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    JANUARY 20

    Nature and Structure of Corporate Boards

    Reading Assignments:

    1.

    Corpor ate Di r ectors Guideb ook, Fifth Editi on, Sections 1 , 2, 4, 5 and 7Focused Questi ons:

    1. What a r e the k ey prov isions of Sar banes-Oxley?a. Cr eated the Public Acc ounting O ver sight B oar d

    i. Objecti ve T o over see the audit of public c om panies that a r e subject t o the secu r itieslaws in or der to pro tect the inte r est of investor s and fu r ther public inte r est in pr e par ationof inf or mation, accu r ate , and inde pendent audit r e por ts of which a r e sold to, and held by , public in vestor s.

    ii. Registe r public acc ounting fi r ms.iii. Establish auditing , quality c ontro l, ethics , inde pendence and other standa r ds r elated t o the

    pr e par ation of audit r e por ts.iv. Conduct ins pection of r egiste r ed acc ounting fi r ms.v. Im pose a ppropr iate sancti ons on public acc ounting fi r ms.

    vi. Per f or m other duties as outlined by SE C. b. Ex panded the ro le of the SE C

    i. Promulgate such r ules and r egulati ons as may be necessa r y or a ppropr iate in the publicinte r est.

    ii. Conduct ins pections to assess the deg r ee of com pliance of each acc ounting fi r m with theact , r ules of the B oar d, SEC.

    c. Audit or Inde pendencei. It is unlawful f or a r egiste r ed public acc ounting fi r m that per f or ms audit se rv ices t o

    prov ide any of the f ollowing n on-audit se rv ices:1. Bookk ee ping, financial inf or mation serv ices , a ppr aisal or valuation serv ices ,

    actuar ial se rv ices , inte r nal audit management or human r esour ces, brok er or deale r, legal or ex per t witness , or any other serv ice that SE C mandates.

    d. Pr e-a pprov al f or non-audit se rvicese. Audit par tner rotationf. Audit or communicati ons to the Audit Co mmittee

    i. All c r itical acc ounting policies and pr actices.ii. All alte r native tr eatments of financial inf or mation that ha ve been discussed with

    management.iii. Any c ommunicati on with management in vo lving unadjusted diffe r ences.

    g. Engagement of the Exte r nal Audit or h. Co m pensation of the Exte r nal Audit or i. Financial ce r tificati on

    i. The pr inci pal executi ve office r and CFO must ce r tify in each annual or quar ter ly r e por tfiled that:

    1. the r e por t does not contain any unt r ue statement of a mate r ial fact or omit t o state a mate r ial fact necessa r y in or der to mak e the statements.

    2. based on such office rs k nowledge , the financial statements and other financialinf or mation in the r e por t fair ly pr esent in all mate r ial r es pects the financialcondition and r esults of oper ations of the issues.

    j. Inside r Tr ading

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    k . Enhanced Financial Discl osur esi. All annual and qua r ter ly financial r e por ts r equir ed to be filed with the c ommissi on shall

    disclose all mate r ial off-balance sheet t r ansacti on, arr angements , o bligati ons, and other r elationshi ps of the issues with unc onsolidated entities that may ha ve a mate r ial cu rr entor futu r e effect on the financial c ondition of the fi r m.

    2.

    How should boar ds of dir ector s evaluate thei r own per f or mance?a. Eithe r inte r nally or thir d- par tyi. Thir d- par ty has the ad vantage of cir cumventing inte r nal facti onalism , or r iling u p

    tensions.ii. Thir d- par ty has disad vantage of maybe ma k ing the stuff public in the e vent of a lawsuit.

    But , if you hir e outside c ounsel t o over see the process , then you might be able t o claimattor ney-client pr ivilege.

    3. Desc r ibe the power r elationshi ps between the b oar d, management , and the sha r eho lder s. What can bedone to align these th r ee g rou ps?

    a. Exist in a g over nance t r iangle b. They act as a system of chec k s and balances

    c.

    Alignment:i. Shar eholder -Boar d Relati onshi p:1. Possible t o give stock op tions t o Boar d membe r s, though that is less of an

    incenti ve than f or executi ves2. Ty pically r ight n ow the r e is ver y little c ontrol over the B oar d by the sha r eholder s

    and the r e is ver y little t r ans par ency f rom the B oar d to the sha r eholder s.3. But , these a r e the big propo sals:4. Mak e dir ector s accountable t o shar eho lder s. One c om pelling way t o incr ease

    boar d accountability is t o r ecor d indi vidual di r ector s' votes on k ey corpor ater esolutions in proxy statements.

    5. Se par ate the positions of chai r man and CEO. This suggesti on is ha r dly novel-infact , s plitting the positions is a c ommon pr actice in many b oar droo ms outside theUnited States- but in light of our model of corpor ate gover nance , it's clea r whyse par ating these tw o roles is vital f or maintaining balance in the b oar droo m.Com panies that fuse the ro les of CEO and chai r man c o lla pse the g over nancetr iangle , unde r mining the system of chec k s and balances that is essential t o r es ponsible c orpor ate gover nance.

    6. Reinvigor ate sha r eho lder s. To star t, in the n omination and electi on process , shar eho lder s could signal thei r su ppor t (end or sement , neut r ality, or nonendor sement) f or candidates the b oar d puts f or th and vo te accor dingly. If inf or med by di r ector scor ecar ds, these r ecommendati ons could be e ven mor es pecific and lin k ed to the per f or mance of indi vidual di r ector s. Some la r ge pensionfunds li k e CalPERS , as well as s ome smalle r, socially based funds , ar e mov ing inthis di r ection.

    7. Give boar ds funding. In the c our se of nor mal e vents , most boar ds can functi onwell with inf or mation prov ided by management. But on cer tain G or dian issues--a

    bet-the-c om pany me r ger decisi on, say, or a com plex product liability c oncer n--insight f ro m an exte r nal per s pective could be ver y useful.

    a. Prov iding di r ector s with inde pendent funding: The Sa r banes-Oxley Actr equir es that audit c ommittees ha ve their own funds f or paying audit or sand ad viser s. Giving budgets t o the full b oar ds would sim ply extend this pr actice.

    ii. Executi ve-Boar d Relati onshi p

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    1. Boar d must prov ide com pany and CEO over sight2. CEO must r egula r ly communicate with the B oar d r egar ding st r ategic vision f or

    the com panyiii. Shar eho lder -Executi ve Relati onshi p

    1. Alignment is easy; st ock op tions (see executi ve com pensati on below)

    2.

    CEO prov ides t r ans par ent financial r e por ts4. How should a lead di r ector inte r act with management and the b oar d?

    In additi on to pr esiding at the executi ve sessi ons, the lead di r ector should act as an inte r media r y betweenthe CEO , the chai r man , and the b oar d, with the auth or ity t o call meetings of the inde pendent di r ector sand set the agendas f or those meetings. This di r ector should als o be able t o suggest t o the chai r man andCEO when it s a ppropr iate t o call a full b oar d meeting and c ollabor ate with him on setting the b oar dagenda afte r soliciting the views of the other inde pendent di r ector s. The lead di r ector needs t o facilitatediscussi on among the inde pendent di r ector s and pass along thei r views t o the CEO. In other wor ds, thisro le calls f or the soft sk ills , di plomacy and judgment , plus the c our age to r aise t ough issues.

    In executi ve sessi ons, he must fi r st listen t o what the other dir ector s ar e telling him and then c onvey itaccu r ately t o the CEO. Ma k e sur e the inte r actions between management and the outside di r ector s ar e as productive as they can be. The lead di r ectors biggest asset in c ontentious sessi ons is the ability t o listen , encour age ever ybody to talk, and then synthesize diffe r ing views.

    Relati onshi p with CEO: The lead di r ector should begin the r elationshi p with the pr esum ption that theCEO may view him with sus picion. The lead di r ector is usually the one to br eak any bad news t o theCEO. The lead di r ector should be f ocusing the CEOs attenti on on two or thr ee se r ious pro blems , not ona laund r y list of com plaints. If the r elationshi p is successful , the CEO will unde r stand that the b oar dwants him t o be oper ating at peak ca pacity , and he will g r adually sta r t to tr ust the lead di r ector as anadviser, sounding b oar d, and sometimes c onfess or . Hell also r ecognize that the r es something in ther elationshi p f or him. M or eover, a lead di r ector can r un inte r fer ence f or the CEO.

    5. Do you belie ve the CEO of a fi r m should als o be chai r man of the b oar d? Ex plaina. Against:

    i. Fail t o adequately chec k the CEOii. Pro bably ma k es boar d mor e passive

    iii. Each per son can f ocus on the one jo b, instead of tr ying t o do bothiv. Less over sight/acc ountabilityv. Mor e lik elihood f or corr u ption

    b. For i. Efficiency

    6. What a r e the k ey pr inci ples of a good executi ve com pensati on progr am?a. Challenge is t o balance cu rr ent en vironment whe r e public disa pprov es of lar ge sala r ies with the

    goal of the c orpor ation, to get talented peop le b. Stay c om petitive with simila r corpor ations in the fi ve ar eas of com pensation with out

    over com pensatingi. Sala r y;

    ii. Annual incenti vesiii. Long te r m incenti vesiv. Benefits and per quisitesv. Retir ement pack age

    7. Desc r ibe the k ey att r ibutes of a successful CEO.

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    a. Co nnected t o the O r ganizati on b. Team Leade r c. Co ur ageousd. Co ntrol cha r ismae. Customer dr iven

    f.

    Listene r, not a stor ytelle r g. Ambiti oush. Multitas k er i. Awa r e of fiducia r y r es ponsibilities

    j. Has the ability t o execute the visionk . Good communicat or l. Timely decisi on-ma k er m. Good Pe r sonnel S k ills

    8. What a r e the c orpor ate gover nance pr inci ples that b oar ds of dir ector s should c onside r ? Whichgover nance pr inci ples d o you feel b oar ds sh ould emb r ace?

    a. Rest r ict the numbe r of inside di r ector s.

    b. Inde pendent di r ector s need t o be inde pendent.c. Pr actice fiducia r y duties a vo id conflicts of inte r est.d. Long-te r m str ategic vision that f ocuses on enhancing sha r eowner value.e. Office r s and di r ector s need t o be aligned with sha r eho lder s and r eceive r easonable c om pensati on

    f or the r isk s that they acce pt.f. Inf or mation pr esented t o shar eowner s must be t r ans par ent.

