E''ers and Dorld Com *ent into a stee$er descent *hen on August 0@, 055?, the %klahoma Attorney 4eneral, Dre* Edmondson, filed a 1HIcount indictment against Mr( E''ers 2Morit), 1( 055?8( The charges *ere dro$$ed *ith the right to refile retained on Fo#em'er 05, 055?( E#en though the charges *ere dro$$ed, it is interesting and instructi#e to see e;actly *hat it *as that the %klahoma Attorney 4eneral charged Mr( E''ers *ith doing that constituted a crime 2E''ers indictment, 055?8( The follo*ing statements are taken from the %klahoma Attorney 4eneral&s indictment against Mr( E''ers 2E''ers indictment, 055?( #u)ra%8. Count 1. Piolation of the %klahoma 1ecurities Act @1 %(1( 1ection 151 218( %n or a'outGMarch of 0551, in connection *ith the offer, $urchase, or sale of defendant Dorld Com, =nc(&s securitiesGBernard J( E''ersGcaused, directed, or allo*ed certain ma+or o$erating e;$enses to 'e ca$itali)edGand allo*ed said e;$enses to 'e materially understated and income to 'e materially o#erstated for the fiscal year ended Decem'er ?1, 0555, in defendant Dorld Com =nc(&s $u'licly a#aila'le 15I- statement filed *ith the 1ECG( !urther, the Defendants *ere *ell a*are thatGthe results of the entries *ould 'e reflected in the 15I-Gand the information contained in the 15I- *ould 'e used 'y in#estorsGduring the course of the offer, $urchase or sale of Defendant Dorld Com =nc(&s securities, andGin#estorsG*ould 'e defrauded 'y the information contained in the 15IL1tatementM( The remaining counts in the indictment alleged that Mr( E''ers instructed 1cott 1ulli#an, the C!%, to make +ournal entries into Dorld Com =nc(&s general ledger corres$onding to e;$ense accounts that *ere materially understated and to make entries that materially o#erstated income( !urthermore, Mr( E''ersG LTheM defendant did not $ro#ideGany su$$orting documentation or any $ro$er 'usiness rationale for the entries( There *as no +ustification in fact or under 4eneral Acce$ted Accounting Princi$les 24AAP8 for the entries( =n essence, Mr( E''ers *as charged *ith directing his C!%, 1cott 1ulli#an to enter false and misleading information on the cor$oration&s financial statements including the -I15 1tatement filed *ith the 1EC *ith the intent to mislead and defraud in#estors and financial institutions 2E''ers =ndictment, 055?( #u)ra(8( %n March 0, 055>, federal authorities indicted Mr( E''ers on charges of securities fraud and cons$iracy( e *as found guilty of all charges and sentenced to 0H years in federal $rison( The toughest sentence e#er handed do*n in a cor$orate accounting case 2"(1( Charges e;I The Managerial Mistakes, Page 1010

Journal of Case Research in Business and Economics DorldCom CE% Bernard E''ers9 former DorldCom C!% 1cott 1ulli#an $leads guilty, 055>8( %n July 0A, 055C, a federal a$$eals court u$held the con#iction and 0HIyear $rison sentence of former Dorld Com CE% Bernard E''ers on charges related to a multiI'illion dollar accounting fraud( The ruling 'y the threeI+udge $anel cleared the *ay for him to 'egin ser#ing the 0HIyear $rison sentence( The o$inion of the court *ritten 'y Judge Dinter is es$ecially telling of ho* the federal courts #ie* cor$orate crime( Referring to Mr( E''ers& crime, he stated that Mr( E''ers& actions to hide Dorld Com&s financial $ro'lems *ere su'stantial and had cost in#estors dearly( e *ent on to say, 3The methods used L'y Mr( E''ersM *ere s$ecifically intended