Governance and Ethics of Dillard's and Sony by Bruce Medler
Chapter 1
Dillard’s
A. Short Term Results are a real concern. Especially in risky cost cutting decisions. (Book 9)
a. There has also been an excessive trail of discriminatory action towards minorities in the last 20 years.
b. From 1994 to 2007, 5 unarmed minorities were shot and killed by armed off-duty police officers working as security guards for Dillard’s.
c. In 2003, Dillard’s received a court order to cease destroying footage of discriminatory behavior. That year an African American woman received 1.3 million dollars after being refused a free sample.
d. In 2004, 80 African Americans shoppers sued claiming racial profiling. It also received an F grade from the NAACP in 2006 for its commitment to African American citizenry. Another area Dillard’s has received criticism has been with their cost saving techniques.
e. In 2005, a 5 year old girl was dismembered by an elevator that was installed by a non-licensed company Dillard’s had created. Furthermore, there were many incidents that went unreported.
f. In 2008, a manager was fired after following protocol and reporting a discrimination charge.
B. Greedy and Incompetent Executives are another issue in Dillard’s. (PPT 57)
a. In 2006, executives had salaries around $4,000,000 dollars.
b. In 2010, executive compensation is still extremely high at about $4,000,000.
Sony
A. Ethical Accountability is a growing concern I have for Sony.
a. In 2005, they started a crusade against copyright infringement. They initially decided to fight copyright infringement by creating a program that would secretly install itself on the user’s computer. If the customer decided to copy the disk onto the computer the program would destroy the CD.
b. Also, the program was not easily removable.
B. Public Trust, Sony has slowly been losing public trust because of its crusade and questionable methods.
a. In 2006 Sony released the PlayStation 3 (PS3) a gaming console with a main selling point of customizable operating system.
b. Several years later Sony realized this could be used as a means to bypass their security systems and allow users to play pirated versions of video games.
c. Sony then made it a crime in their Terms of Service agreement to customize the PS3.
d. This sparked an ethical dilemma between Sony and its customers (stakeholders) (Figure 1.2 PG 9 Book) because following their ToS agreement the individual is no longer in control of the purchased item.
e. Sony began suing PS3 owners they found with modified systems while also subpoenaing Google and YouTube for the IP addresses of anyone who watched a YouTube video on the process of altering the operating system. IE they were suing their stakeholders.
f. After this news became public a group of hacktivists referred to as anonymous claimed they would bring Sony down.
g. On April 3rd Anonymous took down the PlayStation Network and Sony’s website while also collecting all of Sony’s sensitive customer information like credit cards, addresses, names, and telephone numbers.
h. The imprudent part of Sony’s reaction to the event was a delay of 4 days before they had a public response stating that they had not only been hacked but all of their customer data had been stolen. Sony has now been fighting off several class action lawsuits because of their irresponsible methods for handling sensitive customer data.
Comparison
Dillard’s and Sony are both corporations that have culture issues. The issues in both companies are directed at stakeholders specifically customers. (Figure 1.1 Book PG8) Dillard’s I believe is an extremely dangerous company. Their lack of concern for everyone but shareholders is scary. Sony has taken an extremely aggressive stance against its customers. I believe this will hurt them in the long run as technologies develop and they are left behind clinging to hold models of business.
Recommendations
Dillard’s
A. Benefit from objective and competent legal counsel. (Book PG 16)
B. I think with Dillard’s an independent and competent board are necessary to check management strategy and decisions. (Book PG 16)
C. I believe this will help create a positive corporate culture by forcing executives to set a positive Tone at the Top. (Book PG 17)
D. Dillard’s has shown in the past that it does not support ethical behavior and has in fact punished employees for following protocol. Incentives need to be put in place that rewards high-quality and ethical performance. (Book PG 18 Top Paragraph)
E. Need to accept responsibility and accountability of all personnel for their actions and actions of others under their supervision. (Book PG 18 Bottom Paragraph)
Sony
A. Benefit from objective and competent legal counsel. (Book PG 16)
B. With Sony I believe it is necessary for them to maintain the company’s high reputation and stature in the industry and the business community. (Book PG 18 Top Paragraph)
C. They can do this by changing their position on pirated material and following through with their originally selling points. This will help increase public trust and improve the firm’s culture by showing they are willing to stand by what they say.