    JANUARY 27

    The Chief Financial Officer

    S peak er : Lau r a Wr ight , CFO, Southwest Ai r lines

    Reading Assignments:1. Off-Ram ps and On-Ram ps, Kee ping Talented W omen on the R oad to Success , HBR , Mar ch 2005 (HBR

    website)2. Dogfight E r u ption Plane Tic k et Sales , WSJ , Janua r y 6, 20103. Pr ice Rises f or Fuel Th r eaten Ai r lines Net , WSJ , Janua r y 13 , 2011

    Focused Questi ons:1. Why is EBITDA n ot a good measu r e of a fi r m's per f or mance?

    a. Losses a r e magically t r ansf or med int o gains and inc onvenient financial facts that can t beex plained away a r e sim ply ign or ed. As many b oar d membe r s, es pecially th ose on audit andcom pensation committees , have lately lea r ned t o their disg r ace , management can over stater evenue or unde r state ex penses , pass off one-time windfalls as r ecurr ing gains , or, conver sely , disguise r ecurr ing losses as singula r events.

    b. The pr ivate ca pital fi r ms that or iginally em ployed EBITDA as a valuation too l had r easons f or r emov ing inte r est , taxes , de pr eciation, and am or tization f ro m thei r ear nings calculati ons. Theyr emoved taxes and inte r est because they wanted t o substitute thei r own tax- r ate calculati ons and

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    the financing c osts they ex pected unde r a new ca pital st r uctur e. Amor tization was excluded because it measu r ed the c ost of intangible assets acqui r ed in s ome ea r lier per iod, includinggoodwill , r athe r than any cu rr ent ex penditu r e of cash. De pr eciation, an indi r ect and bac k war d-look ing measu r e of ca pital ex penditu r e, was excluded and r e placed with an estimate of futu r eca pital ex penditu r e. In sum , pr ivate ca pital fi r ms st r i pped out inte r est , taxes , and de pr eciation

    because they we r e going to r e place them with thei r own pr esumably m or e pr ecise numbe r s.c. EBITDA a pplied t o public c om panies is a ver y diffe r ent matte r . Fir st of all , r athe r than use thenumbe r to value enti r e com panies , as pr ivate ca pitalists d o, public c om panies and analystsencour age in vestor s to use EBITDA t o value sha r es of stock . Unlik e pr ivate ca pitalists , though , most stock investor s dont substitute thei r own numbe r s f or the numbe r s that EBITDA d rop s.Co m pounding this pro blem , many analysts and j our nalists u r ge in vestor s to use EBITDA as ameasu r e of the cash a business gene r ates. Such ad vice is ill ogical, misleading , and haza r dous to investor s wealth

    d. It is only as r eliable as the Eea r ningsthat g oes int o it. In any case , its no mor e than a rougha ppro ximati on of oper ating cash fl ows. If a c om pany just b r eak s even on EBITDA , it will n ot

    gene r ate en ough cash t o r e place basic ca pital assets used in the business. Inside r s and outside par ties need t o ask : Why d oes the c om pany pr efer EBITDA t o conventional ea r nings?

    2. What a r e the pr imar y r es ponsibilities of the CFO?a. Managing the financial r isk s of the business or agency. This office r is als o r es ponsible f or

    financial planning and r ecor d-k ee ping, as well as financial r e por ting t o highe r management. (Inr ecent yea r s, however, the ro le has ex panded t o encom pass communicating financial per f or mance and f or ecasts t o the analyst c ommunity.)

    b. set tgts

    c.

    long te r m financial pland. monitor per f or mance daily r e por tse. hel p define st r ategic planf. investor r elationsg. accu r acy inte r nal controls, audith. com pliance with r egsi. k ee p back office r unning

    Case: The Board of Directors at the Coca-Cola Company (9-404-039)

    Case Questi ons:1. How has the ro le of the Coca-Co la Boar d changed over the com panys hist or y?2. Mor e s pecifically , how has the B oar d been in vo lved in sha ping the c om panys str ategic di r ection?3. What is y our assessment of the way the B oar d and M r . Daft handled the potential acquisiti on of Qua k er

    Oats?4. In 2003 , how would you evaluate the Co ca-Co la Boar d if you we r e a sha r eho lder ?5. Do you ag r ee with the f r equent media c r iticism of the Coca-Co la boar d?

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    FEBRUARY 3

    Directors Fiduciary Responsibility

    Guest S peak er : Mik e McKetta , Attor ney, Gr aves D oughe r ty Hea ron & M oo dy

    Reading Assignments:1. Corpor ate Di r ector s Guideb ook, Fifth Editi on, Section 32. Some Th oughts f or Boar d of Dir ector s in 2009 , Li pton R osenblum and Cain.3. Risk Management and the B oar d of Dir ector s, Novembe r 2008 , Li pton R osenblum and Cain4. Lawye r ly Wisd om to Rescue Y ou From the Ec onomic St or m, CBM , 2nd Qua r ter 2009.5. Shar eho lder Suits: Y ou Ain t Seen N othing Yet , CBM , Janua r y/Feb r uar y 20096. Life Afte r Madoff s Big Lie, WSJ , Decembe r 11-12 , 2010

    Focused Questi ons:1. How does the business judgment r ule protect di r ector s?

    a.

    The Business Judgment Rule immunizes di r ector s f ro m honest mista k es and poor decisions, aslong as the decisi ons a r e within thei r author ity and as l ong as the decisi on com plies with thei rfiducia r y r es ponsibilities.

    b. Tw o exce ptions:i. S pecial Co mmittees

    1. Sale of a corpor ation2. Tr ansacti on with d ominant sha r eho lder s

    c. Disney c onsciously indiffe r ent2. What a r e the k ey r es ponsibilities of membe r s of boar ds of dir ector s to the fi r m they se rve? Do the

    r es ponsibilities of dir ector s var y de pending on the matu r ity and size of the c om pany?a. The r es ponsibilities will var y de pending on whethe r the com pany is new or matu r e. A new

    com pany will r equir e a m or e engaged acti ve boar d. b. In gene r al:

    i. Hir e CEOii. Review CEOs per f or mance/a pprov e CEOs com pensati on

    iii. Review/a pprov e corpor ate st r ategyiv. Review/a pprov e acquisiti onsv. A pprov ing hi r ing and c om pensati on of CEOs dir ect r e por ts

    vi. Nominate/select new di r ector svii. Review financial r e por ts

    viii. Promote the best inte r ests of the fi r m3. Desc r ibe the fiducia r y duties of membe r s of boar d of dir ector s and seni or management.

    a. For a Delawa r e corpor ation:i. Duty of Care : dir ector s must act on an inf or med basis and in a delibe r ative manne r

    ii. Duty of Loyalty : dir ector s must act with out any c onflict of inte r est de r ived f ro m amate r ial per sonal financial inte r est in the matte r unde r conside r ation

    iii. Duty of Good Faith : dir ector s must als o act in a manne r that they h onestly belie ve to bein the best inte r ests of the c orpor ation and its st ock ho lder s, without r egar d to per sonal or pr ivate motives, even if n on-financial in natu r e

    iv. Duty of Disclosure : dir ector s ar e ex pected t o mak e full and fai r disclosur e to thestock holder s and the b oar d of dir ector s of per tinent inf or mation within the B oar dscontrol (als o sometimes r eferr ed to as the duty of cand or )

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    v. Duty of Obedience : Requi r es a di r ector to avo id committing acts bey ond the sc ope of the power s of the c orpor ation as defined by its cha r ter or the laws of the state ofincorpor ation.

    4. How can the B oar d best balance its ro les of ad visor of management and as an agent f or theshar eho lder s?

    Me: While the BoD has always had a dual role as a resource for and advisor of management, on the one hand, and as anagent of SHs on the others, regulators and activist SHs are tipping this balance in favor of the BoD s role in monitoringcompliance w/ legal and accounting rules.

    y Monitoring f(x) has also gained increased prominence as a result of the financial crisis, which has highlighted inparticular the need for effective risk and compliance oversight. A combo of the 2 roles, however, is necessary for theBoD to be truly effective, and each BoD must find the right balance between monitoring compliance and advising asto strategy.

    y F inding this balance is a critical starting point in any consideration of how to structure the membership andoperations of the BoD

    The corporate balance of power relies on three critical anchors-shareholders, management, and the board of directors. Eachof these has important responsibilities of its own, but their interactions are the key to effective governance. When they worktogether as a system, they provide a powerful set of checks and balances. But when pieces of the system are missing, or notfunctioning well, the system as a whole can become dangerously unbalanced.

    All three relationships in the governance triangle (shareholders-management, management-board of directors, and board of directors-shareholders) depend on mutual accountabilities and an exchange of information. You do not want to be a rubberstamp to the CEO, and cannot feasibly always incorporate SH input. Keeping the long-term company best interests of company in mind can help to balance.

    y Independent Ds help to create independent decisions with balanced interest in mind. Appropriate role of D is asoverseer, not day to day management. Should give frank opinion to mgmt.

    y Seaparate the positions of Chairman and CEO: separating these two roles is vital for maintaining balance in theboardroom. Companies that fuse the roles of CEO and chairman collapse the governance triangle, undermining thesystem of checks and balances that is essential to responsible corporate governance

    y G ive boards funding. Balancing concerns between mgmt and SHs might sometimes requie insight from an externalperspective could be very useful to keep what is right for the company, and thus the SHs and mgmt, in mind.: TheSarbanes-Oxley Act requires that audit committees have their own funds for paying auditors and advisers. G ivingbudgets to the full boards would simply extend this practice.

    y Consider direct lines of communication with shareholderso Companies increasingly willing to communicate with SHs. Ds from Pfizer, Home Depot have met with SHs

    and CtW investment group met with six major banks to discuss concerns. These meetings might benecessary in situations to forestall proxy initiatives particularly when corp has had major compliance orperformances issues

    o BoDs should consider both the advantages and disadvantages and evaluate them case-by-case. Activists not wanting listen-only mtgs, but are incentivized to use the leverage of a potential proxy contest, negativepublicity, SH resolutions and other pressure tactics to promote ongoing, routinized brokering of private

    deals with companies on governance and other things.o Appropriate response to requests for meetings should consider competing concerns as well as SH relationsprograms, and whether greater interactions appropriate. If Ds agree to meet should have managementrepresentative with Ds so that there are not comments misconstrued by SHs and don t undermine theCEOs role as primary spokesman. Should consult mgmt and other Ds to avoid confusion or contradiction incompany s public posture and adhere to requirements of Regulation F D.

