“Ethics First” is the primary message former CFO of Healthsouth Aaron Beam conveys to his audiences. His experience with Healthsouth and the research he’s done about ethics in American business, qualifies him to deliver this compelling story and message to any organization, group or classroom that values ethical behavior, and the process of achieving it.
Aaron Beam’s story is “the untold story of HealthSouth”, one of America’s most successful health care companies and subsequently the perpetrator of a $2.8 B accounting fraud, one of the largest in American history.
Here’s Aaron Beam in his interview with Chuck Gallagher – President of the Ethics Resource Group and business ethics expert.
Tired of traditional talk? People pontificating about this or that? The left or the right? Sometimes the truth is just off lost in the noise. Having learned life lessons the hard way, Chuck Gallagher, international speaker and author, cuts through the noise to share truth through transparency!
Nationally known guests talk about what’s important to you – your life, your concerns and your success. So tune in, turn on to Straight Talk with Chuck Gallagher.
Now, here’s your host, Chuck Gallagher.
CHUCK: Hi, this is Chuck Gallagher with Straight Talk Radio. I have to say it’s an honor today to have my guest on. We talk about a lot of things on Straight Talk Radio and the concept behind this show is to be able to really bring the unobliterated truth to the forefront. Most of you who have listened to the show on a regular basis know that in my late twenties I was highly successful as a CPA tax partner in a firm, testified before Congress, wrote articles in national magazines, taught Continuing Education courses in 30 states, but I also made some really dumb, stupid choices that landed me eventually in federal prison. Not something that I’m particularly proud of, but I do find that that experience was transformative for me, because it gave me an opportunity to really look at the truth behind the choices that I made what got me there and what I can do now that might be helpful.
So from time to time I get an opportunity to talk with people who’ve shared a similar journey. This is a journey that reads like the great American success story. A healthcare company that started from zero, raised some venture capital, became public in two years and became the darling of Wall Street. Many who are in business have heard of the story of HealthSouth.
My guest today is Aaron Beam. Aaron is one of the founders of HealthSouth and its CFO. Aaron, if there is a person on the planet that, of course, knows the back story, but in depth knows more about how it easy it is to step on that slippery slope. I guess you and I are kindred spirits because we have certainly have stepped there and slid into places we’ve never imagined. Thank you for taking the time to be on the show, Sir.
AARON: Well, I’m happy to be here and I hope I can add some light to how these things happen. Should I start?
CHUCK: Yeah, why don’t you start off and tell us a little bit about how did you get involved with the folks at Scrushy and HealthSouth and how did this stuff start that created such quick and immense success?
AARON: Well, I actually was hired by Richard Scrushy to be his employee in Huston, Texas, four years before we started HealthSouth. The company that we both worked hard got bought out and we were facing being unemployed, so Richard had an idea for a startup company and he contacted Citycorp Venture Capital and a startup company is to be a rehabilitation company particularly doing things an outpatient basis. I must say for Richard had some problems, he was very much a visionary in this respect. Even in the early 1980s people were looking for ways to lower healthcare costs.
AARON: Richard’s concept was, “Look, so much stuff has been done in the hospitals and they are so expensive. If you can do something on an outpatient basis, like physical therapy, rehabilitation, do it outside of hospital, it’d be a lot cheaper.” He was able to convince Citycorp to put a million dollars into a startup company and it just took off like a rocket. Their first center made more money than we thought it would. Very quickly we saw there was a need for rehabilitation hospitals. Within a couple of years we noticed that outpatient surgery was becoming a big business.
Before 1980 all surgeries, I don’t care how minor, were done inside of a hospital. State-of-the-art of medicine and everything dictated if a doctor cut on you, you’re inside of a hospital. Today 60% of all surgeries are done outpatient. So our timing was excellent. We just had a niche that was just about to take off. Even if HealthSouth hadn’t done it, I think someone else would have done it. Just one of those things, but we were very lucky. As a result, within two years of starting the company, we were public, which is pretty amazing. The trouble that you get in, first off, a public company, if you’re the CFO or the CEO, it is very high pressure.
