September 11: Management Quality
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Transcript of September 11: Management Quality
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September 11: Management Quality
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Administrative
Books Syllabus Articles Teams If you weren’t here a week ago Who is here?
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Two Perspectives on Quality of Management
Slow and Steady, Boring, Shy Have to Make Change Fast and
Tell Everyone How Great You Are
But First, Does it Matter?
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Methodology
Analysis of Fortune’s America’s Most Admired Companies (AMAC) 1985-2000– Correlations run on change in mean scores and
changes in financial measures (sales, profits, and earnings per share.
– Volatility of perceived management quality tested between two time periods: 1985-1994 and 1995-2000.
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Historical Data: Alcoa
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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Alcoa Survey Average
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Reputation and Financial Performance: Alcoa
EPSOverall rep
Mgmt qual
Prod qual
Fin sound
Invest value
Asset Use Innov
Dvlp/keep People
Comm/Env
Change in EPS 1.0000 0.6862 0.7088 0.3668 0.5741 0.5203 0.6975 0.4394 0.6495 0.5994Correlated with Overall Reputation 0.6862 1.0000 0.8039 0.7256 0.8286 0.8461 0.9005 0.8664 0.9520 0.6877Correlated with ManagementQuality 0.7088 0.8039 1.0000 0.5209 0.5650 0.6264 0.6736 0.5706 0.8340 0.4862Correlated with Product Quality 0.3668 0.7256 0.5209 1.0000 0.3713 0.3681 0.6818 0.7419 0.6896 0.5841Correlated with financial soundness 0.5741 0.8286 0.5650 0.3713 1.0000 0.9556 0.6480 0.6669 0.7635 0.4705Correlated with investment value 0.5203 0.8461 0.6264 0.3681 0.9556 1.0000 0.6343 0.6926 0.8353 0.4388Correlated with asset use
0.6975 0.9005 0.6736 0.6818 0.6480 0.6343 1.0000 0.8669 0.8232 0.5910Correlated with innovativeness 0.4394 0.8664 0.5706 0.7419 0.6669 0.6926 0.8669 1.0000 0.7879 0.4425Correlated with people
0.6495 0.9520 0.8340 0.6896 0.7635 0.8353 0.8232 0.7879 1.0000 0.5595
0.5994 0.6877 0.4862 0.5841 0.4705 0.4388 0.5910 0.4425 0.5595 1.0000Correlated with comm/environ
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Historical Data: Fruit of the Loom
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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Fruit of the Loom Survey Average
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Reputation and Financial Performance: Fruit of the Loom
Profits Overall repMgmt qual
Prod qual
Fin sound
Invest value
Asset Use Innov
Dvlp/keep People
Comm/Env
Change in Profits 1.0000 0.6714 0.7420 0.4185 0.5990 0.5608 0.5807 0.6158 0.3918 0.3436Correlated with Overall Reputation 0.6714 1.0000 0.9653 0.6876 0.9538 0.9493 0.9220 0.7613 0.8709 0.8786Correlated with ManagementQuality 0.7420 0.9653 1.0000 0.6422 0.9081 0.9257 0.8405 0.7848 0.8704 0.7548Correlated with Product Quality 0.4185 0.6876 0.6422 1.0000 0.4978 0.6788 0.5232 0.6948 0.5283 0.5719Correlated with financial soundness 0.5990 0.9538 0.9081 0.4978 1.0000 0.8926 0.9428 0.6236 0.8039 0.8677Correlated with investment value 0.5608 0.9493 0.9257 0.6788 0.8926 1.0000 0.8691 0.6892 0.7800 0.7807Correlated with asset use
0.5807 0.9220 0.8405 0.5232 0.9428 0.8691 1.0000 0.5296 0.7184 0.9134Correlated with innovativeness 0.6158 0.7613 0.7848 0.6948 0.6236 0.6892 0.5296 1.0000 0.6764 0.5064Correlated with people
0.3918 0.8709 0.8704 0.5283 0.8039 0.7800 0.7184 0.6764 1.0000 0.7413
0.3436 0.8786 0.7548 0.5719 0.8677 0.7807 0.9134 0.5064 0.7413 1.0000Correlated with comm/environ
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Historical Data: Airlines
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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Airlines Cmp Survey Average
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Reputation and Financial Performance: Airline Industry
EPSOverall rep
Mgmt qual
Prod qual
Fin sound
Invest value
Asset Use Innov
Dvlp/keep People
Comm/Env
Change in EPS 1.0000 0.8415 0.9057 0.8737 0.6776 0.8658 0.6473 0.9373 0.8835 0.8891Correlated with Overall Reputation 0.8415 1.0000 0.9771 0.8915 0.8851 0.9809 0.9313 0.9733 0.9613 0.8317Correlated with ManagementQuality 0.9057 0.9771 1.0000 0.8324 0.8469 0.9438 0.8689 0.9638 0.9167 0.8656Correlated with Product Quality 0.8737 0.8915 0.8324 1.0000 0.8151 0.8571 0.7429 0.8719 0.9783 0.5699Correlated with financial soundness 0.6776 0.8851 0.8469 0.8151 1.0000 0.8647 0.8735 0.7600 0.8608 0.5573Correlated with investment value 0.8658 0.9809 0.9438 0.8571 0.8647 1.0000 0.9464 0.9596 0.9432 0.7901Correlated with asset use
