Since transparency is still sorely lacking over at Singing River Health and because I rolled out my working theory why the events surrounding this man made financial disaster have unfolded in a certain way we have to take a step back and look at the big picture. And to do that we must think like former CEO Chris Anderson, the man with all the answers.
To understand how the disaster unfolded most good Certified Fraud Examiners will tell you to “think dirty” and what it meant by that term is that the “frauditor” must 1. Understand how the perpetrator thinks by attempting to walk the proverbial mile in the perp’s moccasins which leads to 2. Gaining a possible understanding the motivations which lead to the disaster. This specialty is essentially the intersection of the social sciences with the accounting and finance that was originally pioneered by legendary sociologist/criminologist Donald Cressey, a name that has been mentioned a few times previously on this website.
First up are a few requisite disclosures. Dating back to November of last year I’ve had the pleasure of meeting many fine folks from over in Jackson County with connections to either the hospital system or County Government and the resultant communications with this group have a painted a picture of CEO Anderson that I thought was rich in its depth and color that also came with some analysis that is out of this world in my opinion. Important to note is that the totality of what I’ve been told by multiple parties (many with but some without a dog in the hunt) about Anderson is actually fair to the man, who has been the villain of choice for the media covering this disaster, Slabbed included.
The most frequent adjective mentioned to me concerning Anderson is “charismatic”. This makes a lot of sense as KPMG is a very large accounting firm and Anderson did well there before moving to SRHS on his way to becoming top dawg there. To be the CEO of an organization as large as SRHS would mean statistically that Mr. Anderson would belong to a fairly elite fraternity of Americans in that as CEO of an organization that size maybe .10% of the total population of the US would be Anderson’s cohort sharing the CEO title at such a large organization.
From an income standpoint, despite the fact Anderson’s salary is considered a public record (for now anyway), both SRHS and the County have refused to release any details but it is a very reasonable guess to say Mr. Anderson also fell in the top 1% for US income production via his hospital salary and benefit package. Who among us would not aspire such things for ourselves and our own children? This is where the sociology comes in and for that we turn to the best links I could find:
CEO charisma, compensation, and firm performance ~ Professors Tosi, Misangyic, Fanellid, Waldmane, Yammarino via The Leadership Quarterly Volume 15, Issue 3, June 2004, Pages 405–420
In essence, charismatic CEOs seem able to influence their compensation packages and stock prices but not other indicators of firm performance.
The Curse of the Superstar CEO ~ Rakesh Khurana, Harvard Business Review
What makes today’s profound faith in the charismatic CEO so troubling is the lack of any conclusive evidence linking leadership to organizational performance. In fact, most academic research that has sought to measure the impact of CEOs confirms Warren Buffett’s observation that when you bring good management into a bad business, it’s the reputation of the business that stays intact. Studies show that various internal and external constraints inhibit an executive’s ability to affect a company’s performance. Most estimates, for example, attribute anywhere from 30% to 45% of performance to industry effects and 10% to 20% to year-to-year economic changes. Thus, the best anyone can say about the effect of a CEO on a company’s performance is that it depends greatly on circumstances.
The second most frequent adjective I was told about Mr. Anderson is that he keenly understood what motivated the people that surrounded him. Being a keen observer of human nature is again a very positive personality trait in my opinion. But, like everything else in life such is a double edged sword as the leadership research also goes into some the darker areas of human psychology.
The Dark Side of Charisma ~ Tomas Chamorro-Premuzic, Harvard Business Review
Most people think charisma is as vital to leadership as it is to rock stars or TV presenters and, unfortunately, they are right. In the era of multimedia politics, leadership is commonly downgraded to just another form of entertainment and charisma is indispensable for keeping the audience engaged. However, the short-term benefits of charisma are often neutralized by its long-term consequences. In fact, there are big reasons for resisting charisma.
The four big reasons are: 1. Charisma dilutes judgment, 2. Charisma is addictive, 3. Charisma disguises psychopaths, 4. Charisma fosters collective narcissism
And then there is the Lord Acton factor.
Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority; still more when you superadd the tendency of the certainty of corruption by authority.
Acton is describing a human condition that most folks these days term being drunk with power. Inside a CEO’s realm absolute power does exist. Philosophically I’d argue such absolute power is even necessary in the for-profit world of business.
