Category Archives: Business Development Ethics

How to Implement a Price Increase

This month, I had a remarkably cruddy customer experience. “So what?” you say. “That’s not unusual.” Agreed. But this foul was so grievous, I worried whether another company might repeat the gaffe.

As a professional marketer – as a compassionate human being – I feel duty bound to intercede. If your company is about to wander into the same bad spot, please . . . don’t! Take a deep breath. Get some fresh air. Walk around the block. Pause by reciting the alphabet backwards.

What was the gaffe? A price increase! Well, not the price increase itself, but how it was done. If you want to learn how one company raised prices, and committed a pile of customer missteps along the way, read on . . .

Just after Thanksgiving, I went to Lifetime Fitness for a session with my trainer. I will call him Jim. “Bad news,” Jim said the moment he greeted me. “We have a price increase effective immediately. Personal training now costs another $9.00 for the hour.” “Why?” I asked. “Member education,” he replied, adding that the new rate applied to all Lifetime members, not just at my local facility.

My quarrel is not with Jim. And I’m not even fussing about the price increase, though I could. My beef is with how Lifetime handled it.

Here are tips for a gentler, more effective way to request more coin from your customers:

1. Communicate the price increase in writing. Lifetime put the entire communication onus on its trainers, who mostly informed customers face-to-face, using inconsistent messages. A written explanation from Lifetime’s corporate office should have been available to members. And as of the time I wrote this, Lifetime revealed no information about the price increase on its website.

2. Provide adequate lead time for staff and customers. Lifetime’s trainers told me the corporate office announced the price increase barely one week before it was to take effect. Even worse, that was on November 22d, the Tuesday before Thanksgiving, when many people travel.

3. Give solid, unambiguous reasons for the increase. “Member education”? Clear as mud!

4. Offer a management point-of-contact – including phone number and email – to address questions and concerns. Lifetime provided none, though when I requested it, Jim gave me the email address for his immediate supervisor, who reached out to me within 48 hours.

5. Make sure the frontline staff understands and supports the price change. Based on my conversations with employees, Lifetime bellyflopped by not providing adequate communication or soliciting staff feedback.

6. Expect reactions, and plan for the risks. Concern, complaint, and churn – all of it will come. And Lifetime was unprepared.

Right now, across the USA and around the world, you can find the words price increase scrawled in Magic Marker on thousands conference room whiteboards. Unwelcome change, waiting in the wings. How will customers perceive the news?

When announcing higher prices, management has a choice: they can project clarity, consideration and care, or, in the case of Lifetime, they can demonstrate callousness, opacity, and arrogance.

Above all, a price increase presents an opening for a company to engage with its customers in ways that aren’t predestined to be negative or confrontational. “Here’s why we value your business. Here’s what you can expect from us in return. And if you’re concerned, tell us! We’re listening, and we want to hear what you think.”

That healthy opportunity blew right past the senior management at Lifetime.

Is the Voice of Risk Being Heard?

“If only HP knew how much HP knows, we would be three times more productive,” Hewlett-Packard CEO Lew Platt said.

Had Mr. Platt been talking about his sales organization, he would have pumped up the multiple. Sales teams possess a trove of valuable commercial knowledge. It’s not unusual to find reps who are fluent in finance, marketing, strategy, product engineering and customer support. Some have lived or studied abroad. Some are multi-lingual. Add street smarts about customer behavior, and you’ve got formidable brainpower.

Good for customers, but a mixed bag for employers. Knowledge and risk awareness go hand-in-hand. That can threaten mangers, especially when assigning individual quotas and sales targets. A bit less knowledge makes team members more compliant. Naivete makes management’s fuzzy planning numerology and “stretch goals” easier to swallow. “Team! Get out there and nail your quota!” Woe to the salesperson who tells her boss, “I have a 70% chance of making my number.” In sales culture, determinism is revered while probabilistic thinking gets ravaged.

More! Faster! Better! In this make-your-number-no-matter-what environment, the voices of risk get stifled. Problems don’t surface. Issues remain under wraps. Objections aren’t discussed. “We need to keep meetings short and use our time efficiently,” senior sales executives tell me. “Besides, we aren’t interested in dealing with stuff we can’t change.” Yes . . . But . . . There are significant hard costs when management cannot assess vulnerabilities, let alone, even know what they are.

More than ever, organizations need to be intelligent about uncertainty and risk. Something that former Wells Fargo CEO John Stumpf didn’t appreciate before he landed in a hot seat in front of Senator Elizabeth Warren, who eviscerated him with questions about his company’s widespread abuses. Stumpf got so flummoxed, he could hardly speak. Senator Warren provided most of the answers, too.

In fact, Stumpf’s management team brutally crushed the voices of risk as a way to insulate themselves from what was happening in the field. Using a cudgel called U5, management silenced internal dissent, enabling Wells to implement practices that exploited its customers and employees. U5, a federal form, was intended to prevent financial services employees who commit fraud and other violations from hopping from firm to firm and repeating their transgressions. But Wells Fargo’s management warped U5’s beneficial purpose to intimidate sales employees into submitting to their heinous demands.

When slapped onto an employment record, U5 carries serious consequences. To hiring managers, it means “don’t hire this candidate.” To employees, it means “Move to a Caribbean island and open a sunglasses stand because you’re not working in financial services. Not now. Not later. Not ever.” U5 made it possible for Wells Fargo’s Management to deliver an ominous message to its staff: if you have the temerity to speak out, blow the whistle, complain, resist, or express unhappiness or unwillingness, we will ruin you. And they meant every word.

We will never know with certainty which statements got silenced, but here are a few possibilities:

“These goals are impossible.”

“My customers don’t like our policies.”

“I’m uncomfortable doing this. It’s unethical.”

“The stress here is burning me out and making me sick.”

“No. This is wrong.”

The voice of risk, U5’d. A well-known verb in the bank’s HR Department, I am sure. With U5 and the repressive sales culture at Wells Fargo, untold millions of similar comments never reached the vocal chords – and keyboards – of its employees. A tiny few seeped out. Just not enough to awaken regulators and Wells Fargo’s board of directors from their slumber. It took an outsider’s report – an investigative article in the LA Times – to goad anyone into action. If you want to crush the voice of risk, here’s your model!

