Ethics in Corporate Finance, The Sarbanes-Oxley Act, Corporate

Governance, and Leadership

Presented at National Taiwan University

December 30, 2005

Jason Lin, Ph.D.Professor of Business AdministrationTruman State University

Outline

What is OK behavior Defining Ethics Types of Unethical Behavior Big Financial Scandals Payoffs of Integrity Overview of Sarbanes-Oxley Act of 2002 Sarbanes-Oxley and Corporate Governance Suggestions to Improve Corporate Governance Quality of Leadership Ethical Responsibility Questions

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Is it OK ?

To overlook a classmate cheating as long as he or she is your friend?

To use a project idea from a fellow student? To use a source of information and pass the work off

as your own? To steal a business idea from a co-worker? To be a free rider of a group project for class? To take home small office supplies for personal use? For a manager to overlook undesirable behavior of

people in the organization who are well-liked?

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

What is Ethics?

A system or set of moral principles. The rules of conduct governing a particular class of human actions or a particular group, culture.- Webster College Dictionary

Standards of conduct which indicate how one should behave based on moral duties and virtues rising from principles of right and wrong.

Why important?Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Who acts unethically?*

All levels of American Workforce Nearly half of U.S workers act unethically

- cheating on expense account- Discriminating against co-workers- paying or accepting kickbacks

Attributed to “pressure” due to long hours, sales quotas, job insecurity, balancing work and family, personal debt.

* “Doing the Wrong Thing” Published in the USA Today

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Top 5 Types of Unethical Behavior*

1) Cut corners on quality control2) Covered up incidents3) Abused or lied about sick days4) Lied to or deceived customers5) Put inappropriate pressure on others

* “Doing the Wrong Thing” Published in the USA Today

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Big Financial Scandals

Enron’s Financial Scandal The seventh largest energy company in the US Past earnings were overstated by $500 million Liabilities were understated by billions of dollars The largest bankruptcy filing in the US history Over $ 80 billion of stock market value evaporated

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Enron’s Scandal

Auditors – Arthur Anderson and Enron Top executives knew in Feb 2001

Found guilty of obstruction of Justice in the case

Consequences Top executives in trials (Jan. 17, 2006) Arthur Anderson in court Investors lost billions Enron Employees

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

MCI WorldCom’s Financial Bomb

The second largest long-distance telephone provider in the US

Improperly booked $ 3.8 billion over the past 5 quarters ($11 Billion)

Over $ 125 billion dollars of stock market value evaporated

Auditors – Arthur Anderson Bernard Ebbers was sentenced 25 Years

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Tyco International’s Scandal

CEO/CFO/General Counsel indicted for fraud and theft by the SEC in Sep 2002

CEO/CFO issued bonuses to themselves without board’s approval

CEO/CFO/GC accused of looting $ 600 million from Tyco

CEO/CFO assets frozen by court order Dennis Kozlowski was sentenced 25 Years

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Payoff of Integrity

More effective leadership More trusting personal relationship More effective organizations Stronger communities Better feelings about ourselves

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Reasons for Sarbanes-Oxley (SOX) Act

Corporate Boards are not independent Huge stock options are used as

compensation Stock options are not expensed CEO’s of large companies have lost public

trust No incentive to report misconduct

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

The Sarbanes-Oxley (SOX) Act of 2002

Established the Public Company Accounting Oversight Board

Increased communication Provide Audit Committee with funding for

outside advisors Prohibits future loan’s to officers and

directors

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

The Sarbanes-Oxley Act of 2002

CEO/CFO certify financial statements Top management monitors and reports on

internal controls External auditors must evaluate

management’s approval of internal controls

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

The Sarbanes-Oxley Act of 2002

Illegal for director/officer to fraudulently influence independent auditors

Accelerated reporting of trades by insiders Companies will disclose whether it has code

of ethics for its senior financial officers Unlawful to punish or retaliate against those

reporting unethical behavior

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

The Sarbanes-Oxley Act of 2002

Public accounting firms register with Public Company Accounting Oversight Board

Attorneys will report evidence to material violations of securities laws

Increased criminal penalties for CEO/CFO certifying and filing in bad faith

Criminal penalties for altering, destroying, mutilating, or concealing documents

Securities analysts must adopt conflict of interest rules Large corporations have to be in compliance by June 15, 2004 Smaller companies have to comply by April 15, 2005

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Sarbanes-Oxley and Corporate Governance

Executive Compensation

(Larry Ellison, Dick Grasso)

Independent Board of Directors

(Imbalance of Power)

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Balance of Power in Corporate Governance

CEO & Mgmt

Transparent Updates & strategic financial direction reports Company capital & CEO

oversight

weak controls, little influenceShareholders Board

Minimal information flow, no individualaccountability

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

Suggestions to Improve the Imbalance

Make directors accountable to shareholders Separate positions of chairman and CEO Reinvigorate shareholders Give Board sufficient funding

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University

QUALITIES OF LEADERSHIP

Accept challenges and take risks Master both listening and speaking Live by the values they profess Freely give away their authority Recognize the best in others Have a vision and convince others to share it

TRUE LEADERS?

THE GOOD LEADER: Sun, Yat-Shan, Winston Churchill, Sam Walton, Jack Welch, Warren Buffet

THE BAD LEADER: Larry Ellison, Michael Eisner, Dick Grasso

THE UGLY LEADER: Bernard Ebbers, Ken Lay, Dennis Kozlowski, J.N. Chen

Layers of Responsibility for Ethics

Individual Action

CompanyRegulations

Government and SystemsRegulations

Jason Lin, Ph.D.Professor of Business AdministrationTruman State University

Ethical Evolution

Ethical Courage

Ethical Leadership

Ethical Knowledge

Jason Lin, Ph.D.Professor of Business AdministrationTruman State University

?

Thank You for Your Attention

Jason Lin, Ph.D.

Professor of Business Administration

Truman State University