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Investor Alert: Is Masterworks.io a scam?

Posted in advice, investing, scams by commorancy on April 9, 2022

calm male artist painting on canvas using paintbrushes

Every once in a while, someone decides to sell shares in “something” new. Today, that something is Fine Art. Let’s explore the pitfalls of investing in this idea.

Investing in Art

Purchasing art has always been about buying a single piece of artwork outright. Meaning, you find a piece of art you like and you buy it. That means that piece of art is yours to display in any way you wish. This type of purchasing of art is (and remains) the most optimal way to purchase art. You buy it outright and you own the entire work in totality.

However, there are exceptions to the above. If you purchase a reproduction of an original work of art, this purchase offers much fewer rights to the buyer. Some rights that you forfeit when purchasing a reproduction include reproduction of that art. Meaning, you can display your purchase in any way you choose, but you cannot photograph it and/or sell photographs of that art. The reproduction rights remain with the original work’s owner. Only the person who owns the original artwork may reproduce the work in any way.

Mass Produced

You may be thinking, “But, mine is painted with real paint on real canvas”. That doesn’t matter. What matters is if the painting is the first and the original. Many painters reproduce their works using paint on canvas, many times over. Typically, these reproduction paintings are painted by employees (in a sort of paint-by-number situation), but is not always painted by the original artist. These are painters hired for the sole purpose of creating a copy of the original. These reproduction paintings are sold typically at a fraction of the original art’s cost. These reproductions rarely become valuable simply because of the total number produced. It’s the same reason why many mass produced items rarely go up in value.

Because the original was painted by the actual artist, this original painting is the one that holds value. That’s not to say that every original painting by every artist will increase in value. Many do not. It depends on the artist, the artwork and that artist’s contribution to the art world. Perhaps in time that artist might be seen in some kind of historical light, thus propelling their artwork values upward.

Because an original art piece might spawn many “authorized” copies, copies that could become very popular in sales, that makes the original work much more valuable. For example, an original Thomas Kinkade painting would be worth far more than one of its many reproductions. That doesn’t mean reproductions can’t increase in value, but they will never be valued the same as the original first painting.

Masterworks.io

Masterworks takes the idea of Fine Art to an “investment” level. By that I mean instead of owning the actual painting / art piece in full, you only own a “share” (or small portion) of the art. In reality, this type of investing is an abstract concept. At the moment, Masterworks appears to focus solely on paintings. You might be wondering, “How does owning a small piece of a whole actually work?”

The short answer to this question is that it doesn’t. Investing in a tiny piece of a valuable work of art doesn’t do anything but ultimately make Masterworks as a company rich. You, in fact, don’t own anything but the knowledge that you “might” own a small piece of a work of art. You also own the knowledge that that investment might, maybe return value IF the painting is (eventually or ever) sold at a profit. In essence, you’re essentially placing a long shot bet that eventually that painting might be sold for a profit.

Let’s understand some of the problems with this idea.

Where is that painting?

Good question. If you’re buying into an investment object, you definitely want / need to know exactly where that “object” is physically located in the world. If you invest in a company, for example, you know where their headquarters are. You know who their executives are. You know their physical address and phone number. You can call and talk to someone. You can even find out their sales plans, the products or services the company sells and how much they make in revenue per quarter. Keep in mind that some private companies may be unwilling to disclose their sales numbers. With public companies, that company’s revenues are public knowledge.

Buying into a Masterworks painting, on the other hand, you don’t know exactly where it is. You don’t know under what conditions it’s being stored. You don’t know who currently has possession of it. Masterworks can “assure” you that that item is safe… but is it? Paintings are particularly susceptible to deterioration if not kept under the strictest of environmental controls. Artwork is also susceptible to theft. Both of these issues are difficult to manage at the best of times.

One might think that paying to invest in small bit of a painting might help protect it from being lost to time. It’s a lofty ideal. It’s, unfortunately, an ideal that when considering the underlying logistics of it all, make the investment seem highly risky. It’s also an ideal that may not hold true.

An investor should always ask, “Who owns the original work?” You must also consider the following:

  • Is Masterworks attempting to sell shares in art they don’t legally own?
  • Is Masterworks actually in possession of the art they claim to have bought?
  • Did Masterworks actually buy the painting or is it under some kind of “lease”?
  • Is the art being stored in correct conditions?

Who knows for sure? These are all very good questions. They’re also questions that should greatly concern you when considering “investing” in art through Masterworks.

Paintings as Investments

Art is entirely subjective to every person, but it is also highly volatile in its salability. What I mean is that paintings, particularly abstract paintings, go through ebbs and flows, waxing and waning in popularity and, yes, value. What might seem like an excellent painting today may be seen as outdated and worthless next year. Art’s value comes and goes, sometimes as a result of changing style trends. Painting values are, as I’ve said above, highly volatile. Way more volatile than investing in company stocks, bonds or even precious metals.

Sure, this investment type is yet another “thing” you can put some money into as part of your larger investment portfolio and hope to see a return on investment, but it may not return anything. The problematic issue with this concept is, can Masterworks be trusted or are they simply another Bernie Madoff? This is the ultimate question.

