JANUARY 20 Nature and Structure of Corporate Boards Reading Assignments: 1.

Corporate Directors Guidebook, Fifth Edition, Sections 1, 2, 4, 5 and 7 Focused Questions: 1. What are the key provisions of Sarbanes-Oxley? a. Created the Public Accounting Oversight Board i. Objective To oversee the audit of public companies that are subject to the securities laws in order to protect the interest of investors and further public interest in preparation of information, accurate, and independent audit reports of which are sold to, and held by, public investors. ii. Register public accounting firms. iii. Establish auditing, quality control, ethics, independence and other standards related to the preparation of audit reports. iv. Conduct inspection of registered accounting firms. v. Impose appropriate sanctions on public accounting firms. vi. Perform other duties as outlined by SEC. b. Expanded the role of the SEC i. Promulgate such rules and regulations as may be necessary or appropriate in the public interest. ii. Conduct inspections to assess the degree of compliance of each accounting firm with the act, rules of the Board, SEC. c. Auditor Independence i. It is unlawful for a registered public accounting firm that performs audit services to provide any of the following non-audit services: 1. Bookkeeping, financial information services, appraisal or valuation services, actuarial services, internal audit management or human resources, broker or dealer, legal or expert witness, or any other service that SEC mandates. d. Pre-approval for non-audit services e. Audit partner rotation f. Auditor communications to the Audit Committee i. All critical accounting policies and practices. ii. All alternative treatments of financial information that have been discussed with management. iii. Any communication with management involving unadjusted differences. g. Engagement of the External Auditor h. Compensation of the External Auditor i. Financial certification i. The principal executive officer and CFO must certify in each annual or quarterly report filed that: 1. the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements. 2. based on such officers knowledge, the financial statements and other financial information in the report fairly present in all material respects the financial condition and results of operations of the issues. j. Insider Trading

2 k. Enhanced Financial Disclosures i. All annual and quarterly financial reports required to be filed with the commission shall disclose all material off-balance sheet transaction, arrangements, obligations, and other relationships of the issues with unconsolidated entities that may have a material current or future effect on the financial condition of the firm. 2. How should boards of directors evaluate their own performance? a. Either internally or third-party i. Third-party has the advantage of circumventing internal factionalism, or riling up tensions. ii. Third-party has disadvantage of maybe making the stuff public in the event of a lawsuit. But, if you hire outside counsel to oversee the process, then you might be able to claim attorney-client privilege. 3. Describe the power relationships between the board, management, and the shareholders. What can be done to align these three groups? a. Exist in a governance triangle b. They act as a system of checks and balances c. Alignment: i. Shareholder-Board Relationship: 1. Possible to give stock options to Board members, though that is less of an incentive than for executives 2. Typically right now there is very little control over the Board by the shareholders, and there is very little transparency from the Board to the shareholders. 3. But, these are the big proposals: 4. Make directors accountable to shareholders. One compelling way to increase board accountability is to record individual directors' votes on key corporate resolutions in proxy statements. 5. Separate the positions of chairman and CEO. This suggestion is hardly novel-in fact, splitting the positions is a common practice in many boardrooms outside the United States- but in light of our model of corporate governance, it's clear why separating these two roles is vital for maintaining balance in the boardroom. Companies that fuse the roles of CEO and chairman collapse the governance triangle, undermining the system of checks and balances that is essential to responsible corporate governance. 6. Reinvigorate shareholders. To start, in the nomination and election process, shareholders could signal their support (endorsement, neutrality, or nonendorsement) for candidates the board puts forth and vote accordingly. If informed by director scorecards, these recommendations could be even more specific and linked to the performance of individual directors. Some large pension funds like CalPERS, as well as some smaller, socially based funds, are moving in this direction. 7. Give boards funding. In the course of normal events, most boards can function well with information provided by management. But on certain Gordian issues--a bet-the-company merger decision, say, or a complex product liability concern-insight from an external perspective could be very useful. a. Providing directors with independent funding: The Sarbanes-Oxley Act requires that audit committees have their own funds for paying auditors and advisers. Giving budgets to the full boards would simply extend this practice. ii. Executive-Board Relationship

3 1. Board must provide company and CEO oversight 2. CEO must regularly communicate with the Board regarding strategic vision for the company iii. Shareholder-Executive Relationship 1. Alignment is easy; stock options (see executive compensation below) 2. CEO provides transparent financial reports 4. How should a lead director interact with management and the board? In addition to presiding at the executive sessions, the lead director should act as an intermediary between the CEO, the chairman, and the board, with the authority to call meetings of the independent directors and set the agendas for those meetings. This director should also be able to suggest to the chairman and CEO when its appropriate to call a full board meeting and collaborate with him on setting the board agenda after soliciting the views of the other independent directors. The lead director needs to facilitate discussion among the independent directors and pass along their views to the CEO. In other words, this role calls for the soft skills, diplomacy and judgment, plus the courage to raise tough issues. In executive sessions, he must first listen to what the other directors are telling him and then convey it accurately to the CEO. Make sure the interactions between management and the outside directors are as productive as they can be. The lead directors biggest asset in contentious sessions is the ability to listen, encourage everybody to talk, and then synthesize differing views. Relationship with CEO: The lead director should begin the relationship with the presumption that the CEO may view him with suspicion. The lead director is usually the one to break any bad news to the CEO. The lead director should be focusing the CEOs attention on two or three serious problems, not on a laundry list of complaints. If the relationship is successful, the CEO will understand that the board wants him to be operating at peak capacity, and he will gradually start to trust the lead director as an adviser, sounding board, and sometimes confessor. Hell also recognize that theres something in the relationship for him. Moreover, a lead director can run interference for the CEO. 5. Do you believe the CEO of a firm should also be chairman of the board? Explain a. Against: i. Fail to adequately check the CEO ii. Probably makes board more passive iii. Each person can focus on the one job, instead of trying to do both iv. Less oversight/accountability v. More likelihood for corruption b. For i. Efficiency 6. What are the key principles of a good executive compensation program? a. Challenge is to balance current environment where public disapproves of large salaries with the goal of the corporation, to get talented people b. Stay competitive with similar corporations in the five areas of compensation without overcompensating i. Salary; ii. Annual incentives iii. Long term incentives iv. Benefits and perquisites v. Retirement package 7. Describe the key attributes of a successful CEO.

4 a. Connected to the Organization b. Team Leader c. Courageous d. Control charisma e. Customer driven f. Listener, not a storyteller g. Ambitious h. Multitasker i. Aware of fiduciary responsibilities j. Has the ability to execute the vision k. Good communicator l. Timely decision-maker m. Good Personnel Skills 8. What are the corporate governance principles that boards of directors should consider? Which governance principles do you feel boards should embrace? a. Restrict the number of inside directors. b. Independent directors need to be independent. c. Practice fiduciary duties avoid conflicts of interest. d. Long-term strategic vision that focuses on enhancing shareowner value. e. Officers and directors need to be aligned with shareholders and receive reasonable compensation for the risks that they accept. f. Information presented to shareowners must be transparent.

