978-1285428710 Section 4 SECTION 4F

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SECTION 4F: THE FEAR-AND-SILENCE FACTORS

CASE 4.23 – HEALTHSOUTH: THE SCRUSHY WAY

Use PowerPoint Slides 204 – 209.

Answers and Key Discussion items

1. The HealthSouth culture was similar to the cultures at FINOVA (Case 4.11), Bausch & Lomb (Case

4.26), Enron (Case 4.20), WorldCom (Case 4.15), and Tyco (Case 4.25): there was an iconic CEO

who was getting results and who put the fear into employees who were rewarded if they met numbers

2. The following should help you walk the students through the correlations and common elements in

the cases:

BEHAVIOR EVIDENCE WHERE WE’VE SEEN IT (PARALLELS)

Innovators – “Model of healthcare for the future”

WorldCom

Phenomenal

– Stock rose at a 31% rate per year

Enron, Tyco

Confusing Structure – Billion dollar company through acquisitions WorldCom, Enron, Goldman

Accounting Practices – Profits restated in 2002 and 2003 to reflect $2.5

– You do what you need to do

WorldCom, Enron (Financial Reporting), FINOVA, Bausch &

Gradual Degradation – Fix financial statements over time, quarter to quarter,

engineer your way in and out

– The Chief Auditing Officer developed a 50 point

Enron (Labyrinth Finances); Merrill, Lehman

Enron

Autocratic CEO – Go figure it out

– E-mail those that miss the numbers

Tyco

FINOVA (High pressure environment)

Hollywood Star CEO – Flamboyant always with celebrities, own radio show

Martha, Jack Welch, Enron, World Com

Out-of-Hand Lifestyle – Mr. Scrushy owned mansions, cars, eleven

businesses

Martha, Tyco, WorldCom, Adelphia

“Family” Business – HealthSouth dealt with other family owned business

Enron

Regulatory – Allowed use of jet to politicians, probably more than

Rigged election case, certainly possibilities for rigged

Incentive Programs – Paid his loyal subordinates well

– “Bring ’em up Alabamians”

– Bonuses and salaries grew at exponential rates on

Tyco, Enron, WorldCom, Goldman, Merrill

Enron

Tyco, WorldCom

Young ’uns – VP of reimbursement, 27 years old

– CFO, 28 years old

Tyco

Money Thirst – Don’t hire MBAs just

Tyco (Smart, poor and wants to be rich)

Fraudulent Practices,

Apply the Law

– Became obvious for employees (Diane Henze) but

was ignored by people closer to the top – “I wouldn’t

Merck (Internal knowledge)

Tyco (Internal controls)

Harping on Ethics – “Unusually” generous with the community FINOVA, Enron, Tyco

Weak Board – “We directors really don’t know a lot about what has

been occurring at the company”

– Auditors didn’t find anything, we thought it was right

– Conflict of interest (one director had a consulting

contract for 7 years)

Enron (Expertise of Board members)

Softbank Accounting

Tyco (Activities of Board members), WorldCom (Bernie’s

Board)

COMPANY

Fostered image through affiliation with celebrity and sports endorsers

Billed as “Hospitals of the Future”

Similar to FINOVA, the “financial innovators”

Competitors began to copy HealthSouth model

FINOVA and Enron – rated by Fortune as “Best Companies To Work For” these are all to

innovators

Became a $1B company through acquisitions, incredible/unbelievable stock growth – 31% per year

from 1987 to 1997, beat earnings for 47 quarters in a row

Tyco, $33B growth through more than 200 acquisitions – accounting issues here; explain growth

Also goes to focus on numbers – double-digit growth and pledges to continue despite reality

saying otherwise

Enron

CEO SCRUSHY (these go to culture of fear and silence)

Scrushy “ruled by top-down fear”, threatened critics with reprisals, paid loyal subordinates well

Tyco, Kozlowski “was a scary CEO whose philosophy was, ‘Money is the only way to keep

score’”, sycophantic CEO

Scrushy’s “Monday-morning beatings”, would call employees to facilities at 1:00 AM to come pick up

trash in parking lot to degrade them, hooks in employees

Tyco annual awards banquet where “worst of” employees were paraded to the front of the room

(“death sentence”)

Scrushy a micro-manager of details as small as cellular telephone bills

Exorbitant CEO spending: Scrushy’s yachts, cars, homes, etc.; iconic CEO

Tyco (Kozlowski’s $6,000 shower curtain), Bernie Ebbers

Scrushy hired security to find employees posting on Internet message boards

Enron (C. Verdon) employees fired for comments in employee chat room, cited as “breach of

security”

Scrushy a flamboyant CEO with athlete and celebrity ties, loans of corporate jet to politicians; iconic

