Category Archives: Business Development Ethics

The Lucrative Black Market for Customer Trust

“Free travel.”

A combination of words that grabs my attention, and stirs my soul. When? . . . How? . . . I’m thinking Machu Pichu! The Galapagos! High adventure, or a cheap way to satisfy an obligatory visit to a friend or relative. Sign me up!

A Fly Delta Facebook Event promises two free tickets on Delta by joining a fan page. All you have to do is invite 300 people, add a comment on the fan page, and click a box labeled “confirm tickets.” Alas, at 173 Friends, my community of Facebook acquaintances is so paltry, it will be difficult to capture this coveted prize. Not without me having to get a whole lot friendlier. Fat chance! Besides, the final statement in the offer makes me skittish: “After successful participation of an offer, your download will begin automatically.”

If that enigmatic sentence doesn’t pique your fraud antennae, maybe the name of the fan page will: Delta Air. All part of a choreographed online scam, according to the website Hoax-slayer.

In March, 2015, a similar Facebook scam took off, this one riding on the Qantas Airlines brand:

Today we at Qantas Australia are proud that we have seated over 3 Million passengers since January 1, 2015! So to celebrate this record setting accomplishment we will be giving out FREE first class flights for the rest of this year! That’s an entire year of FREE flights! To win, simply complete the step’s below. [sic]

A persuasive ploy that my finicky high school English teacher, Mrs. Gimmelblatz, would have immediately dismissed. “A grammatical catastrophe!” as she often exclaimed. But in less than 24 hours, this shoddy ruse hijacked over 130,000 Facebook Likes, and more than 153,000 shares – a runaway success by any marketing measure. If only it weren’t fraudulent. The imposter pages were shut down, but not before damage was done.

Expect to see more imposters. “The intention of these scammer like-farmers is to increase the value of the bogus Facebook pages they create so that they can be sold on the black market to other scammers and/or used to market dubious products and services, and distribute further scams. The more likes a page has, the more resale and marketing value it commands,” said Hoax-slayer.com. Fraudsters know that customer trust is highly fungible, and the black market is thriving.

Many scammers assume that consumers don’t pay close attention to the intricate branding and product details that designers, marketers and trademark attorneys obsess over. Delta Air Lines uses Delta as its official name, not Delta Air. Qantas doesn’t embellish its brand name with the company’s country of origin. A kangaroo, the proud centerpiece of its red logo, provides graphic confirmation. “One of the ways firms signal their integrity is branding; it makes little sense to invest vast sums in building a distinct reputation only to allow that reputation to be besmirched by fraud,” William K. Black wrote in an article, How Trust is Abused in Free Markets: Enron’s Crooked ‘E’.

Today, fraud can be astonishingly easy to pull off. Why commit messier crimes when you can just cut and paste a logo, or, if you’re working from inside, just use the one printed on your business card? And nailing the impostors is like a legal version of whack-a-mole. One manufacturer, Saddleback Bags, went the other way on fraud protection, taking a novel if-you-can’t-beat-them-join-them approach. The company’s YouTube video has the ostensible purpose of teaching people how to produce a knock-off of one of its leather bags.

Fraud techniques are often learned from others, and they are easily shared. An insight that Edwin H. Sutherland gave the world in 1939, when he coined the term “white collar crime.” He deserves credit for bravery. At the time, the notion that wealthy aristocrats could be criminally corrupt was as heretic as Galileo’s heliocentricism. And today, there’s no better channel for incubating and spreading white-collar fraud than social media. Whether committed externally or internally, fraud has five characteristics:

1. It works by mimicking an existing signal (e.g. brand name, product design, marketing message, or other communication)
2. It exploits trust
3. It relies on an imbalance of information that favors the party committing the fraud
4. It provides the perpetrator a direct or indirect financial benefit
5. It erodes the value of corporate brand assets, and present and future revenue streams

So while companies vigorously play whack-a-mole to thwart outside brand imposters, many are less aggressive about protecting against internal fraud. “Insiders cause the vast majority of theft losses,” according to Black. And, in a recent review of regulatory filings The Wall Street Journal conducted, “more than 300 companies, with a combined market value of more than $450 billion [maintain] internal-control guidelines that were written more than two decades ago.” In fact, The Wall Street Journal reported that “more than 180 companies disclosed ‘material weaknesses’ in their internal controls in 2013 – the latest year for which data were available – an 11% increase from the prior year, according to data tracker Audit Analytics.” (For further information on this topic, please see the updated 2013 COSO framework for fraud risk assessments.)

