enron briefing clarkson centre for business ethics cc(be) 2 & board effectiveness—cc(be) 2...

Enron Briefing

Clarkson Centre for Business Ethics

& Board Effectiveness—CC(BE)CC(BE)22

& Executive Programs

Rotman School of Management

March 19, 2002

Rotman School of Management, March 19, 2002 2

Agenda Background

• Enron• Accounting Disclosure Manipulation

Enron Problems• Structures, activities and disclosures• Control and culture

Lessons• Governance• Accounting standards and profession• Director’s Behaviour

Questions


Rotman Briefing Team Ramy Elitzur – Accounting, Audit

Former Director, MBA Program, [email protected]

Irene Wiecek – Accounting, AuditAssociate Director, MMPA, [email protected]

Eric Kirzner – Finance, Governance Director, Market Regulation Services, + [email protected]

Len Brooks – Governance, Ethics, Accounting, AuditExec. Dir. , The Clarkson Centre for Business Ethics & Board EffectivenessDirector , Master of Management & Professional Accounting (MMPA)Director, Diploma in Investigative & Forensic Accounting (DIFA)

[email protected]

mailto:[email protected]





The Enron Affair Management was:

• out of control, and engaged in self-dealing• manipulating transactions & financial reports

Company imploded - Chap. 11 in Dec. 2001 Investors misled, pensions lost Executives plead the 5th, poor memory,

ignorance, incompetence Outrage Auditor savaged, profession to be changed


Overview of Key Problems Governance failure at the Board level

• Too much trust• Incompetence - awareness and/or understanding of

role , control & reporting systems• Lack of motivation, conflicts of interest

Dishonest management, conflicts of interest Culture of deception, self-interest Manipulation of accounting and disclosure Poor standard setting Auditor deficiencies Regulatory short-sightedness


Enron Stock Chart

Source: www.globe investor.com

Weekly Prices 1997- 2002


Enron’s Business (10K-2000) Transportation and distribution Wholesale services

• Commodity sales & services, risk management products, plants, etc

Retail energy services - gas, electricity Broadband services

• Nationwide fiber-optic network - build, market, etc. Corporate and other

• operation of water, renewable energy, and clean fuels plants plus other corporate activities


Enron’s Income (IBIT):Income Before Interest, Minority Interest and Income Taxes

2000 1999 1998

Transport & distribution ($ mil.) Trans. Services 391 380 351Portland General 341 305 286

Wholesale Services 2,260 1,317 968Retail Energy Services 165 (68) (119)Broadband Services (60)Exploration & prod. - 65 128Corporate and other (615) (4) (32)

IBIT 2,482 1,995 1,582


Enron’s Wholesale Services

…creation of networks involving selective asset ownership, contractual access to third-party assets and market-making activities. 10K p.36.

…uses portfolio and risk management disciplines, including offsetting or hedging transactions, to manage exposures to market price movements (commodities, interest rates, foreign currencies and equities). 10K p.37.

… sells interests in certain investments and other assets to improve liquidity and overall return, 10K p.37


Enron’s Financial Data2000 1999 1998

Revenues(in Billions) 100.8 40.1 31.3

Operating income (Millions) 1,953 802 1,378IBIT 2,482 1,995 1,582Net Income before Cumulative

Accounting Changes 979 1,024 703Net Income 979 893 703EPS (in dollars) - basic 1.22 1.17 1.07

- diluted 1.12 1.10 1.01


Enron’s Financial Data2000 1999

Current assets (Billions) 30.4 7.3

Investments, other 23.4 15.4

Property, plant, equip, net 11.7 10.7

Total Assets 65.5 33.4

Current liabilities 28.4 6.8

Long-term Debt 8.6 7.2

Deferred credits and other 13.8 6.5

Shareholders’ Equity 11.5 9.6

Total Liab. & Shareholders’ Equity 65.5 33.4


Enron’s Changing Risk Profile

Early By Risk 1990’s 2000 Level

Pipelines, distribution networks LowRetail energy LowPower generation LowOil and gas exploration Med.Alternative energy M/HHedging transactions HighCommodity trading transactions HighBroadband optical fiber networks V. High

Related party transact. (SPEs/Partnerships) ???