D. Need to accept responsibility and accountability of all personnel for their actions and actions of others under their supervision. (Book PG 18 Bottom Paragraph)
Stronger Company
In my opinion Sony is the stronger company. The culture of the company does not take risk with the lives of its customers. Dillard’s sketchy practices have injured its customers physically and mentally. It was aware of its actions and attempted several cover ups of its wrong doing. This shows that the company knows the difference between right and wrong but will choose wrong is the benefit is there.
Chapter 2
Dillard’s
A. Corporate Governance explained on company website.
B. Little specific information about the aspect the company leans towards.
C. I feel that Dillard’s leans toward Shareholder Aspect.
a. I came to this conclusion because of a lack of information talking about customers, employees, local community, and social constitutes.
b. The majority of their information specifies the importance of board’s oversight function and increasing incentives for executives.
c. I believe this focus will continue to cause problems as it has in the past with questionable ethical behavior to the stakeholders.
d. This tendency to favor shareholders over stakeholders could be because of the origin country of the company as the United States tends to favor stakeholders.
Sony
A. Corporate Governance explained on company website.
B. No direct information about specific aspect but a large amount of information for stakeholders is present.
C. I feel that Sony leans towards Stakeholders Aspect.
a. They created a branch to specifically deal with social responsibility in 1994. This branch is called the Corporate Social Responsibility (CSR).
b. Within Sony’s website they have several sections with information from recovery efforts for the tsunami, social contribution activities, stakeholder engagement and partnership, employee, etc.
c. There focus on stakeholders could be because of the culture of Japan with the emphasis on the group over the individual.
Comparison
Both companies do a good job explaining their Aspects of Corporate Governance. One thing that stuck out to me with Dillard’s is with Integrity of Financial Reporting in 2008 Dillard's CFO disappeared during a dispute and was declared dead after he disappeared, Dillard's restated earnings for the previous year. It appears that the previous CFO might have been thrown under the bus. Sony has a very positive record of internal governance.
Recommendations
Dillard’s
A. Improve the corporate governance framework to increase incentives and accountability not only for the shareholders but also the stakeholders. They should also increase relations with stakeholders specifically employees and customers. (Book PG 38 #7)
B. Honesty needs to be rewarded. The company has a firm culture of sweeping everything under the rug. I believe this creates a negative public appearance. If there is an issue the company should get the ugly truth out quickly and implement changes to fix any issues present. (Book PG38 # 1)
C. Dillard’s should respect its stakeholders and improve their satisfaction. I believe the firm culture is currently Us vs. Them and I believe this is dangerous for long term survival and efficiency. (Book PG 39 # 3)
D. Dillard’s has a lack of transparency. This is problematic because it tarnishes the company reputation. To increase trust Dillard’s should use external auditors to investigate and report issues. (Book PG 39 # 4)
E. Should increase focus to stakeholders and executive accountability if they want to increase their public image and employee satisfaction. (Book PG 33 # 9&10)
F. The corporate governance structure should be designed around a value adding philosophy, ethical conduct, accountability, shareholder democracy and fairness. (Book PG 57 Key Point #6) I believe Dillard’s underestimates the value of their stakeholders.
Sony
A. Sony’s main issues deal with a customer base that does not trust them. They should focus on company honesty and empathy. (Book PG 38 #1)
B. Help the customers understand why decisions were made and how they affect the company through use of responsiveness. (Book PG 39 #3)
C. Should increase focus to stakeholders and executive accountability if they want to increase their public image and employee satisfaction. (Book PG 33 # 9&10)
Stronger Company
In my opinion Sony does a better job of increasing awareness of Corporate Governance and has designed a better system of accountability. They have a higher level of employee satisfaction and less corrupt behavior. Sony has a division specifically to increase shareholder knowledge. I believe Sony is the stronger of the two.
Chapter 3
Dillard’s
A. I believe Dillard’s Governance and Ethics is through its employees.
B. The employees are an extension of the tone at the top set by the executives.
C. This is a dangerous situation to be in because the employees are unhappy and feel unappreciated.
D. Employees rated Dillard’s 2.4 out of 5 and gave the CEO a 21% approval rating.
E. A quote from an employee at corporate. “I work in one of the divisional offices and I would love to be interviewed, but I can't give you my name or my position. I know how horrible Dillard's is and I can assure you that it's not just at store level - that there is discrimination, lousy pay and even worse benefits all around - it doesn't get any better when you move into those executive offices. The company is completely mismanaged by two of the Dillard's sons who have no plan, direction or idea of what they are doing. The problem starts at the top and it trickles all the way down. I work with seven other executives and five (including me) are looking for work elsewhere.”
