Want to Make Your Employees Feel Truly Valued? Don't Do This.

Zynga, the maker of great time-wasters like FarmVille, is obviously brilliant when it comes to motivating customers. Motivating employees? Not so much.

The Wall Street Journal's Justin Scheck and Sayndi Raice yesterday broke a story on an unusual move for a self-described "meritocracy"(note: subscription required for full article). While details and public statements have been few, thanks to the pre-IPO "quiet period", the basic issue is this: As CEO Mark Pincus was preparing for Zynga's public offering, he decided that too many shares had been handed out to too many employees, and asked at least some employees to give at least some of those (unvested) shares back. Or risk being fired (fired workers lose all rights to unvested stock).

Zynga now has about 3,000 employees. The heart of the controversy apparently lies with some early employees who were handed large numbers of shares (rather than paying large salaries, a common move with start-ups), but who are now deemed to have contributed less than later hires (who received fewer shares).

While it's not clear that Zynga has done anything illegal, I would argue with Mr. Pincus' statement of pride in the "ethical and fair way that we've built this company" (entire statement can be found here in a New York Times DealBook piece by Evelyn Rusli).

If I were trying to develop a system to set my employees against each other -- and drive down productivity while everyone sniped at everyone else -- I don't think I could have come up with a better system than this one. As Business Insider's Tom Johansmeyer put it, Mr. Pincus is essentially saying to his employees: "You don't deserve to be rich." (full BI article here)

I don't think this is going to help Zynga's future employee recruiting, either....

Olympus Continues its Fall

The Olympus debacle, as I noted last month (see original posts here and here), seemed at first like an interesting culture clash between its former chief executive (a Briton with 30 years' experience with Olympus) and a nearly 100-year-old Japanese company.

Now it's starting to look like "one of the biggest accounting fraud cases in corporate history," according to a Hiroko Tabuchi article in today's New York Times.

The evolving story had centered on one particular acquisition -- of British medical equipment manufacturer Gyrus in 2008 -- and specifically on shockingly high fees ($687 million on a $1.9 billion deal) that were paid to two heretofore-obscure Japanese bankers for "advising" Olympus on the deal. Olympus denied that anything improper had been done.

In a stunning reversal, the company yesterday admitted that "money for mergers had in fact been used to mask heavy losses on investments racked up since about 1990." (emphasis added)

Olympus' current chairman, Shuichi Takayama, acknowledged "inappropriate dealings" but would not admit to outright fraud.

Just How Trustworthy is that Trustworthy Guy in the Corner Office?

You know how, when someone is arrested for a truly heinous crime, there's always a neighbor interviewed who says something along the lines of, "But he was always so nice. Just a nice, quiet, ordinary guy."

A nice, quiet, ordinary guy with thirty-two bodies in the basement.

And then, bit by bit, the background stories emerge: the torturing of animals as a small child, the sociopathic behavior as an adolescent, the inability to control rage.

With heinous corporate crimes, it's the same. Enron gets extolled as a model ... until it isn't. Madoff's investment advice is utterly brilliant ... until it isn't. The headlines are shocking, but in the weeks and months that follow, more information comes out and the surprise ends up being that the shenanigans went on as long as they did. (Many people, for example, had tried to bring Madoff to the SEC's attention?)

Two days ago, I wrote a post about the fall of MF Global. As I noted then, it had seemed at first like a simple too-many-big-bets-that-turned-out-badly failure. And then the little matter of $600 million plus in missing customer funds turned up.

And today's New York Times carries a DealBook article by Susanne Craig, Ben Protess, and Michael J. De La Merced, that claims that while the firm fell apart astonishingly fast, "the collapse came after regulators raised warning flags for more than four months." Not exactly an overnight disaster. Jon Corzine, former Goldman partner, former US Senator from New Jersey, former Governor of New Jersey, had been chairman and chief executive officer of MF Global for less than two years.

The Times reporters note drily that "even when the watchdogs sound the alarm, it is not necessarily enough to save a firm." Regulatory agencies and the FBI are now looking into the matter, although no charges have been filed. So far.

And the authors also note that the resistance to regulators' insistence that the firm should raise more capital and provide more information about some risky transactions shows that "three years after the financial crisis, Wall Street executives are still fighting regulators' demands."

Over the course of the next several months, I expect to read reports of new banking bonuses, all in the name of "we have to keep the very best people." Me, I think these guys may be some of the very worst with whom to trust our hardly-earned cash.

Is the Goldman Halo Slipping? (Please Tell Me It Is)

"But -- he was at Goldman."