AARON: People want, in this short-term mind, they want earnings better every quarter. Every quarter. Give me better numbers, give me better numbers. So, the whole system is geared toward you, doing whatever you have to do to make the numbers. Now, I’m not saying that they make you cheat, but there is so much pressure. You learn the old saying “lipstick on the pig” is very true for a public company; you learn to be evasive about anything that’s negative about your company. Anything happens that’s negative, you paint it, there’s a rosy picture. I think that bullied you to, over time, become more and more deceptive, less transparent and kind of set you up for that day when you may consider crossing a line and actually committing fraud. I’ve studied a lot about this since I got out of prison and everything. The temptations that you put yourself in and the temptation on Wall Street to cheat is tremendous.
CHUCK: Aaron, before we go in to the rest of the story, you and I again both have had our misdeeds and have spent our time in federal prison. I guess that makes us part of the same fraternity, so of speak, fraternity, neither one of us wanted to pledge to. But you made a really interesting comment as we start this program off with Straight Talk Radio, and that is expectation.
Now, you’re the CFO of HealthSouth, so I’ve got to ask this, doesn’t it mathematically seem impossible to always grow?
AARON: [chuckles] It does and that’s the silliness of it that Wall Street expects you to keep growing, but here’s what happens. Early on you grow fast. You’re a small company, the number are small, and doubling your revenue or tripling your revenue is not that difficult and as long as you’re doing that, Wall Street gives you a high P.E. They demand your stock because you are a high-growth company.
Over time it slows down, but you may still be delivering 20%, 30% growth and Wall Street winds up overpricing your stock. They keep pricing you as if you’re going to keep growing like that. What happens is that first time you have a bad quarter, they don’t gently let you down. [chuckles] They take you from a P.E. of 50 down to 30, whatever. It is silly. It is impossible, but if I had to do it all over again, I would realize this phenomenon better and I would actually try to tell investors beforehand, “We will slow down. Our 5-year projections are not rapid growth all the time.”
Unfortunately, Richard Scrushy was so obsessed with building his wealth, and he could just see the dollar signs every time the stock went up 5, 10 dollars a share and he just, almost like he was addicted or hooked, he just did not want the stock to ever go down. It was unrealistic and, unfortunately, he was my boss.
CHUCK: So, let’s take that, Aaron, because we’re going to dissect kind of this process because I think for people that are listening– There are a lot of people and I know you do, I know that you speak to groups literally all over the country and we have about three minutes until our first break, but when you do that and you’re in the process, people will look at you and say, “Well, I would never do X.”
The reality of it is there’s two parts to what I’m hearing you say. On one hand, you had the pressure of Wall Street and I’m going to make a quick example. Apple computer. Been the darling of Wall Street for number of years and I mean it had an explosive growth and done incredible things. Of course, they were doggone close to bankrupt, a decade or so ago, maybe two, but everyone knows at some point everybody got an iPhone or people that want an iPad have got one. If you want an iWatch, that’s fine, but not everybody is going to wear one of those, so there’s a point at which you just can’t grow any faster. You might be able to generate lots and lots of additional cash and create a lovely income, but it’s not going to be that. So you had the pressure of Wall Street on one side, but you also had the pressure of your boss, who didn’t want to face the reality of a startup with explosive growth eventually matures and, therefore, things slow down.
AARON: No, you summarized it well. It’s interesting that you mention Apple because, recently, I don’t know if you’ve read about it, but the current CEO of Apple, I forgot his name–
CHUCK: Tim Cook. Yep, Tim Cook.
AARON: Tim Cook actually from the city that I live in now, in Alabama. He was at an investor conference and he was telling investors what Apple was doing to make their products more environmentally friendly when they’re disposed of and things about treating the workers better, all kinds of things that are socially responsible. Some investors said, ”Mr. Cook, what is this all going to do to the bottom line, what is it going to do to your return on investment?” and he lost it. He told the guy, “If I run this company trying to always make the numbers better and disregard social responsibilities, you should not want to own this stock,” and he got a standing ovation. So it’s kind of interesting that you mention Apple because you’re right! Since right now, every other person owns an iPhone. Do you expect everybody in the United States to own one? It’s silly, you know?