Corporate Governance

Role of the Board of Directors - traditional strategic objectives - set or approve company policies and procedures:

• set or approve• ensure dissemination and compliance

laws, regulations, & expectations of society• ensure monitoring and compliance• act as ethical conscience (Dey Report & CICA)


Enron’s Governance Failure Begins

1997 - Board suspends code of conduct to deal with an SPE (JEDI/Chewco) emergency (alternative controls considered …not implemented)• Can’t find outside investor before year-end• Non-consolidation tests not satisfied:

• Outside investor - 3%investment at risk, control. Fastow (CFO) has Koppers - who reports to

Fastow - appointed to run/invest/control SPE Realization that guard is down/can be controlled


Enron’s Governance Structure

BoardKen Lay: Chair; Co-chair ZZZ

Audit, Compensation Cees.

ManagementLay, Skilling: CEO

Fastow, CFO; KoppersCausey, CAO; Buy, CRO

Watkins; Kaminsky; McMahon

Company Policies

Code of Conduct

Internal Audit ?

Whistleblowers ?

AuditorArthur

Andersen

Outside Law Firm

Consultant: Arthur Andersen

MissingSuspended

Compliance

GuidanceFinan.

ReportsSPEs

© L. Brooks


Governance Failure Allows Fastow to control SPE transactions:

• Sales of assets at inflated prices (False gains)• False hedging of losses on Enron investments

(Falsely keeps losses off Enron Income Stat.)• Exorbitant payments to Fastow & helpers• Hiding of SPE debt ultimately to be borne by

Enron Fastow to create more SPEs (LJMs…) Manipulation of accounting disclosure


Partial Impact

Payments to Fastow & helpers Invest._ Return Other

Fastow $25,000 $4.5 mil in 2 mo. $30 mil+stock options+Koppers 125,000 10 mil (incl. $2 mil in fees

friend)2 others 5,800 1 mil

Manipulated transactions in Q3 & Q4, 1999Asset sales, plus 1 hedge $229 profit of $570 before tax

and 549 after tax (~50%)


Manipulation of Accounting Disclosure

A Backgrounder

The Accounting Art of WarBy Ramy Elitzur


The Accounting Art of War

“A Strategy of Positioning evades Reality and confronts through Illusion.”

The Art of War by Sun Tzu

© R.Elitzur



“Appearance and intention are fundamental to the Art of War. Appearance and intention mean the strategic use of ploys, the use of falsehoods to gain what is real.”

The Book of Family Traditions on The Art of War, Yagyu Munenori

© R.Elitzur



The accounting art of war incorporates the entire menu of reporting strategies that management employs to manipulate financial statements.

Involves much more than earnings management.

© R.Elitzur


The Agency Framework

Modern corporations have a separation of ownership and management.

As such, there is an inherent conflict of interests between shareholders and managers.

Mechanisms to alleviate the agency problem:• Compensation plan (to create goal congruence

between shareholders and managers)

• Monitoring or auditing, both internal and external.

© R.Elitzur


The Agency Framework In The Context of Enron

The Mechanisms to alleviate the agency problem failed in Enron:• The compensation plan: Not only it did not

reduce the agency problem but it actually exacerbated it.

• Monitoring or auditing, both internal and external failed to bring the accounting problems to light.

© R.Elitzur


Tools in The Accounting Art of War

Earnings Management Revenue Manipulation Off-Balance-Sheet Liabilities Sheer Opportunism

© R.Elitzur


Tools in The Accounting Art of War

Earnings Management

Companies may want to: Increase reported earnings. Decrease reported earnings. Smooth earnings.

