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Solved by verified expert:Review the attached case study and also use information from attached presentation on Chapter 18 (Corporate Governance for MBAA605)Answer all parts o this multi-pronged Assignment: Question: Identify and Critically evaluate the case study issue(s) from the perspective of Business, Government, Society, Infividually; Critically evaluate and discuss how the issues are inter-related.
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Chapter 18
Corporate
Governance
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
What is Corporate Governance?
o Corporate governance: The exercise of authority
over the members of a corporate community based on
formal structures, rules, and processes
o The authority is based on a body of rules defining the
rights and duties of shareholders, boards of directors,
and managers
18-2
Figure 18.2 – The Power Triangle
18-3
The Corporate Charter
o Corporate charter: A document issued by a state
government to create a corporation
o Corporate charters specify the purpose of the
corporation and basic rights and duties of
stockholders, directors, and officers
o Fiduciary responsibility: The legal duty of a
representative to manage property in the interest of
the owner
18-4
The Corporate Charter
o Charters include provisions about numbers of shares
and classes of stock authorized, dividends, annual
shareholder meetings, the size of boards, and
procedures for removing directors
o Bylaws: Rules of corporate governance adopted by
corporations
18-5
The Corporate Charter
o States compete to attract the incorporation fees and
tax revenues of corporations
o For more than a century tiny Delaware has been the
victor in this competition
18-6
Figure 18.3 – Flow of Authority in
Corporate Governance
18-7
Federal Regulation of Governance
o Corporate governance laws have been primarily the
province of states, however, the Supreme Court has
said that the Constitution empowers Congress to
regulate corporations if it chooses
o Federal intervention generally comes in reaction to
conspicuous failures of governance and imposes
mandatory rules and restrictions
18-8
Enron Corp. Example
o Enron enjoyed admiration and respect among
investors, managers of other companies, and the
public
o Government regulators uncovered multiple instances
of :
o Juggling accounting records to inflate sales and profits
o Hiding debt, concealing excessive CEO perks and
compensation in vague footnotes
18-9
Enron Corp. Example
o Ignoring standard accounting and financial practices
o Shredding documents to destroy incriminating records
18-10
Enron Corp. Example
o The board’s Special Investigative Committee did not
place sole blame for Enron’s failure on its directors,
but it accused the board of failing to exercise it
oversight responsibility
o A fundamental cause of the catastrophe was the
culture of the company
o In 2006 a federal jury found Chairman of the Board
Lay and CEO Skilling guilty of conspiracy and fraud
18-11
The Sarbanes-Oxley Act
o It holds management responsible for accurate
financial reports and strengthens the power and
responsibility of board audit committees
o A few of the act’s provisions are:
o Creates a five-member oversight board that has
authority over practices of accounting firms
o Prescribes rules to improve auditing
18-12
The Sarbanes-Oxley Act
o Requires the CEO and CFO to sign and certify the
accuracy of annual and quarterly financial statements
o Establishes heavy criminal penalties for violating its
provisions
18-13
Lehman Brothers Example
o Lehman Brothers Holdings began in 1850 as a cotton
broker and grew into the nation’s fourth-largest
investment bank
o Since 1994 it had been run by a CEO named Richard
S. Fuld, Jr. Intense, intimidating, and impatient
o In 2006, Fuld decided that the way to keep share
prices rising was to make Lehman grow faster
18-14
Lehman Brothers Example
o To fund its operations, Lehman depended on
borrowing tens of billions of dollars each day in
financial markets
o Lehman’s bankruptcy caused panic in the markets
o During the year preceding bankruptcy the board met
eight times and its members earned between
$325,038 and $397,538
o Lehman’s management made serious errors of
judgment
18-15
The Dodd-Frank Act
o A statute to reform financial regulation and prevent a
recurrence of the 2007–2008 financial crisis
o Portions repealed in 2018 – what is the effect on
financial organizations?
o Any unintended consequences?