AARON: I used that as an example.
CHUCK: Well, I’ll tell you what we’re going to do. We’re going to take a quick break and go so fast here on Straight Talk Radio, but my guest is Aaron Beam. He’s the former CFO of HealthSouth and we’ve got some really, really interesting things we’re going to be talking about as we continue this process because people need to know what the pressure is like and how easy it is to sometimes put that first step on the slippery slope. This is Chuck Gallagher with Straight Talk Radio and we’ll be back in just a moment.[Commercial break]
CHUCK: My guest is Aaron Beam and this is Chuck Gallagher with Straight Talk Radio. Now, you may not have heard the name Aaron Beam before, but you need to listen to this show because we’re talking about an interesting case study in what can happen when need combines with opportunity and you can rationalize behavior and step on that slippery slope.
I speak about ethics and ethical choices, so does my guest. He was part of the great American success story of HealthSouth and ended up, like I, serving time in federal prison because of some choices that were made. Aaron, thank you for being willing to be a guest on the show.
We were talking in the first segment about Apple and Tim Cook and his willingness to say, “Hey, you know what? Earnings aren’t always going to be as great as they are right now and if you want to own us, you need to own us for the long haul, not for the short run.” But you made the comment that your boss, Richard Scrushy, was really, really taken with the value of the stock. This is going to be on YouTube so people can see we got a little gray hair. It’s almost like being a young man in your teens going in your early twenties thinking that by the time you’re in your late fifties, you’re still going to be that viral young man who is 17 years old. There’s a point when you just have to recognize the truth is it ain’t never going to be exactly the way it was and dramatic growth cannot continue forever. Yet, you felt the pressure from your boss to somehow make that happen. Tell us how that took place.
AARON: Well, Richard was the type of guy that, like many CEOs of companies that go off the rails, Enron, WorldCom, Tyco, he was very charismatic. He was able to get people to follow him and these people thought he’s good leader because either through charm or intimidation or just their whip and smarts they can have people follow them.
The problem with these types of people, sometimes though, is that to them it’s all about the money. They measure their success by how much money they can make and accumulate. Richard Scrushy actually told the Birmingham newspapers, 1995, it was his goal to become a billionaire. When he started HealthSouth, he was not worth more than $100,000. I estimated in 1995 that he was worth $600 million. In 1997 he was the highest-paid executive in the United States taking home $110 million in that one year.
AARON: So his whole basis of measuring success was about how much money he could make. Even from the Bible forward we all know and all realized that just pure accumulation of wealth, for the sake of accumulation of wealth, isn’t a true measure of success. There are a lot of things in life that are really more important, but unfortunately [coughs] Richard, that’s what he was all about. I must say I was intimidated by Richard. He charmed me like he charmed other people and [coughs] one thing that I’ve learned after writing my book and studying all this is that being ethical takes a lot of courage.
AARON: I don’t think that can be understated. Typically people don’t have the courage to stand up for what is right and what is ethical. I realize now that back in the go-go days, I didn’t have the proper courage to stand up to Richard and I let him to manipulate me and it’s sad that I had that problem. Today I feel like I understand this a lot better and if I went to work for somebody today and they tried to intimidate me and bully me into doing something I shouldn’t do, I would have the good sense to walk away.
CHUCK: Aaron, let me ask you a good question. Put this into a perspective to me, how old were you when you were connected with Richard and HealthSouth?