© R.Elitzur


Earnings Management

Merchant (1990) and Merchant and Bruns (1990) find that earnings management is a widespread phenomenon.

Furthermore, the same studies surveyed managers and report that, according to these managers, earnings management is an acceptable practice.


Increasing Reported Earnings

Why? This could increase bonus and other

compensation.

© R.Elitzur


Examples

Enron Waste Management where the company

overstated income from 1992 to 1996 by more than US$ 1 billion.

Livent, Inc.

© R.Elitzur


Income Decreasing Strategy

Why? In cases of monopoly because of anti-

trust considerations. Regulated utilities. ‘Blood Bath’.

© R.Elitzur


Example

Microsoft The issue of capitalization of software

development costs. Does this strategy have a significant

impact?

© R.Elitzur


1999 2000 2001 Revenue $ 19,747 22,956 25,296 Operating expenses: Cost of revenue 2,814 3,002 3,455 Research and

development 2,970 3,772 4,379

Sales and marketing 3,238 4,126 4,885 General and

administrative 715 1,050 857

Total operating expenses

9,737 11,950 13,576

Operating income 10,010 11,006 11,720 Losses on equity investees and other

(70) (57) (159)

Investment income/(loss) 1,951 3,326 (36) Income before income taxes 11,891 14,275 11,525 Provision for income taxes 4,106 4,854 3,804 Income before accounting change

7,785 9,421 7,721

Cumulative effect of accounting change (net of income taxes of $185)

– – (375)

Net income $ 7,785 9,421 7,346

Microsoft Income Statements

© R.Elitzur


R&D % 1999 2000 2001Of Sales 15.04% 16.43% 17.31%Of Op. Inc. 29.67% 34.27% 37.36%

The Magnitude of R&D Expenses in Microsoft

© R.Elitzur


The Accounting Art of War (Cont.)

Manipulation of Valuation Companies may want to increase

reported revenues. Example: MicroStrategy

© R.Elitzur


MicroStrategy

the Securities and Exchange Commission, when moving to crack down on lax accounting standards, in December 2000 has found that MicroStrategy Inc., an inventory-management software maker, was prematurely recognizing revenue.

© R.Elitzur


MicroStrategy Stock PriceAccounting Change

© R.Elitzur


Sunbeam

A new CEO, "Chainsaw Al" Dunlap, was hired in mid 1996 to turn the company around. A year after he was hired, Al Dunlap Dunlap declared success in turning Sunbeam Corp. around in terms of profits and revenues.

It was later found that the revenue growth came from manipulation of revenues.

© R.Elitzur


Sunbeam (Cont.)

The company instituted an "early buy" program for gas grills in the fourth quarter that gave retailers the opportunity to buy grills in November and December of 1997 but not pay until as late as June 1998.

The company also started a "bill and hold" program that allowed Sunbeam customers to use its warehouses to store goods that they had bought, but not necessarily paid for.

© R.Elitzur


Sunbeam (Concluded)

Between them, these two programs accounted for a substantial part of Sunbeam's apparent revenue gains in 1997. In essence, these revenues were nothing more than future sales booked now. When this was found out the prices of Sunbeam Corp. shares plunged.

© R.Elitzur


Other Notable Examples of Revenue Manipulation

Rite Aid (inflated revenues in 1998 and 1999 by over US$ 1 billion)

HomeStore.com (booked US$ 54 million to US$ 95 million as ad revenue in the first three quarters of 2001 that it never received in cash but as a result of revenue swaps with advertisers for undisclosed goods and services).

© R.Elitzur


Off-Balance-Sheet Financing

Companies may want to omit debt from the balance sheet.

© R.Elitzur


Example of Off-Balance-Sheet Debt

Enron Motivation:Lower cost of debt to finance

aggressive acquisition strategy. Special Purpose Entities (SPEs). Debt

omitted over $600 million. Financial Instruments. Debt not shown

on the balance sheet $1.5-3 billion.

