¡¡Since he joined Singapore-based Keppel Corporation 27 years ago, Soon Hoe Toe has helped to guide its rapid growth from a local shipyard to a global multi-billion-dollar diversified company. Toe, now Group Finance Director for the corporation, has helped develop new businesses and divest others, such as the company¡¯s recent sale of its Keppel Capital banking business.
¡¡The balancing of rapid growth around the world and profitable operations requires both a keen sense of finance and a long-term perspective. It is not a focus on short-term hits but a commitment to building a business that will last some time. It also requires a commitment to transformation. Our organization is about change, he said.
¡¡Teo completed the Wharton Fellows program, which focuses on helping senior managers lead organizational transformations, in 2001. The Wharton course enabled me to link up to what is current and to prepare for trends in the future, giving me an updated approach to macro scenario planning.
¡¡What has changed since he started his career? The changes that have taken place can be summed up by these two words ¡ª global and speed. Things move almost instantaneously, and your job in finance has to be fairly well linked up to the global scene, said Teo, whose company operates businesses in Asia, Europe, North America, and South America.
¡¡External shocks such as the Asian financial crisis in 1997 also have tested the strength of his organization ¡ª and made it more resilient for the future. You always have to be prepared, even though there is no way to specify that something will happen like the 1997 crisis or the 9/11 crisis, he said. An organization that is well prepared in terms of a strong financial position will be better equipped to face such crises. Those who survived were not only financially prepared but also had the intent to carry out changes and continuous restructuring after the crisis.
¡¡Keppel¡¯s own commitment to transformation has helped refine its capabilities for change. It is a metamorphosis, Teo said. You change, you become stronger, and you are better able to absorb more shocks. You have to continue to focus on the areas where you can grow.

The Importance of Integrity

¡¡Understanding the business is crucial to effective financial management. We have to focus on areas where we can scale and grow out of core competencies, he said. You have to be involved in those businesses and understand what they are all about. If you don¡¯t understand, you won¡¯t be able to pick up the intricacies of the business. When you understand the business, coupled with a keen sense of finance, then you will be able to zero in on the right spots ¡ª those areas that are likely to throw up trouble ¡ª you can detect them as early as possible.
¡¡In a fast-moving environment, it is not merely sound financial systems that enhance the future of the company. It is the people who are hired. At the end of the day, I would sum it up in one word ¡ª integrity, Teo said. In any business, you need to have integrity of systems, financial statements that really capture the integrity of the company and the integrity of the people. You can have a business with the best checks and controls in the world, but if you are unable to identify people with integrity to manage it, you are not going to be able to build a very valuable asset for the future.
¡¡For someone who has been with the organization for a long time, Teo is very focused on the future. Our current challenge is to get the company even more equipped with the right people to carry on into the future. If you have people with the same keen sense of business building and finance, then the organization will be endowed with assets that can propel future growth. The environment is getting tougher, the marketplace is becoming more and more globalized, and technology is changing so quickly. That will require people who can adapt to these changes quickly.

The Ethics of Leadership

¡¡Like most companies, Enron has a code of ethics, but its code was no more than window dressing. The boilerplate code of ethics that most corporations have doesn¡¯t mean anything if the people at the very top of the organization reward the wrong behavior and set the wrong examples, said Thomas Donaldson, academic director of the Executive Development Program, former director of the Wharton Ethics Program, and a leading scholar in the field of business ethics.
¡¡Enron¡¯s board of directors, by deliberately voting to set aside its code of ethics in order to approve some questionable partnerships, definitely set some wrong examples, he said. In all my years of teaching ethics and following other corporate scandals, I¡¯ve never heard of a board of directors doing anything like that, Donaldson said. Still, as a professor of ethics, Donaldson admits that Enron¡¯s dazzling collection of sins is a useful teaching tool.
¡¡For one thing, no one doubts now that ethics matter ¡ª especially in terms of financial performance. I hear a lot of executives sharing their concerns about the appearance of their reports. While none of these companies are Enrons, in the past there may have been a tendency to puff a little bit. Now people are reluctant to do anything that might appear even remotely questionable, he said.