AARON: I was about, when I went to work for him, the previous company I was about 36, 37 years old. I wasn’t a kid by any means, but I had never had much financial success. What was new in my life after I met Richard is I became very wealthy. That in itself was a problem. I got caught up in buying another Mercedes, a beach house. I bought over $30,000 worth of Hermes neckties. So I got caught up in living the wrong kind of lifestyle and thinking that having $30,000 worth of neckties was really important. [chuckles]
CHUCK: Aaron, let me say this, and I say this for the folks that are listening on the radio show, there are so many jewels that you’ve shared. We are, you are, I am, we are responsible for the choices that we made and that we make, but it is interesting to know that not that it’s someone else’s fault for what we did, because we have to be accountable and responsible for our own choices, but in so many cases people can be lulled into that charismatic vision. This is a crazy analogy, but it really works. Think of Jim Jones and the people that drank the Kool-Aid. Most people had enough sense to know that if you drink Kool-Aid with poison you’re going to die and most people don’t have the inclination to want to do that, but he was charismatic enough to lure people in and I heard you and I fell into the same trap, quite frankly, but I heard you say, “I came up and I’m going to put a word in your mouth, but I wasn’t wealthy,” but hanging on to Richard coattail, letting him be the voice and the charismatic leader allowed you to find something that you have never found before in your life, which is an intoxicating place to be and if you came up, and let’s assume that you weren’t raised wealthy and now all of a sudden you became a multimillionaire, well, that’s a pretty intoxicating drug!
AARON: No, you’re right. It’s very, very true. People ask me, when I talk about Richard in detail, they say, “But, why did you work for him? Why didn’t you just leave? If he was such an S.O.B., why didn’t you get away from him?” The problem was that I was proud of the company itself. I was one of the founders. I didn’t want to walk away from something I had helped start. I didn’t want to walk away from the money.
So, over time I just sort of distanced myself from Richard, but I stayed at the part. I stayed there longer than I should have because of all these things that you say. The wealth is very, very enticing.
The silly thing about making a lot of money, though, is that at some point you’re starting to pressure on yourself to keep your wealth. I had about five homes at one time. I sat down a few years ago and figured out that to pay the utilities, not the mortgages, but most of the time I did not have mortgages, that to pay utilities, pay insurance, pay property taxes, security, upkeep, what have you, I had to make almost half a million dollars a year just to keep that lifestyle up! I look back on it. Why did I do that? Why did I put myself through that kind of pressure and all to just to keep my wealth, when you can only sleep at one house at a time, when you can only drive one car at a time? But you have to go down the road. You have to experience these things to realize; today I lost all of my material wealth, to speak of. When I went to prison, I had to pay restitution and today I have one house. [chuckles] I do have two cars. My wife has a car and I have a car. They’re both ten years old, but I feel less pressured and more happy today than when I had all that money.
CHUCK: That’s interesting to hear and I’ve heard many, many people say very much the same thing. I remember as a kid, and you and I have enough age on us we can remember these things, I remember as a kid going to the playground and it had a little merry-go-round kind of things. If you got on a merry-go-round and you were the one running around on the outside, you tried to get that thing to go as fast as you could because, ultimately, the objective was, I want to spin somebody off or get them sick, whichever the case may be. It’s kind of like being on there. I mean, you hang on and then you sit back and you say, “When I’m off it, it really is much more comfortable than when I’m caught up in this merry-go-round of things that just don’t make sense.”
AARON: Don’t make sense. Don’t make sense. I remember times when we had a condo in New Orleans, several beach houses in Florida, we had a little farm house in Alabama and I had a house in Alabama. I remember many times my wife and I would sit down and say, “Oh no, we haven’t been to our beach house in a month. We need to get down there.” Or, “We haven’t been in our condo in New Orleans in six weeks. We need to get down there.” We were working very hard to try to enjoy all this stuff we had. [chuckles]
AARON: It was just crazy, just crazy.
CHUCK: My guest today is Aaron Beam. He’s the former CFO of HealthSouth. HealthSouth is one of those case studies that business schools look at. It was an incredible company that was one of the first to really change the dynamic of how healthcare is provided in this country and yet at the same time became an amazing disaster, all focused on trying to keep up an image or maintain a concept that was physically unsustainable.
We’re going to come back after this message. We’re going to talk a little bit about first step on the slippery slope. What happened when you recognized that, okay, we’re going to miss the earnings and how did the president of this company responded to that.