JANUARY 27 The Chief Financial Officer Speaker: Laura Wright, CFO, Southwest Airlines Reading Assignments: 1. Off-Ramps and On-Ramps, Keeping Talented Women on the Road to Success, HBR, March 2005 (HBR website) 2. Dogfight Eruption Plane Ticket Sales, WSJ, January 6, 2010 3. Price Rises for Fuel Threaten Airlines Net, WSJ, January 13, 2011 Focused Questions: 1. Why is EBITDA not a good measure of a firm's performance? a. Losses are magically transformed into gains and inconvenient financial facts that cant be explained away are simply ignored. As many board members, especially those on audit and compensation committees, have lately learned to their disgrace, management can overstate revenue or understate expenses, pass off one-time windfalls as recurring gains, or, conversely, disguise recurring losses as singular events. b. The private capital firms that originally employed EBITDA as a valuation tool had reasons for removing interest, taxes, depreciation, and amortization from their earnings calculations. They removed taxes and interest because they wanted to substitute their own tax-rate calculations and

5 the financing costs they expected under a new capital structure. Amortization was excluded because it measured the cost of intangible assets acquired in some earlier period, including goodwill, rather than any current expenditure of cash. Depreciation, an indirect and backwardlooking measure of capital expenditure, was excluded and replaced with an estimate of future capital expenditure. In sum, private capital firms stripped out interest, taxes, and depreciation because they were going to replace them with their own presumably more precise numbers. c. EBITDA applied to public companies is a very different matter. First of all, rather than use the number to value entire companies, as private capitalists do, public companies and analysts encourage investors to use EBITDA to value shares of stock. Unlike private capitalists, though, most stock investors dont substitute their own numbers for the numbers that EBITDA drops. Compounding this problem, many analysts and journalists urge investors to use EBITDA as a measure of the cash a business generates. Such advice is illogical, misleading, and hazardous to investors wealth d. It is only as reliable as the Eearningsthat goes into it. In any case, its no more than a rough approximation of operating cash flows. If a company just breaks even on EBITDA, it will not generate enough cash to replace basic capital assets used in the business. Insiders and outside parties need to ask: Why does the company prefer EBITDA to conventional earnings? 2. What are the primary responsibilities of the CFO? a. Managing the financial risks of the business or agency. This officer is also responsible for financial planning and record-keeping, as well as financial reporting to higher management. (In recent years, however, the role has expanded to encompass communicating financial performance and forecasts to the analyst community.) b. set tgts c. long term financial plan d. monitor performance daily reports e. help define strategic plan f. investor relations g. accuracy internal controls, audit h. compliance with regs i. keep back office running

Case: The Board of Directors at the Coca-Cola Company (9-404-039) Case Questions: 1. How has the role of the Coca-Cola Board changed over the companys history? 2. More specifically, how has the Board been involved in shaping the companys strategic direction? 3. What is your assessment of the way the Board and Mr. Daft handled the potential acquisition of Quaker Oats? 4. In 2003, how would you evaluate the Coca-Cola Board if you were a shareholder? 5. Do you agree with the frequent media criticism of the Coca-Cola board?

6 FEBRUARY 3 Directors Fiduciary Responsibility Guest Speaker: Mike McKetta, Attorney, Graves Dougherty Hearon & Moody Reading Assignments: 1. Corporate Directors Guidebook, Fifth Edition, Section 3 2. Some Thoughts for Board of Directors in 2009, Lipton Rosenblum and Cain. 3. Risk Management and the Board of Directors, November 2008, Lipton Rosenblum and Cain 4. Lawyerly Wisdom to Rescue You From the Economic Storm, CBM, 2nd Quarter 2009. 5. Shareholder Suits: You Aint Seen Nothing Yet, CBM, January/February 2009 6. Life After Madoffs Big Lie, WSJ, December 11-12, 2010 Focused Questions: 1. How does the business judgment rule protect directors? a. The Business Judgment Rule immunizes directors from honest mistakes and poor decisions, as long as the decisions are within their authority and as long as the decision complies with their fiduciary responsibilities. b. Two exceptions: i. Special Committees 1. Sale of a corporation 2. Transaction with dominant shareholders c. Disney consciously indifferent 2. What are the key responsibilities of members of boards of directors to the firm they serve? Do the responsibilities of directors vary depending on the maturity and size of the company? a. The responsibilities will vary depending on whether the company is new or mature. A new company will require a more engaged active board. b. In general: i. Hire CEO ii. Review CEOs performance/approve CEOs compensation iii. Review/approve corporate strategy iv. Review/approve acquisitions v. Approving hiring and compensation of CEOs direct reports vi. Nominate/select new directors vii. Review financial reports viii. Promote the best interests of the firm 3. Describe the fiduciary duties of members of board of directors and senior management. a. For a Delaware corporation: i. Duty of Care: directors must act on an informed basis and in a deliberative manner ii. Duty of Loyalty: directors must act without any conflict of interest derived from a material personal financial interest in the matter under consideration iii. Duty of Good Faith: directors must also act in a manner that they honestly believe to be in the best interests of the corporation and its stockholders, without regard to personal or private motives, even if non-financial in nature iv. Duty of Disclosure: directors are expected to make full and fair disclosure to the stockholders and the board of directors of pertinent information within the Boards control (also sometimes referred to as the duty of candor)

7 v. Duty of Obedience: Requires a director to avoid committing acts beyond the scope of the powers of the corporation as defined by its charter or the laws of the state of incorporation. 4. How can the Board best balance its roles of advisor of management and as an agent for the shareholders?
Me: While the BoD has always had a dual role as a resource for and advisor of management, on the one hand, and as an agent of SHs on the others, regulators and activist SHs are tipping this balance in favor of the BoD s role in monitoring compliance w/ legal and accounting rules. y Monitoring f(x) has also gained increased prominence as a result of the financial crisis, which has highlighted in particular the need for effective risk and compliance oversight. A combo of the 2 roles, however, is necessary for the BoD to be truly effective, and each BoD must find the right balance between monitoring compliance and advising as to strategy. y Finding this balance is a critical starting point in any consideration of how to structure the membership and operations of the BoD The corporate balance of power relies on three critical anchors-shareholders, management, and the board of directors. Each of these has important responsibilities of its own, but their interactions are the key to effective governance. When they work together as a system, they provide a powerful set of checks and balances. But when pieces of the system are missing, or not functioning well, the system as a whole can become dangerously unbalanced. All three relationships in the governance triangle (shareholders-management, management-board of directors, and board of directors-shareholders) depend on mutual accountabilities and an exchange of information. You do not want to be a rubber stamp to the CEO, and cannot feasibly always incorporate SH input. Keeping the long-term company best interests of company in mind can help to balance. y y Independent Ds help to create independent decisions with balanced interest in mind. Appropriate role of D is as overseer, not day to day management. Should give frank opinion to mgmt. Seaparate the positions of Chairman and CEO: separating these two roles is vital for maintaining balance in the boardroom. Companies that fuse the roles of CEO and chairman collapse the governance triangle, undermining the system of checks and balances that is essential to responsible corporate governance Give boards funding. Balancing concerns between mgmt and SHs might sometimes requie insight from an external perspective could be very useful to keep what is right for the company, and thus the SHs and mgmt, in mind.: The Sarbanes-Oxley Act requires that audit committees have their own funds for paying auditors and advisers. Giving budgets to the full boards would simply extend this practice. Consider direct lines of communication with shareholders o Companies increasingly willing to communicate with SHs. Ds from Pfizer, Home Depot have met with SHs and CtW investment group met with six major banks to discuss concerns. These meetings might be necessary in situations to forestall proxy initiatives particularly when corp has had major compliance or performances issues o BoDs should consider both the advantages and disadvantages and evaluate them case-by-case. Activists not wanting listen-only mtgs, but are incentivized to use the leverage of a potential proxy contest, negative publicity, SH resolutions and other pressure tactics to promote ongoing, routinized brokering of private deals with companies on governance and other things. o Appropriate response to requests for meetings should consider competing concerns as well as SH relations programs, and whether greater interactions appropriate. If Ds agree to meet should have management representative with Ds so that there are not comments misconstrued by SHs and don t undermine the CEOs role as primary spokesman. Should consult mgmt and other Ds to avoid confusion or contradiction in company s public posture and adhere to requirements of Regulation FD. Consider shareholder proposals seriously o Ds should evaluate whether SH proposals will promote long-term value creation. Study this year said SH proposals do not measurably improve stock market or operating performance. Another fiction of activist movement is utility of corporate governance ratings, which are based on one-size-fits-all metrics and used to keep track of latest governance dogma. Two studies concluded that governance ratings are not good

