Transcript Document 7144919

Brief Update on the
Marriott School of Management
Brigham Young University
Ned C. Hill, Dean
DFW Management Society
May 13, 2004
What BYU Team Did Beat Stanford & USC?
(not to mention UCLA, Notre Dame, Virginia & Utah)
What BYU Team Did Beat Stanford & USC?
(not to mention UCLA, Notre Dame, Virginia & Utah)
Answer: The Marriott School of Management!
22. MIT
23. Emory
WSJ Rankings
24. IPADE (Spain)
25. Ohio State
31. Notre Dame
26. Brigham Young
34. Thunderbird
27. Wake Forest
37. NYU
38. UCLA
28. Washington (St. Louis)
29. University of Virginia
30. Stanford
39. London Business School
40. USC
What the Wall Street Journal Said
• “Brigham Young’s Marriott School of
Management stood out for its students’ integrity in
this era of corporate scandals. ‘Our recruiters
return to Brigham Young year in and year out
because of the school’s high ethical standards,’
says Roger McCarty, corporate strategy
development leader for Dow Chemical Co.”
• “Recruiters find that Brigham Young produces a
particularly valuable type of graduate these
days…the ethical accountant.”
…continued
• “Brigham Young, which is sponsored by the
Church of Jesus Christ of Latter-day Saints, is
considered one of the best schools for hiring
students with high ethical standards.”
• “In addition to ethics and integrity, recruiters gave
students very high marks for analytical and
problem solving abilities, communication and
interpersonal skills, fit with the corporate culture
and team orientation.”
MBA Rankings
• During 2001-03, we advanced or
maintained standing in every
major MBA ranking for the third
year in a row
– 22nd worldwide in Forbes (17th in U.S.)
– 29th in U.S.News & World Report (2004
ranking was 39th)
– 1st bang for the buck in Business Week
– 2nd for Ethics in The Wall Street Journal
– 5th for Leadership in The Wall Street
Journal
Other Rankings
• 3rd Graduate Accounting
•
(Public Accounting Report)
3rd Undergraduate
•
Report)
38th Undergraduate
Accounting (Public Accounting
Management (U.S.News & World
Report)
• No. 1 “Stone Cold Sober School”
(Princeton Review)
Student Achievements
Undergraduates beat out
MBA students nationwide
to win Fortune Small
Business Magazine’s first
business plan competition.
MBA team wins 2003
Thunderbird Innovation
Challenge, beating 154
other teams.
Student Achievements
MBA students win the
D.A. Davidson & Co.
investment competition—
earning a 32 percent
return on their
investment.
Three students placed
second at the Net Impact
2003 International Case
Competition.
Student Achievements
An information systems
student placed first and
another student placed third in
the school’s first appearance at
the National Collegiate
Conference.
An MPA student was the first
in Utah to win an American
College of Healthcare
Executives Scholarship.
Student Achievements
Marriott School MAcc team
wins first place in Deloitte
national auditing case
competition in March
against all top Accounting
programs.
Marriott School MBA
team wins first place in U
of Denver National Ethics
Case competition—with
invited schools known for
their ethics programs.
Student Achievements
Undergraduate accounting
students took first place and the
graduates took second place at the
Deloitte Tax Case Study
Competition. This is the seventh
time in the twelve-year history of
the competition that both BYU
teams placed among the top
three—an unparalleled
accomplishment.
Alumni Portals
• New portal service unveiled in
September 2003
• Portals are customized by
program and year (i.e. MBA 1996,
MAcc 2001)
• Alumni portals are a
powerful tool to renew
connections and establish
new relationships
Alumni Portals
Visit your alumni portal to:
•
•
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•
•
Update your profile
Access a class directory
Participate in online forums
Connect to the Management Society
Search 40,000 Marriott School and nearly
half a million BYU alumni records
Web: marriottschool.byu.edu
• Click “Alumni Portals”
Management Society
• Now a global organization
• 40 Chapters in the U.S.
