Courage to Lead with Integrity - Albrecht - Summit, Dec 2017
Having the Courage to Lead with
Integrity and Strong Corporate
W. Steve Albrecht
Nov. 30 – Dec. 1, 2017
First—A Little About My Background
I’m an Academic
But, I’m Also a Professional
Together, these two
have given me an
exciting and fun
Corporate In-house Training
Boards of Directors
Some of my consulting clients
Simpson Thacher & Bartlett LLP
My boards of directors
Red Hat, Inc,
(NASDAQ) $4 Billion
Larry H. Miller Co.
Health Plans and
My current private company boards My past boards
What are the duties of a board of directors
• Our first role is oversight of management. With absentee
owners (public companies), it is the board that must
ensure management is acting in the best interest of
• Our second role is advisory. Good boards have skills and
backgrounds that add value to management by helping
them consider and make strategic decisions.
• Caution: It is not the role of the board to micro-manage
management. In fact, good boards do everything possible
to make management, and especially the CEO, as
successful as possible without interfering with his or her
The Board’s Responsibilities
We must solve
(3) Adverse selection
Advisory Role We must act as if the
Oversight Role shareholders’ money
was our own
As an expert witness
in 38 major fraud cases
where members of senior
involved, I have seen the
adverse selection problem
work many time when
CEOs and others took
advantage of shareholders.
They had superior
information and they used
it to enrich themselves at
the expense of the
In these cases,
directors ignored the
they were asleep
(not doing their jobs),
Three ways corporations are held accountable
1. By competition and the markets—good companies work hard to stay ahead
• Market share
• Disruptive technologies
• Efficiency of markets
• Stock prices
2. By laws and regulations—there’s a million of these (FCPA, DoJ, OSHA, SEC, etc.)
• If laws are broken and investigations pursue, everyone loses—the shareholders,
management, the directors, etc.
3. By self-imposed corporate governance—especially by good boards in
their oversight role.
Of these three, strong corporate governance always works best!
The 5 elements of good corporate
1. Integrity and ethical behavior: Board members should always act with the highest
integrity. We should always seek to find the truth and then do the right thing.
2. Rights and equitable treatment of shareholders: Board members’ first interest should
be to the shareholders. Boards should not serve the executives or themselves and
should always act in good faith and with loyalty to the company and shareholders.
3. Role and responsibilities of the board: Boards should recognize that members need
sufficient, relevant skills and understanding to review and challenge management’s
performance and to provide oversight and advice to them. Boards must make sure that
they are of adequate size and have appropriate levels of independence and
commitment and are constantly improving themselves.
4. Disclosure and transparency: Board members should clarify and make publicly known
the roles and responsibilities of board and management to provide stakeholders with a
high level of accountability. Boards should implement procedures to independently
verify and safeguard the integrity of the company's financial reporting and assets.
Disclosure of material matters concerning the organization should be timely and
balanced to ensure that all stakeholders have equal access to clear, factual information.
5. Interests of other stakeholders: Boards should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders,
including employees, investors, creditors, suppliers, local communities, customers, and
Who do the corporations work for? A
So basically we have a system in which the corporate executives, the
CEOs, are trying to make sure the legal system works not for the
companies, not for the shareholders, not for the bondholders—but for
themselves. So it’s like theft. These companies are basically now
working for the CEOs and the executives and not for any of the other
stakeholders in the corporation, let alone for our broader society.
(Joseph Stiglitz (Nobel Prize winner)
Do boards let CEOs run amuck?
Duties of Directors
• Good faith: The principle that directors and officers
of a corporation in making all decisions in their
capacities as corporate fiduciaries, must act with a
conscious regard for their responsibilities as
• The duty of care: Using “that amount of care which ordinarily careful
and prudent men would use in similar circumstances.”
• The duty of loyalty: Requires that a director’s corporate decisions be
based on a good-faith belief that they will serve the best interests of
Duty of Care
Duty of Loyalty
Business Judgment Rule
What these duties mean for us as
1. Integrity and ethical behavior: We should always act with the highest
integrity. We should always seek to find the truth and then do the right
• What this means for me personally: I should never compromise what
I know is right (always do what my mother would expect me to do;
never do anything that would be embarrassing if reported on the front
page of the Wall Street Journal)
Example 1: Revenue Recognition Issue
Example 1: Revenue Recognition Issue
• Brand new board member asked to chair the audit committee—first meeting
• Realized the company used the half-month convention of revenue recognition
• 1st – 15th (full month’s revenue)
• 16th – 31st (half month’s revenue)
• Blessed by Big 4 firm
• Decided it wasn’t right—should use daily recognition method
• Was told we would have to restate financial statements if we changed and we would be sued
• Many phone calls with attorneys, auditors, management culminating in “the call” to take the high road
(“That damn company on the east coast”)
• Made decision to change revenue accounting and restate regardless of consequences
• 17 class action and 3 derivative cases; personally named (I was the goat)
• SEC—“we were watching and were going to make you change” (Overnight, I became the hero)
• All the suits were dismissed or were settled for very small amounts after a period of 2-years because we
“took the high road”
• Invited back to the board after mission
Example 2: Fraud Investigation in the Philippines
• Received a whistle-blower tip about accounting irregularities in the Philippines
• Because of the “specificity” and “seeming legitimacy” of the complaint decided to
investigate but couldn’t let the CEO know about the investigation—didn’t know
whether or not he was involved actually or his pressures led to the problem
• Hired a forensic law firm, forensic accounting firm and IT firm to image
computers, interview key people and investigate without informing our CEO or
other members of management
• Once we realized we could “ring-fence” the problem to the Philippines and it
wasn’t company management that “motivated” or “pressured” the fraud, we
brought the CEO and other key members of management “over the fence”
• Turned out to be a $16 million accounting fraud that was motivated by a
manufacturing manager trying to make his unit look better
What these duties mean for us
2. Rights and equitable treatment of shareholders: Our first interest should
be to the shareholders. We should not serve the executives or ourselves and
should always act in good faith and with loyalty to the company and
• What this means for me personally: Every decision I make must be made
from the perspective of the shareholders and that when I am spending the
shareholders’ money I must act as if I’m spending my own money.
