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Corporate Governance – =
Management’s =
Challenge
January 13, 2006
Presentation to Institute=
of Internal
Auditors
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My Perspective
=
•Pr=
incipally
that of front line CFO
•Hu=
ndreds
of presentations to investors
•Do=
zens
of board meetings
•Do=
zens
of “NO WAY” situations
•Al=
so as
an FEI lobbyist / advocate on behalf of CFOs and financial
executives
•Al=
so
that of a Corporate Director
•Al=
so
that of a Personal Investor
Be
a Student of Corporate Governance
=
•“ A good corporate governance structure is a working system for principled goal-setting, effe=
ctive decision-making and appropriate monitori=
ng of compliance and performance. Through such a vibrant and responsive structure, the C=
EO,
the management team, and the board of directors can interact effectively <=
/span>and respond quickly to changing
circumstances, within a framework of solid corporate values, to provide enduring value to the stockholders who invest in the enterprise.”
<=
/span>
•=
The
Business Roundtable, May 2002
Governance Challenge for Management
MULTIFACETED
MULTIFACETED
•Management is a hired agent/trustee/steward
•Tasked by the shareholders to maximize the value <=
/span>of the assets entrusted to them
=
•This role as an agent of others is underappreciate=
d
•Large assignment
•Control and protection of the assets
•Timely and accurate reporting about =
performance
•Strategic deployment of the assets
•Personal interface with board and investors
•
Scoring a 10 as a Management Team
•Promote TRANSPARENCY – “TIME TELLS ALL=
=
ANYWAYS” – never forget it!!!!! Balanced financial =
reporting.
•Help your board be informed, independent and active.
•Have a clear and simple strategy that all can
repeat
•Don’t be defensive. It only makes investors =
and directors more suspicious.
=
•Intellectual honesty – mistakes happen, busi=
ness
is tough.
•Promote a strong, practical and efficient internal=
control environment.
•
Governance Failures
=
•Agency abuse – excessive management <=
/span>compensation
to the shareholders’ detriment
•Fi=
nancial
reporting misstatement towards stock
price manipulation
•Misappropriation of company assets
•Ou=
tright
theft of company assets
•Conflicts of interest toward personal gain =
at companies
expense
Roots of Disasters
=
•“Corporate Arrogance”
•Lack of moral backbone on the front line
•Corporate Governance collapse
•Inability to challenge previously successful CEOs
•Boards that are bought off essentially
=
•Auditors that don’t audit
=
•Enforcement and regulatory oversight failure
Governance
Smoke Signals
=
•Lack of free communication with management – hesitant and guarded
•Board meetings and materials superficial
•CEO dominates director selection and committee assignments
•Audit committee going through the <=
span
style=3D'position:absolute;top:87.25%;left:7.19%;width:80.03%;height:10.75=
%'>motions – checklist oriented<=
/div>
Phil’s
Personal Red Flags
=
•SPIN
– CEO’s that think they can TALK their way out of anything.
•Corporate culture that says – “we̵=
7;re
better than anybod=
y”
– “you just don’t understand our business, we’re different, you don’t g=
et
it”
•Indecipherable financial reporting
•Over leverage and constant asset sales
•Complicated business models are more often a sign of problems, not genius
Governance Questions
=
•How does the CEO interact with the Board?
•Does she encourage questions? Comfortable with dissent?
•Does he surround himself with yes-men?
=
•Does she promote a real give and take with the Board?
•Does he limit director access to the staff?
•Is she a controlling personality or secure and open?
•Can I understand the business well enough to be a =
director?
Governance Questions
=
•“How does the company make money?”
=
;
•“Is shareholder value being created or
destroyed?”
•“Do we know which businesses earn above the =
cost of capital?”
•“How is employee morale? Retention rate of mgt?”
=
;
•“How does our strategy differ from our competitors?”
•“Are our major brands getting stronger or eroding?”
•“What major projects are under way? Are they on schedule and on budget?”
<=
/div>
•
My
Principles as Corporate Director
•Selection
and evaluation of CEO
•Successi=
on
– focus on depth of mgt
•Open and
honest communication
•Mutual
respect
•Stockholders
•Employees
•Communities
•Government
•Encourage
interaction
•Promote
social time
My
Principles as Corporate Director
<=
span
style=3D'font-size:114%;font-weight:normal'>•Selection
of advisors
<=
span
style=3D'font-size:114%;font-weight:normal'>•Private
time
•<=
span
style=3D'font-size:114%;font-weight:normal'>•Commitment
to great people
<=
span
style=3D'font-size:114%;font-weight:normal'>•Due
care in preparing materials
<=
span
style=3D'font-size:114%;font-weight:normal;visibility:hidden'>•
Contact
Information
Philip B. Livingston
Vice Chairman, Approva Corporation
=
;
Email: phil.livingston@approva.net
=
;
Phone: (703)956-8363
www.phillivingston.com
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eader›
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Unafraid to fire the CEO and oth=
er
senior executives if their performance should warrant termination and to
locate and recruit their successors
Willing and able to disagree and
challenge management
Knowing when to say “enoug=
h is
enough”
Aligned, as major stockholders, =
with
the interest of the corporation’s stockholders…
See Phil’s Statement and W=
hite
Paper – Principles of Corporate Governance pg iii-v
The paramount duty of the board =
of
directors of a public corporation is to select a Chief Executive Officers =
and
to oversee the CEO and other senior management in the competent and ethical
operation of the corporation on a day-to-day basis.
The selection, compensation and
evaluation of a well qualified and ethical CEO is the single most important
function of the Board.
Mutual Respect – The
relationships of the Board and management with stockholders should be
characterized with candor; their relationships with the employees should be
characterized by fairness; their relationship with the communities in which
they operate should be characterized by good citizenship and their
relationships with the governments should be characterized by a commitment=
to
compliance.
Motivated to make the corporation successful as soon as possible
=
Avoid information overload and mind-numbing presentations
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