Don’t commit financial crimes. Ever. It’s not worth it. Losing everything you own and your reputation is better than spending a meaningful chunk of your life in federal prison.
Burning Bellatorum is an excellent example of how hubris and an economic crisis (Covid) drove a great business into the ground, damaged countless lives, and will likely lead to prison time for the CEO. Definitely worth reading if you’ve ever raised capital or plan to in the future.
You might be taking this a little bit far. What Madoff was doing was plainly, and blatantly criminal. There really wasn't a business at all. I don't know how he'd "scale up" without imploding, and am skeptical that people would intentionally ignore and obvious Ponzi scheme.
So I guess another way to put it is that Madoff really didn't pretend to be legit, at least when you popped the hood. Honestly, I'll admit that I know less about the criminal side of the housing crisis (vs. Madoff), but I think even after the fact, stakeholders where claiming "nothing to see here, I did nothing wrong"; this is a much harder case to make when all you're doing is stealing people's money.
The analogy might work if he was actually doing some investment, misrepresenting these investments to the customer, but wound up doing really well anyway, and getting big. This is more like what Shkreli got busted for. Of course, he didn't get away with it, but that could be because of his notoriety.
Cheap debt and steady economic growth has made it easy for bad actors to fly under the radar. That may change if there’s a prolonged economic downturn.
Just read any recent SEC regulatory action. You'll get things like:
* JPMorgan participated in an illicit scheme for a profit of 5M so they got a 200k fine
* Citadel engaged in fraudulent mislabelings of orders for a total of 280.000 actions of the same type over some three years, got a fine of 100k (for some 30cents/infraction).
* and so on and so forth.
Past a point, it's just the cost of doing business.
> If you accept for a moment that there is de facto discrimination arising from the actions of private actors, and you believe that this is a net negative for society, how would you go about reducing or elimination it?
Laws can’t make people love each other. We have to make that choice on our own. We learn to accept and include others through our life experiences and the examples set by leaders in our society. If you want people to change their behavior, set a good example for others to follow and encourage others to follow suit.
The board of directors of a company does not exist to shower love among the members. It's there to provide oversight and steerage to a corporation. The members could all hate each other and (at least theoretically) still perform that role with skill and committment.
Yes, Excel spreadsheets frequently contain errors that are hard to spot. Sometimes those errors end people’s careers and damage companies. Tools like Quantrix that use multi-dimensional models provide a formula syntax that’s radically less error prone while providing far superior reporting.
Quick story: I was the CFO for a company that sold to a private equity group (PEG). I took over as the CEO as the founders retired, leaving me to deal with the PEG. It quickly became apparent that the PEG managers looked at everything through the lens of an Excel spreadsheet. These guys were brilliant attorneys and analysts but lacked experience building businesses and managing teams. Ultimately, they couldn’t add much value in terms of operations or strategy, but they were great at financial modeling/quantitative analysis and forcing us to justify expenses. That may sound good at first—eliminating wasteful spending—but it ultimately led to the gradual erosion of the company culture and employee loyalty. It’s easy to cut benefits and pay given that many workers lack the leverage to do anything about it, while it’s much harder to reduce hard costs like materials and equipment. That meant employees just kept getting squeezed, and it was surprisingly difficult to quantify the impact that terminating an employee or cutting benefits would have on morale/culture/performance.
The moral of the story is that people with analyst mindsets play an essential role in our economy, but sometimes giving those people power over large organizations can have disastrous consequences. There truly is a disconnect between measurement and understanding.
> The moral of the story is that people with analyst mindsets play an essential role in our economy, but sometimes giving those people power over large organizations can have disastrous consequences.