This is Chuck Gallagher with Straight Talk Radio. My guest is Aaron Beam and we will be back in just a moment.[Commercial break]
CHUCK: This is Chuck Gallagher with Straight Talk Radio. My guest is Aaron Beam. He is the former CFO of HealthSouth. HealthSouth was one of the success stories. I mean, absolutely on the cutting edge of really changing to some extend how today in healthcare many of us receive the care that we have. But it also had a kind of a bad ending. It really didn’t go so well.
Aaron, tell us a little bit about what happened when you recognized that you weren’t going to be able to deliver the earnings that Wall Street was expecting.
AARON: It was in the second quarter of 1996. We had been not committing fraud, but doing some pretty creative accounting to make numbers up until that point for several years. Doing things that I don’t think were illegal per se. I doubt anybody could have been prosecuted, but it was pretty shabby accounting.
CHUCK: Okay, but let me just stop you for just a second. Give me just a quick idea what is shabby accounting.
AARON: Well, it’s just like when you put an asset in service. You’re supposed to estimate the useful life of an asset, how long it will last.
AARON: For the short term you know that you want to depreciate that asset over a longer period of time when you can. But if you put an asset in service and you know it’s going to be worthless in 10 years, writing it off in 20 years is shabby accounting.
CHUCK: Okay. That makes sense. I get it.
AARON: That’s a judgment thing. You can say, “Nobody really knows how long this asset is going to last.” Again, you come back to the short-term orientation. That’s where a lot of the shabby accounting comes from; it’s doing those types of things.
CHUCK: Got it. Okay.
AARON: In the summer of 1996 we had missed our numbers really badly. My chief accountant and I decided we couldn’t do anymore accounting tricks. We went into Richard’s office to tell him that we had to report a bad quarter. Never had we reported a bad quarter in 10 years of being a public company. We went into his office. We told him the situation. We said that we had to report earnings below expectations. His face turned red, he started trembling, “Get out of my office! Have you guys lost your minds?! This is not an option! We are not going to report a bad quarter! Here’s the problem. You’ve guys have gotten lazy. You’re smart. You know how to fix those numbers. Get back in your office and fix these numbers!”
AARON: “If we report a bad quarter, the stock is going to crash. We’re going to be sued. You won’t be the rock stars in Birmingham anymore.”
And then he pled with us. He said, “Look, guys, healthcare is the biggest business in the United States. We’re barely in the acute care hospital business. We can get in that in a big way and become one of the largest companies in the country.” We were actually 350th on the Fortune 500 list at the time.
AARON: Then he just literally pled with, “Guys, please, there’s got to be something you can do.” Bill Owens, who had worked for our auditors, said: “Look, I can make entry small enough. We have 2,500 sets of books,” because we had that many operating units.
AARON: “I can make entries small enough and spread them through the 2,500 ledgers and I know the auditor’s threshold for examining these types of entries and they won’t look at it and I will get the numbers to where they need to be.” And he was very plain about it. He said, “Richard, Aaron, I will be crediting revenue we didn’t generate. I will be debiting assets we don’t have.”
AARON: Richard thought about it for just a few minutes, and he says, “Guys, this is our best option.”
CHUCK: Wait, wait, wait. So let me get this in my head right, okay? So basically, the fix was going to be, which was very intentional, “I’m going to create fake revenue and I’m going to create fake assets so my debits and my credits will balance. So my balance sheet will go up. My income statement will go up and it’s going to be done little increments at a time that likely no one will ever see. So we just made it up out of thin air.”
AARON: Out of thin air.
AARON: Just classic cook in the books. Literally. Richard said, “This is our best option. Stock holders won’t get hurt. Nobody will lose their job and we’ll only do it this one time.” [chuckles] “And it’s what we need to do.”
At that point I should have had, and I mention the word courage again, I should have had the courage to stand up to Richard and say no, but I was intimidated by him. He always carried a gun in his briefcase. Not literally. He was just fearful of what he would do if I stood up to him. Today I realize that I was being a coward. I needed to have stood up to him and say, “No, Richard, we won’t do this,” but I let Bill Owens that night cook the books.