While the research indicates that best CEOs are not necessarily the ones that are charismatic, my anecdotal experience stretching back almost 30 years is that the best CEOs are not only competent (rather than charismatic ) but they also possess a strong internal moral compass. This does not mean such folks aren’t sufficiently ruthless when the situation calls for it (and yes sometimes being ruthless is part of a CEOs job ) it means they self-temper the power they wield. And those that don’t have that moral compass. The research drills down even further:
The Disturbing Link Between Psychopathy And Leadership ~ Victor Lipman, Forbes Magazine
It is not the image we like to have when we think of business leaders. But troubling research indicates that in the ranks of senior management, psychopathic behavior may be more common than we think – more prevalent in fact than the amount such seriously aberrant behavior occurs in the general population.
At first blush this may seem counterintuitive, even outrageous. We tend to think of psychopathy as the province of criminals, with leadership qualities that may land someone atop a fringe religious cult, say – not in a boardroom. But before discussing the research, let’s consider for a moment why this possibility is actually less bizarre than it may initially seem.
The hallmarks of the psychopathic personality involve egocentric, grandiose behavior, completely lacking empathy and conscience. Additionally, psychopaths may be charismatic, charming, and adept at manipulating one-on-one interactions. In a corporation, one’s ability to advance is determined in large measure by a person’s ability to favorably impress his or her direct manager. Unfortunately, certain of these psychopathic qualities – in particular charm, charisma, grandiosity (which can be mistaken for vision or confidence) and the ability to “perform” convincingly in one-on-one settings – are also qualities that can help one get ahead in the business world.
Lipman then goes on to excerpt portions of Snakes in Suits: When Psychopaths Go to Work, by Paul Babiak, Ph.D., and Robert Hare, Ph.D
Several abilities – skills, actually – make it difficult to see psychopaths for who they are. First, they are motivated to, and have a talent for, ‘reading people’ and for sizing them up quickly. They identify a person’s likes and dislikes, motives, needs, weak spots, and vulnerabilities… Second, many psychopaths come across as having excellent oral communication skills. In many cases, these skills are more apparent than real because of their readiness to jump right into a conversation without the social inhibitions that hamper most people… Third, they are masters of impression management; their insight into the psyche of others combined with a superficial – but convincing – verbal fluency allows them to change their situation skillfully as it suits the situation and their game plan.
This whole subject gets complex as here is another Forbes link that lends extra color and better elucidates what I am saying:
Do psychopaths make good CEOs? ~ Scott Olster
Olster’s answer is both yes and too much of a good thing is not necessarily good. Here is the snippet that well sums up the complexity:
So, murder and other violent actions aside, should we all embrace our inner psychopath if we want to get ahead in life? Not quite, but Dutton does offer a few qualities that non-psychopaths should work on if they want to get through life a little easier. They include mental toughness, focus, and mindfulness. Dutton notes that cognitive behavioral therapists have been helping their patients develop these qualities for years now. Buddhists have been on the case for even longer.
How does all this fit with the chain of events surrounding the SRHS disaster from 2008 to the present as we know it today from a big picture standpoint?
It seems that Chris Anderson shares some common personality traits of those in his cohort in having both charisma along with the trait of being a keen observer of human nature. Empirical research also tells us that having a charismatic CEO does not lead to organizational excellence over the forgone alternatives. In fact the above research showed that “charismatic CEOs seem able to influence their compensation packages and stock prices but not other indicators of firm performance” which is a nice way of saying the charismatic in general excelled on gaining enhanced personal benefits associated with the position but were not distinguished from their cohort in general from an organizational performance standpoint.
Now here are some clues as to what is driving my thinking courtesy of Jackson County Special Counsel Billy Guice:
First the PR preface to start the story:
It was the perfect storm.
Brewing like a hurricane inside Singing River Health System, an unsustainable pension plan sat, slowly losing its financial footing. Then blew in the effects of a struggling — some would argue, failing — community hospital.
When the two combined, it created a kind of devastation from which the system could not recover.
This is why I am saying the retirees are being scapegoated. You see folks April Haven is faithfully telling the story the Supervisors want told, the problem is the story the Sups are telling is not accurate in my view as a practicing CPA. Defined benefit pension plans are certainly out of fashion overall and there are reasons for that trend which generally do not center around the plans being “unsustainable”.
