At The Coca-Cola Company, our publicly stated mission is to create value over time for the owners of our business. Of course, there are plenty of other missions upon which a company could focus: serving customers; pursuing philanthropy; providing the highest quality of products and services; creating jobs and job security.
But I would submit that in our political and economic system, the mission of any business is to create value for its owners. In the wake of huge layoffs at certain companies, this idea has been vilified by many critics, and doubt has arisen in the minds of many business leaders about their purpose. This is incredibly dangerous to the companies whose leaders doubt their purpose and to the society that those companies serve. So why is creating shareowner value the right mission for our businesses? There are three basic answers to this question:Increasing shareowner value over time is the job society demands of us.Increasing shareowner value enables us to contribute to society in meaningful ways. Focusing on creating value over the long term keeps us from acting short-sighted.
Good Quotes (via Roberto Goizueta)
“The greatest contributions we make to society come not because we do good deeds, but because we do good work.”
“We must remain focused on our core duty: creating value over time.”
Will the new SEC rule help or hurt. It’s hard to say from a personal bottom-up point of view risk management comes from temperament and resistance to institutional imperatives and psychological influences. Anywho, perhaps this is the next best thing.
Introduction (via CFO.com)
Monday-morning quarterbacks pinned the blame for the financial crisis largely on excessive risk taking, particularly at large financial institutions. Subsequent calls for regulatory reform have increasingly included nonfinancial companies and their boards, which critics accuse of having been lax in overseeing risk management.
Now, the Securities and Exchange Commission is requiring companies to describe in their proxy statements how the supervision of risk is distributed among their boards and board-level committees. Approved in December and effective on February 28, the rule is part of a package of rules intended to improve disclosures regarding executive compensation that may foster risky behavior.
By prompting companies to define their board members’ responsibilities for overseeing risk, the disclosure could reveal inefficiencies. You could have a situation where the compensation committee, the audit committee, and potentially a risk committee are all addressing similar areas related to risk, says Mark Plichta, a partner at Foley & Lardner. “[Board members] need to understand the boundaries of who is doing what. There are a lot of gray areas and areas for overlap.”
But the disclosure could also show, as a recent survey suggests, that some companies delegate responsibility for overall risk management to the audit committee. That duty, some experts maintain, should be reserved for the board of directors.
Because audit committees tend to straddle the line between overseeing financial-risk management and process, they are sometimes pressed to look at other types of risks as well. (The New York Stock Exchange requires listed companies’ audit committees to periodically review the processes for handling risk exposures.) According to a survey of board members and senior executives by KPMG’s Audit Committee Institute, 18% of audit committees are primarily responsible for overseeing strategic risk, and 58% oversee IT security and privacy risks.
Introduction (via Harvard Law)
In our paper Are Incentive Contracts Rigged By Powerful CEOs?, which is forthcoming in the Journal of Finance, we argue that powerful CEOs induce their boards to shift the weight on performance measures towards the better performing measures, thereby rigging the incentive part of their pay. The intuition is developed in a simple model in which some powerful CEOs exploit superior information and lack of transparency in compensation contracts to extract rents. The model delivers an explicit form for the rigging of CEO incentive pay along with testable implications that rigging is expected to (1) increase with CEO power; (2) increase with CEO human capital intensity and uncertainty about a firm’s future prospects; and (3) negatively impact firm performance.
Findings (via Harvard Law)
The findings have important policy implications. A direct solution to rigging would be to require more explicit disclosure of ex ante incentive pay contracts. The argument that poor disclosure is justifiable given firm concerns about leaking competitive information and difficulty in recruiting executives strikes us as overstated and self serving. It is, therefore, reassuring to note regulatory efforts in this regard, with the SEC sending letters to 350 companies in 2007 critiquing the way they described the pay of their top executives. Even in the absence of better disclosure, the good news from our paper is that contract rigging might be reduced in other ways as well. Our results suggest that policies that increase the independence of boards may be effective in reducing contract rigging by powerful CEOs. In addition, rigging may be moderated in firms with stronger governance along other dimensions.
To identify the most effective mechanisms for detecting corporate fraud we study in depth all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on obvious actors (investors, SEC, and auditors), but takes a village of several non-traditional players (employees, media, and industry regulators). Having access to information or monetary rewards has a significant impact on the probability a stakeholder becomes a whistleblower. Reputational incentives do not work as well. Yet, after SOX auditors’ reputation pays off in new client business, increasing their willingness to reveal fraud.
