May 23, 2013

MF Global: Why Words Matter – A Cautionary Tale for All Professional Communicators

On Halloween 2011, MF Global announced that it would file for bankruptcy protection after its billion dollar bets on European sovereign bonds triggered margin calls the company was unable to meet. MF Global’s directors, employees and customers were shocked by the filing – the eighth largest bankruptcy filing in history. But this was no ordinary filing. What happened is a cautionary tale for all corporate communicators and PR professionals as well as the directors, employees and customers of the firm.

A few days before the filing, MF Global firm reported that segregated client money seemed to be missing. By year’s end, about $1.2 billion of client money could not be found. Even worse, management was unwilling or unable to provide any clear explanations of what had happened to the funds. Customers were shocked by MF Global’s failure to keep its speculative investing accounts separated from the client’s funds. This revelation became the focus of Congressional hearings, multiple lawsuits, and regulatory investigations.

Could anyone have foreseen these problems at the firm? Yes. A careful reader of the MF Global shareholder letters in their annual reports from 2008 to 2011 would have spotted candor clues that revealed weaknesses in the company’s governance and accountability systems.

  1. Clue #1: A company that changes CEOs three times in as many years requires a higher standard of disclosure and transparency.
  2. Clue #2: A company that consistently reports improved revenues and net income in its letter to shareholders, but fails to mention it is losing money, i.e. negative earnings per share (“EPS”) will delude only themselves when they claim that their strategy is working.
  3. Clue #3: A company where the CEO states that a corporate transformation initiative can be achieved “in relatively short order” displays a lack of knowledge about how organizations work and the stickiness of cultural norms and values.
  4. Clue #4: A company whose CEO states that his company’s “best-in-class risk management” framework requires that everyone (but no one person) in the firm is responsible for managing risk reveals a high degree of transparency, but an uncommon lack of common sense.
  5. Clue #5: A company whose CEO feels obligated to report on the company’s honesty, ethics and client-centered business model in each year’s shareholder letter is likely to foster a corporate culture where ethics and honesty are discussed a great deal, but are not always practiced. For instance, each of these quotes comes from one of the four shareholder letters:
  • [We are a truly] an independent company—we do not trade against our clients’ interests. 
  • Amid the many positive changes we made last year to better serve our clients, we were very careful to leave our company’s greatest attributes firmly in place. We have an extremely talented team.
  • Our extensive global presence is unsurpassed. And we continue to live up to and reinforce our reputation for honesty and integrity every single day.
  • Our people are at the core of defining and sustaining our firm’s culture, the cornerstone of which is our commitment to building and maintaining the trust of our clients. Collectively, we will achieve our long-term objectives through the integrity with which we approach our work and the ethical handling of our clients’ business.
  • We also know that our reputation for integrity and discipline is fundamental for creating stakeholder value. There is simply no excuse for failing to live up to the highest standards…I believe the [the compliance, control and risk management] systems and people we have assembled will provide the foundation for our success in the years ahead. [Emphasis added.]

Clearly, these systems assembled to “provide a foundation for success in the years ahead” were not adequate to protect both customer and investor capital.

Any investor, employee, customer or director who found these clues in the company’s shareholder letters might have been surprised by MF Global’s filing, but would not have been shocked. Over the past four years, we found that MF Global’s candor scores consistently ranked in the bottom decile of our CEO Candor Surveys. Each letter offered evidence that the corporate culture was handicapped by inconsistent management and ineffective governance.

The moral of this cautionary tale is clear: Words and numbers matter in judging whether a company deserves the trust of its customers, investors, employees and the public at large. It pays to analyze the numbers and read the shareholder letters.