HR and Corporate HR and Corporate Governance: A Call to Governance: A Call to

CourageCourage

Patrick M. Wright

Professor of HR Studies

Cornell University

The Consequences:The Consequences:

What have been the consequences of the recent corporate scandals noted above?

Are these consequences problems? Why or why not?

Consequences of ScandalsConsequences of Scandals

Lack of Trust

Investors’ trust in markets Public’s trust in corporations Employees’ trust in Leaders

Investors’ Trust in MarketsInvestors’ Trust in MarketsRest of ScandalsEnron Breaks

Public Perception of Business Public Perception of Business LeadersLeaders

------------------ September 11, 2002

How Much do You Trust How Much do You Trust Large Corporations?Large Corporations?

05

1015202530354045

AGreatDeal

Quitea Bit

Some VeryLittle

Noneat All

July, 2002

July, 1998

Source: Hart-Teeter Poll

Has Honesty of Corporate Has Honesty of Corporate Executives Changed in 10 Executives Changed in 10

Years?Years?

More Trustworthyand Honest

Less Trustworthyand Honest

No Difference

Not Sure

Source: NBC/WSJ Poll

Consequences of ScandalsConsequences of Scandals

Lack of Trust

Investors’ trust in marketsFalling market and stock prices

Public’s trust in corporationsIncreased call for regulation

Employees’ trust in LeadersLack of motivation/commitment

Discussion Questions:Discussion Questions:

What were the causes behind these corporate scandals?

How do you think firms can ensure that they are not the victims of such scandals?

How can HR help?

Proposed Causes:Proposed Causes:

Bad Apples (Individual personality/ethics/values)

Dysfunctional Culture Dysfunctional Incentive Systems

(Executive pay/stock options) Poor Controls The “System”

(Analysts/Auditors/Shareholders)

Proposed Solutions:Proposed Solutions:

Select Ethical LeadersBuild Ethical CulturesRedesign Executive Pay/IncentivesCreate Independent Analysts/AuditorsReengineer Boards/Roles

Characteristics of Bad ApplesCharacteristics of Bad Apples

What are some characteristics of leaders who are likely to end up in scandals?

Lack of Moral Compass/Dishonesty Selfishness/Greed/Ego

Indicators of Bad ApplesIndicators of Bad Apples

Lying –To Whom?

–In reports–To peers/bosses/subordinates–To spouse?

Indicators of Bad ApplesIndicators of Bad Apples

Excessive Focus on Money/Power/Self

–Self-promotion over others–Credit history–Definitions of success–Treatment of subordinates

The Power of CultureThe Power of Culture

How could Enron’s culture, which so many pointed to as its competitive advantage, result in its demise?

How could Arthur Andersen’s culture, which was built on ethics, allow it to fall?

The Power of ValuesThe Power of Values

“Arthur Andersen did not lose its 50-year old reputation in a day. They sold their soul to their clients over the last 5-10 years by compromising their values more and more, just to make money. What looks from the outside like a giant step in destroying documents was to them just another step in sacrificing values for greed.”

Unknown MBA Student

Where does the Culture get Off-Where does the Culture get Off-TrackTrack

Reward Systems begin to create dysfunctional incentives

Controls begin to create dysfunctional incentives as well

Executive PayExecutive Pay

What has caused executive pay to spiral, particularly relative to lower level employee pay?

What have been the consequences?

Spiraling Executive PaySpiraling Executive Pay

Total pay increased 2.2% in 2002, but…

Executive pay increased 5.9% Middle Mgt pay increased 2.7%Rank and file pay increase 1.1%Company Revenues increased .89%

Source: Economic Research Institute

What has Caused the Spiral?What has Caused the Spiral?

Market/War for Talent Unexpected stock gains Perceived Market (“above the mean”) Interlocking Boards

Potential ConsequencesPotential Consequences

Does executive pay (level of pay) focus leaders’ attention on the wrong things?– Does it drive ego?– Does it make people focus on pay more?

Executive Pay DysfunctionExecutive Pay Dysfunction

“The strange part is, the more I made, the more I got preoccupied with money. When suddenly I didn’t have to think about money as much, I found myself starting to think increasingly about it. Money corrupts the mind”

Daniel Vasella, CEO, Novartis

For the love of money is the root of all kinds of evil.

I Timothy, 5:24

For the Love of Money…For the Love of Money…The oddest aspect of Kozlowski’s conduct, for those of us naïve enough to think that people take money because they somehow need it, is that he began availing himself of what became hundreds of millions of dollars in company loans…precisely at the moment that his pay was exploding…

Kozlowski began regularly taking loans in 1996 and 1997 – just as his board-approved compensation leaped from $8.8 million to $52.8. It wasn’t until ’98 and ’99 though, that he really went hog-wild on the borrowing. Apparently his approved compensation of $136.1 million in 1999 left him in a cash squeeze.

From “The Big Kozlowski”, Fortune, Nov. 18, 2002

Beyond Just Executive PayBeyond Just Executive Pay

Oh, and what about…– “spinning of IPO’s?”– Books?– Participation in other boards?

Should outside pay of executives be controlled by the firm?

The SystemThe System

What responsibility to analysts have for the current crisis of trust?

Focus on quarterly earningsFocus on meeting expectationsFocus on growthFocus on consistent growth

The “System”The “System”

Once you get under the domination of making the quarter – even unwittingly – you start to compromise in the gray areas of your business, that wide swath of terrain between the top and bottom lines

Daniel Vasella, CEO Novartis

Do not think lightly of evil, saying, “It will not come to me.” By the constant fall of water drops, a pitcher is filled; likewise, the unwise person, accumulating evil little by little, becomes full of evil

Buddha, Dhammapada verse 121

The Wrong Controls or the The Wrong Controls or the Futility of Controls?Futility of Controls?

We work in a system with certain safeguards, but they are imperfect. We can circumvent safeguards for our own interest and for our reputations short term or for short term success. Temptation is all around us…

I do believe that the social framework in which we live gives us some boundaries and is absolutely needed. But all of these boundaries and all of the laws will be too weak and too imperfect to keep somebody on the right path who doesn’t want to walk on the right path. So if you want to cheat, you will always find a way.

Daniel Vasella, CEO Novartis

The Course of ActionThe Course of Action

It’s not about regulation; it’s about SELF regulation

The only answer is diligence– Selecting Leaders with the right core values– Critically examining incentives– Constantly monitoring “real” culture– Building strong boards– Actively searching for conflicts– Focusing attention on the right things– Having the Courage to speak out

Be CourageousBe Courageous

Know your moral valuesBe willing to stand up for themBe prepared to pay the cost

“The tragedy of society is not the noisiness of the so-called bad people, but the appalling silence of the so-called good people.”

– Martin Luther King Jr.