In fact I am professionally aware of certain tax strategies involving succession planning at certain types of organizations that actually center around a defined benefit pension plan. The key to making these business strategies pay is achieved by funding the Pension Benefit Trust, a tax free entity, that are usually structured with what most people would term an overly generous benefit that requires large annual employer contributions proportionate to the size of the organization but this expense is tax deductible subject to certain limitations.
All this is a long way of saying that it is possible, in fact I’ll step out and say that in my opinion it is more likely than not, the SRHS pension plan became “unsustainable” because the powers that run the hospital (and this goes beyond Chris Anderson) wanted the plan to become “unsustainable”. In fact I do not think the $88 million dollar management perpetrated accounting fraud has any direct bearing on the fact that SRHS did not fund employer contributions to the SRHS pension plan beginning in 2010 as much as it is the symptom of a much larger problem that struck the pension plan coupled with structural decline in the community hospital marketplace. Again Billy Guice gives us the clues:
“They are exposed to market fluctuations,” he said. “They are a little too aggressive in their investments.”
Guice said it’s risky because in 2007 the system completely overhauled its portfolio.
Instead of a more diverse portfolio that included investments such as government obligations, mortgages and corporate notes and bonds, SRHS began putting more and more into private equity funds.
Guice said he’s not been able to get a clear answer for why SRHS began focusing on the high risk, high reward private equity funds.
At the end of fiscal year 2007, the plan had $152.5 million in net assets, Guice said.
By the end of FY2008, the plan had $126 million, but that figure dropped to $107 million by the end of the same calendar year.
What happened in 2008? The last financial crash related to out of control real estate speculation. Market declines wiped out a third of the pension trust’s value which meant the unfunded liability skyrocketed. Part and parcel to this is to spot the BS in Mr. Guice’s account and that would be here:
By 2009, the pension was funded even less at 72.3 percent, and the unfunded liability had grown to nearly $47 million.
At the time that huge funding gap was discovered, Guice said SRHS was already running tight on money in operations, so leaders decided to make a partial payment of only $2 million in 2009.
Guice said when it became apparent that the health system could never catch up, he believes they gave up.
Let’s highlight the BS. In the fall of 2008 the stock market cratered. At September 30, 2008 the investment valuation rout had already begun and the SRHS unfunded liability to the plan would have jumped at that time by something on the order of $26,000,000, a huge amount for a $300,000,000/year organization. By the end of 2008 the unfunded liability was even worse and no one will be able to convince me Chris Anderson and Mike Crews did not understand the implications of that fact. What I am saying is “the huge funding gap” cited by Guice was not finally discovered in 2009 as some sort of after the fact epiphany. Remember folks, as CPAs both Anderson and Crews would have been keenly aware of the growing problem, at the minimum on a monthly basis when the trusts investment statements came in, especially in light of the construction and property acquisition binge the hospital was on during that general time period which was also a major consumer of cash.
So economic factors are hitting the health system hard. The decline in the stock market meant the unfunded pension liability would soar just when SRHS was becoming cash poor due to now questionable real estate acquisitions coupled with a building spree. In response SRHS reduces and then stops contributing to the pension plan altogether during the same time period net income was being overstated by not recognizing the proper amount of bad debts associated with uninsured patients. Is it possible the bogus net income was created to offset those pension liability increases? My guess would be yes based on what we now know but it is deeper than that in my opinion.
When a family has more month left than money due to an unforeseen circumstance what is the typical response? Usually it is to prioritize the bills that need to be paid over items that ideally can wait. Normally someone does not delay paying their bills simply because they want to stiff their creditors. They delay out of necessity with the full intent of making good. We know from Scott Taylor Trustee that SRHS delayed paying year end bills in order to help meet the financial covenants attached to the outstanding bonds which also shows how keenly aware Anderson and Crews were of the financial situation at SRHS, even while they were misleading the employees and pensioners as to the health of the plan. The fact patterns fit a coverup so then the question becomes what was the gang covering up?
Let’s change the scenario to a family that always has more month than money because during the days of easy money for real estate, they bought a house that was too expensive for their level of income subject to a mortgage with escalating payments. Worse, after the crash the house declined in value so it is now worth less than the mortgage. This situation was actually common back in 2008 and 2009. What does that family do?
- Arrange for a short sale and hope the lender lets them off for the difference as an incentive to maximize the remaining value of the property. Once out from under the unaffordable house the family then moves into something they can afford.
- Stop making payments and live in the house for as long as you can. After all some lenders actually prefer the houses remain occupied during the foreclosure process (and after until resold).
