Dealing with white collar crime

The former CEO of the German conglomerate Arcandor, Thomas Middelhoff, was recently sentenced to three years in prison for mis-using company resources for private purpose. Despite the fact that Middelhoff can (and in fact did) appeal against this ruling, he was arrested immediately in the court room last Friday (November 14, 2014). The judge feared Middelhoff might otherwise avoid his detention (because of the high sentence as well as because Middelhoff’s permanent place of residence is outside of Germany and because he doesn’t currently seem to have a stable job). This arrest gained a lot of attention in the German media as Thomas Middelhoff certainly was a particularly prominent and rather controversial business leader even before this latest in an entire series of falls.

It is tempting to point to the parallel of Thomas Middelhoff and Jeffrey Skilling, the ex-CEO of Enron: Both of them were particularly shiny CEOs, covered in numerous articles and praised as examples of successful leadership – and both left their CEO-positions voluntarily and unexpectedly just a few months before the insolvency of their organizations. Both cases are classical examples for the study of corporate vanity and arrogance – and both end in jail. But next to this coincidental resemblance, the case allows to quickly reflect about at least five interesting business ethics aspects:

1) Increasing attention towards (and sentences against) white-collar crime
In the more recent past there have been quite a few legal cases against business leaders, e.g. because of tax fraud, corruption or (as here) because of misuse of company resources. I wouldn’t necessarily describe this as a new trend, but it seems to be at least somewhat different from the past, that nowadays these cases quite often affect previously well-respected business people. I don’t know of an equally high number of similar cases from the 1960s or up to the 1990s. As a consequence managers today and tomorrow will definitively need to be prepared to eventually face legal consequences for immoral behavior in their leadership role – or to just stop doing it, because the old assumption that nothing bad will happen to themselves is no longer valid.

2) Mixing private life and business 
Thomas Middlehoff was convicted for the misuse of company resources. Two of the most prominent accusations (he was convicted for 27 out of 44 accusations that were brought up by the prosecutor):

(a) He used a private jet at the company’s expense (cost of 91,000 EUR) to travel to New York in order to attend a board meeting of the New York Times, where he served as non-executive board member as a side-job.

(b) He mandated a celebration publication for this mentor Mark Wössner, the ex-boss of Bertelsmann, Middelhoff’s previous company (cost of 180,000 EUR).

The prosecutor claimed that both of these expenses (plus several others such as use of helicopters to fly from his private home to work, despite the fact that he had a personal driver and an apartment close to his office) were not related to his job as CEO of Arcandor, but rather private in nature. And this is not only important for executives, but for almost all of us: business and private lives have been getting less clearly separated in the last few decades; not only for Thomas Middelhoff. But as both dimensions are getting more and more interwoven, it will be getting increasingly important, that we draw a sharp line with respect to usage of resources, expense reports, company assets etc.. Even if we work from home, this doesn’t mean that we are allowed to take company property home. And this is particularly true for people who are active for multiple companies, employers, clients etc. at the same time. It is important to diligently separate between these different actors.

3) The Al Capone tactics of public prosecutors
No, Thomas Middelhoff is certainly not Al Capone. But there is a bit of a resemblance in the tactics of the public prosecutors: As commonly known, Al Capone was finally arrested and convicted on basis of rather insignificant crimes/violations (such as contempt  of court, vagrancy or tax fraud), all of which are close to irrelevant when compared e.g. to the assumed order of the Saint Valentine’s Day Massacre. Middelhoff certainly never ordered a shooting or anything even close to that – this is not the point. But what can somehow be compared is the fact that from a moral perspective the charges that brought Middelhoff to jail (a total of 500,000 EUR of misused company property) are rather insignificant when compared to the fall of Arcandor, one of Germany’s previously largest companies. The shareholders, the customers and the more than 85,000 employees (status 2008) certainly had to (and are) suffering more since the insolvency than a total value of 500,000 EUR. Not all of this can or should be attributed to Middelhoff personally, but it seems to be widely accepted that at least one of his managerial decisions contributed significantly to the fall of Arcandor: In order to raise capital for investments, the management board of Arcandor agreed to a massive sell-and-lease-back deal for the real estate of their department store business. The monthly rent proofed to be a poisonous pill, but it is not only the decision in itself that is dubious: Thomas Middelhoff himself and personally invested in a fund that bought from and then rented the department stores to Arcandor – and this is certainly a drastic case of conflict of interest, and from my perspective (a) economically more damaging and (b) morally even worse than the flights to New York. The rather harsh sentence of 3 years in jail can well be considered to also include some sort of moral condemnation for other behaviors than just the 27 accepted accusations.