F. Governance and Ethics explained online but appear not to be followed.
G. Executives seem to lack incentives to increase stakeholder’s satisfaction. (Book PG 65 Incentives)
Sony
A. I believe Sony is known for its Governance and Ethics through the news and media outlets.
B. The Governance and Ethics of stakeholders and shareholders appear to be more positive than negative.
C. Employees rated the company 3.4 out of 5 and a CEO approval rating of 70%.
D. Sony does a good job explaining their Governance and Ethics online but does not completely follow through.
E. The main complaint about Sony’s work environment is the long hours required for advancement. I believe this is probably because of the Japanese background of the company. It is very common for Japanese to work long hours without benefit.
F. Lots of social responsibility like tsunami relief efforts and social contribution teams for the future. Society Level (Book PG 64 #1)
Comparison
Sony definitively shines through as the golden child between these two companies. The employee satisfaction at Dillard’s is very low. I think they are frustrated and are now acting out as a way to help reduce their cognitive dissonance. Sony does have some frustrated employees but there are far less. Overall, I believe both companies have unhappy customers.
Recommendations
Dillard’s
A. Create positive incentives to motive all levels of employees. (Book PG 65 Incentives)
B. Increase the responsibility of each manager for their ethical behavior. (Book PG 65 #4)
C. Work on organizational based incentives. This needs to start at the top of the organization and echo throughout. A possible organization incentive could be every employee gets a set universal bonus percentage based on profits. This percentage would be the same at the top and at the bottom of the organization. (Book PG 67 #1)
D. Dillard’s needs to become aware of the satisfactory level of its employees and should evaluate possible course of action. (Book PG 71 # 1&2)
E. I believe that an increase in employee satisfaction will cause an increase in customer relations and will enhance the company’s reputation. (Book PG 70 #3)
F. Employees need to be encouraged to speak up for wrongdoing. In the elevator incident with the dismemberment of the little girl employees were probably aware of this practice but I believe no spoke up because of fear of retaliation. Whistleblowing should be encouraged and rewarded. (Book PG 71 #5 top)
Sony
A. Sony’s main negative ethics issues all coincide with copyright infringement. This area has been well covered by the media and even better on the internet. I believe Sony would be able to increase its overall ethics appearance by dropping its crusade. By adapting to alternative courses of action they should see increased rate of return. (Book PG 71 #2&3)
B. Approximately 5% of PS3 owners modify their systems. After their crusade starting Sony has seen a huge decrease in sales and PSN activity. Approximately 21% of PS3 owners are considering switching to the Xbox 360 and selling their PS3s. (Book PG 71 #5)
C. By establishing a positive relationship with their customer I believe Sony will be able to increase their reputation. (Book PG 70 #3)
Stronger Company
In my opinion Sony is the stronger company because it has happy employees that are promoting a positive image of the company. They are very active in social causes and have a fairly high level of satisfaction. Dillard’s has angered their employees and has formed a gap between the top and everyone else in the company. This is definitely a non-friendly environment to work. Sony’s employees’ only real concern was the long hours that came with the job. Most of the employees believed their leadership was effective but perhaps a little distant.
Chapter 4
Dillard’s
A. The CEO could determine certain important information unnecessary or deliver information too late for the board to act in his or her favor. (Book PG 110 #3)
B. The CEO could influence his or her own salary and bonuses. Which the CEO compensation is already high. (Book PG 111 #5)
C. The CEO could decide his or her successor. Dillard’s is a company passed down generations and this is most likely a reason for its decline since the CEO succession. (Book PG 109 Table 4.3)
Sony
A. Boards need to be elected each year and this could distract a CEO from performing his or her duties. (Book PG 109 Figure 4.3)
B. It is recommended that boards meet regularly without management present and if the CEO is part of the board this is not possible. (Book PG 109 Figure 4.3)
C. If the CEO was able to influence his compensation it would be unlikely that his compensation would decrease with performance. (Book PG 111 #5) This year Sony’s CEO Stinger’s salary decreased 16% as company performance was down 30%.