    y Consider shareholder proposals seriously o Ds should evaluate whether SH proposals will promote long-term value creation. Study this year said SH

    proposals do not measurably improve stock market or operating performance. Another fiction of activistmovement is utility of corporate governance ratings, which are based on one-size-fits-all metrics and usedto keep track of latest governance dogma. Two studies concluded that governance ratings are not good

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    predictors of corp performance and caution companies against making governance changes solely to boosttheir ratings.

    o Responses of corps to SH proposals that receive majority support are monitored by activists andRiskMetrics as policy recommends a withhold vote when Board fails to be sufficiently responsive to theseproposals. Paying close attention to SH proposals and being proactive in SH communications anddisclosure will likely created right environment for acting on SH resolutions even when determination may

    be to reject them.o Ds should watch developments in reg and legislative arenas. Ex: Carl Icahn announced that he is launching

    a lobbying group to push legislators to pass pro-SH law including leg that sets limits in exec compensationand prohibits poison pills and classified boards. Corporate social responsibility framework outlined inreport of Special Representivate to UN proposes another layer of expansive procedural and monitoring reqsfor boards.

    a. Se par ating or avo iding c onflicts of inte r est would be a g r eat sta r t. These tw o duties a r e notmutually exclusi ve, but r athe r go hand in hand. By acting as an ad visor of management , theBoar d u pholds its duties t o act in the best inte r est of its sha r eho lder s. So by pr acticing acti veover sight over management , es pecially u pper level executi ves, the B oar d can r est assu r ed thatthey ha ve access t o the most inf or mation needed t o mak e inf or med decisi ons as inde pendentdecisi on mak er s. Inde pendent decisi on mak ing r equir es maintaining a fine line between itsr elations with management. While di r ector s need t o be aligned with management t o mak e su r ethey a r e effectuating the l ong and sh or t te r ms of the c orpor ation, they must als o se par atethemsel ves in or der to have an unbiased per s pective in sc r utinizing oper ational affai r s of management , es pecially in r egar d to CEO over sight. The di r ector must always r emembe r wher ehis duty lies , which is t o the sha r eholder s, and acc or dingly minimize possible c onflicts withu pper management that pr events h olding an inde pendent per s pective of constr uctive sk e pticism.One of the best ways of do ing this w ould o bviously be t o maximize the numbe r of inde pendentdir ector s serv ing on its b oar d, and minimize the pr esence of inte r ested indi viduals li k e the CEO.

    b. This is es pecially t r ue when it c omes t o the decisi on over whethe r or not a CEO sh ould se rve in adual ro le as CEO and Chair . It w ould be best t o avo id such a situati on, since executi ve controlover the boar d can lead t o a situati on whe r e the CEO has inc r eased oppor tunity t o mani pulate theBoar d. This pro blem is ver y evident and exace r bated in the situati on whe r e a CEO is als o theChair, and his duties as CEO , as well as c orpor ate st r uctu r e and access t o com pany managementand em ployees , can often enable the potential t o successfully act in self-dealing ways. H owever, the pro blem can bec ome cir cula r with r egar d to finding s olutions if the ro les of Boar d andmanagement a r e not se par ated prop er ly. The duty as ad visor of management is o bviously at r isk of br each when y ou have a situati on whe r e the CEO, as Chair, essentially c ontro ls the B oar dsaccess of inf or mation r egar ding oper ational affai r s. The CEO is als o enabled t o mani pulate the

    boar d agendas and meeting procedu r es, which is dange rous if the CEO is b oth Chair and ashar eholder as well.

    c. Since it is ver y common now to align management and sha r eho lder inte r ests th rough executi vestock com pensation plans , the CEOs possible inte r ests in self-dealing a r e exace r bated if he isgiven the oppor tunity t o control the B oar d. He may want t o mak e decisi ons that maximize theshor t-ter m value of his st ock as oppo sed t o the long te r m maximizati on of over all sha r eholder value , es pecially when the r e ar e enough annual incenti ves and b onuses in place t o incenti vizehim t o do things such as mani pulate financial over sight of the c om pany, pur suant t o his ro les as aclose par tner with b oth the CFO and the B oar d. This can r esult in a situati on whe r e the CEO hashis thumb over the affai r s of the management , em ployee r elations, the Di r ector s, and theshar eholder . Additi onally , dir ector shar eholder s may lend undue c r edence t o the statements of the CEO-Chair because thei r per sonal financial inte r ests a r e tied t o the com pany. The r ationale

    behind this is that the inc r eased per sonal financial sta k e will incenti vize these di r ector s to buddy

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    u p with the CEO in or der to k now mor e about oper ational acti vities. In the or y, this per sonalinte r est can w ork out gr eatly since it enc our ages acti ve r elations with management. H owever, acunning CEO awa r e of his inc r eased influence over the B oar d via his Chair position, canmani pulate the decisi on-ma k ing processes of Boar d membe r s th rough his ro le as the gate k ee per of inf or mation.

    d.

    The CEOs closer r elations with management and em ployees only ma k es the r isk potentialwor se. His inc r eased sway over both the B oar d and the fi r ms em ployees leads t o a situati onwher e it bec omes ver y har d to challenge the CEOs per f or mance or any possible ulte r ior agendasor motives. Due t o the B oar ds r eliance on the such a CEO , it can o bviously dec r ease the abilityand incenti ve to act f or shar eho lder s bette r ment th rough acti ve CEO over sight. Additi onally , thesituati on is als o one cha r acte r ized by c om placency and a lac k of scr utinizati on over the fi r msfinancial progr ess and stability. This is because the ease of access t o r elevant inf or mation via theCEO-Chair can disincenti vize them t o conduct inde pendent sc r utinizati on or to engage theconsultati on of outside ad visor s. Over time , the di r ector s may bec ome me r e pu ppets of the CEOwho has the c ontrol to pull thei r str ings and ma k e them m ove in any di r ection he wants. Such aclose alignment ma k es it ver y difficult t o see the c om pany with a clea r per s pective. Additi onally ,

    inde pendent di r ector over sight may sta r t to be viewed as cumbe r some to dir ector s since theyhave easie r access t o inf or mation through the CEO- Chair that r equir es a lot less inde pendent bur den or work . In the end , we just ha ve a bunch of Boar d di r ector s who ar e too lazy andunawa r e to questi on or scr utinize thei r CEO , thus failing its c or e duty t o the sha r eho lder s.

    5. Ar e Boar d membe r s tak ing on mor e liability at this time than they ha ve hist or ically?a. Yes and N o

    b. No because the r e is still the significant pro tection of the business judgment r ulec. Yes because it is clea r that the business judgment r ule d oes not pro tect e ver y action tak en by

    dir ector si. V an Gorkom : dir ector s we r e f ound g rossly negligent because quic k ly a pprov ed me r ger

    without substantial inqui r y or ex per t advice, ther ef or e br eached duty of car e, protectionof business judgment r ule una vailable

    6. What role can D&O c over age play in pro tecting Di r ector s?a. Mak e su r e if they a r e held liable , they d ont ha ve to pay out of per sonal assets

    7. What can a di r ector do to k ee p corpor ate decisi ons away f ro m a ju r y and in purv iew of the b oar d of dir ector s?

    a. Act disinte r ested based on as much inf or mation as possible , then get benefit of business judgment r ule

    b. Process must be inde pendent , inf or med , in goo d faith , and with out conflicts8. What questi ons do inde pendent di r ector s need t o ask themsel ves to insu r e that in a t r ansacti on invo lving

    their com pany they ha ve com plied with thei r fiducia r y duties?

    a. Have I r ef r ained f rom doing something that hu r ts constituents (c orpor ation and sha r eho lder s) or is motivated by self inte r est

    b. Have I d one what a pr udent per son would d o in simila r cir cumstances?c. Have I made a decisi on based on a process that is

    i. Inde pendentii. Inf or med

    iii. In good faithiv. In best inte r est of com pany and sha r eho lder sv. With out conflicts

    9. What a r e the di r ector s fiducia r y duties t o a solvent corpor ations cr edit or s?

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    a. The di r ector s have no duties t o cr editor s when a c orpor ation is s o lvent , they just ha ve a duty t o the corpor ation and the sha r eholder s

    b. When the c orpor ation is ins olvent th ough , the di r ector s do have duty t o cr editor si. The r isk tak er s of bad judgment in an ins o lvent corpor ation ar e cr editor s

    ii. So cour ts ask if the di r ector s acted prop er ly towar ds the r isk tak er s of the decisi on

    1.

