A Scrushy Lesson for All Business Leaders

Meet Mr. Richard Scrushy, the former CEO of HealthSouth, currently serving a seven-year federal stretch in Texas on a bribery conviction—he bribed former Alabama Gov. Don Siegelman—but that isn’t what were here to talk about. No, Mr. Scrushy has been brought to the Jefferson County Circuit Court in Alabama—HealthSouth is headquartered in Alabama—to face a civil suit brought by the company’s investors and stemming from the rather self-serving management style he adopted during his time as CEO. According to a story on BhamWeekly.com:

A derivatives action on behalf of HealthSouth investors is seeking damages from the former CEO. The lawsuit is a civil case in state court. Scrushy risks paying damages if he loses, but he will not face further time in prison.

Why are the stockholders suing Mr. Scrushy? They are suing because when he was the CEO of this publicly-traded company he used the firm as an extension of his own wallet. Moreover, as a man of grand ambition and expensive taste, he did it big.

Plaintiff’s lawyer John Haley described how a fairly small $7 million account fraud ballooned over a period of seven years (1996-2003) to approximately $2.7 billion. Haley also discussed how Scrushy would use the company for personal reasons, directing business to companies that he had set-up and spending $40,000 on breast implants for the members of his girl band, 3rd Faze. The band itself was paid by HealthSouth and traveled to events on HealthSouth aircraft and on HealthSouth’s dime.

The end result of all this was that HealthSouth, the company that Mr. Scrushy was supposed to be leading, was being bled to the tune of $2.64 billion in accounting fraud and another $1.23 billion in fees and legal settlements once that fraud was brought to light. Now, the investors want to get some of that back.

It doesn’t help that the main witnesses for the prosecution are the five HealthSouth CFOs who already confessed to being in on the fraud, but Haley described it like this: it’s like a car accident, and Scrushy was at the wheel. The CFOs are the ones riding with Scrushy at the time of the accident. “He was the driver of the vehicle that caused the damage,” Haley said.

To give the trial judge, Circuit Judge Allwin Horn, a complete picture of the damage done, Scrushy’s successor, Jay Grinney, took the stand to testify about the conditions he found when he took over in 2004 and what he had to do to keep the company out of bankruptcy. He discussed to utter lack of any internal controls, describing how there was virtually nothing in place to catch or prevent fraud and malfeasance, saying that the situation was “unlike anything he had seen at other companies.” To deal with the mess, Grinney said that HealthSouth was forced to amend nearly 90% of its accounts to reflect real numbers, spending more than one million man-hours to clean up the fraud. According to Grinney, it is the responsibility of the CEO to make accurate statements to shareholders and the public and that any CEO who saw the same documents that Scrushy saw “should be able to see fraud of the magnitude of HealthSouth’s fraud.”

In other words, assuming that Scrushy was not somehow brain dead during his time at HealthSouth, he would have had to know about the fraud going on in his company, and if he knew about it, there had to be a reason he did nothing to stop it; a reason such as he was in on it! That is kind of circumstantial, but the breast jobs for his girl band and all that business going to his side companies do go a long way toward bolstering the plaintiff’s case. We’ll have to see how it all plays out.

The Bottom Line

The case against Richard Scrushy is a pretty strong one, in spite of the felonious nature of the plaintiffs’ star witnesses, but it’s not done yet. Regardless of the trial outcome—remember the OJ trial—there are some important lessons for every business owner, president or CEO.

Lesson One: You are not a rock star. It is sad but true. A better analogy would be the captain of a ship. You cannot afford the stereotypical attitude, vanity and self-centeredness of a rock star while you are at the ship’s helm and dodging icebergs.

Lesson Two: There is always someone you need to please. It may be your partner; it may be your investors. It is always your customers. If you don’t, you have a problem. During this time when corporate heads are rolling and CEOs are regarded as highly as the US Congress, the odds of being punished for even perceived wrong-doing is rising by the day.

Lesson Three: Your primary responsibility is to your investors, partners and employees, not to yourself. This is a corollary to Lesson Two: To please these people, you have to put the business first. In other words, do your job. Scrushy did not do his job as CEO and now he will be made to pay for that.

Leadership is about service. It is about making sure that the people following you have what they need to get their jobs done effectively. It is about creating an open and honest atmosphere in which everyone can pull together for a common goal. The Scrushys of the world pervert this and everyone suffers as a result. That is not leadership, its not creativity and its not cleaver. It is theft, no more, no less, and it cheats everyone connected to it.