Management education and training focus on "How to be a Good Leader."

An industry has sprung up around figuring out what leaders do and shouldn't do, why one type is better than another, who is this month's good or bad leader and manufacturing can't-miss recipes for success.

Resisting the temptation to be sign up for the latest "breakthrough" is easier if you keep a few things in mind.

First, not everyone can be a leader. For every leader, there must, by definition, be at least one follower, preferably more.  Management training's goal is to turn everyone into leaders. If this goal is ever universally achieved, how will anything get done?

Note: Don't interpret this as meaning you shouldn't aspire to be a leader or won't someday be a leader. It is instead recognizing a truism missed by most organizations: there exists a leader/follower "balance" dictated by strategic needs, not by who's on the payroll at the moment.

Second, leaders also must be followers. Leaders who think they are not subject to second-guessing will be rudely surprised sooner than later. Every leader is responsible to somebody all the time, which is a very good definition for a follower.

Leaders are over-rated and leadership is always in short-supply. The traditional picture of a leader doesn't suit the team-orientation of today's knowledge-based businesses. In networked organizations, it's seldom clear who's leading and who's following and that's the way it should be. But to make that work, leadership is required from followers.

Being a follower isn't a bad thing. Get over it. Without good followers, no leader, no matter how good they are, can get the whole job done. Hierarchical reporting relationships, the stock-in-trade of industrial concerns and management instruction, are fading fast. Flatter structures where the lines between leaders and followers aren't bright or consistent work better.

Stop worrying about whether you'll be a "good leader" some day. Invest your energy instead in practicing good leadership and building your "followership value."

Keep in mind that leaders and leadership are two very different things.

Leadership should be practiced by everyone; it's all about passion, commitment and getting the right thing done at the right time. It’s not about who can talk the loudest or longest.

Leaders, especially good ones, may be different from the rest of us; they seem to have (and probably need) more of traits and characteristics like intelligence, high-energy, drive, determination and decisiveness.

Leaders sometimes start out "good," but turn "bad" over time. Others are bad from the get-go. Occasionally, leaders start out good and become even better. Followers have a hand in which of these happen and can reap the benefits or pay the price. Followers who practice good leadership can avoid bad leaders, get good leaders and make good leaders even better.

How to Keep a Good Thing from Going Bad

What kinds of "leading" should followers (team members) do? If you have to have a leader, how can you make sure your leader stays "good?" What do you do with a bad leader? Here are some tips and ideas.

Limit the Tenure of Leaders.  Term-limits have benefits in politics; they also work in business. Teams don’t always require leaders, but if your team thinks it does, rotate the job. Having different leaders for different phases of a project is another approach worth considering.

Share the Power, Victories and Defeats.  President Reagan kept a framed quotation on his Oval Office Desk as a daily reminder of what this meant, "There's no limit to what someone can do or where they can go if they don't mind who gets the credit." Use this quotation as a team motto and watch what happens.

Don’t let your Leader think he or she is a Celebrity.  Don’t believe all the good (or bad) things that are being said or written; when was the last time you knew the newspaper got the whole story completely correct? Good followers know how to get and give the unvarnished truth (which is the best kind). And in case someone forgets, remind them, “It’s not personal, It’s just business.”

Get a life outside of business and don’t neglect it.  Don’t take yourself too seriously. Laugh heartily and often at your mistakes.

Where’s this going?

Here’s something else to think about, “What management model will follow the current team-orientation buzz?” Teams evolved from hierarchical structures that decentralized decision-making. What will evolve from teams? Considering this question might be a source of competitive advantage.

A few academics and a growing number of practitioners think a "collaborative" model is the next step. If that's right (or even close), a sort of co-equal process of decision-making will develop where essentially there is no leader. And if there is no leader, then there aren't any followers either, right?

By the way, don't confuse collaboration with consensus. Consensus means everyone involved has to approve in order for something to be decided; the converse of that being that anyone can also veto anything. 