Creating Collaborative Cultures

¡¡At the heart of the Enron debacle, Donaldson says, is the corporate culture. Enron¡¯s culture celebrated skating close to the edge and winning big while taking big risks. Speaking up and raising red flags was not welcome, he said. But all too often, when you peel away the layers of most corporate Watergates, to your horror you find that there are lots of people involved ¡ª a lot of people who look just like you and me, Donaldson said. The heavy pressure from the top to make the numbers look good needs to change to create a more tolerant culture. A lot of our class discussions post-Enron have focused on shaping and maintaining a healthy corporate culture.
¡¡Ultimately, a company¡¯s culture is defined by its leadership. In the past, leadership had a more militaristic tone: you used common values and assumptions to get people to do what you wanted them to do. In today¡¯s global marketplace, basing leadership on such commonalities is often no longer viable. Managers need to focus on building collaborative teamwork across diverse organizations.
¡¡Collaborative teamwork is at the heart of the Social Systems Workshop, an experiential learning component that Professor Kenwyn Smith developed exclusively for use in Wharton¡¯s EDP.
¡¡Now almost everything is done using a co-production model, said Smith, associate professor of organizational behavior at the School of social work of the University of Pennsylvania. Companies are increasingly relying on partnerships with other organizations. Leadership has become more about building and maintaining relationships that are more lateral and less hierarchical than in the past. Running a corporation is now like running a community. What you need to do is organize the multiple skill sets of diverse employees so that they all work collaboratively for a shared purpose.

How To Recruit the New Generation

¡¡How can companies make jobs more attractive to this new generation of workers? Cappelli said organizations need to:
¡¡¡¤ Institute effective performance management. In the past, first-level managers were promoted strictly on seniority, and companies did not pay enough attention to how they actually worked with employees. As a consequence, many people reported being unhappy with how they were managed in their last job. This is changing as companies realize that employees increasingly view their jobs as investments and will not tolerate a position in which they are not constantly learning and moving up. Modest investments in management training can help remedy this problem.
¡¡A good performance management program explicitly outlines what is expected of an employee, how it will be measured, and what the rewards are for meeting these expectations (as well as the consequences of not meeting them).
¡¡¡¤ Create an employee value proposition. Recruiting has become more like marketing, Cappelli said. What if you had to sell your jobs in a competitive marketplace? What would you say about what it¡¯s like to work at your company? He pointed out how IBM¡¯s ads don¡¯t mention products but give an image of the company¡¯s culture and values. It is estimated that one in five job applicants applies because of a company¡¯s advertisements.
¡¡¡¤ Respect work-life balance. This new generation of workers places a high value on work-life balance. Policies that recognize the need for flexibility can be part of your employee value proposition ¡ª to help attract good talent and create a climate of commitment.
The standard model of replacing older workers with younger, recent graduates is changing, Cappelli said. In the U.S. there isn¡¯t so much a shortage of workers as a shift in the balance of workers. Increasingly, companies are finding that they need to keep more of their older workers, the ones who have the knowledge and experience. In today¡¯s IT market, the current glut of jobs should be balanced within a few years when colleges and universities begin graduating their IT students.
¡¡Peter Keeble, Senior Director, Worldwide Corporate Groups at 3Com, said Cappelli¡¯s insights on the IT sector were right on target. Jennifer McElrath, a consultant with the worldwide executive recruiting firm Egon Zehner International, said it was helpful to get broader faculty perspectives on these issues. As a 1985 Wharton MBA graduate, she had an added reason for enjoying participating in the forum so close to home. It is exciting to have access to Wharton so close by, she said. And this forum was a great outreach to the local HR community.

Too Good To Be True

¡¡Publicly traded corporations get to raise capital from the public to finance growth and in return are expected to create shareholder value ¡ª and a soaring share price can give the impression that whatever you¡¯re doing, keep doing more of it. If the rise in shares is linked to shady or shaky practices, it¡¯s risky to call attention to them. What would you have done if you had been confronted with evidence suggesting unethical or unlawful activities within your firm?
¡¡Most catastrophes, from corporate bankruptcies to air crashes, occur after a series of smaller, individually correctable mistakes. If any one of the mistakes had been corrected at any point, the eventual disaster could have been prevented. The whistle-blowers within Enron were not heeded, the financial structure was risky and concealed, the auditors said it was all OK, the board allowed ethics rules to be suspended and didn¡¯t ask the right questions later, and almost no one asked whether something growing that fast was real.
¡¡The fallout from Enron will be significant for accountants, management, boards and, hopefully, will improve transparency for shareholders. But let's hope that we don¡¯t legislate barn door closings for escaped horses, because no matter the rules, this kind of thing still comes down to decisions that individuals and groups choose to make.
¡¡Decisions are made at multiple levels ¡ª individual, managerial, and enterprise-wide. Stopping to examine your decision processes is one way to help see mistakes early on. ¡¡¡¡¡¡¡¡Wharton developed the science of studying the decision process. In Wharton on Making Decisions, published last year, Professor Stephen Hoch and Professor Howard Kunreuther, co-director of Wharton¡¯s Risk Management and Decisions Processes Center, and other faculty offer insights into how people make decisions in various contexts and recommendations for improving the process. Emotions and an overemphasis on speed lead the list of strategic errors the authors identify in a previously spectacular corporate failure, Barings Bank.
¡¡As we continue to pick through the wreckage of Enron and other business failures, we need to look for lessons that can help us make better decisions. Some of these will involve implementing organized systems for decision support and advanced analysis. But other insights will be as simple and straightforward as remembering and applying the simple wisdom that you can¡¯t violate the laws of economics for very long.

