Corporate Governace

Introduction

In this paper, I discuss the main issues and reasons because of which large public companies need the proper corporate governance system in the late 1980 and after. If we look upon the history or evolution of corporate governance, it affected by lot of events held in the whole World. As a result of series of corporate shocks in the 20th century, staring with East Asian and Russian financial crises and followed by series of corporate governance scandals in Europe and the United States. These countries introduced new changes and reforms in corporate governance system.

By definition corporate governance is

• “Corporate governance is about the way in which boards oversee the running of a company by its managers, and how board members are in turn accountable to shareholders and the company.”

• “A jargon term for the fashionable issue of how companies should be run in the context of society as well as the law and best practice.”

Corporate governance before 1980

Before 1980, the main aim of corporate management is to think of themselves not the shareholders. In this view, they tried to grow the firm by “balancing” the claims of all major “stakeholders”--employees, creditors and local communities. 4 This is the fact that in majority of countries of the world, the corporate governance was a major problem before 1980.Claessens et al. (2000), Khanna and Rivkin (2001) and many others found the reasons of bad corporate governance like the ubiquity of family controlled corporate groups in poor countries as well as in some rich countries.

The main issues that triggered for good corporate governance

• Governance Failures

The one main reason of new corporate governance rules is failures of organizations and their management to cope with needs and expectation of their all stakeholders. Different countries may face different governance problems at different times. If we loop upon the history of corporate governance, the corporate scandals triggered the multinational companies and governments to introduced new best practice codes of corporate governance. e.g., the progress of British code s of practice, which started with Cadbury committee (1992), would be relate to corporate frauds like Poly Peck ,Maxwell and Coloroll at the end of 1980 and start of 1990. However, the boom of such frauds especially in USA, in the beginning of new century many cases reported those put influence on public’s confidence and economy values worldwide.

• Enron Crisis and Reasons

Enron was the major player in the energy market or industry in the world especially in U.S. Before its collapse, it was at top ranking and had huge share of this industry. The major causes or reasons behind Enron’s fraud can be summarised as

• Hiding losses from public, investors, stakeholders and authorities.

• Inside trading.

• Wrong diversification of business.

• False analysis and annual reports.

• Executives sold their stock when share price was its peak because they planning for bankruptcy.

• Wrong rating by credit rating agencies and they mislead the investors.

• Personal loans to the executive or stakeholders even at very low interest rate.

• Misuse of company resources as one director Linda’s donated $1.2m to charity.

• Enron spent $ 4.6m trying to affect the White House, Congress and Federal agencies.

• Off balance-sheet transactions to hide debts and financial performance.

• They took the advantage of the soft accounting and auditing rules.

• “Soft money” gifts to the political parties.

• Issuing of high yield “Junk Bonds”.(FT special report)

WorldCom has disturbed the world’s economy after a big accounting fraud. It follows governance fraud, at Enron and its accountants Andersen, which resulted in loosing investor’s confidence. Main bankruptcy scandals of USA are Enron, WorldCom, Adelphia, Xerox, Tyco, Global Crossing, and Qwest etc and we can summaries their financial irregularities in the following table

Table

Company Country Scandals

Ahold NL False earnings show in financial statements

Enron USA Not show debt in SPEs

Parmalat Italy wrong recorded deals and transactions

Tyco USA False profit, and wrong business records, Fat cats

WorldCom USA Expenditures recorded as capital expenses

Xerox USA False Speed up their revenue

• Shareholder activism

Shareholders (investors) activism can also put pressure on corporations for good governance. If we look upon the history, single shareholders, whether institutions or common public, have had less opportunity of effecting on corporate and activities of corporations given the fragmentation of ownership. Shareholders can raise a question at annual meetings but they would need enough votes to pass a revolution that relate with management problems. However, attitude changed with the passage of time. Now private persons have make associations and institutional investors have become more aggressive to work together and have more votes to influence Investee Company. The California Public Employees' Retirement System (CalPERS) is the largest pension fund in the U.S, with $160 billion under authority. They introduced corporate governance rules since 1984.

• Rating agencies: corporate governance indices

Many rating agencies have introduced different methods to evaluate corporate governance performance