• 17 International chapters
• Developed central membership
database
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•
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Membership records
Online dues/events payment
Online calendar
Communication tools
• Formalized 5-year strategic
plan
The Crisis in Confidence
Why the Public is Losing Faith in American
Business and What We Can Do About It
Part 1: The Problems*
*Much of this material from Associate Dean W. Steve Albrecht
What’s Gone On?
• Misstated financial statements: Qwest, Enron*, Global
Crossing, WorldCom, Xerox, etc.
• Executive loans and corporate looting: John Rigas
(Adelphia), Dennis Kozlowski (Tyco--$170 million—the
$15,000 umbrella stand), Bernie Ebbers (WorldCom),
Stephen Hilbert ($175M from Conseco)
• Insider trading scandals: Martha Stewart, Sam Waksal,
etc.
• IPO favoritism, incl. spinning and laddering: Bernie
Ebbers, etc.
*For the fascinating story of the fall of Enron, read Pipe Dreams by Bryce or
The Smartest Guys in the Room by McLean & Elkind.
What’s Gone On?
• Excessive CEO retirement perks: Delta, PepsiCo, AOL
Time Warner, Ford, GE, IBM (consulting contracts, use of
corporate planes, executive apartments, maids, etc.)
• Exorbitant stock options for executives
• Loans for trading fees and other quid pro quo transactions
(Citibank, Chase, etc.)
• Bankruptcies and excessive debt
• Massive fraud by employees
• Mutual fund scandals (1/6 of all funds may have been
involved)—Note: Marriott School faculty member, Bernell K.
Stone is working at SEC on this issue.
Example: Making Earnings at Enron
• “Mark-to-market”—book future profits today and
don’t worry about delivery
• “Revisit” deals to generate higher profits
• Delay losses (even hide them in SPE’s)
• Mark up value of non-traded assets
“They knew that they stretched and twisted the rules to
Enron’s advantage but they saw their actions as
creative not misleading.” – from The Smartest Guys in
the Room
Example: Personal Loans at Conseco
• Stephen C. Hilbert, chairman and CEO
– 33-acre estate in Indiana with 25,500 sq. ft. mansion
– 18,500 sq. ft. vacation home in St. Martin
– Race horses, etc., etc.
• Financed by $175M in loans from company
• Now owes over $200M
• Claims that loans are forgiven when ownership
changed hands—has transferred >$100M in assets
to his sixth wife
• He built up $8.2B in debt at Conseco
Consequences of These Problems
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Lost confidence in capital markets
Lawsuits—one company has over 3,000
Bankruptcies
Lost reputation and bad press
Longer and more expensive audits, special inquiries
Fines & investigations
Damaged employees & reputations
Lost retirement and pension funds
Directors with personal liability, forced resignations
Losses from fraud
The Cost of Bad Press
Largest Bankruptcy Filings
Company
Assets (Billions)
