Corporate Governance and Regulatory Processes - Case Study Example

Name: Tutor: Title: Corporate Governance and Regulatory Processes Course: Date: Introduction Companies and institutions are struggling to build strong bases in good corporate governance particularly after the incidences of financial crisis. Research indicates that during financial crisis, corporations and institutions those that do not have strong corporate governance fail to survive the hit of financial crisis, and thus may require government assistance or reforming their codes of conduct. Corporate governance is corporate-wide concern of ethical issues that affect the stakeholders of companies or institutions. Therefore, good corporate governance should involve practices such as transparency and accountability, fairness and honesty, responsibility and integrity as well as reputation and judgment (Jose 2008). It is important to note that good governance enhances the perception of the public and the actions of professional workers. Corporations or institutions that survive the unpredictable occurrences of volatile economies have positive perceptions for the principles of corporate governance. Although the aspects of good corporate governance may vary from one corporation to another, such differences are not so great because corporate governance is generally essential in monitoring individuals in an organization. Thus, corporate governance provides control over those resources owned by investors and shareholders. On the other hand, poor corporate governance affects both the profitability of corporations or institutions and their services at large. Basically, good corporate governance contributes to a transparent business environment in which corporations and institutions must be held accountable for every action taken to accomplish their day-to-day tasks. This promotes the growth as well as the financial stability of such corporations (Monks et al. 2003). Corporate Governance failures-Case study WorldCom WorldCom is the second largest telecommunication company in the world. The company is well known case of corporate governance failures. In 2002, WorldCom was charged with bankruptcy within the Federal court of Manhattan for involving in huge accounting irregularities. Studies indicate that deviations from the needed corporate behaviors resulted from lack of Board of Directors to value and effectively respond to abuses of cultural management from the corporation’s top management. The increased deviations from the ethical corporate behavior at WorldCom Company have been encouraged by the failure of board of directors to identify and address effectively the abuses. This created an unethical culture in the top management of the WorldCom Corporation. Additionally, abject failure of the individuals in the company to play their fiduciary roles and responsibilities as expected by the shareholders as well as lack of transparency between the company’s board of directors and its senior management, have been considered the contributing factors to corporate governance failures (Thornburgh 2003). Poor integration and Entrenched Culture Poor integration particularly of the acquired companies is also one the contributing factors to failure of corporate governance at WorldCom Company. The company’s failure to effectively integrate the acquired companies led to various organizational problems such as the senior management did not recognize the need to develop a cooperative way of thinking within the different units of WorldCom. Research also reveals that WorldCom acquired many competitive local exchange carriers or commonly known as Clercs that proved to be managerial terrifying because the capacity was not utilized yet very expensive (Eichenwald 2002). The presence of fraudulent actions as well as improper conducts that have occurred across the different levels of the organization, for instance, a case in which the CEO provided falsified SEC reports and ordered other executives to ensure that they achieve the required financial outcomes by all ways inclusive of frauds, clearly indicates that WorldCom’s strategic apex actively involved in fraudulent activities. Such an action contributed to the company’s corporate governance failures. This is simply because the company’s top management level acted in a manner that influenced the middle line management to ignore the requirements of the code conducts to involve in fraudulent behaviors. In an attempt to encourage certain employees to develop their corporate code of conduct, it has been reported that WorldCom’s CEO, Mr. Ebbers allegedly termed such efforts as “the increasingly waste of time” (Scharff 2005). Correspondingly, a fraudulent behavior was committee at WorldCom where the company’s board of directors opted to lend about $415 million from its coffers to enable Ebbers clear his personal debts that were amounting to over $800 million. This was intended to protect the company’s CEO from involving in huge sell of its stock that would have led to a high reduction in WorldCom’s stocks. Based on the corporate governance point of view, it can be noted that the loans to Ebbers, the CEO at WorldCom are extra troubling reasons to account for the company’s failure its corporate governance (Pulliam 2002). WorldCom also involved in accounting misstatements, and thus raising its terrifying financial state. The accounting mischief could be described as enormous as how the company’s level of fraud that was committed in an ordinary way. As a result, over $9 billion were achieved through false accounting entries within the financial systems of WorldCom in the attempt to meet the desired financial objectives. This clearly shows lack of transparency and integrity in the accounting or financial systems used at WorldCom Company, and thus contributing to the company’s corporate governance failure (Theodore 2005). WorldCom delayed to take action against Fraud The U.S. Securities and Exchange Commission (SEC) blamed WorldCom for not taking immediate action when the company was identified with the alleged evidences of fraud. Similarly, WorldCom in a civil lawsuit case was charged against fraud by SEC for involving in a financial scandal to attack the Corporate America and demoralize the public trust in Wall Street. As a result, the SEC disregarded the explanation of WorldCom Company as a detail to how the scandal of a $3.8 billion took place as completely