Novel Concept, Poorly Realized

The idea of share investing in art is definitely novel, even Masterworks states as much. However, is it realistic?

First, there’s the idea that you only own a tiny fraction of a painting. How does that work anyway? Are they planning on cutting up the piece of art if the art price bottoms out and there’s nothing left to pay you back your investment? Clearly, no. They’re simply going to tell you that you’re out your money and they STILL get to keep that art even if it’s worthless. Not only do you NOT get the art after investing, you don’t get your investment back if the painting is sold at a loss.

Second, there’s the logistics of where this art is stored. You have no idea as an investor. Unless Masterworks intends to spend boatloads to create a location to store all of this art under perfect archival environmental conditions (highly unlikely) AND they can prove that fact to investors, the art is then completely open to deterioration, decay and possibly destruction or even theft. Some art, in fact, may be produced using non-archival media. This means that no matter how well a piece of art is stored, it may still slowly (or quickly) deteriorate to the point of no longer even being art (or saleable) even within a few months. You can’t stop deterioration, which actually makes some art less valuable every day that passes.

Third, who actually owns (and holds) that art? Are art owners selling the full piece of art, selling it under consignment or are they selling only the concept of ownership as shares, so then Masterworks then manages that “concept trust”? If Masterworks is selling shares in works of art they do not rightfully own and possess, that is very close to a Ponzi scheme. It may also be very illegal. That’s like someone claiming to sell you the Brooklyn Bridge. Sure, anyone can claim to sell it, but they do not own it. They do not even own a piece of it. Giving money to someone claiming to sell you the Brooklyn Bridge is, thus, the very definition of a scam and fraud. With Masterworks, be very careful.

Masterworks needs to also be very careful in what they are doing, making sure their ‘i’s are all dotted and their ‘T’s are all crossed.. Here’s what Masterworks has to say about their own model and art investing:

‣ We have a novel and unproven business model.
‣ Masterworks issuers do not expect to generate revenue, so investors will only recognize a return on their investment if the painting is eventually sold at a profit
‣ No market exists for the shares and paintings are highly illiquid, so you must be prepared to hold your investment for an indefinite period.
‣ Each Issuer owns a single painting and this lack of diversification magnifies risk.
‣ Your ability to trade or sell your shares is highly uncertain.
‣ Paintings may be sold at a loss.
‣ Costs will diminish returns.
‣ Investing in art is subject to numerous risks, including (i) claims with respect to authenticity or provenance, (ii) physical damage, (iii) legal challenges to ownership, (iv) market risks, (v) economic risks and (vi) fraud.
‣ Issuers are totally reliant on Masterworks.
‣ Masterworks has potential conflicts of interest.
‣ Timing of sale of a painting is uncertain.

https://www.masterworks.io/

photo of a man arranging in a depot

None of the above (or even their web site) describes how or where the art is actually stored or maintained. It almost solely discusses the risks of investing. The fact that Masterworks also finds the need to call out that purchased shares are “illiquid” says a great deal here. This word means that there are few participants, thus low volume, which ultimately means a very low chance of ever being able to sell out of purchased shares.

Consider stocks and bonds. You can likely sell out of any of these positions in about a day. With Masterworks investments, the low volume and few participants means once you invest, you’re likely stuck holding onto that investment until the painting either sells (at a loss or profit) or fails to sell at all. Masterworks doesn’t really state what happens if you can’t sell your position with a painting that never sells. I guess you’re ultimately out your investment money.

Art Storage

As with any artwork and has been stated above, it’s important to understand how and where the art is stored and who actually owns the art. None of this is explicitly stated on Masterworks’s site. I’m actually taken aback by the fact that for all the deluge of investing information provided, there’s equivalently a severe lack of information regarding the artwork itself, where it’s stored, how it’s managed or who owns it while it’s being held for shares. That’s a big, nay HUGE, problem in my book.

However, Masterworks does say this…

Screen Shot 2022-04-06 at 6.23.51 PM

What this ultimately says is that Masterworks locates and purchases art. It doesn’t exactly state what “purchase the work” actually means. Are they taking possession of the work or are they leaving it at the gallery where they found it to remain on sale? They do claim to hold a work of art for 3-10 years. I’m uncertain how this works exactly considering the second half of that “OR” statement. Only questions, few answers.

As I said, for as much information as there is about risk of investing, there’s equally as little about the actual artwork itself… which is huge red flag 🚩.

Any business straddling both the art world and the finance world should be, at once, both engaged in explaining how and where the art is to be stored and handled, but also able to explain the risks of investing. Clearly, Masterworks is only interested in documenting half of this equation.

Volume Investing

Masterworks hopes that as more people jump on board with their share idea and begin investing, a larger and higher volume share marketplace will eventually emerge to allow for easier share trading. At this moment, however, Masterworks has stated that any position you buy is likely to be “illiquid”, thus implying that this is a new market with limited options for selling shares.