8
predictors of corp performance and caution companies against making governance changes solely to boost their ratings. Responses of corps to SH proposals that receive majority support are monitored by activists and RiskMetrics as policy recommends a withhold vote when Board fails to be sufficiently responsive to these proposals. Paying close attention to SH proposals and being proactive in SH communications and disclosure will likely created right environment for acting on SH resolutions even when determination may be to reject them. Ds should watch developments in reg and legislative arenas. Ex: Carl Icahn announced that he is launching a lobbying group to push legislators to pass pro-SH law including leg that sets limits in exec compensation and prohibits poison pills and classified boards. Corporate social responsibility framework outlined in report of Special Representivate to UN proposes another layer of expansive procedural and monitoring reqs for boards.

a. Separating or avoiding conflicts of interest would be a great start. These two duties are not mutually exclusive, but rather go hand in hand. By acting as an advisor of management, the Board upholds its duties to act in the best interest of its shareholders. So by practicing active oversight over management, especially upper level executives, the Board can rest assured that they have access to the most information needed to make informed decisions as independent decision makers. Independent decision making requires maintaining a fine line between its relations with management. While directors need to be aligned with management to make sure they are effectuating the long and short terms of the corporation, they must also separate themselves in order to have an unbiased perspective in scrutinizing operational affairs of management, especially in regard to CEO oversight. The director must always remember where his duty lies, which is to the shareholders, and accordingly minimize possible conflicts with upper management that prevents holding an independent perspective of constructive skepticism. One of the best ways of doing this would obviously be to maximize the number of independent directors serving on its board, and minimize the presence of interested individuals like the CEO. b. This is especially true when it comes to the decision over whether or not a CEO should serve in a dual role as CEO and Chair. It would be best to avoid such a situation, since executive control over the board can lead to a situation where the CEO has increased opportunity to manipulate the Board. This problem is very evident and exacerbated in the situation where a CEO is also the Chair, and his duties as CEO, as well as corporate structure and access to company management and employees, can often enable the potential to successfully act in self-dealing ways. However, the problem can become circular with regard to finding solutions if the roles of Board and management are not separated properly. The duty as advisor of management is obviously at risk of breach when you have a situation where the CEO, as Chair, essentially controls the Boards access of information regarding operational affairs. The CEO is also enabled to manipulate the board agendas and meeting procedures, which is dangerous if the CEO is both Chair and a shareholder as well. c. Since it is very common now to align management and shareholder interests through executive stock compensation plans, the CEOs possible interests in self-dealing are exacerbated if he is given the opportunity to control the Board. He may want to make decisions that maximize the short-term value of his stock as opposed to the long term maximization of overall shareholder value, especially when there are enough annual incentives and bonuses in place to incentivize him to do things such as manipulate financial oversight of the company, pursuant to his roles as a close partner with both the CFO and the Board. This can result in a situation where the CEO has his thumb over the affairs of the management, employee relations, the Directors, and the shareholder. Additionally, director shareholders may lend undue credence to the statements of the CEO-Chair because their personal financial interests are tied to the company. The rationale behind this is that the increased personal financial stake will incentivize these directors to buddy

9 up with the CEO in order to know more about operational activities. In theory, this personal interest can work out greatly since it encourages active relations with management. However, a cunning CEO aware of his increased influence over the Board via his Chair position, can manipulate the decision-making processes of Board members through his role as the gatekeeper of information. d. The CEOs closer relations with management and employees only makes the risk potential worse. His increased sway over both the Board and the firms employees leads to a situation where it becomes very hard to challenge the CEOs performance or any possible ulterior agendas or motives. Due to the Boards reliance on the such a CEO, it can obviously decrease the ability and incentive to act for shareholders betterment through active CEO oversight. Additionally, the situation is also one characterized by complacency and a lack of scrutinization over the firms financial progress and stability. This is because the ease of access to relevant information via the CEO-Chair can disincentivize them to conduct independent scrutinization or to engage the consultation of outside advisors. Over time, the directors may become mere puppets of the CEO who has the control to pull their strings and make them move in any direction he wants. Such a close alignment makes it very difficult to see the company with a clear perspective. Additionally, independent director oversight may start to be viewed as cumbersome to directors since they have easier access to information through the CEO-Chair that requires a lot less independent burden or work. In the end, we just have a bunch of Board directors who are too lazy and unaware to question or scrutinize their CEO, thus failing its core duty to the shareholders. Are Board members taking on more liability at this time than they have historically? a. Yes and No b. No because there is still the significant protection of the business judgment rule c. Yes because it is clear that the business judgment rule does not protect every action taken by directors i. Van Gorkom: directors were found grossly negligent because quickly approved merger without substantial inquiry or expert advice, therefore breached duty of care, protection of business judgment rule unavailable What role can D&O coverage play in protecting Directors? a. Make sure if they are held liable, they dont have to pay out of personal assets What can a director do to keep corporate decisions away from a jury and in purview of the board of directors? a. Act disinterested based on as much information as possible, then get benefit of business judgment rule b. Process must be independent, informed, in good faith, and without conflicts What questions do independent directors need to ask themselves to insure that in a transaction involving their company they have complied with their fiduciary duties?

5.

6. 7.

8.

a. Have I refrained from doing something that hurts constituents (corporation and shareholders) or is motivated by self interest b. Have I done what a prudent person would do in similar circumstances? c. Have I made a decision based on a process that is i. Independent ii. Informed iii. In good faith iv. In best interest of company and shareholders v. Without conflicts 9. What are the directors fiduciary duties to a solvent corporations creditors?