CEO

Similar to Tyson giving favors to Secretary of Agriculture, Mike Espy

Bernie Ebbers

Scrushy a generous yet egotistical philanthropist, gets name on library, college building and

parkway; harping on ethics or socially responsible, which became a way to justify some of their

conduct

FINOVA: reputation for generous giving in community

Tyco (Kozlowski): $4.5M to traveling museum, $1.7M for Kozlowski Athletic Complex, $5M for a

building named Koz Plex

CULTURE

Scrushy would hire “advance-them-up-from-nowhere Alabamians” to create a young officer team that

was more “pliable” than experienced players; Young ‘uns and hooks

WorldCom

Tyco’s Kozlowski would hire people like himself, “smart, poor and wants to be rich”

Compensation plans (generally tied to stock); Scrushy employed top-down pressure to meet

numbers, compensation based on outstanding performance (bonuses, stocks), and said to be in

line with best practices

FINOVA offered generous incentive plans tied to stock price of company

Tyco: meeting numbers meant bonuses, exceeding numbers meant “the sky is the limit”,

employees succumb to the pressure of number achievement

Tyco executives used both incentives and pressure in order to get employees to push the

envelope to maximize results (“financial engineering”)

“Corporate culture created the fraud, and the fraud created the corporate culture”

Enron, 20% of all employees rated below performance, encouraged to leave, created a culture

where nobody wanted to deliver bad news

HealthSouth CFO William Owens – “If you fix financial statements immediately, you’ll get killed. But

if you fix it over time, if you go quarter to quarter, you can fix it.”

All companies studied, including Enron, FINOVA, etc. … over time, less federal/regulatory

intrusion, you can make it work; overestimated ability, underestimated risk

HealthSouth Directors land lucrative consulting contracts, investment ventures with Scrushy and

other favorable contracts and incentives; Scrushy’s personal companies did extensive business

with HealthSouth; culture of conflicts

Similar to Clinton in 1978 after being elected to governor and appointing Tyson executives to

state government positions and Tyson receiving favorable regulatory decisions

Enron doing business with (Lay’s & Skilling’s) relatives

Tyco, $20M to outside director to broker deal for Tyco acquisition, other friends awarded

contracts

HealthSouth “Board of Directors deceived”; weak board; autocratic CEO; sycophants; HealthSouth

Directors claim they “Don’t know a lot about what has been occurring at the company”; “Just to be

clear, the fraud occurred at the corporate level”; Philip Watkins (corporate director) “relied” on

accuracy of information from Ernst & Young and others, should have studied the numbers himself

Enron

Medical reimbursement officer (important HealthSouth position) given to 27 year old

Marisa Baridas (29) of Morgan Stanley, Dean Witter

Diana Henze (HealthSouth VP of Finance) – noticed irregular earnings and EPS jumps, reported to

supervisor, was given excuses and told management would look into it; Henze overlooked for a

promotion because she wouldn’t do what they “wanted her to do”; fear and silence – flat-lined in

organization

Merrill Lynch, although they deny it, allegedly fired John Olson for reporting skeptical Enron

analysis

Coke/Burger King

Loan program for officers – “Get your hooks in them”; hooks, as above

Tyco, Key Employee Loan Program (KELP) and relocation program

Ernst & Young served as outside auditor; internal staff did not have access to corporate financial

books; Tyco did not disclose 700 acquisitions for $8B to public

Enron – investors (Chanos) and reporters (McClean) ask for information, but were readily

dismissed, Skilling told them that they “didn’t get it”; ridicule, fear, sycophantic

High level of executive turnover, especially with older age groups; experienced officers replaced by

younger officers brought in by Scrushy, who were then paid large salaries and bonuses; CEO: A

full generation older and direct reports are young with substitutions

Officers tasked with audits not allowed access to ledgers, only key personnel have access

Tyco, Kozlowski’s officer team was small and obedient

Auditors (Ernst & Young) deceived

Compare & Contrast

One CFO left the company because he was uncomfortable with the accounting practices as well as the

Scrushy management style. He was ridiculed and questioned, but time proved him to have been correct.

It did take courage for him to walk away from an executive position and he does carry that on his resume.

On the other hand, those CFOs who remained ended up being indicted or part of the criminal case or part

of the Congressional hearings. Over the long term the CFO who quit served himself and career better.

CASE 4.24 – ROYAL DUTCH AND THE RESERVES

Answers and Key Discussion Items

1. The same elements that contributed to the culture in all of the other cases in Unit Four existed in

2. Once again we find that meeting numbers alone is nonsustainable. Inevitably the true reserve picture

for the company emerges and the company is faced with two problems: inadequate reserves and the

fact that the company was deceptive about the reserves. One point that applies to this case and all of

the others is that the executives underestimated the risk that the true financial/reserve picture for the

3. Go back to the charts from the other cases and substitute in the factors. Add to them the bizarre skit,

the questions the employees and officers had but would not raise, and emphasize again the

CASE 4.25 – DENNIS KOZLOWSKI: TYCO AND THE $6,000 SHOWER CURTAIN

Use PowerPoint Slides 210 – 217.