CHUCK: Wow. I’m going to ask this question and it’s probably way out of order, but I’m going to go kind of in a different direction for a second. So you spent time in a federal prison? Richard Scrushy never did.
CHUCK: How did he avoid spending time in a federal prison when he was a party, too, cooking the books?
AARON: The third quarter that we cooked the books, the third time we did it, at the end of the meeting there were about seven people involved now. At the end of the meeting he looked us all in the eye and he said, “Guys, if we’re ever caught, I will deny everything. I don’t know what you plan to do, but I will deny everything.” When he was indicted, he left the church that he had been attending [32:33] inner city church and he gave that church a million dollars. Waiting for his trial to begin, in a two-year period, he purchased a television station in Birmingham and he began preaching the gospel on television every day. He hired seven different lawyers. He spent $20 million on his legal team. He hired a jury selection firm to handpick the jury. The trial lasted six months, but he never entered a court room that he didn’t have a Bible in his hands.
When the trial was over, and the jury found him innocent, they asked the jury, “How did you find him innocent” and some of the jury said, “Those CFOs seemed like liars and Mr. Scrushy seemed like a nice Christian man.”
AARON: That’s what happened.
CHUCK: That’s interesting. Absolutely fascinating that that took place. Okay, I know I deviated just a little bit, but the books were cooked for three or so consecutive quarters. What ultimately brought what was done in the dark to light?
AARON: Well, I left the company after three quarters. I was beginning to [33:56] more than I should. I hated myself. I did not have a criminal mind. I had to get out so I left the company. Six years later, after they passed Sarbanes-Oxley, CFO at the time called the FBI and this just passed up. They were proud to be going on for all those years. That’s what did it.
Now, if I could go back a little bit, when you say, “When did you really crossed the line?” obviously, the day you decide to commit fraud and you know it’s fraud and you know you could go to prison for doing it, that’s crossing a big line, but it’s really a process. You start crossing the line in lots of little ways long before you do that. Like I said, putting lipstick on a pig, not being totally honest with Wall Street. You do a lot of things. Your ethics starts slipping before you make that first step.
AARON: So I crossed a lot of little lines. I was on a slippery slope before I actually made that committed fraud.
CHUCK: Got you. So, you were on the slippery slope. You knew what that experience was like. You left after three quarters. What happened after that?
AARON: When I first left, retired, every time a doorbell rang or a phone rang, I thought it was the FBI. So much time had passed. I had no contact with the company after I left. So much time had passed, I actually thought the fraud had stopped. I did not realize that it has gone on all those years. I had turned on my TV one night and the announcer on NBC said, “We open tonight’s news with a breaking story out of Birmingham, Alabama. Massive accounting fraud uncovered at HealthSouth.”
CHUCK: Oh, my goodness.
AARON: “Estimated that there’s $3 billion worth of bogus numbers on their books,” and I just almost passed out. I came forward. My attorney advised me to come forward and tell the world that I played and I wound up getting only three months in federal prison, which a lot of people say I should’ve gotten more and I’m not sure that I shouldn’t have, but I’m human, so I didn’t go to prison longer than they told me I had to.
CHUCK: Right. [laughs] Listen, let me say for both of us that have been there. Three months were probably the longest three months of your life. I had 18 months and it was the longest experience I think I have ever had. Oh, my goodness! Time just slowed to a crawl.
AARON: It is a life-changing event, though. You hear people saying they went through some kind of life-changing event and other than losing a child or a loved one or something physically or medically terrible happening in your life, this is about as bad as it can get, going to prison.
CHUCK: Right. I would absolutely agree with that. We’re coming up on a break. This is Chuck Gallagher with Straight Talk Radio. My guest is Aaron Beam. He is part of what many would call the great American success story, at least the first half of it, when HealthSouth became a company that went from zero to public in two years and that created substantial financial benefits to many of the original founders, Aaron being one.