Voicing risk, pushing back, calling out red flags, blowing the whistle – use any terms you want. Wells Fargo used the threat of severe punishment to systematically turn off every communication management didn’t want to hear. An extreme case, for sure, but far from isolated. Where there’s disdain for knowing the truth, a company’s sales culture will reveal it:

“Sell what we’ve got!”

“I don’t want to hear how you aren’t going to make your number, I want to hear how you are!”

“Don’t give me problems. Give me solutions!”

“Stop making excuses!”

“Quit whining!”

One of the most effective ways to shut down the voice of risk is to brand an employee “not a team player,” or “doesn’t believe in the company’s potential.” It’s not U5, but punitively, it might be the next best thing. Try getting promoted or landing a better sales territory with those tidbits embellishing your personnel record. Management’s message: “if you want to stay here, do as we say, and don’t rock the boat.”

“But . . . nobody wants a department full of Chicken Littles, either!” Fair point. There are clear strategic advantages to being picky about the information one accepts before making a decision. Managers must be granted the flexibility to determine what’s useful and valuable, and what to eschew. After all, in sales and selling, there are no universally recognized standards for framing the truth. Look at any B2B sales organization, and you’ll see different managers using different dashboards, and no two turning the same dials and knobs. Vive la difference!

Yet, there’s a distinction between healthy selectivity and willful ignorance. Sales culture should never be an accomplice to the latter, yet the problem is epidemic. The annals of corporate failures are littered with companies that subdued the voices of risk, and created horribly skewed versions of reality. “Employees are our greatest asset! Amazing that none of them are doubters or naysayers!”

Make sure the voices of risk are not silenced at your company. That begins with the board. In an article, Culture: The One Element Most Critical for the Board’s Management of Risk , Jay Taylor, CEO of EagleNext Advisors, recommends six questions to ask:

• Is the CEO active in creating the culture for the organization? Is he or she modeling the right behaviors?

• Is there appropriate tone at the top, both during and outside of board meetings?

• During strategy, product, and investment discussions, is there transparency around business assumptions, openness to respectful but challenging views, and identification of emerging risks to the business model beyond the immediate planning horizon?

• Is there a willingness to bring forward bad news? Is there an understanding that failure may occur, but the business cannot grow and prosper without taking smart risks?

• Has the board established clear expectations for timely identification and handling of risk, particularly those around business goals and objectives? Is there clear risk ownership?

• Not everything should be filtered through the CEO. Are other executives and risk owners present at board meetings and allowed to take questions directly?

The answers to these questions directly influence the culture within the sales force. They influence the strategy, tactics, compensation, and measurements under which business development teams operate. When salespeople believe that the board views risk management, governance and compliance as a crucial responsibility, an ethical environment can be established within the sales organization. The converse is also true: when it’s evident the board doesn’t want to be bothered with protecting the company’s stakeholders, [stuff] will happen. We saw how that works at Wells Fargo.

In addition,

1. It’s understandable that not every anecdote from the sales force constitutes an “action item,” but make sure it’s clear that salespeople will not be penalized for voicing issues to management.

2. Don’t limit account reviews to “wins.” In meetings and internal communication, allow frank discussion about what impedes selling, and make sure no person or department is held sacrosanct in the conversation.

3. Don’t condemn people for probabilistic thinking. Instead, embrace the approach! That won’t make anyone less determined, resolute, or rabidly goal-focused. In fact, the sales team and its managers will become more risk-aware.

4. Appoint at least one board member to serve as a direct point-of-contact for salespeople who want to elevate concerns about illegal or unethical practices, or any other activity that endangers the company, its employees or its customers.

Uncork the knowledge that exists in your sales organization. Giving risk a voice, and a safe way to express it, provides a measurable financial return. And in the case of Wells Fargo, it could have saved the company from itself.

Announcing the 2016 Sales Ethics Hall of Shame

I’ve never bumped into a live Ouroboros, but if I did, the sight would stop me in my tracks. “OMG! I didn’t think an animal could do that!”

The mythical creature, often depicted as a snake or dragon, has a strange epicurean craving: itself. Some representations show the animal chowing down on its tail, and I assume the meal continues from there. Historians believe the Ouroboros first appeared around 1600 BC. For ancient people, the Ouroboros symbolized harmony in opposites and renewal. Life from death, sustenance from hunger. Hopeful themes that we needed at a time when there were no scientific explanations for geological disasters, famine, floods, and plagues.

But for me, the Ouroboros is a metaphor for self-destruction. A risk plaguing every Sales Ethics Hall of Shame inductee since I began the award in 2013. As with prior years, the stories you’re about to read reveal the calamitous outcomes that occur when corporate managers are so ravenous for cash, they engage in deceitful behaviors and practices. Like the Ouroboros, their companies are sometimes consumed in the process.

Just beyond the edges of honesty and truth lies an open cesspool of malfeasance. An enticing spot for executives who are unfettered by the deliberate shackles of corporate governance. First, get your shoes a tiny bit wet. Then, jump in, hands and feet, and splash around. Even though the environment is putrid, it’s a formula for driving short-term revenue results.

“Integrity in combination with brains technically and efficiently trained is the highest priced, best paid product in the world. It is a rare and most valuable combination,” James Samuel Knox wrote almost 100 years ago in his 1922 book, Salesmanship and Business Efficiency.

Right now, Jim Knox is twirling in his grave at around 3,000 RPM.

For induction into the Sales Ethics Hall of Shame, companies must satisfy three criteria:

1. The primary purpose of the enterprise cannot be to sell an illegal product or service, like crystal meth or human trafficking.

2. More than one employee must be involved in unethical activity. Scams involving a single, rogue employee do not qualify for consideration.

3. Any chicanery must be repeatable and scalable—in other words, embedded in the company’s business process.

Presenting this year’s Sales Ethics Hall of Shame inductees:

Anheuser India. The beer’s on ice. So is the whistleblower.

