CEBC IN THE NEWS

What We Believe: Minnesota Business Leaders Speak Out

Published Sunday, April 13, 2003 in the Star Tribune.

We in Minnesota are blessed to work and live in an exceptional community. Whether in the arts, education, the environment, civic engagement, business enterprise or progressive government, Minnesota has been a national leader in a country that leads the world.

Business has played an important role in the growth of what Minnesota has become. Through job creation, tax payments, volunteerism, philanthropy and executive involvement, business has helped to build the community.

However, during the past year, our American business system has taken a sharp blow to its integrity caused by the unethical actions of some including Enron, Tyco and WorldCom. This has caused an enormous breakdown in trust between the American public and American business.

While there have been swift legislative and regulatory responses, business voices have not risen to the same level. In the absence of a business voice, the public tars all businesses with the same brush.

We are business leaders in Minnesota, and we feel it important to speak up.

We believe that those who govern and lead corporations have not only a fiduciary responsibility, but also a responsibility to ensure that behavior is rooted in integrity and consistent with the company's purpose and values.

Those who invest in corporations deserve and should expect the following:

• An accurate disclosure of information from which to base investment decisions.

• An alignment of the interests of those who manage the company and those who invest in the company.

• A fair return, consistent with the risks, on their investments.

We believe that while businesses must meet the needs of their investors, they exist to serve multiple stakeholders including customers, employees, suppliers and the community while balancing short-term gain and long-term value creation.

Concerned about the breakdown in trust between business and its constituents, four current or former chief executive officers -- David Koch, Chuck Denny, Dick McFarland and Dale Olseth -- convened a group of 30 business executives to address issues of corporate responsibility, corporate governance, executive compensation, and balancing short-term gain and long-term value creation.

The Center for Ethical Business Cultures (CEBC), which is affiliated with the business schools at the University of St. Thomas and the University of Minnesota, facilitated, recorded and reported the group's deliberations. Here are the key themes.

Corporate governance

The headlines identify many ethical and legal breakdowns in corporate America. And the breakdowns can ultimately be traced to failures in corporate governance and integrity. Good corporate governance starts with the board of directors.

To restore trust, board members must be independent and not influenced by other relationships with the company that might affect their ability to impartially represent the shareholders' interests. Where conflicts of interest exist, they should be fully disclosed.

CEO selection is critical as the CEO is a key to building a culture of integrity in the organization and setting the tone of ethical behavior at the top.

Boards should utilize a non-executive board chair, or a lead director when the same person serves as CEO and chairman of the board.

Boards should install feedback mechanisms to ensure the integrity of the organization as well as its progress toward meeting strategic, operating and financial goals.

Boards will need to invest in upgrading their skills and expertise to meet the heightened legal and regulatory standards.

Corporate responsibility

The 1990s saw a decade of too many companies focusing on the shareholder at the expense of other key stakeholders of business.

Corporate responsibility involves a company's responsible behavior toward all of its key stakeholders -- investors, customers, employees, suppliers and its communities. A responsible business always considers its impact on its varied stakeholders, seeking to achieve maximum balance.

It is important to note, that in addition to being the right thing to do, such behavior actually creates long-term value for the business. Studies have shown that over the long term, companies that act responsibly toward their stakeholders improve their revenue, profits, share prices and workforces substantially faster than companies that don't.

Short-term vs. long-term

The 1990s also saw a dramatic shift from long-term shareholder value creation to short-term stock price appreciation as a means of generating wealth.

The individual investor's voice has become increasingly represented by institutions -- pension plans, 401(k) plans and mutual funds -- which intensify the pressure on corporations for a higher return over shorter periods.

It is time for the pendulum to swing back to achieve a better balance between the short and long term. We have a unique opportunity for policymakers, regulators, legislators and business leaders to coalesce around a new paradigm.

