Ethics in Corporate Finance: The Sarbanes-Oxley Act, Corporate Governance, and Leadership

1. Ethics in Corporate Finance, The Sarbanes-Oxley Act, Corporate Governance, and LeadershipPresented at National Taiwan UniversityDecember 30, 2005 Jason Lin, Ph.D. Professor of Business Administration Truman State University

2. 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

3. 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

4. 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

5. 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

6. Top 5 Types of Unethical Behavior* • Cut corners on quality control • Covered up incidents • Abused or lied about sick days • Lied to or deceived customers • 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. CEO & Mgmt Transparent Updates & strategic financial direction reports Company capital & CEO oversight weak controls, little influence ShareholdersBoard Minimal information flow, no individual accountability Balance of Power in Corporate Governance Jason Lin, Ph.D. Professor of Business Administration Truman State University

19. 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

20. 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

21. 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

22. Layers of Responsibility for Ethics Jason Lin, Ph.D. Professor of Business Administration Truman State University

23. Ethical Evolution Jason Lin, Ph.D. Professor of Business Administration Truman State University

24. ? Thank You for Your Attention Jason Lin, Ph.D. Professor of Business Administration Truman State University