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Ethical Leadership Challenges at Diamond Foods Diamond Foods, a nut and snack company, was founded in 1912 by a group of cooperative walnut growers, known as "Diamond of California." Over the years, Diamond Foods grew mostly by acquiring other brands, including Pop Secret, Kettle Foods, and Harmony Foods. It also introduced another line of snack nut products under its Emerald Brand. Today the company is owned by Snyder' s-Lance. Inc. and is headquartered in Charlotte, North Carolina. Snyder' s-Lance, Inc. purchased the company for $1.91 billion in a cash- and-stock deal after an SEC investigation. In addition to Diamond, the Snyder s-Lance, Inc. product line includes the brands Cape Cod, Lance, numerous notable competitors such as Kellogg, U.SA., Frito-Lay, USA Inc., and Mondeleze International, Inc. Brian Driscoll was named President and CEO of Snyder' s-Lance, Inc. in June 2017. He had previously been President and CEO of Diamond Foods, a position he assumed after its former President and CFO were let go due to the scandal at Diamond in which financial reports were falsified. The scandal originated in 2005 under the management of the preceding President and CEO, Michael Mende. His business philosophy was "Bigger is Better, which ultimately led to a corporate culture of poor judgment and fraud. As part of his growth strategy, he secured millions in loans to finance the acquisition of Pop Secret. He later attempted to purchase Pringles from Proctor and Gamble. Had the merger been successful, Diamond Foods would have been the second largest distributor of snack foods in the United States following PepsiCo. In 2011. Mark Roberts an analyst with the Off-Wall Street Consulting Group, raised questions about Diamond's accounting practices. He accused Diamond of incorrectly reporting its payment to suppliers. Diamond would pay growers in September for walnuts that were delivered in Diamond's fiscal year 2011 which had already ended in July. This significantly impacted Diamond' financial statements which if done intentionally, would be illegal. Initially Diamond denied any wrongdoing, arguing that the payments were an advance on the future 2012 crop and had nothing to do with the previous year's crops. Growers refuted this claim, arguing that they were told that the payments were, in fact, for the previous year. Investigations revealed that these payments were made to inflate the fiscal 2011 results by shifting costs into the upcoming year. An internal investigation found that CEO Michael Mendes and CRO Steven Neil had systematically improperly accounted for growers' payments in 2010, 2011, and 2012. They skewed Diamond s financial results and reported an EPS of $2.61 when the correct number was $1.14. As a result, they took home millions of dollars in additional compensation. The "improved* EPS resulting from the accounting fraud was, in part, an attempt to follow Menes' aggressive philosophy and acquire Pringles from P&G. Diamond needed to improve financial performance at any cost in order to meet conditions laid down in the loan convenants and seal the deal. One of those conditions required higher performance standards for factors that affected management compensation. Higher reported earnings would allow for greater compensation. The improper accounting of earnings was an attempt by management to deceive the lenders about Diamond's true earnings. Another ethical concern raised at this time was the fact that Diamond's CFO had a seat on the company s Poard of Directors, which created an overlooked conflict of interest that could have easily lead to a lack of oversight by the Board Subsequently, the company was investigated for criminal fraud, and a new audit was undertaken. This also disrupted the Pringle acquisition process. In addition, Diamond had difficulty meeting the financial report filing deadlines, Their fraud resulted from lack of quality controls and from the inability or unwillingness of top management to set proper ethical standards, thus encouraging more unethical behavior by employees. For example, after payment irregularities were discovered, Diamond's management denied the claims, and insisted that the system worked to "optimize cash flow for the growers." Stock prices dropped to a six-year low of $12.50. The lower stock price was the result of restated historical financial results as well as of the current year's performance. The restated financial results removed a previously reported $56.5 million in profits due to the accounting fraud. The price decline was also impacted on rumors that billionaire investor and activist, David Einhorn, was shorting the stock. The combination increased investor uncertainty about Diamond's future profitability, and the Pringle deal with Procter & Gamble was lost. Following the SEC investigation, Mendes and Neil were placed on administrative leave. Mendes subsequently resigned, and Neil was let go. Mende did not receive promised insurance benefits as his resignation was considered a violation of his duty as CEO. He was required to pay back the 6,665 shares of Diamond common stock that he received from fiscal vear 2010 and also reimburse the company for his 2010 and 2011 bonuses, which totaled $2.743.400. This amount was taken from his Retirement Restoration Plan, but he still received a payment of $2,696,000. After restating its profits, the company still faced risks of litigation, regulatory proceedings, government enforcement and insurance claims. The SEC levied a $5 million fine as settlement of the fraud allegations. The SEC charged Neil for falsifying walnut costs and Mendes for his role in the misleading financial statements. Mendes forfeited $4 million in bonuses and benefits and also paid a penalty of $125.000. Though it was not proven Mendes participated in the scheme, regulatory authorities believed he should have known about Diamond's incorrect financial statements. Neil initially fought the SEC charges but settled by paying $125,000 civil penalty. Investors filed lawsuits against Diamond because of the misrepresentation of its financial standing, a $100 million settlement was made by Diamond Foods. When Brian Driscoll took over Diamond, he outlined his strategic plan to advance the company past its ethical mistakes. It began with improved internal controls of financial statements. Six new directors were appointed to strengthen the board. A forward-looking statement of risks was issued, which identified problems that may arise in the future. It included the Company' s Code of Conduct and Ethics Policy, and a statement about top management responsibility in setting the proper tone for the organization. He replaced the CFO and installed new company financial reporting processes in which managerial approval was needed for material and non- routine transactions. Ethics training, led by the CFO, reinforced proper accounting procedures and training for employees. It led to a better understanding of financial reporting integrity and ethical expectations. He modified the walnut cost estimation policy and