Corporate Governance and The USA

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.

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