Ch17 1

Corporate governance: 

Corporate governance Enron? Sarbanes-Oxley? Director “independence”? (last updated 01 Nov 07)

Why did Enron collapse?: 

Why did Enron collapse?

Slide3: 

Energy trading Energy production Vinson & Elkins LLP Arthur Andersen & Co. Shareholders Board

Slide4: 

Energy trading Energy production Vinson & Elkins LLP Arthur Andersen & Co. Special purpose Entity (LJM) Special purpose Entity Special purpose Entity Special purpose Entity Special purpose Entity Shareholders Board Assets (stock guarantee) Citibank JP Morgan $$ $$

The Enron boardand audit committee (*) (2001 DEF 14A): 

The Enron board and audit committee (*) (2001 DEF 14A)

Slide6: 

ROBERT A. BELFER, 65 Director since 1983 Mr. Belfer's principal occupation is Chairman and Chief Executive Officer of Belco Oil & Gas Corp., a company formed in 1992. NORMAN P. BLAKE, JR., 59 Director since 1993 Mr. Blake is Chairman, President and Chief Executive Officer of Comdisco Inc., a diversified technical equipment leasing and information technology services company. * RONNIE C. CHAN, 51 Director since 1996 For the past ten years, Mr. Chan has been Chairman of Hang Lung Group, comprising 3 publicly traded Hong Kong-based companies in property development, property investment and hotels. JOHN H. DUNCAN, 73 Director since 1985 Mr. Duncan's principal occupation has been investments since 1990. Mr. Duncan is also a director of EOTT Energy Corp. (the general partner of EOTT Energy Partners, L.P.) and Group I Automotive Inc. * WENDY L. GRAMM, 56 Director since 1993 Dr. Gramm is an economist and Director of the Regulatory Studies Program of the Mercatus Center at George Mason University. From February 1988 until January 1993, Dr. Gramm served as Chairman of the Commodity Futures Trading Commission in Washington, D.C. ** ROBERT K. JAEDICKE, 72 Director since 1985 Dr. Jaedicke is Professor (Emeritus) of Accounting at the Stanford University Graduate School of Business in Stanford, California. He has been on the Stanford University faculty since 1961 and served as Dean from 1983 until 1990. KENNETH L. LAY, 58 Director since 1985 Mr. Lay has been Chairman of the Board of Enron since 1986. From 1986 until February 2001, Mr. Lay was also the Chief Executive Officer of Enron. CHARLES A. LEMAISTRE, 77 Director since 1985 For 18 years, Dr. LeMaistre served as President of the University of Texas M.D. Anderson Cancer Center in Houston, Texas and now holds the position of President Emeritus. * JOHN MENDELSOHN, 64 Director since 1999 Since July 1996, Dr. Mendelsohn has served as President of the University of Texas M.D. Anderson Cancer Center. * PAULO V. FERRAZ PEREIRA, 46 Director since 1999 Mr. Pereira is Executive Vice President of Group Bozano. Mr. Pereira served for over five years as President and Chief Operating Officer of Meridional Financial Group and Managing Director of Group Bozano. FRANK SAVAGE, 62 Director since 1999 Since 1995, Mr. Savage has served as Chairman of Alliance Capital Management International (a division of Alliance Capital Management L.P.). JEFFREY K. SKILLING, 47 Director since 1997 Since February 2001, Mr. Skilling has served as President and Chief Executive Officer of Enron. Mr. Skilling served as President and Chief Operating Officer of Enron from January 1997 through February 2001. * JOHN WAKEHAM, 68 Director since 1994 Lord Wakeham is a retired former U.K. Secretary of State for Energy and Leader of the Houses of Commons and Lords. He served as a Member of Parliament from 1974 until his retirement from the House of Commons in April 1992. [CPA] HERBERT S. WINOKUR, JR., 57 Director since 1985 Mr. Winokur is Chairman and Chief Executive Officer of Capricorn Holdings, Inc. (a private investment company)

Slide7: 

*Thursday “… worst audit committee I have ever seen" John Nash, National Association of Corporate Directors

Slide8: 

Enron ethics? [click]

Sarbanes-Oxley Act of 2002: 

Sarbanes-Oxley Act of 2002

Independent directors …an oxymoron?: 

Independent directors … an oxymoron?

Independent directors: 

Independent directors “Firms with more independent boards do not achieve improved profitability, and there are hints they perform worse than other firms.” “To push for greater board independence may be fruitless or even counterproductive.” Prof. Bernie Black

Independent directors: 

Independent directors “We are spending too much time focused on issues related to complying with new laws and rules” “Directors should not only be watchdogs, but also aggressive bulldogs for building a long-term business.” Larry Hirsch

Role of independent directors(judicial review) …: 

Role of independent directors (judicial review) … Shareholder demand Takeover defenses Insider conflicts

In re eBay Shareholders Litigation(Del Ch 2004): 

In re eBay Shareholders Litigation (Del Ch 2004) Shareholders Insiders Omidyar, Whitman, Kagle Outsiders Cook, Lepore Schultz, Bourguignon 40% Demand IPO stock (“spinning”) I-bank business Derivative suit

Slide15: 

Top reasons why “Independent directors” should not get the nod. According to blogger Robert Brown (Univ of Denver) [paper] , Delaware courts -- use a subjective test for defining director independence then disregard it when convenient (such as the categorical exclusion of fees); effectively exclude from the analysis of independence personal relationships (other than those arising from family bonds); largely treat as independent directors employed by non-profits where non-profit receives big contributions from the company (or its employees); impose unreasonable pleading standards, frequently terminating the analysis of independence on motion to dismiss, precluding discovery typically examine each allegation of non-independence in isolation, without weighing all of the factors together; make factual determinations in connection with the analysis of independent directors on motions to dismiss; discourage challenges to independence by forcing plaintiffs to seek inspection, adding costs and delay without yielding appreciable benefits; rely on the standards employed by the stock exchanges to justify findings of independence, without discussing the differences in the standards; routinely disregard information suggesting a lack of independence at the motion to dismiss stage; and routinely require, on a motion to dismiss, that plaintiffs produce information about independence that cannot be obtained in the public domain.

Future of corporate governance (small group ranking of issues): 

Future of corporate governance (small group ranking of issues)

Slide17: 

10 trends that will shape governance landscape: 1. Majority voting will become the norm, replacing the plurality vote standard 2. Executive compensation will be brought into line: enhanced SEC disclosure, advisory shareholder votes,, and recognition of internal pay equity. 3. Separating the roles of chairman and CEO 4. The model of the imperial, celebrity CEO will be replaced by the stewardship model 5. Sustainability and corporate social responsibility, formerly relegated to gadflies, will be recognized as key corporate governance responsibilities 6. Shareholder communications and proxy voting systems will be revamped by the SEC to make better use of technology, 7. Shareholder resolutions will be overtaken by other forms of constructive engagement, and shareholder activism will become less confrontational, 8. The definition of beneficial ownership will become more complicated 9. The spotlight will shift from the governance of companies to the governance of institutional investors 10. Companies will come to recognize that corporate governance is not just a matter of regulatory compliance and accountability but a strategic goal John C. Wilcox, Head of Corporate Governance (TIAA-CREF)

The end: 

The end