Battling Back from Betrayal

December 21st, 2010 by Daniel McGinn

When dishonest employees are exposed within his young business, an entrepreneur faces tough choices – and ultimately rights the ship.

Brought to you by Liberty Mutual's
The Responsibility Project

Stephen Greer hired the first general manager for his fast-growing company’s Mexican operations after several evenings drinking tequila with the man in Guadalajara. Impressed by the candidate’s industry contacts and apparent honesty, Greer thought he’d found the perfect person to help him expand his Hong Kong–based scrap-metal-processing enterprise, Hartwell Pacific—until nine months later, when he realized the new hire was scamming him for thousands of dollars. The second general manager in Mexico wasn’t in the job much longer before suppliers began telling Greer he was taking kickbacks. The third set up a fake supplier bank account in his wife’s name and siphoned off more money. And as this was going down in Mexico, Hartwell Pacific was experiencing similar pilferage in Malaysia. All told, fraud and theft in emerging market locations cost the company several million dollars—and imperiled its founder. “By the time I was 28, I was a multimillionaire. By the time I was 30, I was almost bankrupt,” Greer says. “That happened because we lost control of our business.”

Developing economies offer some of today’s best growth opportunities. But Greer’s experience is a vivid illustration of what can go wrong when an entrepreneur expands without understanding local cultural and legal contexts. Greer didn’t realize that the corollary to cheap local wages is a poor population that may be tempted to supplement paychecks by stealing from employers. He underestimated the risk that local managers, who are often not well supervised by headquarters, will demand kickbacks or pay inflated prices for supplies from relatives or turn a blind eye to employees who are walking away with inventory. “It’s our job to make it difficult for people to steal from us. In a poor country, they’re going to be tempted,” Greer says. “We left our wallet on the ground.”

Until the problems surfaced, Hartwell Pacific and its founder were enjoying an impressive rise. Greer, who was born in Pittsburgh, graduated from Penn State in 1991. After a disappointing job search on Wall Street, he cadged a frequent flyer ticket from his father and moved to Hong Kong, couch surfing with friends while trying to start a business. He settled on scrap metal trading. After the Asian economic crisis of 1997–1998, he shifted to scrap metal recycling, a complex business that requires warehouses, machinery, and a big employee base. He expanded into Malaysia, Thailand, China, the Philippines, and Mexico. In 18 months during the late 1990s, Hartwell Pacific went from two employees to 200 and opened eight operations in seven countries.

When companies grow that quickly, problems often emerge. Doug Tatum, a financial consultant and the author of the 2007 book No Man’s Land, compares this to the gawky adolescent phase in human development. For small businesses, the awkwardness manifests itself as they outrun their existing financing or outgrow the capabilities of their managers. These organizations are, as Tatum puts it, “too big to be small but too small to be big.”

The problems can be even more acute in developing economies. “People look at a good business model, cheap labor, and an untapped market, and they see great advantages,” says Robert Brenner, a vice president at Kroll, a global risk consulting firm. But they don’t account for the vastly different societal rules regarding company property, bribery—and, crucially, enforcement of laws and contracts. And distance precludes close supervision.

“Your day-to-day sense of what’s going on—whether inventory is going out the door, whether sales numbers are real—is hard to get a handle on,” Brenner says. He describes a large luxury goods company that thought its factory in Southeast Asia was running two shifts per day. In fact, the local manager was running a third shift, making products that competed with his employer’s.

For Hartwell Pacific, the biggest strain was a lack of control systems. Greer was so focused on new markets that he glossed over niceties like accounting procedures, inventory audits, and reference checks for new hires. “He wanted to grow fast, and he thought it was a situation where he could fix it later,” says his wife, Mei Greer, who was the chief financial officer during that time. “He kept thinking that if he could control the market, we could keep moving. But we couldn’t catch up with him, and we didn’t have the right people.”

When he finally realized the extent of the fraud in his nascent empire, Greer pulled back, eventually liquidating the operation in Mexico. He also instituted a system of close oversight. He appointed local finance managers who reported directly to headquarters, creating checks and balances on local general managers. He started requiring three signatories for all company checks. He installed metal detectors to prevent theft. Once a month, the local managers flew to headquarters, where they compared revenues, costs, and overall performance. If one plant seemed to be overpaying for supplies, or if revenues seemed out of line with inventory, Greer began asking hard questions—ones he should have been asking all along.

On a personal level, Greer says, he was too trusting before the fraud and too suspicious—maybe even a little paranoid—immediately after it. But his initial naïveté, he believes, did serve a purpose: “If I had been too distrusting, I never would have made the move to incorporate, build a team, and expand into countries where I couldn’t speak the language. It takes optimism and faith in people to achieve that.” In Starting from Scrap, a memoir of his 12 years building the business, Greer writes that one of his biggest lessons was the need to balance growth with control, to give remote employees both independence and supervision. “I learned to love bureaucracy, because it’s better than bankruptcy,” he says. “People need freedom to think and act, but they should be aware that their actions and performance are being measured.”

It’s easy for Greer to look back on this episode, because Hartwell Pacific’s story has a happy ending. Shortly after he dealt with the fraud in his far-flung operations, the global commodities markets began to boom. By 2005 the company had annual revenues of more than $200 million and was solidly profitable. Greer sold Hartwell Pacific to a publicly traded Australian recycling company; he won’t disclose the price but says the proceeds “set my family up for life.” As part of the deal, he stayed on for three years to lead the Asian operations.

Since 2008 Greer has been a senior adviser at Oaktree Capital, a private equity firm looking to acquire a company and appoint him as its CEO. If that happens, he says, his near-bankruptcy experience will serve him well—he thinks of it as the next best thing to an MBA, which he never was able to pursue. And if he has the opportunity to lead another company into emerging markets, presumably he’ll check references before hiring someone he meets at a cantina in Guadalajara.