18-16
Boards of Directors
o Directors in large corporations are chosen after being
nominated by the board and approved by a majority
vote of shareholders
o Directors who are employees of the company are
called inside directors; those who are not employed
by the company are outside directors
o Boards are divided into committees
18-17
Duties of Directors
o Laws impose two lofty duties on directors:
o Represent the interests of stockholders
o Exercise due diligence in supervising management
o Directors do not make day-to-day decisions
o Boards exercise a very broad oversight
o Compensation varies substantially among industries
18-18
Duties of Directors
o Some specific board functions:
o Approve the issuance of securities and the voting
rights of their holders
o Review and approve the corporation’s goals and
strategies
o Select the CEO, evaluate his or her performance, and
remove that person if necessary
o Give advice and counsel to management
18-19
Duties of Directors
o Create governance policies for the firm, including
compensation policies
o Evaluate the performance of individual directors,
board committees, and the board as a whole
o Nominate candidates for election as directors
o Exercise oversight of ethics and compliance programs
18-20
Board Composition
o The average board has 11 members and this has not
changed for many years
o Most state incorporation laws require a minimum of
three, but companies typically have between 7 and 15
o Directors are elected by shareholders, usually for
terms of one year
o Inside directors
o Outside directors
o Independent directors
18-21
Board Dynamics
o The average board meets eight times a year, although
many meet monthly
o Agendas include committee reports, mandatory
governance matters, and presentations by company
executives
o The chairman of the board presides over meetings
18-22
Board Dynamics
o Advocates of greater board independence believe that
a better solution for strengthening the board is to split
the roles of chairman and CEO
o Management opposes separation
o One fear is compromising clarity in the chain of
command
18-23
Executive Compensation
o A compensation committee of the board of directors
sets the pay and benefits of top executives
o Elements of compensation include a combination of
the following
o Base salary
o Annual cash incentives
18-24
Executive Compensation
o Long-term stock-based incentives
o Stock options
o Performance shares
o Restricted stock
o Retirement plans
o Perquisites
18-25
Problems with CEO Compensation
o The size of extraordinary payouts
o The compensation packages given to some newly
hired CEOs
o The golden handshakes received by some CEOs
when they leave under fire
o An alleged bias in favor of boosting CEO
compensation due to the composition of the
compensation committees
18-26
Problems with CEO Compensation
o Nonconformance with the interests of shareholders
o The number and misuse of stock option grants
o The spread between executive pay and that of the
average worker
18-27
Concluding Observations
o Despite well-defined legal bonds between share
owners, boards of directors, and management, there
are many tensions between them
o Scandals revealed lax oversight of financial strategies
and reporting by many boards
18-28
Concluding Observations
o Many shareholders believe that boards have allowed
management compensation to exceed reason
o The outlook is for more pressures and regulations that
tighten board oversight
18-29
Mercy MBAA 605 – SUMMER 2019
Business, Government, and Society
BUSINESS CASE PAPERS:
 It is expected students thoroughly read the case study, textbook chapters, and supplement materials to
understand the topic and identify the issues so as to qualitatively and substantively critically evaluate
how the issues affect and are affected by the inter-relationship of business, government and society.
 As you are Master’s students, write accordingly paying attention to grammar, spelling, syntax, and tone.
Thoroughly proofreading your paper prior to submission is strongly encouraged.
Business Case Papers WILL:
 Be a critical evaluation of the issues and NOT personal opinion.
 Include citations and references of at least 3 trusted sources other than the case study to support
assertions being made as part of the critical evaluation process.
 Answer the multi-pronged Assignment Question specified in the syllabus.
 Comport with all current APA formatting guidelines including, but not limited to references; in-text
citations; cover page; pagination; double-spacing; 1-inch margins; Times New Roman 12-point font.
 Be independently authored and submitted as a Word document via Blackboard.
 Be a Minimum of 3 full pages, Maximum of 4 pages of content.
*this does NOT include the cover page, an abstract if written, or the reference section
**Failure to submit 3 FULL pages of content will adversely impact your grade as follows:
(1 page=33%, 2 pages=66%, 3 pages=100% of content).
Grading Rubric for Business Case Papers
Concise Introduction
Summary of Case
Critical Evaluation of issues from the perspective of Business
Critical Evaluation of issues from the perspective of Government
Critical Evaluation of issues from the perspective of Society
Critical Evaluation of how issues relate with each other
Concise Conclusion
Grammar, Spelling, Syntax, Tone and Writing Style
APA Referencing and Citations
Total points per Business Case Paper
POINTS
10
20
10
10
10
10
10
10
10
100
Business Case Papers will comprise a maximum of 30% of the final grade.
Cases can be purchased at Harvard Business Publishing accessed by clicking this link:
https://hbsp.harvard.edu/import/629182
9
For the exclusive use of S. Campbell, 2019.