    The test is n ot based on a par ticula r cr edit or, just c r edit or s gene r allyiii. But only a t r ustee d or someone on behalf of the c orpor ation can sue the di r ector s10. Unde r what ci r cumstances can an outside di r ector r ely on management and exte r nal ex per ts in ma k ing

    decisions?

    a. Dir ector s should gathe r and use as much inf or mation as possible whethe r that comes f rommanagement or exter nal ex per ts

    b. But di r ector s must engage in inde pendent decisi on mak ing based on the inf or mation that thegathe r instead of just r ubbe r stam ping that inf o

    11. What process sh ould be used t o insu r e that the business judgment r ule will pro tect inde pendent di r ector swhen a t r ansacti on invo lving significant c om pany assets is being c onside r ed by the b oar d?

    a. Dir ector s duties a r e tested m ost in times when significant c om pany assets a r e on the line , e.g.tr ansacti ons and me r ger s

    b. Dur ing these times di r ector s must r ef r ain f ro m acti on motivated by self inte r estc. They must fulfill thei r duties t o the corpor ation and the sha r eholder s by engaging in an inf or med ,

    inde pendent decisi on ma k ing process du r ing which they gathe r as much inf or mation as possible

    The Role of General Counsel in a Public Corporation

    Guest S peak er : Char les Matthews , For mer Gene r al Counsel of Exxon

    Reading Assignments:1. Corpor ate Di r ectors Guideb ook, Fifth Editi on, Sections 8 , 9, and 102. The W or ldCo m Settlement and Di r ector Liability , Wachtell , Li pton, R osen & Katz , Janua r y 7, 20053. Six Legal Questi ons Di r ector s Must As k, CBM , July/August 20084. The Ene r gy of Char les Matthews , Su per Lawye r s, Mar ch/A pr il 2009

    FEBRUARY 10

    Corporate Boards and Start-Up CompaniesS peak er : Alan Bla k e, CEO and F ounde r of York town Techn ologies

    Reading Assignments:1. Char ge It! , WSJ , Novembe r 29, 20042. Its All Relati ve. A family business l oan can be a r eci pe f or disaste r . It d oesnt have to be. WSJ ,

    Novembe r 29, 20043. The Sec r ets of Ser ial Success , WSJ , August 20 , 20074. The Inn ovators DNA , HBR , Decembe r 2009 , p. 61-66 (HBR website)5. Beating the Odds When Y ou Launch a New Ventu r e, HBR , May 2010 , p 92-98 (HBR website)

    Focused Questi ons:

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    1. What can a small business per son do to secu r e the necessa r y ca pital t o star t a business?a. Bank - pro bably not

    b. Non pro fit progr ams var ious, micro lende r s often want t o k now about the business and the per son

    c. Small business administ r ation bac k ed loand. Cr edit ca r ds may be the only thing a vailable , good f or fast financing , r isk y b/c of high inte r est ,

    per sonal liabilitye. Boo tstr a ppingf. Fr iends/family/f oo ls

    2. What ma k es an indi vidual a successful se r ial ent r e pr eneu r ?a. High prop ensity f or r isk /innovation/achie vement

    b. Less sca r ed of failu r ec. Good at r ecover ing f rom failu r ed. Able t o dr aw on ex per ience/c ontacts/financing f rom ea r lier ventu r es, and able r ek indle thei r

    initial passion

    3. Why a r e many ventu r e investor s f ocusing on lar ger and la r ger businesses?

    Many ventu r e investor s say in vesting in la r ger fir ms -- pr ivate and public c om panies with establishedr evenues and profits , but smalle r than the h ouseho ld names ty pically ta r geted by buy out shop s -- can hel p sideste p the st r uggles in thei r tr aditional ma rk et of tiny sta r t-u p com panies. Ventu r e ca pitalists gene r allymak e money only when the c om panies in which they in vest g o public or ar e sold. S pr eading in vestmentsamong buy outs , small and big c om panies is less r isk y than the "s pr ay and pr ay" a ppro ach common inventu r e investing: Putting m oney in d ozens of tiny , un prov en com panies and h op ing one or two will be hugemoney ma k er s.

    4. Is it t r ue that in vestor s in fi r st round financing n or mally get "c r ushed?" If s o, why d o peop le andventu r e funds in vest in fi r st round financing?

    Curr ent 'best pr actices' suggest that angels might d o bette r setting thei r sights e ven highe r, look ing f or com panies that will ha ve at least the potential t o prov ide a 20x-30x r etur n over a five- to seven-yea r holding per iod. Afte r tak ing int o account the need t o cover failed in vestments and the multi-yea r ho ldingtime f or even the successful ones, however, the actual effecti ve inte r nal r ate of r etu r n f or a ty picalsuccessful por tf o lio of angel in vestments might , in r eality , be as 'l ow' as 20-30%. While the in vestor 'sneed f or high r ates of r etur n on any gi ven in vestment can thus ma k e angel financing an ex pensive sour ce

    of funds , chea per sour ces of ca pital, such as bank financing , ar e usually n ot available f or most ea r ly-stage ventu r es, which may be t oo small or young t o qualify f or tr aditional loans.

    Governmental Affairs and Management at NASA

    Guest S peak er : Ma r y Ellen Webe r, Vice P r esident f or Gover nment Affai r s and P olicy at UT S outhweste r nMedical Center and f or mer astronaut.

    Reading Assignments:1. Sma r t Power, HBR , Novembe r 2008 (HBR website)

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    2. Leade r shi p Lessons f rom Ab r aham Linc o ln, HBR , A pr il 2009 (HBR website)3. Ar e You a High P otential , HBR , June 2010 , p. 78-84 (HBR website)4. Pr esident Re vs U p Cam paign t o Mak e Peace With Business , WSJ , Janua r y 7, 2011

    FEBRUARY 17

    Private Wealth Management

    Guest S peak er : Geoff r ey Rayn or, CEO of Q In vestments

    Reading Assignments:1. Hedge Funds Int o the B oar droom, CBM , Janua r y/Feb r uar y 20072. The Mutual Fund in the Flash Cr ash , WSJ , Octo ber 7, 20103. Hedge Funds Raided in P ro be, WSJ , Novembe r 23, 20104. Tilt on Flaunts He r Style as Pat r iar ch, WSJ , Janua r y 8-9 , 2011

    5.

    Hedge Funds Pack Beha vior Magnifies Swings in Ma rk et, WSJ , Janua r y 14 , 2011Focused Questi ons:

    1. Should hedge fund executi ves se rve on the b oar ds of publicly t r aded c om panies?a. Knowledgeable ab out com pany , how ma rk et r eacts

    b. May be t oo shor t ter m if they sit on the b oar d though they ha ve dutiesc. Sometimes ha ve hel ped value , other times hu r td. Needs su ppor t of other shar eho lder s anywayse. Can prov ide outside per s pective

    The Role of the Federal ReserveS peak er : Richa r d Fishe r, Pr esident & CEO , Fede r al Rese rve Bank of Dallas

    Reading Assignments:1. Fede r al Rese rve document ( pages 1-25)2. Geithne rs Tr ade Plan Falls Sh or t at G-20 , WSJ , Octo ber 23-24 , 20103. Fed Fi r es $600 Billi on Stimulus Sh ot, WSJ , Novembe r 4, 20104. Fr esh Attac k on Fed M ove, WSJ , Novembe r 15, 2010Fed Gl o bal Bac k lash G rows, WSJ , Novembe r 8,

    20105. Cr iticism Hinde r s Fed s Plan , Novembe r 22, 2010

    6. Investor s For ecast: Sunny with a Chance of Over heating , WSJ , Janua r y 3, 20117. Meet the Su ppor ting Cast , WSJ , Janua r y 3, 20118. Wea k Hir ing Casts a Cloud, WSJ , Janua r y 8-9 , 20119. Fed Chief Gets a Li k ely Bac k er, WSJ , Janua r y 10 , 201110. U.S. Fact or ies Buc k Decline , WSH , Janua r y 19 , 2011

    FEBRUARY 24

    The CEO and the Media

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    Guest S peak er s:Wayne Slate r, Chief P olitical W r iter, Dallas Morning News James M oro ney, Publishe r and CEO of the Dallas Morning News

    Reading Assignments:1. Analysis: P ost-Mor tem of CBSs Flawed B roadcast , NYT , Janua r y 11 , 2005

    2.

    How Old Media Can Su rv ive in a New W or ld, WSJ , May 23 , 20053. Edit or Out as Mu r doch S peech Changes , WSJ , A pr il 23 , 20084. TVs Alte r nate Uni ver se, WSJ , Octo ber 15, 2010

    Focused Questi ons:1. What is the ro le of the media in the 21 st Centu r y?

    a. Media is pr etty much li k e the 4 th br anch of gover nment in this day and age. It oper ates t o r einf or ce and enhance the system of chec k s and balances by in vestigating and r e por ting on theoper ations and d oings of the other br anches. It als o does a g r eat jo b of allowing the peop le of thecountr y to act as the 4 th br anch of gover nment , and in b oth of these r es pects , pro bably enhancesand bo lster s the f oundati on of democr atic ideals this c ountr y was f ounded u pon. Thin k back to

    the ea r ly days of our countr y whe r e townshi p meetings we r e common place and essentiallyallowed the peop le a lite r al and figu r ative vo ice in g over nmental affai r s. Now that media hass pr ead to other f or ms such as twitte r, facebook, youtube etcANYONE can vo ice thei r op inionand act as a r e por ter . In this ca pacity, anyone can act as a chec k /balance on the g over nmentalaffai r s of this c ountr y and media in the 21 st centu r y consequently all ows f or mor e opendisclosur e. It als o f or ces the g over nmental b r anches t o be mor e f or thcoming with discl osur e, r athe r than being t oo secr etive, because the r e is a much bette r chance in the m oder n media e r athat they will be ex posed e ventually anyways if sec r ets a r e k e pt. Media pr esently has ad vocatedmor e civic in vo lvement because n ow we can bec ome awa r e of what s going on in Texas , Illinois,Tok yo, Kuwait , etc. in a s plit sec ond. It s THAT easy.

    2. How should the publishe r balance the need t o gene r ate a pro fit and the news pa pers r es ponsibility t o the public?

    a. Guess: Maintain integ r ity and c r edibility at all times , because as s oo n as you sac r ifice these pr inci ples the public will tu r n its bac k on you. At the same time , it is im por tant t o gene r ate pro fits but my best guess as h ow to do this (while balancing integ r ity and c r edibility) is t o work har der to publish c r edible and r es ponsible news r athe r than publishing lies or unf oundeds peculation. It is t r ue that the sh ock er st or ies a r e going to gene r ate a lot of r eade r s and profits ,

    but this is n ot a sustainable st r ategy f or pro fit gene r ation in the l ong r un because the lies willeventually be ex posed and y our cr edibility will be at sta k e. At the same time , you ha ve to publishstor ies that the public ca r es about but must wal k the fine line between publishing ga r bageconsistently (Lindsay L ohan) and u pho lding y our duty t o r e por t r eal news (b ombing in the Gazastr i p). Additi onally , to not act this way als o r isk s alienati on f ro m news staff wh o car e mor e about

    jour nalistic integ r ity in thei r r e por ting r athe r than pushing fluff st or ies. The news pa per indust r y, s pecifically , em ploys indi viduals wh o have an inc r eased inte r est , even at a fundamental c or elevel, in indi vidual aut onomy, em power ment , and f r eedom in thei r s peech. When y ou r eally

    br eak it down, the jo bs of r e por ter s ar e to be sc r utinize r s and in vestigat or s. So these guys a r e notf oo ls and can see th rough whate ver corpor ate bullshit y ou push thei r way. Additi onally , ther e is pro bably a c ommon pr inci ple among r e por ter s to be sk e ptical and t o never be victims of corpor ate irr es ponsibility. This pr inci ple de r ives f rom thei r ro les and desi r e to ex poseindividuals/c orpor ations r athe r than be c ontrolled by them. As seen by CBS , alienating y our r e por ter staff is a k in to corpor ate suicide.