Boards of directors must exercise leadership in abandoning short-term strategies that harm long-term value creation and leave it up to investors to choose whether that company meets their investment priorities and time frames. In contrast, some companies will elect to move from being publicly traded to privately owned.

Executive compensation

Executive compensation has become the subject of much public scrutiny. Two themes emerge: excessive amounts of executive compensation and pay for mediocre performance.

Executive compensation has grown significantly faster than compensation for the average worker, and some CEOs were compensated generously while their companies failed.

Clearly, CEOs face substantial risks in guiding their companies, and this should be reflected in the financial rewards. However, boards should play a lead role in readjusting the levels of compensation, which will lead to a better distribution between the lowest-paid worker and the CEO.

Pay should be based on performance, not overall stock market movement, with an emphasis on the long term. Stock options are important and should be linked and paid out based on long-term company performance. The same exercise rules should apply to executives, management and employees.

The bonds of trust and integrity between a business and its stakeholders are crucial. While clearly the actions of a few have jeopardized these bonds for many, there is hope for restoration. Boards of directors and CEOs will play an ever-increasing pivotal role in restoring this bond.

What we need now is courageous leadership.

Ethical Principles Signers

Anthony Andersen, Retired Chairman & CEO, H.B. Fuller

Larry Benveniste, Dean, University of Minnesota, Carlson School of Management

Carl Bergquist, Chairman, President & CEO, The Berquist Company

Norman Bowie, Andersen Chair in Corporate Responsibility, University of Minnesota, Carlson School of Management

Mary Brainerd, President and CEO, HealthPartners, Inc.

Robert H. Carlson, Co-CEO, Reell 

Thomas Colwell, CEO, Colwell Industries, Inc.

Judith Corson, Co-Founder and Former President, Custom Research

Gary Costley, President and CEO, International Multifoods

Jo Marie Dancik, Area Managing Partner, Ernst & Young LLP

Chuck Denny, Former Chairman & CEO,  Telecommunications

Jon Eisele, Managing Partner, DeLoittle & Touche

Sidney Emery Jr., Chairman and CEO, MTS Systems

Ken Goodpaster, Koch Endowed Chair in Business Ethics, University of St. Thomas

Tom Holloran, Professor Emeritus, University of St. Thomas

Russell Huffer, President, Chairman and CEO, Apogee Enterprises, Inc.

Ron James, President and CEO, Center for Ethical Business Cultures

S.A. Johnson, Chairman, Hidden Creek Industries

Jay Kiedrowski, Executive Vice President, Institutional Investments, Wells Fargo Bank

David Koch, Chairman Emeritus, Graco, Inc.

Richard McFarland, Retired Chairman, RBC Dain Rauscher, Inc.

Richard (Pinky) McNamara, Owner and President, Activar Inc.

Kendrick Melrose, Chairman and CEO, The Toro Company

William Monahan, Chairman and CEO, ImationCorp.

Timothy Morin, Former President and CEO, Wizmo, Inc.

Jeffrey Noddle, Chairman and CEO, SUPERVALU INC.

Dale Olseth, Chairman & CEO, SurModics, Inc.

Paul Pesek, Chairman, Locus Medical Technology

Peter Pierce, Chairman, Lyle Signs, Inc.

Christopher Puto, Dean, University of St. Thomas, College of Business

James Renier, Former Chairman and CEO, Honeywell

James Secord, Former President and CEO, Lakewood Publications

John Solberg, President and CEO, Opus Northwest, LLC

Gerald Stenson, Executive Vice President, Wells Fargo Bank, N. A.

William Sweasy, Chairman, Red Wing Shoe Company

Tom Triplett, Attorney and Counselor

Kathryn Tunheim, President and General Manager, GCI Tunheim

Win Wallin, Chairman Emeritus, Medtronic, Inc.

Center for Ethical Business Cultures

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Phone: 651 962 4120 or 800 328 6819 Ext. 2-4120 ▪ Facsimile: 651 962 4042

Email: mail@cebcglobal.org

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