10 a. The directors have no duties to creditors when a corporation is solvent, they just have a duty to the corporation and the shareholders b. When the corporation is insolvent though, the directors do have duty to creditors i. The risk takers of bad judgment in an insolvent corporation are creditors ii. So courts ask if the directors acted properly towards the risk takers of the decision 1. The test is not based on a particular creditor, just creditors generally iii. But only a trustee dor someone on behalf of the corporation can sue the directors 10. Under what circumstances can an outside director rely on management and external experts in making decisions? a. Directors should gather and use as much information as possible whether that comes from management or external experts b. But directors must engage in independent decision making based on the information that the gather instead of just rubber stamping that info 11. What process should be used to insure that the business judgment rule will protect independent directors when a transaction involving significant company assets is being considered by the board? a. Directors duties are tested most in times when significant company assets are on the line, e.g. transactions and mergers b. During these times directors must refrain from action motivated by self interest c. They must fulfill their duties to the corporation and the shareholders by engaging in an informed, independent decision making process during which they gather as much information as possible

The Role of General Counsel in a Public Corporation Guest Speaker: Charles Matthews, Former General Counsel of Exxon Reading Assignments: 1. Corporate Directors Guidebook, Fifth Edition, Sections 8, 9, and 10 2. The WorldCom Settlement and Director Liability, Wachtell, Lipton, Rosen & Katz, January 7, 2005 3. Six Legal Questions Directors Must Ask, CBM, July/August 2008 4. The Energy of Charles Matthews, Super Lawyers, March/April 2009

FEBRUARY 10 Corporate Boards and Start-Up Companies Speaker: Alan Blake, CEO and Founder of Yorktown Technologies Reading Assignments: 1. Charge It!, WSJ, November 29, 2004 2. Its All Relative. A family business loan can be a recipe for disaster. It doesnt have to be. WSJ, November 29, 2004 3. The Secrets of Serial Success, WSJ, August 20, 2007 4. The Innovators DNA, HBR, December 2009, p. 61-66 (HBR website) 5. Beating the Odds When You Launch a New Venture, HBR, May 2010, p 92-98 (HBR website) Focused Questions:

11 1. What can a small business person do to secure the necessary capital to start a business? a. Bank- probably not b. Nonprofit programs various, microlenders often want to know about the business and the person c. Small business administration backed loan d. Credit cards may be the only thing available, good for fast financing, risky b/c of high interest, personal liability e. Bootstrapping f. Friends/family/fools 2. What makes an individual a successful serial entrepreneur? a. High propensity for risk/innovation/achievement b. Less scared of failure c. Good at recovering from failure d. Able to draw on experience/contacts/financing from earlier ventures, and able rekindle their initial passion 3. Why are many venture investors focusing on larger and larger businesses? Many venture investors say investing in larger firms -- private and public companies with established revenues and profits, but smaller than the household names typically targeted by buyout shops -- can help sidestep the struggles in their traditional market of tiny start-up companies. Venture capitalists generally make money only when the companies in which they invest go public or are sold. Spreading investments among buyouts, small and big companies is less risky than the "spray and pray" approach common in venture investing: Putting money in dozens of tiny, unproven companies and hoping one or two will be huge money makers. 4. Is it true that investors in first round financing normally get "crushed?" If so, why do people and venture funds invest in first round financing? Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period. After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments might, in reality, be as 'low' as 20-30%. While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for most earlystage ventures, which may be too small or young to qualify for traditional loans. Governmental Affairs and Management at NASA Guest Speaker: Mary Ellen Weber, Vice President for Government Affairs and Policy at UT Southwestern Medical Center and former astronaut. Reading Assignments: 1. Smart Power, HBR, November 2008 (HBR website)

12 2. Leadership Lessons from Abraham Lincoln, HBR, April 2009 (HBR website) 3. Are You a High Potential, HBR, June 2010, p. 78-84 (HBR website) 4. President Revs Up Campaign to Make Peace With Business, WSJ, January 7, 2011

FEBRUARY 17 Private Wealth Management Guest Speaker: Geoffrey Raynor, CEO of Q Investments Reading Assignments: 1. Hedge Funds Into the Boardroom, CBM, January/February 2007 2. The Mutual Fund in the Flash Crash, WSJ, October 7, 2010 3. Hedge Funds Raided in Probe, WSJ, November 23, 2010 4. Tilton Flaunts Her Style as Patriarch, WSJ, January 8-9, 2011 5. Hedge Funds Pack Behavior Magnifies Swings in Market, WSJ, January 14, 2011 Focused Questions: 1. Should hedge fund executives serve on the boards of publicly traded companies? a. Knowledgeable about company, how market reacts b. May be too short term if they sit on the board though they have duties c. Sometimes have helped value, other times hurt d. Needs support of other shareholders anyways e. Can provide outside perspective

The Role of the Federal Reserve Speaker: Richard Fisher, President & CEO, Federal Reserve Bank of Dallas Reading Assignments: 1. Federal Reserve document (pages 1-25) 2. Geithners Trade Plan Falls Short at G-20, WSJ, October 23-24, 2010 3. Fed Fires $600 Billion Stimulus Shot, WSJ, November 4, 2010 4. Fresh Attack on Fed Move, WSJ, November 15, 2010Fed Global Backlash Grows, WSJ, November 8, 2010 5. Criticism Hinders Feds Plan, November 22, 2010 6. Investors Forecast: Sunny with a Chance of Overheating, WSJ, January 3, 2011 7. Meet the Supporting Cast, WSJ, January 3, 2011 8. Weak Hiring Casts a Cloud, WSJ, January 8-9, 2011 9. Fed Chief Gets a Likely Backer, WSJ, January 10, 2011 10. U.S. Factories Buck Decline, WSH, January 19, 2011

FEBRUARY 24 The CEO and the Media

13 Guest Speakers:Wayne Slater, Chief Political Writer, Dallas Morning News James Moroney, Publisher and CEO of the Dallas Morning News Reading Assignments: 1. Analysis: Post-Mortem of CBSs Flawed Broadcast, NYT, January 11, 2005 2. How Old Media Can Survive in a New World, WSJ, May 23, 2005 3. Editor Out as Murdoch Speech Changes, WSJ, April 23, 2008 4. TVs Alternate Universe, WSJ, October 15, 2010 Focused Questions: 1. What is the role of the media in the 21st Century? a. Media is pretty much like the 4th branch of government in this day and age. It operates to reinforce and enhance the system of checks and balances by investigating and reporting on the operations and doings of the other branches. It also does a great job of allowing the people of the country to act as the 4th branch of government, and in both of these respects, probably enhances and bolsters the foundation of democratic ideals this country was founded upon. Think back to the early days of our country where township meetings were common place and essentially allowed the people a literal and figurative voice in governmental affairs. Now that media has spread to other forms such as twitter, facebook, youtube etcANYONE can voice their opinion and act as a reporter. In this capacity, anyone can act as a check/balance on the governmental affairs of this country and media in the 21st century consequently allows for more open disclosure. It also forces the governmental branches to be more forthcoming with disclosure, rather than being too secretive, because there is a much better chance in the modern media era that they will be exposed eventually anyways if secrets are kept. Media presently has advocated more civic involvement because now we can become aware of whats going on in Texas, Illinois, Tokyo, Kuwait, etc. in a split second. Its THAT easy. 2. How should the publisher balance the need to generate a profit and the newspapers responsibility to the public? a. Guess: Maintain integrity and credibility at all times, because as soon as you sacrifice these principles the public will turn its back on you. At the same time, it is important to generate profits but my best guess as how to do this (while balancing integrity and credibility) is to work harder to publish credible and responsible news rather than publishing lies or unfounded speculation. It is true that the shocker stories are going to generate a lot of readers and profits, but this is not a sustainable strategy for profit generation in the long run because the lies will eventually be exposed and your credibility will be at stake. At the same time, you have to publish stories that the public cares about but must walk the fine line between publishing garbage consistently (Lindsay Lohan) and upholding your duty to report real news (bombing in the Gaza strip). Additionally, to not act this way also risks alienation from news staff who care more about journalistic integrity in their reporting rather than pushing fluff stories. The newspaper industry, specifically, employs individuals who have an increased interest, even at a fundamental core level, in individual autonomy, empowerment, and freedom in their speech. When you really break it down, the jobs of reporters are to be scrutinizers and investigators. So these guys are not fools and can see through whatever corporate bullshit you push their way. Additionally, there is probably a common principle among reporters to be skeptical and to never be victims of corporate irresponsibility. This principle derives from their roles and desire to expose individuals/corporations rather than be controlled by them. As seen by CBS, alienating your reporter staff is akin to corporate suicide. 3. What can be done to help "old media" survive and prosper in the future? Be specific about the various forms of old media.