Absent adequate corporate governance, inside fraud makes travel fakery and similar scams seem like chump change. In March, 2015, over 200,000 protesters took to the streets of Sao Paolo, Brazil to protest billions of dollars that the national energy company, BNP Paribas, stole from consumers, and funneled to corrupt government officials. That’s about the same number of people involved in the historic August 28, 1963 civil rights march on Washington.

Fraud doesn’t spontaneously ignite. Companies must first understand the combination of circumstances that creates fraud before they can effectively fight it. The Fraud Triangle, described by Donald Cressey in a paper titled, Other People’s Money: A Study in the Social Psychology of Embezzlement provides three contributing forces:

1. Financial pressure, or other motivation to steal
2. Opportunity to engage in deceit
3. Rationalization for why it’s acceptable

While companies often can’t control or reduce motivation to commit fraud, they can reduce their risks by decreasing opportunities for abuse, and by monitoring its symptoms:

1. Accounting anomalies – including irregular or missing invoices, an unusually high number of voided transactions, GL journal entries without any supporting documentation, account details that don’t reconcile to the General Ledger, back-dated or post-dated transactions, unexplained variances between tax returns and the General Ledger, excessive number of late payment penalties from vendors

2. Weak internal controls – including missing documentation, no separation between accounting and audit functions, evidence of frequent overrides of transaction procedures, lack of authorization for transactions, lack of integration between accounting and information systems, lack of accounting oversight on departmental transactions, lack of internal conformity on records retention, inadequate protection for valuable assets such as intellectual property and product designs

3. Analytical anomalies – including ratios that are suddenly inconsistent with historical patterns, (e.g. increases in inventory accompanied by a decrease in Payables and/or carrying costs, increases in receivables accompanied by a decrease in bad debt expense), ratios that don’t make sense, excessive Accounts Payable late charges, excessive credit card charges

4. Lifestyle and behavior – an employee who has unusually expensive jewelry, clothing or cars, an employee who rarely uses direct eye contact. In a 2003 scandal at the Washington, DC Teacher’s Union, prosecutors said that union funds were used for “to buy tickets to sporting and entertainment events, plus luxury items including clothing, electronics and art.”

Many executives in smaller companies believe they are immune the risks of stolen trust. “We’re not a very compelling a target,” some tell me. But then I remind them that everyday email fraud flourishes through the same techniques. Who hasn’t received at least one email with a friend or colleague’s name as the “sender,” that contains a short, cryptic message like “You gotta see this!!!” followed by a squirrely-looking weblink? Trust in someone’s good name, exploited through social media. It’s been going on ever since the ‘90’s.

“A generation or two ago, strategic risks were largely confined to anticipating competitors’ next moves and focusing on solutions that could beat them at the same game. Financial risks were hinged on the strength of the US economy and banks’ credit capacity. There were no cyber-threats, no data breaches, fewer regulatory impediments and very short supply chains,” wrote Russ Banham in an article, Emerging Risk: Managing Threats in an Evolving Business World.

All true. And it was a lot less common – and less rewarding – to steal an asset like customer trust, and sell it on the black market.

A Contrarian View of Transparency

In March, 2014, StubHub announced a novel “all in” pricing policy that displayed online ticket prices inclusive of add-on fees and other service charges. The company was responding to consumer research “showing that fans hate nothing more than to see their final ticket price jacked up with additional fees and service charges when they reach checkout,” according to a Wall Street Journal article (The Truth? Customers Don’t want to Hear It, March 26, 2014). Good move. Give customers what they want. Nothing wrong with that!

