Risk Management

Small-town Blues

Some suggest that an out-of-the-way corporate headquarters may place added pressure on the finance staff to comply with dicey executive orders.
Ilan MochariMay 5, 2004

Does locating the headquarters of a large company in a small town increase the likelihood of fraud? Richard Breeden, the court-appointed watchdog of WorldCom-cum-MCI, thinks so. The former chairman of the Securities and Exchange Commission says that WorldCom’s headquarters location in Clinton, Miss. (population: 25,000), placed added pressure on its finance staff to comply with dicey executive orders, since the nearest job alternative was “800 miles away.”

“If you’re in New York City and someone asks you to do something you don’t feel comfortable with, you can do a dozen interviews in a 12-block radius. That gives you some bargaining power,” says Breeden. “That’s not going to happen if you’re out in the boonies somewhere.”

Perhaps none of the companies that experienced large-scale fraud was based in a more remote location than Adelphia Communications Corp. The cable-television provider, which has been in Chapter 11 bankruptcy for the past two years, had been headquartered in Coudersport, Pa., a town of 5,390 on the border between Pennsylvania and New York. It was in “Coudy” that many of the alleged wrongdoings of founder and former CEO John Rigas and his sons, Timothy (CFO) and Michael (executive vice president), took place.

Adelphia CFO Vanessa Wittman, who has been following the trial of her executive predecessors, agrees with Breeden that location was a factor in the fraud. She notes that Chris Thurner, a former accountant at Adelphia, testified that he was threatened with being fired when he questioned transactions. “In that situation, you feel that if you say no to your boss, you’re out of a job with no chance to find a new one,” says Wittman.

Certainly employees at Tyco International Ltd., which is incorporated in Bermuda but until recently handled U.S. operations from Portsmouth, N.H. (pop.: 21,000), didn’t have a lot of options if they decided to walk. (Like Adelphia, which relocated to Denver after the scandal, Tyco’s new management moved the company to an urban setting: Morristown, N.J.)

What does that mean for companies like Wal-Mart Stores Inc., based in Bentonville, Ark. (pop.: 19,730), or Maytag Corp., in Newton, Iowa (pop.: 16,000)? Experts contend that a remote location is only one contributing risk factor. Executive recruiter Peter McLean of Spencer Stuart admits that recruiting is tougher for small-town companies, but he dismisses the small-town theory. “At WorldCom, it had nothing to do with people trying to protect their jobs,” he says. “It wasn’t the underlings who were responsible, it was the leaders.”