Answers and Key Discussion Items

1. Tyco’s stock price fell initially not because of problems with the company, but because its CEO was

indicted for personal tax evasion. That problem hit just as the country was reeling from the

WorldCom collapse. The market reacted because trust was in question – that nebulous psychological

2. No, Mr. Belnick, while not guilty of any crimes, walked a fine line of interpretation in terms of approval,

loans, and use of corporate funds. Ethical breaches include false impressions, taking unfair

advantage, and being complicit when warned of problems. The use of the loan program to buy an

3. Ms. Prue tried to raise a flag and stop the abuses of the program, but, at the same time, she also

benefited from that program. She tried to wash her hands of the problem without disassociating

herself from the company, something that may not be possible to do. A neighbor of Ms. Prue’s,

4. The spending and loans went on for some time because people in the company were complicit.

5 If this were my money, how would I feel? How will this look in the newspaper? Is this balanced?

What if I were on the other side? Am I taking advantage of shareholders? What if everyone in the

6. Use PowerPoint Slides 215 and 216 to discuss the content of the Wilmer Cutler e-mails. The point

7. Mr. Kozlowski crossed the basic line of legality. The mistrials and acquittals are not unusual. In fact,

Mr. Kozlowski may very well win his appeal. In gray legal areas, convictions are tough to come by.

However, gray legal areas are clear ethical areas. Both Kozlowski and Swartz took advantage of a

complicit board and a compliant culture to benefit personally. Kozlowski put money above all else,

CASE 4.26 – BAUSCH & LOMB AND KRISPY KREME: CHANNEL STUFFING AND

CANNIBALISM

Use PowerPoint Slide 218.

Answers and Key Discussion Items

1. The culture at Bausch & Lomb became so obsessed with achievement of earnings and sales goals

that it lost sight of encasing those achievements within certain basic ethical values such as honesty

and fairness. This was a culture possessed with achievement of goals — to do whatever it takes to

meet the numbers. Krispy Kreme had a similar culture, but even the top managers were involved

there. The cultures at Bausch & Lomb and Krispy Kreme were not unlike the cultures at FINOVA and

Fannie Mae: meet the numbers, no excuses, and, in some situations, humiliation for not meeting

those numbers. Use the PowerPoint slide to emphasize the feelings and actions of employees. There

2. There are always negative effects on earnings, share price, and reputation. A 50% plus dip in

earnings, dip in stock price and a long road back to recovery for Bausch and Lomb. For Krispy

Kreme is was a 66% drop in share value and about a five-year period of recovery. There were also

SEC actions in both as well as shareholder suits over the problems. Emphasize that the conduct of

the managers and employees and sales people was in no one’s best interests. However, the

numbers goals had gotten in the way of reasoning. The SEC concluded in Bausch & Lomb that the

3. Employees need to understand that the achievement of goals is within the bounds of the rules and

the rules are no cheating. This limitation on goals is often not communicated clearly to the

employees. The key is not only to protect employees who raise legitimate concerns, but recognize

1. Bausch & Lomb relied on financial manipulation for so long that it takes time to refocus on strategy,

gaining market shares, new products, etc. Also, there are culture and reputational issues to fix.

2. Here are some possible credos (Use PowerPoint Slide 218):

“I would never sign a document that I know contains false information.”

“I would never ship product that I know has not been ordered.”

READING 4.27 – A PRIMER ON WHISTLEBLOWING

Use PowerPoint Slide 219.

Review the options presented in the chart. Discuss with the students the problem that a morally torn

employee faces. They can stay and suffer perhaps physical reaction. They can stay and try and fix the

problem, but then they are labeled disgruntled and their evaluations and pay may suffer. They can leave

and say nothing but they may still be troubled by the fact that they took no action to prevent harm to

others. The problem is trying to reconcile loyalty to employer and company with their personal values and

standards – the company is running contra to those values and the employee must find a resolution.

Answers and Key Discussion Items

1. Options include stay and do nothing, stay and do something, leave and do nothing, leave and do

something and some levels in between. Review the chart with the students and talk about the

2. Also have the students focus on the credo issues in each of the cases – why the employees did what

CASE 4.28 – BEECH-NUT AND THE NO-APPLE-JUICE APPLE JUICE

Use PowerPoint Slides 220 and 221 for a chronology of events.