But then something unexpected happened: StubHub sales dropped as fans began to buy from sites that listed lower base prices. Ticket brokers who bought from StubHub reported that sales declined by 15% to 50% since the new pricing policy was implemented. In case you haven’t bought a concert ticket lately, ancillary fees can escalate the final cost by as much as 50% of the list price that draws in online shoppers. The Wall Street Journal article cited a $400 Justin Timberlake ticket on VividSeats.com in which the company assessed a $199.50 service charge.  “But wait! There’s more!” – the sales cliche applies to the final price that consumers pay, too.

Processed food brand managers can relate to the conflicts that occur when there’s dissonance between what customers say they want and what they really want. “When you tell people something’s healthy, they think it doesn’t taste good,” said Sarah Bittorf, Chief Brand Officer of Boston Market. General Mills recently cut the per-serving amount of sodium by up to 50% in more than 27 varieties of Hamburger Helper. They jazzed up the product by adding other strong flavors like garlic, onion, tomato, and spices. “But the company was careful not to tell consumers about the sodium cuts,” according to another Wall Street Journal article, Food Makers Move Gingerly on Changes (June 24, 2014). There’s a pattern: indiscriminate transparency can put the brakes on sales.

Not long ago, transparency did not require qualification. Something was either transparent, or not. Today, many writers must hedge their use of the word transparency with an adjective. Partial transparency? That sounds weird. Selective transparency? The same! Using adjectives for transparency opens a can of un-tasty sales worms. Business developers would rather believe that unprecedented “customer information power” enables honest, socially-responsible enterprises to vanquish unscrupulous companies that pull the wool over their customers’ eyes, or manipulate what they can see.

In fact, the ideal of a fully-transparent enterprise is Pollyanna. Consider the challenges surrounding corporate transparency about data breaches. “There is this crazy hysteria” about cyber-attacks, said Dawn-Marie Hutchinson, head of information security for Urban Outfitters. In August, 2014, The Wall Street Journal reported that some executives “argue that many breaches don’t lead to harm and can be handled quietly. Not every corporate document is a valuable trade secret; credit-card numbers may be exposed but never stolen, or stolen but never used. Disclosure can cause its own problems, prompting consumers to waste time replacing credit cards, for example. Most seriously, they say, going public could expose weaknesses that others could exploit.” Transparency: Damned if we do, damned if we don’t.

Compared to sales of concert tickets and hamburger supplements, transparency about information breaches scares the bejeebers out of legislators, and has garnered great regulatory interest. Only three states – Alabama, New Mexico, and South Dakota – do not have a data breach notification law, exposing a loophole the size of Alaska. “We actually don’t use the term breach,” Ms. Hutchinson said, because that could trigger disclosure laws,” according to The Wall Street Journal. Clever.

Many executives huff that honesty and transparency are among the core ideals their companies and employees have embraced.  But the act of being transparent is hardly straightforward.

Do customers always benefit when companies are open and honest? Do consumers persistently perceive corporate transparency in positive ways? If not, how should companies define ethical boundaries when it comes to disclosure – about anything? These questions undermine assumptions that corporate transparency, customer-centricity, and shareholder value all play together nicely in the same sandbox. They don’t. More transparency doesn’t always benefit customers, and it does not always yield better outcomes.

“Honesty is the Best Policy.” But, Is the World Ready for a CHO?

“Oh, and it doesn’t hurt to be honest about your capabilities and limitations. These will come out sooner or later,” Bob Thompson of CustomerThink wrote in a recent article. (Why Reps Can’t Sell. It’s the (Selling) System, Stupid!)
In other words, honesty is the best policy. But if you’re searching for succinct how-to’s for honesty, I’m sorry to disappoint. You won’t find any here. Wikihow already offers a practical, easy-to-follow 7-step process, and I won’t attempt to improve on it.

Besides, Thompson’s “it doesn’t hurt to be honest” admonition sent me on a slightly different tangent, piquing my curiosity to understand the cha-ching! –  the actual dollars-and-cents business value of honesty. Though I couldn’t calculate the exact amount, I will estimate it contributes substantially to our gross national product, and leave it at that.

