By David Liss It seems like there's a new twist every week in the post-Enron cleanup of corporate accounting scandals. The latest: Reports that Enron, MCI, and other companies are working in earnest to get a tax refund on monies paid to the U.S. Treasury, calculated against grossly inflated earnings in the past. What chutzpah! On May 15, the Senate passed an amendment to prohibit such refunds.
Examples of companies working to develop corporate-governance practices and standards with integrity will continue to be important in raising the bar for ethical corporate governance in the future (see BW Online, 5/06/03, "A Board's Top Job: Watching the CEO").
I asked Steve Odland, president and CEO of AutoZone (AZO), a Memphis-based auto-parts retailer with 2002 revenues of $5.32 billion, to explain the steps his company has taken to build ethical standards and practices throughout the corporation. Here are edited excerpts from his responses:
Q: How do you define successful corporate governance?
A: The primary objective of corporate governance is to do the right thing to generate shareholder value over the long run, with the highest ethical standards, regardless of what happens with other current and world events. This is how a company should behave.
When I came to AutoZone in 2001, I took a commonsense approach. I wanted to codify board practices to make sure we were doing the right thing and that all parties knew their roles and responsibilities within the corporation. Charles Elson, a professor of corporate governance, had just joined the board. He's the Director of the University of Delaware's Center for Corporate Governance. He pulled together our corporate-governance guidelines.
Five insiders were on the board when I came to the company, with no formal roles defined for directors. Four insiders were removed, leaving me as the only AutoZone employee on a 10-member board. We also restricted the number of outside directorships to no more than three, required board members to invest at least $100,000 in company stock, and set retirement for board members at age 70. We removed a "poison pill" structure that was set in place before I got here. I feel that the shareholders are better served without one.
Q: What are the five most important elements for strong and effective corporate governance?
A: 1. Corporate-governance guidelines. This allows everyone in the company to know how the board is run and what we stand for as a company.
2. Independent board members.
3. A team of officers to certify financial results in a rollup fashion for final approval and sign-off by the CEO.
4. Consistent financial review. Processes are defined to establish regular, frequent, and rigorous team reviews of financial information.
5. Having a code of ethics and a code of conduct, and hiring people whot match these standards. You can have all the processes you want, but if you hire crooks, they'll steal. You must hire the right people.
Q: How do you know you've successfully addressed governance issues?
A: Consistently measuring and evaluating everything is part of what we do every month. Specific objectives are set in the operating plan. We establish key performance indicators (KPI) and track against them each month to measure performance against stated objectives. You can only review what you measure.
The strongest measure we have taken for financial accountability is the implementation of the "40-headed CEO." Every Monday the executive committee meets and reviews the previous week's data. These weekly meetings are complemented by a monthly meeting where all the vice-presidents, senior vice-presidents, and the CEO (hence the "40-headed" CEO) get together in one room for a half a day to review the financials.
In many companies, only a few people see all the numbers. In our company, everyone who controls any aspect of the business sees all the numbers. We feel that this gives us better operating integration. There aren't multiple divisions. Everyone is on a functional team, and everyone is eligible for bonuses based on earnings and return on invested capital for the company as a whole.
If one division is doing badly, then the entire executive team has to work together to bring the numbers up for that area. The bonus for the group is dependent on the success on the business as a whole, not on the success of individual parts. We believe that the more eyes there are on an issue, the more likelihood there is that things will be reported correctly and ethical standards upheld.
As part of this process, we established audit functions that run on parallel tracks. Ernst & Young is our external auditor that reports directly to the audit committee. We outsourced internal audit functions to Deloitte Touche. No additional consulting is permitted for either of these companies.
Q: What is the most important consideration for another CEO who has to address this problem?
A: Companies can have all the guidelines that they want, but the bottom line is that you still must have the right people. These people must be led from the top of the company to do the right thing and to behave with the highest ethical standards. It's critically important that this tone is set from the top.
Q: What failings have you seen in ways that other CEOs/corporations have addressed corporate-governance issues?
A: The consistent message that we give is that we'll lead in the market and achieve our financial goals by doing things the right way. We would rather miss our goals than to achieve them in the wrong way. Not all corporations hold this approach.
Corporate governance and ethical standards by all employees must be stressed every day. Employees need consistent and well-understood policies and business processes. Implementing a meaningful ethics program takes constant vigilance and leadership.
I speak to groups of employees every day. Whenever I give speeches to employees, I always talk about ethics in terms of always doing the right thing and that each employee must to do the right thing every day. You can't possibly watch all decisions and consumer interactions. No amount of laws or regulations can impact the number of decisions that our 45,000 employees make each and every day.
Each employee signs the AutoZone personal code of conduct as a condition of employment and renews their review and signature of this document every year. If employees have doubts about ethical behavior, they're encouraged to check with our legal counsel. Or they're told, "Just don't do it!" if they believe that a potential action could be a violation of our code of conduct.
We have implemented confidential, toll-free hotlines for employees to report improper activities or theft in the workplace. As part of implementing these programs, corporations must ensure that you don't penalize people who bring issues forward. Employees have to do things outside of the environment of fear.
See the following PDF for more on AutoZone's corporate-governance principles. This article continues a new BusinessWeek Online forum, "Ask the CEO." The idea is to pose questions to CEOs, and then let them show you in more detail their thinking about decisions that have an impact on their companies, workers, and shareholders. What would you like to Ask the CEO? Please submit your questions to Ask_the_CEO@businessweek.com