Anheuser-Busch InBev NV, the Indian unit of Anheuser used third party sales promoters to make illegal payments to Indian government officials. “Anheuser-Busch recorded improper payments by its sales promoters in India as legitimate expenses in its financial accounting, and then exacerbated the problem by including language in a separation agreement that chilled an employee from communicating with the SEC,” Kara Brockmeyer, chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit, said.

“AB InBev is the fourth company in the past 18 months penalized by the SEC for its restriction of would-be whistleblowers,” according to a September 16 Wall Street Journal article, SEC Says Anheuser-Busch InBev Indian Unit Made Improper Payments to Officials.

Anheuser won’t feel much pain. The scam cost the company about $6 million in penalties and fines. Last year, Anheuser’s global operations earned $9.22 billion in profit alone.

Premier Cru Wines. “May I suggest the 2015 Ponzi?”

Premier Cru had a reputation for offering great deals on “future arrivals” of the finest vintage wines, and many of the world’s wealthiest people bought into the idea. One connoisseur, Lawrence Wai-Man Hui, was so enthralled that he allegedly paid the company $981,000 for 1,591 bottles. Alas, he received fewer than 100. This year, Premier Cru’s founder, John Fox, faced up to 20 years in prison for wire fraud, but a plea deal reduced his sentence to just 6.5 years.

“The Oakland-based U.S. Attorney charges that Fox conducted a fraudulent scheme, offering wines he didn’t have and using customers’ money to secure wines he owed other clients, wrote Peter Hellman in an August 19, 2016 article in Wine Spectator, Owner of Premier Cru Will Plead Guilty. If this sounds like Madoff, it is – just with wine.

Prosecutors allege Premier Cru’s scheme was in full operation from about 2009 to 2015, when the company went belly up. “In its bankruptcy petition, the firm declared $70 million in debt, mostly unfulfilled orders paid for by almost 9,000 customers in 45 states and 18 countries. It had less than $7 million in assets, mainly wine in its warehouse space.”

The prosecution’s case against Fox ultimately focused on a single fraudulent wire transaction: an undated transfer of $102,271 from H.W.M.L. – the same initials as Lawrence Wai-Man Hui.

Vitamin Water. Faulty math.

“Vitamins + water = all you need.” In 2009, the Center for Science in the Public Interest (CSPI) found this equation hard to swallow, and filed a class-action lawsuit against Coca Cola, Vitamin Water’s parent. The lawsuit cited other sketchy Vitamin Water claims, including “this combination of zinc and fortifying vitamins can . . . keep you healthy as a horse,” and that the drink could reduce the risk of eye disease, promote healthy joints, induce feelings of relaxation, or otherwise bring about a “healthy state of physical and mental being.” One nutritional tidbit that Vitamin Water’s marketers thoughtfully omitted: each bottle contains about 32 grams of sugar, just 9 grams less than a can of Coke.

The lawsuit was settled in April, 2016. “We’re pleased to have a resolution that improves the labeling and marketing of Vitamin Water and will help consumers recognize that the drink contains eight teaspoons of sugar,” said CSPI litigation director Maia Kats. In addition to dropping the false advertising claims, Vitamin Water’s packaging will now include the words, “with sweeteners.”

Lumosity. “Science”: make it part of your sales toolkit!

“Lumosity preyed on consumers’ fears about age-related cognitive decline, suggesting their games could stave off memory loss, dementia, and even Alzheimer’s disease,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “But Lumosity simply did not have the science to back up its ads.”

Lumosity hawked their claims through TV, radio, and social media. The company used “TV and radio advertisements on networks including CNN, Fox News, the History Channel, National Public Radio, Pandora, Sirius XM, and Spotify. The defendants also marketed through emails, blog posts, social media, and on their website, Lumosity.com, and used Google AdWords to drive traffic to their website, purchasing hundreds of keywords related to memory, cognition, dementia, and Alzheimer’s disease,” according to the FTC complaint.

But wait, there’s more. Lumosity also exploited its customers by offering incentives for providing recommendations. “The [FTC] complaint also charges the defendants with failing to disclose that some consumer testimonials featured on the website had been solicited through contests that promised significant prizes, including a free iPad, a lifetime Lumosity subscription, and a round-trip to San Francisco.” In biz-dev, we have a euphemism for this: loyalty incentives.

SwanLuv. Dude! I have this awesome idea for a startup: a “casino for marriage.”

In December, 2015, startup SwanLuv offered aspiring newlyweds a unique opportunity: up to $10,000 toward a dream ceremony. How? Sign up and stay married. Thousands of people bit the bait. But the company’s business model depended on failed marriages to fund new ones, and Swanluv up to 25 years to claw back their initial investment – with interest! It was all in the fine print, not that SwanLuv’s glassy-eyed prospects took the time to read it, let alone consider the risks.

Then, all of SwanLuv’s intentions crumbled. On Monday, February 15, 2016, SwanLuv announced that “actually, no – it would not pay for a single ceremony. Instead, it would let friends and relatives pay for it, providing a crowdfunding platform similar to GoFundMe,” The Washington Post reported (A Website Offered to Pay for Weddings. Then It Came Time to Write the Check).

Some pundits, like Jeff Reid, Founding Director of the Georgetown University Entrepreneurship Initiative, saw SwanLuv’s failure as tactical problem. He said that SwanLuv could have launched with good intentions, and that it collapsed before it could deliver on the promises. “There’s a line you don’t want to cross,” he said, “in terms of over-promising.”

But Reid should know better. This wasn’t over-promising. SwanLuv was a horrible premise for a startup that unfortunately got launched.

Wounded Warrior Project (WWP). Tug on the heartstrings of others, and live large.

WWP, the largest US veteran’s charity, accepted $350 million in donations last year alone. But according to a CBS News report, only 54% of WWP’s funds provided direct benefits to veterans. The rest went to overhead. “Spending on conferences and meetings skyrocketed from $1.7 million in 2010—the year after [Steven] Nardizzi became CEO—to $26 million in 2014,” according to a Fortune report. Nardizzi and WWP COO Al Giordano were fired by WWP’s board of directors in March.

Former WWP employees spoke up about the charity’s extravagant spending that apparently began when Nardizzi became CEO. At a 2014 annual conference at a luxury resort in Colorado, one employee recounted that Nardizzi “rappelled down the side of a building. He’s come in on a Segway. He’s come in on a horse.”

