Why Do We Idolize Entrepreneurs?
A Note From The Editor
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Our culture idolizes entrepreneurs, but some of our most celebrated business leaders are just as unethical as the next guy … maybe more so.
Last year, rapper and entrepreneur 50 Cent filed for Chapter 11 bankruptcy protection after making more than $100 million off his record label, his clothing line and a vitamin water company that was acquired by Coca-Cola. He’s not broke, mind you; just using the court system to stiff creditors for $28 million.
Theranos founder Elizabeth Holmes, who at one time was heralded as an entrepreneurial rock star, pushed a breakthrough in laboratory testing to consumers, knowing full well that it wasn’t ready for prime time. Tens of thousands of blood test results had to be voided. The question is, how many misdiagnoses did that cause?
This is nothing new. I can rattle off dozens of similar stories.
In late December of 2001, ImClone founder and CEO Sam Waksal tipped off family and friends that his company’s new cancer drug, Erbitux, was about to be rejected by the FDA. He was convicted on insider trading and tax evasion charges and served five years in federal prison.
Martha Stewart, who traded on the leaked information, spent five months in prison for lying about it to investigators. The media mogul was forced to resign her position as CEO of Martha Stewart Living Omnimedia as part of a five-year ban from being an officer of a public company.
The great irony of the story is that Erbitux was later approved by the FDA and has been a major drug in the fight against cancer. In 2008, ImClone was acquired by Eli Lilly for $6.5 billion. A little patience and ethics and Waksal and Stewart could have avoided the whole sordid mess ... and been richly rewarded.
The good news is that bad actors can redeem themselves.
Waksal, who has a doctorate in immunobiology, was released from prison in 2008 and founded his second biotech company, Kadmon Holdings. Last week, Kadmon, which is developing drugs for cancer and autoimmune disorders, raised $75 million in a successful IPO. And Stewart is once again chairman of her company.
You may not feel empathy for these entrepreneurs and I’m not at all sure they deserve it. Hubris is not exactly a likeable leadership trait. But they somehow managed to bounce back from their self-made disasters. What they lacked in humility and ethics they made up for in tenacity.
The same can be said of many famous entrepreneurs, some of whom narrowly avoided ugly consequences for ethical lapses by virtue of little more than dumb luck. Case in point, one Steven P. Jobs.
Around the same time that events were unfolding at ImClone, the tech industry was embroiled in a much bigger and more far reaching scandal of its own: stock option backdating. Executives at dozens of tech companies received back-dated stock options to take advantage of lower exercise prices.
The practice was entirely legal, except for one catch: the net gain is a taxable expense for the company. Failing to report it accurately or covering it up is accounting fraud.
By 2008, dozens of top executives -- mostly CEOs and CFOs -- at Altera, Broadcom, Brocade, Cirrus Logic, KLA-Tencor, McAfee, Take Two, Verisign and about a dozen other technology companies had lost their jobs over the fallout. Many more had to give up their ill-gotten gains. One or two received prison terms.
One of the companies hardest hit by the scandal was Apple. The Securities and Exchange Commission (SEC) investigated two large backdated option grants: one for 4.8 million shares to the company’s executive team and another for 7.5 million shares to Jobs, who was CEO at the time.
An internal investigation by Apple resulted in SEC charges being brought against two top executives, both of whom had benefitted directly from the backdated options. SVP and General Counsel Nancy Heinen mainly took the fall for $40 million in underreported expenses, but CFO and director Fred Anderson was also severely sanctioned.
Interestingly enough, Apple’s investigation exonerated Jobs. By chance, his options were underwater and had been cancelled and replaced with restricted shares, so he never benefitted from the backdating. He also got a pass for being unaware of the accounting implications, despite circumstantial evidence to the contrary. A similar investigation at Disney into backdated options at its Pixar subsidiary also cleared Jobs of any wrongdoing.
It was just plain luck that neither investigation found a smoking gun that would have forced directors and the SEC to do something that none of them wanted to do: fire and bring charges against the nation’s most valuable and celebrated CEO.
The moral of all these stories: Nobody deserves to be hoisted up on a pedestal; we’re all human.
For more on what it takes to be successful in today's highly competitive business world, get Steve’s new book, Real Leaders Don’t Follow: Being Extraordinary in the Age of the Entrepreneur, and check out his blog at stevetobak.com.