The Hasidic Masters’ Guide to Management (Book Excerpt)

by Moshe Kranc

Reprinted with permission from The Hasidic Masters’ Guide to Management by Moshe Kranc, published by Devora Publishing.

 

Don’t Trade Embarrassment for Shame

 

THE CABBAGE HAT

The followers of Rabbi Menachem Mendel of Kotsk were known for their extreme poverty and devotion to the truth. One of his Hasidim, Rabbi Shlomo, was so poor that he could not afford to buy a hat. He would keep his head dry with a cabbage leaf when he walked in the rain.

His father-in-law saw this public display of poverty.

“Aren’t you ashamed to be seen wearing a cabbage leaf for a hat?” he asked Rabbi Shlomo. Rabbi Shlomo was puzzled. “Why should I be ashamed? I didn’t steal the cabbage leaf!”

There’s no shame in wearing a cabbage leaf for a hat, so long as you came by it honestly.

Rabbi Shlomo’s father-in-law has confused embarrassment with shame. Rabbi Shlomo might be embarrassed by his poverty, and feel chagrin when he sees other families with more financial stability. But Rabbi Shlomo has no cause for shame — after all, he has done nothing dishonest which might bring him disgrace.

In business, a manager who achieves financial success, advancement or fame can feel justifiably proud. By contrast, managing an unsuccessful enterprise can be embarrassing.

But remember that there is no shame in failure if you gave the attempt your best try. Resist the seductive temptation to achieve success via dishonest means. You will find yourself simultaneously proud and ashamed, fearful of the disgrace that will come when your dishonesty is discovered — and, as the past few years’ business headlines demonstrate, a great deal of dishonesty is eventually discovered.

IN TODAY’S WORLD

Enron’s executives were masters at converting embarrassment into shame. The energy giant ran up billions of dollars in debt, certainly an embarrassing performance. Rather than face an unpleasant reality, they embarked on a shameful campaign of deception, overstating income and hiding the astronomical debt from shareholders and employees via a labyrinth of phony partnerships, shell companies and fabricated subsidiaries.

In the short term, they avoided embarrassment, as they bolstered the price of their stock and continued to attract new investors. In the long term, they brought shame and ruin upon themselves, destroyed the jobs and retirement savings of their 11,000 employees, and toppled America’s seventh largest company.


Enron’s auditor, Aurthur Andersen LLP, fared no better in resisting the temptation to convert embarrassment into wealth via subterfuge.

Enron paid their accounting firm $52 million per year for both accounting services and consulting services. As accountants, Andersen had an ethical obligation to objectively examine the company’s balance sheets. But as well-paid consultants, they had a vested interest in their client’s appearance of success. Andersen officials became committed accomplices to Enron’s fraudulent practices. As the scandal emerged, Andersen’s lawyers instructed their employees to shred thousands of pages of documents that would have shed light on Enron’s crimes. This attempt to cover up shameful behavior via even more shameful behavior backfired. Andersen was found guilty of obstructing justice, their customers fled to more reputable accounting firms, and the venerable accounting firm closed its doors in 2002.


Enabling computers to understand human speech is a challenging problem, as anyone who has used speech recognition software can attest. There are many technical difficulties: people talk at different speeds; accents differ; it is difficult to screen out background noise; choosing between homonyms requires not only voice processing but also semantic awareness.

The market leader in this area for many years was Lernout & Hauspie Speech Products NV (L&H), a publicly traded firm headquartered in Belgium. Unwilling to admit to flaws in their technology, L&H staged a number of fraudulent demonstrations. For example, at one Comdex show, co-founder Pol Hauspie led journalists through a breathtaking demonstration of a computer understanding human speech, until the software script that was simulating real voice recognition lost its place and got out of synch with the demonstrator’s commands.

What drove L&H to falsify claims of the technology’s capabilities? The company was under relentless pressure from investors to grow revenues and deliver results every quarter. This pressure also led L&H into a pattern of deceptive accounting practices designed to overstate sales.

A lot of creative accounting went into the doctoring of L&H’s financial results. Many of the company’s so-called customers were in fact “related parties,” companies with whom L&H had investment ties. L&H routinely reported revenue from barter deals with other software companies in which no cash exchanged hands – the companies exchanged useless inventory, and both companies declared revenues. L&H even found a way to transform their internal research and development costs into revenue: they outsourced their own software development to wholly-owned subsidiary companies, then “bought” the resulting software. They declared revenues of $143.2 million for 1999 in far-off Singapore and Korea, where it was difficult for auditors to verify claims.

Co-founder Jo Lernout knew these were risky practices, but, as he was fond of saying, “The grass is always greener on the edge of the precipice.” Buoyed by shady deals, L&H’s revenues soared to $211.6 million in 1999, even though there remained a long way to go in developing both the technology and the market.

You can’t fool all the people all the time, and you can’t perpetually defer embarrassment by ever more shameful cover-ups. With their Korean revenues, L&H took one step too close to the precipice. On August 8, 2000, The Wall Street Journal reported that many of L&H’s alleged Korean customers had, in reality, done no business with the company. An SEC probe followed and the cover-up started to unravel. L&H filed for Chapter 11 bankruptcy protection on November 29, 2000.
Moshe Kranc has worked in high-tech for over 25 years, with 15 years in management positions in both the United States and Israel. He holds 5 patents in areas related to pay television and computer security, lectures at the Jerusalem College of Technology, and has published numerous technical articles. Storytelling is part of Moshe’s heritage – family tradition has it that he is descended from Rabbi Jacob Kranc, the Magid of Dubno, an 18th century itinerant preacher known as “the Jewish Aesop.”

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