For a long time now there's been a halo around Goldman Sachs, despite the occasional outrageous mis-step (Remember banking as "God's work"? Read my 2009 post about that here). But spend a few years at Goldman, better yet make partner at Goldman, and you could pretty much write your ticket. Those Goldman guys: they had the Midas touch.

Well, for those of you who don't remember your Greek mythology, the whole "turning everything you touch into gold" thing was one of those sneaky "be careful what you wish for" ways that the Greek gods would play "Gotcha" with mere mortals. It's great to be able to turn a piece of wood into a block of gold -- hey, running a kingdom costs money! -- but not so much fun when the juicy steak you were looking forward to eating turns into something that will break a tooth.

Oh and when you're thinking about how smart those Goldman guys are ... Would you please also remember that we taxpayers had to bail 'em out? (Yes, they did repay that TARP money, but still....)

When I first read that MF Global was filing for bankruptcy (New York Times DealBook article by Azam Ahmed, here), it didn't seem so startling. Unfortunate, perhaps, but not startling. Jon Corzine, MF Global's chairman and chief executive officer (and former New Jersey governor, and former US Senator from New Jersey, and, oh yes, former Goldman partner), had bet heavily on European debt -- that Europe would come to the rescue of its smaller, more troubled economies. While he may yet prove right in the long run, he'd bet that way for the short term, and after trying frantically to find a buyer for MF Global over the weekend, the firm filed for bankruptcy protection on Monday.

Times financial columnist Joe Nocera was not feeling particularly forgiving about the MF Global debacle this morning, however. Of Mr. Corzine, he wrote, "you would think that as a former Wall Street titan, he would have noticed that taking giant bets on shaky, long-term bonds while financing your operations with overnight loans that can be pulled at any second is not exactly a recipe for success."

But it's not just the relative stupidity of the strategy that made Mr. Nocera angry. It's the (as he put it) "heads-I-win-tails-you-lose" mentality. If Mr. Corzine had been able to find a buyer for the firm last weekend, Mr. Nocera noted, he would have been in a position to walk away from a company that he had effectively destroyed (stock price less than two years ago when Mr. Corzine took over: $7; stock price before bankruptcy filing: about $1.20), with a "severance package" of $12.1 million.

Now that I think about it, Mr. Nocera, I'm angry too.

Adding insult to the injury: Mr. Corzine apparently came thisclose to selling the firm to Interactive Brokers, when it was revealed that "hundreds of millions of dollars" were "missing" from MF Global customer accounts. According to another Times DealBook article by Ben Protess, Michael J. De La Merced, and Susanne Craig, the sum was originally estimated at $950 million, but is now thought to be "less than $700 million".

As the reporters noted, this might be simply a matter of "sloppy internal controls". But:

In any case, what led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.

At this time, neither the firm nor Mr. Corzine have been accused of any wrongdoing.

But really -- was 2008 that long ago? With the "loss" of something more than $600 million (per this afternoon's DealBook article by Messrs. Protess and De La Merced), you're talking gross mismanagement, or theft, or both. There really aren't any other possible explanations.

As one Times reader commented: "Sure, you can leave a ten spot in your pants pocket and bring your pants to the cleaners, but $600 million?"

A Footnote re Culture Clashes

Just two days ago, I posted some comments on the debacle at Olympus. Several days had already passed since the first stories broke about the firing of Olympus' British CEO. At that time, as I noted, it looked like a classic culture-clash story. And then things got muddier, as the ousted executive, Michael Woodford, accused the company of firing him for presenting evidence of fraud in the 2008 acquisition of a British medical equipment manufacturer, Gyrus.

The story is still unreeling slowly, but today's New York Times carries another Hiroko Tabuchi article that's worth noting. On Wednesday, Olympus' chairman -- to whom Mr. Woodford had presented his evidence of fraud -- resigned. He regretted "causing concern" to the shareholders (Olympus' share price has fallen by half), and continued to insist that there was "no corruption" in the deal to acquire Gyrus.

Tsuyoshi Kikukawa, who resigned yesterday, had been with Olympus for nearly 50 years, and its chairman for ten. He has been replaced by Shuichi Takayama, a managing director who has been with Olympus for 30 years.

As the Times article notes, the current debacle can be seen "as evidence of still-frequent lapses of corporate governance in a country where truly independent board members are still rare, although there’s a requirement that one director or auditor be independent. And still in force, experts say, is a deep-rooted Japanese business culture in which personal relationships can sometimes seem to take priority over generally accepted accounting practices."