NA0180
The Midnight Journal Entry
Anne T. Lawrence, San José State University
O
n an overcast afternoon in Portland, Oregon, on Friday, March 28, 2003,
Richard Okumoto intently studied a set of hard-copy accounting documents
called “adjusting journal entries” spread out on his desk. He had been appointed chief financial officer (CFO) of Electro Scientific Industries, Inc. (ESI), a
multi-million-dollar equipment manufacturer, just a few weeks earlier. Okumoto was
in the midst of closing the company’s books for the third quarter of fiscal year 2003,
which ended February 28. An experienced executive who had served as CFO for several other technology firms, Okumoto was familiar with the task, which normally
would be routine. But this time, he felt that something was seriously amiss. When
reviewing the company’s recent results, he had noticed a sharp dip in accrued liabilities
between the two quarters ending May 31 (the last quarter of the 2002 fiscal year) and
August 31 (the first quarter of the current fiscal year). Now, looking at the detailed
journal entries his staff had provided, he noticed that several significant accounting
entries had been made around midnight on September 12, 2002. The entries made
that September evening had significantly changed the company’s results for the quarter
ending August 31, 2002, a few days before they were reported to the Securities and
Exchange Commission. He later recalled:
The fact that the time stamps [on the journal entries] were midnight through one
o’clock in the morning made me believe they were having difficulties closing the quarter. Not just because of accounting difficulties, but because they were having difficulties
finding the right answers. My initial reaction was, even given a difficult quarterly close,
if the team was working that late at night, that wasn’t typical.
From the pass codes required by the accounting software, Okumoto could see who had
made the entries. They included James Dooley, then the company’s acting chief operating officer and now the CEO, the corporate controller, and several senior members of
the finance team.
One midnight journal entry in particular drew the new CFO’s attention. The
late-night team had wiped out an accrued liability of $977,000 associated with the
anticipated cost of retirement and severance benefits to company employees in Japan,
Korea, and Taiwan. That entry, and several smaller ones, all of which were favorable to
Copyright © 2012 by the Case Research Journal and Anne T. Lawrence. The author developed this case to
provide a basis for class discussion rather than to illustrate either the effective or ineffective handling of
a managerial situation. An earlier version of this case was presented at NACRA’s annual meeting in San
Antonio, Texas, October 2011. The author gratefully acknowledges the assistance of Richard Okumoto
and the thoughtful comments of the editor, Deborah Ettington, and three anonymous reviewers.
The Midnight Journal Entry
137
This document is authorized for use only by Sade Campbell in MBAA605 – Summer 2019-1 taught by DANIEL CUTTER, Mercy College from May 2019 to Nov 2019.
For the exclusive use of S. Campbell, 2019.
net income, had the cumulative effect of permitting the company to report earnings
of $0.01 per share for the quarter ending August 31, 2002, rather than a loss. When
he realized that, Okumoto recalled, he felt “a sinking feeling in my gut.” He asked
himself, “What happened here? At that time of night? All of the changes in a single
direction? What’s going on?” He was sure something was not right.
Richard Okumoto
Born in 1952, Richard Okumoto was raised with his four siblings in a JapaneseAmerican family in a low-income, African-American neighborhood that bordered the
Pepper Street Projects of Pasadena, California. He explained how his parents’ experiences had shaped their outlook:
My parents grew up during the depression years. Dad farmed with relatives, and Mom
grew up tending 3,000 chickens on a three-acre ranch in Gardena, California. Shortly
after the Pearl Harbor attack by the Japanese, my parents were relocated under Executive Order 9066 [under which persons of Japanese ancestry on the West Coast were
sent to relocation camps during World War II]. They met and married in a relocation
camp. During their incarceration, their families could not make their payments. Dad
and his relatives lost their land, and Mom’s parents lost their chicken ranch. After those
experiences, my father was committed to having no debt. He built our family home in
1955, with the idea of paying off the loan in eight years.
In 1962, Okumoto’s father, who worked as a gardener, landscaper, and salesman of
Japanese mutual funds, was disabled in a serious auto accident. Fortunately, by then,
he had almost paid off the loan on their home, so the family was able to survive financially. After the accident, Okumoto’s mother took a job cleaning homes to help support her five children. Okumoto described his relationship with his mother:
She and I had an especially close bond. Shortly before my dad’s accident, both her parents had died. I was the one who supported her through a very difficult year. As a result,
she always treated me differently from the other kids—almost like an adult.
