Transcript: Enron History Corporate Governance By Stephen Groves Trey Mason Laura Rodriguez The Godfathers Past and Present - 5000% - Fixed Cost - $75M minimum - IPO / Privatization Did Sarbanes Oxley go too far, was it just right, or not far enough? The Walt Disney Company Skilling Steps Down Enron: The Smartest Guys in the Room Corporate governance broadly refers to the processes by which corporations are controlled and directed. "Brightest people on Earth" What is Corporate Governance? Enron Executives Sentencing Comparable? What Does Corporate Governance Mean to You? Corporate Governance Re-Assessment - First documented Board of Directors - Bank of England (1694) - U.S. adopted these practices in 1791 - First Bank of the United States "I don't want to be rich... I want to be world-class rich." Enron Aftermath Did Sarbanes Oxley go too far, was it just right, or not far enough? - Ken Lay re-assumes CEO position Aug. 2001 - Enron declares bankruptcy Dec. 2001 Sarbanes Oxley & Public Policy Analysis "No bad news allowed" - Oxley - Light regulation - Internal Controls - Improved Efficiency - Cost of Capital $50 million - Forbes' Worlds Most Reputable Company - Dividing CEO and President roles - 1984 - Diversity of Board - Age - Sex - Race - Background 29 Apr 2015 - Civil Suit - Where are they now? - Fastow - Keynote speaker The Collapse of Enron - $60 billion, 2x the size of Vietnam - $90.75 (Aug. 2000) - $00.26 (Nov. 2001) - Owed $38 billion in debt - Board Diversity - Term Limits - Carrying out Duties of Care and Loyalty - Committee Controls - Advocating Majority Voting - Compensation & Size CONS Sarbanes Oxley & Public Policy Analysis Board Best Practices Birth of Sarbanes Oxley The Walt Disney Company Board of Directors History of Corporate Governance What are some characteristics and/or qualities for a model Board of Directors member? What companies stand out in your mind as having sound corporate governance policies? - History - Bad Examples - SEC & Sarbanes Oxley - Learning from Our Mistakes PROS Questions - Signed by President Bush in 2002 - Enforced by the SEC - Key components of Sarbanes Oxley - Section 404 - Financial Statements - Auditor Independence - Accounting Oversight - Increase Penalties on 'White Collar Crime' - Board Liability Enron Shock and Awe
Transcript: the danger that the board of directors may become insulated from shareholders and beholden to managment Corporate Governanace Rights and equitable treatment of shareholders OECD reports present general principles around which businesses are expected to operate to assure proper governance. Corporate Governance Disclosure and transparency Role and responsibilities of the board the principale-agent issue. Interests of other stakeholders United States, United Kingdom Legal documents why do we need corporate governance ? Corporate Governance models around the world Role and responsibilities of the board Rights and equitable treatment of shareholders Continental Europe The Principals of corporate governance India Disclosure and transparency Interests of other stakeholders
Transcript: Purpose -To provide effective oversight and strategic guidance for top management -To establish trust and maintain confidence for the corporation with its stakeholders -To ensure sustainable development and economic growth for the company -To help managers and owners achieve objectives to improve overall business results of the company -To ensure corporate success in a manner that fits the best interests of all management Functions -Includes the policies, initiatives and practices a corporation uses to accomplish its business goals. -The elected board of directors develop governance strategies for implementation -Goals and Risk Management -Corporate Accountability -Shareholder (Stockholder) Meetings -Government Regulations Guidelines • Board elected by shareholders • Board oversees the proper safeguarding of the assets of the company • Board mission and director responsibilities • Director qualifications • Committees of the board • Annual chief executive operation officer performance evaluation • Management succession • Annual board performance evaluation • Director Compensation • Board Interaction with Outside interested Parties Board Committee and charters •Audit •Compensation •Directors and Corporate Governance •Executive •Finance •Management Development •Public Issues and diversity Review Coca-Cola Corporate Governance: The system of control and performance monitoring of top management which is maintained by boards of directors and other major stakeholder representatives. Boards of Directors: Ensures that an organization operates in the best interests of its owners Corporate Governance How Does This Work? -often selected by shareholders, sometimes also recommended -annual shareholder meeting can consist of voting for board members Selection Process Definition -long process -candidates interviewed -board can consist of some executive directors and some other non-executives -size is company specific -internal committees -maintain order and shareholder relationships Brief Overview • Committed to corporate governance, promotes the long term interests of shareholders • Board is elected by the shareholders to oversee their interests in the long term health and overall success of the business • Board of directors establish corporate governance guidelines, these guidelines include; board missions, director responsibilities, director qualifications, determination of director independence etc.