Human nature is to stop making the mortgage payments. The SRHS plan had a termination clause the 2011 Trust audit report describes:
As a CPA I read that footnote to mean any haircuts to plan participants at plan termination are built into the plan as a matter of operation of the plan itself because after all, you can only distribute the assets you have at the date of termination. As a practical matter, not making the contributions to a pension plan that could be terminated at pretty much anytime fits the definition of a bill that can ride in my opinion. Better yet once the plan is terminated that pesky unfunded liability disappears from the books, boosting net income in the process. From a “matching standpoint”, that increase in net income due to plan termination in theory could have offset the entirety of the overstated receivables, essentially burying the earlier net income misstatements.
What if management wanted the pension plan to become unsustainable as a pretext to terminating it? Besides not funding it annually what would be another action that would speed the process along? The sustainability of most defined benefit pension plans including the one at SRHS inherently depends on employee contributions. The SRHS plan carried a 3% employee match, certainly a low percentage for the type of plan but a source of income to pay plan benefits nonetheless. If I were in Anderson’s shoes faced with that unsavory dilemma I’d starve the plan of new participants, which over time would insure ever decreasing amounts would go to the plan from the employees. Worth noting, a possible solution not involving plan termination would be to increase the employee contribution rate from 3% to 10% for example and raise the years of service required for a full retirement. Anderson went the opposite direction making a decision that would make the plan less financially viable by starving it of new participants. Again from the 2011 Pension Trust Audit:
I guess this lengthy post is a long way of saying that I think the SRHS pension plan became unsustainable because the powers that be wanted it that way as a pretext to terminating it. I do not think this strategy was a secret kept only by Chris Anderson and Mike Crews. In fact I think it is more likely the SRHS Board of Trustees was fully aware what Anderson was doing with the pension plan.
This brings me to a couple of final points the first being the division of current SRHS employees from the retirees. It is natural because it would be easy to point to the retirees as the number one job security threat faced by current employees. The last thing a worker bee wants to have happen is a SRHS bankruptcy filing. I’d argue that such a viewpoint is fundamentally misguided and here is why. The retirees had to work at SRHS at least 10 years to become vested in the plan and except under certain circumstances had to work at least 20 years to begin drawing benefits. What that means is the vast majority of those participating in the plan were the quintessential model long time employee that maybe took a little less in the paycheck over other employment alternatives in order to gain the retirement benefit. Twenty years of service is a long time and it signals a deep commitment to the institution. A commitment evidently shared today by currently employees like registered nurses Kim Henderson and Tammy Nance, who spoke at the last Board of Supervisors meeting defending management. There is absolutely nothing wrong with these dedicated employees speaking their minds but if they had asked me this is what I would have told them before they spoke out.
When the retirees were working at SRHS, they most certainly shared your commitment to the institution. When you leave what makes you think that current management is going to treat you any better on post retirement benefits when the going gets rough and bumpy? You’d be fooling yourself if you think they’ll treat you any different.
Finally there is an assertion that new management at SRHS is somehow different and better than the old. That is a load of horse crap folks. It was current CEO Kevin Holland that lead the charge to terminate the plan in the dark of night without disclosure late last year. And it was CEO Holland that mislead the employees in March 2014 and for that we once again circle back to Billy Guice:
The lies — or missed opportunities to tell the whole truth — soon reached other employees and retirees as well, the county investigation found.
In 2011, for example, then-CEO Chris Anderson sent out an email to employees about their benefits, yet there was no mention of the pension plan contribution freeze.
In addition, Guice said, all the employees ever got regarding their pension was a basic, vague pension plan balance.
“It was nothing a rational person could get and understand,” he said.
Then in March 2014, current CEO Kevin Holland sent out a weekly update email to employees regarding the status of the pension plan, and it did not mention the system’s failure to contribute to the plan.
The email explained how the pension operated.
“The fund grows … through the 3% contribution participants make through the payroll process,” the email said. “It is also funded by SRHS, as well as grows through investments in the stock market.”
At the time that email was sent, SRHS had made it standard operating procedure to not contribute to the plan.
Meet the new boss at the Singing River Health System, he is the same as the old one. In my opinion neither acted alone or on their own initiative.
Next up Slabbed will explore how Jackson County handles its own pension woes plus we’ll do some more speculating on whether the County’s political leaders were aware of the SRHS financial problems earlier than March, 2014.