I'm gonna cosplay an "analyst mindset":
1. Need to measure costs and benefits of slashing benefits/pay.
2. A benefit-- slashing benefits/pay allows us to hit some obvious financial goal
3. A cost-- Uh oh, I don't yet know how to reliably measure any of the costs.
4. Good analysts don't take action without measuring.
5. I'm a good analyst.
Conclusion: I cannot take the action of slashing benefits/pay
The only way to make it work is to add a step "3b: cherry pick metrics for the costs of slashing benefits/pay such that the phony metrics justify the decision management already wants to make of slashing benefits/pay." But now we've shifted from "analyst mentality" to "the mindset of the little Beetle-like bureaucrats described by George Orwell in 1984."
Having dealt with 2 PE exists, rarely is the proposal something as upfront and silly as slash everyones pay. That probably does happen for a company being restructured in the red, but the more subtle actions tend to be things like:
* Comp bands for are now targeting p50 averages rather than p75 or top of market. So you can't close new hires that are going competitors. And you can't give raises to your top performers
* The health benefits are less generous when renegotiated for the following year
* T&E that would have been approved - granted some maybe that shouldn't - but importantly some that should have for top-sales people, are no longer approvable. So your top sales people leave. Or similarly the accelerators or other measures are changed, that might look good on paper but rub top sales people the wrong way.
* Head-count isn't replaced, so teams have to take on more work
* Perks like conference attendance or hardware upgrades, which arguable aren't perks but investments in your team's productivity, are cut/limited
>> Having dealt with 2 PE exists, rarely is the proposal something as upfront and silly as slash everyones pay.
Agreed, but a gradual erosion can occur over the course of several years. PEGs and the operating company's management team have massive incentives to hit their growth metrics. If decreasing 401K contributions helps management hit their EBITDA target, many would argue that they should do exactly that. However, the impact of these decisions accumulates over time and can eventually derail a company's performance.
The reality is that this kind of stupidity is built into accounting systems. It's not even the people with the spreadsheets. They're doing what they've been taught to do. It just happens to be completely wrong-headed - if you're interested in tangible long term growth and not quarterly plunder which moves money around without seeding genuine real value.
Which is why companies can "grow" in accounting terms while actually being hollowed out as going concerns with a future.
Likewise with the planetary economy, which appears to be growing financially while in ecological terms it's almost literally eating its own seed corn.
A better approach needs a revolution in accounting. Current accounting practices are built on so many false assumptions they cannot possibly produce lasting long term opportunity, except for a tiny minority of exceptionally and unhealthily privileged people.
Just look at Intel to see a company that was managed by the accounting people. Great numbers for a few years, large dividend, etc, but now they have to spend billions and billions to put the company back on track and give it a future.
Disagree. Intel has had continuous dividends for at least 30 years.
Few giant American companies have been as consistently successful as Intel. I can think of only Microsoft, one or two energy conglomerates like ExxonMobil, a telecom or two like Verizon, and maybe a bank like Goldman Sachs.
Yep, Bard is part of BD, which is a large beast. Abbott/Abbvie always has something going for them. UnitedHealth has done well for years and years as it has grown. There might also be a stable industrial I am forgetting like a chemical company or 3M.
But overall, giant companies with 30 year runs of knockout growth and/or dividends like Intel are Cinderella stories. Google will be the next one to qualify in a few years I suppose.
It can be more insidious than that. For example, as time goes on more and more of the engineering might be shifted from product development to contracting. In this way you see revenue growth without realising that there is a hard limit and you're throwing away the company's future.
Cash is still King. The more cash on hand, the easier it is for the business to survive in an economic downturn, and the more dividends and stock buybacks can happen for the investors.
Software engineers from a CFO perspective aren't any really different than plumbers or carpenters. It's just labor. Getting a cheaper rate on labor is far more beneficial to the company than say making sure it's employees are happy.
If the company could cut wages 50% across the board and then give the executives 20% raises for saving 50% in labor, they would do it in a heartbeat.
This line of thinking is wrong though, because software developers are more like writers than plumbers. You can fire the writing staff at a sitcom and hire cheaper writers but good luck, it will probably fail.
Y'all are looking for quantitative Quality measures. Good luck. If you aren't sitting on top of Spend informed by actual company history, you're hosed, and most places are hush hush af about that.
