Ways of Improving Corporate Governance in the Post-Enron Era

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Introduction

Corporations need good governance ethics to ensure continued growth and development. Moreover, good corporate ethics ensures their stability and profitability. Competitive edge is every manager’s ambitions. Organizations seek to achieve their goals through good corporate ethics. The boards of directors, CEOs and other stakeholders have the responsibility of ensuring proper corporate governance to spur growth and sustainability. However, it is important to note that governance has been quite difficult even in the open society. It takes into account the need to harness power as has been stipulated in the constitution of such organizations, without diverting to other purposes. This is because corporations define the economic and social life of countries within which they are carried out. In additions, it provides ways or structures by which these corporations are controlled as well as directed. It does this by specifying allocation of responsibilities and rights to the various capacities and participants in that corporation. These participants involve CEOs, managers, board members, shareholders and other stakeholders (Cross & Miller, 2008, p. 23).

Every organization aims to exercise good governance of their businesses. Structures are usually put in place to guard corporate governance. In addition, governments have established numerous policies that regulate corporate governance. Most companies are shifting their focus to ensure that corporate governance encompasses both the controllers and shareholders. Good corporate governance is entrusted with the responsibility of providing viable structures that would benefit every stakeholder, even if it were in theory. In most cases, these structures rarely benefit all stakeholders. In fact, recent years have witnessed criminal activities committed by corporate officers. It is the responsibility of every effective corporation to ensure that these mischiefs are prosecuted as required by law. This paper will try to provide recommendations that an analyst would give to policy makers on ways of improving corporate governance in post-Enron era. It will also endeavor to focus on changes that would apply to C.E.Os., shareholders as well as board of directors. (Cross & Miller, 2008, p. 23).

Corporate ethics

Corporate governance can be defined as the process of controlling and directing business corporations. In addition, it may also refer to processes, laws, or rules by which businesses, organizations or corporations are regulated, operated, or controlled. Still, it may refer to the structures and internal factors that are put in place by corporate officers, shareholders, and the constitution or other stakeholders to govern the corporation. In addition, other external factors such as clients, government regulations as well as consumer groups may influence structuring of corporate governance. It gives inclusive details on how these laws and regulations are distributed to their respective holders. These include managers, CEOs, shareholders and other stakeholders. Corporate governance tries to define their rights and responsibilities. They are therefore, expected to follow the regulations as provided without turning to other processes of their own making. Managing corporations has been a big challenge to managers. This is mainly because of the many structures that need to be followed and balanced to achieve sustainability (Cross & Miller, 2008, p. 23).

Decision-making in corporations lies greatly with the board of directors and CEOs. On the other hand, shareholders tend to have indirect control of these decisions. This makes it difficult for their wishes to be met by the company as they only have the right to elect directors, who may or may not heed to their vision of the company. However, ultimately shareholders reserve the right to change their board of directors to reflect their interests in the company. It is also important to note that the government plays an important role in controlling general practice of corporations. Each government has policies aimed at regulating corporate governance. Business corporations are expected to adhere to the stipulated ethical standards that would help benefit all stakeholders. When this is achieved, the business is said to have achieved good corporate governance and ethics. This is always quite difficult to ascertain, and therefore involve formation of organizations at all levels. For instance, corporations are formed at the regional, national and global levels, among others. Without corporate governance, such formations would be difficult to effect, since it aims to incorporate every stakeholder (Cross & Miller, 2008, p. 23).

Corporate governance has received heavy criticism over the recent past. This has been rife in multinational corporations, which have experienced high-profile scandals. These scandals ranged from abuse of corporate powers to alleged criminal activities by these officers, among others. Such activities have raised serious concern on corporate governance with some quarters of analysts pushing for more government regulation and policies to curb such officers from abusing their powers. On the other hand, researchers have proposed solutions to such problems by implementing effective corporate governance. This kind of corporate governance has provisions for criminal as well as civil prosecution that would tame unethical and/or illegal acts. Several corporate scandals have been witnessed over the recent past, these include massive bankruptcies in the early 2000, which saw Enron, WorldCom, AOL, Tyco, Crossing, and Adelphia Communications, among other companies lose massively. This also led to adoption of the Sarbanes-Oxley Act in 2002, reflecting on the importance of corporate governance (TechTarget, 2006, p. 1).