Collaboration isn't that egalitarian. It emphasizes involvement over decision-making. Decisions come from iterative rounds of developing, analyzing, rejecting and re-formulating choices.  A mechanism exists for up-or-down decisions to ensure the process doesn’t bog down, but is used sparingly if things are going well. Nike features this collaborative technique in its management development training.

To wrap up, leadership might be better viewed as something practiced by leaders and followers. Each will use different types of leadership, but neither, especially leaders, have a monopoly on it. No less important is the idea that leaders and followers are inseparable and indivisible.

Too much attention is lavished on turning everyone into a Good Leader. Don’t worry about the label you’re wearing today. Invest your valuable time and energy in practicing good leadership; that’s where you’ll build the value that lets you make meaningful contributions from which you will reap satisfying rewards.

It's a safe prediction that every one of us, some time during our business career, will announce, "I love my work, it's the office politics I can't stand."

Maybe you've already grumbled it five times this week alone. 

But business is a social process; it involves people interacting with one another.  Someone wants to sell you something, someone else wants to get promoted or, quite frequently, wants your job.

This never-ending process of getting things done is also called politics.  It's how decisions are made.  And it's a necessary part of business. 

So, to succeed in business, do you have to play office politics?  Can you get ahead without resorting to endless maneuvering and always watching your backside? 

The answer is, of course, you can but you've got stick to some tried-and-true rules. 

It's the petty office politics you want to avoid.  Major decisions that affect your company's future require lots of politics, as they should.  In fact, there's nothing healthier than an out-in-the-open, straight-up debate about important issues.  It's when things get petty (and personal) that make you want to get off at the next stop.

First Big Rule:  Never discuss politics.  The best way to avoid saying something that gets you into trouble is not to say anything.  When you feel yourself getting involved in a petty political issue, keep quiet.  Never rail against it, pontificate or claim you're "taking the high road."  Just don't get involved.  Period.

Second Big Rule:  Don't bad-mouth rivals.  Never say anything personally derogatory about anyone, especially someone who is or might be perceived as your rival.  It's all right to "express concern" or even "surprise" at a competitor's actions or behavior, but don't feel you need to have a "sound bite" ready to put them in their place.  Practice diplomacy, which is a form of politics that is never petty.

Third Big Rule:  Find honest ways to praise everyone, even co-workers whom you dislike.  Look for something that's praiseworthy (look hard, you'll find something) and sincerely acknowledge those positive attributes; don't be corny or condescending or it will come back to haunt you.

Fourth (and last) Big Rule:  Be honest with yourself.  Not every setback in your business career will be attributed to office politics (although it will be if you're caught playing petty politics).  Blaming political intrigue for your misfortune may make you feel better, but it doesn't accomplish anything in the long run.  Some things just aren't meant to be.  Get over it and move on.  Learn from your mistakes, don't let them happen again and work harder at setting yourself up for success instead of avoiding failure. 

You've probably noticed that most large, publicly-held companies are led by someone with the (long and impressive) title of "Chair of the Board of Directors and Chief Executive Officer."

And you've probably wondered if doing things this way produces the best corporate governance possible. 

After all, aren't we talking about the leadership roles of two very different, and possibly conflicting, functions in a corporation? 

Doesn't the Board of Directors and its Chair represent the corporation's owners (shareholders)? 

And isn't the Board responsible for hiring the corporation's management which would be led by the Chief Executive Officer (CEO)?

Do you see the potential conflict?  What happens when the shareholders are unhappy with the firm's management?  Would someone filling both roles have a conflict of interest if the shareholders demand the CEO be fired?

It looks likes this heretofore common practice is changing, albeit slowly.   

In 2002, only about 22% of all Standard & Poors-500 companies separated the Chair's job from the CEO. Currently, the percentage has increased to about 36% according to Corporate Library, a research group in Portland, Maine.