When Filed
1. WorldCom
2. Enron
3. Conseco
$101.9
$63.4
$52.3
July 2002
December 2001
December 2002
4. Texaco
5. Fin. Corp of Am.
$35.9
$33.9
April 1987
September 1988
6. Global Crossing
7. Adelphia
8. United Airlines
$25.5
$24.4
$22.7
January 2002
June, 2002
December 2002
9. PG&E
10. MCorp.
$21.5
$20.2
June 2002
March 1989
Some Specifics
• Several indictments and guilty pleas
– WorldCom
• Scott Sullivan (CFO): Pleaded guilty
• David Myers (Controller): Pleaded guilty
• Bernie Ebbers (CEO): Indicted in March, also indicted in
Oklahoma
– HealthSouth
• William T. Owens (CFO): Pleaded guilty, faces 30 years and
$5.5 million in fines
• 14 other former executives pled guilty
• 4 former CFOs agreed to plea bargain
• Richard Scrushy (Chairman and CEO): No federal charges;
SEC complaint—$1.4B accounting fraud
Some Specifics
• Several indictments and guilty pleas
– ImClone
• Sam Waksal: incarcerated (7 years), fined ($4.3 million)
• Martha Stewart: found guilty, case under appeal
• Peter Bacanovic (broker): found guilty, case under appeal
– Enron
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•
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Andrew Fastow (CFO): pleaded guilty, 10 years prison
Lea Fastow(Assistant Treasurer): plea bargain—1 year prison
Ben Glisan (Controller) and 5 others: Guilty pleas
17 other individuals indicted
Not indicted:
– Kenneth Lay (Chairman and CEO)
– Jeffrey Skilling (CEO and President)
Some Specifics
TYCO
• Dennis Kozlowski (CEO): Indicted, mistrial declared
• Mark Schwartz (CFO): Indicted, mistrial declared
Adelphia
• John Rigas (CEO): Indicted
• Timothy Rigas (CFO): Indicted
• Michael Rigas (Exec. VP of Operations): Indicted
Fines and Settlements
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Goldman Sachs
SG Cowen, Lehman Brothers
Citigroup, JP Morgan Chase
Visa USA and Mastercard
Merrill Lynch
FleetBoston Financial
U.S. Bancorp
Bear Sterns & 9 other firms
Household International
Bank of America
WorldCom
$9.3 million
$7.5 million
$305 million
$3 billion
$86 million
$33 million
$32.5 million
$1.335 billion
$484 million
$490 million
$750 million
Mutual Fund Scandal
– Putnam, Bank of America, Bank One, Janus Capital Group,
Invesco, Strong Financial Corp., Charles Schwab, etc. and
hedge fund Canary Capital Partners, etc.
– Illegal trading occurs in at least one out of every six mutual
fund families and costs investors about $400 M per year
– “If you discovered your favorite race-track allowed big
gamblers to place their bets after the horses crossed the finish
line, you would probably take your wagers elsewhere or give
up gambling altogether—that is what has happened with
many mutual funds (funds are valued at 4:00 p.m. daily but
large customers were allowed to trade much later and have
their trades time stamped with earlier times.”
(Stanford Professor—Eric Zitzewitz)
New Frauds Under Investigation
• A few more big frauds and SEC investigations
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Health South ($1.4 billion)
Home Store ($46 million in 2001)
Bristol-Meyers Squibb ($2 billion)
Ahold ($1.05 billion)
Fleming Co’s
Phelps Dodge
Interpublic
Parmalat
• FBI currently has 30 corporate fraud
investigations in which losses to investors
exceeded $100 million
Fraud Triangle
Rationalization
Why So Many Financial Statement Frauds
Recently?
1.
Opportunity
•
•
•
2.
Booming economy hid many problems
Nature of accounting—rule-based
Auditor conflict-of-interest—non-audit services vs. audit itself
Pressure
•
•
•
3.
Misplaced executive incentives
Unachievable Wall Street expectations—rewards for short-term
behavior
Large amounts of debt
Rationalization
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•
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Moral decay in society—weakened family/church structures
Failures in management education
A culture of greed by executives, bankers, and investors
Greed: How to Value a Dot.com
• Take their loss for the year
• Multiply the result by negative 1 to
make it positive
• Multiply that number by at least 100
• If stock price is less than the
result…buy
• If not, buy anyway
Executive Incentives
• Remember T. Boone Pickens?
– Complained about Newmont Mining executives
• Now executives have significant stock options
– Stock prices are tied to meeting Wall Street’s earnings
forecasts
– Focus is on short-term (quarterly) performance only
– Stock price heavily punished for not meeting forecasts
– Stock options may far exceed salary-based
compensation
• Bernie Ebbers (WorldCom)
– 1997 Compensation--$935,000 per year
– 1997 Stock options—1.2 million shares at $26 per
share—stock went to $64.50 ($46.2 million in profit)
Pressure: Meeting WS Projections
Firm
1st Qtr
Morgan Stanley
Smith Barney
Robertson Stephens
Cowen & Co.
Alex Brown
Paine Webber
Goldman Sachs
Furman Selz
Hambrecht & Quist
$ 0.17
0.17
0.17
0.18
0.18
0.21
0.17
0.17
0.17
Actual Earnings
Fraud
Reported EPS
Fraud (Millions)
$0.08
0.09
0.17
$62 M
2nd Qtr
$0.21
0.25
0.21
0.25
3rd Qtr
$0.23
0.23
0.24
0.28
0.21
0.21
0.23
0.23
$0.13
0.09
0.22
$61M
$0.16
0.07
0.23
$71M
Wall Street expectations were especially high for certain industries such as the
telecom industry (e.g. Global Crossing, ATT, WorldCom, Quest)
How Costly is Financial Statement Fraud?
