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Brief Update on the Marriott School of Management Brigham Young University

Brief Update on the Marriott School of Management Brigham Young University. Ned C. Hill, Dean DFW Management Society May 13, 2004. What BYU Team Did Beat Stanford & USC? (not to mention UCLA, Notre Dame, Virginia & Utah).

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Brief Update on the Marriott School of Management Brigham Young University

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  1. Brief Update on theMarriott School of ManagementBrigham Young University Ned C. Hill, Dean DFW Management Society May 13, 2004

  2. What BYU Team Did Beat Stanford & USC?(not to mention UCLA, Notre Dame, Virginia & Utah)

  3. 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

  4. What the Wall Street Journal Said • “Brigham Young’s Marriott School of Management stood out for its students’ integrity in this era of corporate scandals. ‘Our recruiters return to Brigham Young year in and year out because of the school’s high ethical standards,’ says Roger McCarty, corporate strategy development leader for Dow Chemical Co.” • “Recruiters find that Brigham Young produces a particularly valuable type of graduate these days…the ethical accountant.”

  5. …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.”

  6. 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

  7. 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)

  8. Student Achievements Undergraduates beat out MBA students nationwide to win Fortune Small Business Magazine’s first business plan competition. MBA team wins 2003 Thunderbird Innovation Challenge, beating 154 other teams.

  9. 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.

  10. Student Achievements An information systems student placed first and another student placed third in the school’s first appearance at the National Collegiate Conference. An MPA student was the first in Utah to win an American College of Healthcare Executives Scholarship.

  11. Student Achievements Marriott School MBA team wins first place in U of Denver National Ethics Case competition—with 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.

  12. Student Achievements Undergraduate accounting students took first place and the graduates took second place at the Deloitte Tax Case Study Competition. This is the seventh time in the twelve-year history of the competition that both BYU teams placed among the top three—an unparalleled accomplishment.

  13. 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

  14. 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”

  15. 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

  16. The Crisis in ConfidenceWhy the Public is Losing Faith in American Business and What We Can Do About ItPart 1: The Problems* *Much of this material from Associate Dean W. Steve Albrecht

  17. What’s Gone On? • Misstated financial statements: Qwest, Enron*, Global Crossing, WorldCom, Xerox, etc. • Executive loans and corporate looting: John Rigas (Adelphia), Dennis Kozlowski (Tyco--$170 million—the $15,000 umbrella stand), Bernie Ebbers (WorldCom), Stephen Hilbert ($175M from Conseco) • Insider trading scandals: Martha Stewart, Sam Waksal, etc. • IPO favoritism, incl. spinning and laddering: Bernie Ebbers, etc. *For the fascinating story of the fall of Enron, read Pipe Dreams by Bryce or The Smartest Guys in the Room by McLean & Elkind.

  18. What’s Gone On? • Excessive CEO retirement perks: Delta, PepsiCo, AOL Time Warner, Ford, GE, IBM (consulting contracts, use of corporate planes, executive apartments, maids, etc.) • Exorbitant stock options for executives • Loans for trading fees and other quid pro quo transactions (Citibank, Chase, etc.) • Bankruptcies and excessive debt • Massive fraud by employees • Mutual fund scandals (1/6 of all funds may have been involved)—Note: Marriott School faculty member, Bernell K. Stone is working at SEC on this issue.

  19. Example: Making Earnings at Enron • “Mark-to-market”—book future profits today and don’t worry about delivery • “Revisit” deals to generate higher profits • Delay losses (even hide them in SPE’s) • Mark up value of non-traded assets “They knew that they stretched and twisted the rules to Enron’s advantage but they saw their actions as creative not misleading.” – from The Smartest Guys in the Room

  20. Example: Personal Loans at Conseco • Stephen C. Hilbert, chairman and CEO • 33-acre estate in Indiana with 25,500 sq. ft. mansion • 18,500 sq. ft. vacation home in St. Martin • Race horses, etc., etc. • Financed by $175M in loans from company • Now owes over $200M • Claims that loans are forgiven when ownership changed hands—has transferred >$100M in assets to his sixth wife • He built up $8.2B in debt at Conseco

  21. Consequences of These Problems • Lost confidence in capital markets • Lawsuits—one company has over 3,000 • Bankruptcies • Lost reputation and bad press • Longer and more expensive audits, special inquiries • Fines & investigations • Damaged employees & reputations • Lost retirement and pension funds • Directors with personal liability, forced resignations • Losses from fraud

  22. The Cost of Bad Press

  23. Largest Bankruptcy Filings

  24. Some Specifics • Several indictments and guilty pleas • WorldCom • Scott Sullivan (CFO): Pleaded guilty • David Myers (Controller): Pleaded guilty • Bernie Ebbers (CEO): Indicted in March, also indicted in Oklahoma • HealthSouth • William T. Owens (CFO): Pleaded guilty, faces 30 years and $5.5 million in fines • 14 other former executives pled guilty • 4 former CFOs agreed to plea bargain • Richard Scrushy (Chairman and CEO): No federal charges; SEC complaint—$1.4B accounting fraud

  25. 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 bargain—1 year prison • Ben Glisan (Controller) and 5 others: Guilty pleas • 17 other individuals indicted • Not indicted: • Kenneth Lay (Chairman and CEO) • Jeffrey Skilling (CEO and President)