14 a. Network news let viewers behind the screen/unedited interviews, broadcast with alternative methods like online, form overseas alliances b. Network tv less primetime/cheaper shows, make it possible for ppl to watch online at work, let independent programming in c. Newspapers new online content, customized newspaper, updates sent to cellphones d. Advertising narrow ad to narrow audience, turn ads into programming, find new channels e. Book publishers- meet public, go paperless, cater to new cultures f. Movies expand role of theater to new offerings, abandon dvds, home distribution g. Music distribute thru file sharing, mobile phones, capitalize on musicians 4. What can a major news organization do to insure that it reports the news in a fair and accurate manner? Under duress from budget cuts, poor ratings, and reduced influence, CBS News suffered a crushing blow to its credibility after the GWBush/National Guard story scandal. Four executives at CBS News lost their jobs. One question that remained, how much responsibility should be given to division president Andrew Heywad. In several prominent journalism scandals (USA Today and the New York Times) top executives were eventually forced out because of news staff dissatisfaction. A panel investigating the scandal suggested several new procedures aimed at preventing the lax oversight that allowed the National Guard story to be broadcast. Some news staff are worried new procedures would create impediments to aggressive reporting. As to the scandal, some commentators feel that the competitive pressure on CBS News (it was in last place in ratings for both morning and evening news) lead to the National Guard report escaping scrutiny. The producer of the story, Mary Mapes, who was fired after the scandal, had earlier been responsible for several big stories, including the first report about the abuses at Abu Ghraib prison. Those reports made her the most heralded and best paid producer at CBS and gave her the power to push through the National Guard story without out vetting by higher executives. CBS most likely gave in to a combination of competitive pressure, hubris and a little politics. The central explanation for how CBS went wrong seemed to be a case of a star producer overruling the better judgments of an entire series of top news executives. The issue at hand is that the story is false, but whether the documents are forgeries. Most people believe the documents were forged, but the idea that Bush got help getting into the Guard actually might be true. The problem for Rather & company is a journalistic one. They didn't listen to their own document experts, who had some qualms about the documents. They didn't find the secretary of the colonel, who was quite reachable as newspapers found and who cast doubt on the documents. Most importantly, as a journalist, he asked the wrong question. He was looking for evidence that would disqualify the documents as false. He should have been looking for evidence that confirmed they were true. A newspaper must remember that it is supposed to tell the truth. The best way to do that is to ensure that you always get both sides of the story and do your best to determine where the true story really is. Another idea is to make sure that a newspaper sends the appropriate reporters to an event. If there is a political event regarding healthcare, it would be best to send both the health care and political reporter as opposed to just one. That way both parts of the story are being covered in an accurate fashion. Reporters must also make sure that they always place quotes in context and to do their best to not misquote those whom they interview.

15 5. How should a CEO respond to the media concerning a crisis in his or her company? a. Best approach is to be honest with the media, acknowledge problems and issues, but mention what the corporation is doing to either rectify the wrongs or to progress further. NEVER lie to the media because the WILL find out the truth (its their job). The most important thing is to be courteous, forthcoming, cooperative, and accountable. Great opportunity to influence public opinion of the corporation by talking to the media and getting in depth about your side of the story. You win by talking to the media because you have the opportunity to give your side of the story. You lose by not talking because the media will publish things that are damaging to the company and its not even their fault because they can only report what they know. So you either win by talking to the media in an effort to offset negative information against you with your side of the story, or lose by allowing them to publish negative information against you without the benefit of your side of the story to offset the damaging publicity. Be friendly to the reporter and get him on your side so that he will want to give you the benefit of the doubt and an outlet to give your side in a fair and impartial way. Never want media to be your enemy. Further, you cant blame the media for publishing damaging information derived from their sources when you fail to give them your side. The reason you cant blame them is because they have one duty, which is to report the truth based on what they know. They cant know your truth if you avoid giving it to them and its unfair to expect them to be sympathetic to you if you provide no reason for them to. 6. When should a CEO not take a call from the media? a. Never. Guest Speaker specifically said that a CEO should never ignore the media, because it its the corporations opportunity to get their side of the story in the news. Ignoring the media the reporter reporting whatever they already have, which could be very detrimental to the company. Also, dont want to alienate the media because you may need them on your side right now and in the future.

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

MARCH 3 Venture Funding Guest Speaker: Joe Aragona, General Partner and Founder, Austin Ventures Reading Assignments: 1. Take the Money or Run?, HBR, November 2004 (HBR Web site) 2. Making Sense of Corporate Venture Capital, HBR, March 2002 (HBR Web site) 3. Venture Funding Twist, WSJ, February 14, 2007 4. Entrepreneurship and Innovation, Ernst & Young (Aragona requested this be read by students prior to class) 5. The VC Shakeout, HBR, July-August 2010, p 21.23 (HBR website) Focused Questions: 1. Explain the differences between a strategic and a financial investment from both the perspectives of the venture firm and the recipient of the funds.

16 a. Strategic: Investment is made with the primary goal of increasing the sales and profits of the corporation's own businesses. Corporation making a strategic investment seeks to identify and exploit synergies between itself and a new venture. The Venture partners may have a formal alliance with start-ups. b. Financial: Company's goal is to make attractive returns. Corporation seeks to do as well/better than private VC investors. While company hopes that investments will help its own business grow, the main purpose for the investments is the possibility of high financial returns. Also, the companys approval may provide a signal to other investors and customers that the start up company is a good investment causing further increased returns to the original investor. c. Some investments are strategic: They are made primarily to increase the sales and profits of the corporation's own businesses. A company making a strategic investment seeks to identify and exploit synergies between itself and a new venture. For example, Lucent Venture Partners, which invests the telecommunications equipment maker's funds in external companies, makes investments in start-ups that are focused on infrastructure or services for voice or data networks. Many of these companies have formal alliances with Lucent to help sell Lucent's equipment alongside their own offerings. While Lucent would clearly like to make money on its investments in these start-ups, it is willing to accept low returns if its own businesses perform better as a result of the investments. The other investment objective is financial, wherein a company is mainly looking for attractive returns. Here, a corporation seeks to do as well as or better than private VC investors, due to what it sees as its superior knowledge of markets and technologies, its strong balance sheet, and its ability to be a patient investor. In addition, a company's brand may signal the quality of the start-up to other investors and potential customers, ultimately returning rewards to the original investor. For example, Dell Ventures, Dell Computer's in-house VC operation, has made numerous Internet investments that it has expected to earn attractive returns. While the company hopes that the investments will help its own business grow, the main rationale for the investments has been the possibility of high financial returns.