4) (Executive) compensation and misappropriation of company resources
In the German public there have been repeated discussions around several cases of low-level employees who were fired/convicted for theft of company resources – many of which were cases with insignificant monetary value. Cases included stories of people taking home a loaf of bread from a bakery that was left over after closing the store and similar situations. In many cases employers and courts reacted rather harshly and insisted that theft was violating the necessary trust in the relation of the individual and the organization. But up until this case of Thomas Middelhoff there have been significantly fewer cases about misuse/misappropriation/theft of company assets by a board member.

In the past, I did observe (and am currently designing a short study to analyze this aspect) a tendency to be – at least in Western, free-market societies – harsher with respect to the moral evaluation of theft/misappropriation by lower level employees compared to more senior people in the organization, even despite the fact that the latter earn much more and can therefore not claim to have acted out of a financial need. The case however should make us consider to what extend we evaluate the same underlying behavior differently dependent upon the status, hierarchical position and salary of the actors.

And as CEO of Arcando Middelhoff did not only earn significantly more than others, his total compensation also showed a spectacular increase: From 955,000 EUR in 2005 (for 7 months) to 3,863,000 EUR in 2007/2008 (full year) – despite a horrific loss of 562,000,000 EUR (EBT) in this year. It is possible to imagine that someone who earned so much money, somehow lost the touch and understanding of what 91,000 EUR for a trip to New York mean. A person like Middelhoff might possibly have imagined that it didn’t really make a difference if he directly used company resources or just would have asked for a salary increase equivalent to this sum.

5) Moral luck
And finally the case nicely reminds us about the importance of such seemingly irrelevant aspects as luck in moral issues. In his sentence the judge correctly pointed out that there wouldn’t have been anyone to accuse Thomas Middelhoff if the company hadn’t gone into bankruptcy shortly after his resignation as CEO. It was the liquidator of the remaining assets after the insolvency who started to investigate into Thomas Middelhoff’s use of company property. In total the judge accepted claims that totaled 500,000 EUR, which Middelhoff misused for non-company related purposes. Compare this to his annual compensation of more than a million EUR at Arcandor (in addition to e.g. a rather generous golden handshake only a few months before the end of the company), it is indeed more than likely that nobody would have taken the effort to compile the fussy details of the evidence that finally led to this incarceration. This should be a call to humility for all of us: How often did we behave in a wrong way/immoral? If you are anything like me, you will easily come up with several case examples that only due to luck remain unknown to the public – and we can be happy to have this luck.

The just end of a company?

Are ethically suspicious, corrupt or unethical companies less successful than ethical corporations? We might want that – but empirical research is unfortunately inconclusive. Many companies with dubious business practices operate very successfully at the market place. All of us can certainly list some examples.

But as soon as a company goes down the drain that was criticized recurrently as being unethical, the public seems to react with great satisfaction. This is currently the case with Germany’s largest drugstore chain. The company Schlecker is a privately owned business that grew rapidly after its start in 1975 and successfully expanded into several international markets. But at the same time the company repeatedly made it to the press with many different negative news. The highly secretive organization was criticized in particular for the way it treated its employees. Among other issues, trade unions and the press condemned exploitation, low wages, excessive workload and the fact that Schlecker seems to have spied on its employees in several of the 5,400 stores. The company was found to have kept negative lists about “problematic” employees and to have actively prevented the formation of workers councils.

