G0VERNANCE AND ETHICS
2013 GACFE Annual Conference
November 7, 2013
Corporate Governance Center
Brown Bag - September 30, 2010
Paul Lapides, Sri Ramamoorti, Dana Hermanson
&James Tompkins
Who We Are Today
• Comprised of over 35 professors from 20 universities,
the Center is international in scope and
interdisciplinary in its approach.
• The Center has an Advisory Board of pioneers and
national leaders in governance research and practice.
• Our offspring:
Corporate Governance Center
Our Programs
•
•
•
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Thought Leadership
Research
Board Advisory Services
Teaching
Thought Leadership
• Interaction with media, quotes, and letters
• Blue Ribbon Commission on Audit Committees
• 2002 and 2007 Governance Principles
Research
• COSO studies on fraudulent financial reporting
• Academic and practitioner publications
Board Advisory Services
• Director of BAS began in 1999
• Based on demand - no marketing
• Examples
– Governance audit
– Board evaluation
– Expert witness
Teaching
• In-house seminars
• Business and professional
• Classroom
– ACCT 8990 – Forensic Accounting Directors’ College
Directors University
– MBA courses
– EMBA modules
– DBA program
Governance Matters
Item
Fraud
No-Fraud
Majority Outside Directors
31%
83%
Have an Audit Committee
78%
92%
AC All Outsiders
39%
87%
Have Internal Audit Function
19%
83%
From: “Fraudulent Financial Reporting: Consideration of Industry Traits and
Corporate Governance Mechanisms,” Mark Beasley, Joe Carcello, Dana Hermanson
& Paul Lapides, Accounting Horizons, Vol. 14, No. 4, December 2000.
Agenda
ᴥ Linking Governance and Ethics: The Case of
Financial Statement Fraud
ᴥ Setting the Stage
ᴥ Boards and Crisis Management
ᴥ Duties of Board Members
ᴥ What CFEs must know about:
– Board culture and behavioral dynamics
– Governance and ethics
ᴥ Audience Q&A
It Only takes A Phone Call*…(1)
“…One moment you’re a titan of corporate
management. You are, among other things, an outside
director of a company that has, yet again, reported
stellar results. The stock price is up. Senior
management is happy with their well-deserved
bonuses. And you’re basking in the glow of favorable
articles that have just appeared in the WSJ, Forbes, and
Fortune…”
(Note: *Adapted from M.R. Young, Esq., 2000)
It Only takes A Phone Call*…(2)
“…Then, with a single phone call, everything changes.
You’re told that accounting irregularities have surfaced
at the company. Inexplicably, the CFO has confessed.
An emergency board of directors meeting is being
called for the next day. There will be one item on the
agenda: How to deal with a crisis…”
(Note: *Adapted from M.R. Young, Esq., 2000)
Aftermath: A Crisis for the Board
ᴥ When a fraud allegation surfaces, following
Zimmerman’s Law of Complaints (“nobody notices
when things go right”), problems will come out of the
woodwork like nothing the Board of Directors has ever
seen…
ᴥ Those problems will involve crises of corporate
governance; of disclosure; and with creditors,
employees, insurers, and shareholders. And that’s just
in the first two hours…
Shakespeare on “bad news”
ᴥ Cleopatra: Horrible villain! or I’ll spurn thine eyes
Like balls before me; I’ll unhair thy head:
Thou shalt be whipp’d with wire, and stew’d in brine
Smarting in lingering pickle.
ᴥ Messenger: Gracious madam, I that do bring the news made
not the match.
ᴥ Cleopatra: Though it be honest, it is never good to bring bad
news.
--from Antony and Cleopatra, Act 2, Scene v. (emphasis added)
Corporate Governance
• In good times…given benefit of the doubt, riding on
superior corporate performance based on solid
results
Versus (think “Enron” after October 2001)
• In bad times…when a crisis emerges from allegations
that the “superior” performance resulted from
“cooked books”
"Not Me!" (II)
Jeff Leedy
"Me!"
Jeff Leedy
Why the need for a Board of Directors?
ᴥ The “corporation” is inherently riddled with conflict of
interest issues. Why?
ᴥ “Principal-agent problem”: The shareholders own the
firm……but managers operate the firm.
ᴥ As agents for shareholders, managers are supposed to
operate the firm in the best interests of the shareholders
ᴥ But managers are faced with conflicts of interest (and
Board members may be beholden to CEO)
Governance Principles (1)
The purpose of the board is to Promote and protect the
interests of the corporation and its stockholders, while
considering the interests of other external and internal
stakeholders (e.g., creditors, employees, etc.).