0.6473 0.9313 0.8689 0.7429 0.8735 0.9464 1.0000 0.8649 0.8422 0.7874Correlated with innovativeness 0.9373 0.9733 0.9638 0.8719 0.7600 0.9596 0.8649 1.0000 0.9439 0.8723Correlated with people
0.8835 0.9613 0.9167 0.9783 0.8608 0.9432 0.8422 0.9439 1.0000 0.6886
0.8891 0.8317 0.8656 0.5699 0.5573 0.7901 0.7874 0.8723 0.6886 1.0000Correlated with comm/environ
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Level 5 Leadership
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Five Levels
Level 1: Highly Capable Individual – good work, skills, knowledge
Level 2: Contributing Team Member – makes the team better through individual efforts
Level 3: Competent Manager – organizes people and resources
Level 4: Effective Leader – creates commitment and vigorous pursuit of a higher set of performance standards
Level 5: Executive – builds enduring greatness
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Collins – Level Five Leadership
Lincoln vs. Caesar Bush vs. Clinton? Self-effacing, quiet, reserved, shy Professional will & personal humility Bill Gates vs. the Millionaire Next Door
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Professional Will
Ambition is the Institution Burn the Boats: there is no other option Focus on the long-term health of the institution,
not the short-term gains Set up successors well Value system is focused on the greatness of the
organization If Lincoln had only wanted peace, not a great
nation, would we be the same today?
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Personal Humility
Press not important, shuns public adulation Usually from inside – not an outside savior Looks at the mirror, not out the window Apportion credit to others, apportion
responsibility to themselves Inspires through determination, not charisma Boring
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First Who, Then What
Right People on the Bus, Then Start Driving Who Before What: The Right People are
Everything Not a Genius with A Thousand Helpers Vigorous Debate Not How Much You Pay, But Who You Pay Rigorous, not Ruthless
– When in doubt, don’t hire– Make change fast– Best people on best opportunities
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A Nation of Grinders – NY Times Magazine
In America, you are rewarded if you:– Get an education
– Get married and stay married
– Work hard
– Mixed-up – no class consumption
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““You Got Six Months To You Got Six Months To Make Your CEO Look Great”Make Your CEO Look Great”
““You Got Six Months To You Got Six Months To Make Your CEO Look Great”Make Your CEO Look Great”
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Key Points
Reputation = $$$$Management Quality = Reputation
Management Quality is more important than everPerceptions of Management Quality are
changing faster than ever
Bottom Line:You have six months from a management change to start communicating value or it is over in a year
and a half
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Importance of Management
Executives and analysts SAY that management quality is the most important factor when evaluating a company.
Stated Importance
Quality of management 9.3
Product/service quality 8.8
Employees 8.5
Investment value 8.2
Financial position 8.0
Innovativeness 7.8
Asset use 7.9
Comm./Envir. Resp. 6.5
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Today…
The relationship between management quality and overall reputation (both change in and mean scores) has also grown stronger.
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Importance of Management(Overall Reputation and Management Quality Correlated With One Another)
Correlation Coefficient 1985-1994
Correlation Coefficient 1995-2000
Fruit of the Loom .9516 .9961
Liz Claiborne .8470 .8792
Boeing .8772 .9514
UST .9602 .9887
Coca Cola .6810 .9373
Apparel Companies .9012 .9862
Aerospace Companies .9369 .9485
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Today…
Perceived management quality has become more volatile.
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Importance of Management
The average rate of change has doubled. The change from 1999 to 2000 was the
biggest ever – 4%.
Management Quality
1985-1995 1996-2000
Average rate of change 1% 2%
Average point change .06 .11
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Judgment Day Comes Faster Than Ever Among Those Who Buy Your Stock
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Methodology
1000 interviews conducted with the general public February 8, 2001 – February 11, 2001.
Identified individual investors were asked subsequent questions related to the performance of a Fortune 500 CEO.
Individual investors are defined as people who own stocks.