In essence, these structures and internal factors that are put in place by corporate officers, shareholders, and the constitution or other stakeholders to govern the corporation define corporate governance. Different companies employ various models of corporate governance. These include Anglo-American, and coordinated model, among others. In United States, the main models utilized are those named above. The model to be adopted depends greatly on the kind of capitalism in which that country is embedded. Corporations, which lay emphasis on the interests of shareholders usually, assume Anglo-American model. In this regard, they are structured to ensure that shareholders’ interests are well articulated and followed. On the other hand, coordinated model, is commonly assumed by companies that stress on issues that affect all those on board such as customers, workers and managers, among others. Each corporation applies the model that best serves their interest. However, these models are also guided by government regulations, to safeguard interests of other stakeholders of less emphasis to that model (Cross & Miller, 2008, p. 23).

Corporate ethics in Post-Enron era

Corporate ethics have evolved over the years from pre Enron era to its current state in which it has received heavy criticism for high-profile scandals. The 20^th century opened avenues for transformations of corporate governance, especially after Wall Street crash, which was witnessed in 1929. This period saw a series of research on corporate governance with an aim of developing one that could stand the growing economic problems. These included Nature of the firm, and agency theory, among others, to improve corporate governance. In the process, corporate directors’ duties have grown beyond their initial boundaries. In the 1990s, strings of dismissals have seen rising attention on corporate governance. In addition, lack of corporate governance in most Asian countries led to East Asian financial crunch, which affected South Korea, and Indonesia, among others. The 21st century has also witnessed economic crunch, which unmasked problems facing corporate governance. It is during this period that most dismissals were witnessed, beginning with Enron among other corporations (Cross & Miller, 2008, p. 23).

Enron era

The 21^st Century saw increased abuse of corporate powers by managers in multinational Corporations. Most managers throughout the world, in one way or another, abused their powers. These included illegal appointments, diversion of company funds, poor governance ethics, and criminal acts by office bearers, which led to massive bankruptcies in the United States. The companies that exhibited gross violation of corporate ethics during this period of early 2000 included Enron and WorldCom, among others. This led to successful prosecution of Enron chief executives, highlighting massive transformations that had taken place in corporate governance. Prosecution of white collar crimes has been difficult over the years. However, the happenings at Enron, which saw investigations in the glare of press and successful prosecution of both Jeffrey Skilling and Kenneth Lay, sent waves of fear throughout multinational corporations. White collar crimes would not go scot free; restructuring had to be made, on both corporate governance and office bearers, who would now be very careful in carryout their duties for fear of prosecution (Cross & Miller, 2008, p. 23).

In the past, most white collar criminals would be allowed to surrender quietly, and would be shielded from the press and public. During these periods, office bearers would be fined or given short stays in prisons popularly known as “country clubs”. However, Enron executives were the first to see real changes in these moves. They faced real jail terms, which crossed over decades. This was a surprise, and sent fears over the country as executives tried to make proper ways in their dealings with corporate affairs. Defendants could now face sentences in minimum as well as maximum prisons. According to laws of corporate conduct, those lodged with the responsibility of utilizing corporate powers are required to do so in an honest manner. They are also required to give clear statements that are in accordance with corporate conduct to avoid prosecution. As was witnessed in Enron executives’ case, violations of corporate conducts are likely to result in criminal trial and prosecution of lawbreakers (Cross & Miller, 2008, p. 23).

Post-Enron era

After the events in Enron saga, which led to successful prosecution of its two executives Jeffrey Skilling and Kenneth Lay, other executives were set into precedent haunts. Post-Enron era opened a new page on the lifelines of corporate executives. Among the changes that have been utilized to reinforce corporate governance conduct, include recognition of dishonesty as a violation of the conduct. Dishonesty is included as part of a broader way to successfully conduct criminal cases against executives. Companies in America as well as multinational companies embraced the new corporate governance, which held executives accountable to their deeds. Enron Trial left Skilling and Lay, with 6 and 19 felony counts respectively. According to most researchers and analysts, these charges were symbolic in ending years of greed. It was also attributed with the increase in investor confidence, thereby looking into shareholder’s interest. This was a new period, in which checks and balances would count. Effective corporate governance was slowly encroaching into the corporate world (Cross & Miller, 2008, p. 23).