The Okumoto family’s financial situation after the accident was difficult. Okumoto
had vivid memories of how they coped:
Money was very short. We had to account for every penny. Every week, my mother
wrote down in a leather-bound journal everything she earned and everything we spent
in the household, down to the penny. Every week, from the time I was ten years old,
she went through that with me. We lived on a cash basis. There was no credit card, no
second mortgage. In that situation, budgeting became extremely important. Her comment to me was, “You can’t complain [about what you don’t have] unless you understand what’s happening.” Those were her ground rules.
He added this comment about his mother’s values:
The ethics of doing the right thing become very important, because that’s really all you
have. [My mother] instilled in me at an early age, regardless of what else you do, always take
the high road, always do the right thing. That has influenced me throughout my career.
After high school, Okumoto attended San José State University, where he completed an undergraduate degree in accounting in 1974 and attended the MBA program
from 1975 to 1978. He soon embarked on a highly successful career in finance. Over
the next two-and-a-half decades, he held increasingly responsible roles at a number of
high-technology companies in the Silicon Valley, including Fairchild Semiconductor,
138
Case Research Journal • Volume 32 • Issue 2 • Spring 2012
This document is authorized for use only by Sade Campbell in MBAA605 – Summer 2019-1 taught by DANIEL CUTTER, Mercy College from May 2019 to Nov 2019.
For the exclusive use of S. Campbell, 2019.
Novellus Systems, Measurex, Credence Systems, and Photon Dynamics. Okumoto
admired a number of managers he had worked for, who had set high professional
and ethical standards for him and his co-workers. He felt fortunate to have had three
exceptional mentors: Woody Spedden, the CEO of Credence Systems; Jim Hefferman, his boss at Fairchild and later at Measurex; and Don Waite, the CFO at Measurex who later took over that position at Seagate Technologies. “All three individuals
upheld the highest integrity,” Okumoto recalled. “Aside from the technical training I
received from them, I got a strong ethical grounding. They would always tell me to ask
myself—what are your obligations to others?”
Electro Scientific Industries, Inc.
Electro Scientific Industries, Inc., the company that Okumoto joined as CFO in early
2003, was the second-largest technology company in Oregon, trailing only Tektronix
in size. Based in Portland, the company was founded in 1944 as Brown Engineering to
make test and measurement equipment. As technology evolved, so did the company’s
products. In the 1960s, the firm—by then called ESI—moved into lasers, and later
developed applications of laser technology for the emerging semiconductor industry.
ESI went public on the NASDAQ exchange in 1983.
In 2003, ESI’s core business was providing precision production equipment to
electronics firms. The company manufactured equipment that was used in the production of a wide range of electronics products, such as computers, cellular phones, home
entertainment systems, automotive electronics, electronic games, and personal digital
devices. Its products included advanced laser systems, test equipment, and packaging
systems, among others. The company’s customers included many leading electronics
firms, including AMD, Ericsson, IBM, Samsung, Hitachi, Flextronics, Honeywell,
and Lucent. Seventy percent of ESI’s sales were outside the United States, mainly
in Asia and Europe. The company owned and operated manufacturing facilities in
Portland and Klamath Falls, Oregon, and in Escondido, California, and operated sales
offices in many countries. In 2002, it employed 875 people and reported sales revenue
of $167 million (down from $472 million the prior year).
Like many firms in the electronics industry, ESI was badly battered by the economic downturn that began in 2001. After achieving record sales and income in the
fiscal year ending May 31, 2001, the company’s financial results declined precipitously
in FY 2002, as shown in Exhibit A. Sales and profits had continued to decline in the
first half of FY 2003.
Exhibit A: Electro Scientific Industries,
Selected Sales and Income Data*, 1998–2002
1998
1999
2000
2001
2002
Net sales
252,134
197,118
299,419
471,853
166,545
Net income (loss)
22,347
7,528
40,860
99,933
(15,961)
Net income (loss) per share
0.89
0.29
1.55
3.71
(0.58)
*Data refer to fiscal years ending May 31. All data are given in thousands of dollars, except per share
data.
Source: ESI 2002 Annual Report.
The Midnight Journal Entry
139
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