Organizations casually talk the honesty-talk, but many conspicuously meander when walking the honesty-walk. Words, without will or motivation behind them, are just words. What’s missing is Corporate Muscle: a Kahuna of Honest Communication who wields power to make people stay within the lines of the truth, the whole truth, and nothing but the truth. If kahuna doesn’t suit your literary style, call him or her a Chief Honesty Officer, or CHO.Corporate honesty should be easy. But I’ll make a confession: it’s not. Sometimes it’s really hard to drive demand without stretching and distorting the truth like a glob of silly putty. What’s a sales pitch, “Business Case Study,” or ROI Calculation without cleverly stacking facts and figures? But despite the difficulties, honesty-is-the-best-policy can still be embedded into a business strategy. Remember how effectively Radio Shack used bold honesty to parody its own lack of innovation in the spot it aired during the 2014 Super Bowl?

JP Morgan Chase, Bank of America, Goldman Sachs. Immediately following the banking crisis, I expected to see a CHO in their executive suites. But no. How about BP and ExxonMobil? The same. Some industries are more ripe for a Senior Honesty Champion than others. Oddly, instead of anointing a CHO, corporations large and small regularly plug other chiefs into the org chart. From the important, like Chief Financial Officer and Chief Marketing Officer, to the inane, like Chief Fun Officer. But alas, not even titular homage for Honesty (sigh).

Compliance! Change! Synergy! Value! Shout out most any trendy topic, and you’ll find a Chief-Something-Officer all over it, like a fly on poop. Only in America can we find Management-by-magazine so lovingly woven into a bureaucratic corporate tapestry. This seems so wrong. Did someone say, “Well, at our company, honesty really falls under Legal . . .”? Puh-leeeeze!

Today, “honesty is the best policy,” yields 14.7 million online search results. While I didn’t analyze how much of that content contains positive sentiment, it’s seems safe to say that people clearly lionize honesty. Not bad for a 415-year-old idea that traces its origins to an essay, In Europae Speculum, by Sir Edwin Sandys, who wrote, “Our grosse conceipts, who think honestie the best policie.”

Consider three common business situations involving honesty, and how a CHO would formulate strategy, manage risk, and provide governance to increase business value:

Not enough honesty.
As the General Motors Cobalt product liability case demonstrates, companies often use Marketing and Sales to obscure sinister truths about a company’s safety and quality issues. According to Keith Crain, Editor-in-Chief of Automotive News, “This issue is not about a faulty switch. Car companies have been dealing with defective parts and recalls for decades. This does not even rank in the top 10 recalls. Far more serious is whether GM executives knew about the defective switches and the crashes long ago and someone at GM tried to keep the whole issue quiet.”

Too much honesty.
In a recent article in The Washington Post, (College tour de Farce: 5 Ways not to Sell Your School, April 25th), Melinda Henneberger wrote about a tour guide she encountered at the University of California, San Diego. The “truth-telling tour leader dispensed way too much information,” and “soon had parents and progeny alike staring intently at our shoes as she talked about her steamy dating life and her preference for being the one who picks up guys when she goes clubbing.”

Exaggeration and distortion.
There are infinite examples. But here’s a current favorite of mine, a (barely) fictitious sales pitch from the HBO series Silicon Valley:

“The greatness of human accomplishment has always been measured by size, the bigger, the better, until now. Nanotech, smart cars, small is the new big. In the coming months, Hooli will deliver Nucleus, the most sophisticated compression software platform the world has ever seen because if we can make your audio and video files smaller, we can make cancer smaller and hunger and AIDS.”

Outsized marketing floats all boats, especially if you work for a start-up. As advertising executive Milton Glaser said, “If you don’t have a change-the-world outlook, you’re doing it wrong.”–Which is great, but what happens when braggadocio permeates every conversation?

In a recent episode of Comedy Central’s Colbert Report, Stephen Colbert quipped, “Ladies and gentlemen, I believe honesty is the best policy, but a close second is lying about how honest you are.” Colbert’s comment harpooned a disturbing reality, hitting a nerve that needed to be hit. Could an honesty policy at General Motors have saved the lives of thirteen Colbalt drivers?