Some of the impetus for this shift comes from Britain where a 1992 corporate governance reform effort essentially requires a Board's Chair be an "outside" director.  Doing it otherwise, which basically has been the American approach, means "The job of CEO has no boss," according to Harry Pearce, retired vice-chair of General Motors. 

The key to making it work is applying the lessons we've learned. 

A company's elected Board of Directors is responsible for deciding its strategic direction and hiring and supervising the CEO.  Those duties constitute the governance function for which the Board is responsible and no one else. 

Management is charged with implementing the strategic direction set by the Board.  The CEO's job is to "make the trains run on time" and he or she should expect (and demand) the Board stay out of day-to-day operations. 

Conflicts happen when roles and duties aren't clearly defined and understood.  Blurring the governance and management roles by combining their leadership into a single position doesn't seem likely to produce good corporate governance. 

Separating power and setting up checks and balances works well in government settings.  Critics point out that it's not an efficient way to run things.  Decisions take longer and the process isn't as tidy as it could be.  But if that's the price for getting better decisions and, ultimately, better governance, it might be a bargain.  What do you think? 

Management is the Art of "Making the Trains run on Time."

Deciding whether to travel by boat, train or plane is the principal duty of a firm's governance; those are strategic choices (What will we do?). 

Management's role is tactical in nature:  to implement the firm's strategy.  What will we do to make the trains run on time?

In case you're wondering, there's no such thing as a "management gene."  Good managers aren't born with "it."  It is something, however, you can learn and become very good at with practice, practice and more practice. 

But you've got to practice the right way and, most important, start in the right place.  Much of the management training you'll encounter will consist of "new insights" into things to do and not to do.  And when those insights aren't new anymore, they'll be replaced by some "breakthroughs" and some other things to do and not to do. 

Let's take another approach.  What if we were to begin by asking, "What am I managing?"

While you're thinking about that question, you might want to look at my Lecture Notes and PowerPoint slides for our Week in the World of Organizations and their Management. 

• Download organizations_and_their_management_week_6.ppt

Keep reading to learn more about the highlights of Chapters 7 and 8 and even more about becoming an effective manager.

Here's the perspective I'm suggesting you take:  Rather than learning and trying all the latest management tips and tricks, what happens if you first look at your organization and understand what it's doing or not doing or supposed to be doing?

Does your organization look like this? 

Where and how do you think decisions are made in an organization that looks like this? 

What kinds of reports are prepared and how are they distributed?

Now look at this organization.  Doesn't look anything like the first one, does it?  Why do you think that is?  

Do you think the same management "style" would work in these two very different looking organizations?

How do you think information gets transmitted in the "cube farm?"  Where and how do they make decisions?

Highlights and Key Terms from Textbook Reading Assignment

Consider reading Chapter 8 before Chapter 7.  Chapter 8 deals organizing the resources necessary to execute your business's purpose.  Chapter 7 addresses managing those organized resources.  See why I think Chapter 8 should be read before Chapter 7?  Don't resources have to be organized before they can be managed?

Chapter 8

• The only other time I heard the term "chain of command" used was when I was in the US Army.  It presumably is used in all other branches of the armed services, but rarely, if ever, will you hear it in the business world.
• The terms "span-of-control," "organizational height" and "line-versus-staff" are not absolutes.  They will vary in use and importance depending on a firm's strategic purpose.  Also, there are no "rules-of-thumb" that describe whether you have enough or too little of any of them.
• The distinction between "Inside" (Internal) Directors and "Outside" (External) Directors is more than functional.  How can "Inside" Directors be objective in any strategic decision-making?  Don't they have a "conflict of interest" in any decision that effects their compensation or continued employment (which probably is just about every question deliberated by a Board of Directors)?
• A "matrix" organizational structure is a hybrid designed to deal with complex projects where multiple structures may be necessary.  CH2MHill, an international engineering firm started in Corvallis, perfected its use.  A classic example of the matrix structure's application is the development of an airport where separate sub-structures are needed to organize the construction of, for example, runways, terminals and other facilities.
• Be wary of informal organizational gambits like "consensus" decision-making or "open-door" policies.  Consensus requires unanimous agreement (or no objections); something that's difficult and time-consuming to obtain.  It may have the benefit of everybody being "on-the-same-page," but the process for getting there often reduces to finding alternatives that no one finds objectionable as opposed to enthusiastically supporting.  Also, if someone's door is "always open," why do they need to tell you that?  It should be obvious if it truly is always open.
• Managers manage a variety of related, but different functions; supervisors supervise a single function or activity.
• An organization's structure will be defined by its strategic purpose and organized by (i) product, (ii) function or (iii) something else like geographical locations, brands, customers, industries, etc.  None of these approaches will work perfectly; they all suffer some defect.  Organizational structures are, by necessity, compromises and dynamic.  Good managers understand that change occurs constantly and the pace of change is usually increasing.

