10/23/95 BLIND AMBITION: Part 2

BLIND AMBITION: Part 2
How the pursuit of results got out of hand at Bausch & Lomb
Some of those sunglasses would then be sold to legitimate distributors the next quarter. But sources allege that Chan also may have been boosting sales by diverting sunglasses into the gray market. Hong Kong was a natural origin point for gray-market activity, because Chan was selling glasses for 10% to 30% below B&L's prices in the U.S. and Europe. In part, the low prices were due to local competition and to compensate for high duties in some countries. But sources also say Chan would use his marketing budget to fund secret rebates to customers, in effect lowering their buying price.
Ray-Bans seemed to find their way into the gray market at unusually low prices--perhaps with Chan's direct complicity. In either case, those prices allowed buyers to undercut wholesale prices in Europe and elsewhere. One gray-market dealer told BUSINESS WEEK that he approached Chan personally in early 1992 about buying discounted sunglasses for shipment to Italy and Latin America. Chan directed him to two Hong Kong companies, he says. Invoices provided to BUSINESS WEEK show that one, Chamberyan Thom, offered to sell the Aviator for $25.13 apiece in early 1992 to this buyer. During that period, a large Hong Kong optical chain says it was buying the same model directly from B&L for about $32 to $34. The gray marketeer says many of the glasses ended up in Italy.
S.L. Chiu, the manager at Chamberyan Thom whose signature is on the invoices, denies that Chan referred people to his company for discounted glasses and denies selling such glasses. But when pressed, he added: ``We are not doing that now.''
In 1994, the Hong Kong unit started to unravel. Local sources say the end came when accounts receivable hit the roof, in part because ba dan sales that had been booked to legitimate distributors weren't being paid for. Gill declines comment on this allegation. After B&L auditors started the in-depth probe, they found about a half-million sunglasses worth roughly $12.5 million piled up in a rented warehouse. How they got there remains in dispute. Gill says that in the face of a weakening economy, Chan simply sold too much inventory to distributors starting in late 1993, then decided--without company approval--to take back large amounts in September, 1994. Other sources say some of the glasses were indeed returned by customers, but many were a result of faked ba dan sales.
Chan retired in late 1994, as did his controller, James H.K. Tsang. B&L says both had planned to retire anyway. Neither responded to BUSINESS WEEK's requests for interviews. Several other managers also left around the same time. When the problems came to light in 1994, McCluski says B&L, its auditors, Price Waterhouse, and the audit committee of the board reviewed the situation in Hong Kong. Their conclusion: ``The problems did not materially affect Bausch & Lomb's published financial statements.''
Outside accounting experts say B&L probably could not have known if the Hong Kong unit was indeed using tricks such as fake invoices. But if they could not have known specifics, sources close to B&L contend that lax headquarters oversight shares in the blame. Happy with Chan's numbers, they say, Rochester paid little attention to how he produced them. The targets for 1993 ``were too big for Southeast Asia,'' says one B&L source. ``I tried to be conservative, to bring it up to headquarters.'' But headquarters, he says, simply told him they hadn't tried hard enough.
One way to gauge a company's culture is to examine how it assimilates an acquisition. What core values does it instill into a new unit? What kind of conduct is encouraged or frowned upon?
Take the case of Outlook Eyewear Co., a big player in under-$30 sunglasses that B&L acquired in 1992. The money-losing company became a training ground for B&L executives. McCluski, now B&L's CFO, was Outlook president from 1992 to early 1994. He was followed by James T. Horn, who early this year was sent to clean up Hong Kong. But in turning Outlook around, the two employed a variety of questionable methods. When Red Ball day loomed and sales were behind target, McCluski or Horn would simply ship some orders in advance, and hope to avoid early shipment penalties. Other times, reps were told to offer incentives such as price cuts or extended credit to move up a shipment by a few days. Outlook also would ship goods early but tell truckers to take their time.
McCluski says neither he nor Horn engaged in these practices. He says some goods were shipped early in the first few months, but only because of warehouse snafus. ``We'd never intentionally ship before a customer's start date,'' he says. And he denies salespeople ever offered discounts to move up sales. But BUSINESS WEEK's account was independently confirmed by eight different sources. If they are correct, Outlook, too, began skirting the line of acceptable accounting practices. ``It's questionable'' if deliberate early shipments should count as sales, says Robert S. Kay, a professor of accounting at New York University's Stern School of Business. ``If it's done deliberately and on a widespread scale, it's wrong.''
After the SEC investigation was launched early this year, B&L underwent a remarkable transformation. Gill and other top executives ordered the company to follow the most conservative practices possible. Insiders and customers say there's no more quarter-end wheeling and dealing. Sunglass distributors are asked to have no more than three months' inventory in stock. Bonus policies have been changed to reflect broader, longer-term goals. B&L has also now shifted to global management of its product lines. Sales for the first half were up 8.5% to $1 billion while earnings from continuing operations apart from one-time changes were down 10.3% to $61.6 million.
B&L's board, too, has lit a fire under management. The audit committee met several times to review B&L's 1994 financial statements and insisted that controls be strengthened. ``The board made it very clear that this type of behavior wasn't acceptable,'' says Kenneth L. Wolfe, chairman of Hershey Foods Corp. and head of B&L's audit committee. But he, too, sees 1993 as an isolated case. ``Unfortunately, when you have operations scattered throughout the world, people do things they shouldn't,'' he says. ``But I don't think there's a larger problem.''
As for Gill, he seems to reserve little blame for himself. ``It's generally accepted that day-to-day operations of a company are overseen by the chief operating officer,'' he says. ``I don't mean to pass the buck, but...as chairman I'd have only a general understanding of what happened.'' Gill also professes astonishment that any B&L exec could have gotten the message that ethics should take a backseat to numerical goals. ``I have no idea'' why people would believe that, he says. ``We think we are the most honorable beings on the face of the earth.''
Corporate ethics specialists suggest Gill's explanation may be less than complete. Blaming individuals for multiple ethical lapses ``is typical of companies that are well into denial,'' says Warren Bennis, chairman of the Leadership Institute at the University of Southern California's business school and the author of several books on corporate leadership. ``They see no pattern despite the accumulation [of events]. A few bad people become scapegoats for the system.''
A sharp dissonance between the message that senior executives believe they're sending out and the message heard by those down the line is also typical of companies with ethical problems, say ethics specialists. The CEO ``may believe he's telling them not to get into trouble,'' says USC's Bennis. ``But if all the verbal and nonverbal signs sent out focus on making the numbers, he's giving them license to do unethical things.''
Real questions remain as to how deep the changes at B&L go. Even Johnson and Chan--the two division heads held most directly responsible--were not punished. And the two men in charge of bringing B&L's questionable methods to Outlook have been promoted and put in charge of cleaning up. ``It blows my mind,'' says a current sales manager at B&L. ``If it's so important now that we cross the i's and dot the t's, what happened to the people who were doing all this before?''
As for Dan Gill, he still sits in the chairman's office in Rochester, awaiting a move to his sparkling new headquarters. One former executive remembers a videotape presentation featuring Gill that was sent out to remote locations after the SEC investigation and B&L's disastrous 1994 results were announced. In the video, this executive recalls, Gill blamed the problems on poor decisions by individual division presidents and said the divisions needed closer monitoring. ``It was like slapping the hands of children,'' says this executive, ``when they were really acting on Daddy's orders.''