    3. What can be d one to hel p "o ld media" su rv ive and pros per in the futu r e? Be s pecific ab out the var iousf or ms of old media.

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    a. Network news let viewe r s behind the sc r een/unedited inte rv iews , broadcast with alte r nativemethods lik e online , f or m over seas alliances

    b. Network tv less pr imetime/chea per shows, mak e it possible f or ppl to watch online at w ork, letinde pendent progr amming in

    c. News pa per s new online c ontent , customized news pa per, u pdates sent t o cell phonesd. Adver tising na rro w ad t o narro w audience , tur n ads int o progr amming , find new channelse. Book publishe r s- meet public , go pa per less , cate r to new cultu r esf. Mov ies ex pand ro le of theate r to new offer ings , abandon dvds, home dist r ibutiong. Music dist r ibute th r u file sha r ing, mo bile phones , ca pitalize on musicians

    4. What can a maj or news or ganizati on do to insu r e that it r e por ts the news in a fai r and accu r ate manne r ?

    Unde r dur ess f rom budget cuts , poor r atings , and r educed influence , CBS News suffe r ed acr ushing bl ow to its c r edibility afte r the GWBush/Nati onal Gua r d stor y scandal. F our executi ves at CBS

    News l ost thei r jo bs. One questi on that r emained , how much r es ponsibility sh ould be gi ven to division pr esident And r ew Heywad. In se ver al prominent j our nalism scandals (USA T oday and the New Y ork Times) t op executi ves we r e eventually f or ced out because of news staff dissatisfacti on.

    A panel in vestigating the scandal suggested se ver al new procedu r es aimed at pr eventing the laxover sight that all owed the Nati onal Gua r d stor y to be b roadcast. S ome news staff a r e worr ied new procedu r es would c r eate im pediments t o agg r essive r e por ting.

    As to the scandal , some commentat or s feel that the c om petitive pr essu r e on CBS News (it was in last place in r atings f or both mor ning and e vening news) lead t o the Nati onal Gua r d r e por t esca ping sc r utiny.The produce r of the st or y, Mar y Ma pes, who was fi r ed afte r the scandal , had ea r lier been r es ponsible f or sever al big st or ies, including the fi r st r e por t about the abuses at Abu Gh r aib pr ison. Those r e por ts madeher the most he r alded and best paid produce r at CBS and ga ve her the power to push th rough the

    National Gua r d stor y with out out vetting by highe r executi ves.CBS m ost lik ely ga ve in t o a c ombinati on of com petitive pr essu r e, hubr is and a little politics. The

    cent r al ex planation f or how CBS went w rong seemed t o be a case of a sta r produce r overr uling the bette r judgments of an enti r e ser ies of top news executi ves. The issue at hand is that the st or y is false , butwhethe r the d ocuments a r e f or ger ies. M ost peop le belie ve the d ocuments we r e f or ged , but the idea thatBush g ot hel p getting int o the Gua r d actually might be t r ue. The pro blem f or Rathe r & com pany is a

    jour nalistic one. They didn't listen t o their own d ocument ex per ts, who had some qualms ab out thedocuments. They didn't find the sec r etar y of the c olonel, who was quite r eachable as news pa per s f oundand wh o cast d oubt on the d ocuments. M ost im por tantly , as a jour nalist , he ask ed the w rong questi on.

    He was l ook ing f or evidence that w ould disqualify the d ocuments as false. He sh ould ha ve been l ook ingf or evidence that c onfir med they we r e t r ue.

    A news pa per must r emembe r that it is su ppo sed t o tell the t r uth. The best way t o do that is t o ensu r ethat you always get b oth sides of the st or y and d o your best t o deter mine whe r e the t r ue st or y r eally is.Another idea is t o mak e su r e that a news pa per sends the a ppropr iate r e por ter s to an event. If the r e is a political e vent r egar ding healthca r e, it would be best t o send b oth the health ca r e and political r e por ter asoppo sed to just one. That way b oth par ts of the st or y ar e being c over ed in an accu r ate fashi on.Re por ter s must als o mak e sur e that they always place qu otes in c ontext and t o do their best t o notmisqu ote those wh om they inte rview.

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    5. How should a CEO r es pond to the media c oncer ning a c r isis in his or her com pany?a. Best a ppro ach is t o be honest with the media , ack nowledge pro blems and issues , but menti on

    what the c orpor ation is d oing to eithe r r ectify the w rongs or to progr ess fu r ther . NEVER lie t o the media because the WILL find out the t r uth (it s thei r jo b). The m ost im por tant thing is t o becour teous, f or thcoming , coop er ative, and acc ountable. G r eat oppor tunity t o influence public

    op inion of the c orpor ation by tal k ing t o the media and getting in de pth about your side of thestor y. Y ou win by tal k ing t o the media because y ou have the oppor tunity t o give your side of thestor y. Y ou lose by n ot talk ing because the media will publish things that a r e damaging t o thecom pany and it s not even thei r fault because they can only r e por t what they k now. S o you eithe rwin by tal k ing to the media in an eff or t to offset negati ve inf or mation against y ou with y our sideof the st or y, or lose by all owing them t o publish negati ve inf or mation against y ou with out the

    benefit of your side of the st or y to offset the damaging publicity. Be f r iendly t o the r e por ter andget him on your side s o that he will want t o give you the benefit of the d oubt and an outlet t o give your side in a fai r and im par tial way. Ne ver want media t o be your enemy. Fu r ther, youcant blame the media f or publishing damaging inf or mation der ived f ro m thei r sour ces when y oufail t o give them y our side. The r eason you can t blame them is because they ha ve one duty ,

    which is t o r e por t the t r uth based on what they k now. They can t k now your tr uth if y ou avo idgiving it t o them and its unfai r to ex pect them t o be sym pathetic t o you if you prov ide no r easonf or them t o.

    6. When sh ould a CEO n ot tak e a call f ro m the media?a. Never . Guest S peak er s pecifically said that a CEO sh ould ne ver ignor e the media , because it it s

    the corpor ations oppor tunity t o get thei r side of the st or y in the news. Ign or ing the media ther e por ter r e por ting whate ver they al r eady ha ve, which c ould be ver y det r imental t o the com pany.Also, dont want t o alienate the media because y ou may need them on your side r ight n ow and inthe futu r e.

    Case: Saving Disney. Harvard (9-905-014)

    MARCH 3

    Venture Funding

    Guest S peak er : Joe Ar agona, Gene r al Pa r tner and F ounde r, Austin Ventu r es

    Reading Assignments:1. Ta k e the M oney or Run? , HBR , Novembe r 2004 (HBR Web site)2. Mak ing Sense of Corpor ate Ventu r e Ca pital, HBR , Mar ch 2002 (HBR Web site)3. Ventu r e Funding Twist , WSJ , Febr uar y 14 , 20074. Ent r e pr eneu r shi p and Inn ovation, Er nst & Y oung (A r agona r equested this be r ead by students pr ior to

    class)5. The V C Shak eout , HBR , July-August 2010 , p 21.23 (HBR website)

    Focused Questi ons:1. Ex plain the diffe r ences between a st r ategic and a financial in vestment f ro m both the per s pectives of the

    ventu r e fir m and the r eci pient of the funds.

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    a. Str ategic: In vestment is made with the pr imar y goal of inc r easing the sales and profits of thecorpor ation's own businesses. Corpor ation mak ing a st r ategic in vestment see k s to identify andex plo it syne r gies between itself and a new ventu r e. The Ventu r e par tner s may ha ve a f or malalliance with sta r t-u ps.

    b. Financial: Co m pany's g oal is t o mak e att r active r etu r ns. Corpor ation see k s to do as well/bette r

    than pr ivate V C investor s. While c om pany hopes that in vestments will hel p its own businessgrow, the main purpo se f or the in vestments is the possibility of high financial r etur ns. Als o, thecom panys a pprov al may prov ide a signal t o other investor s and cust omer s that the sta r t u p com pany is a g ood investment causing fu r ther incr eased r etur ns to the or iginal in vestor .

    c. Some in vestments a r e str ategic: They a r e made pr imar ily t o incr ease the sales and profits of thecorpor ation's own businesses. A c om pany ma k ing a st r ategic in vestment see k s to identify andex plo it syne r gies between itself and a new ventu r e. For exam ple, Lucent Ventu r e Par tner s, whichinvests the telec ommunicati ons equi pment ma k er 's funds in exte r nal com panies , mak esinvestments in sta r t-u ps that a r e f ocused on inf r astr uctu r e or services f or vo ice or data netw ork s.Many of these c om panies ha ve f or mal alliances with Lucent t o hel p sell Lucent's equi pmentalongside thei r own offer ings. While Lucent w ould clea r ly lik e to mak e money on itsinvestments in these sta r t-u ps, it is willing t o acce pt low r etur ns if its own businesses per f or m

    bette r as a r esult of the in vestments.

    The other investment o bjecti ve is financial , whe r ein a c om pany is mainly l ook ing f or attr activer etur ns. He r e, a corpor ation see k s to do as well as or bette r than pr ivate V C investor s, due t o what it sees as its su per ior k nowledge of mark ets and techn o logies , its st rong balance sheet , andits ability t o be a patient in vestor . In additi on, a com pany's b r and may signal the quality of thestar t-u p to other investor s and potential cust omer s, ultimately r etur ning r ewa r ds to the or iginalinvestor . For exam ple, Dell Ventu r es, Dell Co m pute r 's in-h ouse V C oper ation, has made

    nume rous Inte r net in vestments that it has ex pected t o ear n att r active r etur ns. While the c om panyhopes that the in vestments will hel p its own business g row, the main r ationale f or theinvestments has been the possibility of high financial r etu r ns.

