![School of Business – Business Ethics; Topic 5:Corporate Governance
Course Week [Term]
Business Ethics
Topic 5: Corporate Governance](https://image.slidesharecdn.com/b502ethicslecturet005rf-150609085805-lva1-app6892/85/b502-ethics-lecture-t005rf-1-320.jpg)
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B502 ethics lecture t005_rf
- 1. School of Business – Business Ethics; Topic 5:Corporate Governance Course Week [Term] Business Ethics Topic 5: Corporate Governance
- 2. School of Business – Business Ethics; Topic 5:Corporate Governance Outline of Lecture In this lecture we will cover: • What is corporate governance • Corporate governance practises • Accountability • International variations in corporate governance
- 3. School of Business – Business Ethics; Topic 5:Corporate Governance Learning outcomes: Assess the role of the company as a moral agent Explain the concept of corporate governance Understand the key principles of corporate governance in the UK Learning Outcomes
- 4. School of Business – Business Ethics; Topic 5:Corporate Governance Areas of Business Ethics • Corporate Governance o The rules, processes and practices by which a company is directed and controlled • Corporate Social Responsibility o Finding the balance between economic, environmental and social success • Corporate citizenship o The extent to which business meet the legal, ethical and economic responsibilities set by shareholders. • Sustainability o Resiliency over time due to economic, environmental and social success. • Risk Management o The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making • Corporate Decision-making o The process of identification, analysis and choice of a course of action • Fair trading o A social movement whose stated goal is to help producers in developing countries achieve better trading conditions and to promote sustainability
- 5. School of Business – Business Ethics; Topic 5:Corporate Governance Corporate Governance • The definition of Corporate Governance o The rules, processes and practices by which a company is directed and controlled. • Legal Persons and Moral Agency o In the eyes of the law, the corporation is a person, distinct in its personality from the persons who bear ownership shares in it (its shareholders) or conduct activities on its behalf (its directors, officers, and other employees).
- 6. School of Business – Business Ethics; Topic 5:Corporate Governance Corporate Governance If the company is a legal person, is the company also a moral agent, distinct from the persons who compose it? Morally, how or in whose interests ought the company be managed?
- 7. School of Business – Business Ethics; Topic 5:Corporate Governance The Robert Maxwell Scandal Media Mogul • Dec 1991 it was revealed that Maxwell had taken the following in order to keep the companies afloat: • £448 million in assets from the combined pension funds of Maxwell companies • £388 million in cash and assets from Maxwell Communications Corporation (MCC) • £97 million in cash from Mirror Group Newspapers (MGN) How could this happen?
- 8. School of Business – Business Ethics; Topic 5:Corporate Governance The Enron Scandal Energy Trading Corporation Key dates and events: • July 1985 - Enron is formed by the merger of Houston Natural Gas and Omaha- based InterNorth. • 2000 - Enron reaches No. 7 on the Fortune 500 list. • August 14, 2001 - Jeffrey Skilling resigns as CEO, and Kenneth Lay becomes CEO again (He had been CEO from 1985-2000). • August 15, 2001 - Sherron Watkins, Vice President of Corporate Development, sends a memo to Kenneth Lay about accounting issues. • October 16, 2001 - Enron announces a third quarter loss of $618 million. • October 31, 2001 - The US Securities and Exchange Commission (SEC) opens a formal investigation into Enron's transactions. "Enron Fast Facts - CNN.com." CNN. Ed. CNN Library. Cable News Network, 26 Apr. 2015. Web. 20 May 2015. <http://edition.cnn.com/ 2013/07/02/us/enron- fast-facts/>.
- 9. School of Business – Business Ethics; Topic 5:Corporate Governance The Enron Scandal Energy Trading Corporation What accounting issues worried Sherron Watkins? “Cooking the books” - making the financial status of the company look better than it really is Hiding debt: Using offshore accounts, fake trades amongst shell companies, and hiding billions of dollars of debt in special purpose entities so that mostly profit appeared on Enron’s financial statements. Using the mark-to-market accounting method: The accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.