Comparison
Dillard’s has a lot of complaints about the top level decision makers. Many complain about the compensation the CEO receives. I believe this is because William Dillard is the CEO and chairman of the board several of his siblings sit on the board of directors. Sony does have CEO duality however the system is not corrupted and the CEO of Sony currently receives less compensation than the CEO of Dillard’s. This is perplexing as Sony is a much larger company.
Recommendations
A. Dillard’s should remove any CEO duality and should not allow the CEO’s brother to serve on the board. This affects the ability of a board to be independent. (Book PG 109 Table 4.3)
B. Dillard’s should increase the size of the board. Currently there are only 3 members and 2 of them are brothers. This is a serious conflict of interests as they have a majority control over all decisions. (Book PG 95 Duty of Avoid Conflicts of Interest)
C. The shareholders should elect the Compensation committee not the board of directors. This creates a system that is completely controlled by the Dillard’s family. (Book PG 97 Compensation Committee)
D. CEO succession should be determined by shareholders not the board of directors. (Book PG 108 #1)
Sony
A. Sony has done a good job creating a corporate governance and ethics system of checks and balances as far as compensation is concerned.
B. My one suggestion would be to not allow CEO duality but I believe it is not a pressing issue.
Stronger Company
Sony has strong checks and balances system that has helped keep the top of Sony conflict of interest free. Dillard’s has a system that encourages conflicts of interests without consequence. Sony is the clear winner.
Chapter 5
Characteristics of a Good Director
A. A director should be independent and without influence from management. (Book PG 135 Evaluation of directors)
B. Directors should not have conflicts of interest. (Book PG 135 Evaluation of directors)
C. Directors should formulate a basis for determining directors’ compensation. (Book PG 136 #2)
D. Directors should evaluate CEOs and place the information on the company website. (Book PG 136 #3)
E. The ability to provide advice and counsel to the company’s senior executives. (Book PG 135 Evaluation of Directors)
F. Have the ability to identify areas of concern and poor performance and then to address those issues. (Book PG 136 Evaluation of directors)
G. Directors should have a
Dillard’s
With my information about Dillard’s I believe the directors have several conflicts of interests as the board is seated by 4 Dillard’s siblings. These characteristics are not up to my standard.
Sony
Sony has a good design in their corporate governance structure. They have limited opportunity for conflict of interest and have shown the CEO is not in full control. My knowledge of the company is limited but it appears to be an effective system. They meet my expectation for effective directors.
Comparison
Sony is clearly the superior of the two in terms of directors and boards. Dillard’s is very corrupt at the top level and it shows as this corruption is passed down through the company.
Recommendations
Dillard’s
A. I believe the directors of the company need to be evaluated. They cannot manage the oversight of conflict of interest if they are part of the conflict of interest. They should strongly consider removing the CEO and his family members from the board. (Book PG 135 Evaluation of Directors)
B. The new board should assess the performance of management and use this to determine a possible cap on compensation. (Book PG 135 Evaluation of Directors)
C. They should implement a system that requires a team of external auditors to evaluate the independence level of each member of the board. (Book PG 135 Compensation Committee Responsibilities)
D. If it is impossible to remove the family members from the board. The number of outsiders to insiders should be increased.
Sony
A. One thing Sony might consider is using the Nominating committee to decide the successor. (Book PG 142 Nominating Committee) I read in an article when Noboyuki Ibei retired he appointed his successor Howard Stinger. The article failed to mention if the board had any ability to choose or not. If they did have the ability to say no or to elect a different CEO then this is not a problem.
Stronger Company
I believe Sony is the stronger company because they have continually shown their ability to design governance systems that work. They make it a key priority at Sony to ensure shareholders and stakeholders are not taken advantage of by the management and CEO.
Chapter 6
Dillard’s
A. Executive Compensation Disclosure (Book PG 161 Executive Compensation Disclosure)
B. Dillard’s awards stock ownership to executives. (Book PG 160 #7)
C. Executive provide a salary. (Book PG 159 #1)
D. Annual incentive compensation bonus Book PG 159 # 2)
E. Quarterly and Annual Financial Reports (Book PG 170 Conceptual framework for Financial Reporting)
Sony
A. Sony uses an ERM system that they are constantly updating to meet threats.
B. Quarterly and annual financial statements. (Book PG 170 Conceptual Framework for Financial Reporting)
C. Designed a long term incentive compensation program. (Book PG 170 #3)
D. Annual incentive compensation bonuses (Book PG 159 #2)
E. Disclosure executive compensation. (Book PG 161 Executive Compensation disclosure)
F. Executive provide a salary. (Book PG 159 #1)
Comparison
Both companies employ a large range of protection to help fight the paradox of management. Both companies have had to restate financial reports before. Sony has been in a negative light recently because of the upset PS3 customers along with the Anonymous hackings.
