For the past five years I have been an
expert witness on the subject of executive compensation.
My pulse went from the normal 60 beats per minute to well over 90 when I read Friday the 19th's Wall Street Journal about MassMutual Insurance Company.
Nearly every executive mismanagement problem got rolled into one at MassMutual.
I have found five key business lessons.
Start with the CEO's jealous wife...
Start with the CEO's jealous wife who
tried to get the board to listen to her pleas of CEO-staff
infidelity. That started the ball rolling on an investigation that
turned up serious corporate mismanagement. Every CEO in America
should consider a vow of single living and chastity -- definitely no
sex with co-workers. Marriage and romantic affairs seem to be two of
the main sources of information about CEO mismanagement. Bitter
divorces have yielded bushels of data on hidden CEO perks.
Second lesson is that MassMutual is a consumer coop. Coops have no better record of management than profit making companies. The mutual in the name means that people who own MassMutual insurance polices are the owners of the company and get to vote on the composition of the board.
Third lesson. I've said it here before many times. Nepotism is a sign of poor management. At MassMutual, S.A. (name removed at the accused's request), the executive accused of having an affair with the CEO Robert O'Connell, was the first to hire her son. Having an affair seems to get some perverse leverage. After S.A. hired her son, Robert hired his son, then his daughter, then her husband. Both S.A. and Robert schemed together to dismantle a long-standing MassMutual policy against nepotism. (See comments below for a counter statement.)
Frankly, I have three wonderful
children and I would never consider hiring them. Some are too
competent to settle for working their way up in management and all
three are too powerful and independent to take a job with daddy. Any
kid who is so weak that daddy can get them to follow in his footsteps
has to lack good managerial skills.
Fourth lesson. Never create an
opportunity for self-dealing by your CEO or any employee. (See the
next story.)
Fifth lesson. Secret accounts that are not reported to the SEC or reported in Annual Financial Statements are preposterous, outrageous and should constitute a crime.
The Board of MassMutual gave O'Connell
a “ghost” account when he joined the company. The Board put $4
million in the ghost account and O'Connell was allowed to manage a
portfolio consisting of choices from two mutual fund families. Any
net capital gains on the ghost portfolio would be paid to O'Connell
at retirement. Secret accounts of course, secret retirement benefit.
CEO's are privy to much insider information, so this ghost account is inherently a poor idea with plenty of illegal potential.
O'Connell conspired with his (accused) paramour and one other person to change the limitations on his ghost account. Before long O'Connell was posting incredible capital gains from stocks he claimed to have purchased before he actually did purchase them. He claimed he had put the stocks in his portfolio before they had spectacular run-ups in the market.
Five lessons of corporate fraud and board mismanagement.