Speeches and statements
University of Illinois College of Business Leighton LecturePresident B. Joseph White Thank you. I want to recognize Richard and Grace Leighton and thank them for their gift to create this lecture series. Thanks also to Dean Avijit Ghosh for this opportunity to speak out on business leadership and ethics. I have entitled my remarks this afternoon, “High Integrity Leadership.” Let’s start with this admission. A small but significant and visible number of corporate leaders have, since 2001, created a train wreck for all of us who believe deeply in the extraordinary value of our free enterprise system and in the vital importance of high integrity leadership as a matter of both practice and principle. As we watch Martha Stewart leave prison and Bernard Ebbers heading to prison, and as we prepare for the spectacle of Ken Lay’s “empty suit” defense, let’s face up to the fact that there is a crisis of confidence in American business leadership and we are all paying the price. One price we are paying is the Sarbanes-Oxley Act, legislation passed by Congress in the aftermath of the corporate scandals of the last few years: Enron, WorldCom, Adelphi, and so on. It is legislation that deeply affects corporate governance, the audit profession, financial reporting and internal control. Executives and their mouthpieces in Congress are complaining mightily about SOX, as it is called. Because Jane Donaldson, the wife of SEC Chairman William Donaldson, is a U of I alumna and a director of the U of I Foundation board, I had the occasion recently to tell Mr. Donaldson my opinion of Sarbanes-Oxley. “The costs are real and substantial,” I told him. “The benefits are far less certain.” Nonetheless, American business brought this intrusive legislation upon itself because during the boom of the late 1990’s, some number of executives, board members, bankers, auditors and even regulators were, variously, greedy, fraudulent, negligent, naïve, and self-dealing. And few, if any, honest and responsible business leaders spoke out — expressed their outrage — over the transgressions of their colleagues. Whatever your feelings about New York Attorney General Elliot Spitzer, it’s hard to argue with his contention that self-regulation failed miserably. So where do we go from here? Well, this afternoon I would like to urge you to do something that sounds simple but isn’t: commit yourself to being a high integrity professional — and person — for your entire career and life, no matter how great the temptations to do otherwise. That’s it. I guarantee that if you make and keep this commitment — to be a high integrity professional and person — it will serve you extremely well. But it won’t be easy. What does it mean to be a high integrity business professional? Well, let me keep it simple. It means that for your entire career:
As you can see, these are good, though challenging principles to live by as well as to work by. I think that the first three requirements — obeying laws and regulations, being honest, and managing your commitments — are straightforward; I won’t spend much time on them. But don’t miss the abundant lessons from the business scandals about how many senior executives failed to live up to these simple principles. Didn’t Martha Stewart listen when her parents told her, “Oh what a tangled web we weave, first we practice to deceive?” Didn’t the CEO of Adelphia, now in prison, remember that public companies are subject to laws and regulations intended to protect the interests of shareholders who have entrusted their savings to management? Didn’t the stockbrokers who churned their clients’ accounts remember that they had promised to help those same clients save for their children’s college educations or for a comfortable retirement? As I reflect on these people who let themselves and others down, I think of my dad, who is 89 now. He often told me as I grew up that one of the most important things in life is to be able to look yourself in the mirror in the morning without flinching. Good advice. But this afternoon, I want to emphasize the fourth principles, which is that you will avoid conflicts of interest and when they are not avoidable, you will resolve them in favor of your duties and responsibilities, not yourself. Why? Because if I were to cite a single, overarching transgression of the recent corporate scandals, it would be financial conflicts of interest. Time and again, people with serious conflicts did exactly the wrong thing. Instead of avoiding or resolving such conflicts with integrity, they capitalized on them for personal gain. And let’s not kid ourselves. A lot of people were involved. For example, it was not only Enron CFO Andrew Fastow (a business school graduate, by the way) who profited from his wholly inappropriate investments in Enron off balance sheet special purpose enterprises. Ninety-seven Merrill Lynch managers also personally invested in Enron’s LJM2 partnerships, which Merrill had structured. Or consider the number of executives of investment banking firms and public company CEO’s who were involved in a practice called IPO spinning. Investment bankers funneled hot initial public offering shares to CEO’s of public companies in hopes of being awarded future investment banking business. The practice was widespread. Merrill, Credit Suisse First Boston, Salomon Smith Barney, even Goldman Sachs did it. WorldCom CEO Bernard Ebbers reportedly made $11 million flipping IPO shares he received from Salomon Smith Barney between 1996 and 2001. Over the same period, WorldCom paid Salomon $140 million in shareholders’ money for underwriting its debt and equity offerings and another $76 million for mergers and acquisition work. What does all this have to do with you, you might ask? I think the answer is, a lot. Conflicts of interest are abundant in professional life. I guarantee that you will confront at least one, and probably more, within a few years of graduation, and many more throughout your careers. Let me speak very personally on this matter in an effort to bring it alive for you. I want to tell you my Sterling Software story. In the 1990’s, I was dean of the University of Michigan Business School. I raised a lot of money — over $100 million — from individual donors for scholarships, professorships, institutes and centers. And for a new $20 million building that we called Sam Wyly Hall. Sam Wyly is a graduate of the University of Michigan Business School and an archetypal Texas entrepreneur. He has made hundreds of millions of dollars, lost it, and made it again. He has been the chairman of several public companies including Michaels Stores. At the time I approached him for a $10 million gift to fund a new building on the business school campus, he was CEO of and a big shareholder in a public company called Sterling Software. As Sam and I got acquainted in the course of numerous conversations about my gift request, his trust and confidence in me seemed to grow. I was ecstatic when he made an oral commitment