Chapter 7

• Don't be concerned with the "levels of management" discussion.  Depending on your firm's strategic purpose, one level might be one too many or half-a-dozen might not be enough.  After skimming through this section, go back to the first question, "What am I managing?"
• Simplify the planning process and be sure to know the difference between planning and plans.  To be successful, innovative solutions and creative problem-solving are needed; in other words, have lots of plans for dealing with a complex and competitive marketplace. 

Planning, on the other hand, too easily morphs into a never-ending process headed by a Vice President and a small army of analysts and administrative assistants.  Keep it simple and succinct:  Strategic plans are long-term in scope (more than one year; sometimes up to 3).  Tactical plans are short-term in scope (usually cover no more than one year).

• Make sure you know all about Management, Governance, Organizations and Leadership, but go lightly on "Controlling."  Well-designed systems will be "self-controlling."  And you don't want a reputation of being "too-controlling."

Skip through the Information Technology (IT) material; last week's "leading-edge" technology will be outdated next week.  Hire only IT people who understand how your business works; the technology is supposed to support the business, not the other way round.

Don't worry if your management or leadership style doesn't fit the textbook's description.  Your style should "fit" your organization and nobody else's idea of the right or wrong way to do things. 

The "Time Management" discussion misses several important points.  First, successful managers should want to be interrupted.  Opportunities (and problems) usually don't arrive at precisely scheduled times.  Second, learn to accept and deal with interruptions; they're part of managing.    

Fighting the Budget Battle is one of the Final Plan's bigger challenges.  Here are some weapons to help you emerge victorious. 

The most frequent problem is the Capital Budget's Sources and Uses of Funds don't balance.  The total of each has to be identical, otherwise your budget won't behave. 

Next on the list is understanding the difference between (1) your capital budget's initial inventories and (2) your operating budget's periodic replenishment of those inventories.  Doesn't that sound exciting?

I'll bet you can't wait to read more.

First, organize your Capital Budget's "Uses of Funds."  Account for all the money necessary for starting the business.  Think about all the equipment, staff wages and benefits, supplies and other "stuff" you'll need in order to be ready for your grand opening. 

Also, don't forget all the indirect costs of incorporating, obtaining business licenses, setting up your accounting system, insurance and much, much more.

There are three special types of startup costs you won't want to overlook.

1. The first is what we call "Working Capital."  This is the amount of cash needed to cover operating losses until the business is consistently producing positive cash flows (also known as the "Breakeven Point").  Fortunately, the spreadsheet automatically computes your Working Capital needs for you.  You just need to make sure it is making logical sense. 
2. Next are "Owner Distributions.  This item answers the question, "How will the Owners pay their personal expenses until the business becomes profitable?"  It is also sometimes called "Draws."  Calculating it starts with estimating the monthly amount the Owners need for defraying their personal living expenses.  Next, estimate the number of months until the business consistently generates cash flows the Owners could use for their compensation.  The product of these two numbers will then be the amount to include in your Capital Budget's Uses of Funds for "Owner Distributions."
3. Last, but not least, is a Contingency.  No matter good you get at budgeting, there always will be expenses you didn't anticipate or that will be more (and sometimes less) than you expected.  To cover these occurrences, include a lump-sum amount equal to at least 10% of all your startup costs; for especially uncertain ventures, I'd suggest bumping it up to 15%.