In other words, if you invest $100 into a painting and gain 2 shares, those shares in that painting are most likely to remain yours until the painting sells at a profit or a loss. The question is, though, even if the painting sells, does Masterworks have the painting to sell? I’m still skeptical.

Art Galleries

Masterworks, as a company, needs to be a whole lot more forthcoming about all aspects of its business operations, especially surrounding where, how and who stores the art after it’s purchased.

What Masterworks should have planned for is purchasing a number of galleries around the United States (or around the World) to support their business model. Instead of simply attempting to sell the investment share idea, they should have worked this idea full circle.

4cycle

Here’s where things get a little dicey for Masterworks. Instead of creating a complete sales cycle (or sales funnel as some might call also it), they leave out one very important piece: Galleries. Clearly, they have Acquisition, Investments and Sales. Though, questions about Masterworks’s acquisition process remains, primarily because they don’t have galleries.

To really make this business model complete, Masterworks needs to own and operate its own set of galleries. Why galleries? Owning galleries sets a tone that you know how to properly store and manage expensive artwork in addition to offering a place to actually sell it properly. Though, paintings can be sold through auction houses as well. Masterworks is attempting to sell art for millions of dollars, yet Masterworks doesn’t really state where, or more specifically how, that artwork is managed and stored. It’s an important and necessary piece that’s conveniently missing.

Owning galleries keeps Masterworks honest and allows for auditing. If there is a gallery where a specific investment work lives, investors can visit the gallery and physically see the art they have invested in. This verifies that the artwork exists, that it is genuine (not faked), that it’s in Masterworks’s possession and that it can be verified. Without this piece, verification of the actual art remains an open question. Images on a web site do not verify that anything is genuine. Talking to someone on the phone doesn’t verify authenticity either. Only physically seeing the artwork in person can an investor verify the painting and, thus, verify that their investment is backed by something real.

Questions without Answers

That leaves too many open questions. Questions like, “What exactly am I investing in?” Like, “Where is the artwork stored?” Questions like, “Is the artwork properly stored for a long sales wait?” Like, “Is the artwork in the possession of Masterworks directly?” All of these questions could be easily resolved if Masterworks owns and operates a set of galleries… or at least a showroom at the bare minimum.

Additionally, with Masterworks ownership of galleries, this means you, as an investor, can physically go see the art you’ve invested in. You can see if it’s as it appears in the images. You can see it on exhibit, or at least it can be brought out for a viewing. You can see that it’s being kept and stored in appropriate environmental conditions.

There are so many questions surrounding the art itself, there is absolutely no way I would recommend anyone to invest in Masterworks… unless you absolutely like throwing money away on odd “investment” strategies. Knowing where that art is, how it’s being stored and if it’s being stored appropriately combined with knowing you’re able to view the actual art is extremely important BEFORE investing any money in a share of a painting.

Ponzi Scheme?

While I previously made reference to Bernie Madoff and his ponzi scheme, that statement isn’t intended to suggest that Masterworks runs a Ponzi scheme or that it intends to make off with your money. However, because of so many lingering questions, this business model seems unnecessarily risky… especially not knowing the answer to far too many questions surrounding the paintings.

Additionally, because of the volatility in art sales, as an investor, you must fully trust and be reliant on Masterworks buyers and appraisers to locate “valuable art” that might sell for some amount of money higher than what was paid. However, you’ve no idea if the art they’ve selected will actually sell at all. Because art is so subjective, what a few like, too many others may hate.

It also means betting that some nebulous “whale” will come along and snap up that piece of art (for millions) you just so happen to have invested in. That isn’t likely to happen often. Unless the art is of great historical value (i.e., Leonardo DaVinci or Michaelangelo or even more recent artists like Mark Rothko, Roy Lichtenstein or Marcel Duchamp), art produced by artists living and working today might fetch random amounts, but perhaps not millions. There’s just no way to know what any piece of art might fetch when produced by today’s artists. It’s all a calculated, but a seriously risky best guess.

Unfair to Artists

One thing Masterworks also seems to be attempting is to force art to be sold at far higher prices than it’s actually worth. This is what many collectors attempt to do, usually via auction. That is, Masterworks appears to intend to artificially inflate art prices to make better returns on shareholder investments. The difficulty is that this artificial inflation (nor does the sale itself) benefit the artist at all.

Where Masterworks might “buy” a work for $70,000 from an artist via a gallery, they may attempt to turn it for $1.3 million. That nets a huge profit for Masterworks and a lesser amount for shareholders in that work. However, for the artist, $70k is all they have received. The artist is not fairly compensated from a Masterworks sale.

One might argue that aftermarket sales of art never has benefited the artist. Yes, but here’s a business model that could arguably help bring artists into the fold by making sales on behalf of the artist. This goes hand-in-hand in owning galleries. Instead, it seems Masterworks has chosen an aftermarket sales model that excludes the artist. A model that only makes money for investors and Masterworks, but not for the artist. Intentionally leaving the artist out of this process is entirely greedy and unfair to the artist.

