Corporate Governance & Regulation - Enron - Case Study Example

Introduction Corporate governance is an important and vital element of businesses in the 21st Century. Most businesses in the UK and the United s are subjected to variosu corporate governance rules and regulations. This is meant to ensure that firms are ran and directed appropriately to deal with all issues and matters that are of urgent importance. The aim of this paper is to examine the importance and significance of effective corporate govenance systems in firms. To this end, the paper will examine and review the different perspecitves and views on the aims and purpose of corporate governance. Definition of Corporate Governance Perhaps the most simple and most basic definition of corporate governance is what was put forward by the Cadbury Report and the South African King report which asserts that “corporate governance is the system by which companies are directed and control” (Tricker 7). This narrows the scope of the definition of corporate governance into a system or mechanism through which authority for control and governance is delegated to a certain people who wield the highest and most significant authority in the organisation. “It refers in particular to the powers, accountability and relationships of those who participate in the direction and control of a company. Chief amongst these participants are the board of directors and management” (HIH Royal Commission 27 para 76). This definition is rather comprehensive and it links corporate governance to the authority and accountability relatinoships that exist in organisations. This include the identification of the job tasks or designations that are responsible for corporate governance and this include the board of directors and the management. They are senior elements and parties of the company and they play a fundamental role in the affairs of organisations and entities because they direct affairs and utilise the resources of the business owners with the view of attaining the best possible results for the organisation. This perspective of corporate governance is described by Skouson (7) who states that corporate governance consists of the people, processes, and activities in place to help ensure the proper stewardship over a company’s assets. This definition indicates that the fundamental purpose and the main reason for corporate governance is to set up a system through which a responsible group of people can be formed who will have oversight of the activities of a firm and they will be able to authorise the delegation of activities to different parties in the entity and monitor and control the results that will be attained by the entity. This group play a stewardship role and are accountable directly to the owners of the entity. This means that corporate governance is about the responsibility delegated to the to managers and directors of an organisation and this is done with the view of getting them to attain the best interest and the best results for the entity. Thus, Solomon defines corporate governance as “the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all stakeholders and act in a socially responsible way in all their business activities” (21) This indicates that corporate governance has to do with the need for controls and checks that emanates from the top of the organisation. And this boils down to the board of directors and the management of the firm. However, Milton Friedman gives a different perspective of corporate governance. He states that “corporate governance is the conduct of business according to the owners’ or shareholders’ desires, which is generally about making as much money as possible while conforming with the basic rules of the societies embodied in law and local customs” (Fernando 14). This perspective of corporate governance indicates that it is a process through which the people charged with the control of the firm will conduct business in a way and manner that will attain the highest returns to shareholders and also adhere to all the relevant rules and norms in the society. This means that corporate governance has to do with the management and board of directors of a firm working within the relevant rules and regulations of the land in order to attain the best results and the best profits for the firm. Solomon’s definitions of corporate governance indicates that corporate governance is about how a firm will deal with the agency problem which revolves around the need to ensure that a firm’s management and board of directors work to attain the best interest of the business rather than their own parochial interest. Therefore corporate governance is there to set up a framework within which a business’ management and directors can be made to work and formulate systems and structures that will ensure that they will meet their primary and fundamental obligations as stewards of the entity. Case Study: Enron Enron was a leading energy company in the United States. It had its headquarters in Houston, Texas until 2001 when the firm was embroilled in a scandal and it was dissolved (Wearing 80). The company came into existence after the merging of InterNorth and Houston Natural gas in 1985. As Enron grew into a major energy giant, Jeffrey Skilling was brought on board to develop executives and through various forms of negligent corporate governance practices, there was massive misconduct amongst the people charged with corporate governance. This culminated in the maintenance