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Time Allotted to New CEO
24% 23%
9% 5% 6% 7% 9%
0%
20%
40%
60%
80%
100%
6 months orless
6 months -1 year
1 - 1 1/2years
1 1/2 - 2years
2 - 3 years + 3 years Never makejudgments
Average = 17 months
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Compared to 10 Years Ago…
2%
10%
13%
37%
39%
0% 20% 40% 60% 80% 100%
Didn't make 10years ago
Don't know
Longer
About the same
Shorter
Three times more say shorter than longer
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Still…
CEOs are American Icons!
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Who Wants To Be A CEO (Anymore)?
An Investment Community Perspective
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Methodology
Brief Telephone Interviews with Targeted Audience Conducted in January & February 2001 Market Conditions
– January 31, 2001• Dow Jones Industrial Average Close: 10,887.36• NASDAQ Composite Index Close: 2,772.73
– As of 3/16/01• Dow Jones Industrial Average Close: 9,827.64• NASDAQ Composite Index: 1,890.74
– Percent Change• Dow Jones Industrial Average: -9.73%• NASDAQ Composite Index: -31.81%
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A Cross Section of Top US Financial Institutions
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In your opinion, what is a reasonable timeframe (in months) for a new CEO to significantly increase shareholder value?
According to the Investment Community, new CEO’s have, on average, 14.5 months to increase shareholder value
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Is that time frame shorter, longer or the same as your time frame say, 10 years ago?
85% of participants surveyed feel that this is a shorter time period than 10 years ago
Nearly half believe this time is 1-3 years shorter than 10 years ago
“More immediate results are required…Wall Street and analysts are more involved
in management choice today.”
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CEO Turnover
In the 1990s, a third of CEOs appointed at 450 major corporations lasted three years or less
One in four companies went through three or more CEOs
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Recent CEO Tenures
Jill Barad, Mattel– 37 Months
John McDonough, Newell Rubbermaid– 35 Months
M. Douglas Ivester, Coca-Cola– 28 Months
Robert Knowling, Covad– 28 Months
Michael Hawley, Gillette– 17 Months
Durk Jager, Procter & Gamble– 17 Months
Lloyd Ward, Maytag– 15 Months
Richard Thoman, Xerox– 13 Months
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“Why is everyone mad at me?” –CEO
Earnings performance Share price Litigation/Crisis Compensation/Golden
Parachute issues
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Are CEOs generally worth the compensation they receive in salary and options?
Fully one-third of the participants do NOT believe that CEO’s are generally worth the compensation they receive in salary and options
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CEO Compensation
Top 10 CEO’s by Total Compensation (1999)• Salary Plus Bonus, and Long-term Comp.
– CHARLES WANG - COMPUTER ASSOC. INTL. = $655.4 Million– L. DENNIS KOZLOWSKI - TYCO INTL. = $170.0 Million– DAVID POTTRUCK - CHARLES SCHWAB = $127.9 Million– JOHN CHAMBERS - CISCO SYSTEMS = $121.7 Million– STEPHEN CASE - AMERICA ONLINE = $117.1 Million– LOUIS GERSTNER – IBM = $102.3 Million– JACK WELCH - GENERAL ELECTRIC = $93.1 Million– SANFORD WEILL – CITIGROUP = $90.2 Million– PETER KARMANOS JR. – COMPUWARE = $87.5 Million– REUBEN MARK -COLGATE-PALMOLIVE = $85.3 Million
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CEO Compensation: A Widening Gap
1989: $1.2M– 45 times the blue-collar wage
1999: $12.4M– 475 times the blue-collar wage
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Should exiting CEOs be paid the “golden parachutes” they receive in salary and severance?
NO!
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Should exiting CEOs be paid the “golden parachutes” they receive in salary and severance?
Three out of four participants feel that exiting CEOs should NOT be paid these “golden parachutes”
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Is a troubled company better off appointing an insider or an outsider as CEO?
Three quarters feel that it is better to appoint an outsider as CEO of a troubled company to bring in a “Fresh Perspective”
Current Environment– 80% of CEOs are still hired from the inside
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Would you want to be the CEO of a Fortune 1000 company today?
Nearly two-thirds would NOT like the title of CEO on their office door or parking space
OfficeOfficeCEO’sCEO’s
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Professional Heartburn
“It is bad enough being an analyst!”
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My Doctor Said…
CommunicateCommunicate
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Conclusions
Reputation has a measurable financial value Management quality drives reputation Perceived management quality is more
important than ever
You’ve got six months; or your CEO has no more than a year and a half.
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Presentation Guidelines Redux
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Guidelines
Each Team Member Has a Role Have a Team Leader Use Any AV Approach that works for you One-page handout – should include:
– Team members– Key question(s)– What you propose
Three Steps:– What you are going to say– Say it– What you just said
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An Example of An “A” Team Presentation
Fall 2002
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Any guesses as to what this is?