Artists Deserve Compensation

One might think that $70,000 is a lot of money for the sale of a painting. It is. But, it is nowhere near the amount that the artist could have netted if they had sold it for $1.3 million.

Artists shouldn’t be required to invest in their own paintings with Masterworks just to net more profit on an aftermarket sale. Instead, Masterworks should work directly with artists to list the work and then compensate the artist for at least 50% of the sale, either directly or by issuing a 50% ownership stake in the art via shares. The rest of the profits should go to paying out shareholders. This model would not only fairly compensate every artist, but it also fairly compensates the shareholders and Masterworks itself.

Artists are always the one who seem to get the shaft. This problem has existed for many, many years. Masterworks can modify their business model to make sales that directly benefit the artist while also properly compensating shareholders and turning a nice profit for Masterworks. Instead, it seems they have ignored this aspect only to make their sales benefit mostly Masterworks executives the most, leaving out the artist.

Artists vs Corporations

If you’re of the mindset that you would like to see artists fairly compensated for their work, skip these risky investment schemes and buy directly from an artist. If you buy directly from an artist, you are helping that artist, not some random corporate executives operating a more or less faceless and questionable company. If you’re willing to shell out $20 to see a movie actor perform, then why wouldn’t you be willing to pay an artist for the artwork they produce?

Not only can you carry pride in the fact that you purchased art directly from the artist, you also own an original work of art in full, not solely just a share in a work of art that you’ll never see. You can also hold pride in knowing that you have helped the artist produce even more work. Buying art from Masterworks does not, in any way, encourage artists to continue to their craft. In fact, the pittance that the artist might receive in the first sale may be barely enough to cover the time and effort put into producing that painting let alone help them produce future paintings. Art supplies are expensive.

Art Valuation and Secondary Market

Let’s talk about the investing and trading pieces. Masterworks operates a secondary market where shares can be traded. Unlike Wall Street stocks where a stock’s value is based on such fluctuating data points as company profits, company revenue, investor calls, product sales and announcements, analyst recommendations, investor confidence and volume of trading, paintings have no such intrinsic back end data points (other than perhaps trading volume… and even that is drummed up via this questionable investment scheme).

Art valuation is entirely subjective, made solely by a random person appraising its value. What that means is that if you invest in a work that claims to have a $30 “share price”, you’re at the mercy of an appraiser to raise or lower this price. Bid and ask sale prices might influence pricing some, but the pricing seen on the secondary market site is mostly “best guess”. There’s nothing behind that painting to “prop up” its changing value. There are no profit margins, no new product announcements, no analyst calls, no company books to review, nothing. It’s a painting. That’s it. Paintings don’t randomly change value UNLESS they are sold. Anything else purported is a dubious scheme.

Investing in a painting with a fluctuating value is a false equivalence to stock. There’s nothing there to change the value of the share in a painting, yet it seems that the values do change. Why? The painting hasn’t yet sold, so it makes zero sense. As I said, there’s nothing in any painting to justify changes in the share price until AFTER it’s sold. Once a painting has been sold, then the share price will change to reflect the sale price of the painting.

If Masterworks intends to see a painting’s share price fluctuate daily, like stocks, then there’s something seedy, dubious and awry going on. It’s also something that you as an investor need to understand before investing a cent. Intraday changes in painting’s share price prior to a sale is extremely dubious.

One might argue that there are a limited number of shares in the painting. That each share sold makes every share more valuable. I might be willing to accept that argument except a painting can be arbitrarily divided 100 times, 1,000 times or even 1 million times. When does that share division end? You can’t really divide a painting up like that. If you’re going to apply a random investment concept, such as a share, onto a painting, then any division into shares is entirely arbitrary and disconnected and holds effectively a fractional value tied to the current “worth” of the painting. Ultimately, there’s only one (1) painting. Therefore, there should only be one (1) share. When you buy that one (1) share, you buy the painting.

Having this sub-construct of many shares which are separate from the “painting as a single commodity” is not only an odd concept to apply to a physical object, it might be seen as a form of Ponzi scheme. These “shares” are actually an abstract idea applied to a single physical object which cannot be subdivided physically. So, how exactly does this abstract division concept work? That’s exactly what Masterworks is attempting to find out. It’s also why the Masterworks business model is unproven.

Overall

I can’t recommend investing “shares” in paintings via Masterworks for reasons already outlined above. However, let me summarize these points:

  • Proper art storage isn’t explained (very high risk)
  • Returns on investment isn’t fully explained (high risk)
  • Paintings aren’t guaranteed to sell (high risk)
  • No sales benefits given to the artist (problematic)
  • No galleries to physically view or confirm ownership (exceedingly high risk)
  • Art prices are highly volatile (high risk)
  • Art sales are solely dependent on subjective criteria (overly risky)
  • Art values are solely dependent on Masterworks “appraisers” (highly risky, requires high trust)
  • Intraday changes in share prices are nonsensical prior to the painting being sold (dubious)
  • Must trust Masterworks for both valuation and truth (overly risky)
  • Must trust Masterworks that they actually own and possess the art (exceedingly risky)
  • Secondary market attempts to treat shares in a painting like stocks (exceedingly risky & dubious)

Without seeing the painting physically, as an investor, you have no idea if Masterworks truly has that painting in their possession. It’s easy to take a picture and put it on a web site, making claims that they own and possess the work. This then tricks the investor into a purchase. Then, you hold and hold and hold and the painting never sells. In fact, you could come to find they don’t even own the original art. You might find that they’re selling something they don’t even have possession of.