Transcript: Major Laws: General Company Law, 1966 New Economic regulations, 2001 Law on Financial Security, 2003 Trust and Modernization of the Economy, 2005 Codes are reccomened guidelines for companies to follow put forthe by national employees associations. MEDEF and AFEP Vienot 1, 1995-Focused on Board of Directors Vienot 2, 1999- Director independance Vienot 3, 6/16/2013 Vienot 3: Stricter reccommendations and shareholder votes on executive remuneration Employee representation at the board level Maximum directorships from 5(law) down to 4 Enhanced compliance: "Comply or Explain" 11.3% of french companies had an institutional investor as the main shareholder compared to over 40% in the US France has a very high percentage of international investors compared to the world Over 60% of founding companies are still under control of the founding family The state controls a measly 2% equity stake Implications: Hostile takeover bids are not uncommon in France, 234 between 2003 and 2005 Different management teams compete to usurp under performing incumbents The "takeover market" becomes a de facto governance mechanism One-tier system: Both executive and non-executive members make decisions together Two-tier system: Separate the two groups in to one management board and one supervisory board Two-tier on the decline: 76% unitary in 2004 This doesn't preclude functional separation of CEO&COB The management board is headed by the CEO and they focus on operational decisions The supervisory board is led by the Chairman and deals with strategic decisions Oversees the management board Used to represent a variety of stakeholders by including various internal and external representatives French Laws regarding Boards: Limit inside directors to 1/3 of seats Maximum of 5 boards per person BoD Committees: Audit Nominating Remuneration Remuneration: Tripled between 1998-2004 to 4.9M Euros average Typically 50% variable (like options) CEO pay has come under fire recently Now limited to 450k Euros for CEOs of companies with high state ownership Applies to companies like: postal service nuclear power giant Areva electric utility EDF railway company SNCF public transport operator RATP Then: Board consisted of 3 French managing partners, two of whom are Michelin family Nearly no scrutiny over decisions One of two companies not to fully implement Vienot 1 standards Only CAC 40 Company that has made no progress to meeting Vienot 2 standards Now: 8 members, including 1 Irishman, and 3 women, E. Michelin died, 2006 Michel Rollier retains 23,276 shares, 8.5 times the rest of the board combined! Takeaways: Guidelines vs. Law and implementation timeline Inside vs. outside directors The importance of international directors Sources: http://virtusinterpress.org/additional_files/book_corp_govern/sample_chapter04.pdf http://studentyard.net/what-are-the-unitary-and-two-tier-board-structures/ https://www.aohub.com/aoos/viewContent.action?uid=JAI3emRuMU4%3D&popup=HxapDW%2FMKd4%3D&nav=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQTBTrTXtG0BY%3D&fr=&key=Ec8teaJ9VaqqzApvHny0AF7eOOGbnAEFKCLORG72fHz0%2BNbpi2jDfaB8lgiEyY1JAvAvaah9lF3dzoxprWhI6w%3D%3D& http://www.ecgi.org/codes/documents/afep_medef_code_revision_jun2013_en.pdf http://www.france24.com/en/20120613-france-moscovici-hollande-ceo-executive-pay-cap-euros-state-firms/ http://www.michelin.com/corporate/group/corporate-governance/board http://www.economist.com/node/507536 Corporate Governance in Space Shareholders and Ownership Board of Directors Governance Codes From America to France By, The C-Suite OOH-LA-LA! Case Study: Michelin Governance Codes vs. Law Stock Markets and Ownership Board of Directors Remuneration Representation Case Study: Michelin
Transcript: That's amazing! Confidentiality breach Loss of partnership with FeelBetterNow, Inc. Loss of edge with BrainPhone Insider trading - trading of stock by individuals with access to non-public information about the company Chance to make conversation with son A. Tell his son B. Tell a local news anchor C. Keep his employer and their partners' information private D. Start his own company and produce a BrainPhone knock-off ...and they call it a BrainPhone Uncle Bill works for Apple Unfair advantage due to advanced knowledge (intentional or unintentional) Promotion, salary bonus, or other incentives Does this make Bob guilty? Uncle Bill takes this knowledge to the office Huge success of BrainPhone Confidence in information security Corporate Governance Presentation Bob tells his son, Tom, about the exciting new BrainPhone Acquire FeelBetterNow, Inc. Gain competitive advantage Potential