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Claims that coaches and consultants for corporate executives boost productivity and profits turn out to be completely false. White collar criminologist Bill Black takes apart the example of Nortel Networks

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SHARMINI PERIES: It’s The Real News Network, and I’m Sharmini Peries, coming to you from Baltimore.

You may have noticed that we are having our summer fundraiser. It is just halfway through. And we do our best throughout the year not to bombard you with pitches about fundraising. But as you can see, we have accelerated our adventure here in terms of trying to raise $200000 for this summer. And I promise once we achieve that, we won’t bother you again till December. This is so we can keep bringing you the good quality analysis and news that we have on The Real News Network. So if you haven’t donated, please do.

And let me begin this segment with introducing our regular guest here at The Real News Network, Bill Black, who has been working on a series on executive coaches in the corporate world. We are the beneficiary of these segments that Bill is producing, which will be available to you in print, as well as by trying to explain to us what the different segments that he is writing about are. So you’re the beneficiary of the first segment here. And as you know, Bill Black is a Professor of Law and Economics at the University of Missouri Kansas City. He’s a white-collar criminologist and former financial regulator, and author of the book The Best Way to Rob a Bank Is to Own One.

All right, Bill, let’s start off with the basics, here. What is an executive coach in the corporate sector, and how are they being used?

BILL BLACK: So it’s a metaphor to sports. And it was designed, the phrase was designed to get over the negative connotation that we’re assigning somebody to train you how to be a competent manager because you’re incompetent. And coaches, the idea is even the best athletes in the world get better if they have good coaching. So you know, no negative connotation to having an executive coach.

SHARMINI PERIES: All right, Bill, so in your article, you refer to a study that has been done on executive coaches, the purpose, and how they have been so successfully used. So tell us about the study, and the particular case of Nortel.

BILL BLACK: Well, let me first give you the background. What I’m particularly interested in is disastrous management, and how this has dramatically reduced throughout the Western nations rates of productivity growth. And it’s productivity growth that allows wage increases without inflation, better products, all those good types of things. And one of the terrible things that has happened over the last decade all through the West is that productivity growth has been at record lows for modern history.

And one of the key reasons of all of that is that we changed executive compensation, supposedly to get increased productivity. And instead it’s produced exactly the opposite, by producing all kinds of executive behavior that destroys productivity, wealth, the environment, you name it, but makes a lot of money for the officers. And indeed, this is so bad that the intellectual father in academics, Michael Jensen, of modern executive compensation has done a mea culpa and said we’ve actually ruined things, such that surveys- and these are not anti-business types. These are business school-type researchers doing surveys. Found that 78 percent of chief financial officers admit that they would deliberately reduce the firm’s overall profitability to what’s called, as a euphemism, smooth earnings, right, so that the corporation could act as if it was more profitable in the existing quarter. Now, unsurprisingly, the compensation system has been perverted into something that also makes the CFO, and most particularly the CEO, more money in these circumstances.

So I’m looking at this collapse of managerial ethics and ability that’s produced this enormous reduction in productivity. And at the same time, we have this whole new industry created in roughly the late 1980s-1990s that’s described as one of the great growth industries in business, producing an estimated $2 billion in fees annually to these coaches. And that figure is from over a decade ago, when it was described as the fastest-growing thing. So of course, I’m looking at this contrast. We have the rise of executive coaches who are claiming enormous gains in productivity and profits when they’re used with numbers for the economy that show exactly the opposite. So how could this be true?

And I was startled to see that the living proof that executive coaches use, and I mean today, on their websites today, of the supposed wonderfulness of executive coaching, is a study at Nortel, of all places. And I’m going explain why that proves our family rule that it’s impossible to compete with unintentional self-parody. But here’s the key quotation from an alleged study, although it’s actually a piece of junk, that supposedly found that when Nortel hired executive coaches, there was a 529 percent increase. In other words, for every dollar of hiring an executive coach, the firm Nortel made $5.29 cents more money. So this is fabulous. There’s nothing like this return on investment in hardly anything in life. You know, typical returns on investment are anywhere from 3 to, at the peak, 20 percent. And this is a 529 percent improvement, right? So that’s pretty extraordinary.

And then when you actually look at the guy’s report, the supposed academic who did this supposed study at Nortel says no, no, no. Actually, if you add in the benefits of employee retention- in other words, if you gave people coaches, the managers coaches, they retained officers more, and other employees- then, then the benefit goes up to 788 percent return on investment. So this is the greatest thing ever. Except if you know anything about Nortel, which obviously these folks don’t, you’re going, are you insane? Because A) Nortel doesn’t exist anymore. Why? Because of incredibly incompetent management, completely lacking integrity, who the Securities Exchange Commission said engaged in massive stock fraud through accounting fraud through all the abuses that I was talking about that studies have found that CFOs do. And what did they do in response? They promoted the CFO to president.

Now, the guy that he was succeeding had been named Canada’s CEO of the year in the year he was destroying the firm. And in the year in which this study that was supposedly done that showed the supposed massive benefits to executive coaching from executive- from retention, better employee retention, quote-unquote, Nortel management had actually cut over 10000 jobs.

So every aspect of this is just a complete lie. It is the worst possible thing. Nortel at its peak had a supposed value of 250 billion U.S. dollars, all of which was wiped out in a bankruptcy. There was about a $7 billion payout, or net about $4 billion. But you know, that’s the greatest destruction of Canadian wealth in history. And nothing comes close. At its peak, Nortel represented one third of the supposed total capitalized value of all the corporations listed on the Toronto Exchange, Stock Exchange, which is effectively Canada’s national stock exchange, right. This is a company that existed for over a hundred years, with its predecessors and such, that was wiped out by these very folks that they’re praising. In other words, far from explaining how you can get massively increased productivity, the Nortel example helps explain why you get exactly the opposite.

But then, consider this. As I said, executive coaches, and I mean bunches of them, when you go to their website they cite this Nortel study. Today. I mean, talking 2018. Now, it’s been dead for a decade. And anybody who knew anything about business would know that. So A) These executive coaches obviously know nothing about business, and B) They’re being hired by corporate officials who obviously know nothing about business, or they would never rely on Nortel’s supposed massive productivity gains.

SHARMINI PERIES: So Bill, when it comes to Nortel Canada, how many jobs were actually lost?

BILL BLACK: It was at peak 90000 jobs destroyed. This is, again, the greatest destruction of jobs in Canadian history. So that’s bad enough. But to call these folks that did this the best CEO in the country, to make them at the time Canada’s newsmaker of the year, these are the obscenities of the fact that we put CEOs on a pedestal and glorify them, simply because through all kinds of bad management, accounting scams, they’re able to report record growth or record profits. Nortel actually didn’t even report particularly great profits, with all its scams. It just did merger after merger after merger, did something like 20 of them in the peak of the dot com boom. And that produces all kinds of phony accounting income, but then produces disaster down the road.

SHARMINI PERIES: All right, Bill, we look forward to your next segment, which I hope is coming out shortly.

BILL BLACK: It will.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.

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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.