Shaffi Mather explains why he left his first career to become a social entrepreneur, providing life-saving transportation with his company 1298 for Ambulance. Now, he has a new idea and plans to begin a company to fight the booming business of corruption in public service, eliminating it one bribe at a time.
About Shaffi Mather (Via Ted)
Shaffi Mather is the founder of 1298 for Ambulance, Education Access for All, and co-promoter of Moksha-Yug Access.
Purpose of This Paper/Memorandum (via Harvard Law)
This memorandum outlines the risk oversight obligations of the board of directors and certain best practices derived from governmental, regulatory and other sources and provides recommendations for structuring and improving risk oversight at the board level. Attached as Appendix A to this memorandum is a discussion of some of the common areas of risk that companies may face.
Introduction (Via Harvard Law)
Balancing risk and reward has never been more challenging than it is today. Companies face risks that are more complex, interconnected and potentially devastating than ever before. Over the past two years, a perfect storm of economic conditions has triggered an extraordinary downward spiral from which we are only recently beginning to emerge: the subprime meltdown, liquidity crises, extreme market volatility, controversial government bailouts, consolidations of major banking institutions and widespread economic turmoil both in the U.S. and around the world. Against the background of the global financial crisis and the still uncertain global economy, companies are re-assessing their strategies for responding to the challenges and pressures of the new environment. Risk—and in particular the risk oversight function of the board of directors—has taken center stage in this re-assessment, and expectations for board engagement with risk are at all-time highs. Risk from the financial services sector has contributed to large-scale bankruptcies, bank failures, government intervention and rapid consolidation. And the repercussions have spread to the broader economy, as companies in nearly every industry have suffered from the effects of a global constriction of the credit markets, sharply reduced consumer demand and volatile commodity prices, currencies and stock prices.
The public and political perception that undue risk-taking was central to the breakdown of the financial and credit markets has fueled an extensive legislative, regulatory, and even judicial focus on risk management and risk prevention. A number of legislative and regulatory proposals that address or touch upon risk-related items are currently pending. The Securities and Exchange Commission recently proposed disclosure rules that would require discussion in proxy statements of the board’s role in overseeing and managing risk and the relationship between a company’s overall employee compensation policies and risk management. Bills introduced in Congress have called for independent risk committees responsible for the establishment and evaluation of risk management practices to be formed at large financial institutions as well as other publicly listed companies. Risk management is also likely to receive heightened focus by shareholder activists and other “good governance” proponents, and the SEC has recently liberalized its approach to shareholder proxy proposals addressing risk oversight. While we expect that the business judgment rule will survive the financial crisis intact, boards and companies should remain mindful in the current environment of the possibility that courts may apply new standards, or interpret existing standards, to increase board responsibility for risk management. Finally, the reputational damage to companies and boards of flawed risk management processes must also be considered.
Risk & Boards of Directors (Via Harvard Law)
A company’s risk management system should function to bring to the board’s attention the company’s most material risks and permit the board to understand and evaluate how those risks interrelate, how they affect the company, and how management addresses those risks. Given the challenges and complexities of the current risk environment, companies may want to refocus on industry experience and qualifications in their new director selection process, and, in addition, provide tutorials to help their directors better understand and assess the risks the company faces. Proposed revisions to proxy statement disclosure obligations would expand required information about directors and director nominees, mandating a discussion of the specific experience and skills relevant to service as a director and, where applicable, as a committee member
Warren Buffett , “In looking for someone to hire, you look for three qualities: integrity, intelligence and energy” “Without the first the other two will [kill] you”
“An individual is whole and complete when their word is whole and complete, and their word is whole and complete when they honour their word,” says HBS professor Michael C. Jensen in this interview that appeared in Rotman: The Magazine of the Rotman School of Management, Fall 2009. Jensen (and his coauthors, Werner Erhard and Steve Zaffron) define and discuss integrity (“a state or condition of being whole, complete, unbroken, unimpaired, sound, in perfect condition”); the workability that integrity creates for individuals, groups, organizations, and society; and its translation into organizational performance. He also discusses the costs of lacking integrity and the fallacy of using a cost/benefit analysis when deciding whether to honor your word. Key concepts include:
1. The personal and organizational benefits of honoring one’s word are huge—both for individuals and for organizations—and generally unappreciated.