“More than 40 former employees told CBS News that spending by the charity was out of control. Two former employees were so fearful of retaliation they asked us not to show their faces,” according to the CBS report. “It was extremely extravagant. Dinners and alcohol and just total excess,” one said. “I mean, it’s what the military calls fraud, waste and abuse.”

Youi. The company’s tagline: “We get you.” Ain’t that the truth!

Youi, a large insurance provider based in Australia, had a unique selling model. Imagine you wanted a quote for car insurance. So you visit Youi’s website, but find no option to receive this information online. Instead, you’re informed that you must talk directly with one of Youi’s sales reps. That’s when trouble starts.

This year, five internal whistleblowers stepped forward to expose Youi’s sales practices. They describe a “company culture [that] encouraged sales staff to defraud potential customers on a large scale by billing them for policies they never signed up for. The whistleblowers also say customers are having claims rejected due to a cult-like corporate culture that drives staff to falsify insurance documents to make sales. Youi’s customers are left paying for policies that don’t actually cover them,” according to an article, Does Youi Owe You? Insurer Accused of Billing without Consent. Youi’s tactic for direct rep involvement with prospects is key for perpetrating the scam, and it has propelled the company’s growth.

“On the phone, customers are often told they can’t be provided with a quote until credit card numbers are handed over. Once the credit card details are secured, some of Youi’s sales representatives put them through as a sale, no matter what the customer asked for.” According to one rep, “They would say they needed to get credit card details to [email] a quote. Then they would activate the policy without telling the client.” Youi’s revenue was $654 million in 2015, up from $71 million in 2011.

“Even if a customer tells the sales representative they don’t want the policy, their credit card details will often be billed. ‘If I wanted a sale, what I would say is OK, that’s your quote, just to hold the price, if you give me your credit card details we can put it in the system,’ says another whistleblower.” Said a third, ‘Quite often a client would ring within a cooling off period and want to cancel that policy – and it would not be done.’” You can read additional complaints by clicking here.

How do customers perceive this experience? One described it as “probably one of the worst I’ve ever had in my life.”

In August, Youi’s senior management announced their intention to plead guilty to misconduct charges filed by the New Zealand Commerce Commission. “We have made some mistakes and acknowledge that even one is simply one too many, said Danie Matthee, Youi’s CEO. “I would like to apologise to every affected customer personally and provide each one with the assurance of our commitment to achieving only the best customer outcomes.”

Trump University. No BS degrees here. Just degrees in BS.

Trump “University” (I am compelled to add quotes) began in 2005, and ceased operations in 2010. The company made this year’s Hall of Shame because litigation against the company is still pending and . . . because . . . well, by now, you know.

In Trumpian fashion, the ad claims were yuuuuggggge. “He’s the most celebrated entrepreneur on earth . . . And now he’s ready to share—with Americans like you—the Trump process for investing in today’s once-in-a-lifetime real estate market.” The ad shared that Trump had “hand-picked” his instructors, and ended with a backhanded compliment for prospective students: “I can turn anyone into a successful real estate investor, including you.”

But the New York State Attorney General’s (AG’s) office considered Trump U a sham, in part because the term University did not conform to state requirements. The AG filed a complaint against the Trump University. Among the allegations, “no specific Donald Trump techniques or strategies were taught during the seminars, Donald Trump ‘never’ reviewed any of Trump University’s curricula or programming materials, nor did he review any of the content for the free seminars or the three-day seminars.”

Instead, the attendees were served motivational Pablum. “The contents and material presented by Trump University were developed in large part by a third-party company that creates and develops materials for an array of motivational speakers and seminar and timeshare rental companies.” As for Trump’s physical presence at Trump University? The closest the attendees got to Trump was standing next to a life-sized photo of The Donald – for a Tweetable photo op, of course.

The Trump U Sales Playbook that would work well at your local used car lot. “If they can afford the gold elite don’t allow them to think about doing anything besides the gold elite,” one paragraph advised. Such high-pressure selling tactics were cited in the AG’s complaint:

“This bait and switch was laid out in the Trump University Playbook (“Playbook”), which provided step-to-step directions to Trump University instructors on what to tell students during the seminars. . . . Trump University instructors and staff were given detailed guidance as to how to build rapport and approach consumers one-on-one to encourage further purchases. Trump University representatives were explicitly instructed to push the highest priced Elite programs. Even when students hesitated to purchase the expensive programs, Trump representatives were provided stock responses to encourage purchases, including encouraging students to go into debt to pay for the Elite programs.”

Trump University exploited and abused its salespeople, too. According to a 2016 article in the New Yorker, Trump University: It’s Worse Than You Think, former Trump University salesperson Ronald Schackenberg recounted working with one couple which included a man who was on disability. He explained, “After the hard-sell sales presentation, they were considering purchasing the $35,000 Elite program. I did not feel it was an appropriate program for them because of their precarious financial condition.” Schnackenberg said that his bosses reprimanded him for advising the couple to select a lower-cost alternative. Another salesperson then “talked [the couple] into buying the $35,000 program after I refused to sell this program to them,” he testified. “I was disgusted by this conduct and decided to resign.”

The Trump Network / Ideal Health. 2,187 people X $20 = A Lot of Money.

“The Trump Network was a marketing company that sold vitamins and beauty products. Within a few years, the company fell on hard times, leaving some salespeople in tough financial straits,” The Washington Post reported on March 24 (Some say Trump Network let them down). Trump “became involved in an industry that consumer advocates had long criticized as promising financial independence to sales recruits but rarely delivering it.”

When Donald Trump licensed his name to Ideal Health, salespeople were thrilled. “Oh, my God, people cried when they heard it was him,” said Jenna Knudsen, who was a top producer at Ideal Health at the time. “They cried and looked at each other and said, ‘We’re going to be millionaires!’”

That didn’t work out, exactly. “In one complaint to the FTC, obtained through a Freedom of Information Act request by The Washington Post, one former sales representative recounted spending $1,887.75 on starter kits and other materials. ‘They kept tricking me into believing that I will make money just by selling more products and inviting more people, but the rate of return is so low,’ wrote the consumer who is not identified. ‘In other words, they are scamming and deceiving people, making them believe that if they ‘just hang in there’ they will make money.’”