While Masterworks may own some of the work they claim to own, there’s literally no way for an investor to confirm that every piece of art listed is actually in the possession of Masterworks. This problem is exacerbated mainly because Masterworks operate no galleries.

For this reason, Masterworks could be selling you shares in a work that they do not, in fact, own or possess. That’s effectively a form of fraud.

Masterworks would do best to modify their business model to offer a process that can prove they physically own the paintings they claim to own. The only way this is really possible is if they open and operate at least one Masterworks gallery somewhere so shareholders can visit and request a viewing of the art they’ve invested in. This is effectively an audit system which holds Masterworks accountable to all shareholders. Without this change in their business model, investing in any work that Masterwork claims to own is unnecessarily risky. To anyone willing to give money to this company, I say, “caveat emptor!” Let the buyer beware.

Without such basic investor auditing responsibilities, I strongly recommend staying away from this novel, but highly problematic investing concept and stay away from Masterworks as a corporation. That’s not to say this concept can’t be revised to be more functional, but at the moment this concept is just not there. This concept forces an over-burdensome amount of trust and risk onto the investor and off of Masterworks, while leaving too many unregulated, unauditable and manipulable pieces in the hands of Masterworks executives.

Bottom Line: If an employee at Masterworks wished to game the Masterworks system, the lack of proper auditing over this concept would allow any executive far too easy access to game it… thus losing investments from investors and truly turning this into a huge fraud scheme.

Business Concept: B
Business Execution: F+
Scam Risk Level: Exceedingly High, Stay Away
Recommendation: Don’t Invest in Masterworks

↩︎

Business: Does my company have a toxic culture?

Posted in best practices, Employment, workplace by commorancy on April 5, 2022

meeting-1280Toxic work cultures aren’t always obvious, at least not when you’re first hired and not always to managers. As a new hire, these work cultures can become apparent over time, but many times it creeps up on you unaware. Sometimes it’s even ingrained as part of the culture. For managers, a toxic workplace is yours to manage, but too many managers fail to see it and fail to act on it. Let’s explore the business of a toxic workplace culture.

Business Culture

Founders and CEOs must cultivate not only their business ideas and breathe life into them, they must also breathe life into a thriving business that operates and implements those ideas. That means hiring staff. However, hiring qualified candidates and hiring honest, ethical and affable people are two entirely different things. Sometimes, hiring a qualified candidate brings with it toxic baggage under the guise of affable.

Hiring Practices

Businesses today hire primarily based on qualifications, not on interpersonal skills. What this means is that companies end up with all manner of people on the payroll. At least some of these people are likely to be toxic in many different ways. Simply because the hired person can do their job correctly doesn’t necessarily make that person the best choice for your business’s success. A toxic person can overwhelm an office with distrust, negativity, bad morale and seek to destroy the very business itself… all while performing their job perfectly and correctly.

Why? The above example person is toxic, through and through. They have no sense of moral compass and are willing to do anything to torpedo anything and anyone who stands in their way. This is the very type of person you really don’t want to hire. Yet, many companies unknowingly do.

Why does this happen? It happens because businesses don’t have a means to screen for this level of toxicity from any candidate. However, there are some ways to help determine toxicity levels, but very, very few companies employ such behavioral culling during an interview. Keep in mind, though, that even the best of behavioral tests to determine toxicity can be foiled by candidates who intentionally and knowingly practice toxic workplace behaviors. If a candidate seems too ideal even after taking a behavioral test, that person might become problematic when in the workplace.

Interview Questions

Many hiring managers naively believe you can ask simple questions and determine if someone is toxic. While this might work a small portion of the time, a large portion of the time it simply doesn’t work. Unless that toxic candidate is completely naïve about hiring practices (hint: they’re likely very knowledgeable), they’re not likely to intentionally (or accidentally) reveal their toxic nature during an interview. That’s not to say it can’t happen. However, for these naïve candidates, you don’t really have to go out of your way to find them. These candidates will out themselves just by their own stupidity. These naïve people are the exception, not the rule.

Far too many toxic people are the shrewd, cunning and know exactly what they are doing. They see your questions coming and answer them to impress, not reveal their own personal flaws. Any questions designed to elicit personal responses will be turned around into how their work skills have improved business operations.

For a hiring manager, these are the kinds of candidates who are the most difficult to weed out because they are, as I said, shrewd and cunning and seem the perfect candidate, on the surface. They know how to ace an interview and they’ll do it with flying colors. When a candidate seems too good to be true, this should be a red flag in and of itself. No one is that good.