© R.Elitzur


GE

Just recently (March 2002) General Electric Co. reported that it had off-balance-sheet SPEs that held US$56 billion of assets at the end of 2001, up from US$ 41 billion a year earlier.

© R.Elitzur


Kmart

Kmart has long-term lease commitments that had, based on my calculations, a present value around US $5.5 billion in 2000. When added both to the assets and liabilities of Kmart in 2000 it changed the debt to equity ratio from 1.4 to 2.3 and the debt/assets ratio from 58% to 70%.

© R.Elitzur


Air Canada

A similar exercise in Air Canada resulted in an addition of C$ 7.5 billion of assets and liabilities and a jump in the debt/equity ratio from 17.72 to 38.38.

© R.Elitzur


Adjustment for Off-Balance Sheet Leases - HBC (1999)

(3) B/S & financial ratios adjusted for capitalization:

Jan. 2000 Financial

Statements

Adjustments for

capitalizationTotal

TA 4,274,212 +1,362,183 5,636,395LTD 700,184 +1,362,184 2,062,367E 2,265,525EBIT 271,544

Current Adjusted DifferenceLTD/E 0.31 0.91 195%ROA 0.064 0.048 -24%

© R.Elitzur


Opportunism

Example: Air Canada

© R.Elitzur

47Rotman School of Management, March 19, 2002

Air Canada Q2’01: Revenues hurt by economy, competition

(millions)Consol.

2001Q2

AC & CA2000 Q2

(adjusted) Change

Oper. Revenue $ 2,564 $2,772 $ (208)

Oper. Expense 2,635 2,571 64

Oper. Income (Loss) (71) 201 (272)

Non-oper. Income (Exp) (76) (49) (27)

Income (Loss) Before Tax (147) 152 (299)

Tax (Provision) Recovery 39

Net Income (Loss) $ (108)

Per Share $ (0.90)© R.Elitzur

48Rotman School of Management, March 19, 2002

Air Canada

Q1’01: Difficult Economic, Cost Environment (millions)

Consol.2001Q1

AC & CA2000Q1 Change

Oper. Revenue $ 2,344 $2,305 $ 39

Oper. Expense 2,637 2,462 175

Oper. Income (Loss) (293) (157) (136)

Non-oper. Income (Exp) (1)

Income (Loss) Before Tax (294)

Tax (Provision) Recovery 126

Net Income (Loss) $ (168)

Per Share $ (1.40)

Per Share Ex. 1x $ (1.84)

© R.Elitzur


How Fastow/Enron Misused SPEs

To manipulate financial reports and

siphon off funds to Fastow & helpers

until the company imploded.

By Irene Wiecek


Guiding Financial Reporting Principles Economic substance over legal form – portrayal of reality

• Which assets and liabilities are part of the company?• When is a transaction a bona fide transaction? • Management intent

Arm’s length presumption - party is unrelated and bargaining on its own account – therefore price and terms fairly arrived at.• Versus related party transactions – fiduciary

responsibilities Transparency – also a fundamental principle of efficient

capital markets

The difficulty with Enron lay with sifting through the complexity


Decision making principles

All the relevant information available? Quality of information i.e. based on

reality, numbers reliable? Understandable?

“Enron’s SPEs were a mystery to most people at Enron”


• Economic entity concept - extends beyond legal entity

Economic Entity

Legal Entity

Which assets & liabilities are part of the company?