Another rep, Sara Harper, said “A picture was painted that [Trump] was involved at a level of business decision-making that I don’t think he really was.” As sales representative Yvonne Zook explained, “With Trump coming in, they hyped it up to make us believe, oh, it’s not going to take us long now; we’re going to make money so much faster.”

Most of the controversy comes from how sales representatives were rewarded and recruited. Many were wowed by a de-facto pyramid scheme: “2,187 people X $20 = A Lot of Money.” Multi-level marketing companies are legal, but the FTC prohibits pyramid schemes.

“A Trump Network compensation plan shows that those in sales were promised big rewards for recruitment. A hypothetical example presented by the company showed that salespeople could build ‘levels’ of salespeople under them and would earn commissions of $100, $25 or $20 each time a new recruit bought a business starter kit for $497.”

“Extraordinary growth on Level 7.” – Sounds like a Trumped-up promise.

Mitsubishi. How many miles per gallon would you like this vehicle to get?

When car makers release mileage ratings for their vehicles, they are assumed to be honest. But in lieu of tests, Mitsubishi took shortcuts by using rudimentary desktop calculations. And when tests were conducted, Mitsubishi manipulated resistance ratings to produce better mileage results. In April, Mitsubishi admitted to falsifying data on four models, including mini-cars sold only in Japan, and others sold under Nissan Motor Company’s brand name. It’s not hard to understand why: higher mileage ratings help sell vehicles. And this year, Mitsubishi disclosed that it has been engaging in such deception for 25 years.

“Investors responded by pushing Mitsubishi shares down by 10%. The fuel test scandal has now erased half of the company’s market value, and its shares are sitting at a record low,” according to the website, KTLA.com. At the time the article was published, Mitsubishi stock sold for $3.40 per share, well below its December 1, 2015 high of $8.42. Since then, the stock has rebounded slightly to $4.46 (11/13).

The scam forced Mitsubishi to book a one-time loss of $479.5 million in 2016, more than triple the original estimate. Mitsubishi will use part of the funds to pay owners of the affected vehicles. Each mini-car owner will receive $960, while owners of other models will receive $290.

When news of the scandal broke, Mitsubishi Motors said its management created an “environment for fraud.” In May, Mitsubishi President Tetsuro Aikawa and Executive Vice President Ryugo Nakao announced they will leave their positions effective June 24. “The Japanese government called the situation ‘extremely serious,’ noting Mitsubishi violated the trust of its customers,” according to a UPI report, Mitsubishi Offices Raided after CEO After CEO Admits Fuel Economy Deception .

The incident marks the first time a Japanese carmaker has admitted misconduct in reporting fuel efficiency.

Mylan. Outcry? I don’t hear any outcry. Do you hear any outcry?

Adults and children at risk of severe allergic reactions carry EpiPen injectors, a Mylan product, in the event of emergencies. “After acquiring the injectors in late 2007, Mylan has raised the price 17 times by a total of 548%,” according to a report in The Wall Street Journal, CEO of EpiPen Maker Defends Price (September 22). That leap calls into question whether the company’s costs have escalated in tandem.

Mylan’s CEO, Heather Bresch, cited rising costs for sales, marketing, and disease-awareness efforts. Really? And stratospheric price hikes are only part of the shenanigans. The US Government has accused the company of overcharging the federal-state Medicaid program. “Andy Slavitt, acting administrator of the Centers for Medicare and Medicaid Services, said Mylan wrongly classified the emergency epinepherine product as a generic when it should have been classified as a brand-name product . . . In doing so, Mylan paid a smaller rebate of 13% or about $163 million when it should have been paying a rebate of 23.1% or more,” according to a Wall Street Journal article, US Disputes EpiPen Fees. Seems the company wants things both ways: Mylan has received significant protection from the FDA, which has limited its competition.

Second, to ameliorate concerns from a congressional committee investigating the company’s pricing strategy, Mylan performed creative profit calculations. Bresch said Mylan’s profit was a paltry $100 for a two-pack of injectors, on a list price of $608. But in response to questions from The Wall Street Journal, “Mylan said that the profit figure presented by Ms. Bresch included taxes, [a fact that] the company didn’t clearly convey to congress. The company substantially reduced its calculation of EpiPen profits by applying the statutory US corporate tax rate of 37.5% – five times Mylan’s overall tax rate last year. Without the tax-related reduction, Mylan’s profits on the EpiPen two-pack were about 60% higher than the figure given to Congress . . .”

In September, representative Elijah Cummings of the House Oversight committee said, “We didn’t believe Mylan’s numbers last week during their CEO’s testimony, and we don’t believe them this week, either.” Last year, Mylan moved its headquarters to the Netherlands for tax purposes.

Theranos. First, we must become billionaires. Then we’ll worry about test accuracy and quality control.

“In Arizona, Theranos successfully lobbied for a law allowing laboratories to provide blood tests directly to patients without involvement by doctors, who are trained to question unusual results,” The Wall Street Journal reported in October (Flawed Theranos Tests Hurt Patients). That effort provides a clue about the company’s motivation: less oversight means greater profit. Arizona Governor Doug Ducey bought the company’s lobbying rational, and signed a law that granted the company its wish. He prematurely lauded the company’s CEO, Elizabeth Holmes, citing her “devotion to serving and empowering patients with new and improved technology.”

Clueless about the technology, Ducey passed a bad law, and jeopardized the health of thousands of Arizona residents. According to the Wall Street Journal article, Theranos “left a trail of agonized patients who had been drawn to Theranos by its claims of convenience, low cost and reliability . . . Theranos failed to maintain basic safeguards to ensure consistent results, according to regulators, independent lab directors and quality control experts.” Bypassing physicians in the information chain removed a crucial safeguard for patient care.