Second, prepare your Operating Budget.  Forecast the revenues your business is likely to generate and the expenses it must incur to produce those revenues.  In your plan's text, describe the assumptions and calculations that underlie these forecasts.  For the time being, don't worry about income taxes or any accounting adjustments; focus only on cash flows.

Prepare the Operating Budget for a three-year period by quarters (don't use months, that's too much detail).  Begin with your firm's startup stage, move through its launch and growth stage and show, in the third year, how it stabilizes at maturity.

Third, identify the Sources for the funds needed by your Capital Budget's Uses.  This will also be your firm's "Capital Structure."  Chances are you'll be using one or more of three sources:  (a) an equity investment by the firm's founders, (b) a bank loan or (c) a third-party investor equity investment.

Finding the right "mix" of these sources isn't "rocket science."  Study the amount of cash produced by the firm's operations in its third year; these represent funds that could be used for debt repayment and might then be the amount able to be borrowed as part of the initial Capital Structure. 

As a general rule, try to fund your firm's capital budget with founder investments or bank loans; third-party equity investments are extremely expensive and usually not worth the amount of control that must be given up.

Fourth, put the finishing touches on your budget.  Pay back your bank loan and check whether your assumptions still hold.  Were your contingencies enough?  Evaluate the amount of cash on hand versus the founder's initial equity investment; what was the rate of return earned by the business?  Express that rate on an annual basis and compare it with other investments you could have made.  How did you do?

TROUBLESHOOTING

If your budget isn't behaving, raise the hood and check these things. 

First, are your sources and uses of capital funds equal?  If they aren't, your budget will never make sense.  Add or subtract sources or uses until the amounts balance and see if that makes your budget better behaved.

Another problem area is Inventories.  They appear in two places and are treated differently in each.  First, you might have an initial inventory that is in the Uses part of your Capital Budget.  Make sure this is a "Positive" number.

Next, there's another "Inventories" in the Operating Budget.  These are "replenishments" and must be a "Negative" number.  When your business is operating, it is drawing down your initial inventory to make the products that are being sold.  As some point, you must replace the inventory that's been used.  To do so, you need to buy more materials for your inventories by paying out cash from your operating budget which explains why it is a negative number.

Finally, a word of caution about tinkering too much with the spread-sheet's formulas.  Be careful about plugging any numbers or overriding any formulas.  The cells are linked together in ways that will produce unexpected results if you fool around with it too much.  Be patient and try a little trial-and-error if all else fails.

Now that wasn't so bad, was it?

Just when the memories of Enron’s ethical and financial meltdown were starting to fade, the current financial and economic mess breathed new life into the debate about corporate social responsibility. Heads are rolling and earnings are Wall Street’s least favorite holiday color – bright red.

Calls for investigations are mounting and it won’t long before a CEO is seen on the evening news taking a “perp walk.” For the moment, the loudest cries are, “See, we told you big business wasn’t to be trusted. More and tougher laws are needed to make those corporations act responsibly.”

Before picking sides in what many call the ultimate imponderable (can corporations be responsible?), let’s pick apart some of the terms and rhetoric being hurled around.

Your textbook introduces the subject by announcing firms have responsibilities that go beyond producing and selling products (p. 34).  Nothing is added though to tell us what it means to “go beyond” getting products made and sold or how to go about doing it.

We are told, however, that product safety should be “ensured” and one way to do that is by “warning labels” (but weren't sub-prime borrowers warned their payments could go up?).  Car sales tricks are singled out to illustrate irresponsible sales practices (hardly a shocking revelation).  Federal and state laws are said to help employees get treated responsibly (but suing their employer isn't something most employees can afford to do).  Owners and creditors will insist a firm be financially responsible (although things went badly wrong for Enron's shareholders and bankers).  The role firms play in their community and how they affect the environment is supposed to produce responsible behaviors.