  26. 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

  27. 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

  28. Mutual Fund Scandal • Putnam, Bank of America, Bank One, Janus Capital Group, Invesco, Strong Financial Corp., Charles Schwab, etc. and hedge fund Canary Capital Partners, etc. • Illegal trading occurs in at least one out of every six mutual fund families and costs investors about $400 M per year • “If you discovered your favorite race-track allowed big gamblers to place their bets after the horses crossed the finish line, you would probably take your wagers elsewhere or give up gambling altogether—that is what has happened with many mutual funds (funds are valued at 4:00 p.m. daily but large customers were allowed to trade much later and have their trades time stamped with earlier times.”(Stanford Professor—Eric Zitzewitz)

  29. 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 Co’s • Phelps Dodge • Interpublic • Parmalat • FBI currently has 30 corporate fraud investigations in which losses to investors exceeded $100 million

  30. Fraud Triangle Pressure Opportunity Rationalization

  31. Why So Many Financial Statement Frauds Recently? • Opportunity • Booming economy hid many problems • Nature of accounting—rule-based • Auditor conflict-of-interest—non-audit services vs. audit itself • Pressure • Misplaced executive incentives • Unachievable Wall Street expectations—rewards for short-term behavior • Large amounts of debt • Rationalization • Moral decay in society—weakened family/church structures • Failures in management education • A culture of greed by executives, bankers, and investors "The Perfect Storm"

  32. Greed: How to Value a Dot.com • Take their loss for the year • Multiply the result by negative 1 to make it positive • Multiply that number by at least 100 • If stock price is less than the result…buy • If not, buy anyway

  33. Executive Incentives • Remember T. Boone Pickens? • Complained about Newmont Mining executives • Now executives have significant stock options • Stock prices are tied to meeting Wall Street’s earnings forecasts • Focus is on short-term (quarterly) performance only • Stock price heavily punished for not meeting forecasts • Stock options may far exceed salary-based compensation • Bernie Ebbers (WorldCom) • 1997 Compensation--$935,000 per year • 1997 Stock options—1.2 million shares at $26 per share—stock went to $64.50 ($46.2 million in profit)

  34. Pressure: Meeting WS Projections Firm1st Qtr 2nd Qtr3rd 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)

  35. 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

  36. How People Got Involved • The CFO instructed the chief accountant to increase earnings by $105 million. The chief accountant was skeptical about the purpose of these instructions but he did not challenge them. The mechanics were left to the chief accountant to carry out. The chief accountant created a spreadsheet containing seven pages of improper journal entries, 105 in total, that he determined were necessary to carry out the CFO’s instructions. Over 20 people were involved in making or instructing to make similar entries. 250 companies announced financial restatements in 2002

  37. High Amounts of Debt • During 2000, Enron’s derivates-related liabilities increased from $1.8 billion to $10.5 billion • Enron hid billions in off-balance sheet (SPE) debt • Enron’s on-balance sheet debt was huge • WorldCom had nearly $100 billion in debt • Not only did Bernie Ebbers borrow $100 billion for WorldCom but he also racked up over $1.3 billion in personal debt while CEO of WorldCom • Every company that committed financial statement fraud had huge amounts of debt 186 public companies with $368 billion in debt filed for bankruptcy in 2002—includes WorldCom, Conseco, Global Crossing, United Airlines

  38. Auditors—the CPAs • If auditors aren’t the watchdogs, then who is? • Became greedy--$500,000 per year per partner compensation wasn’t enough; saw everyone else getting rich (Andersen’s partners were jealous of Accenture partner’s income) • Audit became a loss leader • Easier to sell lucrative consulting services from the inside • Became largest consulting firms in the U.S. very quickly (Andersen Consulting grew to compete with Accenture) • A few auditors got too close to their clients • Entire industry, especially Arthur Andersen, was punished for actions of a few

  39. Problems in Management Education • AACSB moved to “mission based” standards—ethics (and other subjects) no longer required • Result—fewer and fewer ethics classes • Other subjects crowd the schedule • Ethics may be seen as unconnected with business • Ethics began to be “integrated” into the curriculum • Excesses of dot-com economy impacted business schools

  40. Part 2: Possible Solutions

  41. Areas of Change • Improve auditing • Improve management • Improve boards of directors • Improve business school education

  42. Restore Public Confidence 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

  43. 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

  44. Focus of the New Guidelines and Laws • The Auditors • Top Management • Boards of Directors • Investment Banks

  45. 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

  46. II. Top Management: Sarbanes-Oxley • Requires management “certification” of appropriateness of financial statements (penalty < $5 M, 20 years prison) • Prohibits officers or directors from fraudulently influencing or misleading an auditor • Requires an officer code of ethics • Requires forfeiture of bonuses after restatements or if fraud is discovered • Prohibits loans to executive officers and directors • Includes officer and director blackout periods on trading

  47. 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 company’s auditor • Requires a procedure to protect “whistleblowers” • Must have authority to engage outside counsel if needed • Must disclose whether at least one member of audit committee is a “financial expert” • Receives reports from auditors re alternative treatments of accounting information and all material communications between management and auditor

  48. 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

  49. 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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