inadequate. The chairman of Security and Exchange Commission (SEC), Harvey Pitt responded harshly to the explanations provided by WorldCom. Harvey blamed the company for not being committed to provide the investors with full information and not fully cooperating with SEC (Tran 2002). Recommendations as to what should have been done to avoid the increased accounting irregularities at WorldCom Company The management of WorldCom needs to develop effective internal controls to solve the problem of lack of transparency that seems to have existed between the company’s senior management and its board of directors. Although lack of transparency is not directly translated to the huge accounting frauds that WorldCom committed, it should be understood that failing to ensure transparency in the financial systems created an environment and culture that permitted dramatic growth of fraud in the company. Therefore, WorldCom Company needed a culture or internal processes that could help to implicitly investigate and encourage detailed questioning of the various grounds or sources for fraudulent activities. In so doing, the company will create a transparent working environment in which cases associated with accounting irregularities will be effectively monitored (Lorsch & Robertson 2004). Although the WorldCom’s CEO, Bernard Ebbers can be blamed for the company’s involving in massive frauds and encouraging unethical cultural practices, the board of directors should equally be blamed. This is because the board of directors that was managing WorldCom at the time the company began to face scandalous incidences particularly those related to fraudulent activities contributed destructively to WorldCom’s corporate governance failure. The Board of directors should have stepped in and controlled the financial irregularities and other disgraceful activities. This could help to stop the succeeding corporate governance failure at WorldCom Company. Furthermore, the board of directors was required to be aware of the fraud caused by Ebber, the CEO of the company of protecting his personal financial needs. Therefore, directors should focus on building the relationship of transparency between the company’s board of directors and the management. This can be achieved through creation of clear communication links between the board and other management departments within the company (Thornburgh 2003). Basically, lack of effective audits and balances on the leadership of senior management could be addressed by establishing an independent and more vigorous board of directors, creating a corporate culture the encourages ethical conducts that fits the code of conduct requirements of WorldCom Company. However, this could be achieved only if formalized as well as clearly documented policies and regulatory processes in particular, clear communication channels were developed to allow employees raise their concerns and promptly report cases of misconducts among the company’s stakeholders (Lorsch & Robertson 2004). Since WorldCom failed to make effective integration the newly acquired companies which turned out to be one of the major contributing factors to failure of its corporate governance or organizational problems. For example, the senior management could not recognize the need to develop a cooperative way of thinking within the different units of WorldCom. It could be important for the company to take enough time to manage its newly acquired companies. Generally, it can be noted that the accounting irregularities at WorldCom was a risk that went undetected for quite a long period of time. This clearly indicates that the internal financial control systems of the company are inadequate to provide enough information on the accounting irregularities. On the issue of fairness, the Audit Committee comprising of Internal Audit Department and the company’s board of directors did not notice existence of the accounting irregularities. Since the spring of 2002, it appears as if the Audit Committee rarely undertook investigation to identify and evaluate risks such as frauds that potentially and negatively affect the accounting or reporting systems of WorldCom Company. Therefore, the Audit Committee was supposed to make considerable credit by taking immediate and more responsible steps to investigate all the accounting irregularities as they occurred in the company (Romero & Atlas 2002) Conclusion Good corporate governance can be achieved in a more cost-effective way by ensuring that significant risks such as fraudulent actions are controlled rather than covering the possible occurrence of such risks in the organization. It is quite clear that the way an organization perceives good corporate governance determines its public image. The board of directors at WorldCom Company needs to be very sensitive to the aspects of good corporate governance by providing incentives to the management to encourage them meet their corporate governance goals. The goals of good corporate governance should be able to build an ethical corporate culture that respects the law and codes of conduct for a company. WorldCom would have controlled its massive fraudulent activities if an effective internal audit was practiced to monitor and manage the company’s financial and operational issues. Bibliography Eichenwald, K., 2002, Acquisitions of new companies at WorldCom led to its rise and fall, New York Times, New York. Jose,G.S., 2008, Corporate Governance and Ethics, Edward Elgar Publishing.USA Lorsch, J & Robertson, A., 2004, Ways of restoring Trust at WorldCom, The Harvard Business School p. 138. Monks et al., 2003, Corporate Governance, 3rd Ed, Blackwell Publication. Pelliam, S., 2002, WorldCom’s ex-CEO created huge debts. The Wall Street Journal. Retrieved May 14, 2013 from, Romero, S & Atlas, D., 2002, An overview of how WorldCom Collapsed, New York Times. USA. Scharff, M., 2005, WorldCom's accounting fraud, how the role of groupthink was perceived? Journal of Leadership & Organizational Studies. Retrieved May 14, 2013 from, Theodore, F., 2005, Accounting Misstatements and how WorldCom failed, E-Commerce Times. New York. Tran, M., 2002, How WorldCom failed to act against its frauds. Retrieved May 14, 2013 from, Thornburgh, D., 2003, The bankruptcy of WorldCom. Lessons of Corporate Governance that can be learned from WorldCom’s case, The Institute of Global Career Management, San Francisco. Read More