But, that isn’t the rest of the story was. The rest of the story was in order to miss the numbers, the books were cooked. Some people listening to the show might say, “Well, Gee, I would never do that.” There are a plenty of people who make choices when faced with enough pressure and temptation.
When we get back after this break, we’re going to talk a little bit about that slippery slope and a book that Aaron has written, which is something that is a must-read, especially if you’re in business. This is Chuck Gallagher with Straight Talk Radio. We’ll be back in just a moment.[Commercial break]
CHUCK: Aaron Beam has written a book Ethics Playbook. He is the former CFO of HealthSouth and also a person that spent some time in federal prison for his contribution to the massive accounting fraud that took place there.
Aaron, you and I both have the opportunity to speak to groups. We talked about ethics and people often look at me, and I’m sure at you the same, and say, “Why would I want to listen to someone who has participated in doing something so wrong? What can they teach me?” and I think both of us would say, “We can teach a lot,” because as long as life is in imbalance, if everything is going perfect and life is in balance, it’s easy to be ethical. But what happens when life gets out of balance? What happens when there is undue pressure? What happens when things aren’t going the way we want them to? How easy it is to succumb to temptation? So I am honored to have you as a guest on the show. Talk to us a little bit about Ethics Playbook and what took place in your working years to write that?
AARON: Well, when I got out of prison, I could not get a job and I had lost all of my material things. I actually needed to try re-retire.[Chuck chuckles]
AARON: And the job market for felons is not very good.
CHUCK: No, it’s not. No, it’s not.
AARON: For three years I mowed the lawns. I mowed the lawns. A lot of my clients were amazed to learn that a CFO of New York’s stock exchange company was mowing their lawn, but anyway I did it for three years.
But I began speaking to universities and CPA associations and all back in 2009. I noticed, when I gave my speech, I basically told the story of HealthSouth. But during Q&A people always wanted to know, “How can I avoid being in this kind of situation that you got yourself into? How did it really take place?” During Q&A I’ve decided to write a book about ethics and I started researching professors that have written books about it. Particularly Dan Ariely at Duke University.
I wrote a book that explains, and let me real quickly, if I can, explain how these large corporate frauds really happen, Enron, WorldCom, Tyco, HealthSouth.
AARON: One person doesn’t do it. There is somebody typically at the center that’s sort of the leader, like Scrushy or Bernie Ebbers or Kozlowski. These guys, as I said earlier, all have big personalities, are very charming. They love the money that they can create. Studies show that most frauds, at the big level, are started by the CEO, not the CFO. But he can’t do it by himself. He needs in enablers. Typically the CFO is a major in a book. Now, what does the CFO do? He does it more out of wanting to please stockholders, keep the stock up, not so much to put money in his pockets like the CEO wants. They do it for a little bit different reason.
But for these frauds to go on for years and grow, grow and grow, the fiduciaries don’t do their jobs. Boards of Directors, outside of auditors, investment making firms, lawyers, they don’t do their job. Of course, the big reason there, in most cases, when it really goes off the tracks is that, who pays these people?
AARON: They are paid by the company. So that’s powerful. Who pays you, you have a tendency. Overtime a board may just start representing the Chairman of the Board or the CEO and they don’t look out for the stockholders. Sometimes they are incompetent. It’s good old boys’ club. They really shouldn’t be on the board, but they don’t do their job.
Then, rank-and-file employees eventually become involved and they become involved because simply they are afraid of losing their job. Then society in general is part of the problem. Enron was voted by Fortune magazine the most outstanding company in the United States three years in a row. These guys at the top, the CEOs, they become like the star athletes, they begin to believe they are above the law because everybody is telling them, “You’re the greatest thing. You’re the best company in the United States!” So what you’ve been doing seems okay, almost, and you start buying into it. So society in general is part of the problem. I also think, and I can’t prove it, but I think the Kardashians are part of the problem, also.
CHUCK: [laughs] Okay.
AARON: There’s something wrong with those people.