None of this provides much help to a business manager. How can a busy manager be accountable to the firm’s stockholders and creditors while being responsible to its customers, employees and community?

What can you do to satisfy all these interests? Can you be all things to all these constituents? Will making businesses more accountable produce more responsible behavior? And who decides if a firm has not been responsible enough?

Your textbook identifies various “stakeholders,” all of whom claim some interest (a “stake”) in a business (p. 10-17).  Every stakeholder’s role is said to be “critical,” but no guidance is given about how to (a) rank the roles or (b) reconcile conflicts between the roles.

How stakeholder roles interact certainly is critical; it determines a firm’s operational effectiveness.  Sitting at the epicenter of these interactions are the firm’s managers.  When the interests of a firm’s stakeholders are perfectly aligned, the manager’s job is easy.  But how often does that happen? When they conflict, how do the managers decide which stakeholder gets favored over the others?

Do they look for solutions that satisfy every interest? Is that possible? Or, because it might be impossible to satisfy every stakeholder, do managers sometimes ignore the stakeholders, which include the firm’s owners, the stockholders, and instead satisfy their own interests?

These last points illustrate some of the limitations of the “stakeholder theory” of business governance; it provides a great description for the problem, but doesn’t offer much that managers can use to solve it. It is, however, a starting point for a better approach to accountability, which in turn, might lead to greater degrees of responsibility.

Most of the ideas for making business more responsible involve (a) stiffer penalties for irresponsible acts or (b) making them more “transparent” by requiring more disclosures and oversight.  Both remedies, however, are “more of the same.”  They haven’t worked before and won’t magically start working now.

The law books already overflow with all manner of crimes and punishments; adding more won’t get us to a “tipping point” where all corporate misdeeds disappear.  Enron's financial reports were award-winning and sending off warning signals long before it crashed; its Statement of Cash Flows showed the end was coming two years before it arrived. 

Most financial reports aren’t read now; publishing more and longer reports won’t make investors read and understand the information they’re receiving.  Many complained that Enron's business was too complicated and the complex information published about it wasn’t easy to understand.  Why would you invest your life savings in something you didn't understand?

Another potential “fix” suggests making corporations focus less on meeting short-term earnings expectations and more on building long-term value.  These initiatives are aimed at blunting the axiom, "Maximize shareholder value."  But does "value" always have to be measured in financial terms?  And why can't value be maximized over the next five years, not the next three months?

Who are the owners of the large, publicly-held companies traded on the New York Stock Exchange?  Are they middle-class workers building an investment fund for retirement or social activists wanting more responsible environmental practices?

The biggest stock owners are institutional investors such as mutual funds and retirement programs; individual investors are “small fries” in today’s investment world.

The California Public Employee Retirement System (CalPERS), for example, buys stocks as investments for the retirement funds of California’s 1.5 million state employees; as of October 2007, it held nearly $255 billion of stock and bond investments.

85.7% of Nike’s stock is held by a total of 857 institutional investors. This equates to each investor holding on average about 391,234 shares; at a per-share price of $66.27 as of December 21, 2007, each investor then had about $26 million invested.  CalPERS was one of these investors, owning 1,372,420 shares of Nike stock with a total market value of about $90.95 million.

With nearly 7/8 of its stock held by a comparatively small number of investors, Nike should and probably does pay attention to what they say. But is an investor like CalPERS interested only in short-term returns?  Goal IX of their Asset Management Policies directs them to “achieve long-term, sustainable, risk-adjusted returns.”

CalPERS has implemented initiatives to assure they invest only in companies espousing reasonable levels of executive compensation, sound environmental practices and majority-vote procedures.  In sum, CalPERS isn't an institutional investor/owner/stockholder concerned only with short-term gains at the expense of long-term stability.

