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Courage to Lead with Integrity - Albrecht - Summit, Dec 2017

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Courage to Lead with Integrity - Albrecht - Summit, Dec 2017

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Courage to Lead with Integrity - Albrecht - Summit, Dec 2017

  1. 1. Having the Courage to Lead with Integrity and Strong Corporate Governance W. Steve Albrecht Summit Nov. 30 – Dec. 1, 2017
  2. 2. First—A Little About My Background 3 I’m an Academic But, I’m Also a Professional Together, these two have given me an exciting and fun career Professor at: Illinois Stanford BYU Practicing CPA Corporate In-house Training Consulting Expert Witnessing Boards of Directors
  3. 3. Some of my consulting clients 5 FBI (Affiliated Expert) Simpson Thacher & Bartlett LLP
  4. 4. Simpson Thacher & Bartlett LLP 6 Morrison Foerster Sidley Austin LLP My Expert Witnessing—38 Cases
  5. 5. My boards of directors Cypress Semiconductor (NASDAQ) $2.5 Billion Revenues Red Hat, Inc, (NYSE) $3 Billion Revenues SkyWest Airlines (NASDAQ) $4 Billion Revenues Larry H. Miller Co. (Private) (Owns Utah Jazz) Deseret Mutual Benefit Association (Private) Manages Health Plans and Retirement Accounts My current public company boards My current private company boards My past boards Bank
  6. 6. 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 shareholders. • 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 role. Oversight Advisory Make CEO successful
  7. 7. The Board’s Responsibilities Corporation Agents Management & Employees (High Information) Principals Shareholders (Low Information) Board of Directors We must solve (1) principal/agent problem (2) Information asymmetry problem (3) Adverse selection problem 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 management were 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 shareholders. In these cases, sometimes the directors ignored the problems, sometimes they were asleep (not doing their jobs), and sometimes they participated.
  8. 8. Three ways corporations are held accountable 1. By competition and the markets—good companies work hard to stay ahead • Market share • Disruptive technologies • Competitors • Efficiency of markets • Stock prices • Etc. 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!
  9. 9. The 5 elements of good corporate governance? 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 policy makers.
  10. 10. Who do the corporations work for? A Contrarian’s View 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?
  11. 11. 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 fiduciaries. • 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 the corporation. Good Faith Duty of Care Duty of Loyalty Business Judgment Rule
  12. 12. What these duties mean for us as directors 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 thing. • 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
  13. 13. 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
  14. 14. 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
  15. 15. Fraud & Compromise Triangles Fraud Triangle Rationalization Compromise Triangle
  16. 16. 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 shareholders. • 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” vote) • Example 2: CEO Salary—new board member and my first compensation committee meeting • Example 3: Terminating a founder/CEO from the company—he was a 6% owner • Example 4: Terminating a board member who had a conflict of interest with the company and was using the company to enrich himself.
  17. 17. 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 independence) • 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)
  18. 18. 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 director? 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.
  19. 19. Searching a prospective board member’s background 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 following: • 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.
  20. 20. 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%)
  21. 21. 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.
  22. 22. Benefits of Having Courage and Taking the High Road 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 liable. 7. Your company has a good reputation. 8. You get invited to serve on other boards and do other work.
  23. 23. Concluding Thoughts • 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.”

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