Looks

Many people, particularly those who are overly attractive, can easily betray and feed into the toxic culture problem. That’s not to say that people who appear “perfect”, “flawless” and “beautiful” are all toxic, but as a hiring manager, you should always remain on your toes when considering hiring those who fall into the “perfection” bucket. What exactly is “perfection”?

It’s those men and women who look like they’ve stepped off of a runway, out of an advertisement or look like a model. These people are impeccably fit, immaculately coiffed, perfectly groomed, carry themselves in an overly confident way and both have overly engaging smiles and a personality to match. People who are genuine don’t tend to look or act like this. Everyone is beautiful in their own way, but these people who exude that “perfect model” appearance and who appear “perfectly flawless”, not just in appearance, but also when talking with them, should leave you skeptical as a hiring manager. Nobody is that “perfect”. The problem with many of these people is “ego”, which is one of the primary driving factors behind toxic workplace behavior.

The one job where such beautiful people can be hired, albeit with trepidation, is outside sales. These people can become the face of your sales team. Because sales jobs are grueling, tiring and relentless, hiring flawless and beautiful people to visit with clients can greatly help make a sale. You just have be aware that these people can sow seeds of discord while in the office, if allowed. However, they can just as easily land million dollar deals for the company. Ego has its place… and having overly beautiful people on a your sales team is typically the one and only one job role where ego works.

Yes, I do understand how tempting it is to hire that beautiful office assistant. I get it. They’re eye candy every single day. However, that eye candy for you can turn into a nightmare for everyone else. Be cautious when considering the “overly beautiful” people of the world for internal positions outside of sales.

Note, there is a significant difference between simple beautiful and glamorous beautiful. It’s these glamorous beautiful people who bare watching. “Simple beautiful” people are typically down-to-earth, aren’t overly made up, don’t have perfectly coiffed hair, don’t wear overly flattering clothing and are focused on the work at hand. The “glamorous beautiful” people are overly concerned about their appearance, smell and personality, yet still manage to get their work done. It’s these overly glamorous people who are more likely to fall into the toxic bucket due to ego.

Probation Period

Many companies hire new employees on a conditional basis. Basically, so long as the employee is able to perform properly for a period of time, usually 90 days, then the job becomes permanent thereafter.

Don’t think that a probationary period actually offers enough time to out a toxic employee. Toxic employees are patient. They are more than willing to wait through any probationary period while remaining on their best behavior. They’ll do their job well and everyone will praise that employee’s work efforts. This type of toxic employee is seething and ready to let lose their toxicity, but they’re more than willing to temper that toxicity until they know the job is fully theirs. As I said, this type of toxic employee is overly patient.

Once their “tenure” actually begins, that’s when the employee will slowly begin to unleash their toxicity. Small at first, then no holds barred after several months.

They do this for several reasons:

  1. By being patient allows slowly ingratiating themselves into the company. They can then make their skillset (in)valuable to the point that the company might have a hard time replacing them.
  2. Waiting through that waiting period, they get to know who they can “beat up” and who they must “kiss ass”. It gives them plenty of time to determine the “lay of the land”.
  3. Kissing up. This may start right away, but usually takes a few weeks because they don’t want to kiss up to the wrong person. This type of toxic employee will “kiss up” to their immediate superior to make them feel superior. They’ll accept lots of work from their manager and turn it all in perfectly. In effect, they become the perfect “Yes, man” and a model employee. They might even win a monthly employee award.

Kissing Up and Overly Friendly Attitudes

Someone who “kisses up” and who exhibits artificially friendly attitudes is someone to watch closely. This kind of behavior seems like the flip side of toxic behavior. In fact, these friendly attitudes are actually part of toxic behavior. It’s just that because this behavior seems friendly and nice, it’s difficult to see it as part of a toxic person. Toxicity comes in many forms, but most people tend to classify it with only negative behaviors. Positive behaviors tend not to be classed under toxicity simply because they are positive.

Most toxic people will exhibit a mix of both positive and negative behaviors, but that are both fully tied to their toxicity. They’ll start mostly with positive and then slowly work their way to the negative spectrum. Know that the reason behind the overly friendly attitudes and “kissing up” is tied to their toxicity.  “Kissing up” usually only occurs with their direct manager or managers above them. The toxic person almost never uses these artificially friendly attitudes toward coworkers. In fact, most coworkers will typically see a toxic person as aloof and arrogant.

Lone Workers

However, don’t assume that a lone worker indicates toxicity. Lone workers can be some of the most productive people in your organization and that has nothing to do with toxicity. A lone worker may choose to work alone solely because the “team” around them may, in fact, be toxic and may be the ones holding that person or project back. Lone workers may, in fact, be a product of a toxic workplace culture. Toxic employees tend to want to sabotage the work of others, including that person who is seen as a lone worker. Because it’s nearly impossible to alert anyone in a company to one or more toxic employees without being seen as a “problem”, to avoid that scenario entirely, many employees instead turn to becoming a lone worker to avoid having to interact with toxic workers bent on sabotaging projects (and other employees).

Toxic employees then choose other “behind the back” strategies to discredit one or more lone worker employees. I’ll come back to this “snitching” topic shortly.