For Enron, the big issue was whether the SPEs were part of the entity


Economic entity concept

Report on resources controlled by the company – where the company has the potential to reap the benefits but is also exposed to the risks

Consolidated financial statements recognize that even though there may be separate legal entities, together, they constitute an economic unit


The Concept of Control

Continuing power to determine strategic policies without the cooperation of others

Spectrum

No control Significant Joint Control

Influence Control

Related parties


Control Benchmarks

General presumption regarding control• Normally – equity ownership >50% - must

also prove control exists• SPE – U.S. equity investment (at risk) >3%

(now 10%), Canada >10% - must also prove control exists


SPE Primer

Consider the following:• Demonstrably distinct – cannot be unilaterally

dissolved by transferor, outside ownership• Restrictions on activities • Legal form - may be corporation, partnership or

trust

SPEs are meant to be outside entities


SPE Primer

Business reasons for creating SPE• Economic benefits i.e. collateralize assets, share risk,

obtain more favourable financing, cash out,

• Examples - synthetic leases, pools of similar assets (AR, mortgages, investments)

Wrong reasons • get debt off financial statements, hide losses/risks,

generally manipulate financial statements, “P&L protection”


Enron’s SPEsChewco/JEDI Syndicated

investment

Off balance sheet liabilities ($628 million), revenues recognized early, profits on own shares

LJM Provided market

for assets

Artificial profits

Equity overstated($1.2 billion)

LJM1/Rhythms Investment

“hedge”

Unrecognized losses($508 million ‘97-’00)

LJM2/Raptors Investment

“hedge”

Unrecognized losses ($544 million)


Chewco/JEDI

Intent - JEDI Originally formed in 1993 with CalPERs to syndicate investment opportunities. Enron wanted to find another investor in 1997 so that CalPERs would invest in another vehicle.

Chewco formed 1997 as SPE Nov 2001 – accounting reviewed and

determined to be in error – consolidated retroactively


Chewco/JEDI Kopper/Dodson Dodson

LP/GPBig/Little

SONR River

$11.4

GP LP

$11.4

ENRON Chewco

$132 LP Barclays GP

$240 JEDI$240 + $11 +132 = $383

© I. Wiecek


Chewco/JEDI

Economic substance

At issue

Consolidate

Chewco

Part of economic entity? 3% test not met due to $6.6 million cash reserves

Kopper’s involvement

Joint venture

JEDI

Part of economic entity? Equity accounting, full consolidation due to Chewco?

Capital Transaction

Jedi investment in Enron CS

Non - event Cannot recognize gains on investment in own shares

Revenue Recognition

Guarantee fees,

Management fee

Fees for services over time

Upfront/ early recognition

Related Party Transactions

All transactions

Arm’s length? In best interests of Enron? I.e. Kopper received $10 million on repurchase and $2 million in fees


LJM1/Rhythms

Intent – Transfer of risks/provide additional markets

Fastow GP – seek outsides investors Formed 1999 - 20 transactions to 2001 Rhythms/Net connections

• Little market for CS (Enron had large holding). Worried about price risk.

Unwinding


LJM1/Rhythms Fastow

LP/GPERNB/

Campsie LJM Partners

Fastow $15 GP GP LP

$1

LJM Swap LJM1 Co

LP

LJM GP Swap Sub

3%- test not met since negative equity

© I. Wiecek


LJM1/Rhythms 3.4 million CS Enron FV $276 ($168 discounted)

ENRON LJM1/Swap Rhythms CS Sub

$64 Note $104 Put option on Rhythms CS (Swap to $168 buy Rhythms CS at $56) FV $104


LJM1/RhythmsEconomic substance

At issue

Consolidation? Part of economic entity?

3% test not met L > A; Fastow GP

Hedging

Put option on $5.4 million shares Rhythm

True economic

hedge?

68% prob that structure would default i.e. if Enron CS declined

Related Party Transactions Arm’s length Fastow’s involvement, payout skewed

Unwind – large windfall to LJM1 $4.5 million to Fastow

Unwinding Arm’s length Settlement – value to Enron


LJM/Other

Issues• Selling to LJM assets that it could not sell

elsewhere – subsequently repurchased• Economic substance? Bona fide transaction?