If your primary output is software then maybe you're right. But in most companies software enables more efficient output usually in the form of products or services. A bank uses software, but it's profit is based upon banking... etc.
It's why most Fortune 500 companies run Java, so they can easily replace one person with another.
It's hard to argue against it when I see companies becoming more and more consumer hostile (cheap products that break in a year or after warranty is up, slow buggy software, incomplete game releases, ads crammed into every open space, FANG cornering their markets, dark patterns, etc.)
Software engineers from a CFO perspective aren't any really different than plumbers or carpenters
Plumbing systems are extensively documented and well-understood. The equivalent situation in plumbing would be that the entire layout of the city's sewage system (or similarly, the construction plans for the company's headquarters) is only kept inside the heads of two senior developers, likely because the Powers That Be have decided that keeping accurate documentation is not worth the cost. Preventative maintenance and quality control are impossible, because nobody knows which pipes have been laid first and are the most at-risk from leaking.
Point being: everything is just labour. That doesn't mean software "engineering" should be allowed to fall so far below the baseline we expect from other engineering professions.
Incentives matter and PEGs want companies to grow significantly over the life of their investment. The biggest reward comes from the future sale after you’ve increased the enterprise value 10x. I’m sure that people have made poor decisions for short-term gains, but the real issue is giving immense power to someone who has never actually had to build teams, ship products, or go the extra mile to make customers happy. Being “smart” doesn’t mean you always make good decisions. Some of the most successful entrepreneurs I know aren’t particularly book smart. In fact, much of their success could be attributed to the fact that they just didn’t quit when any other reasonable/normal person would have thrown in the towel.
Ehh some PEGs do not care about long-term. Often they want to do anything that can get them some lump sum dividends and bonus payouts. Cost cutting combined with a recapitalization cookbook, selling assets like real-estate, and then using the proceeds and borrowed cash for themselves. Terminal price won't matter much due to either the initial windfall or because someone else will be holding enough of the bag after recap.
I definitely agree with you. I would further argue that the "analyst mentality" has become so engrossed in the foundation of capitalism(and always has been, really) that we see companies across many industries closing down due to the "worker shortage". When in reality the CEO's of the companies complaining the loudest that "no one wants to work" have decided that paying living wages in a deeply competitive job market is less doable than letting the company totally stagnate and dissolve due to lack of people willing to work hard for pennies.
I think the key that leads to 3b is that costs are hard to measure. I.e., I think it's less that the PEG are coming into it with the idea that they want to cut and are cherry picking for that, it's that they will happily do whatever the easily available data tells them is right, ignoring or handwaving the harder to get data.
I worked at a company that started to go through the "you can't improve what you don't measure" phase. In general it was good for the org I was in, but I used to have to remind management that there's a corollary to that saying, which is: you necessarily improve things you measure at the expense of the things which are difficult or impossible to measure.
This seems to be a hard one for some types to truly grok. A common response is that we need to figure out how to measure it, thinking there was some single magic number that things could be distilled down to. But often even if you figured out how to measure some of them, there's always other intangibles you're not tracking. So you need to always be conscious of it.
"If you spend 10% less on birthday presents for your children, will that make them love you 10% less? How can you justify spending this much on presents?"
there's another issue with measuring too much: if you only derive value of that you can measure, you will constantly feel bad when doing things that have no apparent measurable value.
So then you say to yourself, relaxing on the sofa has value because it makes you perform better to have breaks. But do you really believe this? And in any case, you still can't help measuring value into relaxing because you are brainwashed into thinking everything must be quantified in order to justify something. So even relaxing or playing video games must be seen in such a context in order for you not to feel bad. it's becoming rediculous.
I also like to point out in a few similar contexts: even if you could measure all the things, and you could create a perfect/optimal cost function, there would still be no guarantee that you'd be able to find the optimal global solution. So relax.
The thing I have noticed is when the anecdotes and the data disagree, the anecdotes are usually right. There's something wrong with the way you are measuring it.