Management tried to play the public criticism down, but new issues surfaced over and over again. – Even after the founder and owner, Anton Schlecker, stepped down as CEO and handed over control to his two children, Lars and Meike, who started remodeling and re-imaging activities. Early 20110 the trade union Verdi accused Schlecker of forcing permanently employed staff members into new contracts as temp workers with lower wages and inferior working conditions. This criticism was picked up by the government – and Germany’s Federal Ministry of Labour and Social Affairs, Ursula von der Leyen, announced to start official investigations. Again Schlecker’s dingy image was confirmed in the public.

Schlecker had ignored an important lesson: All companies are dependent upon several different stakeholders that are relevant for survival. Most importantly next to the owners/investors (in this case the patriarch Anton Schlecker) are employees and customers. To be sustainably successful, companies need to constantly balance the potentially conflicting interests of these – but also many other – stakeholder groups. This is where Schlecker failed: The drugstore giant continuously ignored the interests of its employees – until this even started to have effects on a second stakeholder group: the customers. They finally didn’t want to shop from a company that was famous for treating its employees poorly and stayed away. The business model that was based on continuous growth and expansion was at stake.

The attempt to change the negative image came to late. In 2010 the company started a remodeling of its stores and tried to access new – desperately needed – customer segments. The company stopped the practice of using temp workers and came to a collective agreement with the trade union Verdi. But even now many activities failed: The attempt to access new customers in the internet lead to a major data leakage – sensitive data of 150,000 customers became visible. Schlecker also introduced a new slogan with a wild mix of German and English language: “For you. Vor Ort.” The slogan was criticism by a group of language purists – to which the head of corporate communication responded with a letter that leaked to the public and provoked vivid reactions: The PR person wrote that he – as person with an academic education in humanities – would also disapprove the usage of “Denglish” (a term used to describe the mixture of German and English), but the “average Schlecker customers” rather had a “low to medium level of education”. Again Schlecker was perceived as company that only focused on the interests of the owner and did not show respect for the other stakeholders.

Such dilettante mistakes prevented the planned success of the transformation. On January 20, 2012 the company had to file bankruptcy. As the company was operating as a non-incorporated, private firm (“registered merchant”/”eingetragener Kaufmann”) Anton Schlecker will be liable personally. According to press reports he might even run into personal bankruptcy.

This might now be perceived to be the just consequence for an unbalanced or even unethical management style. But we shouldn’t forget one important aspects: Yesterday the liquidator announced that almost half of the employees will need to be laid off and almost half of the store will be closed. The story illustrates that unbalanced management will harm all stakeholders in the long run – but it is very unfortunate that the ones suffering most will again be the employees. So shouts of triumph about Anton Schlecker’s suffering are completely inappropriate.

Corporate taxes as ethical issue

On January 26, 2011 the Financial Times reported about new information on the IKEA corporate structure. According to this report, all IKEA stores have to pay a royalty fee of 3% of their revenues to a foundation that is under ultimate control of the the owner’s family and that is located in the low-tax country Liechtenstein.

This foundation is reported to own the IKEA trademark and to have capital reserves of up to 14.4 billion USD.

This disclosure raised concerns especially as the IKEA company originated in Sweden – a country that is famous for its comparably high taxes. And of course: Deducting a 3% royalty fee from the revenue increases cost and reduces profit – which in turn is taxable in all the countries IKEA is operating in.

The FT article acknowledges that the corporate structure seems to be perfectly legal and reports that the IKEA founder Ingvar Kamprad said, that „taxes were a cost like any other, and all costs needed to be kept to a minimum“ to fit to the company’s low-cost philosophy.

This case throws another interesting light to the ongoing discussion about the role of taxes within the broader CSR discussions. What is the social responsibility of business in terms of tax payments? Is it morally acceptable to try to search for each and every possible way to reduce taxes? Which effect might this have on the functioning of countries and societies? How do the effects of „tax engineering“ compare to the usually rather small budgets for CSR departments and/or ethical initiatives? Can and should companies do everything to reduce their taxes – as long as they don’t violate the law?

But how about individuals? Should companies behave differently from us as individuals?

 

Addition on November 22, 2013 (@ 15:05 CET): If this is of any interest to you – please also see here:

http://www.youtube.com/watch?v=xvxRePIv85Y