added inputs each quarter which had to be reviewed and signed off by cross-functional management. His efforts • Referen X Pricing pdfto u X convert Course X 6 60% fostered better documentation and oversight of accounting procedures and better supplier communication. A Grower Advisory Board was introduced to receive input from the growers and enhance communication between growers and the company. Diamond followed the Sarbanes-Oxley internal control policies involved with grower accounting procedures The controls on accounts payable and invoice processing were revised. A third-party report known as "Internal Control-Integrated Framework* evaluated the effectiveness of its internal controls. The reporting controls were implemented and improved communication, which allowed better transparency. These new controls enabled the company to escape bankruptcy and restore shareholder confidence which ultimately led to the Snyder s-Lance, Inc. merger. Under Brian Driscoll' s leadership Snyder s-Lance, Inc. has an Ethical Code of Conduct with questions and answers on the webpage. QUESTION What were the organizational A culture factors that caused misconduct and accounting fraud? Pease explains in detail. 650 words CASE 2 Sseko Designs Engages in Social Entrepreneurship Liz Forkin Bohannon, Founder and CEO of Sseko Designs, a socially minded fashion and design company from Portland, Oregon, uses the company as a platform to empower women in Uganda and Bast Africa. In 2008, after travelling to Kampala, the capital city of Uganda, she was appalled to see the extreme poverty of the people, especially that of its women. She discovered that the top 2 percent of high school girls who were eligible to go to a university were required to return to their villages and work for 9 months while saving their money for tuition. Most of these girls did not continue their education because the families needed the money for their subsistence. She also learned these women preferred to work rather than receive a handout. Her first attempt at a socially conscious for profit business was a short lived chicken farm. It was then that she recalled an incident from her college days whensshe made a sandal that used ribbons to avoid he noise made by flip-flops, so she redesigned them by purchasing rubber flip-flop bottoms tied with ribbon. Liz believed she could improve upon her original design using materials obtained locally. For two weeks she traveled through Kampala looking for suppliers while gaining skills in sandal making through tutorial videos on YouTube. She developed a business idea for a work-study model for Ugandan women who showed college potential. Liz would offer women employment during the nine-month period they had to earn enough revenues for college. The women would make sandals and other products that could be sold to consumers in the United States. In the process the Ugandan women would not only learn skills but also have the chance to earn their wages to go to college. Of course, making the sandals was only half the battle. The Bohannons also had to find buyers. Together the couple traveled the nation for six months in their Honda Odvssey minivan often sleeping in the van and showering at truck stops to save money 3 to try and convince stores to purchase sandals from Sseko Designs. In 2009, this became the first product offered by Sseko Designs. The sandals became an immediate success when Martha Stewart recommended them in her gift ideas and their inventory was soon depleted. To continue the company s growth, Liz and her husband, Rob, sought funding via the popular ABC reality show Shark Tank, on February 13, 2015. Entrepreneurs Mark Cuban, Barbara Corcoran, Kevin O' Leary, Lori Grainer and Robert Herjavec were offered 10% stake in Sseko for a $300,000 investment. At that price, the company would be presumed to be worth $3 million. On the other hand, Sseko had suffered a $90,000 loss in 2014 and anticipated it would lose money in 2015 as well. The Bohannons explained that the reason for the loss is that they are putting more money-into development and are hiring more salespeople. They expressed their belief that as more Americans learn about Sseko, its unique products, and its social mission, sales would increase, and the firm would recoup its profits. It is not unusual for an organization to incur debt or suffer losses as it expands. Debt, managed correctly, could actually help a firm because it allows it to take on opportunities it would not normally have with limited funds. However, a negative cash flow often turns off investors, and the sharks were no exception. Of greatest concern to the sharks was the belief that the Bohannons overvalued their business. However, the Bohannons explained that they could not lower their valuation due to the deals they had already struck with the four private investors. Mark Coban made an offer for 50% ownership which they declined. The sharks maintained that was too high a value, especially for a company that, in their judgment, was too focused on its social mission and philanthropy and not enough on profitability, The Bohannon' s countered that many of today' s retailers and their customers value companies with a social mission. This, they maintain, is especially the case with the millennial generation, their target customers. They noted that younger consumers are less concerned about brand names and more interested in the story behind the brand. They believe that many customers prefer buying from firms that share their values. They maintain that if a company supports a cause the consumer cares about. then the company's brand will be viewed more favorably. They told the sharks that this will be the key to increasing Sseko' s sales and profits. While the Sharks deelined the opportunity to invest in Sseko, their expäSure on the show resulted in a 500-fold increase in traffic on their website and a 1000% increase in sales for the month of February. In addition, other investors came forward. They received the entire investment that they initially wanted from the sharks without having to decrease their estimation of the value of their company. Sseko Designs has already had a major impact on Uganda. Not only is it the largest foot wear manufacturer- resulting in more jobs for Uganda as well as for the Ethiopian and Kenyan artisans who create crafted products for Sseko to sell- it also serves to empower women. Currently, Sseko employs 65 women im Uganda and is the country s largest footwear manufacturer. Their product offerings have expanded to include apparel, footwear, jewelry, accessories and leather bags Today, the company supports the education of women by providing scholarships for their employees. Kach employee Is encouraged to save b0% of their salary which goes into their personal Sseko savings accounts for 9 months, after which the account receives a 200% match from the company. Additional funding for these scholarships comes from the Sseko Fellows program. This program began two years ago and has 300 Fellows. Sseko fellows are US social entrepreneurs who sell the company products direct.