to create a false $icture of $rofita'ility e#en for $rofessional analysts LandM that in E''ers& case *as moti#ated 'y his $ersonal financial circumstances( 4i#en Congress& $olicy decisions on sentences for fraud, the sentence is harsh 'ut not unreasona'le6 2A$$eals court u$holds E''ers con#iction, 055C8( The message deli#ered 'y the federal courts is $ainfully clear:if a CE% is con#icted of defrauding in#estors and financial institutions, he *ill 'e $unished harshly( The Dorld Com Cor$oration and its in#estors also $aid a dear $rice( The amount of the accounting fraud *as estimated to 'e in the range of K11 'illion *hich caused the colla$se of the Dorld Com Cor$oration *hich *as then declared 'ankru$t( Dhat final remarks can 'e made on such a sad ending for the man and the cor$orationE According to re$orters Jayne %&Donnell and Andre* Backo#er, of the U#A Today maga)ine, Mr( E''ers& highIrisk act came crashing do*n on him, 205508( Their fi; on the story of Mr( E''ers is that he 'uilt u$ Dorld Com *ith reckless 'old deals and 'ig gam'les that ultimately crashed( Again, according to their article $u'lished Decem'er 11, 0550, in U#A Today in the Money section, Mr( E''ers s$ent money, his o*n and that of the cor$oration la#ishly( !or e;am$le, he 'ought Canada&s 'iggest ranch and t*o farms( The ranch manager, Joe 4ardner, *as said to ha#e 'oasted that after E''ers 'ought the ranch in British Colum'ia in 177A, that, 3De ha#e all the money in the *orld(6 Additionally, he in#ested in a minor league hockey team, a trucking com$any, an allIterrain #ehicle dealershi$, a lum'er yard, enough tim'erland to co#er half the state of Rhode =sland, and a yacht com$any( e financed these $urchases *ith K>5A million in loans from Dorld Com( =t seems he and Mr( Rigas of Adel$hia 'oth 'elie#ed that they could use the cor$oration&s assets for their $ersonal financial transactions( Mr( E''ers 'uilt Dorld Com into one of the largest cor$orations in the telecom industry( =n 1777, his $ersonal fortune *as estimated at K1(> 'illion and Forbes listed him as one of the richest men in the "(1( But his in#estments sho*ed a lack of good +udgment( e $aid a huge $remium for the com$anies he ac,uired( e o#er$aid for the ranch, the tim'erland, the yacht yard, minor league hockey 'usiness, and seemingly e#erything else he in#ested in( According to the 'ankru$tcy court record, Dorld Com&s many ac,uisitions *ere $oorly integrated and lacked strategic $lanning( Mr( E''ers& $lan *as to gro* 'y ac,uisitioning( But the strategic $lan *as seriously fla*ed( The ac,uisitions *ere not *ell integrated into the cor$orate structure( =n all, Dorld Com made a'out C5 ac,uisitions, *ith its ac,uisition of MC= in 177A, costing K>5 'illion( These ac,uisitions caused 'ig financial $ro'lems( De't mounted on de't( Mr( E''ers *as alleged to ha#e used Dorld Com shares to secure K1 'illion in $ersonal loans( 2E''ers& high risk act came crashing do*n on him, 0550, #u)ra%8( Dhen Dorld Com stock did rise, he used the increase in stock #alue to make more ac,uisitions( But as stock $rices dro$$ed it 'ecame increasingly difficult to meet the de't o'ligation for 'oth his de't and that of Dorld Com( Dhen Dorld Com 'ecame increasing una'le to manage its e;cessi#e de't, Mr( E''ers made the fatal mistake of directing his C!% to hide the true condition of the cor$oration 'y entering false data The Managerial Mistakes, Page 1?1?

