Corporate Governance
We begin with a highly interactive lecture to address the key question of corporate responsibility. We first ask the core question, “To whom do you, as a corporate officer or director, owe responsibilities?” To a great extent, the course then follows the flow of the four principal stakeholders we will have identified: shareholders, customers, employees, and the public at large.
As our obligations to shareholders are far better defined in the law than, say, our responsibilities to the public, a question of ethics naturally arises in the discussion. Thus, in the first two sessions, we also introduce the “triple lens” framework. Specifically, we argue that every decision ought to be put through the test of three lenses: financial, legal, and ethical.
Later we discuss insider trading cases (Martha Stewart,) cases of misappropriation of a corporate opportunity (David Sokol of Berkshire Hathaway,) and a private equity case that raises questions of potentially unethical behavior (ABRY Partners and F+W Publications.)
We use a variety of cases as vehicles for discussing managing risks and managing risk managers. We introduce the notion of paying close attention to the distinction between risk management and sheer speculation, and discuss the global financial crisis of 2008. The cases we review:
- Fighting Corruption at Siemens. This is a case about a scandal involving Siemens paying hundreds of millions of dollars (or Deutsche Mark) in bribes around the world, and what they did to reform the corporate culture. It is a highly innovative multi-media case.
- The Fall of Enron.This case makes use of video to discuss the before and after of Enron. Did the company ever have a viable business model? What was so attractive about it? Where did it go wrong? Where were the failures? Were there governance failures? What could the board have done? What did they fail to do?
- Portfolio Risk Management. We combine a highly interactive lecture with a case discussion of Ashanti Gold. Ashanti was a Ghana-based gold mining company that received accolades for its highly sophisticated risk management techniques in the global derivatives markets. Eventually, the company nearly went bankrupt, largely as a result of its trading desk’s activities. Were they hedging the price of gold or speculating?
- The Tip of The Iceberg – JP Morgan and Bear Stearns. This is a great vehicle for discussing the recent global financial crisis, and the role corporate organization and incentives played in that meltdown.
On this day, we focus on the role of the board, its committees, and on how board actions help to institute or reinforce a corporate culture.
- Bausch & Lomb. Bausch & Lomb presents a rich case that helps us discuss four key questions: (i) Materiality – what is material enough to warrant using up the board’s time; (ii) Managerial discretion in accounting decision; (iii) Questions of revenue recognition, one of the most common ways firms commit accounting fraud; and (iv) The roles regulators play in influencing board and company behavior.
- Accounting Problems at Molex. In Molex, we discuss an accounting firm’s decision to resign an important account, unless the client’s board dismisses its CEO and CFO, both of whom appear to have done a good job. Should the board cave to the accounting firm’s demands, or should they accept the firm’s resignation? In the post-Enron era, how does “accepting your accountant’s resignation” look to regulatory authorities?
- Greenbriar Growth Partners. Greenbriar is a case about a very active private equity investor serving on the board of one of his portfolio companies. Whose interest does John Isenhower represent: his firm’s, the private equity firm's, or the portfolio company’s? And what is he to do when their interests may not be entirely aligned? In addition, what should the independent directors do when they feel he is being too aggressive? The case raises powerful questions about the boards of companies with dominant (whether controlling or not) shareholders.
- Simon’s Hostile Bid for Taubman. Simon and Taubman are established family-controlled mall developers in the United States. They are both listed companies, but still controlled by their respective founding companies. Simon is the largest, Taubman the highest-end. When Simon decides to acquire Taubman, the Taubman family says, “We are not for sale, regardless of price.” What should Taubman’s independent directors do?
On the final day of this program, we explore several comprehensive cases that allow us to tie together many of the concepts discussed over the previous days.
- Shell Oil in Nigeria. As an operator of an oil exploration joint venture with the Nigerian government, Shell Oil has been accused of complicity in the government’s arrest and conviction of environmental activist Ken Saro-Wiwa. Now as Saro-Wiwa is tried by a military tribunal and sentenced to death, should Shell let him hang? Or should they try to use their influence with the Nigerian government to seek leniency? Shell has a policy of non-interference in host countries’ affairs. Should they abide by their own policy, or try to protect Saro-Wiwa from what is widely believed to be an unjust conviction?
- Milgram Experiments.Yale psychology professor Stanley Milgram’s experiment demonstrated that people (or the vast majority of them) will follow orders from a perceived authority figure even if the order is one that is clearly causing physical harm to another (innocent) person. What are the implications for employee behavior? What does this say about companies’ ability to shape their employees’ behavior, for better or worse?
- Beech-Nut Nutrition Company. In this final case, the subject is Beech-Nut, a U.S. subsidiary of Nestlé Foods. Both Nestlé and Beech-Nut have strong reputations for high-quality food products. In Beech-Nut’s case, it is particularly well-known for offering a great “100% pure apple juice” for babies. What should Beech-Nut do when suspicions arise that its supplier might be shipping it adulterated concentrate, instead of pure concentrate? Beech-Nut is under tremendous pressure to produce profits for Nestlé, and concentrated flavored sugar water is not at all harmful to babies. A product recall would be enormously costly.