by J. Edward Ketz
Recently, I was thumbing through Stephen Covey’s 1989 bestseller, “The Seven Habits of Highly Effective People.” I felt awed by the thought that the financial world would have been very different over the last few years if managers and directors and their professional advisors had read the book and heeded its message.
Looking only at the title, one might have the impression that this book dealt with time management or time efficiency or how to manage people effectively or how to make decisions with resolve. Like ocean water splashing on a sandbar, this notion turns wet when one reads the subtitle - “Restoring the Character Ethic.”
And the opening quote alone reinforces this perception: “There is no real excellence in all this world which can be separated from right living.”
In the first part of the book, Covey claims that the American culture shifted from the “character ethic” to the “personality ethic” some time after World War I. By character ethic, he means the belief in principles of right living and that individuals should abide by those principles, including trust, justice and telling the truth. By personality ethic, he signifies either the idea of positive thinking and inspiration or the direction of public relations. Under this ethic, one does not worry about principles, but about how one relates to others. At the extreme, this ethic could turn “manipulative, even deceptive.”
Covey asserts that while positive thinking and PR constitute important aspects of one’s personal development, they “are secondary, not primary traits.” He then argues that the “Character Ethic is based on the fundamental idea that there are principles that govern human effectiveness,” and so those who aspire to become effective people must acquire and develop the character ethic. The seven habits that he espouses rest on this basic assertion.
The first three habits relate to a person’s moving from an attitude of dependence to a state of independence. These habits are: (1) be pro-active; (2) begin with the end in mind; and, (3) put first things first.
The next triad of habits nudges a human being from a position of independence to a state of interdependence, a status that recognizes the existence of other people with an appreciation for them as individuals. These habits are: (4) think win/win; (5) seek first to understand, and then to be understood; and (6) synergize.
The last habit is: (7) sharpen the saw to improve one’s performance in each of the habits.
If Arthur Andersen’s partners had observed the first three habits, they would still be practicing accounting today. Recall the firm’s creation of a very aggressive, indeed incorrect, accounting for telecoms. Arthur Andersen proposed that a telecom such as Qwest enter into a swap agreement with another telecom, each exchanging some broadband for the other’s.
Any objective observer would realize that the swap consisted of like assets, thus preventing the recognition of any gain or loss according to APB Opinion 29 (ignoring any boot). But the partner in charge of such financial contraptions should have asked where such a product might take the firm.
Would investors and creditors accept such an accounting? Would regulators? If not, what would the consequences consist of? Apparently, nobody at Andersen asked these questions and precious few cared whether Qwest or WorldCom or any of the other telecoms lied to the investment community.
This leads us to the second triad of habits that concentrate on acknowledging others instead of trying to destroy them in some sort of eat-or-be-eaten mentality.
Managers and directors and corporate lawyers and auditors apparently think that investors and creditors are the enemy or that it’s OK to cheat them. If managers and directors and their professional advisors would attempt to devise win/win situations with the investment community, everybody would be better off.
And how many managers, directors and accountants even today attempt to understand the needs of investors, creditors and other stakeholders in the business enterprise? Unfortunately, too many do not care, and instead search for “I win, you lose” opportunities.
I find it irritating and disappointing that some managers have begun to criticize the increased costs of corporate governance, including the costs to improve internal controls and the costs of external auditors. They even have the effrontery to claim that these activities don’t provide any value! Didn’t these managers learn anything from the recent collapse of the financial markets?
I suggest that we all re-read Stephen Covey’s book and ponder how to develop a character ethic. If we apply the material in the book to our professional lives, much improvement will result.
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