Three Major areas of responsibility: Monitoring the CEO
and other senior executives; overseeing the
corporation’s strategy and processes for managing the
enterprise; including succession planning; and (3).
monitoring the corporation’s risks and internal controls,
including the ethical tone.
“
Sources: “21st Century Governance Principles for U.S. Public Companies ,“Lapides, P.D., M.S. Beasley, J.V. Carcello, F.T. DeZoort, D.R. Hermanson, T.L. Neal, and J.G. Tompkins. May 8, 2007.” Drivers
License Test for Directors,” Directors Monthly, March 2004, 7.
Governance Principles (2)
Directors should employ healthy skepticism in meeting
these responsibilities.
Sound governance requires effective interaction among
the board, management, the external auditor, the
internal auditor, and legal counsel and others.
“NIFO”! (John Nash)
Sources: “21st Century Governance Principles for U.S. Public Companies ,“Lapides, P.D., M.S. Beasley, J.V. Carcello, F.T. DeZoort, D.R. Hermanson, T.L. Neal,
and J.G. Tompkins. May 8, 2007.” Drivers License Test for Directors,” Directors Monthly, March 2004, 7.
Major Challange
The single major challenge addressed by
corporate governance is how to grant managers
enormous discretionary power over the conduct
of the business while holding them accountable
for the use of that power…(Monks & Minow,
2001)
Committees of the Board
Audit Committee
Nominating Committee
.
Compensation Committee
Finance Committee
Technology Committee
Special Committees
.
Business Judgment Rule
ᴥ In the absence of fraud, conflict of interest, or other
breaches of loyalty, a director will not be held liable to
his/her corporation if he/she acted in good faith and
with a reasonable basis for believing that the action
was lawful and furthered the company’s interests.
ᴥ How decision was made is critical (decision-making
process should preferably be documented).
ᴥ Little “second guessing.”
Legal Obligations: Duty of Care
ᴥ Act in good faith.
ᴥ Keep informed.
ᴥ Attend meetings.
ᴥ Commit time and attention.
ᴥ Reasonably believe in basis of actions.
ᴥ Act in corporation’s best interest.
"The Audit."
Jeff Leedy
Delaware Law: Duty of Care
A Board of Directors’ duty of care “includes a duty to
attempt in good faith to assure that a corporate
information and reporting system [in concept and
design], which the board concludes is adequate, exists.”
(In re Caremark International Inc., 698 A.2d 959, 970
(Del. Ch. 1996))
Legal Obligations: Duty of Loyalty
ᴥ Don’t use the position to make personal profit or
gain.
ᴥ Allegiance to the corporation comes first (part of
fiduciary obligation).
ᴥ Confidentiality is essential.
Board Culture & Oversight
"Board culture is an important component of board
failure. The great emphasis on politeness and courtesy
at the expense of truth and frankness in boardrooms is
both a symptom and cause of failure in the control
system. CEOs have the same insecurities and defense
mechanisms as other human beings; few will accept,
much less seek, the monitoring and criticism of an
active and attentive board.“
--Harvard Professor Michael Jensen, 1993
Slumber Parties
“. . . two directors were sleeping . . .”
“. . . and I was on my way.”
“Shhh! You’ll Wake the Board”
Business Week, March 2001
• Alumni and faculty confirmed that some
board members are still falling asleep at
meetings.
• Others are unprepared, bored, disinterested,
or overwhelmed.
Whither Ethics: Isn’t Anybody Sorry?
Accepting post hoc rationalizations by bad actors means:
1. Ethical behavior requires nothing more than avoiding the
explicitly illegal (premium on skirting edges of the law)
2. Refusing to see the bad things happening in front of you
makes you innocent (“just play possum or victim, later on”)
3. Telling the truth, is after all, the same thing as making sure
that no one can prove you lied…plausible deniability
--From the post-Enron narrative chronicled in “The Smartest Guys in the Room,”
McLean & Elkind, 2003
Distinguishing between “what is legal” and “what is right”…the
line of legality is not fixed, and so, it is easy to “cross the line”
with risky behaviors
--Harry Kraemer, former CEO, Baxter International, 2011, in From Values to Action
CALSTERS Issues Corporate Governance Report
Four ethical issues
1.
2.
3.
4.
Executive compensation
Majority vote standards
Diversity of corporate boards
Sustainability
The Discussion Continues
Next steps for you?
Board of Directors, Board of Advisors,
or Just Plain Board Bored?
COLES.KENNESAW.EDU/CGC