Fixes that would direct managerial attention away from investors like CalPERS don’t seem prudent.  Stakeholders frustrated by not having their interests heeded by a company’s managers might be better served by asking investors like CalPERS to represent and support them.

This discussion suggests approaches to improving accountability and responsibility include investor practices and methods.  Should large investors be required to give their members a stake in how investment policies are developed, for example? After all, isn't "professional management" one of the reasons people invest through mutual funds?  Is the "agency problem" found in large corporations also found in the mutual funds that invest in them?

When investing through a mutual fund, for example, voting rights obtained by the fund from its investments are delegated to the fund's management, not its members.  Recent SEC rule changes now require funds to disclose how they voted and the policies and procedures associated with their voting, but member input is rarely solicited.

A growing number of institutional investors claim to be "socially responsible" in selecting investments for their members.  This sort of market-driven response is probably preferable to more regulation and disclosure.  But is more work needed in order to strike the best balance?  

Would it be a better approach to evaluate the policies and practices of the "buy-side" (institutional investors) of the information-exchange problem rather than the "sell-side" (the corporations and their management)?  For example, should an investment fund’s shares be voted en bloc or according to member shares?  Should an investment fund poll its members about the issues being considered at a company’s annual meeting?

This topic is complicated and has no easy answers.  This long-winded post has hopefully spurred you to think about some of these issues and how you'll deal with them when you slip into your manager's chair. 

It also tried to open a door onto different ways of analyzing the problem.  It's not clear how much more can be done by regulating corporations more tightly or punishing more severely bad corporate behavior.  The practices used by Investment Fund and Mutual Fund managers to obtain input from their investors about important issues of firm governance and social responsibility are not well understood.  No industry-wide "best practices" have been developed as doing so has been resisted by the funds managers.  Would taking a different tack produce better results?

Were Enron's accounting gyrations the cause or an effect of what happened?  How did things get so out-of-control? 

The finger of blame is usually pointed at Enron's off-balance sheet machinations or their accountant's conflicts of interest.  But aren't these symptoms of something larger?  Are they really what brought Enron down? 

What was the "disease" that made so many people at Enron act so badly?  Why didn't someone yell, before it was too late, "We've got to change and start doing the right thing!"

Did the problem at Enron also start with the letter "E?"  Did their values and culture put ethical considerations in second place after financial gains?  How was that allowed to happen? 

Did it start first with everyone "looking the other way" when someone "fudged" their expense account instead of saying, "That's not right."  How was it allowed to fester unchecked for so long and to get so bad? 

We're going to spend some time trying to figure out what's the "right thing" for you and your organization.  One safe bet is you and your organization won't always agree on what's "right" for every "thing."

To get started, here are my lecture notes and PowerPoint slides:

• Download Ethics (Week 6)

Having publicly-held corporations be responsive to shareholder and community concerns is one of the reasons for wanting good corporate governance. 

Another is avoiding loss of financial value.  Enron's market capitalization reached nearly $60 billion; when it collapsed and everything was lost, much of the blame was aimed at the formerly high-flying energy-trader's governance.

The Sarbanes-Oxley legislation and passel of new SEC rules that followed tries to improve corporate governance.  But were more and stricter rules and requirements the best way to do that?  Won't the government be outmatched by the high-paid lawyers and accountants on most big-company payrolls?

Isn't there another question that might be more important?  It's a question some people don't like to ask and many don't want to know the answer to, "Does good corporate governance make a positive difference when it comes to financial performance?" 

Opponents of increased regulatory oversight argue it's always a bad bargain; there may be some benefits, but they aren't justified by the costs.  Proponents take the opposite tack saying markets don't penalize good behavior; good corporate governance and good financial performance go hand-in-hand.

Which side is right?  Has anybody tried to answer this question with some serious thought and analysis?

Another post mentioned the California Public Employees Retirement System, widely known by its acronym, CalPERS.  When it comes to financial behemoths, there's no one bigger. 

