Brief Update on the Marriott School of Management Brigham Young University

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(No Transcript)
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Brief Update on theMarriott School of
ManagementBrigham Young University

• Ned C. Hill, Dean
• DFW Management Society
• May 13, 2004

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What BYU Team Did Beat Stanford USC?(not to
mention UCLA, Notre Dame, Virginia Utah)
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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 24. IPADE (Spain) 25. Ohio
State 26. Brigham Young 27. Wake Forest 28.
Washington (St. Louis) 29. University of
Virginia 30. Stanford
WSJ Rankings
31. Notre Dame 34. Thunderbird 37. NYU 38.
UCLA 39. London Business School 40. USC
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What the Wall Street Journal Said

• Brigham Youngs 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
  schools 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
  daysthe ethical accountant.

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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.

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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

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Other Rankings

• 3rd Graduate Accounting
• (Public Accounting Report)
• 3rd Undergraduate Accounting (Public Accounting
  Report)
• 38th Undergraduate Management (U.S.News World
  Report)
• No. 1 Stone Cold Sober School (Princeton Review)

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Student Achievements
Undergraduates beat out MBA students nationwide
to win Fortune Small Business Magazines first
business plan competition. MBA team wins 2003
Thunderbird Innovation Challenge, beating 154
other teams.
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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.
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Student Achievements
An information systems student placed first and
another student placed third in the schools
first appearance at the National Collegiate
Conference. An MPA student was the first in
Utah to win an American College of Healthcare
Executives Scholarship.
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Student Achievements
Marriott School MBA team wins first place in U
of Denver National Ethics Case competitionwith
invited schools known for their ethics programs.
Marriott School MAcc team wins first place in
Deloitte national auditing case competition in
March against all top Accounting programs.
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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 threean unparalleled accomplishment.
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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

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Alumni Portals

• Visit your alumni portal to
• 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

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Management Society

• Now a global organization
• 40 Chapters in the U.S.
• 17 International chapters
• Developed central membership database
• Membership records
• Online dues/events payment
• Online calendar
• Communication tools
• Formalized 5-year strategic
• plan

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The Crisis in ConfidenceWhy 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
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Whats Gone On?

• Misstated financial statements Qwest, Enron,
  Global Crossing, WorldCom, Xerox, etc.
• Executive loans and corporate looting John Rigas
  (Adelphia), Dennis Kozlowski (Tyco--170
  millionthe 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.
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Whats 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.

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Example Making Earnings at Enron

• Mark-to-marketbook future profits today and
  dont worry about delivery
• Revisit deals to generate higher profits
• Delay losses (even hide them in SPEs)
• Mark up value of non-traded assets
• They knew that they stretched and twisted the
  rules to Enrons advantage but they saw their
  actions as creative not misleading. from The
  Smartest Guys in the Room

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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 handshas transferred gt100M in assets to
  his sixth wife
• He built up 8.2B in debt at Conseco

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Consequences of These Problems

• Lost confidence in capital markets
• Lawsuitsone 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

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The Cost of Bad Press
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Largest Bankruptcy Filings
Company Assets (Billions) When Filed
1. WorldCom 101.9 July 2002
2. Enron 63.4 December 2001
3. Conseco 52.3 December 2002
4. Texaco 35.9 April 1987
5. Fin. Corp of Am. 33.9 September 1988
6. Global Crossing 25.5 January 2002
7. Adelphia 24.4 June, 2002
8. United Airlines 22.7 December 2002
9. PGE 21.5 June 2002
10. MCorp. 20.2 March 1989

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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 complaint1.4B accounting fraud

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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
• Andrew Fastow (CFO) pleaded guilty, 10 years
  prison
• Lea Fastow(Assistant Treasurer) plea bargain1
  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)

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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

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Fines and Settlements

• Goldman Sachs 9.3 million
• SG Cowen, Lehman Brothers 7.5 million
• Citigroup, JP Morgan Chase 305 million
• Visa USA and Mastercard 3 billion
• Merrill Lynch 86 million
• FleetBoston Financial 33 million
• U.S. Bancorp 32.5 million
• Bear Sterns 9 other firms 1.335 billion
• Household International 484 million
• Bank of America 490 million
• WorldCom 750 million

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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 altogetherthat is what has happened
  with many mutual funds (funds are valued at 400
  p.m. daily but large customers were allowed to
  trade much later and have their trades time
  stamped with earlier times.
  (Stanford ProfessorEric Zitzewitz)

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New Frauds Under Investigation

• A few more big frauds and SEC investigations
• Health South (1.4 billion)
• Home Store (46 million in 2001)
• Bristol-Meyers Squibb (2 billion)
• Ahold (1.05 billion)
• Fleming Cos
• Phelps Dodge
• Interpublic
• Parmalat
• FBI currently has 30 corporate fraud
  investigations in which losses to investors
  exceeded 100 million

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Fraud Triangle

Pressure

Opportunity
Rationalization

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Why So Many Financial Statement Frauds Recently?