Guarantee against losses• At issue – gain recognition


LJM2/Raptors

Intent • Syndicate capital investments• Hedge• Create markets

Fastow GP- Formed Oct 1999 Significant contribution to NI $1 billion

3Q 2000 to 3Q 2001 4 Raptors – 2 of which discussed below


LJM2/Raptors Fastow/Kopper

LP/GP50 Limited

Partners LJM2 CMLP

$394 GP LP

LJM2 $30

LP

Talon

Enron

© I. Wiecek

3%- test unclear


LJM2/Raptor 1/Talon Capitalization and $41 put

$350 - 3.4 million CS Enron FV $537 ($350 discounted)

$50 million note

$41 million premium on put

ENRON/ LJM2/Talon

Harrier

LCC interest

$400 million Note

Put option on Enron CS – Talon to buy Enron CS @$57.50

© I. Wiecek


LJM2/RaptorsEconomic substance

At issue

$41 million put Intent? Credit risk? Arm’s length

Impact on 3% test

ConsolidationLJM2, Talon

Part of economic entity?

3% test

Fastow GP

Investment in Enron

Real transaction? Show NR as assets?


LJM2/Raptor 1/TalonTotal return swaps

Intent to protect Enron against losses on merchant investments

Enron pay future gains on investments to Talon

Talon pay to Enron future losses on investments

Locked in value on Enron’s books


LJM2/Raptor 1/TalonTotal return swaps

Economic substance

At issue

Hedge Total return swaps

Effective hedge? Credit Risk

Dating of agreements


LJM2/Raptor 1/TalonCostless Collars

Intent to shore up creditworthiness of Talon

If Enron CS fall below $81, Enron pays Talon difference

If Enron CS increases above $116, Talon pays Enron difference

Costless since premiums equal


LJM2/Raptor 1/TalonCostless Collars

Economic substance

At issue

Hedge Costless collars

Effective hedge?

Gains? Asset values

Investment in Raptors

Significant influence?

Gains eliminated?


LJM2/Raptor 3

Issues• TNPC – held shares of the very shares that

they were meant to hedge.• Not presented to the BOD


Things to think about Business model – non standard

transactions/changing business model Intent - structuring transactions to achieve

accounting objective versus economic objective Narrow interpretation of GAAP - the 3% test –

rules based versus principles based Complexity – non-standard legal structures Documentation – deal sheets, formal approvals When the legal form becomes more important

than the economic substance


Enron’s Governance StructureWas Short Circuited

BoardKen Lay: Chair; Co-chair ZZZ

Audit, Compensation Cees.

ManagementLay, Skilling: CEO

Fastow, CFO; KoppersCausey, CAO; Buy, CRO

Watkins; Kaminsky; McMahon

Company Policies

Code of Conduct

Internal Audit ?

Whistleblowers ?

AuditorArthur

Andersen

Outside Law Firm

Consultant: Arthur Andersen

MissingSuspended

Compliance

GuidanceFinan.

ReportsSPEs

© L. Brooks


Enron’s Ethical Culture Code suspended, alternate controls ignored Bogus trading floor for visiting analysts Whistleblowers/doubters came forward (to), but

• Co-chair (Lay) resigned, 32 mil. … suicide?• Kaminsky (Fastow) …….. ignored• McMahon (Fastow)...transferred …now CFO• Sharon Watkins (Lay)… Enron’s law firm

found no problem …fox in the chicken coup No protected whistleblower path to the Board Do we need an Ethics Committee?


