Have you ever seen...
a Ponzi scheme become the primary paradigm for an entire organization?
A Ponzi, or Pyramid Scheme relies on the constant establishment of new
sources of revenue in order to pay debts accumulated while establishing
previous income sources. When individuals do it to other
individuals it is regarded as a crime. This is because it is a
certainty that the possibilities for new sources of income must
eventually be exhausted. Whoever is on the last rank of those who
have become involved are the ones left holding the bag. Think of
it as an adult version of the children’s game called “musical chairs”.
There are not enough seats to go around, and somebody is always caught
short when the music stops.
The corporate equivalent of the Ponzi scheme occurs when an organization
is constantly using anticipated revenue from one venture to finance
another. They hope that one new product line or location will
become profitable in time to pay back money borrowed to finance the next
product. Each generation of investors is betting that another
group willing to buy into the paradigm is not far behind them.
The level of risk involved in this process is dependent upon the market,
how good the product is, and how much is wagered on its success.
Wise bets are essential.
Unfortunately, the parallel to a game of chance is all too close.
Much like a person addicted to gambling, the greater the losses the more
desperate one becomes to win big. Of course, to win big you must
bet big. And desperation is rarely a source of wisdom in placing
the bets. But then, overconfidence is not known to make people
wise either.
No matter how you look at it, it is a dangerous game to play with high
stakes.
Now imagine that through desperation or overconfidence a terrible
decision is made. For instance, instead of using the anticipated
income to pay old debts or finance a new income producing venture,
corporate leadership elects to obtain non-income producing assets.
Or worse yet, spends the money on creature comforts.
Now the pyramid collapses. It is those who have come last who are
hurt the worst. In the traditional pyramid scheme, it is those who
invested last who are hurt the most, because there is no one to pay them
yet. In the corporate version of the scheme it is those who were
hired last who are hurt the most because they have the least seniority
and are usually the first to be laid off.
Ponzi’s original design works the same way as all other con games.
It relies on the victim’s greed. The urge to get rich quick is a
necessary component in the seduction by the con artist. In the
corporate world, it is often not “get rich quick” but “get big quick”
which is the enticement. No matter. It taps into the same
“beat the system” feelings that drive the typical pyramid scheme
participant.
This article is not intended to question the legality of the practice of
building card houses with company funds. After all, there is no
intent to deceive or do harm. Rather, the question is: As
managers, how do we decided how much risk is too much? This is a
question that can only be answered in part by the mathematical equations
of Operations Research and Management Science. In general, the
elements of corporate personality and individual judgment are key
factors.
The question becomes almost entirely one of ethics when one is working
in the non-profit sector, or in a publicly held corporation. That
is, when it is not the manager’s own money that he or she is gambling
with.
Many of these decisions are made at the C.E.O. and C.O.O. levels.
This writer has seen too many occasions in which the board of directors
is the proverbial “Johnny come lately” and is shocked to find what sort
of condition its enterprise is in. Then they begin making
decisions based in desperation too.
Have you seen instances in which too much aggressive growth based on
unstable finances have brought an organization to the brink of disaster?
What finally caused recognition of the problem? What was done
about it?