Isolated Aberrations -- Or a Way of Business?
Current and former execs say that under CEO Dan Gill, maintaining Bausch & Lomb's double-digit sales and earnings growth was all-important, creating pressures that led to unethical behavior throughout the company:

HONG KONG B&L's Hong Kong unit allegedly inflated revenues by faking sales of Ray-Ban sunglasses to real customers. Some of the glasses were allegedly then sold at cut-rate prices to gray-market dealers. B&L auditors discovered policy violations last year, and Gill appointed new local managers.

MIAMI By accepting cash payments and third-party checks, a Miami warehouse may have indirectly helped launder drug money until mid-1990. Senior B&L managers tolerated the lucrative trade, say former executives. B&L declined comment.

CONTACT LENSES Under pressure to beat sales targets in 1993, contact lens managers shipped products that doctors never ordered and forced distributors to take up to two years of unwanted inventories. These practices appear to violate acceptable accounting standards and have led to an SEC investigation. B&L blames the problems on overaggressive division executives.

GRAY-MARKETEERING Forced to meet inflated sales goals, many U.S., Asian, and Latin American managers knowingly sold contact lenses and Ray-Bans to gray-market distributors, creating a huge gray-market problem for B&L. The company says such sales violated policy and denies its practices led to the problem.

DATA: BUSINESS WEEK
By Mark Maremont $by With Joyce Barnathan in Hong Kong