2. We can honor our word in one of two ways: by keeping it on time and as promised, or if that becomes impossible, by owning up to the parties counting on us to keep our word in advance and cleaning up the mess our failure to keep our word creates in their lives.
3. By failing to honor our word to ourselves, we undermine ourselves as persons of integrity, and create “unworkability” in our lives.
4. Integrity is a necessary but not sufficient condition for maximum performance.
5. There are unrecognized but significant costs to associating with people and organizations that lack integrity.
Most of the 10 European countries included in a new report by Transparency International (TI) lack adequate laws to protect whistleblowers who often take risks and brave possible sanctions to expose wrongdoing, including corruption.
In addition to revealing a legal void, the report also identifies ambivalent or negative attitudes towards those who report malfeasance in Bulgaria, the Czech Republic, Estonia, Hungary, Ireland, Italy, Latvia, Lithuania, Romania and Slovakia. Such negative perceptions, the report found, deter insiders from exposing corruption.
“Inadequate protection will result in crime going unreported,” said Miklos Marschall, Director for Europe and Central Asia at TI. “Whistleblowers must be shielded from retaliation. There must also be effective mechanisms to investigate their allegations.”
Whistleblowing is a key component in the fight against corruption. Those within public institutions and the private sector who speak out about wrongdoing potentially save lives and resources, as was the case when a doctor disclosed the cover-up of the SARS outbreak in China. Poor or no follow-up of initial reports, as in the Madoff pyramid-scheme scandal in the United States, can cost investors millions.
The TI report, Alternative to silence: Whistleblower protection in 10 European countries , shows that with the exception of Romania, none of the countries analysed currently have stand-alone whistleblower protection legislation. Hungary and Lithuania are in the process of drafting legislation. Further, in many countries, the act of reporting may be superseded by other laws which prohibit the release of information while libel and defamation regulations deter whistleblowing, the report found.
Additional Excerpts (Via Transparency.Org)
“Whistleblowers face high personal risks, particularly when there is little legal recourse to save them from dismissal, humiliation and even physical abuse,” said Anja Osterhaus, Programme Coordinator at TI and author of the report. “When illegal or unethical behaviour is reported, we all stand to gain. Companies, public bodies and non-profit organisations should introduce mechanisms to encourage internal reporting and provide a safe alternative to silence.”
Can you imagine an America without a strong middle class? If you can, would it still be America as we know it?
Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can’t make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.
Families have survived the ups and downs of economic booms and busts for a long time, but the fall-behind during the busts has gotten worse while the surge-ahead during the booms has stalled out. In the boom of the 1960s, for example, median family income jumped by 33% (adjusted for inflation). But the boom of the 2000s resulted in an almost-imperceptible 1.6% increase for the typical family. While Wall Street executives and others who owned lots of stock celebrated how good the recovery was for them, middle class families were left empty-handed.
The crisis facing the middle class started more than a generation ago. Even as productivity rose, the wages of the average fully-employed male have been flat since the 1970s.
Excerpts (Via Huffington Post)
But core expenses kept going up. By the early 2000s, families were spending twice as much (adjusted for inflation) on mortgages than they did a generation ago — for a house that was, on average, only ten percent bigger and 25 years older. They also had to pay twice as much to hang on to their health insurance.
Pundits talk about “populist rage” as a way to trivialize the anger and fear coursing through the middle class. But they have it wrong. Families understand with crystalline clarity that the rules they have played by are not the same rules that govern Wall Street. They understand that no American family is “too big to fail.” They recognize that business models have shifted and that big banks are pulling out all the stops to squeeze families and boost revenues. They understand that their economic security is under assault and that leaving consumer debt effectively unregulated does not work.
Families are ready for change. According to polls, large majorities of Americans have welcomed the Obama Administration’s proposal for a new Consumer Financial Protection Agency (CFPA). The CFPA would be answerable to consumers — not to banks and not to Wall Street. The agency would have the power to end tricks-and-traps pricing and to start leveling the playing field so that consumers have the tools they need to compare prices and manage their money. The response of the big banks has been to swing into action against the Agency, fighting with all their lobbying might to keep business-as-usual. They are pulling out all the stops to kill the agency before it is born. And if those practices crush millions more families, who cares — so long as the profits stay high and the bonuses keep coming.