“A federal inspection report said a Theranos laboratory ran an important blood test on 81 patients in a six-month period despite erratic results from quality-control checks meant to ensure the test’s accuracy.” The test measured how long it takes blood to clot, an important indicator for patients who are at risk for having strokes or blood disorders. For patients taking blood thinners, such as warfarin, inaccurate measurements can have fatal consequences. “Too much warfarin can cause fatal bleeding, while too little can leave patients vulnerable to clots and strokes, according to medical experts.” Inspectors allege that Theranos released test results to patients even when the results violated the company’s own quality assurance requirements. Patients have filed at least ten lawsuits against Theranos in Arizona and California.

Holmes has admitted her company’s technology was a fraud, and she relied on secrecy to perpetuate the scheme. According to an article in Vanity Fair, “When employees questioned the accuracy of the company’s blood-testing technology, it was [COO Sunny] Balwani who would chastise them in e-mails (or in person), sternly telling staffers, “This must stop,” The Wall Street Journal reported. [Balwani resigned in May.] He ensured that scientists and engineers at Theranos did not talk to one another about their work. Applicants who came for job interviews were told that they wouldn’t know what the actual job was unless they were hired. Employees who spoke publicly about the company were met with legal threats. On LinkedIn, one former employee noted next to his job description, “I worked here, but every time I say what I did I get a letter from a lawyer. I probably will get a letter from a lawyer for writing this.” If people visited any of Theranos’s offices and refused to sign the company’s lengthy non-disclosure agreement, they were not allowed inside.

Tyler Shultz, grandson of former Secretary of State George Shultz, worked for Theranos and is currently embroiled in a legal battle with the company for exposing their internal testing discrepancies. “Fraud is not a trade secret,” Tyler Shultz said. “I refuse to allow bullying, intimidation and threat of legal action to take away my First Amendment right to speak out against wrongdoing.”

Update: In October, 2016, Theranos shuttered its blood-testing facilities and its management has decided to refocus its efforts on developing products for outside labs, hospitals, and doctors offices. Federal regulators have proposed banning CEO Holmes from being involved in any blood-testing company for at least two years.

Honest Company. Our supply chain will cleanse all those bad ingredients from our products.

Honest Company became a valuable marketer of household cleaning supplies and diapers partly by bragging about ingredients that were absent from its products – namely, SLS or sodium lauryl sulfate. SLS, in case you didn’t know, is common to popular products like Colgate toothpaste and Tide laundry detergent. But Honest Company told consumers that SLS irritates skin, and placed it at the top of its Honestly Free Of . . . label. The company achieved $1.7 billion in market valuation in less than four years.

In 2016, the Wall Street Journal commissioned two independent laboratories to verify Honest Company’s SLS-free claim. And . . . “our findings support that there is a significant amount of sodium lauryl sulfate in Honest’s detergent,” said Barbara Pavan, a chemist at Impact Analytical, one of the testing labs. The second lab corroborated those results.

Honest Company disagreed with the findings. “We do not make our products with sodium lauryl sulfate,” said Kevin Ewell, Honest Company’s manager of R&D. Confused?

Hang in there, because there’s more: “Honest said its manufacturing partners and suppliers have provided assurances that its products don’t contain SLS beyond trace amounts. Honest provided the Wall Street Journal with a document it said was from its detergent manufacturer, Earth Friendly Products LLC, that stated there was zero “SLS content” in the product. Earth Friendly, in turn, said the document came from its own chemical supplier, a company called Trichromatic West Inc, which it relied on to test and certify that there was no SLS,” according to the Wall Street Journal article, Laundry Detergent from Jessica Alba’s Honest Co. Contains Ingredient It Pledged to Avoid (March 10). And Trichromatic sources its products from India-based Galaxy Surfactants (emphasis, mine).

Still with me? Good . . . “Trichromatic told the Wall Street Journal the certificate wasn’t based on any testing and there was a ‘misunderstanding’ with the detergent maker. It said the ‘SLS content’ was listed as zero because it didn’t add any SLS to the material it provided to Earth Friendly and ‘there would be no reason to test specifically for SLS.’” (italics, mine)

Clear as mud. This finger pointing and semantic obfuscation isn’t helpful to customers. But what about the claims that SLS is dangerous in the first place? “In its pure form SLS can cause skin rashes, but many consumer products companies including P&G, Colgate-Palmolive Co. and Seventh Generation Inc. have vouched for its safety when used in their products.” That doesn’t matter. Jessica Alba, co-founder of Honest Company, describes SLS as a “toxin” in her 2013 book, The Honest Life.

The Wall Street Journal’s investigation caused Honest Company to revise its Honestly Free Guarantee. Before, the company described its products as “honestly free of” dozens of ingredients, including SLS. Then, it tweaked the semantics ever so slightly to say its products are “honestly made without” those ingredients. And statements that the ingredients the company eschews are “risky” or “toxic”? Scrubbed clean off the website.

Verizon. Free Supercookies! But we’re not telling whether we just gave one to you.

Every digital native knows that the non-edible kind of cookie tracks what people do online. We live with these cookies, and we’ve devised clever ways to defeat them. Mostly, we know cookies exist, even though we don’t pay specific attention to their presence. But supercookies are different “because they create unique identifiers that cannot be deleted by users,” according to a Wall Street Journal article, Verizon Fined in ‘Supercookie’ Investigation (March 8).

And sometimes, consumers don’t know their privacy has been invaded. The FCC investigated Verizon following complaints that supercookies were used to deliver ads from 1-800-FLOWERS.com to a rich, vulnerable target demographic: male Android smartphone users ages 25-44 with incomes higher than $75,000 prior to Valentine’s Day, 2014. Ka-ching!

Such demographic targeting occurs all the time. The ethical issue is that Verizon used supercookies without disclosure and consumer consent. “Consumers care about privacy and should have a say in how their personal information is used, especially when it comes to who knows what they’re doing online,” said FCC Enforcement Bureau Chief Travis LeBlanc. Verizon will pay $1.35 million to settle the case.

Among this year’s Sales Ethics Hall of Shame inductees, Premier Cru, SwanLuv, Trump University, and Trump Network were all consumed a la the Ouroboros. The others have survived, but I have no doubt they lost some vital pieces and parts. In particular, customer trust.

President-elect Trump, who is directly connected to two companies in 2016’s Hall of Shame, has pledged to cut business regulation. Que sera, sera. I expect a very healthy crop of candidates for 2017’s Sales Ethics Hall of Shame.