• Example 1: Vote to buy subsidiary “I’ll vote affirmatively but I would vote
“no” if it were my own money (vote was 10-1 yes and I was the only “no”
• Example 2: CEO Salary—new board member and my first compensation
• Example 3: Terminating a founder/CEO from the company—he was a 6%
• Example 4: Terminating a board member who had a conflict of interest with
the company and was using the company to enrich himself.
What these duties mean for us
3. Role and responsibilities of the board: We should recognize that our board
needs sufficient relevant skills and understanding to review and challenge
management’s performance and to provide oversight and advice to them. We
also must make sure that our board is of adequate size and has appropriate
levels of independence and commitment and is constantly improving itself.
• What this means to me personally: I must always be contributing and
independent and should resign when I’m not and should expect the same
from other board members. We wouldn’t put up with a non-performing CEO
and we shouldn’t put up with a non-performing board member.
• Example 1: Booting a board member off in the middle of a meeting (lack of
• Example 2: Proactively initiating the termination of a board member who
wasn’t contributing (70 years old when mandatory retirement age was 75)
• Example 3: Not appointing a board member several others wanted because
of personal life issues (Let’s look at this case)
Should we appoint this director?
After a search, several board members wanted to appoint a new director, director
candidate A. He appeared to be very highly qualified, had tremendous industry knowledge, was the
former president of a very large company in our industry, would add diversity to the board and
already served on one large company’s board. He was currently the CEO of a smaller company but
had indicated his willingness to join our board. He appeared to be the perfect candidate.
However, in researching his background, we found that, while married, he had a very
famous and public 8 and ½ year affair with a separate lover. In fact, because he had recently
decided to leave the lover and go back to his wife, the lover had smeared the airwaves, streets of
New York, and YouTube with posters, videos and other propaganda about their affair.
1. Are the off-premise and/or private activities of board members and executives their own
business or should a board consider these types of issues when appointing someone to be a
2. Would you appoint this person to your board? Why or why not?
3. What are the ramifications of appointing such a person to your board?
The culture of the board and the company is extremely important.
Searching a prospective board member’s
We just did a board member search on one of the boards I’m on. In doing a background search, the search firm we used (one of the
largest) retained a private investigator to conduct a background search on the candidate. We received information about the
• Employment History
• Corporate board affiliations
• Not-for-profit affiliations
• Education, including where the candidate went to school, if graduated and when
• Personal litigation against the person
• Professional litigation against the person
• Interaction with regulators & licensing authorities (CPA, etc.)
• Driving record and history
• Credit history
• Press coverage & online media coverage
• Social media findings
Lesson: If you want to serve on a board, be careful with your personal life, how you drive, what you post on
social media, etc. and make sure you tell the truth about your experience, education and background.
What these duties mean for us
4. Disclosure and transparency: We should clarify and make public the roles
and responsibilities of the board and management in order to provide
stakeholders with a high level of accountability. We should implement
procedures to independently verify and safeguard the integrity of the
company's financial reporting and assets. Disclosure of material matters
should be timely and balanced to ensure that all stakeholders have equal and
timely access to clear, factual information.
• What this means to me personally: I should understand Reg. F-D and take
my board and committee responsibilities seriously (e.g. reading thoroughly
financial statements, 10-Ks and 10-Qs, etc.) and if our companies have
information that would affect investor decision making we should disclose it
as soon as possible. Our F/S should be beyond reproach.
• Example 1: $133 million inventory write-off in merger
• Example 2: Sell-though to sell-in revenue increase disclosures
• Example 3: Pledging of stock disclosure (69%)
What these duties mean for us
5. Interests of other stakeholders: We should recognize that we have
legal, contractual, social, and market driven obligations to non-
shareholder stakeholders, including employees, investors, creditors,
suppliers, local communities, customers, and policy makers.
• What this means to me personally: I must know and care for every
stakeholder as if he or she were myself and consider their views when
making boardroom decisions.
• Example 1: Wells Notice—Controller and CFO
• Example 2: Shutdown business in Italy
• Example 3: Not allowing a CEO to belittle key employees in public.
Benefits of Having Courage and Taking the
1. You sleep better at night knowing you did what was right.
2. Your company performs better—backed by solid research.
3. Your fellow board members have confidence in you and trust you (they
want you back) and don’t want you to leave.
4. The executive team knows you are a straight shooter who doesn’t play
games. They also know you have their backs if they do what is right.
5. Regulators have trust in you, both when they see you proactively do
what’s right and when you disagree with them.
6. If there is litigation, you usually win or, as a minimum, aren’t personally
7. Your company has a good reputation.
8. You get invited to serve on other boards and do other work.
• As a board member (or professional), at the end of the day, the greatest asset you have is your
reputation; compromises and shortcuts will come back to haunt you.
• Expert witness—resigned from engagements when I felt we were wrong
• Board member—made tough decisions and was sued in two different cases
• One high integrity board member can make a huge difference in the boardroom. You need to
be that person.
• Good corporate governance (including high
integrity) is critical for both
you and your companies
“We can afford to lose money,
even a lot of money.”
“We can’t afford to lose
reputation—not even a
shred of it.”