Reforming Corporate Governance - Case Study Example

Memo to the President: Reforming Corporate Governance Introduction The economic challenges that have faced the United States have been attributed to lack of corporate discipline and policies to guide their actions and behaviors. As a result, the country has been faced with a number of financial crisis, most of which have been attributed to lack of corporate ethics and governing laws. For example, the 2008 prime mortgage meltdown that led to the foreclosure of a number of corporates including Enron among other financial institution was attributed to the poor corporate governance. The reckless behavior of the financial institutions led to the provision of debt services to member of the public who had been declared unable to serve their loans and thus procure credit from other institutions (LeBaron 25). The failure of the mortgage holders to service their loans necessitated a foreclosure that affected the economic situation of the country. To mitigate these challenges among others that affect the economic stability of the country, there is need for the development of reforms within corporate governance to inculcate the doctrine of ethical business practice. In this memorandum, I will explain why reforming corporate governance will eliminate the unethical behaviors of companies that have in the past affected the economy of the United States. This memo will also explain the weaknesses of the Sarbanes-Oxley act which has curtailed its ability to protect the economy from unethical corporate practices (Wesley II, Curtis and Hermann 466). Ethics challenge in American corporates According to the national business ethics survey conducted in 2009, most respondents identified ethical challenges and misconduct within the workplace. The survey identified a number of issues which employees noted including abuse of office, corruption and bribery and political interference and contributions. The challenges of corporate America which has affected their ability to perform and boost the economic performance of the country has been attributed to lack of proper ethical governance (LeBaron 25). One of the most dominant ethical challenges in the country is employee mistreatment and harassment by top management of organizations. According to Myrtle Bell, sexual harassment has affected the willingness of employees to commit to the organization especially dominant among the immigrant employees. Most of the employees are exposed to deliberate poor work environments, low wages and excessive work schedule without overtime pay (Wesley II, Curtis and Hermann 466). Apart from employees, corporates in the United States have grown into mega bullies that transfer the same treatments to their customers. As a result, shoddy products have been released into the market with the knowledge of corporate management despite the impacts it has on the health of the consumers. In most instances, financial and investment institutions have lied to customers and provided discriminatory information based on their nationality, sex and even religion. In most cases, customers do not report incidences of mistreatment and falsification of information, making it essential for reforms to be introduced to control the ethical actions of corporates. Employees especially the top management of corporations has not been spared in this virulent unethical behavior of corporations. Research has indicated that the management of top corporations has continued to abuse their powers and misuse the resources of the company. Breach of privacy of information has also increased in this age of data hoarding and selling as employees entrusted with crucial corporate information trade them to competitors. As a result, most organizations have lost significant amount of investment due to poor market performance attributed to internal espionage by its employees. In 2008, most companies were accused of providing falsified information to the Federal Reserve thus inflating their abilities to engage in different businesses in the country. By releasing misleading and falsified information to the customers and the investors, the corporates operated on unethical ground which has been attributed to the loss of investor capital. This necessitated the enactment of the Sarbanes-Oxley Act of 2002 which forced top management of organizations to certify financial statements. However, this act has not effectively protected investors and other companies from the widespread unethical behaviors of companies, a situation that can only be fully eliminated through the introduction of reforms to oversee corporate governance (LeBaron 25). Reforming corporate ethics in American businesses During the inquiry into the Enron saga which led to the closure of the business, the directors of the company made a shocking revelation that has shaken the ethical debate within corporate governance. As managers of the company who were involved in monitoring its financial performance, the directors confessed their ignorance of the poor performance of the company which led to its collapse. This negligence has been attributed to the design of corporate governance in the country, one that must be changed to cushion investors and the Americans. In this section, I will try to explain the approaches that can be adopted through your intervention to reform the approach of corporate governance in the country and prevent a repeat of Enron. According to the state laws of the United States, directors of corporates are mandated to act within the best interest of stakeholders which can create maximum share profits for the shareholders. However, the hyperinflation of the share profits to cover the eyes of the stakeholders and grant them false confidence led to the destruction of Enron. Following the lessons from Enron, it is evident that any management approaches adopted in pursuit of profits and increase in share profits must remain within the ethical confines of corporate governance behaviors. A number of reform options are available that can be adopted to improve the performance of corporates and eliminate unethical behaviors which are destructive to businesses (LeBaron 25). First, auditors in corporations in the United States must be granted independence and provided with the power to work without the influence of other members of the executive. In most cases, companies have behaved like own bosses of their auditors as they have been granted the power to select and pay the auditing firms according to the corporate accountability commission. This proposal was forwarded by Ralph Estes to the congress as way of eliminating the interference that has been witnessed in the external audit activities in different corporates (LeBaron 26). According to Ralph, the introduction of the corporate accountability act will enhance the powers of auditors and place them directly responsible and answerable to the stakeholders as opposed to the influential management. This will create room for the inclusion of controversial issues such as green gas emission, exact wages and salaries paid to employees and the valuation of the company to potential investors. Second, law breaking firms whose unethical activities have brought to the public domain through court cases should be barred from working on government tenders and contracts. The federal government has given a precedent by suspending Enron and Arthur Anderson from servicing its tenders, a decision that will force accountability within