– Monthly pension to amount to 80% of last salary – Six cars and seven drivers– 34 office workers– 12-bedroom mansion– Three cooks – 2 housekeepers– 9 Security Men– Gym– Swimming pool– Sauna – Medical care for him and his family– Pay for trips inside Kenya and abroad– State Funeral upon death
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Golden Parachute:
A clause in an executive's employment contract specifying that he/she will receive large benefits in the event that the company is acquired and the executive's employment is terminated. These benefits can take the form of severance pay, a bonus, stock options, or a combination thereof.
http://www.investorwords.com/cgi-bin/getword.cgi?2201
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CEO Compensation
Brought to you by:
Karen Dwyer
Jerry Roenbeck
Jonathan Gaynor
Tarshia Griffin
Valerie Pitchford
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Argument for Large CEO Compensation
Attract top management Promote loyalty Motivate long-term financial gain Parachutes deter takeovers Promote stability
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Studies show:– CEO’s no more likely than average paid
employees to stay based on the salary/benefits
– Huge compensation packages do not ensure loyalty
– Stock options can be ineffective– Takeovers still occurring– Zero Cost Collaring
Not So!
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Let’s Look at the Stats
Average US CEO – salary over $2M Average CEO makes 17x the average
American CEO’s of major corporations make 85x the
average American
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Let’s Look at the Stats
CEO Compensation– Up 212% in the past decade
Compared to the– Factory workers’ up 54%
– Engineers up 73%
– Teacher up 95%
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Let’s Look at the Stats
CEO payment outdoing inflation– Satisfactory workers’ pay up 4.7%
– Outstanding workers’ pay up 7.7%
– ½ Fortune 500 made large cuts yet CEO pay surged
1979-89– Family take home up 9%
– Income of the richest 1% (31% CEO) up 31%
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Example 1
Jack Welch– 81,000 layoffs in the first 5 years as CEO– 993 acquisitions– Apr 4, 1981
• Market Capital up $402.4B• Revenue $21B
– 20 years later• Market Capital up 5000%• Revenue $129.9B
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Example 1 (cont’d)
Jack Welch Perks– $80K/mo apartment in Manhattan
– $127K/mo in living expenses
– $3.5M/yr use 737 Boeing
– Courtside Knicks tickets
– U.S. Open tickets
– Country Club
– Restaurant Bills
– Security
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Business Health
Executive Compensation packages contain Perverse Incentives that Hurt Business– Why? Incentives to boost stock price and
earnings reports hurt firms in the long run
– How? Downsizing, Demoralization, Reduced LT investment and inflated accounting
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Business Health
Downsizing: cuts in manpower increase short term profits, but ultimately hurt output
Demotivation: Fear of downsizing leads to lower productivity while employees not cut are overloaded with work
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Business Health
Reduced Long Term Investment: Cuts in long term investments like Research and development & training reduce expenses but prevent growth
Fraudulent Accounting: Accounting rules and reports are “bent” aggressively by executives to inflate earnings, but can destroy the firm’s credibility or worse
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It's Clean Up Time
Self governance New York Stock Exchange Sarbanes-Oxley Act
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Awareness
“Enron – itis” has increased public awareness of CEO compensation packages.
How can public awareness have a hand in diminishing these “golden parachutes”?– Be informed about CEO contracts.
• Visit, www.thecorporatelibrary.com/ceos
– Use your knowledge to support organizations and politicians that want to fight the same battle
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Where is the discussion headed?
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Will closer scrutiny of corporations be effective?
Media coverage places pressure on large corporations to respond to the scrutiny
Statistics made available give the public a point of comparison in terms of their own financial security
The recently unemployed (nearly 4200 from Enron and 17,000 from Worldcom) will demand justice
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What reform options look promising?
Grant stock with restrictions on its future sale instead of granting options
Emphasize long-term rewards for long-term success
Penalize executives who fail to reach success, as opposed to heavily compensating them
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What reform options look promising?
Monitor the role of business funds in political campaigning
Reform pension laws to stop over exposure to one stock
Prevent a company from investing its pension funds in its own stock
Create higher standards of transparency and disclosure in the audit profession
See for yourself– http://news.bbc.co.uk/1/hi/business/1854642.stm– www.corpwatch.org
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QUESTIONS?
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Questions for Discussion
Does Level 5 Leadership Make Sense? Does it fly in the face of what we often think makes the best CEO?
If you were to run an “American” business, how would Collins’ principles apply? What would be American about it?
How does the Collins model compare to the CEO-star model implied by the “hurry-up and communicate” presentation? Who’s right?
What is more American? What is not? If the face of 9/11, who is a great leader?