The only time a toxic person seemingly works well with others is if the manager explicitly asks the person to do so as part of their job duties… at which point, the toxic person will immediately ingratiate themselves into the “group” as if they were always the best of chummy buddies. For the rest of the group, it’s odd and offputting and they can see exactly what’s going on. For the manager, they see it as a person taking initiative and taking direction well. Managers don’t get to see what’s really going on behind that toxic curtain when they’re not in the room.

However, that group of workers definitely get to see it. They see the artificiality of the attitude. The taking on of extra work. The sometimes doing the work of others. It even can get to the point that the toxic employee will intentionally take work from another, do it intentionally wrong and then attempt to pin that “shoddy” work on the original owner. It’s all overkill, but it’s something the toxic person does to ensure they are accepted by the manager and to make sure their skills are seen as irreplaceable. They sow the seeds of being irreplaceable so that at the point they think that they are, they can fully unleash their toxicity.

Snitching

One behavior that should immediately shoot up red flags to a manager is “snitching” or “tattling”. These traits may seem like a good thing, but these behaviors are, in fact, a form of toxicity. When one employee goes behind the back of another to make disparaging remarks without them having attempted to resolve the issue first, this firmly indicates toxicity.

These types of “snitches” are the very definition of toxic. This behavior intentionally sows seeds of discord between the manager and staff. Effectively, this toxic person is a wedge attempting to drive a huge gap between the manager and the workers… to cast doubt and suspicion on a specific person or group of people.

When an employee steps into your office and attempts to convince you, as manager, that one or more people is/are a problem, red flags should appear instantly. Not about the people being mentioned, but about the person sitting in your office. This is why toxic people tend to like to win “lead” roles on teams. That title gives them more credibility and trust to step into a manager’s office to disparage others.

Unleashed

Once a toxic worker has been working long enough to feel irreplaceable, perhaps even being told so by a manager, the gloves come off. Sometimes they do so after waiting to be promoted to a “lead” position, cinching their toxicity. Becoming a “lead” allows a toxic person to unleash their toxicity in full. Usually, this type of person begins by latching onto the person they like least. In fact, they don’t really care who it is, just that there’s someone they can pour their toxicity onto. And, boy do they ever.

First, they start with subtle hints that the person is doing something untoward (snitching). Nothing specific, mind you, but they sow enough seeds of doubt with the manager that the manager must take a much closer look. These lies, of course, are usually just that. Lies. Yet, the manager now trusts the toxic person enough to begin to believe their lies. The lies usually start with a shred of truth, like claiming the person has been spending too much time on email and not enough working. When, in fact, the person has written the same amount of email they always have. Or, that the employee has been taking too many smoking breaks.

Second, the toxic person may even go so far as to not only lie, but plant “evidence” in the desk of the person they are now directing their toxicity to. Because most offices are fairly open and trusting, many employees leave their desk drawers unlocked while away from their desks. This facilitates the toxic person’s behaviors, particularly planting of evidence.

This leaves trusting employees open to abuse from toxic employees. Depending on the kind of “evidence” planted, it might even elicit probation for the employee or even termination. The toxic employee thinks, “One down, many to go”. This is the start of a huge morale problem which lasts until enough employees leave that there’s no one left to complain.

As employees begin to disappear one at a time, the manager won’t suspect the toxic employee, but instead will fail to understand why so many employees are leaving. Because the now trusted, but highly toxic employee, is now running the show, so to speak, they have full reign to do as they please.

Once they’ve cleaned house sufficiently, this is where they turn their ire onto their manager seeking that job role. At this point, they’ll both lie and plant evidence to implicate the manager in some kind of in-house scam. That manager’s manager might or might not fall for the bait. It depends on how loose or tight that relationship is. At this point, the toxic employee might be discovered, but possibly not.

These toxic employee scams are generally so subtle that it’s hard to trace it back to a specific employee.

Agenda Behind Toxicity

Sometimes there’s an agenda. I’ve seen the above toxic situation unfold before, in fact. Here’s the story.

Note that this didn’t occur in my office, but we got the details of it by all of the employees who fell into it. We had a new person hired. I’ll call her Jill. Jill was a fairly competent worker who did her job well… at least for a few months. After a few months, the manager promoted her to “lead”. At this point, she was still liked by most and did her job fairly well.

However, once promoted to lead. The entire workplace changed. Employees began seeing a side of her they hadn’t seen. Over the next couple of months, her behavior changed towards them. Yet, her manager saw none of this. In fact, her manager got caught up in a problem of his own, which kept his attention focused on that problem.

Within one to two months, her manager left the company and she was again promoted to manager. At once, she fired nearly every single person on the team and simultaneously hired a bunch of her “friends”. Only one or two “original” employees remained. This was her goal. To hire people she wanted and get rid of those she didn’t want.