to the $10 million gift for the building that would bear his name. A few months after Sam made that commitment, but before the commitment was paid or even formalized in writing, I received a call from him inviting me on behalf of the board of Sterling Software to become a director of the company. It was an attractive opportunity. The tech sector was soaring in the late 1990’s. Sterling was the world’s fifth largest software company and highly profitable. Directors received a $50,000 a year fee and, more importantly, an initial grant of 50,000 options on Sterling stock that was, as I recall, selling at about $50 a share. You didn’t have to be very good at math to calculate that if Sterling stock doubled — and in the tech boom that was the least one would expect — those options would be worth $2.5 million. I was intrigued. I liked Wyly and respected his business achievements. I did extensive due diligence on Sterling Software and some of the smartest people I knew on Wall Street told me it was a solid company with good prospects. I was in an expensive time of life with kids in college and graduate school and I was saving for retirement. It also seemed to me that it would be awkward to say “no” to Mr. Wyly at such a critical moment in the gift process. So I agreed to join the board. But then I couldn’t get comfortable with the decision and I wasn’t sure why — until I attended my first meeting. What I realized as I sat at the board table was that I could not serve effectively as an independent director — speaking my mind, calling them as I saw them, and challenging Sam Wyly if and when required — with this major gift pending. And, at the same time, I was stricken with a concern that Wyly’s tremendous act of generosity — a $10 million gift to the University of Michigan — might be construed by some — and therefore tainted — as a quid pro quo for my support on the board despite my official status as an independent director. It was a classic conflict of interest. Where did my allegiances lie? As I sorted it out, the answer became obvious, as did the action I had to take. My first allegiance was to the University of Michigan, my employer, where I was a dean and faculty member. My second allegiance was to Sam Wyly as an alumnus and donor. So I had to put the University’s and Wyly’s interests first. My own interest in being a Sterling director and getting the fee and the rich option package had to come third. And, I concluded, my interest was incompatible with my allegiance to the University and to Wyly as a donor. So, immediately after that first board meeting, I met privately with Sam, explained my thinking to him, and resigned from the board. I felt a mixture of relief and a little regret when Wyly said that he understood completely, respected my judgment on the matter, and accepted my resignation. The big option grant, of course, evaporated with the resignation. Being human, I couldn’t help tracking the price of Sterling Software stock for awhile. It soared and the company was ultimately sold to Computer Associates for a big price. So, my decision cost me a lot of money. But it was the right thing to do and I would do it again today, faced with the same circumstances. A clear conscience is, truly, priceless. You will, in your career, face decisions of this kind … conflicts of interest … repeatedly. What will you do? Well, if you resolve today to be a high integrity business person your entire career, the answer will be clear. You’ll do the right thing, which sometimes means foregoing personal gain in the short term. The University of Illinois College of Business has great strength, and a great tradition, in accounting. So it seems fitting to end my remarks today with another story, an inspiring story, about a man named Arthur Andersen, the founder of the public accounting firm that bore his name until its truly tragic demise in connection with having served as Enron’s auditor. Throughout much of the history of the modern accounting profession, Arthur Andersen, the firm, was the gold standard for auditor independence. Arthur Andersen, the founder, was personally responsible for that standard. A couple of years ago, the Chicago Tribune retold a famous story. Let me quote here: “[Arthur] Anderson set the tone [of independence] on a day in 1914 when a railroad executive burst into his cramped reception area, demanding that Andersen bless his corporate ledger. In a distant foreshadowing of WorldCom, the railroad man had inflated his profits by failing to properly record day-to-day expenses. What followed would be recited to thousands of the firm’s trainees for decades to come: Andersen shot back that there was not enough money in the city of Chicago to make him approve the bad bookkeeping. The small firm lost its big client, but the railroad went bankrupt a few months later, vindicating Andersen and establishing a reputation for independent thinking that would lead to decades of prosperity.” That’s from the Tribune. Unfortunately for the American business system and for the audit profession, I think there is no doubt that Arthur Andersen and other major accounting firms lost their bearings over the last thirty years by aggressively pursuing consulting revenues from audit clients. Andersen’s culture of auditing independence was overwhelmed by and subordinated to a culture of pleasing clients to retain their business. This created a classic conflict of interest between the independence required for auditing excellence and the hunger for fees from a satisfied consulting client. Indeed, Arthur Andersen’s billings of $58 million to Enron in fiscal year 2000 were comprised more of consulting fees than audit fees. As consulting fees rose, Andersen became a firm that couldn’t say no. And this conflict of interest eventually led to the demise of a once-great firm and the devastation of the professional lives of thousands of once-proud Arthur Andersen partners and employees So, to wrap up here, what’s advice do I have for you? First and foremost, commit yourself today to being a high integrity professional. It’s the right thing to do and it will help you know the right thing to do many times in your career. Second, recognize conflicts of interest when they arise. Don’t rationalize and don’t kid yourself. Be clear about where your responsibilities lie and act accordingly. Be courageous. Sometimes doing what’s right will be difficult and, in the short term, cost you money. Some people will think you’re crazy, but they’re wrong. Finally, remember that over the long haul, your most precious assets are your integrity, your independence, your reputation, and your peace of mind. Always maintain and enhance them. Never, ever impair or put them at serious risk. I guarantee that if you live by these simple but challenging principles, you will have a career, and a reputation, of which you’re proud. And, we here at the University of Illinois will be proud of you. Now, I would be happy to hear your comments and answer your questions. Thank you. |