• Financial statement fraud causes a decrease
in the market value of a stock of
approximately 500 to 1,000 times the
amount of the fraud.
$2 billion drop in
$7 million fraud
stock value
How People Got Involved
• The CFO instructed the chief accountant to
increase earnings by $105 million. The chief
accountant was skeptical about the purpose of
these instructions but he did not challenge
them. The mechanics were left to the chief
accountant to carry out. The chief accountant
created a spreadsheet containing seven pages of
improper journal entries, 105 in total, that he
determined were necessary to carry out the CFO’s
instructions. Over 20 people were involved in
making or instructing to make similar entries.
250 companies announced financial restatements in 2002
High Amounts of Debt
• During 2000, Enron’s derivates-related liabilities
increased from $1.8 billion to $10.5 billion
• Enron hid billions in off-balance sheet (SPE) debt
• Enron’s on-balance sheet debt was huge
• WorldCom had nearly $100 billion in debt
– Not only did Bernie Ebbers borrow $100 billion for
WorldCom but he also racked up over $1.3 billion in
personal debt while CEO of WorldCom
• Every company that committed financial statement
fraud had huge amounts of debt
186 public companies with $368 billion in debt filed for
bankruptcy in 2002—includes WorldCom, Conseco, Global
Crossing, United Airlines
Auditors—the CPAs
• If auditors aren’t the watchdogs, then who is?
• Became greedy--$500,000 per year per partner
compensation wasn’t enough; saw everyone else getting
rich (Andersen’s partners were jealous of Accenture
partner’s income)
• Audit became a loss leader
– Easier to sell lucrative consulting services from the inside
– Became largest consulting firms in the U.S. very quickly
(Andersen Consulting grew to compete with Accenture)
• A few auditors got too close to their clients
• Entire industry, especially Arthur Andersen, was punished
for actions of a few
Problems in Management Education
• AACSB moved to “mission based” standards—ethics
(and other subjects) no longer required
• Result—fewer and fewer ethics classes
– Other subjects crowd the schedule
– Ethics may be seen as unconnected with business
• Ethics began to be “integrated” into the curriculum
• Excesses of dot-com economy impacted business
schools
Part 2: Possible Solutions
Areas of Change
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•
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Improve auditing
Improve management
Improve boards of directors
Improve business school education
What the Laws/Guidelines
Attempt to Accomplish
Restore
Public Confidence
Align Directors
More Towards
Shareholders
Improve
Quality of
Financial
Information
Encourage
Ethical & Legal
Behavior
in Management
and Boards
Why Should Sarbanes-Oxley, NASDAQ, NYSE
and SEC Concern Everyone?
• These laws and guidelines may help us
avoid problems and improve oversight
• We may be rated, reviewed, evaluated by
outside agencies
• If problems do arise, must show we did all
we could to prevent them
• May open new jobs and careers
Focus of the New Guidelines and Laws
1.
2.
3.
4.
The Auditors
Top Management
Boards of Directors
Investment Banks
I. The Auditor: Sarbanes-Oxley
• Creates a Public Company Accounting Oversight
Board (PCAOB)
• Prohibits certain non-audit services
– Bookkeeping, IS, appraisals, internal audit, management functions,
etc.