Legal Issues

The FDA requires full disclosure of all product contents on the label. It is a felony violation of federal law

to mislead or mislabel intentionally. Also, the sale of apple juice with no apple juice constituted fraud.

Answers and Key Discussion Items

1. While no one was harmed by the apple juice, it was fraud to tell consumers it was apple juice and

charge apple juice prices. Also, there was the possibility that a baby might have had an allergic

2. This was a company that had no avenues for employees to report problems they suspected and did

not have the appropriate culture for responding to problems and questions that were pursued

diligently by employees. LiCari made sure he had his facts straight and he did follow the lines of

3. Beech-Nut was facing tremendous competition and the need to keep prices down. The ease of the

substitution and its low cost made the continuing dependence on a chemical concoction necessary.

4. See Answer to #7 for various additional models. Is it legal? (Blanchard & Peale) Very simple

5. LiCari is an honest and conscientious man who did everything he could and explored every avenue to

try to help the company correct its problems. LiCari wrote anonymously to the FDA because of his

conscience, but did not want to be involved in the process of investigating or have his name revealed

to Beech-Nut. This is also a credo moment. Some employees could have lived with the fake juice.

LiCari’s identity was revealed eventually but he wanted to remain anonymous to avoid the public

scrutiny, stress, and hassle.

6. Hoyvald and Lavery escaped the federal charges, but not state charges. There is a critical point here

– just because it’s not illegal does not mean that the conduct is ethical. There are much deeper issues

of unfair advantage, false impressions, etc. But, it is also important for the students to realize that

7. The two overestimated their abilities and underestimated the ability of truth to percolate to the

surface. Applying Laura Nash: What is my intent? What are the long-term consequences? The

8. Yes, consumers remember this – not the reason but the damage to the company. Trust is breached.

CASE 4.29 – NASA AND THE SPACE SHUTTLE BOOSTER ROCKETS

Answers and Key Discussion Items

1. Ethicist Manuel Velasquez draws the line on moral responsibility for deaths that result from products

at those who made the ultimate decision to go forward with a product; not with those who helped in its

However, such a position does not recognize the human reaction of feeling responsibility because of

knowledge they possessed, but did not act upon. In other words, that someone is willing to draw a

2. Ask the students if they would have been comfortable placing a call to NASA when the decision,

made against their advice, was made. Ask them if such a step, taken outside supervisory lines, is

3. Locke’s comment is a classic illustration of an attempt to quantify on the basic rights that cannot and

4. Absolutely. The information about the risk beyond original specifications and risk levels should have

been covered and considered. Perhaps this information should have been controlling.

5. Such support for a position is gained through the persuasion of others about the moral/ethical

correctness of your position. Mr. Boisjoly could have convinced others of the risk, the loss of life, the

6. Everyone bought into the risk according to the specifications. The astronauts did not realize that they

were being launched under conditions not included in the specs. They had not assumed the degree

7. Yes, this is a case used to teach engineers, scientists, and psychologists about the power and role of

group think. The comment on “engineering” vs. “management” hat is indicative of a type of ridicule

The reflection of Gene Krantz, a respected leader at NASA, is critical for understanding what culture

can do to us in the workplace. There were individuals who were very worried about human life but

NOTE: Discuss with the students the lives of McDonald and Boisjoly after the booster rocket failure. Are

all those who point out wrongs and misdeeds punished for pointing out problems? Does it seem as if

permanent?

The engineers had safety concerns. Managers had concerns about contracts, earnings and public

relations. There was tremendous pressure to get the launch off because of NASA’s budget and

CASE 4.30 – DIAMOND WALNUTS AND TROUBLED GROWERS

Answers and Key Discussion Items

1. In this case, the shareholders/growers remained silent – it was not employees, but they were making

2. The company lost an acquisition, financials had to be restated, there was an SEC investigation, CEO

3. They should have contacted the board, disclosed the issues about the checks, and asked for an

CASE 4.31 – NEW ERA: IF IT SOUNDS TOO GOOD TO BE TRUE, IT IS TOO GOOD

TO BE TRUE

Answers and Key Discussion Items

1. The college administrators wanted very much to believe that New Era could deliver on its promises

2. Mr. Meyer tried to bring the matter to their attention, but he may not have been as fully informed as he

could have been when he initially brought it to their attention. At that point, there was no reason to

3. Mr. Meyer had tremendous personal and financial pressures. He could not afford to lose his job and

4. The reality is that the truth emerges, whether through Mr. Meyer or otherwise. Perhaps a better

5. Returning the money would be a difficult decision for most of these organizations because of limited

funds. While not legally required to do so, many felt that they had profited at the loss of others and

6. Nonprofits are very much in the same mode as businesses. They still have bills to pay, competition,

and often the added danger of an attitude that because they are doing good that there are