These transformations saw rise in stock exchange participation by the American population. Most of them did this through the corporate pension schemes, which they believed were stronger and well managed with high level of corporate ethics. This shows how important corporate governance is to shareholders and potential investors. Another thing that merged is intense scrutiny of corporations by investors and board members, which was not the case during the pre-Enron era. Suddenly everyone seemed to care how much CEOs earned and every activity that was carried out in those corporations. During the late 1990s, share prices rose sharply, and ethical violations were rampant, but very little complaints were heard from investors as well as board members. However, when these issues came into the limelight, everyone was concerned and scrutiny observed in earnest. Later on, policy makers along with business leaders tried to bring up codes and rules as well as regulations that could govern individuals with the responsibility of pursuing corporate vision. These were entrenched in the corporate command to ensure that effective corporate ethics were in place and could be applied by every company (Cross & Miller, 2008, p. 23).

Recommendations to policy makers to increase effectiveness of corporate governance in this post-Enron era

Policy makers have a responsibility of introducing good corporate governance, which have the propensity to successfully investigate and prosecute violation of corporate codes of ethics. Business leaders also have this responsibility, and such proposals should be raised with policy makers to reach at an effective solution for corporate problems. As can be observed above, the model chosen in corporate governance determines the line of emphasis. For instance, Anglo-American and coordinated models emphasize on shareholders and customers respectively. In this regard, there are several policy issues relating to various stakeholders in company management that need inclusion in making effective corporate governance methods. Such recommendations include issues relating to interest of investors (shareholders), board of directors as well as managers and executives. Investors need protection against unscrupulous CEOs and Chair. They also require guidance on decision making regarding election of board members as well as the chairperson. In addition, they need to be fully aware of their rights and duties that are in accordance with good corporate governance (Cross & Miller, 2008, p. 23).

Boards of directors, who make crucial decisions regarding the operation of corporations, are also important in development of good corporate governance. They serve various interests as some acts as investors while others represent administration of such corporations. It is therefore important that their interests be unified to act within the jurisdictions of corporate ethics. Another group of people that require close monitoring is CEOs; they have the responsibility of running everyday businesses in corporations. They get into close contact withal factors of production, and represent the company. This makes them quite essential to corporate governance as they hold the power to guard it. Issues that surround them include decision making for company functions. Such functions are quite challenging and may therefore require their full attention. Among the issues concerning corporate governance that face shareholders, board of directors and CEOs, include their benefits, powers, rights and duties among others. These are as explained in the recommendations below (Cross & Miller, 2008, p. 23).

Issues involving boards of directors

Boards of directors are very instrumental in strategizing organizational structures. They ensure that only qualified people are given executive positions in the company. They therefore expect exemplary results from the company. Financial results of the company are very essential to boards as they get their remunerations from the same. These remunerations are in terms of salaries, among other benefits. It is therefore quite easy to note that their efforts are centered towards ensuring good corporate governance. Boards of directors have several responsibilities that are aimed at charting a way forward in implementing corporate governance. They play an important role in the implementation of corporate governance. This is because the board endorses a corporation’s strategy. They also develop the organizational directional policies as well as appoint senior executives. In addition, they supervise and remunerate their executives. Boards of directors are also entitled to hold office bearers accountable for their actions that may affect government authorities as well as investors (Cross & Miller, 2008, p. 23).

Board of directors usually conspires with CEOs in many issues. For instance, in the case involving Chairman and CEO in Enron saga, it was a scheme between the chair and CEO, which led to abuse of corporate powers. They were later convicted under the new regulations guiding corporate governance with 6 and 19 counts of felony. This was an embarrassment to the institution where investors are expected to have complete confidence on managers who take responsibility for their funds and make critical decisions on their behalf. Policy makers are therefore required to provide adequate information that would assist both board of directors and the CEO to deal with issues affecting them. Effective corporate governance should include all the participants, without leaving out other stakeholders. This would ensure benefit to all parties, which would in turn result in sustainability of the company (Cross & Miller, 2008, p. 23).