Author’s note: some readers might wonder why Wells Fargo didn’t make this year’s list. The company was inducted into the 2015 Hall of Shame.

Risk Committees: An Antidote for Fraud

I have a writing problem that’s giving me fits. I’m knee-deep into fraud – that is, describing how to prevent it. Unfortunately, the subject doesn’t involve using fun, energetic words like transformative change and market domination.

Instead, I must become jazzed about ideas that are antithetical in our caffeinated, exponential growth-obsessed business culture: constancy and stability. I must double down on the Zen we supposedly derive from mom-and-apple pie values like honesty, transparency, and trustworthiness. What – no market disruption? I’d rather watch reruns of regular-season baseball games.

Please don’t take this as whining. I’m game for a new expository challenge. Fraud prevention . . . let’s see . . . I know! What’s the ROI of thwarting a nascent scam before it obliterates a company, its leaders, or both? What’s the value of slaying a scandal before it causes customers injury, death, or financial ruin? Now this gets me going! I can write about corporate managers and auditors as champions, armed with sharp ears and ready eyes. Finely-tuned algorithms able to detect the subtlest transactional anomalies. Deceit – headed off at the pass! Energy, baby!

Lead gen, content creation, and predictive analytics might nudge the revenue needle northward, but they won’t save a company from cataclysmic self-destruction. That’s a primary purpose of fraud prevention. There are cases to prove it. Oh, have I got your attention now?

Expect wretched outcomes when these are present in a company:

1. Ethical hypocrisy: senior managers model poor ethical behavior; e.g. The “Code of Conduct” or “Values Statement” – if they exist – are regularly violated or ignored by staff

2. Lame internal governance, oversight, and audit controls: revenue-generation processes that are disconnected from other departments; prevalent attitude that ‘what happens in Sales, stays in Sales’

3. Weak channels for staff to report unethical or illegal activity: no documentation provided to sales force regarding how to report problems; no formal process for mediation

4. Penalties for whistleblowing: sales personnel describe being harassed or intimidated after reporting issues to supervisors, or being castigated as ‘not a team player’

5. Dissonant strategic and tactical goals: corporate strategy champions growing long-term value of customers, while tactical goals are centered on achieving high monthly revenue targets

6. Sales incentives and compensation substantially skewed toward revenue attainment: low base salary, and commissions based exclusively on percentage of sales

7. Sales culture that glorifies achieving objectives unrelated to customer success: prominent recognition for quantity of new customer accounts opened, or number of appointments held

8. Unrealistic or supremely difficult sales performance goals, accompanied by stringent penalties for non-achievement: termination of employment for underachieving “stretch” targets

9. Arrogance: believing “fraud could never happen here . . .”; accepting the delusion that the company hires only “honest” sales candidates and managers

10. Lackadaisical or perfunctory mediation and redress for customer complaints: unabated customer difficulties with selling tactics and allegations of product misrepresentations

Preventing systemic bad behavior begins with the company’s board, whose members must recognize that executing strategy inevitably carries the possibility of doing harm to customers, employees, suppliers, and shareholders. “. . . the full board is ultimately responsible for taking ownership of risk oversight and making sure strategic risks to the business are regularly discussed,” writes Maureen Bujno, Managing Director for Deloitte’s Center for Board Effectiveness.

Soul-searching questions for boards to answer:

1. How might the activities of this company cause harm to its stakeholders?

2. Could our executive and sales pay plans / incentives create conditions that compromise or damage trust or safety for customers, employees, vendors, or contractors?

3. How confident are we that the senior management of this company will become aware of unethical or illegal activity when it occurs?

4. Does this company have adequate mechanisms to communicate and enforce its legal and ethical standards?

5. Has this company taken sufficient steps to reduce the possibility that its stakeholders will be harmed?

When it comes to preventing fraud and ethical abuses, boards should avoid becoming enmeshed in tactical details and operating minutia. One prominent exception: board members must be open to holding direct conversations with employees who want to report fraud. The risks to a company are simply too great for board members not to know when risky behavior or activity takes place. And as the Wells Fargo case has demonstrated, there is no certainty that the established channels for reporting problems will work, or that employees will feel safe using them.

Board-sanctioned risk committees as an elixir. Day-to-day operating risks can be addressed by a cross-departmental risk committee. Openness and transparency are useful antidotes for fraud risk, and companies can develop these capabilities in-house through a team dedicated to monitoring, identifying, and reporting conditions that might be unethical and illegal. The good news: establishing a risk committee doesn’t demand staffing it with specialized talent. And now the bad: risk committees succeed only when boards care about risk prevention, and management responses to the issues the committee exposes are both timely and adequately considered.

Some recommendations for getting started:

Step 1: If the name Risk Committee doesn’t sound catchy, or fails to entice people to join, give the committee a different name.

Step 2: Decide how to recruit and appoint members. Sales and Marketing must be represented, but make sure other departments are, too.

Step 3: Select a capable leader – or ensure that one can be chosen.

Step 4: Write a committee charter to establish the purpose, objectives, goals, and authority. For example, “The purpose of the Committee is to provide oversight to ensure that marketing and sales strategies, tactics, policies, and procedures do not conflict with laws and regulations, and that they comply with the ethical guidelines of the company. The committee is entrusted with identifying and communicating all matters of concern to senior management, and when necessary, to members of the corporate board.”

Step 5: Establish the scope of what the committee will be able to do, examine, review, and report, along with expectations and guidelines for preserving confidentiality.

Step 6: Determine how often the committee will meet, the role and obligations for committee members, and the duration they will be asked to serve.

Step 7: Create a template for how the Committee’s findings will be communicated. At a minimum, that includes how to document or record incidents, determining who should be told, describing how they should be told, and guidelines for assessing and reporting the magnitude of the threat.

Step 8: Plan a kick-off event, and make sure senior managers are involved.

Step 9: Document the Committee’s activities and the actions taken in response to situations it has identified and shared with senior management.