New Board Responsibilities Comprehensive Risk Management

• Broad understanding of business model• Financial literacy• Guidance & Control framework• Focus on corp. culture, ethics & reputation• Business ethics…whistleblower protection plan• Ethics Risk Management

Trust, but challenge, don’t turn away • Caremark National Case, trend

© L. Brooks


Comprehensive Risk Management requires understanding the business

Risk Events Causing Drops of Over 25% Share Value,Percentage of Fortune 1000 companies, 1993-1998

Strategic ……………………………. 58%Customer demand shortfall (24) Competitive pressure (12)M & A Integration problems (7) Mis-aligned products (6)

Operational …………….31%Cost overruns (11) Accounting irregularities (7)Management ineffectiveness (7) Supply chain pressures (6)

Financial ………..6% [Foreign macro-eco, interest rates ]Hazard …….0% [Lawsuits, natural disasters]

Source: Mercer Management Consulting/Institute of Internal Auditors, 2001


Comprehensive Risk Management includes Ethics Risk Management

Ethics Risk Reputation Success

Reputation is important Arthur Andersen…………… survival RBC Dominion………reputational capital Tylenol ……………competitive advantage

Selling trust and credibility, not pills, …

© L. Brooks


Comprehensive Risk Management depends upon the Corporate Ethical Culture

Comprehensive Risk Management utilizes both:A. Key risk factor identification & measurementB. Review of key business processes including the ethical

culture that underpins process integrity Ethical culture provides guidance for employees

about when to adhere to the Code, when actions are not covered in Code, in a grey area, or in a crisis - tools to measure ethical culture do exist

Enron’s Board failed to consider any of this!Few corporations do A, fewer do B!

© L. Brooks


Audit Committee must

Understand key business operations Understand comprehensive risk

management model and reports Examine key/large transactions Ensure compliance with good policies Ensure fair presentation

Who wants this risk?How much should the members be paid?

© L. Brooks


Accounting Standards & Disclosure

FASB’s 3% standard was too low … now changed to 10%

Need rededication to:• fair presentation, not specific rules

orientation or pro forma illusions• clarity• transparency

SEC/IASC will be more evident… Can.?


Audit & Professional Standards

SEC rules on non-audit services More emphasis on professional ethics Stronger enforcement/punishment for

individual professionals:• in accounting/audit firms• in corporate clients

Is it in the public interest to shut down Arthur Andersen?


Eric Kirzner:A Director’s Commentary

An eye-opening example from my experience My criteria – must be met before I accept a

Director’s post. Tradeoffs a Director must understand Process steps for a Director to consider


Finance, Governance

1. AME HISTORY Listed Montreal

Exchange Board: affinity people;

friends of management Going Private transaction

• Independent committee

• NOBODY: Management; board

members understood!


Membership Criteria

My criteria for serving:

1. I am an expert in the field

2. The other board members: either experts, or knowledgeable and representing key stakeholders• union reps on pension plans for example

3. No Cronyism


Membership Criteria


4. Chair is expert, experienced and understands balance between unfettered debate and accomplishments.


Membership Criteria


5. All functions in place Management; internal audit and external audit Independence of internal audit and

management Independent directors

• 50% plus?; public governor proxy

• Fee for service!


Membership Criteria


6. Committee Structure Governance HR Audit and finance Risk management Independent directors dominate committees?


Understand Tradeoff

Paradigm #1

DIRECTORS TO:

“ Act in best interest of…”

Company (statutory) OR

Shareholders (regulatory)

Paradigm #2 Maximization of

Shareholder wealth

Paradigm #3 Public/ethical

responsibility


Process For Board Member

1. A Model• Can you develop checklist of responsibilities

• Example: meet CDIC guidelines?

2. Committees• Audit, HR, finance• Appropriate trade-off approval and

recommending


Process

3. Board self-assessment• Peer group review • Chair review

4. Independent Directors; Public Directors • Must understand everything• Ultimate sanction of voting with their feet!94


Comments & Questions

The Last Word• Ramy• Irene

Questions


New Governance Series

For directors and senior officers: Director’s Responsibilities Financial literacy Guidance and control systems Ethics risk management Comprehensive risk management

Thank You

on behalf of the

Clarkson Centre for Business Ethics

& Board Effectiveness—CC(BE)CC(BE)22

Executive Programs

Rotman School of Management

enron briefing clarkson centre for business ethics cc(be) 2 & board effectiveness—cc(be) 2...

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