chapter  12
27 Pages

Value enhancement through corporate governance and social responsibility

Financial scandals that have plagued large corporations in the United States (i.e., WorldCom, Enron, Global Crossing, Tyco, and Qwest) and Europe (i.e., Maxwell, Marconi, and Parmelat), in addition to the recent financial troubles seen in the global economy, have reignited the discussion on corporate governance. As a result of these events, boards have been reshuffled, senior management teams have been changed, and more robust procedures for managing operational and financial risks have been established. Old corporate governance regimes have been restructured and many new regimes have been installed. In addition, numerous public debates and legal proceedings, shareholder activism, and investor outrage have spurred government involvement in the matter. Legislators in different countries have focused on introducing more corporate laws and stock exchange regulations aimed at adopting a set of commonly accepted corporate conduct standards for more equitable treatment of shareholders, for the establishment of accountability and control over directors and management, and for improved transparency in financial reporting. In 2001, the US Congress enacted the Sarbanes-Oxley Act, which introduced new measures into federal securities and corporate laws. The Act was “designed to protect investors by improving the accuracy and reliability of corporate disclosure.” While the Act is broad and general, it provides useful guidelines related to disclosure of off-balance sheet liabilities, conflict of interest on the part of security analysts, timing of bonus payments to corporate executives, and more. Regulators in the United Kingdom have followed a similar pattern, amending The Combined Code (aka The Combined Code: Principles of Good Governance and Code of Best Practice), which contains the corporate governance principles and code provisions to be applied to the UK’s publicly listed firms. These amendments incorporate the recommendations of the Higgins report (on non-executive directors) and the Smith report (on audit committees). Similar initiatives have been undertaken in other countries. Even though these undertakings have gone a long way towards identifying key problems and proposing new methods of corporate

conduct, some experts have argued against a regulation-based approach in favor of establishing best market practices based on principles. Such a principle-based approach has been successfully implemented in the field of accounting (for example, in generally accepted accounting principles).