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The Battle for Business Ethics
Polaroid's Final Days Come Into Focus

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By TParadiso
August 26, 2003

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Polaroid's Final Days Come Into Focus

The long awaited federal bankruptcy examiner report on Polaroid was finally completed. Much to the chagrin of retirees and stockholders who requested the examination, management did not intentionally undervalue the company to force it into bankruptcy. Quite the opposite, management did all it could to hide the company's rapidly deteriorating financial condition.

Many Polaroid employees not only lost their job but their life savings. Thousands of retirees and disabled employees saw their health and life insurance benefits go up in smoke. They had believed the company's management manipulated Polaroid's finances to induce the bankruptcy. They also contended the eventual sale to Bank One for $255 million was a sham that greatly undervalued the company's true value.

I'll admit, I was hoping the stockholders and retirees were right. I've tracked the Polaroid bankruptcy saga and the pathetic and unethical leadership of former CEO Gary DiCamillo that led to the company's demise. A Candidly Speaking column written in May 2002, offered a scathing assessment of Mr. DiCamillo and his fellow executives. It would have come as no surprise if management had taken liberties.

Alas, as far as the bankruptcy is concerned, management is not at fault. At least with respect to unnecessarily tanking the company. That hasn't changed my opinion of DiCamillo and his greedy band of colleagues. Sour grapes you say. Think I just can't admit I was wrong?

It is true admitting to being misguided in my judgment is not something that comes easy. To put it bluntly, there's practically nothing I dislike more than having to say I was wrong. Regardless, as much as it pains me, on the rare occasion when a miscalculation occurs, I do step up because it's the right thing to do. But with respect to my assessment of the Polaroid management team, no error has occurred.

The bankruptcy examiner's report may have cleared them of intentionally bankrupting the company. However, it found ample evidence not all was not kosher. Examiner Perry Mandarino's report disclosed numerous examples of dubious conduct.

In July 2001, less than three months before the bankruptcy filing, Gary DiCamillo was granted a special bonus of $1.4 million by the board of directors. Special, that's not exactly the word I would use. They also gave him $25,000 to pay legal expenses related to "protecting his interests in a potential bankruptcy filings." That's interesting. Hold that thought.

A month after granting DiCamillo's special bonus, five board members received payments ranging from $63,000 to $272,000. The payments were deferred compensation and were made just six weeks before the bankruptcy. Despite being entitled to the money, the payments raised eyebrows immediately after they were disclosed.

In a Boston Globe article dated December 21, 2001, Polaroid spokesman Skip Colcord said, "They (the board) were certainly aware of the financial challenges the company was facing, but didn't have any prior knowledge of a bankruptcy when the deferred compensation plan was stopped."

Hmm, something's slightly askew with the timing. They weren't aware bankruptcy was imminent but they gave DiCamillo's twenty-five grand to cover his legal costs in the event of the bankruptcy they were not aware of. Insightful. Must be why they rose to the stature of board members.

Polaroid's auditor, who amazingly wasn't Arthur Andersen but KPMG LLP, failed to inform stockholders the company was on the brink of collapse by issuing a "going concern" warning on the 2000 financial statements. A going concern statement by an auditing firm indicates a company may not have the financial wherewithal to stay in business.

The aforementioned Mr. DiCamillo apparently played a major role in convincing KPMG not to disclose the company's precarious position. Problem is he didn't do it in the conventional manner, which would be to convince the partner in charge of the Polaroid account. Instead, he called Stephen Butler, chairman and CEO of KPMG. Evidently the two men served together on the board of an undisclosed nonprofit. Whatever he said must have worked because the warning wasn't included in the company's financial statement for another six months. Fortuitous. Had it happened earlier it may have cost Gary D. a cool $1.4 million.

As you would expect, KPMG "remains confident that it acted appropriately at all times and stands by its actions in this manner." That must be why they fought tooth and nail to prevent public disclosure of the entire report. No doubt they just wanted to protect client confidentiality, even though the client was "dead."

Polaroid was drowning in a sea of debt and was in danger of defaulting on its loan covenants. In order to avoid a default they had to maintain a certain level of cash. To accomplish that, they resorted to accounting gimmickry that allowed them to delay the inevitable by about a year. These included some shady maneuvers with a deferred tax asset and dubiously switched some long-term debt to short term. Hey, what's a few marginal accounting decisions among friends.

Finally, one of the accusations made by retirees and shareholders turned out to be right. They claimed former executives who stayed with the new company received part ownership. At least eight did. Most notably among the eight are former general counsel Neal Goldman and former CFO William Flaherty.

Why are these two of particular note? Because both men were present during the auction process that resulted in Bank One's winning bid. Mandarino indicated in his report he didn't know whether the two men had discussed a potential ownership position before or after the sale of the assets were approved. Gee, that's a tough one. I'm guessing there might have been some casual chitchat.

FYI: Goldman and Flaherty were also the beneficiaries of a number of large payments in the six months prior to the bankruptcy filing. Goldman received two incentive compensation payments: $85,000 in April and another $75,000 in August. Flaherty got a $100,000 signing bonus when he joined in June. That's odd. Flaherty gets a hundred grand for coming on board in June only to see the company go belly up in October. Lucky for him he managed to get a piece of the new company huh? Talk about a lucky break.

Now you know why there is no reason for me to admit being misguided in any way for having nothing but utter disdain for DiCamillo and friends.


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