    Governance in the Defense DepartmentS peak er : Bill Co hen, For mer Secr etar y of Defense

    MARCH 24

    The External Auditor and the Audit Committee

    Guest S peak er : Da rr ell McK own, Par tner, Er nst & Y oung

    Reading Assignments:1. Corpor ate Di r ectors Guideb ook, Fifth Editi on, Section 6

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    2. Mor e Work f or the Audit Co mmittee , CBM , 1st quar ter 20093. Audit or s Face F r aud Char ges , WSJ , Decembe r 20, 2010

    Focused Questi ons:1. What a r e the im plications of r isk -based auditing procedu r es?

    *Risk-based auditing: audit or s per f or m fa r fewe r tests of the numbe r s on the c om pany's b ook s thanthey w ould ha ve at an audit client whe r e they per ceived the r isk of accounting f r aud t o be highe r . "Low r isk "items -- such as cash on the balance sheet or accounts that fluctuate little f ro m yea r to year -- often get n o mor ethan a cu r sor y r eview, f or year s at a st r etch. Instead , audit or s r ely mor e hea vily on what management tells themand the audit or s' assessments of a com pany's "inte r nal controls."

    In t r aditional audits , the audit or s went th rough e ver y numbe r in the b ook s, check ing each ent r y f or accu r acy. H owever, as corpor ations ha ve become inc r easingly la r ge, and the pr icing f or audits (which isder egulated) has bec ome inc r easingly c om petitive, audit c om panies ha ve moved to r isk based auditing. The

    basics: the audit or is su ppo sed t o assess the over all com pany f or r isk of f r aud , and then assess diffe r ent a r eas of the book s f or their susce ptibility f or f r aud. The less li k ely the audit or think s f r aud is , the less the c om pany/a r ea

    is audited. (F or instance , they may decide n ot to audit any ent r y below $5 ,000.)The b road leeway the audit or s have in assessment is par ticula r ly troublesome when y ou conside r howclosely the audit or s work with the c om panyit is easy f or their judgment t o be clouded. Als o, they want t o maintain g oo d r elationshi ps with the CEOs etc. s o they may be hesitant t o offend by l ook ing t oo closely. Als o, if an audit or decides n ot to look into entr ies bel ow $5 ,000 , e.g. , then the executi ves k now how to str uctu r eillegal t r ansacti onsjust b r eak them u p into small ent r ies. Finally , the idea behind r isk -based auditing is t o mak e auditing ec onomically efficient and profitable. Audit or s have a la r ge incenti ve to cut cor ner s unde r thissystem. In sh or t, r isk -based auditing d oes a poor jo b of ensu r ing c orpor ate honesty in financial t r ansacti ons.

    A look at the r isk -based a ppro ach als o hel ps ex plain why in vestor s continue t o be sock ed by acc ountingscandals , f ro m Wor ldCo m Inc. and Tyc o Inter national Ltd. t o Par malat S pA, the Italian dai r y com pany thatadmitted fa k ing $4.8 billi on in cash. Just because an acc ounting fi r m says it has audited a c om pany's numbe r sdoesn't mean it actually has chec k ed them.

    2. What a r e the im plications of Sar banes-Oxley f or corpor ate Ame r ica?Sar banes Oxley c om pliance was ext r emely ex pensive and time-c onsuming the fi r st yea r, and has

    been ver y un popular . Many a r gue that the new SOX r egulati ons will n ot be able t o control the s or t of systematic executi ve f r aud that it is intended t o pr event (li k e Tyc o, Enron, and W or ldCo m). H owever, itdid lead c om panies t o clean u p their book s, and may ha ve im prov ed efficiency in s ome ar eas. It als o hashel ped t o r estor e consume r confidence.

    Some of the new r egulationssuch as the ones inc r easing audit or inde pendence and disall owingauditing c om panies t o prov ide non-audit se rv icesseem li k e a r eally g oo d idea. Othe r sli k e mak ingthe CEO and CFO gua r antee e ver y SEC submissi onmay be overk ill. One of the big r easons thesescandals occurr ed was because of the m ove to r isk -based auditing , discussed bel ow, and SOX hasn tchanged that.

    3. How should the inde pendent audit or inte r act with the audit c ommittee , the B oar d, and management?It is ver y im por tant that the audit or have good, f r ank work ing r elationshi ps with the audit

    committee , the boar d and management. (Es pecially management) The audit or is fed the inf or mation bythe com pany (management) , and if they d ont have good r elationshi ps, then the management will beloathe t o give them necessa r y inf or mation and may e ven withh old things. H owever, it is im por tant that

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    audit or s r emembe r that they d o NOT w ork f or the management. They a r e em ployed by the c om pany(the sha r eho lder s) and they w ork, mor e or less , f or the boar d. They sh ould be ca r eful n ot to get to closeto management , as that may cl oud thei r judgment , mak ing them unable t o prop er ly assess r isk . Theyneed t o avo id conflicts of inte r est. Basically , they sh ould always ha ve a c or dial , ar ms lengthr elationshi p with management.

    The audit c ommittee and the audit or s need t o be ver y comf or table with each other and t r ust eachother a gr eat deal. If the r e is s omething w rong with the financials , the audit or must r e por t it t o thecommittee , which puts them in the difficult position of r atting out management. The audit or s need t o feel that they can tal k to the committee in c onfidence. The b oar d should over see audit or inde pendence.

    Inde pendent audit or s have less of a r elationshi p with the B oar d as a wh ole, but I assume thatther e needs t o be mutual t r ust and r es pect, without conflicts of inte r est.

    4. What has been the im pact of Sar banes-Oxley?a. Mor e timely discl osur e of executi ve- pay deals and r equir ed CEOs t o r etur n com pensation based

    on financial r esults that we r e late r r estated. The discl osur e r equir ement squelched an other pervasive, but little- k nown, pr actice of the 1990s , a side effect of the op tions cr aze: the"back dating" of stock op tions.

    b. Public c om panies in the U.S. will ha ve s pent mor e than $26 billi on to com plyc. Gr eate r accountability in the b oar droo md. In r eassu r ing in vestor s and r estor ing c onfidence in the integ r ity of com panies' financial

    statementse. Mor e r igoro us inte r nal contro ls, f or ced top executi ves to cer tify the accu r acy of financial r esults

    and c r eated a watchd og f or auditing fi r ms. It als o ex panded the ro le of boar d audit c ommitteesand r equir ed com panies t o tak e "whistlebl ower " com plaints m or e ser iously. Related st ock -exchange r ules b o lster ed boar droom inde pendence by r equir ing r egula r pr ivate sessi ons of inde pendent di r ector s, among other changes.

    f. Co m pliance c osts f or the law a r e falling and that the r eview of inte r nal controls has "c ontr ibutedsignificantly t o mor e r eliable financial r e por ting."

    g. Heightened f ocus on inte r nal contro ls prom pted hund r eds of com panies t o disclose "mate r ialweak nesses" in thei r accounting and t o r estate pr ior financial r esults.

    h. Tax on business , r isk aver sion, lower s us c om petitiveness5. What did M r . McK own mean by the c orpor ate g over nance t r iangle?

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    Thr ee basic r elationshi ps: boar d-sha r eholder s, boar d-management and management-shar eholder s. They a r e each detailed bel ow, but note that the g r eatest em phasis is placed on the

    boar d-sha r eho lder r elationshi p. The c orpor ate balance of power is delicate and the successfulinte r action of all th r ee com ponents is the k ey to effecti ve gover nance. When they w ork

    togethe r as a system with acc ountabilities and unfette r ed exchange of inf or mation, they prov ide a power ful set of chec k s and balances. L ook on PAGE 3 of this outline f or the in de pth discussi onof power r elationshi ps of the t r iangle.

    6. What is the role of the r eview par tner in an audit?

    Venture CapitalS peak er : Shawn R osenzweig , McCo mbs Ente rpr ises

    MARCH 31

    The Chairman of the Board

    S peak er : Ga r y Kelly , CEO , Southwest Ai r lines

    Reading Assignments:1. Disc ount Carr ier s Southwest , Air Tr an Tie Kn ot, WSJ , Se ptembe r 28, 20102. Southwest Alte r s Plan , WSJ , Se ptembe r 29, 2010

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    APRIL 21

    Governance of a Non-Profit Organization

    S peak er : Lee Wal k er, For mer Chair man of the B oar d of Ca pital Met ro and f or mer Pr esident of Dell

    Reading Assignments:1. The New W ork of the N on-Profit Boar d, HBR Se pt.-Oct. 1996 (HBR website)2. Work ing on Non-Profit Boar ds: D ont Assume the Sh oe Fits , HBR , Nov .-Dec. 1999 (HBR website)3. The High and L ow Notes of Non profit B oar d Se rvice, CBM , Summe r 1999

    Focused Questi ons:1. Why d o membe r s of non- pro fit boar ds lose inte r est in thei r gover nance acti vities and what can be d one

    to im prov e their r elationshi p with the n on- profit or ganizati ons they g over n?

    a.

    tak es too long to mak e decisi ons, exec h oar ds inf o, lack of k nowledge , little per sonalaccountability , not pr acticed at w ork ing as a team , feel unde r used. L ow sta k es, process d r iven, ambigi ous outcome

    b. ex per ience outside n or mal fieldc. new w ork cr ucial t o success issues , r esults lin k ed to timetables , defined measu r e of success ,

    r equir es engaging inte r nal/exte r nal constituenciesd. ask mor e questi ons of ceo, develop ties t o constituents , find out o bjecti ves, what needs t o be

    measu r ed, goal dr iven meetings , r ecr uit boar d based on chemist r y, innovate

    2. What a r e the diffe r ences between g over ning a f or - pro fit and a n ot-f or - pro fit or ganizati on?y In both cases , boar ds a r e r es ponsible f or setting the or ganizati ons missi on, monitor ing its progr ess

    towar d achie ving that missing , and selecting and e valuating its manage r s.y Non- pro fit w ork invo lves mor e than just ha ving your hear t in the r ight place.y Mission & Measu r ement

    o For - pro fit Fact or s such as profit g rowth and ma rk et ca pitalizati on ar e effecti ve measu r es of a

    com panys long-te r m per f or mance When a c om pany is n ot doing well , the boar d comes unde r pr essu r e f ro m sha r eho lder s,

    analysts and potential acqui r er s Corpor ate boar d is ALWAYS c oncer ned ab out how the c om pany is d o ing r elative to

    com petitor so Non- pro fit

    Financial c onside r ations ar e only one dimensi on of its missi on statement Service that a n on- pro fit gives to its constituencies is often the m ost im por tant var iable Tough to balance b oth finances and se rv ice Much ha r der to measu r e success (n o stock pr ices , f or exam ple) Financial r esults on their own ar e a poor means of measu r ing per f or mance Surv ival and l ook ing past budget pro blems t o ultimately st r engthen se rv ices and hel p

    finances in the l ong r un may be a w or thy endea vor f or a non- pro fit The financial tail must n ot be all owed t o wag the n on- pro fit dog

