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Should Inmates Run the Biz-Dev Asylum? The Case for Strengthening Sales Governance

Andrew Rudin | Jul 2, 2016 120 views 3 Comments

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“I don’t care how you make your number, as long as you make it,” my district sales manager told me many years ago. Nobody accomplished a Big Hairy Audacious Goal while stressing over boundaries. I know how the West was won.

But my manager should have cared. Achieving a revenue target entangles many different behaviors. Some are laudable, like agility, tenacity, assertiveness, customer focus, and good personal hygiene. But others can be manipulative, unethical, or illegal. When conditions are ripe, bad behaviors spawn and fester. Occasionally, they are exposed, like a colony of voracious termites found under a fallen tree trunk that just rolled from its dark, earthy foundation. In June, 2016, Volkswagen agreed to pay $14.7 billion to settle claims resulting from its sales deceit. A mondo penalty for not caring how a number is made.

Volkswagen’s dishonesty was propagated through modern software technology, using flowcharts, decision boxes, algorithms, code, and computer chips. But other techniques for juicing the top line have existed since the invention of accounting records. As Karen Berman and Joe Knight wrote in their book, Financial Intelligence, “Revenue recognition is a common arena for financial fraud . . . the most common source of accounting fraud has been and probably always will be in that top line: Sales.” Channel stuffing and bill-and-hold. These crafty techniques have vaulted thousands of sales reps and managers into bonus-land. You won’t learn about them on Etsy.



I can’t fault my boss for being laissez faire. His attitude reflected that of his boss, his boss’s boss, and every boss all the way to the C-Suite, where information technology converts biz-dev complexity into integers. A process that cleanly extracts ethical messiness and other biz-dev slop, leaving executives room to “focus on the numbers.” Message to sales force: as long as revenue meets expectation, what happens in Sales can stay in Sales. “If I told you all that went down It would burn off both your ears.” No thanks. I’ll stick to analyzing my spreadsheets.

Corporate boards, beware. “The responsibility of the board to prevent scandals is more important than the responsibility to clean up the mess once it has emerged. Here most boards are still at the starting gate,” wrote Kirk O. Hanson in a 2014 article, Five Ethical Responsibilities of Corporate Boards.

It’s a global problem. In June, 2016, IndianExpress reported that “poor customer service practices of [Indian] banks have come under fire from the Reserve Bank of India (RBI). Despite the banking regulator putting in place Codes of Conduct and Charter of Customer Rights, the RBI has found that banks observed the code ‘more in breach than in practice,’ raising the possibility of a regulatory intervention.”

“We have taken cognizance of the fact that there has been mis-selling in third party products. We are going to take it very seriously. The banks should review how it is being done and be very careful that 75-year-old people should not be sold wrong products simply because salesmen require bonuses or compensation. It is something that we will undertake careful review of and if necessary take action wherever warranted,” said RBI Governor Raghuram Rajan in June, 2016. He could not have expressed this ugly reality in a more genteel way.

His statement points to an even darker story. Too often, companies don’t bother to govern the internal machinery that drives their revenue, leaving it up to the inmates to run the asylum. “You made goal this quarter. Keep doing what you’re doing.” Sales and selling has traditionally been a black box to the rest of a corporation, and many senior executives prefer to remain unknowing about what happens within the guts of its raucous machinery, and what goes on outside, where prospects are “engaged” deals are “closed.”

Ethical principles frequently clash with demands for quota attainment, and in the absence of governance, it’s not always clear or predictable which actions and outcomes will prevail. One thing is certain: when others don’t examine the black box’s innards, the likelihood of harming employees, customers, suppliers and shareholders increases substantially. As Mr. Rajan knows, bad sales ethics break customer trust, poison a company’s brand, undermine shareholder value, and corrode economies. Sounds like a governance problem to me.

What is governance? Corporate governance provides “the structure for determining organizational objectives and monitoring performance to ensure that objectives are attained,” according to the Organization for Economic Cooperation and Development’s 1999 publication, OECD Principles for Corporate Governance. “The OECD emphasized that ‘there is no single model of good corporate governance,’ but it noted that in many countries corporate governance is vested in a supervisory board that is responsible for protecting the rights of shareholders and other stakeholders (employees, customers, creditors, and so on). The board, in turn, works with a senior management team to implement governance principles that ensure the effectiveness of organizational processes,” wrote Peter Weill and Jeanne Ross in their book, IT Governance. Their ideas apply equally to governing sales.