It’s hard to say, but without someone at the highest level within an enterprise responsible for establishing a culture for honesty, as well as creating a strategy for executing and governing it, we won’t see the end of criminal corporate liability, massive breakdowns in trust, and the implosion of business value that accompanies it.

There’s Nothing Worth Admiring in Sales Deception

This past week, I wanted to try something new. Something out of my comfort zone. So I promised my family I would not say or write anything controversial, and would only express bland opinions incapable of igniting debate or causing rancor.

It’s been a tough seven days, but I came up with one statement I thought was pretty safe:

“Jordan Belfort, the central character in The Wolf of Wall Street, is no example of virtue.”

When I offered this comment at home, nobody argued with me. This is highly unusual, considering I have two teenage children.

But Jim Keenan’s blog post this week, Why This Sleazy Sales Pitch is Frickin’ Awesome and You Can Learn from It, somewhat upended my assertion. His post includes a vignette from The Wolf of Wall Street, a phone conversation in which Belfort, played by Leonardo DiCaprio, cons a prospect out of four thousand dollars. The entire call takes one minute, forty seconds. Sweet!

Keenan writes, “It’s a pretty cheesy call. [Belfort’s] lying, he’s manipulating the buyer, he’s overbearing and he cares very little for whether or not his buyer actually makes money. So, yeah it’s not ‘good’ sales.”

Beside that, Mrs. Lincoln, how was the play? Good, it seems. Keenan continues, “But, in this traditional, used car salesman, cheesy pitch are some intriguing lessons,” and at the end Keenan writes, “It offered sales people so much, if they were looking.”

I found nothing to admire about Belfort’s deception, though not for lack of trying. His approach demonstrates the worst kind of exploitation: a deliberate, unapologetic betrayal of trust. Belfort’s well-honed conversational banter should never be championed as good sales technique—unless your business model involves scamming unsuspecting victims for profit. For me, the vignette offers just one important lesson: if you’re a salesperson who seeks to get fired immediately, this scene shows you exactly how to do it.

Belfort’s success fully depends on ignorant prospects. Not under-informed. Ignorant. He preys on compliant people who receive his well-polished pitch, and are unable to recognize he’s playing them like marionette puppets. Without this perverse asymmetry, Belfort has no sales leverage. In fact, he has nothing. What would happen if Belfort had the misfortune of encountering a prospect who wasn’t an utter imbecile, say, an empowered buyer? We don’t know for certain, but here’s what he might tweet in the wake of such a conversation:

Would have closed deal but #uppityprospect had objection and asked for reference. #salesfail #numbersgame

Referring to Belfort’s approach as awesome compares to watching a medical quack attempt to bleed disease out of an unconscious patient, and approvingly calling out the fact that the man holding the scalpel is wearing a surgical mask and gloves. Great that the patient was possibly spared an infection, but the purpose of the incision was to exorcise demons, and the victim bled to death. Anything that happened in between is not something most people would want used in a training video about surgical hygiene. Belfort’s power is so ludicrously lopsided, and the premise of his sales interaction so completely wrong  that this comparison hardly seems necessary. But what the heck!

Do Belfort’s tactics serve as a model that others should strive to emulate? I’ll keep my opinion bland and uncontroversial: No way. Not even close.

Sales Governance and Compliance: It Takes a Village

Two hundred and thirty-six years. That’s the cumulative amount of prison time that Bernie Madoff, Dennis Kozlowski, Bernard Ebbers, Kevin Trudeau, Jeffrey Skilling, and Walter Forbes were sentenced to serve for criminal fraud. The shortest sentence was 10 years—sufficient time to practice yoga while chanting Om Namah Shivaaya, or Woulda Coulda Shoulda – whichever comes to mind.

We know how amorality spreads when a senior executive meanders onto the ethical low road. “A fish begins rotting at the head,” as people commonly describe the infectious chain reaction.