• Opportunity
• Booming economy hid many problems
• Nature of accountingrule-based
• Auditor conflict-of-interestnon-audit services
  vs. audit itself
• Pressure
• Misplaced executive incentives
• Unachievable Wall Street expectationsrewards for
  short-term behavior
• Large amounts of debt
• Rationalization
• Moral decay in societyweakened family/church
  structures
• Failures in management education
• A culture of greed by executives, bankers, and
  investors

"The Perfect Storm"
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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 resultbuy
• If not, buy anyway

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Executive Incentives

• Remember T. Boone Pickens?
• Complained about Newmont Mining executives
• Now executives have significant stock options
• Stock prices are tied to meeting Wall Streets
  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 options1.2 million shares at 26 per
  sharestock went to 64.50 (46.2 million in
  profit)

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Pressure Meeting WS Projections

• Firm 1st Qtr 2nd Qtr 3rd Qtr
• Morgan Stanley 0.17 0.23
• Smith Barney 0.17 0.21 0.23
• Robertson Stephens 0.17 0.25 0.24
• Cowen Co. 0.18 0.21
• Alex Brown 0.18 0.25
• Paine Webber 0.21 0.28
• Goldman Sachs 0.17
• Furman Selz 0.17 0.21 0.23
• Hambrecht Quist 0.17 0.21 0.23
• Actual Earnings 0.08 0.13 0.16
• Fraud 0.09 0.09 0.07
• Reported EPS 0.17 0.22 0.23
• Fraud (Millions) 62 M 61M 71M

Wall Street expectations were especially high for
certain industries such as the telecom industry
(e.g. Global Crossing, ATT, WorldCom, Quest)
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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 stock value
7 million fraud
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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 CFOs
  instructions. Over 20 people were involved in
  making or instructing to make similar entries.

250 companies announced financial restatements in
2002
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High Amounts of Debt

• During 2000, Enrons derivates-related
  liabilities increased from 1.8 billion to 10.5
  billion
• Enron hid billions in off-balance sheet (SPE)
  debt
• Enrons 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 2002includes WorldCom,
Conseco, Global Crossing, United Airlines
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Auditorsthe CPAs

• If auditors arent the watchdogs, then who is?
• Became greedy--500,000 per year per partner
  compensation wasnt enough saw everyone else
  getting rich (Andersens partners were jealous of
  Accenture partners 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

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Problems in Management Education

• AACSB moved to mission based standardsethics
  (and other subjects) no longer required
• Resultfewer 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

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Part 2 Possible Solutions
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Areas of Change

• Improve auditing
• Improve management
• Improve boards of directors
• Improve business school education

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What the Laws/Guidelines Attempt to Accomplish
Align Directors More Towards Shareholders
Improve Quality of Financial Information
Encourage Ethical Legal Behavior in
Management and Boards
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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

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Focus of the New Guidelines and Laws

1. The Auditors
2. Top Management
3. Boards of Directors
4. Investment Banks

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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

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II. Top Management Sarbanes-Oxley

• Requires management certification of
  appropriateness of financial statements (penalty
  lt 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

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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
• Appoints companys 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

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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

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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

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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 Weeks analysis of
  good and bad boards

Some of these may be necessary but, by
themselves, are not sufficient for a great board.
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Whose Board Was This?

• Two insiders, 14 outsiders
• Skilled directors
• 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.

Compensation 381K in 2000!
Conflicts of interest
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IV. Investment BanksUnder Discussion at SEC

• Split research and sales of securities (Eliot
  Spizers 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

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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
• Howeverschools may decide whether to have
  stand-alone course or integrated program

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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
• Discuss ethics frequently at all levels
• Offer specific fraud courses
• Cover cases that involve students in ethical
  issues
• Have consequences for unethical behavior

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Fraud Triangle Revisited
Will this goaway?

SarBox, etc. may help here
Pressure
Fraud Triangle
Opportunity
Rationalization
What can wedo here?

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Can Ethics be Taught in Business Schools?
Here and Now

• Level 1 Ethical FrameworkPersonal understanding
  of ethical principles, right and wrong behavior
• Level 2 Ethical CourageAbility to apply that
  understanding, even under pressure
• Level 3 Ethical LeadershipAbility to cause
  others in an organization to live ethically

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Counsel to Berkshire Hathaway-owned companies
We can afford to lose money, even a lot of
money. We cant afford to lose reputationnot
even a shred of it.
Quote from Scott Hymas, CEO of RC Willey, 6/19/03
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Questions?