Policy makers should find ways of ensuring CEOs are protected from wrong decisions. A company may underperform due to other factors other than the CEOs mistakes. In most cases investors rarely understand, they may call for the CEO to resign, but this would be unfair to him/her. Effective corporate governance should be able to address such issues and ensure that only credible and provable abuse of office situations is punished. In addition, it is important for effective corporate governance to put in place other ways of enlightening shareholders on company structures and activities. This way, a better understanding of company operations would help resolve financial problems among other (Cross & Miller, 2008, p. 23).

Issues involving Shareholders

Shareholders expect returns on their input in the company. This cannot be achieved if there is no effective corporate governance. Policy makers should therefore ensure that shareholders’ interests are also covered in corporate governance to ensure mutual benefit and growth of the company. Most companies received criticism in the late 1990s when their stocks rose but little was done to reflect the improvements on shareholders’ dividend. This was quite difficult for most investors to understand, in fact, what later transpired in the early 2000 were issues of bankruptcies (Cross & Miller, 2008, p. 23).

Shareholders main interest lies with financial performance of the company. This ensures good returns for them as well as the rise in stocks. Shareholders tend to shy away from underperforming companies, resulting in lower stock valuations. Another issue that affects shareholders is dishonesty of other parties. These include company executives, as well as board of directors. Effective corporate governance is important in ensuring sustainability of companies. Corporate governance has undergone several transformations since it was instituted. Companies nowadays involve all stakeholders in their decision making even though this has not reached the required level. Stakeholders to corporate ethics are numerous and encompass the shareholders CEO, and board of directors, among others. Others include stock exchange and government authorities, among others. The events in Enron proved to scare investors, even though successful prosecution of both executives transformed corporate world. Investors in post Enron era are quite positive on their investments as they know that law protects them from unscrupulous executives. In essence, shareholder issues lies with financial performance of companies. Policy makers should therefore ensure that they develop models of corporate governance in which, all the participants are covered and protected from unethical practices (Cross & Miller, 2008, p. 23).

Investors have the responsibility of voting in, proven individuals with capacities to give proper guidance and execution of functions of the corporation. Investors reserve the right to elect a new chair into the system. However, this right seems limited to some extent as most company chairs get many years in office. In most cases, investors rarely understand company issues, they may call for the CEO to resign, however this can be unfair to him/her. Effective corporate governance should be able to address such issues and ensure that only credible and provable abuse of office situations is punished. In addition, it is important for effective corporate governance to put in place other ways of enlightening shareholders on company structures and activities. I would recommend fewer years for chair in office, to improve their accountability records. Furthermore, it would be wise if they could be dethroned from such offices whenever adequate and credible information is received about abuse of office. This should also apply to CEOs, who are known to overuse their powers (Sun, 2009, p. 1).

Issues involving Modern role of the CEO

CEOs perform duties of the company on behalf of the company. They take shareholders’ responsibilities regarding active management of company activities. They are accountable to the board of directors and ultimately to the shareholders, through those elected or appointed to the board. Shareholders do not have direct link with company executives even though they own the company. This is mainly because companies are very large and in most cases are owned by millions of individuals, with varying interests. CEOs need salaries and other benefits, they also need to build their reputation and hence spur growth of their respective companies. Competitive edge of companies lies greatly on the mechanisms CEOs employ to govern their respective organization. CEOs have the responsibility of making decisions on behalf of shareholders. Policy makers should ensure that they provide effective guidelines that would assist corporations to check performances of CEOs to guard against abuse of corporate powers. Policy makers are also required to offer alternative ways of corporate governance that would assist boards of directors to deal with issues affecting the CEOs (Cross & Miller, 2008, p. 23).

Accountability is very essential in corporations; CEOs are expected to account for every action undertaken. CEOs should be expendable whenever adequate proof is availed regarding their abuse of corporate powers. In this regard, effective corporate governance should incorporate all parties in it, and should make board of directors along with company executives expendable, whenever they divert from corporate standards and practices laid out by the institution. Government authorities and other relevant stakeholders should also be involved in developing effective corporate governance (Sun, 2009, p. 1).

