There has been much in the news in recent months about Minneapolis entrepreneur Tom Petters, the alleged architect of a Ponzi scheme that bilked investors out of $3.5 billion. While not presupposing his guilt or innocence, his plight offers a lesson to anyone in business, whether he or she is the CEO in the big corner office or the lowliest line worker.
In case you’ve been living under a rock someplace, Petters faces 20 counts of wire and mail fraud, conspiracy and money laundering. I don’t pretend to know how this alleged conspiracy began. But it is inconceivable to me that Petters and his confederates set out to defraud anyone. That is, they did not meet in some clubby backroom and draft a seven-point business plan that would:
- 1. Round up a cadre of savvy, well-heeled investors.
- 2. Convince them to buy high-quality electronics that will be resold to retailers at a profit
- 3. Pay these investors terribly attractive rates of interest to use their money.
- 4. Actually buy no merchandise whatsoever.
- 5. Use investors’ money to pay off other investors and fund lifestyles of the rich and famous for ourselves.
- 6. Cover our scam by creating fake invoices to mask non-existent sales.
- 7. Provide enough cash to support the high life forever because we’re so smart our criminality will never be discovered.
I have a different thought. I have an abiding belief in both the innate integrity and the fallibility of man. I believe that the vast majority of men and women are guided by a reasonably efficient moral compass that leads them to do the right thing. But life’s pressures twist and warp their moral compass like a magnet realigns iron filings.
In business life, all manner of pressures seek to bend and break our true moral instinct. But here’s an important clue: when these untoward pressures successfully cause one to lose direction, they do so an inch at a time. What starts out as a small and temporary lapse of moral judgment becomes the progenitor of larger and more frequent moral suspensions. A slippery slope, indeed.
That’s why in my books, Cheat To Win and Beat The System, I heavily promote the importance of having top management set a clear, concise, and consistent tone of the highest moral and ethical behaviors. And I make this suggestion not only because it’s the right thing to do; it is also the most successful thing to do.
The criminal behavior of the John Deans, Richard Haldemans and John Erlichmans, for example, would have never has occurred were it not for the moral shortcomings of their boss, Richard Nixon. Likewise, the alleged conspiracies in the Pettersgate affair might never have happened had Petters set a higher moral tone, and insisted on that level of superior moral conduct from employees and associates.
Without clear direction from the top, managers and employees can drift into schemes which, although honorable at the start, can become dishonorable. Slowly, inexorably, even the best intentions can be subverted by peer pressures, expediency, opportunity, and the worst lure of them all—the love of money.
A Lesson from a Slippery Slope of the Past
Keep in mind that the eponymous con man for whom the Ponzi scheme is named began his financial dealings legitimately (although his shadowy background could have foretold his penchant criminal activity). Charles Ponzi in the 1920s bought international postal reply coupons (IRC) in Italy, and then redeemed them in the U.S. for stamps at their higher value. After selling the stamps, he pocketed the difference. He was making 400% on his money. Very smart. Perfectly legal.
But Ponzi succumbed to the pressures of greed, arrogance, and stupidity. He coaxed his friends and associates to back his scheme, offering them a 50% return on their investments in just 45 days. His venture attracted thousands of investors so many, in fact, that investor capital soon outpaced the market for IRCs. To keep his house of cards afloat, Ponzi was “forced” to pay old investors — not with profits from his enterprise — but with new investor money. That’s perfectly illegal.
Although the government claims Petters was doing much the same in his business using consumer electronics instead of postal coupons, he has at this point not been found guilty of anything—except in my view, extremely poor leadership.
Great business leaders set a high moral tone in their dealings with all whom their business touches, and they convince those who work for them that lapses in moral or ethnical judgment will simply not be permitted. Petters failed in this most fundamental element of leadership.
My experience has been that employees and associates who don’t agree with scrupulous morals will seek employment elsewhere. Likewise, claiming the high moral ground seems to attract employees with the same, dare I say, righteous stripe. Had Petters exercised that kind of moral fiber, he likely wouldn’t be sitting in jail today. Worse, if he’s found guilty of the multitude of charges against him, he may spend the rest of his life behind bars of steel regretting that very elemental business shortcoming.