THE ROLE OF GOVERNANCE
IN RECENT AMERICAN CORPORATE FAILURES
Abstract
The following report provides a discussion of the issues
of corporate governance in relation to the notorious collapses
of Enron and WorldCom. The Cadbury Report, published in 1992,
was the first of its kind, setting out guidelines for the
provision of 'good' corporate governance, and offering a code
of best practice. From this, other literature has stemmed.
An analysis of the problems within Enron and WorldCom is accompanied
by an explanation of how well the earlier literature on corporate
governance can explain these problems. This leads onto a consideration
of the way in which the corporate governance literature has
evolved, with a discussion of the more recent developments,
such as what has become known as the Smith Report. Finally,
twelve 'key points' of corporate governance have been provided,
which have been derived from the findings of the analysis
of the collapses of Enron and WorldCom.
1. Introduction
1.A Aim
The aim of this project is to assess the role of governance
in recent American corporate failures, and the extent to which
the Cadbury literature explains the problem of corporate failures.
This will be done through the analysis of two well-known American
failures - Enron and WorldCom.
1.B Specific project objectives
(a) To examine the theory of corporate governance, in particular,
the Cadbury literature.
(b) To determine the primary reasons for the failures of Enron
and WorldCom.
(c) To assess the extent to which theories of corporate governance,
in particular, the Cadbury literature, can support the reasons
for the failures of Enron and WorldCom.
(d) To compile a report and identify any areas that may have
been overlooked by theories of corporate governance so far.
1.C Context.
The literature on corporate governance is vast. However, it
was not so readily available ten years ago. The Cadbury report
was published in 1992, and was the first in-depth statement
on Corporate governance.
The Cadbury committee was chaired by Sir Adrian Cadbury. It
should be mentioned that Sir Adrian formerly ran CadburySchweppes,
a company with firmly embedded Quaker values and a strong moral
code. The Cadbury committee was established by the Financial
Reporting Council, the London Stock Exchange and the Accountancy
profession. It came into existence specifically to discuss issues
of corporate governance, following the collapse of various UK
companies during the 1980s and 1990s, for instance, the Maxwell
communication corporation. Robert Maxwell, in his defence, did
some good through highlighting the dangers of a concentration
of power. Within the report was a 'Code of Best Practice,' which
according to Sir Adrian Cadbury (1992), set out to make recommendations
that focused on the "control and reporting functions of
boards, and on the role of auditors."
The Cadbury
Code sparked a wide-spread debate, and on the whole, was well
received. It has led to the creation of extensive literature
on the subject. Following its publication, various companies
have established their own codes of practice based on the
Cadbury Code. According to Sir Adrian Cadbury (1992): "The
committee has become the focus of far more attention than
I ever envisaged when I accepted the invitation to become
its Chairman…It is, however, the continuing concern about
standards of financial reporting and accountability, heightened
by BBCI, Maxwell and the controversy over directors' pay which
has kept corporate governance in the public eye."
The subject of corporate governance remains extremely relevant.
Accountability is important, as Sir Adrian acknowledges (1992):
"The country's economy depends on the drive and efficiency
of its companies. Thus the effectiveness with which their
boards discharge their responsibilities determines Britain's
competitive position." According to a press release in
Scoop (2002): "Corporate governance has been a hot topic
since the Enron and WorldCom accounting scandals in the US."
The University of Auckland considers the subject of corporate
governance to be so topical that they have recently established
it as a degree course.
|