- Jeff Bezos
You can think many things of Bezos, but he does know how to make a business make money. Data is important, but things that are hard to measure that you only learn as anectodes is also important.
I'm not disagreeing here, but it could be that the fraud is a drop in the bucket of Amazon revenue. And just trying to get metrics on it, may cost more than what Amazon benefits from it.
I tonight bought a 3d printer hotend from the source company, because I couldn't be sure the product I order from Amazon would be genuine.
It's pretty bad when the products being sold on Amazon are labeled "Genuine assembled E3D V6 Hotend", when if Amazon gave a shit, it would only need to say "Assembled E3D V6 hotend."
Science advances in strange ways sometimes. Plate tectonics started basically with the anecdote of "south america really looks a lot like it fits into east Africa", but wasn't believed at first due to no hard data.
Anedoctes are not data, but when you have some with no data, instead of ignoring it you should take it as a signal to go search if there is data to support it. Great scientists and mathematicians usually have good intuition of things to research, not because they have data, but their mental models of the subject tell them that there should be interesting data there.
Your story is the story of most companies. I watched "my" company get sold to private equity, and leading up to our "soon" sale they have been slashing the one thing they can, employee benefits (it's been a quick 3 year decline). I've watched more than half our team leave, much to the chagrin of befuddled execs.
"Why are they leaving?"
"Well, we used to have meaningful raises, bonuses, profit sharing, etc. but you have consistently cut those things."
"Yes yes, but why they are leaving?"
"...."
Before we were acquired I managed to get an offer from another company to leave at one point.
I knew the founders well, and they knew I was critical to success, so they made me quite the offer to stay. For where I'm at, my salary is far above CoL, so I don't have an incentive to leave yet. That and I got some shares that will vest when the company sells this year.
But if I hadn't gotten that bump before acquisition, I'd likely be gone. It's impossible to get a raise now. On the plus side, I now work like it's impossible to get a raise, if you catch my drift.
Once it sells, I'll move on to something I love again. Planning to do consulting with some friends who started a co-op.
I worked at a company that went through a private equity acquisition and I have a question you might be able to answer.
If you exclude layoffs and incentivized retirement, it seemed to be that a greater percentage of individual contributors left as compared to managers. Lots of managers stuck around for 12+ months, and it seemed like the percentage of managers of managers (e.g. directors, VPs) who stuck around was even greater. Almost the entire C-suite stayed for years after the acquision.
Was there any financial or other incentives given to managers to stay? As an individual contributor, the morale was just terrible. I just couldn't understand why the managers and other people in leadership positions stuck around.
> I just couldn't understand why the managers and other people in leadership positions stuck around.
Money. Investors typically carve out equity to retain key personnel (i.e., management units/stock). The units are worthless unless the company appreciates in value, so management becomes laser-focused on doing whatever it takes to increase the company's valuation. Everything else becomes a secondary concern.
I had guessed something like this was going on, but reading this just really makes me wonder what's really going on in the minds of a private equity folks. The C-suite and senior leadership were the ones who drove the company to the point that they ended up in the hands of private equity, but they were incentivized to stay.
I get that they exiting leadership knows the company and it's hard to find new people. But it just seems so crazy to me.
We had teams that had 50%+ percent of people gone between layoffs and attrition. It was comical to see how much stuff fell between the newly formed cracks. I still can't comprehend how much they must have been incentivized to stay when the earth was crumbling around them.
As a one-foot-in manager, I tend to stick around as long as someone is still on the receiving end of one of my policies. Bad practice to not observe the unpleasant consequences with future aspirations to leadership.
this is basically the micro example behind the deindustrialization of the United States. Mitt Romney type corporate raider MBAs outsourcing everything to China for cost savings to maximize short term profit
expand this over 50 years by 1000s of similar groups of people doing the same thing and you go from the "Arsenal of Democracy" to begging China for masks and ventilators
That, and the industrial base lobbying to allow "free trade" and subsidize expansion into countries which have high levels of corruption, low environmental protections and worker's rights.