But a fish can begin rotting anywhere. This month The Economist reported that 70% of companies surveyed were affected by fraud in 2013, up from 61% in the previous year. If you’re curious to explore the sociology behind this trend, save yourself the time. Willie Sutton, the notorious robber, provided a terse, but insightful summation when asked why he chose banks as his preferred target: “Because that’s where the money is.”

Most fraud never gets reported. Some readers might remember Travis Doe, the pseudonym for a former sales co-worker, who I wrote about in a 2007 article, On My Honor as a Salesperson: Why Sales Ethics Matter. Travis scammed his company and its customers, until he inadvertently blew his cover. He didn’t bag as much cash as these convicts, and he didn’t go to jail. Instead, Travis was quietly fired, and he slithered off into oblivion, until resurfacing—on LinkedIn, of all places! I recently stalked his profile page, and wasn’t surprised to discover that he didn’t use Thief for any of his various job titles, nor did he list the company he scammed as one of his employers. Don’t ask, don’t tell.

Thinking like a fraudster will help prevent fraud. Let’s look through Travis’s eyes at the conditions he found ripe for exploitation:

1. High financial rewards for fraud. Travis funneled customer orders through a shell reseller company he maintained. Resellers received a price discount of 40%, and Travis reaped 100% of the margin.

2. Sales compensation skewed heavily toward rewarding revenue achievement. Travis knew that as long as he made his number, he could operate without tripping any alarms.

3. Lax internal audit controls and ineffective transaction monitoring. No one sought explanations about the “Reseller’s” business offering, or why a company was allowed a reseller discount when it had no resources, and no capacity to add value.

4. Siloed business operations. Travis reported through the reseller channel, and his activities were not scrutinized by direct sales management.

5. Remote monitoring without control. Activity reports were sent to managers working in remote offices.

The growing rate of corporate fraud should remind executives that Travis Doe was no low-probability, rogue employee outlier. There are plenty more Travises, many lurking behind cleanly-scrubbed LinkedIn profiles. And if Travis Doe had complicit parties to his fraud, it was his tone-deaf managers who had their heads immersed in sand. They tacitly allowed Travis to take full advantage of them. With effective sales governance and compliance procedures in place, Travis might have had to move on to find a different company from which to steal.

There are ten hallmarks for effective governance and compliance programs, adapted from US Department of Justice guidelines designed to help companies comply with the Foreign Corrupt Practices Act.

1. Commitment from senior management. Top management must model the right behaviors if they expect others to behave similarly.
2. Documented code of conduct, and unambiguous compliance policies.
3. Oversight autonomy and resources. It takes a village—the oversight team must work without pressure for making revenue goals, and must be allowed sufficient time and power for investigation.
4. Ongoing risk assessment. Risk exposure for sales fraud changes as people, processes, and technologies change.
5. Training and continuing advice for employees. As one attorney told me, “companies that breach regulations have better cases if they can prove they have provided employees ongoing training about ethical and legal obligations and boundaries.”
6. Incentives and disciplinary procedures. Employees must be motivated to blow the whistle, and the consequences for non-compliant activity must be enforced.
7. Due diligence for business practices of third-party resellers and channel partners. Vetting and monitoring reseller sales practices is as important as ensuring compliance for internal practices.
8. Confidential reporting and internal investigation. The ability to expose the truth requires assurances for anonymity.
9. Continuous improvement, testing and review.
10. Mergers and acquisitions: pre-acquisition due diligence and post-acquisition integration.
Legal and ethical governance and compliance have evolved into significant issues for companies engaged in global sales. And tactics around revenue generation have percolated into almost every area that leaders must address, including cybercrime, money laundering, China’s bribery crackdown, and trade sanctions. Companies that educate their sales and marketing staffs about these issues and others will be better prepared for the challenges, and can avoid onerous legal penalties.

Organizations that implement a sales governance and compliance program should not expect to drive fraud risk to zero. As The Economist reported, “fraud within companies is a risk that can never be eliminated, just managed.”

Further reading: The Dow Jones Global Compliance Symposium, April 22-23, 2014, Washington, DC.

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