of a financial reporting system that provided misleading information in the annual financial statements that hid major debts from failed deals and projects. The financial reporting system was always endorsed by the accounting and auditing firm, Aurthur Anderson which was the accounting firm of Enron that was engaged in providing many services to the company (Monks and Minnow 301). Therefore, the board of directors of Enron endorsed some very high risk transactions based on the recommendations of financial reports and management of the company. This was due to a number of overrides that occurred within Enron and allowed the management of Enron to get away with many failed activities and deals that proved to be highly problematic to the firm. On one fateful day, a staff member of Enron blew the whistle on the company and reported their misleading and illegal accounting practices. This led to investigations and within days the shares of Enron fell sharply and steeply from $90 in 2000 to $1 after the scandal at the end of November 2001 (Wearing 81). An investigation was conducted and it was discovered that Enron’s financial reporting system had been hampered by large scale misleading reporting and false information. This led to a situation where Enron’s assets and liabilities had to be revalued. Through the process, Enron’s assets which were worth over $60 billion were filed for bankruptcy in the largest case of its kind in US history (Monks and Minnow 302). The Enron saga led to two main things. The first was an emphasis on the responsibility of managers and directors in ensuring that there are controls and checks and balances in the firm ot ensure that the members of the financial reporting unit provide accurate and truthful informaiton. This led to the passing of the Sabeans Oxley Act in the United States and there were penalties for presenting false or misleading information. Secondlly, there was the need for accounting rules to be made to ensure that information put forward by accountants and audit firms were accurate and had no biases or misleading elements. This ensured that corporate governance came with a high degree of accountability. Aim of Corporate Governance “The ultimate aim of corporate governance is to help foster professional or ethical behaviour at all levels of a firm and develop a culture that draws the best out of people” (Urlacher 101). This means that the existence of corporate governance creates a system through which the firm’s activities are streamlined and there is a high degree of responsibility placed upon people in authority and who are given the right to use a firm’s resources and shareholders’ investments. Thus, the fundamental end of corporate governance is to ensure that there are standards and there are targets and yardsticks with which the conduct and activities of a firm’s is linked to. This include the streamlining of different processes and different activities that a firm goes through. This is because corporate governance creates the checks and balance as well as expectations of a firm in order to regulate conduct and affairs throughout the firm in its operations and affairs. Corporate governance involves the integration and identification of some standards and codes of best practice like cardinal virtues, integrity and trust (Urlacher 101). This means that corporate governance allows a firm to institute various standards and codes for acting and this is to be complied with at all levels and at all standards of the firm. Corporate Governance and Stakeholder Issues A stakeholder is an individual who affects or is affected by the activities of a firm or an organisation (Freeman 96). Some authorities like Freeman argue that the reason why corporate governance exists in the contemporary society is that the world has evolved to a point where the rights of all stakeholders including persons who are not working with an organisation have rights and these rights are recognised. Thus, the essence of corporate governance is that it is meant to steer the organisation and ensure that the firm works to attain the best interest of all people who are connected to the entity. Thus, corporate governance to such thinkers involves the capability of a firm to have a body that is at the helm of affairs and is sensitive and considerate of all the needs and expectations of all relevant parties in its activities and processes. Hence, corporate governance to these authorities and theorists is one that involves the adherence to the rules and norms of the society and an attempt to satisfy the needs and expectations of all stakeholders in different ways and forms. Corporate governance to such persons is successful if the authorities provide all the needs and expectations of stakeholders and they are sensitive to these needs and expectations in the processing of their activities. Where a firm is not proactive in dealing with the needs of stakeholders, that firm is seen as a failure. However, most authorities in this school of thought seem to admit the fact that stakeholders vary in the power and influence. Thus, they encourage management and board members charged with corporate governance to use various techniques and tools like the Mendelow Matrix to evaluate the position and processes of different stakeholders and use it identify the best needs of stakeholders and discharge them as and where necessary. Corporate Governance and the Maximisation of Shareholder Wealth In the view of other authorities like Milton