Recommendations
Dillard’s
A. There are rumors of self-serving and self-dealing at Dillard’s these rumors should be investigated and if true should be fixed. (Book PG 156 Self-Serving and Self-Dealing)
B. Succession planning should be addressed. Family inheritance could be part of the problem with the corruption in the Governance of Dillard’s. (Book PG 156 Succession Planning)
C. Dillard’s should investigate new ways to invest capital. Currently, they are considering starting a REIT program. I believe this is a good direction to take. (Book PG 184 Improving deployment of capital & seizing opportunities)
Sony
A. There are rumors of self-serving and self-dealing at Sony these rumors should be investigated and if true should be fixed. (Book PG 156 Self-Serving and Self-Dealing)
B. Update ERM to meet new world threats. (Book PG 182 Enterprise Risk Management)
C. Sony should recognize that their position on copyright infringement is going to bring constant attacks from Anonymous and that these attacks will probably increase in scale. It is necessary for them to monitor and assess possible risks. (Book PG 185 #4&8)
D. It is important that the company respond quickly getting the ugly truth out before another fraud scare happens. A week is an unacceptable response time to black swans. (Book PG 185 #5)
Stronger Company
In my opinion Dillard’s is the stronger company because they have less overall issues. They also are not the target of a hacktivist organization that is determined to crush it. I believe if Sony can overcome its current issues it is possible for it to become the superior company in this category.
Chapter 7
Dillard’s
A. Conflict of Interests (Book PG 196 Provision 206)
B. Tampering with a Record or Otherwise Impeding an Official Proceeding (Book PG 199 Provision 1102)
C. Criminal Penalties for Altering documents (Book PG 198 Provision 802)
D. Study and Report on Violators and Violations (Book PG 198 Provision 703)
E. Retaliation against informants (Book PG 199 Provision 1107)
Sony
A. Attempts and conspiracies to Commit Criminal Fraud Offenses (Book PG 19 Provision 902)
B. White Collar Crime Penalty Enhancements(Book PG 198 Provision 903)
C. Auditor Independence (Book PG 197 Provision 201)
D. Regulation of Foreign Public Accounting Firm (Book PG 196 Provision 106)
E. Corporate Responsibility for Financial Reports (Book PG 195 Provision 302)
General Issues
Dillard’s
A. Tampering with a record: 2003 Minority discrimination videos.
B. Retaliation Against Informants: 2008 a manager was fired for following protocol and filing a discrimination charge. Lawsuit pending.
Sony
A. Sony knowingly stole patents for a computer chip for the PlayStation Portable. Ordered to pay 18.5 million. 2008
B. 2008 The US government sues Sony for a program secretly installed onto computers to prevent copyright infringement. The program began to go haywire and destroy personal computers and even government computers.
C. CEO Howard Stinger is believed to have committed the following crimes SEC violations, wire fraud, bank fraud, money laundering and other willful breaches of U.S. and international law.
Comparison
Both companies have a large amount of violations of the Sarbanes-Oxley Act. Dillard’s violations were reactions to already discovered problems that compounded on top over each other. Sony has some very questionable ethics regarding copyright infringement. They believe it is ok for them to infringe on copyrights but those who infringe on theirs better watch out because they are coming over you.
Recommendations
Dillard’s
A. Dillard’s should be heavily monitored by the SEC because of their continuous efforts to cover their tracks and if caught should be several punished. (Book PG 199 Provision 1102)
Sony
A. Sony has taken a stance of hypocrisy that I believe needs to be rectified. Their attempts and conspiracies to commit criminal fraud offenses are offensive. (Book PG 198 Provision 902)
B. The board should consider a nominating a new CEO with the idea of stakeholders in mind. The court system has been leaning towards the customer favor. This can in the long run hurt Stockholders because of the decreasing company image. (Book PG 216 Corporate Governance and Courts)
Stronger Company
I believe Sony has too many sketchy areas within this question especially with their CEOs behavior towards rules and regulations. Dillard’s on the other hand has attempted multiple times to cover up their violations. I think both companies are relatively weak in this area.