loss of job Potential civil charges filed against Loss of reputation and integrity Any person who becomes aware of non-public information and trades on that basis may be guilty. Samsung Stakeholder Analysis Whoa! vs. So what was Bob supposed to do? Apple Guess what I saw?! Samsung Electronics Co., Ltd. a BrainPhone? http://en.wikipedia.org/wiki/Insider_trading Bob is a custodian at Samsung While sweeping, he sees plans for the new BrainPhone, which uses technology from Samsung's newest partner - FeelBetterNow, Inc. Brooke Blackwell Jim tells his uncle, Bill, about the BrainPhone Scenario 1 Scenario 2 ...and they call it a BrainPhone vs. VS. Apple buys FeelBetterNow, Inc. within a week Competing fairly Apple falls behind Samsung vs. What if Bob's son told him he was about to invest all of his money in FeelBetterNow, Inc.'s competitor Bob Tom tells his best friend, Jim, about the BrainPhone over a game of poker Lose upper hand to Samsung's BrainPhone Lose market share, stockholders, etc. Uncle Bill Samsung Electronics Co., Ltd. Wow, this is cool!
Transcript: Duty not to misuse information or position LOYALTY and GOOD FAITH The Duties Common Law Duty: Corporate Governance LOYALTY and GOOD FAITH Statutory Duty: Related party transactions Statutory Duty: Statutory Duty: Statutory Duty: Common Law Duty: Common Law Duty: Duty to act with reasonable care and diligence Duty to prevent insolvent trading Requirement to disclose certain interests Duty to act in good faith in the best interests of the company and for a proper purpose Statutory Duty: Statutory Duty: CARE and DILIGENCE Duty to act in good faith in the interests of the company Duty to use powers for a proper purpose Duty to retain discretions Common Law Duty: Duty to avoid conflicts of interest Common Law Duty: Duty to act with reasonable care and diligence
Transcript: 1. Is this in violation of the code of ethics? 2. Is the situation worse since Brooke and Eric are not close friends? What do you think? Code of Business Conduct and Ethics 1. Did Brooke violate the code of ethics? 2. Should Eric report Brooke for violating the code of ethics? Scenario 2 What do you think? What do you think? Brooke is the manager Hayley and Eric are staff members Hayley and Eric did not know each other before starting work one month ago Brooke is in the middle of her morning rounds Brooke is the manager Hayley and Eric are staff members Hayley and Eric just meet when they started work a month ago Eric is the manager Brooke and Hayley are staff members Brooke and Hayley are close friends and have known each other for a long time Brooke and Hayley are sitting in their neighboring cubicles Eric is in the middle of his morning rounds Scenario 4 Keep in mind how things appear Brooke is the manager Hayley and Eric are staff members Hayley and Eric are close friends Corporate Governance Natalie Boyd Scenario 3 Is this in violation of the code of ethics? What do you think? 1. Should Brooke report Eric for violating the code of ethics? 2. Since Hayley and Eric are not friends does that make the joke worse? Scenario 1 Questions NCI Group
Transcript: "The bigger they are, the harder they fall." The pace of manufacturing has increased in the modern era. With technology, companies are able to grow faster than ever before which increases the scale of potential damage of corporate wrong-doing. Globalization and Population Corporate Governance The Basics Free Market Technology A free market economy encourages executives of a company to engage in riskier business behavior in order to have short-term gains. Refers to the policies and practices by which an organization is directed and managed at executive levels. Focuses on accountabilities to shareholders and stockholders and how the business will avoid risk and the competence, ethics and propriety of the leadership. Corporate Governance began in the 1990's with the growth of larger businesses and changing markets. Mostly used by, but isn't limited to, large public businesses to avoid risk and scandals. Gives greater insurance to the stock/share holders. Goals of Corporate Governance Definition With markets growing globally and connecting in new ways, problems grow at a greater scale than ever before. With a higher population, large companies have greater potential of harming the economy at a global level with risk and scandals. Setting the company's strategic aims Providing effective leadership Supervising the management of the business Ensuring transparency for shareholders Factors for Improving Globalization Technology Population Free Market
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