What signals should Risk Committee members listen for? What conditions should trigger concern? For starters, any artifacts of the ten fraud-risk elements I described. In addition, whenever opacity, process silos, limited access to customer-facing personnel, reluctance to answer questions or provide information about customer complaints or regulatory compliance occur, risk indicator lights glow red. These situations should be considered for committee oversight.

Boards must recognize that companies face new risks when executives assume fraud and abuse problems can’t be controlled, when they claim that mitigation is too expensive, or when they dismiss oversight as a distraction for the business.

Foiled business scams rarely make it into news feeds. The activities that lead to their demise hardly seem remarkable. Often, an employee – or employees – shares information with a manager or board member who cares enough to act. Then, established prevention mechanisms kick in, and perform as designed. Routine – as it should be. No matter the size, industry, or leadership, an organization is never immune from causing harm through unethical behavior, misguided strategy, and sketchy tactics. Risk committees perform a vital role that no company can afford to overlook: oversight that reduces the probability a company will cause financial and physical harm through systemic bad behavior.

When I Say “Cheat,” You Say “How Much?” Why Salespeople Are Easy to Exploit

“Your judgment gets clouded out in the field when you are pressured to sell, sell, sell.”

Wells Fargo, 2016? Actually, no. Dial back about twenty-two years – to 1994. This came from Prudential Insurance sales rep John Vetter, about a scam that began in the 1980’s. A scam that victimized nearly eleven million Prudential customers.

Customers suffer when pressure is baked into the sales culture. Carol and Keith Nicholson were loyal Prudential Insurance customers at the time Keith was diagnosed with Leukemia. “Carol had been known to say that she trusted her Prudential agent like she trusted her pastor. He was going to play a vital role in smoothing a very uncertain future. Therefore, when her agent suggested that she and her husband take out a new life insurance policy on Keith at no additional cost, the couple agreed, no questions asked. They just signed the forms, believing they had brought even more certainty to the unpredictable future,” according to a business school discussion about the case prepared by Hunn, Shenkir, and Walker of the University of Virginia’s McIntire School of Commerce.

The Nicholson’s were wrong. When Keith died, Carol discovered that the $103,000 Prudential life insurance policy they traded in was worth only $22,000. “The Nicholson’s agent had taken advantage of the couple’s trust by borrowing against their old policy in order to get them to purchase a new and more expensive policy.” [Hunn, Shenkir, and Walker]

By 1998, Prudential estimated its liability in the US from related class action lawsuits at $2 billion. States with large populations of retirees were especially hit hard, and investigations into the company’s practices ensued. “Prudential trained its agents to mislead, misrepresent and defraud policyholders,” according to a 1997 internal report from the Florida attorney general’s office.

Pressure, incentives, training, pressure. Repeat. That’s how eleven million Prudential customers got scammed. The same way Wells Fargo opened two million credit card accounts without customer consent. The same way Valeant/Philidor tricked health benefits providers into overpaying millions of dollars for prescription drugs. And the same way Dun & Bradstreet Credibility Corporation used alarming, but groundless, sales pitches to frighten small business owners into subscribing to their service.

You’d think after a while, the actors in these corporate debacles – boards, executives, shareholders, and employees – would figure things out, making such sordid patterns fizzle into obscurity.

But no. Today’s CXO’s, engorged on bonuses from share price appreciation, and financially fattened from meeting short-term revenue and profit targets, often gut internal governance to keep their gravy trains rolling. They emasculate audit enforcement and crush dissension. It’s all in a day’s work. Practical advice for the first-time job seeker: bolt from any hiring manager who says, “We run an aggressive sales organization here.”

It’s revolting to see sales strategies and tactics used for malevolent objectives, and to learn the consequences that victims endure. Executives can salivate over clever strategies for sales enablement, but anyone who fails to consider the possibility of harm to employees and customers needs to remove his or her head from the sand.

Not every revenue scandal involves the sales force. Enron’s meltdown first flourished in the CFO’s office, implemented through creative manipulation of debits and credits. VW’s emissions-cheating scheme was prosecuted through its engineering department. Turing Pharmaceuticals controversial price gouging was the brainchild of its profit-obsessed CEO, Martin Shkreli.

But all too frequently, you’ll find the sales organization close to the heart of an ethical storm. The linchpin in the mechanism for repeatable, scalable deceit. The reason, in five easily-tweetable words: Salespeople are easy to exploit.

1. The sales team holds a unique position of trust with a company’s customers. And all scams rely on the ability to exploit trust.

2. Salespeople provide a convenient smokescreen for unethical managers. Too tempting to ignore. At Wells Fargo, the sales force took the fall for not upholding corporate values, when in fact, they were executing them.

3. Commission- and incentive-based pay plans enable management to control behavior like a puppeteer manipulating a marionette. Such plans predominate in sales organizations, and many salespeople depend on their income-at-risk to make ends meet. That makes them particularly vulnerable to making ethical compromises.

4. Organizations traditionally control salespeople as individuals, despite the popular rhetoric about playing as a team. It’s embedded in the culture. Companies champion sales individuality: individual contributors, individual quotas, “What’s-in-it-for-me? (WIFM),” and personal motivation. Through internal sales contests, companies often play salespeople against each other, limiting their individual and collective power to resist management abuse.

5. Many times, salespeople don’t understand their personal risk situations. In deterministic you-will-make-your-number sales cultures, salespeople – particularly those new to the role – fail to confront the uncertainties they face. Instead, lacking background and experience, they acquiesce to management’s performance demands, no matter how unrealistic.

6. Thanks to automation, many sales roles have become de-skilled. And will become more so. That makes salespeople easy to replace, and easy to threaten.

Think of sales as the revenue-risk shock absorber for a company. Industries can become more competitive. Market demand can wax and wane. State-of-the-art products can unexpectedly decline, or become “disrupted.” Senior executives can constantly tinker with planning and strategy, and achieve rock-star fame through TED talks about their “lessons learned.” But one thing remains durable, as surely as the sun rises and sets: revenue expectations for salespeople never recede or decline. Do companies exploit that by endlessly funneling risk onto its sales force? I think so.

Salespeople who have worked even a short time are inured to working harder to maintain their standard of living. Companies like Wells Fargo and others have learned exactly how easy it is to manipulate their salespeople to achieve that prosaic goal.

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