Journal of Case Research in Business and Economics on its 'ooks, and e#en *orst, to enter false data on its -I15 1tatement( At that $oint he reached the end of the road:federal $rison( Case %uestions The cases of -en /ay 2Enron8 and Bernie E''ers 2Dorld Com8 ha#e some interesting similarities( Both men *ere skilled and e;$erienced e;ecuti#es( Both men *ere successful in increasing the si)e and sco$e of their cor$orations( Both men made decisions and e;ercised +udgment that 'rought an end to their careers and financial ruin to their cor$orations( o* *ere the decisions each man made similar and ho* *ere they dissimilarE As a 'oard mem'er *hat signs *ere there that each man *as em'arked on a course that *ould end in financial ruin for the cor$oration, its em$loyees, and shareholdersE Conclusion As is often the $ro'lem *ith case studies, it is not easy to formulate a conclusion that flo*s smoothly and fla*lessly from the analysis( This is also true of this author&s attem$t to identify 'eha#ioral fla*s that can ser#e as markers associated *ith financial ruin resulting from faulted e;ecuti#e leadershi$( o*e#er, there does seem to 'e #alue in identifying, studying and classifying fla*ed e;ecuti#e 'eha#ior that if detected in the formati#e stages, can 'e halted 'efore it $rogresses to the terminal stage *here a cor$oration, its shareholders, and the general $u'lic suffer serious losses( This then is *hat the author offers as the #alue of this study:the identification of fla*ed cor$orate e;ecuti#e 'eha#ior $atterns that ha#e the $rocli#ity for doing irre$ara'le harm to the cor$oration( As all cor$orations ha#e a 'oard of directors, it seems reasona'le that 'oard mem'ers should 'e #igilant in monitoring CE% 'eha#ior to $reclude CE%&s from engaging in the ty$es of 'eha#ior $resented in this study( Regarding the case of Al Dunla$, the $rimary lesson to 'e learned is that a CE% should tem$er his actions regarding the careers and +o's of su'ordinates and em$loyees so as to a#oid the general im$ression of 'eing totally insensiti#e to their needs, and e#en *orse to a$$ear to take a $er#erse $leasure in their $light( Mr( Dunla$ seemed to en+oy the re$utation of 'eing ruthless in laying off em$loyees and shutting do*n $lants( That makes cor$orate directors a$$rehensi#e a'out the re$utation of the cor$oration( A second lesson to 'e learned from an analysis of the Al Dunla$ case is ne#er to gi#e an ultimatum to the 'oard of director telling them to acce$t something or you *ill resign( The outcome is most often that the 'oard acce$ts the resignation( the $rimary lesson to 'e learned from the case of -en /ay and the Enron Cor$oration is that e#en though a CE% may 'e *ell intentioned, that *ill not $rotect him or the cor$oration if he attem$ts to decei#e the financial institutions that are its creditors or to decei#e the in#estors( E#en acce$ting the fact that he *as acting to $rotect the cor$oration, his attem$t to hide the true financial condition of the cor$oration *as legally and ethically cul$a'le( =f a cor$oration is in dangerously 'ad financial condition, the outcome of attem$ting to decei#e or hide the true financial condition *ill ultimately result in criminal charges of fraud( There are se#eral lessons to 'e learned from the case of John Regas and the Adel$hia Cor$oration( The first is that a son $ositioned in an o#ersight $osition o#er his father is fraught *ith $eril( John Regas s$ent the cor$oration&s money as though it *as his $ersonal money( is son *as una'le to correct this $ro'lem( The second lesson is to not attem$t to hide an enormous The Managerial Mistakes, Page 1>1>

Journal of Case Research in Business and Economics amount of de't to make the cor$oration a$$ear in financial state that is false( The $resent state of cor$orate management is that $rosecutors *ill ha#e )ero tolerance for CE%&s *ho engage in fraudulent $ractices such as attem$t to hide de't of use cor$orate funds for e;cessi#e $ersonal $urchases( Regarding the case of Bernie E''ers and the DorldCom Cor$oration, the $rimary lesson to 'e learned is similar to that of -en /ay *hich is not to $lace the interests of trying to $rotect the cor$oration a'o#e those of 'eing honest and forthright( Mr( E''er *as o#erly aggressi#e in the $ractice of mergers and ac,uisitions to the $oint of 'eing reckless *ith the cor$oration&s resources( Dhen this resulted in more de't that the cor$oration could handle he succum'ed to fraud and deceit to hide the true condition of the cor$oration from its creditors and in#estors( This *as the mistake the cost him his career and 'rought ruin to his cor$oration(

The Managerial Mistakes, Page 1H1H