"Trust but Verify"

The words above were spoken about twenty years ago by President Ronald Reagan in response to meetings he’d had with USSR President Mikhail Gorbachav. The two had been discussing an agreement to reduce nuclear arms to non-threatening levels.

To eliminate the friction of the cold war, both sides, the US and the USSR (at the time), had to agree to mutually destroy long range ballistic missiles. With the threat eliminated, peace talks could begin in earnest.

A sticking point in the negotiation was how to manage the inspection and confirm the actual reduction compared to the promised reduction. President Reagan said each side must trust each other but a plan was needed to verify that each side could be assured compliance with the promise.

Yes, I trust you, but we need to verify the expected performance. This leads me to an examination of a recent management case study experienced by a close friend of mine.

Although through our relationship I am privy to many details, in order to discuss this situation publicly, I must maintain confidentiality. There is also a legal proceeding currently pending so the names will be changed to protect the alleged innocents.

I think there is a learning opportunity here for all managers who have trusted employees. My friend Roger (not his real name) operates a manufacturing business in this hemisphere. Roger started about 15 years ago and 14 years ago hired a quality assurance inspector whom we’ll call Hector. Hector relocated from the U. S. to Central America to oversee contract manufacturing operations. To make a long story short, Hector was a prime example of the so-called Peter Principle. From a book by the same name, the management teaching was that someone will inevitably rise to their highest level of incompetence.

For example, it’s not atypical that you would take your best salesperson and make him or her sales manager. Forget the fact that the competencies required for successful performance in each of these roles may be completely different; expediency, dire need and the course of least resistance are highly motivating or opportunistic factors. While the business was small with a few number of factories to manage, Hector seemed to perform fairly well. His area of responsibility encompassed quality assurance and production management and liaison with cutting and logistics in the Miami HQ.

But the business grew and additional factories were required. The staff expanded to include more inspectors. Additionally, more competencies were added to the cut and sew operations. Trim sourcing, pattern making and eventually, full package were added to the repertoire. So the business increased horizontally and vertically. Hector was loyal, worked many hours and tried really hard. But Roger didn’t seem to keep very tight controls. Roger lived in Miami and traveled only occasionally to Central America. He left the hiring decisions to Hector along with control of the payroll and overhead expenses other than direct costs associated with manufacturing.

While Roger was occupied by sales and growing the company, he trusted Hector to hire staff, source production and set prices. As the company expanded, Hector’s staff increased dramatically to well over 45 people supervising manufacturing and logistics. Hector operated the staff within budget but cracks in management performance began to occur. Unfortunately, Hector had never been trained to manage a large staff and took no pains to self-educate himself. He had the classic syndrome of one year experience repeated fourteen times. Excuses and finger-pointing substituted for improved performance. Roger complained to me frequently about the problems with off-shore sourcing. He didn’t quite realize that the greatest source of his information was Hector’s responses to the questions of why there was poor quality and late delivery.

Hector was not only incompetent to handle the job but he was also lazy. New sources at more competitive prices were not sought as Hector complained that the programs Roger had booked were not attractive. Roger believed Hector, as his responses sounded reasonable. Roger didn’t doubt Hector’s word because who knew better than Hector who had lived in the country for fifteen years?

Then things started to change. Roger had hired some experienced management at the home office. The new team did not buy into Hector’s excuses as Roger had become accustomed to doing. The new, intelligent team dug in their heels and wouldn’t accept the poor performance offered by Hector that Roger had accepted with his own rationalizations. Roger was a small entrepreneur without a board of advisors. There was no one else to serve as a sounding board and Roger was the victim of his own counsel.

Lesson number one for Roger was to be aware of “devolving.” When you are the boss and make all your own decisions, it’s easy to avoid holding your own feet to the fire. An independent board of advisors or directors needs to ask the tough questions on a regular basis. Here, Roger was fortunate that his new management team saw the writing on the wall. Give Roger a little credit for not overruling them in favor of Hector. But it became obvious that there was no longer a place in the organization for Hector and he had to leave. Right or wrong, after so many years, there are emotions involved both from Roger and the Central American associates, some of whom had been employed almost as long as Hector. Because Hector had become ensconced over a long period of time and hired his own staff, replacing and removing him would not be simple or easy.

The day and time came and Roger sat Hector down to advise him that it was time for Hector to move on. Plans were discussed to have Hector as smoothly as possible, disassociate from the company. While parting was difficult, there was a greater difficulty yet unforeseen and somewhat more devastating, than just firing someone for lack of performance. Since Hector was away from the office during his dismissal, the senior management team entered Hector’s office to take over operations and safeguard the running of the company. While cleaning out some files, it became readily apparent that there were some extra curricular activities Hector was conducting which were outside the scope of his employment.

Bank statements and transaction records indicated that Hector had become his own entrepreneur unbeknownst to Roger. Hector had become a partner in one of the contract factories to whom the company sourced and thus Hector was acting as buyer and seller. Under most international laws, this constitutes criminal activity.

Although now Hector appeared to be a criminal he wasn’t that smart. Not many thieves are. He had left all the records on the company premises. Roger contacted the best lawyer in the city and showed up with four cartons of documents as evidence. The lawsuits, both civil and criminal are in progress now.

Most of us know about law suits. They are costly, time-consuming, irritating, distracting, and have no guaranteed favorable outcome. How could Roger have protected himself? How can you protect yourself when you have faith in a long term employee?

Trust but verify. Set up your controls for both performance and accounting. If you operate internationally, engage your professional accountant in the U.S. along with an independent and certified accountant in the foreign country to check on documentation, tax filings and confirm vendor costs. Offer your purchases for regular bid review by qualified vendors. Develop an employee manual to outline acceptable behavior and grounds for dismissal. Have regular reviews of personnel performance. Conduct “360 degree” interviews to get a wide perspective and input from others around the employee. Discuss your problems and issues with a board of advisors who will candidly give you their unbiased opinions. Ask your customers to rate your performance and suggest areas of improvement and pay attention to what they say.

If you continue to get the same complaints, you haven’t taken sufficient steps to solve the problem. Ask the one key question: “Would you recommend our company to someone?” And listen to the answers of others. If you are the boss, it’s too easy to listen only to yourself. You can’t expect to bet on your luck that you will have loyal employees step up and tell you the truth. The truth may be that you are not doing your job. How many employees can be expected to take that risk? Would you listen to them anyhow? Well, you’d better listen to someone. My good friend Roger didn’t listen when he had the same problems occur repeatedly. He bought the excuses of his trusted employee Hector.

The result? Roger has paid a price in lost sales, dissatisfied customers and loss of other (legitimate) employees who left the company after working for the allegedly crooked Hector. In the meantime, Hector is out of the job with Roger’s company and Hector is facing hard jail time for his crimes of theft and embezzlement. That’s little consolation to Roger whose main goal is the healthy future success of his company. I believe Roger’s company will survive. I know some of the key people there and they are very qualified. It’s sad, but Roger could have been years ahead of where he is now had he set up systems and developed the discipline to verify the trust he had placed in Hector. Don’t make the same mistakes.

Joseph Greco is president of Greco Apparel. Visit them on the web at www.grecoapparel.com