A 2008 CapGemini Survey shared that “all sales executives stated that Sales Governance will become more important in the future. In addition, 86% of the Sales Executives anticipate their group management to put more focus on questions related to Sales Governance the coming three years.” The study covered 42 companies in Norway, Sweden, and Finland, and defines sales governance as “the method used by management to drive the sales organization towards effectiveness and high performance and to promote a desired sales behavior.” The study’s authors represent sales performance in context – specifically, in relation to influence from competitors, customers, organizational culture, corporate strategy. So far, so good.

The study explains that “Sales Management is the core element of the Sales Governance Framework. It entails both a strategic and an operational level. At the strategic level of Sales Management, the sales strategy is aligned with the corporate strategy and short¬-term and long¬-term business objectives are defined. At the operational level, the activity plan is implemented and managed as required. Cross-functional co¬operation is a pre-requisite for achieving internal strategy alignment and operational efficiency. . . Sales Governance enables best practice identification and implementation, and ensures an adequate sales behavior.”

Given CapGemini’s inclusion of a method used by management in its definition of governance, there’s little surprise that “Sales Executives saw driving sales productivity and reducing non¬-value adding time” among the major benefits achieved from undertaking the program. Unfortunately, promoting adequate sales behavior (whatever that means) and driving sales productivity do nothing to protect companies and their customers from unethical and illegal activity, or its consequences. In fact, they might exacerbate the problems. When juxtaposed to the OECD’s governance standard of protecting the rights of shareholders, employees, customers, and creditors, I call CapGemini Governance-lite.

Although CapGemini addresses one important component of corporate risk, sales readiness, its governance model falls pathetically short for deeper risks. Using this model, the unethical practices in 2015 of GM, VW, Takata, Peanut Corporation of America, Wells Fargo, Medtronic, and many others would not have been thwarted. Sales organizations can be highly productive and efficient while institutionalizing seamy practices. “The dashboards look peachy! Keep doing what you’re doing . . .”

The case for board-level involvement in sales governance. Today, selling abuses make international headlines, and the case for board involvement in sales governance could not be stronger. “Boards must think about risk and strategy,” said Erica Salmon Byrne, Executive Vice President, Governance and Compliance of the Ethisphere Institute, in a webinar titled, Enabling Ethical Leadership: Equipping Your Board to Govern Companies with Integrity.

Ethisphere, which conducts an honoree program for the World’s Most Ethical Companies (WMECs), reported that 90% of its 2016 corporate honorees offer employees its board or a board committee as a conduit for reporting misconduct or raising concerns. “Boards are increasingly interested in measuring and cultivating an ethical corporate culture; 86% of WMECs update the Board on such efforts . . . Not only do WMECs more frequently evaluate their [Ethics and Compliance] programs (61% of honorees conduct annual reviews vs. 27% of non-honorees who annually review), but honorees tend to evaluate their program very broadly,” Ethisphere said in its 2015 report.

The duty of board-level sales governance. The line between board oversight for sales governance and management’s responsibilities can be thin and fuzzy. Board-level sales governance addresses strategic risks extending beyond salesforce productivity and efficiency. Primarily,

1. To ensure sales goals are balanced, and support corporate strategy

2. To ensure business development policies and practices are consistently legal, ethical and fair

3. To protect the customer’s best interests

4. To ensure effective mechanisms exist for identifying and reporting activities or events that threaten the above

Hanson’s Five Ethical Responsibilities of Corporate Boards provides useful guidelines for what boards must know or examine. He wrote:

1. Knowing the health of the company’s ethical culture. Most boards or their audit committees hear pro forma reports on ethics violations and lists of calls to their hotlines. Few know anything about the culture in which these violations arise. Do these behaviors reflect widespread acceptance of improper behavior — or a few bad apples?

2. Evaluating the ethics of the business strategy. Business models and strategies are being junked and reformulated everywhere in our modern economy. New sources of revenue are being sought; radical transformations of manufacturing and delivery systems are being implemented. Sadly, some boards are swept along by management proposals to change the nature of the business without asking critical ethics questions about the strategies.

Most boards have learned to ask whether the company is ready to monitor a China-based supply chain to insure worker safety. But few boards have discussed the ethics of tax inversions, big data mining strategies, or staffing strategies which make family life difficult.

3. Monitoring the real ethics risks in the organization. Every organization manages financial risks, and boards pay close attention to the level of that risk. Few senior managements and even fewer boards evaluate the ethical risk of entering new markets, extending the supply chain to new regions, or putting extreme performance pressure on a sales force that is prone to shortcuts . . . Boards are charged with oversight over the adequacy of this ethics risk assessment.

4. Monitoring the ethical behavior of the leadership team. No decisions are more complex than hiring and firing top executives. It is tough enough to find a prospect who has the skills needed to execute the company’s strategy for the next five years.

5. Verifying that the elements of the ethics and compliance system are strong. The Federal Sentencing Guidelines list seven to 10 elements of an ‘adequate’ ethics and compliance management system.