Governance in the Defense Department Speaker: Bill Cohen, Former Secretary of Defense

MARCH 24 The External Auditor and the Audit Committee Guest Speaker: Darrell McKown, Partner, Ernst & Young Reading Assignments: 1. Corporate Directors Guidebook, Fifth Edition, Section 6

17 2. More Work for the Audit Committee, CBM, 1st quarter 2009 3. Auditors Face Fraud Charges, WSJ, December 20, 2010 Focused Questions: 1. What are the implications of risk-based auditing procedures? *Risk-based auditing: auditors perform far fewer tests of the numbers on the company's books than they would have at an audit client where they perceived the risk of accounting fraud to be higher. "Low risk" items -- such as cash on the balance sheet or accounts that fluctuate little from year to year -- often get no more than a cursory review, for years at a stretch. Instead, auditors rely more heavily on what management tells them and the auditors' assessments of a company's "internal controls." In traditional audits, the auditors went through every number in the books, checking each entry for accuracy. However, as corporations have become increasingly large, and the pricing for audits (which is deregulated) has become increasingly competitive, audit companies have moved to risk based auditing. The basics: the auditor is supposed to assess the overall company for risk of fraud, and then assess different areas of the books for their susceptibility for fraud. The less likely the auditor thinks fraud is, the less the company/area is audited. (For instance, they may decide not to audit any entry below $5,000.) The broad leeway the auditors have in assessment is particularly troublesome when you consider how closely the auditors work with the companyit is easy for their judgment to be clouded. Also, they want to maintain good relationships with the CEOs etc. so they may be hesitant to offend by looking too closely. Also, if an auditor decides not to look into entries below $5,000, e.g., then the executives know how to structure illegal transactionsjust break them up into small entries. Finally, the idea behind risk-based auditing is to make auditing economically efficient and profitable. Auditors have a large incentive to cut corners under this system. In short, risk-based auditing does a poor job of ensuring corporate honesty in financial transactions. A look at the risk-based approach also helps explain why investors continue to be socked by accounting scandals, from WorldCom Inc. and Tyco International Ltd. to Parmalat SpA, the Italian dairy company that admitted faking $4.8 billion in cash. Just because an accounting firm says it has audited a company's numbers doesn't mean it actually has checked them. 2. What are the implications of Sarbanes-Oxley for corporate America? Sarbanes Oxley compliance was extremely expensive and time-consuming the first year, and has been very unpopular. Many argue that the new SOX regulations will not be able to control the sort of systematic executive fraud that it is intended to prevent (like Tyco, Enron, and WorldCom). However, it did lead companies to clean up their books, and may have improved efficiency in some areas. It also has helped to restore consumer confidence. Some of the new regulationssuch as the ones increasing auditor independence and disallowing auditing companies to provide non-audit servicesseem like a really good idea. Otherslike making the CEO and CFO guarantee every SEC submissionmay be overkill. One of the big reasons these scandals occurred was because of the move to risk-based auditing, discussed below, and SOX hasnt changed that. 3. How should the independent auditor interact with the audit committee, the Board, and management? It is very important that the auditor have good, frank working relationships with the audit committee, the board and management. (Especially management) The auditor is fed the information by the company (management), and if they dont have good relationships, then the management will be loathe to give them necessary information and may even withhold things. However, it is important that

18 auditors remember that they do NOT work for the management. They are employed by the company (the shareholders) and they work, more or less, for the board. They should be careful not to get to close to management, as that may cloud their judgment, making them unable to properly assess risk. They need to avoid conflicts of interest. Basically, they should always have a cordial, arms length relationship with management. The audit committee and the auditors need to be very comfortable with each other and trust each other a great deal. If there is something wrong with the financials, the auditor must report it to the committee, which puts them in the difficult position of ratting out management. The auditors need to feel that they can talk to the committee in confidence. The board should oversee auditor independence. Independent auditors have less of a relationship with the Board as a whole, but I assume that there needs to be mutual trust and respect, without conflicts of interest. 4. What has been the impact of Sarbanes-Oxley? a. More timely disclosure of executive-pay deals and required CEOs to return compensation based on financial results that were later restated. The disclosure requirement squelched another pervasive, but little-known, practice of the 1990s, a side effect of the options craze: the "backdating" of stock options. b. Public companies in the U.S. will have spent more than $26 billion to comply c. Greater accountability in the boardroom d. In reassuring investors and restoring confidence in the integrity of companies' financial statements e. More rigorous internal controls, forced top executives to certify the accuracy of financial results and created a watchdog for auditing firms. It also expanded the role of board audit committees and required companies to take "whistleblower" complaints more seriously. Related stockexchange rules bolstered boardroom independence by requiring regular private sessions of independent directors, among other changes. f. Compliance costs for the law are falling and that the review of internal controls has "contributed significantly to more reliable financial reporting." g. Heightened focus on internal controls prompted hundreds of companies to disclose "material weaknesses" in their accounting and to restate prior financial results. h. Tax on business, risk aversion, lowers us competitiveness 5. What did Mr. McKown mean by the corporate governance triangle?

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Three basic relationships: board-shareholders, board-management and managementshareholders. They are each detailed below, but note that the greatest emphasis is placed on the board-shareholder relationship. The corporate balance of power is delicate and the successful interaction of all three components is the key to effective governance. When they work together as a system with accountabilities and unfettered exchange of information, they provide a powerful set of checks and balances. Look on PAGE 3 of this outline for the in depth discussion of power relationships of the triangle. 6. What is the role of the review partner in an audit?

Venture Capital Speaker: Shawn Rosenzweig, McCombs Enterprises

MARCH 31 The Chairman of the Board Speaker: Gary Kelly, CEO, Southwest Airlines Reading Assignments: 1. Discount Carriers Southwest, AirTran Tie Knot, WSJ, September 28, 2010 2. Southwest Alters Plan, WSJ, September 29, 2010

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APRIL 21 Governance of a Non-Profit Organization Speaker: Lee Walker, Former Chairman of the Board of Capital Metro and former President of Dell Reading Assignments: 1. The New Work of the Non-Profit Board, HBR Sept.-Oct. 1996 (HBR website) 2. Working on Non-Profit Boards: Dont Assume the Shoe Fits, HBR, Nov.-Dec. 1999 (HBR website) 3. The High and Low Notes of Nonprofit Board Service, CBM, Summer 1999 Focused Questions: 1. Why do members of non-profit boards lose interest in their governance activities and what can be done to improve their relationship with the non-profit organizations they govern? a. takes too long to make decisions, exec hoards info, lack of knowledge, little personal accountability, not practiced at working as a team, feel underused. Low stakes, process driven, ambigious outcome b. experience outside normal field c. new work crucial to success issues, results linked to timetables, defined measure of success, requires engaging internal/external constituencies d. ask more questions of ceo, develop ties to constituents, find out objectives, what needs to be measured, goal driven meetings, recruit board based on chemistry, innovate 2. What are the differences between governing a for-profit and a not-for-profit organization? y In both cases, boards are responsible for setting the organizations mission, monitoring its progress toward achieving that missing, and selecting and evaluating its managers. y Non-profit work involves more than just having your heart in the right place. y Mission & Measurement o For-profit  Factors such as profit growth and market capitalization are effective measures of a companys long-term performance  When a company is not doing well, the board comes under pressure from shareholders, analysts and potential acquirers  Corporate board is ALWAYS concerned about how the company is doing relative to competitors o Non-profit  Financial considerations are only one dimension of its mission statement  Service that a non-profit gives to its constituencies is often the most important variable  Tough to balance both finances and service  Much harder to measure success (no stock prices, for example)  Financial results on their own are a poor means of measuring performance  Survival and looking past budget problems to ultimately strengthen services and help finances in the long run may be a worthy endeavor for a non-profit  The financial tail must not be allowed to wag the non-profit dog

