You are here

Different Approaches to Corporate Governance

15 January, 2016 - 09:10
Available under Creative Commons-ShareAlike 4.0 International License. Download for free at http://cnx.org/contents/05c97be4-3ad0-47f2-b5a7-a75d0ad90ab7@3.72

This content is available online here.

  • The first link refers to a news story on Dunn's resignation from the Hewlett-Packard board.
  • It is taken from PBS's Online NewsHour in a report delivered by Margaret Warner on September 22, 2006.
  • The second link provides background information on the Hughes Aircraft case profiled just below.

CORPORATE PROFILES:

Arthur Andersen

Once a highly respected company, Arthur Andersen no longer exists having gone bankrupt in the wake of the Enron disaster. Arthur Andersen provided Enron with consulting and accounting services. The consulting division was more successful but the accounting division, with its long tradition of outstanding ethical service, was the corporation's backbone. Arthur Andersen signed off on Enron's use of mark-to-market accounting which allowed Enron to project optimistic earnings from their deals and then report these as actual profits years before they would materialize (if at all). They also signed off on Enron's deceptive use of special purpose entities (SPE) to hide debt by shifting it from one fictional company to another. With Arthur Andersen's blessing, Enron created the illusion of a profitable company to keep stock value high. When investors finally saw through the illusion, stock prices plummeted. To hide their complicity, Arthur Andersen shredded incriminating documents. For federal prosecutors this was the last straw. The Justice Department indicted the once proud accounting firm convinced that this and previous ethical lapses (Sunbeam and Waste

Management) showed a pattern of unabated wrongdoing. Arthur Andersen was conflicted of obstructing justice on June 15, 2002 and closed its doors shortly after.

McLean and Elkind provided background for this profile on Arthur Andersen. See below for complete reference.

AA Timeline (Taken from Smartest Guys in the Room)

  • 1913— Founded by Arthur Andersen: think straight, talk straight
  • Stood up to Railroad company in early years. When asked to change accounting standards, Andersen said, There is not enough money in the city of Chicago [to make AA give into client demands]
  • 1947-1963—Leonard Spacek became president of AA succeeding Arthur Andersen.
  • Spacek helped motivate the formation of the Financial Accounting Standards Board. AA also served as conscience of accounting profession criticizing the profession and the SEC (Securities and Exchange Commission) for failing to square its so-called principles with its professional responsibility to the public.
  • 1963-1989—Slow erosion of standards and development of competition between accounting and consulting divisions. (Consulting division was developed to take advantage of a profitable direction in the financial industry.)
  • 1989—Consultants achieve relative autonomy as separate business unit. (McLean: 144)
  • 1997—Consultants break from firm.
  • 1988-1991—Arthur Andersen receives 54 million in fees from Enron
  • 2000—Enron pays AA 52 million. The lion share of this was for consulting fees.
  • June 15, 2002—AA found guilty of obstruction of justice. Today's verdict is wrong....The reality here is that this verdict represents only a technical confliction. (McLean: 406)

Hughes Aircraft

Howard Hughes founded this company at the beginning of the twentieth century. Hughes became a regular supplier of military hardware to the U.S. military. In the 1980's this included parts for surface to air misiles and fighter aircraft. One division specialized in computer chips designed to convert analogue information to digital for use in guidance systems and decision support systems. For example, these chips interacted with radar to help pilots of fighter aircraft avoid enemy missiles and also served as an essential component for missile guidance systems, the so-called smart bombs. Hughes had won the competitive bids for these highly profitable military projects but they had also committed themselves to tight delivery schedules with inflexible deadlines. And on top of this, the U.S. Airforce demanded that these computer chips and the systems that integrated them be rigorously tested to show that they could withstand the severe environmental stresses of battle. Hughes soon fell behind on the delivery of these computer chips causing a chain reaction of other delays both within the company and between the company and other links in the military supply chain. The environmental tests carried out by quality control under the supervision of Frank Saia had worked hard to complete the time-consuming tests and still remain on schedule with deliveries; hot parts (parts in high demand) were pulled to the front of the testing line to keep things running but soon even this wasn't enough to prevent delays and customer complaints. Giving way to these pressures, some Hughes supervisors pushed employees to pass chips without testing and even to pass chips that had failed tests. Margaret Gooderal and Ruth Ibarra resigned from the company and blew the whistle on these and other ethical failings that had become rampant in Hughes. So the corporate social responsibility question becomes how to change this culture of dishonesty and restore corporate integrity to this once innovative and leading company. (Background information on Hughes can be found ).

Patricia Dunn v. Tom Perkins on Corporate Governance

When Patricia Dunn became a "non-executive" chairman of Hewlett-Packard's board on February 7, 2005, she brought with her an outstanding reputation in corporate governance. Her top priorities were to oversee the election of a new CEO after the firing of Carly Fiorina whose management of the recent acquisition of Compaq had lost her the HP board's support. Dunn also was determined to stop leaks to the press from high-level HP officials. She viewed the latter task as a fundament component of the post-Enron corporate governance approach she felt was needed as Hewlett-Packard moved into the 21st century. But her formal take on CG was at odds with powerful board member and successful venture capitalist, Tom Perkins. In his opinion, too strict an approach to CG stood in the way of HP culture and took focus away from competing with Dell and IBM as well as staying on the cutting edge in the development of new technology. As the leaks continued, Dunn's investigation into their source (most likely a discontented HP board member) became more active and rigorous. And the disagreements between her and board member Perkins deepened; their incompatible views on CG (and other disagreements) led to Perkins's resignation from the HP board. Things became critical when Perkins received a letter from A.T. and T. informing him that an account had been established in his name (but without his knowledge or consent) using the last 4 digits of his social security number and his private phone number. During the HP-led investigation into the press leaks, a private investigation firm used an illegal technique known as "pretexting" to obtain confidential information about HP board members and news reporters including private phone and social security numbers. Perkins reported this to the SEC, and Patricia Dunn, as chairman and de facto head of the leak investigation, was indicted on four criminal charges including identity theft.

For a complete case study see Stewart (complete reference below) and Anne Lawrence and James Weber, Business and Society: Stakeholders, Ethics, Public Policy, 13th edition (McGraw-Hill): 501-513.

Dunn focused on incompatible views of corporate governance as one of the causes of the rift that had developed between her and Perkins's: Tom's model of governance may be appropriate in the world of venture capital, but it is outmoded and inappropriate in the world of public company governance. (Stewart, 165) She also made clear her strong views on board members leaking confidential information shared during board meetings to the press: The most fundamental duties of a director-the duties of deliberation and candor-rely entirely upon the absolute trust that each director must have in one another's confidentiality. This is true for trivial as well as important matters, because even trivial information that finds its way from the boardroom to the press corrodes trust among directors. It is even more critical when discussions can affect stock prices....Leaking "good" information is as unacceptable as leaking "bad" information-no one can foretell how such information may advantage or disadvantage one investor relative to another. (Stewart, 156)

Questions

How can successful corporate governance programs be integrated into companies with free-wheeling, innovative cultures without dampening creative and imaginative initiatives? How does one make sense of the fundamental irony of this case, that a conscientious pursuit of corporate governance (attacking violations of board confidentiality) can turn into violation of corporate governance (violation of the privacy and persons of innocent board members)?

Word Version of this Template

Please view or download it at EAC TK STD TEMPLATE.doc

This is an example of an embedded link. (Go to "Files" tab to delete this file and replace it with your own files.)