CHUCK: [laughs] Okay, Aaron, I was buying in everything, but that was a twist that I really do appreciate. Thank you so much. I’ve never had this on the show before. But by Gosh, let’s get the Kardashians.
AARON: Well, I don’t know. They may be a problem. Lots of people think they are really good people. That’s sad. Now, real quickly, because we’re running out of time. How you build ethical strength? In 400 A.D. St. Augustine said that complete abstinence is better than perfect moderation. What he is saying is that it’s better to try to be perfect than to be moderately right. I ask you, “What is the right moderate amount of texting before you are arriving? What is the right moderate amount of cheating on your taxes? What is the right moderate amount of padding an insurance claim or cooking the books? The answer is zero!
As an individual you need to try to be perfect when it comes to behaving ethically. Don’t let yourself rationalize that any little bit of cheating might be okay because humans have a way of rationalizing and explaining their behavior so they can feel good about themselves. Now, you can’t be prefect. As you lower your standard and say, “I’m going to cheat a little,” you’re on a slippery slope.
CHUCK: Aaron, you are so right and I just want to echo something that you said because it is incredibly powerful and that is as soon as you begin to rationalize, that word is the word. Now, I’m going to go back for just a second, kind of as a simple summary before we close things out in a minute, but here it is. HealthSouth has been growing, growing, growing, growing and all of a sudden you’re going to miss a quarter. Now, if I were looking at it, I would say, well, the “need” concept was, “Gosh, I don’t want to miss the quarter.” But you’re going to miss it. The opportunity, “Well, Gosh, we can across 2,500 units put small amounts in which would be enough to help us get there.” The rationalization was, “We can’t. Not support the shareholders and the employees and people will lose their job and they’ll lose their wealth and after all, we’ll do it only this one time.” As long as you can buy into those three things, it’s like a three-legged stool. There’s a foundation from which you can make that decision. Question is: Do you step up on the three-legged stool and make that decision or do you stand down and recognize I’m not going there? And, Aaron, you said there is zero tolerance. You’re absolutely right.
AARON: Yep, that’s the way it has to be. About my book, Ethics Playbook.
AARON: It is available on Amazon, if somebody would like to buy it. The book, in great detail goes into why people cheat, what you do about it, how you build a strong ethical culture and it took me three years to write and I’m very proud of it. Now, you might say, “Well, look at Aaron Beam. Here he is. Trying to get rich from his crime by writing this book.” I wrote the book because for good intentions and I want to help society with the book. The truth of it is, Chuck, you writing a book and making you wealthy is about as lucky as you being struck by lightning while you’re on your honeymoon with Kate Upton. It’s not going to happen.
CHUCK: [laughs] I love that. You are full of it today and I appreciate it. Folks, this is Chuck Gallagher with Straight Talk Radio and I really want to encourage you to do something. My guest is Aaron Beam. I really would suggest that you go to aaronbeam.net. Go to aaronbeam.net. There is some great information there and you can pick up a copy of his book.
When Aaron and I talked the other day, I bought a copy of your book of off Amazon. I bought it on Kindle. Aaron, I’ve read a lot of books. It really is a great read and I think you’ve succeeded in the three years that you spent writing it, no, it’s not going to make you rich, but one thing I will promise those who are on the show listening and who see this via YouTube, it is absolutely worth it. If you’re in business or a business student, this ought to be a must-read because it gives you the understanding of human behavior and how it is that someone smart, like Aaron Beam, a founder of a company could make a step that would end him up in federal prison. Aaron thank you for taking the time, buddy, to be on the show. It’s an honor to have you here.
AARON: Thank you, Chuck, and I really appreciate your kind remarks. I wish we had more time. I think you and I can talk about this for hours.
CHUCK: You know what? We’ll probably figure out a way to do this again in another format. I do appreciate you being on this show and, folks, Aaron Beam is my guest. It’s aaronbeam.net. Here we are on Straight Talk Radio. This is Chuck Gallagher and remember, every choice you make has consequence. So make empowering choices for your life. I’ll talk to you next week.
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