Corporate Boards Should Focus on Performance, Not Conformance

¡¡After the corporate governance revolution of the 1990s that led to a new era of accountability to shareholders, the Enron debacle has brought new attention to the role of corporate boards and governance. Board members now increasingly realize the need to act more vigorously to hold managements accountable and actively probe areas such as conflicts of interest and compensation of top executives. At the same time, however, would-be reformers of corporate governance practices must guard against going too far and imposing rules that tie managements?hands.
¡¡These were some key issues that Wharton professors and a former CEO of Campbell Soup discussed at a session on corporate governance in Philadelphia as part of the Wharton Fellows program.
¡¡Participants in the session recognized that much of the current soul-searching on corporate governance follows from the failure of Enron’s board of directors to detect that the company was about to implode. That’s the biggest problem with Enron. Where was the board? asked David W. Johnson, chairman and CEO emeritus of Campbell Soup Co.
Johnson said that until shareholder activists began to pop up in the late 1980s, corporate executives were focused on so-called stakeholders. The suppliers, the employees, the unions ?all these were stakeholders. It was very confusing in the 1980s. I didn’t know what we were really doing, he said. I concluded the prime purpose was to build long-term shareholder wealth.
¡¡Good corporate governance, Johnson said, can be a competitive advantage if the board focuses on performance, not conformance. A basic plan for directors would require them to hire and evaluate the chief executive and monitor the strategic plan with clear milestones. The board should also be involved in succession plans, internal development and pay-for-performance. Board members also should be evaluated, the way executives are. Only 20% of corporate directors face performance measures.
¡¡The first outsider hired to run family-controlled Campbell Soup, Johnson became an innovator in governance. When he was hired in 1990 after working for companies such as Colgate-Palmolive and Warner-Lambert, he told the board he would work hard to improve the firm’s performance and build wealth. But he also demanded that the Campbell board take on a larger role, including bringing a broader perspective to the company, balancing the views of management. Johnson asked board members for open and honest debate in determining the company strategy. But once the course was set, he forbade back-biting and demanded support for the plan in private and public forums. They could see that their job had just gotten bigger, Johnson said.
¡¡At Campbell Soup Johnson tied executive compensation to performance and required equity ownership. He demanded the same of the board. In 1990 Campbell directors received $47,000 in cash plus a pension, medical benefits and donations to favorite charities. It was all kissy-kissy, said Johnson. By 1997, cash payment to the board had dropped to $26,000, with no medical, pension or charitable contributions, but stock options worth $150,000 if the share price grew. In 1990 directors were required to own 400 shares, but by 1997 the requirement was 6,000 shares, or about $300,000 worth at the time.
¡¡Johnson said companies help their boards be more effective by holding fewer, more efficient, meetings with materials sent well ahead for study. A chairman trained in running meetings can make a difference, and talented board members should receive extra training. Pay for board members could increase, he said, if the Enron fall-out leads to greater personal risk for serving on a board.
¡¡Johnson proposed a diagnostic checklist of trouble signs for boards including failure to meet earnings estimates, industry rankings, long-term problems going unresolved or constant restructurings. But none of those checklists prepared us for what happened at Enron, he said. Everything was perfect, wasn it? Except it wasn. He imagines directors around the country with weak financial and accounting skills growing nervous: Can you imagine all those on audit committees today whose knees are knocking?
¡¡Elizabeth E. Bailey, who chairs Wharton business and public policy department and has served on the boards of companies such as CSX and Honeywell, said that corporate governance policies are shaped internally by shareholders, the board and management. The role of the board, she said, stems from the idea that management should operate the core business, but it needs oversight to make sure shareholder interests are maintained.
¡¡The thought is that if someone is not monitoring the management, there could be self-dealing and the kind of things that are on everybody mind from the Enron situation, she said. Managers have been known to give themselves perks ranging from thick carpets on the floor to surrounding themselves with extra people to golf club memberships. Academics call this the agency problem, Bailey added.
¡¡Boards can also use many outsiders to monitor management, she said. These can include accountants, lawyers, credit rating agencies, investment bankers and advisors, the media, analysts and corporate governance watchdogs. Regulators also play a role in establishing standards in areas such as accounting or auditing, though she added, The accounting and auditing standards in cases like Enron clearly failed.