So, is it culture? Or is it ethics? And will it look more like one to us, in the West, and more like the other, to those in Japan?

Make Haste Slowly, Please

Let's say you've developed a nifty new medical device, and -- best yet! -- you've gotten some venture-capital financing to help you bring this product to market. How many regulatory hoops should you have to jump through to start selling it to the patients who need it?

What if you're one of those patients? More hoops, or fewer?

Or if your nifty device doesn't work? Or has side effects you hadn't been aware of?

Different answers, maybe?

Today's New York Times carries an article by Barry Meier and Janet Roberts on the expensive lobbying efforts by venture capital firms to reduce the regulation required to bring new devices to market.

According to the Times article, venture capitalists and device manufacturers "argue that the FDA suffers from high personnel turnover, an unwieldy bureaucracy and a regiment that forces start-up device companies to run new and costly tests constantly, often duplicating past efforts."

But that's only one side of the story, isn't it?

The reporters quote the editor of Archives of Internal Medicine, who said that venture capitalists operate under "this unwritten assumption that every new device is innovative." But the reality, she added, is that some devices "are killing people or causing significant harm."

I've written about more than one of those devices in the past -- the cone-beam CR scanner that may be exposing children and adolescents to excessive radiation (post, here) and the DePuy hip replacements whose metal-on-metal design is failing early far too often, requiring painful and extensive additional surgery (post, here).

The House seems more interested in the manufacturers' and investors' concerns, however:

Since February, four House panels have held hearings on the impact of FDA procedures on device approval. At those sessions, 19 of the 26 listed witnesses were investors, entrepreneurs, industry consultants, trade group officials or patients who said that agency delays in approving a device had harmed them or a loved one. The list included no patients injured by a flawed device; one hearing the Senate had a more varied witness list. [emphasis added]

One investment fund manager is quoted as saying, "This is about survival... We are deeply concerned about the future."

Shouldn't they be "deeply concerned" about the "survival" of their patients?

Culture Clash, or Egregious Ethics?

When the news broke about ten days ago that Olympus -- the Japanese company best know for its digital cameras, although its medical equipment business is far more profitable -- was firing its British CEO, it seemed like a classic culture-clash story.

Indeed, that's how it was presented. As the New York Times' Hiroko Tabuchi reported (full story, here), Olympus' chairman said, "We hoped that he could do tings that would be difficult for a Japanese executive to do... But he was unable to understand that we need to reflect a management style we have built up in our 92 years as a company, as well as Japanese culture."

Isn't that a fascinating comment? In other words, Olympus wanted a CEO who was un-Japanese, but not too un-Japanese. How's that for a recipe for failure? (Michael Woodford, the ousted CEO, was British, but had spent 30 years with Olympus, so you'd think he would have a pretty good handle on Japanese culture.)

Share prices in Olympus dropped dramatically on the news of the CEO's demotion.

They declined further two days later, when Mr. Woodford claimed that he was forced out because he had presented the Olympus chairman with evidence of fraud. (Article by Hiroko Tabuchi here)

As further explained a few days later by the Times' Wayne Arnold and John Foley (full story, here), Mr. Woodford said that "he was forced out after pointing out governance problems surrounding overseas acquisitions, in particular a $1.9 billion deal for Gyrus, a British medical equipment firm. He accuses [sic] the board of violating British law against paying a buyer for an acquisition, false accounting and breach of fiduciary duties."

So now it appears not to be a cultural issue at all, but an ethical and legal one. Were Japanese laws allegedly violated as well? Or only British laws?

The heart of the conflict, as reported yesterday by the Times' DealBook reporter, Ben Protess, is "a mysterious $687 million payout" made by Olympus to two formerly-unknown Japanese bankers (full story, here). That payout was originally described as a "fee" for advising Olympus on the 2008 Gyrus takeover. But, as Protess notes, that payout is "more than 30 times the norm on Wall Street" -- and Wall Street is not generally known for underpaying itself.

Protess also reported that "the FBI is now investigating the $687 million payment... The focus of the investigation is not yet clear, and a spokesman for the FBI ...declined to comment."

So now there are American laws that may have been broken, too?

Protess quotes Jeffrey Manns, an associate professor at George Washington University Law School: "This is such an extraordinary deviation from normal fees.... No one would have entered into this transaction if they were showing good business judgment."

Olympus, of course, insists that the payment was "appropriate".

It's far too early to know whether this is primarily a cultural clash or an ethical (and legal) breach; the mess may well end up having elements of both, and those elements may be closely intertwined. Either way, there's an ugly smell hanging over a once-admired firm.