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    A non- pro fit boar d must k now when it is l osing m oney, but it may c ontinue t o want t o lose money t o hel p long-te r m goals; figu r ing out how to handle l oses is one of the m ostim por tant jo bs of a non- profit boar d

    y Choo sing the B osso For - pro fit

    This is the m ost im por tant duty Getting this r ight is the f r amew ork f or success

    Easie r to find s omeone because y ou ar e usually l ook ing f or something with indust r ysk ills , goo d environments , etc. or someone wh o was next in line on a successi on plan

    o Non- pro fit Just as im por tant , but mor e ar t than science In look ing f or a new leade r, non- profits unde r tak e intense inte r nal assessments and r un

    national sea r ches that can last u p to 18 months BUT s ometimes full-bl own sea r ches li k e this a r en't necessa r y Maybe s omeone in the c ommunity Maybe the #2 per son in cha r ge of the n on- pro fit wh o k nows all ab out it

    y Whos on Fir st?o For - pro fit

    CEO is gi ven r elatively f r ee r eign t o set and im plement a st r ategy This st r ategy is then r eviewed by the b oar d Many c orpor ate CEOs a r e also boar d chai r men

    o Non- pro fit Com pletely n or mal f or CEO t o r e por t to non-executi ve chai r Rift between CEO and chai r man is c ommon and can t r igge r many pro blems Chair of non- pro fit se rves a r elatively fixed te r m (ab out th r ee yea r s) With such quic k and r e peated tu r nover, CEO must manage diffe r ences t o establish an

    effecti ve work ing r elationshi p with wh oever the new chai r is of the b oar d

    Smar t CEOs actively manage thei r r elationshi ps with chai r s and b oar d membe r s andcontinually meet with e ver yoney Boar d St r uctu r e and P rocesses

    o For - pro fits 8-14 membe r s per boar d to hel p stimulate candid debate Thr ee k inds of peop le: leade r s of simila r corpor ations, s pecialists in r elevant

    techno logies , peop le with g oo d political c ontacts Audit , com pensation, nominating c ommittees Nominating c ommittee r elatively inacti ve No oper ations committee

    o Non- pro fits

    MUCH LARGER (u p to 40 peop le sometimes) Needs t o r e pr esent the many c onstituencies that ha ve a sta k e in the n on- profit Executi ve committees (usually ha ve limited r es ponsibilities)

    y Prov ides small-g rou p atmos pher e that hel ps membe r s talk about pro blems on amor e intimate basis

    y Membe r s can discuss sensiti ve top ics with less dange r of leak sy Big r isk that an executi ve committee will tu r n int o an u pstair s b oar d, which will

    cause pro blems with th ose in the d ownstai r s b oar d Nominati ons committee

    y Carr y out sea r ches themsel ves because they r e best suited t o do so y Often times or ganizati on is dee ply roo ted in the l ocal community

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    y Enor mous bu r den f or this c ommittee because tu r nover is often r eally high Committee cha r ged with unde r standing and e valuating h ow the or ganizati on and its

    professionals a r e achie ving the qualitati ve as pects of thei r missi on; this oper ationscommittee is k ey

    y Being a B oar d Membe r o For - pro fit Eight one-day meetings per year

    Regula r hour s Membe r can ex pect to stay until r etir ement or a hostile ta k eover or conflict of inte r est Highly paid Conflicts of inte r est a r e im por tant

    o Non- pro fit Much g r eater diver sity of ro les exists Anti-s ocial h our s

    y Not usually scheduled day-l ong meetingsy Often times 2 h our mid-day meetings r andomly scheduledy Evening meetingsy Intr udes on family li ve

    Wee k end r etr eats Tu r nover can unde r mine the b oar ds commitment t o an or ganizati ons st r ategy No com pensati on, usually ex pected t o give high d onations to the or ganizati on Usually wanted a r e peop le with dee p pock ets Conflicts of inte r est a r e im por tant

    Challenges Facing the Worlds Largest Not-For-Profit Corporation

    Guest S peak er : Carolyn Gallaghe r, For mer Chair man , Boar d of Gover nor s, U.S. P ostal Se rv ice

    Reading Assignments:1. Statement of Caro lyn Gallaghe r, Chair man B oar d of Gover nor s, U.S. P ostal Se rvice, Mar ch 25 , 20092. Deliver ing on the P romise of Non profits , HBR , Decembe r 2008 (HBR website)

    APRIL 28

    The Chief Executive Officer

    Guest S peak er : Kenneth Jast row, For mer Chair man of the B oar d and CEO , Tem ple-Inland Financial Se rvices

    Reading Assignments:1. What Executi ves Sh ould Remembe r, HBR , Febr uar y 2006 (HBR website)2. The W rong Way t o Pick a Chief Executi ve...and the Right Way , CBM , May/June 20073. Risk : Ever y Boar ds Biggest Challenge , CBM , Janua r y/Feb r uar y 20094. How to Pick a Good Fight , HBR , Decembe r 2009 , pp 48-57 (HBR website)5. Leade r shi p in the Age of Tr ans par ency , HBR , A pr il 2010 , pp 39-46 (HBR website)6. Accuse r Said Hu r d Lea k ed an H-P Deal , WSJ , Novembe r 6-7 , 20107. A pple Chief t o Ta k e Lea ve, WSJ , Janua r y 18 , 2011

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    Focused Questi ons:1. What a r e some of the m ost im por tant less ons that Pete r Dr uck er had f or business executi ves?

    "Successful ente rpr ises c r eate the c onditions to allow thei r em ployees t o do their best w ork ."

    Mr . D r uck er offer ed plenty of other lessons, of cour se. He belie ved or ganizati ons sh ould a r ticulate aclea r purpo se, with s pecific , measu r able g oals; he de veloped the c once pt of "management by o bjecti ve,"to k ee p manage r s in ste p with th ose goals; he enc our aged manage r s to ask uns pok en questi ons andconside r ignor ed issues.

    Com panies sh ould "t r eat em ployees li k e their most valuable r esour ces, including pushing decisi onmak ing to the lowest le vels."

    (f rom htt p://www.ca r eer jour nal.com/myc/management/20051115-thu r m.html)

    -ask what needs t o be done-ask what is r ight f or enterpr ise-took r es ponsibility f or decisions/c ommunicating-f ocused on oppor tunities r athe r than pro blems- productive meetings-action plans-we r athe r than i-work closely with k nowledge w ork er s/de velop them-look at how best n on profits define missi on- pay attenti on to assum ptions business is f ounded on

    2. Why is it s o har d to fir e a CEO?

    It's ha r der than e ver to say g oodbye t o a CEO with out a big chec k . Th r ee times in r ecent wee k s, a f or merchief has w on milli ons afte r challenging a b oar d that fi r ed him "f or cause." A chief executi ve te r minated

    because the b oar d belie ves he c ommitted such se r ious misdeeds usually can't c ollect se ver ance or other exit payments. Te r minated CEOs ar e assisted by a well c r afted em ployment c ontr act and s ophisticatedlawye r s, to successfully challenge a dismissal. It's s o har d to fir e a CEO f or cause that many b oar dsdon't t r y, even when ethical pro blems a r e invo lved. Some boar ds work out other de par tur e arr angementsthat all ow the CEO to leave with se ver ance or othe r benefits intact. Als o, if the CEO sues , the suit candr ag on f or year s and be ver y ex pensive.

    Nea r ly th r ee-f our ths of the CEOs of com panies in the Standa r d & P oor 's 500-st ock index ha veem ployment c ontr acts or sever ance plans. The acc or ds ty pically let b oar ds r emove a chief f or cause incases of delibe r ate neglect of duties , gross misc onduct , a felony conviction or com pany- r elated f r aud.Executi ves insist on these protections in case of disag r eements with di r ector s. But the te r ms ar e oftenvague , leaving much t o the inte rpr etation of ar bit r ator s, judges and ju r ies. E ven if the c om pany wins inar bit r ation, the r uling c ould ha ve a chilling im pact and hu r t a com panys ability t o br ing in g r eat CEOs.

    3. What c r iter ia should a b oar d examine when its selects a new CEO?a. The boar d should examine the candidate s professional r ecor d to mak e sur e the r e ar e no

    incidents of f r aud , cheating on ex pense acc ounts , or dishonesty. The candidate needs t o be

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    qualified t o actually r un the c om pany. They need t o unde r stand a c om panys cultu r e, str ategy , products , and the biggest challenges ahead , and they need t o be able t o win the t r ust of subor dinates. Additi onally , a boar d should look at past work ex per ience , inside and outside of the com pany.

    b. The boar d should als o examine the candidate s per sonal r ecor d while unde r standing thediffe r ence between m or ality and integ r ity. M or ality is a m or al judgment , while integ r ity is ab outtelling the t r uth. B oar ds sh ould look to mak e su r e the r e ar e no dr unk dr iving pro blems , substance abuse pro blems , per sonal tax pro blems , or sexual ha r assment hist or y. Weight hasshifted t owar d conside r ing CEOs integ r ity afte r Boeing chief St oneci pher had an affai r andemba rr assed the c om pany. They want s omeone wh o can ma k e good judgments.

    4. How should the B oar d of Dir ector s manage the successi on process?

    Preemptively cho ices sh ould be made eithe r while y ou still ha ve a CEO or an a ppro ach dete r mined.Proactively the dir ector s should be intimately in vo lved and a vo id Eisne r -lik e assu r ances that asuccess or is in place.

    Car efully r eview of per sonal and professional hist or ies of potential candidates is c r itical.

    Things to consider before hiring a new CEO

    Anne Mulcahy (Xe rox) became CEO afte r work ing at Xe rox and ha ving no tr aining or ex pectations to become CEO. She says he r lack of tr aining was a g ood thing. She had n o pr econceived notions, no time t o develop bad habits. She just ste pped r ight in and led.