They're the nation's largest public pension fund with over $245 billion invested in the stocks and bonds of over 2700 companies.  When they speak, people pay attention, particularly if they are one of your biggest stockholders.

About 20 years ago, CalPERS began asking whether there's a connection between poor financial performance and bad corporate governance.   

Below-average financial performance isn't hard to detect or measure.  CalPERS compares an investment's performance with popular  indexes (S&P 500, for example) as the first step of their process.

Deciding whether a company uses good or bad governance is more complicated.  Companies govern themselves in many different ways.  There's no one universal set of practices that everyone agrees is better than others.

After much trial and error, CalPERS focuses on some of the following for identifying whether a company is "poorly governed":

• Roles of Board Chair and CEO are combined
• Relatives serving on Board of Directors
• Size of Board (Number of Directors)
• Relative proportion of Insider/Outside Directors
• Actual or Potential Conflicts of Interest
• Insider members on Board's Nominating or Compensation Committees
• Procedures for Amending Bylaws or Voting on Shareholder nominees or initiatives
• Material restatement of financial results
• Compensation plans insufficiently linked to performance

CalPERS annually publishes a "Focus List" of companies in its investment portfolio that have performed poorly and have poor governance.  The 2007 list has 11 companies on it, a few of which are well-known. 

• Dollar Tree Stores.  Underperformed S&P 500 by 21% and refused to remove super-majority voting requirements that control stockh0lder initiatives.
• Eli Lilly & Company.  Underperformed S&P 500 by 52% and refused to grant stockholders the right to call special meetings.
• International Paper Corporation.  Underperformed peers by 35% and refused to remove super-majority voting requirements. (Fortune magazine named International Paper as one of "America's Most Admired Companies.")
• Sara Lee (Jimmy Dean Sausage and Kiwi Shoe Polish among many others).  Underperformed peers by 36% and refused to implement measures to make Board less isolated and more accountable.

CalPERS does more than just publicize the names of the companies they identify as poor financial performers and badly governed. They meet with board members, executive officers and, in many cases, ask for specific actions they believe will improve the company's governance.

After all this "dust" settles, was it worthwhile?  Where companies agreed to improve their governance, did their financial performance also improve?  Are valuable benefits gained from good governance?

Several studies have looked at what's called the "CalPERS effect."  Most of them show positive results in terms of stock-price performance during the year after CalPERS initiates its focus on improving a company's governance.  Poor financial performers perk up after making changes in their governance.  More than anything, the governance initiatives seem to stop rapidly eroding financial value.   

Some inconsistencies in the results show up, however.  The "poorest" performers tend to improve the most, which skews the average somewhat.  Likewise, the positive effects of improved governance seem to fade over time; five-year performance improvements are less than one-year improvements. 

Some of this might be explained by CalPERS not having consistent standards or enforcing them uniformly over time.  CalPERS' management is subjected to political pressures that might cause it to act unevenly at times.

In sum, there is market-derived, hard evidence that shows good corporate governance gets financially rewarded.  Investors and markets look for and support efforts that make companies more transparent and accessible.   

Here's the setup for the case presentations.  Note when your team is presenting and its responsiblities. 

• Download Case Presentation Process (Fall 2009)

Keep reading for more information about the presentations.

Note that the "topics" for each team's presentation are different from the analysis that was prepared for the case-briefs.  That's because "live" decision-making is different from reviewing written submissions.

Each presenter should budget about five minutes for their part in the process.  Save a little time for Q&A. 

Pay close attention to the "Techniques and Methods."  You can assume that your audience (the firm's Board of Directors and Senior Management) has received and reviewed your case-brief. 

Your challenge is to identify and communicate the "essential" points of your topic.  There probably won't be more than three or four of them.  How will you present those points so they're clearly understood? 

Doing that will require organizing your presentation so it's got an opening that gets everyone's attention, some analysis and support for its key points and a summary that leaves no doubt about what your audience should know and remember when you're finished.