For sales governance, Boards should have access to, and regularly review the following:

• Sales Code of Conduct
• Corporate compliance and ethics policies
• Ethics training program or curriculum
• Misconduct reporting system
• The investigation process

In addition, boards should ensure that employees who report misconduct understand their legal rights, and have appropriate protection. Few people will want to report misconduct when companies exert draconian penalties on those who have voiced concerns.

“Make your number any way you can!” Right now, millions of sales reps operate under this heavy, boundary-free instruction. How will they behave? Which strategies and tactics will they use on their prospects and customers? What outcomes will occur? Corporate boards should care, and get involved.

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3 Responses to Should Inmates Run the Biz-Dev Asylum? The Case for Strengthening Sales Governance

  1. Joe Fantuzzi July 3, 2016 at 1:50 pm (1 comment) #

    Andrew,

    What is your point?

    The examples of software fraud (sans VW not categorized as a sales governance issue) are recollections from the 80s and 90s. Since circa 1995, Revenue Recognition rules and sanctions have increased, Audit and Compensation committees have more power, Whistleblower laws are soundly in place, C-suite executives (some personal friends) who blatantly frauded in that era have served time, and the software industry has mostly evolved to a ratable model – as in revenue is now recognized only as it is delivered.

    I’ve found some of your pieces more accurate and informative, and appreciate that track.

    Joe Fantuzzi
    RiskVision

  2. Andrew Rudin July 7, 2016 at 7:59 am (223 comments) #

    Hi Joe: thanks for your comment. “The board of directors’ key purpose is to ensure the company’s prosperity by collectively directing the company’s affairs, whilst meeting the appropriate interests of its shareholders and stakeholders. In addition to business and financial issues, boards of directors must deal with challenges and issues relating to corporate governance, corporate social responsibility and corporate ethics,” according to the BREFI Group (see http://www.brefigroup.co.uk/aboutus/index.html).

    Reducing the risk that a company or its executives engage in illegal or unethical activity to inflate revenue and/or profit fits solidly within what a Board must govern. That is my point. And employees, shareholders, and customers, shouldn’t consider themselves adequately protected by whistleblower laws, the putative power of audit committees, or even the integrity of GAAP (Generally Accepted Accounting Principles). In fact, The Wall Street Journal recently reported that “just 29 companies in the S&P 500 index – or 5.7% of the total – closed their books for 2015 using US Generally Accepted Accounting Principles. That’s a sharp decline from 25% in 2006, according to the research firm Audit Analytics.”

    The article continues: “The adjusted, or customized, figures many finance chiefs use to supplement their company’s standard financial reports inflate income by an average of 44% at profitable companies.” Yes – that blew my mind. Another reason that board involvement in sales governance is urgently needed.

    As far as VW – the New York Times article, Problems at Volkswagen Start in the Boardroom (http://www.nytimes.com/2015/09/25/business/international/problems-at-volkswagen-start-in-the-boardroom.html?smid=tw-share&_r=0) says it best: “an insular governing structure, overseen by family members and labor, allowed the current scandal over the flouting of emissions standards to happen.”

    The Federal Trade Commission maintains a public list of its cases and proceedings (https://www.ftc.gov/enforcement/cases-proceedings) – a reminder that illegal selling practices flourish, because by the time the FTC deals with it, the deed is done. Many of the cases represent missed opportunities for Board-level governance to recognize and manage the risk.

  3. Andrew Rudin July 20, 2016 at 8:27 am (223 comments) #

    An update on a related development: US Probes Chrysler Dealers’ Sales Data, Wall Street Journal, July 19, 2016. An Illinois dealer sued Fiat Chrysler in January, 2016, “alleging the automaker rewarded retailers for falsifying sales.” The article reports that the dealer was offered $20,000 to falsely report sales of 40 vehicles. “Probes into Fiat Chrysler’s practices ratchet up scrutiny over how automakers count sales . . . Fiat Chrysler until recently aggressively promoted its monthly sales winning streak, which dates back to shortly after the company emerged from a government-brokered bankruptcy restructuring. Some dealers say the company is pressuring them to keep the streak going even as new-car demand cools.”

    Internal and regulatory controls might strengthen the integrity of revenue reporting, but there are plenty loopholes, including tinkering with the definition of when a product is ‘delivered.’ In the Fiat Chrysler lawsuit, the company considers a product ‘delivered’ when the car shows up on the dealer’s lot, not when a consumer purchases it. Elsewhere in the world, the Journal article explains, sales figures are based on actual vehicle registrations. A car in dealer inventory is considered unsold.

    That subtlety leaves plenty of room for channel sales shenanigans.

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