    Going with an inside r does not ensu r e success. Disney ch ose R o ber t Ige r as CEO and he was an inside r .Iger was a disaste r and the f or mer Boar d membe r s thought Ige rs choice was a sham.

    Going with an inside r can ensu r e that the CEO is al r eady familia r with the c om pany , which is im por tant because CEOs have to devote a lot of time t o activities that d ont invo lve the on-goings of thecom pany , so pr evious k nowledge of the c om pany is im por tant.

    An outside r may als o be good because if things a r e a mess , an outside rs per s pective and a c om pletechange may be needed. Als o, pr evious CEOs have mor e ex per ience and k now all the demands and

    intr icacies of being a CEO

    Now, per sonal beha vior is so im por tant f or CEOs, which is e vident by B oeings dismissal of CEOStoneci pher afte r his ex plicit e-mail t o a female em ployee he was ha ving an affai r with became public.Bad publicity t owar ds a CEO can r eflect poor ly on the c om pany. As a r esult , Boar ds a r e conductingextr emely lengthy and th oro ugh in vestigati ons and bac k ground chec k s of CEOs. For exam ple, pastDUIs can indicate that the CEO is prone to mak ing bad decisi ons.

    5. What is the m ost im por tant r es ponsibility of the CEO?

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    While the CEO is su pposed t o lead the c om pany t o success , the most im por tant r es ponsibility of theCEO is the em ployees and the cultu r e. He r b Kellehe r (CEO of Southwest Ai r lines) ex plained: our fir sto bligati on is t o our em ployees. Ou r em ployees will ta k e ca r e of our customer s [which will lead t o profits and the satisfacti on of sha r eho lder s].

    Anne Mulcahy ( CEO of Xerox) als o ex plained the im por tance of tak ing ca r e of the em ployees. She wasable t o avo id ban kr u ptcy and b r ing Xe rox out of enor mous t rouble. She did this by ma k ing theem ployees ha ppy (such as by gi ving thei r bir thdays off). The em ployees at Xe rox stayed with the Xe roxlonger than other com panies em ployees stayed. When em ployees a r e ha ppy, they w ork har der andhandle cust omer s and business r elations bette r . Mulcahy made su r e that the em ployees we r e committedto the com pany , which ha ppiness ensu r es that they will n ot give u p (bankr u ptcy) and will find ways t o succeed , as in Xe rox.

    Rega r dless , Anne Mulcahy ex plained that the CEO must gi ve 100% and d o what needs t o be done, even

    if it means fi r ing w ork er s and f r iends.

    -setting st r ategy and vision-setting cultu r e-maximizing sh value

    Public Relations

    Guest S peak er : Jeff Hunt , CEO of Pulse P oint G rou p and For mer CEO , GCI Read P oland

    Reading Assignments:1. Gilded and Gelded! Ha r d-Won Less ons From the PR Wa r s, HBR , Octo ber 2003 (HBR website)2. The A r t of the A pology, CBM , Second Qua r ter 2010 , p. 723. Six Ways t o Surv ive a Cr isis , CBM , Fir st Qua r ter 2010 , p. 204. Let the Res ponse Fit the Scandal , HBR , Decembe r 2009 , pp 82-88 (HBR website)

    Focused Questi ons:

    1. What can firms do to avoid public relations problems?

    The a r ticle is ab out AT&T and the time when Mi k e Ar mstrong succeeded B o b Allen as CEO in 1997and only lasted fi ve yea r s. Once one of the g r eat Ame r ican businesses , AT&T had ta k en a beating as newcom petitor s eme r ged and its t r aditional business disinteg r ated. These a r e the less ons lea r ned.

    y Dont Fall in L ove with Y our Own St or y. New CEO A r mstrong was the ty pe of per son the medialoved. He c ould easily win the over, but maybe t oo much. His ann ouncements and ex planati ons of the com panys str ategic plans r aised ex pectati ons that AT&T c ouldn t meet. The r e was a g rowing per ce ption that AT&T was changing its cultu r e and executing a r a pid ma k eover . Quic k acquisiti onsmade it the la r gest owner of cable TV systems in the c ountr y and a maj or player in wi r elesstele phones. The buzz was that it was building a platf or m that w ould offer one-st op shopp ing f or wir ed and wi r eless c ommunicati ons and cable TV. S o when things began t o go amiss , the com panyhad a m or e difficult time c ontrolling than damage than if it had been m or e modest in lay out out its

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    plans. When the c om pany began di vesting f rom some of its businesses , it was widely seen as ar e pudiati on of Ar mstrongs ambiti ous plans.

    y Unde r stand the Business Media s Mind-Set. Business media is pr eoccu pied with the c olor ful per sonalities at the t op of the c orpor ate wor ld. Be ca r eful of allowing r e por ter s to tr a p your executi ves. St or ies d ont change di r ection because the subject c oop er ates. Ha ve the CEOs tr usted

    lieutenants or a PR per son prov ide factual inf or mation and k ee p tabs on the r e por ters progr ess.Also, r emembe r that the business media is f ocused on winne r -tak e-all c onflicts , r eal of imagined , among com panies. And the assessment of whos winning and wh os losing can change quic k ly.Jour nalists view most events as c om petitive st r uggles , they look f or conflict , dr ama and setbac k sinstor ies, and es pecially a ppr eciate mean-s pir ited ideas ab out r ivals. Als o, dont f or get that themedia is o bsessed with c om petition among themsel ves. The AT&T PR man let it be k nown that theCEO w ouldnt do exclusi ve inte rviews with out a promise that big chun k s would r un as ver batimquestions and answe r s. At fi r st For tune magazine r efused. When he t old them he was callingBusinessWee k next , For tune ga ve in. Then all of the other major magazines and news pa per s ag r eedtoo, because they didn t want t o lose the inte rview t o a com petitor .

    y Dont Miss the Symb o lism in the Facts. G o beyond r ational a r guments and add r ess the

    shar eho lder s emotional concer ns. When AT&T cut 40 ,000 jo bs, they did it t o im pr ess Wall St r eet , and it did. But they didn t thin k about the e vening news , whe r e the CEO was painted as g r eedy f or cutting j o bs while ta k ing a huge pay chec k . Symb olism is im por tant , and so is a sha r ed sense of sacr ifice. If the CEO had ann ounced that AT&T s top execs and b oar d membe r s we r e donatingsome of thei r sala r ies and fees t o a fund f or fir ed em ployees , it wouldnt ha ve made much financialdiffe r ence but it w ould ha ve made a huge symb o lic diffe r ence. But because they didn t do it, no r ational a r gument ab out the necessity of the lay offs c ould over come thei r symbolic im pact.Lear ning f rom those mista k es, when A r mstrong tookov er as CEO , he ann ounced that he was

    banning chauffe r -dr iven t r ans por tation f or executi ves. It was su per popular with em ployees andmade the business pages as a sign of how se r ious he was t o change the cultu r e. In actual fact , ther ewas only one per son who was being chauffe r ed a round anyway , an o lder executi ve wh o was ab out to

    r etir e. When A r mstrong cut j o bs, he f roze executi ve sala r ies. Th ose ar e the ty pes of symb o lic actsthat a r e im por tant.y Pay M or e Than Li p Serv ice t o Your Stak eholder s. Investor s, customer s, em ployees , and the

    communities in which peop le work ar e all im por tant. All business li ves by public a pprov al. Thefundamental way t o get a pprov al is t o deserve it , and you do that n ot by what y ou say but f ro m whatyou do.

    2. What role should PR play the firms communications strategy?

    CEO A r mstrong and AT&T:y Avo id ma k ing un r ealistic sh or t-ter m ex pectations because of the desi r e to continu ously gi ve the media

    something positive to talk about.o CEO A r mstrong did this and it bac k fir ed. He hy ped u p ever ything and the media l oved him afte r hetook over as CEO. H owever, he could not meet his un r ealistic claims. In one instance , the mediahy ped his potential deals with Time Wa r ner . Afte r the deal fell th rough, the media felt bu r ned f or publicizing it and t ook their ange r out on AT&T.

    o A CEO sh ould always gi ve factual inf or mation about ex pectations and the cu rr ent state of thecom pany in or der to avo id this pro blem.

    o AT&T s new CEO , Dor man, is honest and has a vo ided the public limelight t o a cer tain extent. Thishas been successful.

    Jeff Hunt , S peak er :y The c om pany and CEO sh ould be pr e par ed to handle the media s attem pts at c ontrover sy and negati vity

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    o The CEO and fi r m should pr e par e f or inte rv iews and possible questi onso In additi on, the CEO sh ould k now how to handle an inte rviewe r s techniques.

    y The c om pany and CEO sh ould always ma k e sur e that they stic k to the facts and get the intendedmessage ac ross.

    3.

    What a r e the 10 public r elations c r isis that lie a round the c or ner and what can the B oar d of Dir ector s do todeal with them?

    4. What d oes the CEO need t o unde r stand ab out public r elations?

    Jeff Hunt , CEO , GCI Read P oland (S peak er ):y U p to 60% of the ma rk et value of the c om pany is d r iven by the CEOs r e putation.

    Work er s tak e notice and ha ve pr ide in the c om panyCustomer s ce r tainly n otice

    y Public r elations get ha r der and the c om pany is a bigge r tar get f or cr iticism as it bec omesmor e successful.

    AT&T a r ticle:y business t oday is as much ab out managing per ce ptions and exte r nal r elationshi ps as

    managing em ployees , finances , and assetsy A poll ask ed professional in vestor s if they a r e mor e lik ely t o r ecommend or buy a st ock if a

    CEOs r e putation is g oo d:1996: 70% said yes2001: 90% said yes

    y A CEO sh ould always thin k about public r elations in e ver y action they d o.For exam ple, the AT&T CEO , Ar mstrong, messed u p afte r laying off work er s when he didnothing t o hel p his public r elations. The CEO , as suggested by the a r ticle , should ha vedonated a por tion of his and the executi ves sala r ies to the laid- off work er s.

    y Public r elations is n ot about polishing an image or cr eating buzz; it s about building l ong-ter m r elationshi ps between an instituti on and its sta k eho lder s.