Summary

Corporate governance refers to the processes, laws, or rules by which businesses, organizations or corporations are regulated, operated, or controlled. It may also refer to the structures and internal factors that are put in place by corporate officers, shareholders, and the constitution or other stakeholders to govern the corporation. In addition, other external factors such as clients, government regulations, as well as consumer groups may influence structuring of corporate governance. In essence, corporate governance involves several stakeholders, encompassing clients, shareholders, management, board of directors and other participants. Effective corporate governance is very instrumental in ensuring mutual benefit, social and economic benefits to the country. This works to reward shareholders for their inputs as well as remunerate executives and directors as is required without affecting company sustainability. Several issues surround the three main parties to corporate governance; these are shareholders, board of directors as well as company executives such as CEOs. These are mainly because they are the ones who make critical decisions regarding company management (Clarke, 2008, p. 1).

Boards of directors are very important in any corporation. This is because they formulate policies and structures for companies. In addition, they supervise and remunerate these executives. Boards of directors are also entitled hold office bearers accountable for their actions that may affect government authorities as well as investors. It is also important to note that every party in an organization has some form of interest in its financial performance. Investors expect returns on their shares. Directors on the other hand expect financial packages in terms of salaries and benefits as well as reputation. CEOs also need salaries and other benefits. In fact, executives need to build their reputation to spur growth of their respective companies. Other stakeholders like lenders also expect returns such as interests on their contributions. Effective corporate governance is important in ensuring sustainability of companies. Corporate governance has undergone several transformations since it was instituted. Companies no longer employ their decision making tools without involving other stakeholders. These include government, shareholders, board of directors, the community, and customers, among others. Stakeholders to corporate ethics are many and encompass the shareholders, CEOs, and board of directors, among others. (Clarke, 2008, p. 1).

Shareholders on the other hand require profits in terms of dividend on their inputs. This cannot be achieved if there is no effective corporate governance. Policy makers should therefore ensure that shareholders’ interests are also covered in corporate governance to ensure mutual benefit and growth of the company. Most companies received criticism in the late 1990s when their stocks rose but little was done to reflect the improvements on shareholders’ dividend. This was quite difficult for most investors to understand, in fact, what later transpired in the early 2000 were issues of bankruptcies (Clarke, 2008, p. 1).

Conclusion

Effective corporate governance is important in ensuring sustainability of companies. Corporate governance has undergone several transformations since it was instituted. Companies no longer employ their decision-making tools without involving other stakeholders. These include governments, shareholders, board of directors, the community and customers, among others. Stakeholders who forms a party to corporate ethics are numerous and encompass shareholders CEO, and board of directors, among others. Corporations are viewed as institutions within which rights of shareholders are entrusted on the CEO. The CEO is therefore assumed to act in shareholder’s best interest (joint). They make all the decisions regarding direct company control and management on behalf of shareholders. Since the two parties are separate, and one works on behalf of the other, there is need for alignment to ensure incentives of shareholders (Clarke, 2004, p. 2).

Corporate governance involves inclusion of Board of directors whose strategies are important to the company. This is because board endorses the corporation’s strategy. They also develop the organizational directional policies as well as appoint senior executives. In addition, they supervise and remunerate these executives. Boards of directors are also entitled hold office bearers accountable for their actions that may affect government authorities as well as investors. It is also important to note that every party in an organization has some form of interest in its financial performance. Investors expect returns on their shares. Directors on the other hand expect financial packages in terms of salaries and benefits as well as reputation. CEOs also need salaries and other benefits. In fact, executives need to build their reputation to spur growth of their respective companies. Other stakeholders such as lenders also expect returns such as interests on their contributions; this makes them instrumental in development of effective corporate governance. Therefore, effective corporate governance should incorporate all parties in it, and should make board of directors along with company executives expendable, whenever they divert from corporate standards and practices laid out by the institution. Government authorities and other relevant stakeholders should also be involved in developing effective corporate governance (Clarke, 2004, p. 2).

Reference List

Clarke, T. (2004). Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance. London and New York: Routledge

Clarke, T. (2008). Corporate Governance: The Significance of Corporate Governance. UTS Centre For Corporate Governance. Web.

Cross, F.B., & Miller, R.L. (2008). The legal environment of business: Text and cases – ethical, regulatory, global, and e-commerce issues. (7th ed.). West: Cincinnati.

Sun, W. (2009). How to Govern Corporations So They Serve the Public Good: A Theory of Corporate Governance Emergence. New York: Edwin Mellen.

TechTarget. (2006). What is Corporate Governance? Searchfinancialsecurity.

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