It was 1980. The prime interest rate that banks charged their most creditworthy borrowers had risen to an unprecedented 21.5%, and I had a little more than a year under my belt as a sales representative for a financial services company.
It was also a time that I was conversing with the chief financial officer of a financially challenged institution about an upcoming project—conversations that soon progressed to the point of a proposal. To my disappointment, though, the one that I was directed to deliver was priced at a sizable premium to prime. Clearly, we were taking undue advantage of the institution’s weakened position.
But I was young, inexperienced and on the bottom rung of the corporate ladder. So, I explained to the CFO that our proposal took into appropriate effect his organization’s current circumstances, just as I had been instructed to do.
He accepted my explanation and agreed to move forward with us.
My company required a board of directors resolution ratifying the institution’s acceptance of our proposal, given the dollar magnitude of the prospective transaction. The CFO complied. I then brought the executed document back to corporate headquarters and asked for the contractual agreements to be prepared.
All standard procedure. That is, until I reviewed the completed documentation package and noticed the insertion of a new provision that called for a large, nonrefundable commitment fee atop the high rate of interest the institution had agreed to pay, to be remitted up front.
I was mortified. Surely this must be a mistake, I thought. But it wasn’t. The senior executive who set the pricing for my original proposal decided that because the organization was willing to pay so high a rate, no other options were obviously available to it. Consequently, or so his thinking went, the prospective borrower would then have no alternative to but to accept the added fee as well.
I couldn’t believe it. Not only had the financing cost for this transaction become unreasonably exorbitant, but the CFO—whose trust I engendered—would rightly feel betrayed.
I didn’t know what to do except deliver the now-toxic agreement, call attention to the added provision and apologize for the reprehensible bait and switch. But the CFO was a gentleman. He had no discernable reaction. Instead, he told me that he would bring it up at the next board meeting and let me know the outcome.
Two weeks later, his assistant called and asked that I retrieve the signed documents along with a check for the upfront fee. Months later, the project was completed, the financing agreement triggered, and I was paid a commission for making the sale.
I later learned that soon after I had left the contracts with the CFO to be signed, he called an emergency meeting of the board, presented our transaction and alerted the members to the revised terms.
The board approved our deal.
And fired the CFO.
Years passed, and I registered to attend an industry seminar. During the reception, I happened to see the former CFO on the opposite side of the room. I had been relieved to hear that he soon found another position. We briefly made eye contact. I nodded and smiled wanly.
He turned his back to me and left the room.
When I teach the section on business ethics to the students who take my entrepreneurial finance course, I talk about the five constituencies but for whom business owners would not be in business in the first place: customers, lenders, investors, suppliers and employees—and the responsibility they have to faithfully honor the commitments they make, whether orally or in writing.
What I did 40 years ago was tantamount to defrauding my customer. Sure, some might say this was a small-F fraud rather than a capital-F, as I did not engineer the scheme. But not to me. Nor to the person who paid for my disgrace with his job.
Frauds are unsustainable business models. At some point, the truth is revealed, the perpetrators unmasked, and those who were misled realize the true cost of believing in something—or someone—that was not worthy of their trust.
I learned a hard lesson from that experience. The executive who directed my actions did not. Not long after, the board of directors fired him.