Corporate Governance

Executive Summary

In a nutshell, Corporate Governance is the foundation by which a company regulates and directs. It is a set of guidelines, procedures, and disciplines that executives utilize to standardize a corporation. There are many influences that impact a firm’s corporate governance like its’ executive personnel and Board of Directors (BODs). Being elected by a firm’s shareholders, the board’s tasks plays an integral role in a firm; they determine the purpose and values by which a company will build a foundation on. In a general sense, corporate governance can be described with two general categories, good and bad corporate governance. The standards of a good corporate governance system are determined by its ability to set rules and guidelines that can co-exist with a firm’s integrity as well as good public perception. On the other hand, bad corporate governance raises doubt on a firm’s integrity due to illegal actions which was evident in corporate fraud cases around the years of 2001-2002.

While the roots of corporate governance can be traced to the years of 1970s in the United States, it came to fruition around the late 1990s into the early 2000s. More specifically, in the middle of the 1970s, illegal actions like prohibited expenditures “… by U.S. corporations to foreign officials drew the [Securities and Exchange Commission] further into the corporate governance realm.” (Cheffins, 3). Events like corporate bribery raised necessary actions for S.E.C. to undertake many incidents of unethical corporate governance practices and amend solid policies that would refrain corporations from committing the act once again as well as constructing an audit committee to supervise corporations’ audits. Upon restraining the illegal actions of corporations, S.E.C., in 1976, also took to the New York Stock Exchange (N.Y.S.E.) to ensure that their provisions were achieved by each of the corporations that were listed with N.Y.S.E. and that they had “… an audit committee composed of independent directors…” (Cheffins, 3).

With corporations emerging and the economy booming, the next wave of corporate governance cases arrived in the United States throughout the 1980s and 1990s (Holmstrom and Kaplan, 1). In the 1980s, the trend of corporate buyouts and mergers had exponentially grown which called for a cause of restructuring the corporate governance for corporations that went through buyouts. These buyouts required the utilization of financial leverage, which is a process by which a corporation borrows money to make investments like buyouts. In the years between 1984 and 1990, equity of at least $500 Billion were used to fund corporate buyouts and more (Holmstrom and Kaplan, 1). Entering the years of 1990s, the board of directors of corporations began to extend corporate governance plans. An extension of corporate governance was to improve policies as standards to assess the board of director’s actions (Cheffins, 13). During the time, public pension funds started to advocate board of directors in a movement to eliminate incompetent executive personnel; this drive brought acceptance from many notorious corporations like American Express, IBM and others (Cheffins, 13). Corporate governance had also reached the country of United Kingdom (U.K.) in the 1990s. In the year of 1991, U.K. looked to take the reign on corporate governance and propose a Committee on the Financial Aspects of Corporate Governance; However, this proposal did not live up to its purpose, many British corporations had fell victim to the lack of accountability from the executive personnel (Cheffins, 19). The corporate governance that was involved in the years of 1990s was a precursor to the corporate outbreaks that were about take place in the beginning of the years of 2000s.

In the years of 2001 to 2003, the corporate governance predicament was a catastrophic one. Many U.S. corporations were tasked with restructuring financial reports and conceding any unethical fraudulent claims that they were accused of. Most prominently, companies like Enron and WorldCom, who were listed in the rankings of Top 25 of the Fortune 5000 in the year of 2000, were found with increasingly amount of fraudulent statements. The consequences of the actions by the corporations was dire; Administrative personnel of the corporations in question were sentenced to prison for a considerable amount of time. Due to corporations not coinciding with the prior governance policies that were implemented, the United States Congress enacted the Sarbanes-Oxley Act of 2002, more commonly referenced as SOx, which enforced restrictions on corporate fraud and helped provide corporate investors with security. Primarily considered as a reinforcement tactic in the wake of accounting frauds, SOx also found its purpose as a kickoff towards how corporations regulate their processes. Though the corporate governance requirements that were listed in SOx are not newly identified ideas imposed by the United States Congress, they are more so concepts that had been utilized before by successful corporate governance professionals (Romano, 3). While the United States was facing a financial governance crisis, European countries soon look to follow the same path with corporate scandals with well-known corporations like Parmalat and Royal Dutch Ahold (Winter, 3). However, the European legislative committee did not enforce a mandatory act similar to United States’ Sarbanes-Oxley; they predicated their response United Kingdoms’ plan of corporate governance. Once considered as the epicenter of Italian commerce, Parmalat was accused of embezzling around 4 billion Euros. While there were cases against Parmalat’s executives, Europe was in a position of standstill for quite some time, imposing little to no strict legal actions in response to the fraudulent acts. On the other hand, in the case of Royal Dutch Ahold, the company was forced with the notice of resignation from its executive and financial executives due to the falsification of its profits and exaggerating the amounts the company had brought in. Many were quick to tag these financial crises in Europe as “Europe’s Enron”.

In the aftermath of corporate fallouts (Enron, WorldCom, and others), corporate investors had a feeling of doubt and insecurity from their investment in corporations. In order to regain the trust of corporate investors, legislators were tasked with amending regulations following the scandals. Auditing firms were deprived of their consulting processes as well as some corporation