At this point, the company was in a financially dire situation, not entirely of her making, but her shenanigans didn’t help and her ineptitude in managing was felt over our services being sold… leading would-be buyers to competitors. Over a month or two, her and her new “team” was unable to properly manage the equipment she was to tasked to manage, causing outages and she was forced to leave (not fired, but asked to resign). After that, many of her hires were also laid off, mostly because of the company’s financial situation. The few who managed to stay through her firing spree stayed on to manage the equipment after her departure, one of which became the new manager.

Unfortunately, the company only remained in business for ~9 more months before ultimately closing its doors for good.

This is a perfect example of a toxic workplace culture. It also impresses the importance of watching closely who is managing your company. Even managers can impact the bottom line. Even managers can cause toxicity. Oh, and her toxicity attempted to reach us in our remote office. However, our manager realized exactly what it was an completely ignored her. Since she had nothing to do with the services we managed in our office, her toxicity remained mostly confined to her office. Though, I firmly believe her toxicity was part of the reason the company ended up folding.

Workplace (mis)Trust

This is a fairly typical scenario above. Toxic employees tend to, at least over a period of time, cause large departures of other employees and generally sow mayhem by their toxicity. Many times it’s for a specific agenda, such as wanting to hire specific people they know. It is not only because the toxic employee is willing to lie, cheat and back stab, but also because no one wants to be around this type of toxicity every day. Toxicity is easily spotted by those on the ground and it grows over time to the point that employees must make a decision: stay or go. Managers typically stay insulated from this toxicity because that’s how a toxic employee wants it.

In fact, toxic employees typically sow seeds of doubt and distrust about all of the employees they intend to “stab” with the manager. Once they have these seeds of doubt planted, any one of those employees who attempts to have a conversation with the manager ends up finding that the manager no longer trusts them. Sometimes you don’t find out about that lack of trust until a performance review.

Losing trust in a workplace is tantamount to being fired. The point at which you have lost your manager’s trust, an employee should line up another job. Trust between manager and worker is paramount. Losing that trust means being unable to do your job correctly, even if you do it correctly.

Toxic employees intentionally seek to sow seeds of mistrust between manager and staff, with the exception of that toxic employee, who seeks to have the highest level of trust from the manager. Again, this is a huge red flag. Any new-ish employee who immediately tries to impress upon you, as the manager, how trustworthy they are and how untrustworthy everyone else is should be viewed as toxic.

Managers don’t need to be told whom to trust. Managers need to determine and establish trust level between their employees themselves. Unless an employee shows that they are untrustworthy, there is no reason to mistrust an employee based on another employee’s word.

There’s where a toxic employee can up their game by planting “evidence” of mistrust. If, as an employee, you’ve been framed by a co-worker over something that has been “planted”, you definitely need to find another job. Trying to win a “I said, they said” battle can be almost impossible over planted evidence. Worse, if another employee is willing to stoop so low as to actually plant evidence onto another employee, it’s time to leave. There is almost no way to convince a manager that the evidence was planted.

As a manager, having to evaluate alleged evidence found in or on someone’s desk can be exceedingly difficult. You’re a manager, not a detective. I get that. How do you manage this issue if it arises? It’s a difficult challenge, one where I can’t easily give you answers.

However, I an point you in this direction. Review who is he senior of the two employees. If the employee who “found” the evidence is claiming another more senior employee is untrustworthy, you need to better understand why that newer employee was rooting through another employee’s desk AND how they knew that “evidence” was even there. If the reporting employee is only a few months into the job, you should suspect more of that new employee than sincerity. If you’ve never had any issues with the more senior employee, then that new employee may be a toxic employee.

Employees who seek to pit manager against older employees should be immediately suspected as toxic. Once you suspect a toxic employee, you need to monitor them closely. You don’t need to alert your other employees, though. However, you also need to accept any of the toxic employee’s claims as insincere. You should make note of each and every one of them. Once you can confirm the toxic employee is sowing seeds of discontent around the office, you’ll need to take them aside and with the assistance of the HR team, place them onto a probationary period.

Know, however, that placing a toxic employee on probation won’t solve their toxicity. Once you identify a toxic employee, the only means to solve that problem is by firing them. The probationary period is simply a stepping stone to firing them. By placing them into probation and following through with standard procedures, you can then fire the employee without them having any legal recourse against you or the company.

Toxic employees are shrewd both in and out of the office. If they’re fired, expect a wrongful termination lawsuit. They won’t have any problems bringing legal action against a company for being terminated. That’s also part of their toxicity. As a manager, you must follow all procedures that allow you to fire the employee correctly.

Toxic employees know that their actions in the office cannot be easily covered by office etiquette or code of conduct rules. Meaning, toxic behaviors are almost impossible to enforce as a firing offense. Instead, you would need to fire them for not performing their work duties, which work performance is a reason to fire an employee. Playing psychological games, however, is not a reason to fire and is never written into code of conduct rules as part of the terms of employment.

The problem with probation, however, is that the employee can pass the probation requirements easily and still allow them to sow seeds of discontent. This is why probation exercises may be futile when you’re seeking to fire a toxic employee. You may simply have to rely on your company’s “at-will” hiring clause (you do have one of these, correct?) and simply fire them straight up.

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