People at the very top unfortunately now listen to the bean counters far too much.
This really does make social problems of an us vs them sort when all of the money manages to drift up with only the false promises of altruism at charity galas being the sign of any of the generated wealth making its way back down to the workers...
The goal of a private equity group can sometimes be be to extract as much money from the company as possible in a given time frame, rather than to ensure the long-term success or survival of the company.
"and it was surprisingly difficult to quantify the impact that terminating an employee or cutting benefits would have on morale/culture/performance"
I think it is not surprising, when you consider that a precise weather forecast for more than 3 days is usually considered impossible.
When you deal with very complex systems, where small changes can have a big effect via self enforcing feedback loops - how can you expect to calculate all that?
And human social dynamics seem to be at least as complicated as the global weather.
I agree. Considering the complexity within organizations, imagine pleading your case to a couple of Stanford MBAs that are 1) incredibly smart, 2) operate in a PE culture that rewards managers that provide others with "negative feedback" to get results, and 3) believe in their hearts that cutting benefits is "optimizing" the business to maximize shareholder value. They can make a compelling counter-argument for just about anything.
I did not meant it as criticism. And I can imagine that situation, which is why I choose a different path, to not be in that position in the first place.
Not saying that my path is better, definitely not money wise, but I knew early, that I do not get along with a culture, that is focused on assigning oversimplificated numbers to people, which is what MBA's seems to be mainly about.
I worked at a place with a lean 6 sigma certified specialist who towards the end of the companies doom effectively had the lead engineer cleaning out molding machines to track down every last tiny molded part that over the course of several years of continuous running had flung outside of its target. Same guy told me if the coke machine ever stole my change that he'd help me get it back from the vendor.
Like many management system fads, it started as a useful kernel of wisdom or obvious maxim that idiots ran with and turned into a monster. In the case of six sigma, the idea is about constantly optimizing your workflows and not accepting "we've always done it this way" as an excuse.
But most people lack the critical thinking skills to correctly apply wisdom when necessary and instead need a solid framework to operate within. That's how these things inevitably develop. Just like how Agile is supposed to be about getting working code over being bogged down in process but inevitably ends up with with half baked products that have massive issues.
Six Sigma also gets applied to industries it has no business being in. The mentality works best when you have a fixed workflow. In manufacturing it would be if you are making a lot of one thing. You can do a lot of optimizing. But I have seen it employed in organizations where every project was vastly different. Instead of a lean approach it should have, and previously was, following a house of quality philosophy. This happened to be in an industry where cost was rarely a consideration but performance and reliability were.
Great comment and thank you. It has only popped up sparingly in my industry thankfully.
What you're saying makes sense to me in that you should never fall into the "this is how I've always done it" trap, but putting a complex beauracratic process around that is just going to create a whole new problem.
What was done for some time is at least to some extent proven o work. Any new way is not yet proven to work and can be worse (or can be better but it is not granted)
If you ever work in government, procurement people think like that because their goal is objective competitive process that that meets the minimum standard to fulfill the purpose.
There’s a certain logic to it. You don’t want to see random government employees driving around in Teslas, so generally speaking they will be in nondescript 4-door sedans. Having a human say “no” makes them accountable, so a complex process will determine what kind of car you need.
Taken to extreme, it becomes a problem. Procurement officers get lazy and focus on their process instead of the needs of the customer. So they treat humans like Ford Tauruses and allow vendors who understand how to game the process walk out the door with millions.
From what I've seen after the attempt to adopt Six Sigma within a large pharmaceutical, 6S has several inescapable vulnerabilities due to not knowing:
1) which important company components produce signals that aren't measurable (e.g. internalities like deep domain knowledge in R&D or externalities like market swings or competitor behaviors),
2) which signals are too dynamic or complex to optimize, and
3) which signals are insignificant, irrelevant, irreproducible, or simply meaningless noise.
Applying Six Sigma to R&D illustrates these caveats nicely.