21 A non-profit board must know when it is losing money, but it may continue to want to lose money to help long-term goals; figuring out how to handle loses is one of the most important jobs of a non-profit board Choosing the Boss o For-profit  This is the most important duty  Getting this right is the framework for success  Easier to find someone because you are usually looking for something with industry skills, good environments, etc. or someone who was next in line on a succession plan o Non-profit  Just as important, but more art than science  In looking for a new leader, non-profits undertake intense internal assessments and run national searches that can last up to 18 months  BUT sometimes full-blown searches like this aren't necessary  Maybe someone in the community  Maybe the #2 person in charge of the non-profit who knows all about it Whos on First? o For-profit  CEO is given relatively free reign to set and implement a strategy  This strategy is then reviewed by the board  Many corporate CEOs are also board chairmen o Non-profit  Completely normal for CEO to report to non-executive chair  Rift between CEO and chairman is common and can trigger many problems  Chair of non-profit serves a relatively fixed term (about three years)  With such quick and repeated turnover, CEO must manage differences to establish an effective working relationship with whoever the new chair is of the board  Smart CEOs actively manage their relationships with chairs and board members and continually meet with everyone Board Structure and Processes o For-profits  8-14 members per board to help stimulate candid debate  Three kinds of people: leaders of similar corporations, specialists in relevant technologies, people with good political contacts  Audit, compensation, nominating committees  Nominating committee relatively inactive  No operations committee o Non-profits  MUCH LARGER (up to 40 people sometimes)  Needs to represent the many constituencies that have a stake in the non-profit  Executive committees (usually have limited responsibilities) y Provides small-group atmosphere that helps members talk about problems on a more intimate basis y Members can discuss sensitive topics with less danger of leaks y Big risk that an executive committee will turn into an upstairs board, which will cause problems with those in the downstairs board  Nominations committee y Carry out searches themselves because theyre best suited to do so y Often times organization is deeply rooted in the local community 

22 y Enormous burden for this committee because turnover is often really high  Committee charged with understanding and evaluating how the organization and its professionals are achieving the qualitative aspects of their mission; this operations committee is key Being a Board Member o For-profit  Eight one-day meetings per year  Regular hours  Member can expect to stay until retirement or a hostile takeover or conflict of interest  Highly paid  Conflicts of interest are important o Non-profit  Much greater diversity of roles exists  Anti-social hours y Not usually scheduled day-long meetings y Often times 2 hour mid-day meetings randomly scheduled y Evening meetings y Intrudes on family live  Weekend retreats  Turnover can undermine the boards commitment to an organizations strategy  No compensation, usually expected to give high donations to the organization  Usually wanted are people with deep pockets  Conflicts of interest are important

Challenges Facing the Worlds Largest Not-For-Profit Corporation Guest Speaker: Carolyn Gallagher, Former Chairman, Board of Governors, U.S. Postal Service Reading Assignments: 1. Statement of Carolyn Gallagher, Chairman Board of Governors, U.S. Postal Service, March 25, 2009 2. Delivering on the Promise of Nonprofits, HBR, December 2008 (HBR website)

APRIL 28 The Chief Executive Officer Guest Speaker: Kenneth Jastrow, Former Chairman of the Board and CEO, Temple-Inland Financial Services Reading Assignments: 1. What Executives Should Remember, HBR, February 2006 (HBR website) 2. The Wrong Way to Pick a Chief Executive...and the Right Way, CBM, May/June 2007 3. Risk: Every Boards Biggest Challenge, CBM, January/February 2009 4. How to Pick a Good Fight, HBR, December 2009, pp 48-57 (HBR website) 5. Leadership in the Age of Transparency, HBR, April 2010, pp 39-46 (HBR website) 6. Accuser Said Hurd Leaked an H-P Deal, WSJ, November 6-7, 2010 7. Apple Chief to Take Leave, WSJ, January 18, 2011

23 Focused Questions: 1. What are some of the most important lessons that Peter Drucker had for business executives? "Successful enterprises create the conditions to allow their employees to do their best work." Mr. Drucker offered plenty of other lessons, of course. He believed organizations should articulate a clear purpose, with specific, measurable goals; he developed the concept of "management by objective," to keep managers in step with those goals; he encouraged managers to ask unspoken questions and consider ignored issues. Companies should "treat employees like their most valuable resources, including pushing decision making to the lowest levels." (from http://www.careerjournal.com/myc/management/20051115-thurm.html) -ask what needs to be done -ask what is right for enterprise -took responsibility for decisions/communicating -focused on opportunities rather than problems -productive meetings -action plans -we rather than i -work closely with knowledge workers/develop them -look at how best nonprofits define mission -pay attention to assumptions business is founded on 2. Why is it so hard to fire a CEO? It's harder than ever to say goodbye to a CEO without a big check. Three times in recent weeks, a former chief has won millions after challenging a board that fired him "for cause." A chief executive terminated because the board believes he committed such serious misdeeds usually can't collect severance or other exit payments. Terminated CEOs are assisted by a well crafted employment contract and sophisticated lawyers, to successfully challenge a dismissal. It's so hard to fire a CEO for cause that many boards don't try, even when ethical problems are involved. Some boards work out other departure arrangements that allow the CEO to leave with severance or other benefits intact. Also, if the CEO sues, the suit can drag on for years and be very expensive. Nearly three-fourths of the CEOs of companies in the Standard & Poor's 500-stock index have employment contracts or severance plans. The accords typically let boards remove a chief for cause in cases of deliberate neglect of duties, gross misconduct, a felony conviction or company-related fraud. Executives insist on these protections in case of disagreements with directors. But the terms are often vague, leaving much to the interpretation of arbitrators, judges and juries. Even if the company wins in arbitration, the ruling could have a chilling impact and hurt a companys ability to bring in great CEOs. 3. What criteria should a board examine when its selects a new CEO? a. The board should examine the candidates professional record to make sure there are no incidents of fraud, cheating on expense accounts, or dishonesty. The candidate needs to be

24 qualified to actually run the company. They need to understand a companys culture, strategy, products, and the biggest challenges ahead, and they need to be able to win the trust of subordinates. Additionally, a board should look at past work experience, inside and outside of the company. b. The board should also examine the candidates personal record while understanding the difference between morality and integrity. Morality is a moral judgment, while integrity is about telling the truth. Boards should look to make sure there are no drunk driving problems, substance abuse problems, personal tax problems, or sexual harassment history. Weight has shifted toward considering CEOs integrity after Boeing chief Stonecipher had an affair and embarrassed the company. They want someone who can make good judgments. 4. How should the Board of Directors manage the succession process? Preemptively choices should be made either while you still have a CEO or an approach determined. Proactively the directors should be intimately involved and avoid Eisner-like assurances that a successor is in place. Carefully review of personal and professional histories of potential candidates is critical. Things to consider before hiring a new CEO Anne Mulcahy (Xerox) became CEO after working at Xerox and having no training or expectations to become CEO. She says her lack of training was a good thing. She had no preconceived notions, no time to develop bad habits. She just stepped right in and led. Going with an insider does not ensure success. Disney chose Robert Iger as CEO and he was an insider. Iger was a disaster and the former Board members thought Igers choice was a sham. Going with an insider can ensure that the CEO is already familiar with the company, which is important because CEOs have to devote a lot of time to activities that dont involve the on-goings of the company, so previous knowledge of the company is important. An outsider may also be good because if things are a mess, an outsiders perspective and a complete change may be needed. Also, previous CEOs have more experience and know all the demands and intricacies of being a CEO Now, personal behavior is so important for CEOs, which is evident by Boeings dismissal of CEO Stonecipher after his explicit e-mail to a female employee he was having an affair with became public. Bad publicity towards a CEO can reflect poorly on the company. As a result, Boards are conducting extremely lengthy and thorough investigations and background checks of CEOs. For example, past DUIs can indicate that the CEO is prone to making bad decisions. 5. What is the most important responsibility of the CEO?