corporations. However, some companies with worse records whose behaviors have affected the investment of innocent Americans have continued to win government contracts and tenders. This action should be applied across the board and bar all unethical corporations from bidding or participating in government activity. For example, Lockheed martin has been accused of over 63 gross economic and financial violations but continues to win government tenders, an act that has encouraged other companies to continue with their unethical activities. Major multinationals should not be spared as well as this will pass a strong message to other companies about the government’s commitment to eliminate unethical actions within the corporate sector. For example, Boeing, Raytheon and general electric that serve major tenders worth over $1 billion shillings should be barred for a specific period of time to send a strong signal to the business community and players. The United States mandatory governance is however a blend of the two systems. In some states, companies are not compelled to adhere to the requirements but are required to make formal disclosure of the rules they have or have not adhered to (Bhimani 142). Firms that are cross listed in the United States are required according to the Sarbanes-Oxley act to submit their evidence of compliance to the mandatory governance regulation. The SOX regulation has a prohibition for ‘insider loans’ especially among companies listed under this act. Such companies must also ensure that they submit their balance sheets for each financial year (LeBaron 25). Third, the congress should enact laws that establish broad duty of loyalty to protect the public from intentional malpractice by companies. As it stands today, only shareholders are subjected to the corporate duty of loyalty while the stakeholders enjoy a free ride despite their influence in the management of companies. This provision enabled Enron to hike its electricity price to over 900% in California and its environs, a decision that led to a spike in the company’s share price. By adopting the code of corporate citizenship developed by Hinkley, corporate piracy against the public will be eliminated (Minkes and Minkes 78). Finally, corporates should ensure that the board of directors is made of financially and economically knowledgeable professionals who can be able to monitor the activities of the company. In most cases, directors have lacked professional knowledge in the area of operation of the business and this has granted unethical managers to exploit the company and fleece the shareholders. Just like the country is governed by its own citizens and not outsiders, a law must be introduced that prohibits the nomination of outsiders into the board of directors. Members of the board should be allowed to self-nominate and be subjected to a democratic process to ensure that the team is made of informed professionals that can champion the interest of the company and the stakeholders (Bhimani 142). Eliminating corporate malfeasance Corporate malfeasance is the engagement in illegal activities by individuals within a company while utilizing the company’s resources and employees. Such actions are in most instances intentional and intended to fulfill the selfish needs of an individual or a group of employees. Corporate malfeasance exists in different forms and has continued to fleece public and private corporations in the united states due to lack of strong prevention laws. Examples include financial deception, a reason that has been attributed to the destruction of Enron among other companies (Nader 126). Security fraud is also an example corporate malfeasance and involves the promotion of stock of a company to the public and the employees at a time that it faces imminent closure (Irani, Subir and Suresh 8). Through this act, new standards were established for the formation of corporate boards and the nomination of members to the audit committee. This has created room for the introduction of independent members to the audit committees to identify discrepancies in the financial reports released by the companies. Criminal penalties and accountability standards were also introduced by the SOX and this reduced the level of corporate crime though the act has not completely eliminated this vice within private companies. Through the creation of the accounting oversight board for the companies, the act empowered the SEC with powers to monitor and oversee the accounting activities of firms and establish threshold for their standards (Nader 126). The United States applies mandatory corporate governance as its mode of regulation, especially with the enactment of the Sarbanes-Oxley act. A number of other major economies have however embraced the adoption of the enabling mode of governance and rejected the mandatory corporate governance. Mandatory corporate governance is practiced in major states of the United States. A mandatory system provides guarantee that firms in this system will have to implement any reforms that market regulators put in place (Bhimani 142). This is contrary to the enabling governance where nothing guarantees a fair play and the enforcement of implementation of any changes. Enabling governance has the ability to ensure that there is compliance to regulatory mechanisms especially when it is implemented together with mandatory disclosure of organizations practices. Wholly mandatory system is also slightly more costly to implement when compared to the enabling governance style (Nader 126). Recommendations The corporate governance environment in the United States must be effectively regulated to eliminate the loopholes that companies has exploited to fleece the public and the stakeholders. As the president of the United States, the constitution grants you the power to initiate different legislations and enactments to eliminate the chances of another Enron or even a repeat of the 2008 financial crisis. First, the corporate governance of the United States must be reformed to eliminate the ethical malpractice that has affected its performance and contributed to the decline in public trust in most public institutions (Irani, Subir and Suresh 8). Second, malfeasance must be addressed from the top of the country’s leadership to weed out political support for corporate crime. Research has indicated that corporate criminals in the country rely on the support and protection of influential politicians in the country. By introducing laws that will eliminate the protection of criminals, the currently witnessed corporate malfeasance will be considerably reduced and stakeholders granted a chance to monitor the growth of their investments. Works cited Bhimani, Alnoor. "Making Corporate Governance Count: The Fusion of Ethics and Economic Rationality." Journal of Management & Governance 12.2 (2008): 135-147. Irani, J. J., Subir Raha, and Suresh Prabhu. "Corporate Governance: Three Views." Vikalpa: The Journal for Decision Makers 30.4 (2005): 1-10. LeBaron, Dean. "Our Role in Corporate Malfeasance." Financial Analysts Journal 61.1 (2005): 25-26. Minkes, Leonard. and Minkes, John. Corporate and White-Collar Crime. Los Angeles: SAGE Publications, 2008. Nader, Ralph. "Reforming Corporate Governance." California Management Review 1984: 126. Wesley II, Curtis L., and Hermann Achidi Ndofor. "The Great Escape: The Unaddressed Ethical Issue of Investor Responsibility for Corporate Malfeasance." Business Ethics Quarterly 23.3 (2013): 443-475. Read More