• Limits lead and concurring partner to 5 years on
an audit
• Requires a one year “cooling off period” before
audit partners can work in key positions for clients
• Increases liability of auditors
II. Top Management: Sarbanes-Oxley
• Requires management “certification” of
appropriateness of financial statements (penalty <
$5 M, 20 years prison)
• Prohibits officers or directors from fraudulently
influencing or misleading an auditor
• Requires an officer code of ethics
• Requires forfeiture of bonuses after restatements
or if fraud is discovered
• Prohibits loans to executive officers and directors
• Includes officer and director blackout periods on
trading
III. What Sarbanes-Oxley Says about
Board Audit Committees
• Requires independence
– All members must be external directors
– Members may not accept any compensation other than director
fees
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Appoints company’s auditor
Requires a procedure to protect “whistleblowers”
Must have authority to engage outside counsel if needed
Must disclose whether at least one member of audit
committee is a “financial expert”
• Receives reports from auditors re alternative treatments of
accounting information and all material communications
between management and auditor
Enforcement of Sarbanes-Oxley
• Increases the budget of the SEC -- 200 more professionals
• Makes it a felony to “knowingly” destroy or create
documents to “impede, obstruct or influence” any existing
or contemplated federal investigation or to defraud
shareholders (up to 25 years of imprisonment)
• Extends the statute of limitations on securities fraud
– Earlier of five years from the fraud or
– Two years after the fraud was discovered
(was three years and one year, respectively)
• Increases the maximum penalty for mail and wire fraud
Implications of Guidelines from
NASDAQ/NYSE/SEC
• Shareholders must approve stock option plans
• Requires majority of board members to be independent
• Requires regular “executive sessions” for independent
directors
• Prohibits independent directors from receiving more than
$60,000 from company (except board compensation)
• Independent directors to determine executive
compensation
• Mandates continuing education for directors
• Requires a code of conduct for senior management
Generally Accepted Guidelines
for a Good Board
• Skilled board members – “at least one with experience in core business”
and “one who is CEO of equivalent-sized company”
• Equity interest in the firm – “at least $150,000”
• Independence – “no more than 2 inside directors” and “none should do
business with the company”
• Focus – “attend at least 75%” and “≤ 4 boards for fully employed and ≤ 7
for retired members”
• Small size (9 or fewer)
• Existence of certain committees (audit, nominating, compensation)
• Executive sessions – “independent directors should meet regularly without
management”
Many of these from Business Week’s analysis of good and bad boards
Some of these may be necessary but,
by themselves, are not sufficient for a great board.
Whose Board Was This?
• Two insiders, 14 outsiders
• Skilled directors
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Former Stanford Business School dean (accounting professor)
Former CEO of insurance co.
Former CEO of international bank
Former head of Commodity Futures Trading Commission
Hedge fund manager, etc.
• Equity stake: all board members owned significant shares
in company
• Right committees: audit, compensation, nominating, etc.
Conflicts of interest
Compensation =
$381K in 2000!
IV. Investment Banks
Under Discussion at SEC
• Split research and sales of securities (Eliot
Spizer’s $1.4B settlement against 10 IBs)
• Prevent banks from using IPOs as rewards
– Lowball price so favored clients get a bump
• Change rules to allow an auction system for
IPOs
• Open “road shows” to public
Some Good News
• Baylor studies
– Significant shift in attitude toward more ethical
behavior: 1985 vs. 2002
– The more students attend church, the more
disapproving they are of unethical behavior
• AACSB issued new standards requiring
institutions to develop a code of conduct for
students, faculty and administration
• However—schools may decide whether to have
stand-alone course or integrated program
Improving Management Education at BYU
• Require ethics course for all students
– Taught by business school faculty
– Reinforce in other classes
• Have a code of conduct for students, faculty, staff
– BYU Honor Code
– Considering adapting it to business environment
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Discuss ethics frequently at all levels
Offer specific fraud courses
Cover cases that involve students in ethical issues
Have consequences for unethical behavior
Fraud Triangle
Revisited
Fraud
Triangle
Rationalization
Here and Now
Can Ethics be Taught in Business Schools?
Level 1: Ethical Framework—Personal
understanding of ethical principles, right and
wrong behavior
Level 2: Ethical Courage—Ability to apply that
understanding, even under pressure
Level 3: Ethical Leadership—Ability to cause
others in an organization to live ethically
Counsel to Berkshire Hathawayowned companies:
“We can afford to
lose money, even a
lot of money.”
“We can’t afford to
lose reputation—not
even a shred of it.”
Quote from Scott Hymas, CEO of RC Willey, 6/19/03