25 While the CEO is supposed to lead the company to success, the most important responsibility of the CEO is the employees and the culture. Herb Kelleher (CEO of Southwest Airlines) explained: our first obligation is to our employees. Our employees will take care of our customers [which will lead to profits and the satisfaction of shareholders]. Anne Mulcahy (CEO of Xerox) also explained the importance of taking care of the employees. She was able to avoid bankruptcy and bring Xerox out of enormous trouble. She did this by making the employees happy (such as by giving their birthdays off). The employees at Xerox stayed with the Xerox longer than other companies employees stayed. When employees are happy, they work harder and handle customers and business relations better. Mulcahy made sure that the employees were committed to the company, which happiness ensures that they will not give up (bankruptcy) and will find ways to succeed, as in Xerox. Regardless, Anne Mulcahy explained that the CEO must give 100% and do what needs to be done, even if it means firing workers and friends.

-setting strategy and vision -setting culture -maximizing sh value

Public Relations Guest Speaker: Jeff Hunt, CEO of Pulse Point Group and Former CEO, GCI Read Poland Reading Assignments: 1. Gilded and Gelded! Hard-Won Lessons From the PR Wars, HBR, October 2003 (HBR website) 2. The Art of the Apology, CBM, Second Quarter 2010, p. 72 3. Six Ways to Survive a Crisis, CBM, First Quarter 2010, p. 20 4. Let the Response Fit the Scandal, HBR, December 2009, pp 82-88 (HBR website) Focused Questions: 1. What can firms do to avoid public relations problems? The article is about AT&T and the time when Mike Armstrong succeeded Bob Allen as CEO in 1997 and only lasted five years. Once one of the great American businesses, AT&T had taken a beating as new competitors emerged and its traditional business disintegrated. These are the lessons learned. y Dont Fall in Love with Your Own Story. New CEO Armstrong was the type of person the media loved. He could easily win the over, but maybe too much. His announcements and explanations of the companys strategic plans raised expectations that AT&T couldnt meet. There was a growing perception that AT&T was changing its culture and executing a rapid makeover. Quick acquisitions made it the largest owner of cable TV systems in the country and a major player in wireless telephones. The buzz was that it was building a platform that would offer one-stop shopping for wired and wireless communications and cable TV. So when things began to go amiss, the company had a more difficult time controlling than damage than if it had been more modest in layout out its

26 plans. When the company began divesting from some of its businesses, it was widely seen as a repudiation of Armstrongs ambitious plans. Understand the Business Medias Mind-Set. Business media is preoccupied with the colorful personalities at the top of the corporate world. Be careful of allowing reporters to trap your executives. Stories dont change direction because the subject cooperates. Have the CEOs trusted lieutenants or a PR person provide factual information and keep tabs on the reporters progress. Also, remember that the business media is focused on winner-take-all conflicts, real of imagined, among companies. And the assessment of whos winning and whos losing can change quickly. Journalists view most events as competitive struggles, they look for conflict, drama and setbacks instories, and especially appreciate mean-spirited ideas about rivals. Also, dont forget that the media is obsessed with competition among themselves. The AT&T PR man let it be known that the CEO wouldnt do exclusive interviews without a promise that big chunks would run as verbatim questions and answers. At first Fortune magazine refused. When he told them he was calling BusinessWeek next, Fortune gave in. Then all of the other major magazines and newspapers agreed too, because they didnt want to lose the interview to a competitor. Dont Miss the Symbolism in the Facts. Go beyond rational arguments and address the shareholders emotional concerns. When AT&T cut 40,000 jobs, they did it to impress Wall Street, and it did. But they didnt think about the evening news, where the CEO was painted as greedy for cutting jobs while taking a huge pay check. Symbolism is important, and so is a shared sense of sacrifice. If the CEO had announced that AT&Ts top execs and board members were donating some of their salaries and fees to a fund for fired employees, it wouldnt have made much financial difference but it would have made a huge symbolic difference. But because they didnt do it, no rational argument about the necessity of the layoffs could overcome their symbolic impact. Learning from those mistakes, when Armstrong tookover as CEO, he announced that he was banning chauffer-driven transportation for executives. It was super popular with employees and made the business pages as a sign of how serious he was to change the culture. In actual fact, there was only one person who was being chauffered around anyway, an older executive who was about to retire. When Armstrong cut jobs, he froze executive salaries. Those are the types of symbolic acts that are important. Pay More Than Lip Service to Your Stakeholders. Investors, customers, employees, and the communities in which people work are all important. All business lives by public approval. The fundamental way to get approval is to deserve it, and you do that not by what you say but from what you do.

2. What role should PR play the firms communications strategy? CEO Armstrong and AT&T: y Avoid making unrealistic short-term expectations because of the desire to continuously give the media something positive to talk about. o CEO Armstrong did this and it backfired. He hyped up everything and the media loved him after he took over as CEO. However, he could not meet his unrealistic claims. In one instance, the media hyped his potential deals with Time Warner. After the deal fell through, the media felt burned for publicizing it and took their anger out on AT&T. o A CEO should always give factual information about expectations and the current state of the company in order to avoid this problem. o AT&Ts new CEO, Dorman, is honest and has avoided the public limelight to a certain extent. This has been successful. Jeff Hunt, Speaker: y The company and CEO should be prepared to handle the medias attempts at controversy and negativity

27 o The CEO and firm should prepare for interviews and possible questions o In addition, the CEO should know how to handle an interviewers techniques. The company and CEO should always make sure that they stick to the facts and get the intended message across.

3. What are the 10 public relations crisis that lie around the corner and what can the Board of Directors do to deal with them? 4. What does the CEO need to understand about public relations? Jeff Hunt, CEO, GCI Read Poland (Speaker): y Up to 60% of the market value of the company is driven by the CEOs reputation. Workers take notice and have pride in the company Customers certainly notice y Public relations get harder and the company is a bigger target for criticism as it becomes more successful. AT&T article: y business today is as much about managing perceptions and external relationships as managing employees, finances, and assets y A poll asked professional investors if they are more likely to recommend or buy a stock if a CEOs reputation is good: 1996: 70% said yes 2001: 90% said yes y A CEO should always think about public relations in every action they do. For example, the AT&T CEO, Armstrong, messed up after laying off workers when he did nothing to help his public relations. The CEO, as suggested by the article, should have donated a portion of his and the executives salaries to the laid-off workers. y Public relations is not about polishing an image or creating buzz; its about building longterm relationships between an institution and its stakeholders.