Sunday, February 16, 2014

How a ton of good luck can be bad and a little bad luck can be good

In his blog he writes about an experience that, had he handled differently, might well have caused him to go jail.  Having the opportunity to hire a star CFO at one of his companies, he jumped at the chance.  The CFO recommended a change to the company’s stock option practices that could potentially have benefited the employees. 

But Horowitz was already a believer in a strong legal function and had his General Counsel review the suggestion.  The General Counsel believed that the practice was illegal and recommended against it.   Horowitz followed his General Counsel’s advice.  Years later, the same CFO would be accused of wrongdoing by the SEC for stock option granting practices at a prior company.  She was asked to leave the Horowitz company and ultimately did spend a few months in jail.  It sounded like a difficult period for Horowitz and one that left a long term impression.

This challenging episode is a great reminder to me that, in Corporate America, a little bit of bad luck can be good and a ton of good luck can be bad.  This seems counter intuitive at first so I will explain.

A few rough seas of the sort Horowitz experienced in his introduction to creative stock option practices can be a valuable learning lesson.  He had enough bad luck to forever remember the lesson but not so much as to sink his company.  I imagine that today Horowitz feels even more strongly that an effective General Counsel will report to the CEO.  That creative accounting isn’t necessarily a good thing.  And that lawyers who simply speak the truth and are heard are an executive’s best protection against going to jail.    

By contrast, companies, executives and boards that have had only good luck tend to lack these war stories.  They don’t have the tough learning experiences to draw upon.  It’s not so much that they are certain to be more reckless, but rather that they may not consider the importance of compliance or ever think about the events that could destroy their businesses or careers.  That is, all the good luck is a bad thing – it exposes their blind spots and allows them to become tolerant of sloppiness that hasn’t (yet) caused major problems.  As a result, a sort of quiet bliss makes them more susceptible to big failures that more seasoned, perhaps hardened, business people will know how to avoid.

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