I'm only speaking towards this one particularly useless buffoon, but the fact that he was allowed to wield any sort of power over anyone says something.
This is the kind of thinking that is wrecking a business I’ve just quit. Management consultant decides that we need more customers so instructs us to open the product up globally. We explain that this is likely to be both expensive (lots of testing needed due to the usual geographic differences), but more important, based on our collected data and the use case (geographically local content), this expensive change is statistically likely to result in only a single new customer (literally, one).
But “every customer counts” so other activities which are likely to result in more customers are put on hold to capture a single customer.
The problem in these cases is often that the management consultant doesn’t consider the resource limitations and opportunity costs of their decisions, particularly if they come from a much larger business. If you have only one lead engineer, then getting them to chase discarded parts (or, in my case, a single customer) makes no economic sense at all.
Quite often, the problem is not a focus on measurement per se, but rather the very human problem of focusing only on those metrics that support the analyst’s intuition.
Spent 3 years under a PE group, and the "management by spreadsheet" was very real, and utterly corrosive. The constant squeeze meant eventually everyone started to realize the only people who were going to make any real money/have benefit was a handful of PE folks and their satellites; everyone else would be squeezed until breaking. Even where our CoC were good (as mine was), we knew the eventual pressure would make it all buckle, so get out before it breaks you.
Interesting observation. The PEG managers would probably admit that turnover had some financial cost, but I doubt they ever actually put a number on it and added it to their calculations. Am I right?
Granted bean counters fail as leaders (typically) but I would strongly argue it's the job of leaders to explain up front costs and value to been counters.
E.g. yes not providing free/cheap coffee/drinks in the office saves money, but it has a damaging cost in terms of employee attitudes and getting people to talk openly in a friendly environment about what they're working on and being able to ask for help.
These things can't be directly easily measured but can be quantified in a way that bean counters see the true value of the little extras...
When company stops providing free coffee/snacks many employees will see this as a signal that a company is going down and it is time to look for a new job. Such signals are hard to quantify but they are real.
Hm… this reminds me of streetlight effect. Not everything that needs improvement/optimization can be measured properly, not everything measurable should be KPI. Tangentially related, I witnessed few times when it caused failure in application of data science to business. The company wasn’t ready, did not have proper data infrastructure, vision or skillset, but still models were built and deployed to no avail.
Just to play devil's advocate, surely their approach is more rational than that. They're probably looking at it from the perspective that the business needs to have a profit margin of X in order to justify investing in it.
They probably do understand that cutting costs impacts company culture and morale. But shutting the company down probably impacts that much more.
They do understand that cutting costs will have an impact on culture and morale, they just think the marginal benefit exceeds the marginal cost. Keep in mind, PEG managers are chasing a carried interest bonus which they only achieve after covering the minimum return promised to their investors. Plus, leveraged buyouts--which PEGs frequently use--increase a company's risk of failure. Everyone's under intense pressure to perform.
This is ultimately a cultural challenge, not an analytical challenge. You don't win cultural battles with intellectual debate, rigorous analysis, or facts. You win cultural battles with politics and power. That means finding a way to get "the wrong people" off the bus and "the right people" on the bus.
Given your background I'd love to talk to you. Since HN doesn't have private messages as far as I know, would you be willing to contact me at the email address in my profile?
While your experience sounds painful it also sounds like something that would have happened in the 90s. I don't think most tier 1 organizations still think in that way.
Less than a decade ago I worked at a company that was acquired by a private equity group. What jscode said matches my experience. For a while I also tracked (on Glassdoor and some other sites) companies that were purchased by that firm, and seems like employees at different companies had the same experience. EBITA was king, nothing else matters.
Burning Bellatorum is an excellent example of how hubris and an economic crisis (Covid) drove a great business into the ground, damaged countless lives, and will likely lead to prison time for the CEO. Definitely worth reading if you’ve ever raised capital or plan to in the future.
https://www.amazon.com/Burning-Bellatorum-Priceless-Investor...