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 / Summer 2004 / Issue 35(originally published by Booz & Company)


Herb Kelleher: The Thought Leader Interview

KELLEHER: I think the CEO’s job has changed a lot in the last 20 years. I don’t say that it’s necessarily for the better or the worse, but there has been a significant change. I think that CEOs of substantial companies have now become public figures, whether they want to be or not. You might as well acknowledge that. With all the media coverage of companies, you’re going to be in the limelight. You’re going to have to be able to respond to the media. You’re going to have to be able to address the public. That’s different.

Also, of course, as we’ve gotten more complex in America, we have become more regulated. So you spend a lot more of your time dealing with various governmental agencies than you did in the past. When I started practicing law, I would estimate that 5 percent of our total practice involved some kind of interface with the government in one of its myriad forms — local, state, or national. When I stopped practicing law, it was about 60 percent. I think that’s just a manifestation of what’s happened in business — that the regulatory aspects of it are now much more important than they used to be, and you have to know how to deal with those because that is a fact of life.

S+B: What about the relationship with the board? With changes in governance, Sarbanes-Oxley, and so forth, how is that going to shift?

KELLEHER: That’s not really a problem. If you were running your company right, if you weren’t trying to deceive someone, if you were basically making judgments that were intended to tell the public as closely as you could exactly what your earnings were, then Sarbanes-Oxley and the New York Stock Exchange regulations are just minor addenda to what you’re already doing. It may take you a little more time. It may cost you a little more money to comply. But it’s not unduly burdensome.

The primary thing I’m concerned about is that the new compliance focus distracts your board of directors, and this is relatively new. When you see that your board is now spending three hours focusing on regulatory issues and a half hour on the company’s business and what it plans to do, you have the feeling that perhaps it’s taking people away from focusing on results and achievement, at least on an interim basis.

Another thing that concerns me is the impact on internal controls. I’ve asked several heads of big accounting concerns, “What’s going to be your criteria of what’s material and immaterial?” Business judgment has to enter into it. Years ago, our internal audit department concluded that some passengers were defrauding us. So audit went out and bought a $300,000 system and hired two people to operate and maintain it. So I asked them, “How much are we losing here?” They said $18,000. I said, “Let them steal $18,000. We’re spending $65,000 a year to keep people from stealing $18,000.”

It reminds me of a fellow who owned a chain of theaters in Texas. He had a manager of 17 years standing, and went in and fired him one day. The guy says, “After 17 years and this enormous success that we have had, how can you fire me?” The owner said, “Well, for the first 15 years you were stealing $800 a month, and you were worth that. But lately you’ve been stealing $1,200 a month, and you’re not worth that.” So I hope we don’t just surrender business judgment and say that every little thing that goes awry from the accounting standpoint is as important as every other thing that might go awry. That concerns me a little bit.

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