¡¡Bailey pointed out that many established industries, such as packaged goods or food, don't have much flexibility in auditing. More room to maneuver exists for high-tech industries or with new financial instruments such as derivatives. The system tends to be behind the innovative capability of people figuring out how to get around these rules. Regulators also have a role in overseeing the financial sector and markets, with policies on competition, foreign direct investment and corporate control.
¡¡Bailey believes that the current attention on what went wrong at Enron appears to be focusing on outside forces, not just traditional internal mechanisms. We seeing that it not the internal issues alone that are important. In other countries, she said, stakeholders still make up an external force on corporate governance. In Europe there a much stronger emphasis on the rights of labor inside firms. Emerging markets, she said, really don't have any kind of good monitoring set up in the public sector.
¡¡ She cited recent Wharton research that indicates that companies with fewer shareholder restrictions outperformed those with more restrictions, such as poison pills or golden parachutes, from Sept. 1990 to Dec. 1999. The people who have the least shareholder restrictions have higher returns than the companies that have a lot of power in the hands of management, she said.
¡¡David Larcker, a professor of accounting at Wharton and an expert on executive compensation, said research shows the pay is higher if the CEO is also board chairman. Large boards also tend to inflate compensation. If the board if bigger they tend to make worse decisions. If a board has 18 or 20 members that’s not a good sign. He added that older boards tend to go along with hefty management pay, as do boards with many members serving on multiple boards. Another indicator of governance problems is a company with no block of shares worth more than 5%. We're talking about big money here, he said of executive compensation packages. I think a lot of board members are asleep at the switch.
¡¡Larcker has researched stock options and found some puzzles. First, he said, it appears that many employees do not understand their options, and many are overly optimistic about their long-term economic value. Companies are doing a bad job of explaining this, he said, which I view as almost fraudulent. Research also indicates that $1 in stock option value correlates to a $1.79 per share decrease in future operating income. That's kind of frightening, he said. In my mind its unclear if options are a panacea or not.
In the future, according to Larcker, compensation will be more directly tied to key drivers within the company, whether it is maintaining a franchise, or focusing on other aspects of the business such as employees, customers, technology or alliances. Boards seem to be decreasing their reliance on simple benchmarks or merely matching competitors. They still want to know this but they're not locked into it which I think is a very healthy attitude.
Robert E. Mittelstaedt, Jr., director of Wharton Aresty Institute of Executive Education, pointed out that companies are adding more independent directors. Lots of ground remains to be plowed but I think we're moving in the right direction, he said. Corporate governance is a growing concern abroad. At some large global companies reform is underway, he said, noting Sony has decreased the size of its board from 38 to 12 directors. International companies are motivated to reform their corporate governance practices if they want to attract investors, especially in the U.S. The long-term impact is that at some point the capital markets get to vote on your performance, and your performance and your governance are all wrapped into one.
¡¡Mittelstaedt, who serves on several boards, said he does not think directors will hire more outside consultants to help them make their own decisions. If management hasn’t done that themselves then there something wrong, he said. You can become overly reliant on outsiders.
¡¡Mittelstaedt also warned that in the aftermath of the Enron debacle, corporate governance reform might go too far in directions that tie corporations?hands. He serves on one board where, in his opinion, the best member of the audit committee was a physician who asked good questions. Under rules passed last year members of that committee must have some financial expertise. We legislated the physician off the committee, said Mittelstaedt. There a danger there.
¡¡Mittelstaedt said board members?long, staggered terms make it difficult to make big changes quickly. He pointed to several circumstances that give companies a chance to upgrade their board. For example, companies can overhaul their boards after a merger or after a public offering of stock. A major crisis or turnaround also offers opportunities when companies can revamp their boards. When a company is in really serious trouble, it time to ask if the CEO and his team have all the help from the board that is necessary, he said. At times you have to ask a board member to leave.