Friedman, the essence of corporate governance is to increase the wealth and returns of shareholders. This is because they accept the premise that corporate entities are formed when shareholders come together to pool their resources to start a firm and this is done by getting these shareholders to buy shares and come together to create a unified stock of capital. Hence the primary essence of appointing directors and persons charged with governance is to get them to increase profitability and enhance return on investment. Thus, a firm will have to work towards the attainment of the best financial results to keep shareholders happy. This premise is very important because the directors are voted into power by shareholders with their primary aim and their primary objective being the attainment of higher prosperity through more profits. Thus, this is the fundamental essence of corporate governance. Corporate Governance and Sustainability In reconciling the position of Shareholder V Stakeholder essence, Aras and Crowther (87) identifies that if a firm needs to exist and thrive into the future, there is the need for the firm to concentrate on making profits in an ethical way and manner. This is done by using ways and techniques that enables the firm to make money and also respect stakeholder expectations and needs. This is because the survival of a firm is fundamentally dependent on whether stakeholders are happy to continue working with the firm or not. Thus, in spite of the fact that the firm is fundamentally concerned with making the most and the highest levels of profits possible, there is the need for firms to work to satisfy stakeholders if they desire to operate into the foreseeable future. This is because a sustained method and a sustained approach of satisfying stakeholders ensure that shareholders continue to attain profits and returns on their investments over a long period of time in the future. Corporate Governance as Strategy Formulation and Checks and Balances In practice though, corporate governance is concerned with creating and maintaining checks and balances. This is because the fundamental requirement of directors and members of the board is to steer the entity and ensure that the entity operates in a way and manner that continues to enable it to attain its fundamental goals and expectations. Thus, corporate governance is concerned with the formulation of a long-term and organisation wide strategy that will affect all the units of the firm (Johnson and Scholes 2). This guides all the units and components of the firm and enables the firm to attain its aims through an authoritative decision by the legitimate persons charged with the control of the firm’s resources. Once corporate strategy is put in place, there is the need for the board and corporate governance authorities to monitor the results through the instituion of checks and balances. This include the institution of various checks and efforts to ensure that risks are appropriately sized up and they are used to deal with issues and matters in such a way and manner that the firm remains on track without violating the general rules of the external society within which the firm operates. Conclusion There are different approaches through which corporate governance can be defined. Corporate governance can be seen as an approach and a method through which stewardship can be carried out in a firm. This include the appointment of directors and managers to implement the vision of the firm and attain results that are expected by shareholders. Theoretically, corporate governance is seen as a means through which a firm maximises returns for shareholders. This is done through providing the highest possible profitability to the firm. However, other authorities argue that for a firm to attain survival over a long period of time, corporate governance must be conducted with the view of identifying stakeholders and providing stakeholder needs and expectation. In practice though, corporate governance is concerned with the formulation and implementation of strategy. This is complemented by the assessment of risks and the identification of solutions to problems that may arise with the advent of the firm. This leads to the creation of a framework through which a firm works and operates to attain the best results and minimise the influence of negative externalities. Works Cited Aras Guler and Crowther David. A Handbook of Corporate Governance and Social Responsibility Surrey: Gower Publishing. 2012. Print. Fernando Albert. Corporate Governance: Principles, Policies and Practices Delhi: Pearson. 2011. Print. Freeman Eric. Stakeholder Theory Yale University Press. 2010. Print. HIH Royal Commission. Directors’ Duties and other Obligations Under the Corporations Act. 2010. Print. Johnson Kevan and Scholes David. Exploring Corporate Strategy New York: McGraw Hill Publishing 2012. Print. Monks Robert and Minow Nell. Corporate Governance Hoboken, NJ: John Wiley and Sons. 2012. Print. Skouson Fred. An Introduction to Corporate Governance: Theories, Principles and Practice Mason, OH: Cengage. 2005. Print. Solomon Jill. Corporate Governance and Accountability Hoboken, NJ: John Wiley and Sons Publishing. 2011. Print. Tricker Bob. Corporate Governance: Principles, Policies and Practices Oxford: Oxford University Press. 2007. Print. Urlacher Pauline. New Issues in Corporate Governance New York: NOVA Publishing. Wearing Robert. Cases in Corporate Governance London: SAGE. 2010. Print. Read More