- 10. School of Business – Business Ethics; Topic 5:Corporate Governance The Enron Scandal Energy Trading Corporation Once these (and more) facts were made public, what happened? The fallout: • Shares went from approx. $90 a share to less than £1 in 2001 • Enron filed for bankruptcy protection with an estimated $38 billion in outstanding debt • US Securities and Exchange Commission launched an investigation • Nearly 22,000 employees lost their jobs and their pensions • Enron’s auditors, Arthur Andersen, were charged with (and convicted of) obstruction of justice for shredding documentary evidence and conspiracy to commit fraud
- 11. School of Business – Business Ethics; Topic 5:Corporate Governance The Enron Scandal Energy Trading Corporation The Sarbanes-Oxley Act addresses Enron’s transgressions point by point. Long Title: “An Act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” • Part of United States federal law • Sets regulatory standards for all U.S. public company boards, management and public accounting firms
- 12. School of Business – Business Ethics; Topic 5:Corporate Governance The Sarbanes-Oxley Act Major elements of the Corporate Governance Laws in the US Public Company Accounting Oversight Board (PCAOB) Provides independent oversight of public accounting boards and enforces the Sarbanes-Oxley Act mandates. Auditor Independence Establishes the standards for auditor independence to limit conflicts of interest. (Absent with Arthur Andersen.) Corporate Responsibility Senior executives must take individual responsibility for the accuracy and completeness of corporate financial reports. Enhanced Financial Disclosures Requires internal controls for assuring the accuracy of financial reports and disclosures – including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. Analyst Conflicts of Interest Defines the code of conduct for securities analysts, and requires disclosure of known conflicts of interest.
- 13. School of Business – Business Ethics; Topic 5:Corporate Governance The Sarbanes-Oxley Act Major elements of the Corporate Governance Laws in the US Commission Resources and Authority Enhanced the SEC’s authority to ban professionals from practice. This section also explains how you can be barred. Studies and Reports The Comptroller General and the SEC must investigate public accounting firms for evidence of ‘creating accounting’ [cooking the books]. Corporate and Criminal Fraud Accountability Details specific criminal penalties for the manipulation, destruction or alternation of financial records, and provides protection for whistleblowers. White Collar Crime Penalty Enhancement Increase the criminal penalties associated with white-collar crimes and conspiracies. For the first time, failure to certify corporate financial reports is a criminal offense. Corporate Tax Returns The CEO should sign the company tax return.
- 14. School of Business – Business Ethics; Topic 5:Corporate Governance The UK Code on Corporate Governance • Developed to address the internal controls, financial reporting and accountability of a company. • Currently owned and published by the Financial Reporting Committee • Operates by ‘Comply or Explain’ • This means that although there is no requirement to comply with the principles set out in the code, but if a company doesn’t comply it must publicly explain why they have not complied.
- 15. School of Business – Business Ethics; Topic 5:Corporate Governance The UK Code on Corporate Governance Major elements of the Corporate Governance Laws in the UK Leadership Establishment of an effective board; Clear division of responsibilities between the board and executives Effectiveness Board (and sub-committees) should have a balance of skills, experience, independence and company knowledge; formal and transparent procedures for appointing new directors to the board; Accountabilities The Board should present a balanced and understandable assessment of the company’s position; understand the nature and extent of risks, maintain risk management and internal control systems; have clear and formal arrangements for corporate reporting Remuneration Transparency is key; no Director should be involved in deciding her or her own remuneration Relations with shareholders The board, as a whole, has responsibility for ensure that a satisfactory dialogue with shareholders takes place; AGMs.
- 16. School of Business – Business Ethics; Topic 5:Corporate Governance Essential Work for Next Week Does corporate governance work? • Board size, structure and balance • Chairmen and CEO roles • Sub committees • Remuneration committees • Internal controls • Minority shareholder rights • Financial reporting Despite all of these checks & balances Tesco still finds scandals. Why?
- 17. School of Business – Business Ethics; Topic 5:Corporate Governance References
- 18. School of Business – Business Ethics; Topic 5:Corporate Governance End of presentation
Notas del editor
- In the UK the corporate governance system typically addresses the internal business controls, financial reporting and accountability of a company. It’s not just about the l Of course some of these controls and financial reporting requirements are required by law, but Corporate Governance concerns the rights and responsibilities of people who take part in running of the company. The UK Code on Corporate Governance Owned and published by the Financial Reporting Council (FRC), known as ‘the Code’ Operates a ‘comply or explain’ Main principles of the Code: Leadership - Establishment of an effective board; Clear division of responsibilities between the board and executives Effectiveness - Board (and sub-committees) should have a balance of skills, experience, independence and company knowledge; formal,
- Moral agency - the ability of a company to act autonomously in order to make morally correct decisions Should we expect companies to make moral decisions?
- The complete story of the Enron Scandal is much longer than what we can present here now.
- What do you think motivated Sherron Watkins to speak to Kenneth Lay about her concerns? - We could talk about the ethics of whistleblowing here. Advanced: Mark-to-market is a legitimate (even popular) accounting method, was Andrew Flastow wrong to impose it as Enron’s accounting method?
- Jeffrey Skilling (Enron CEO) hires Andrew Fastow to be CFO. Fastow creates special purpose entities (financial vehicles commonly used to achieve short term goals) to transfer liabilities away from Enron. Dumbed down version from http://money.howstuffworks.com/cooking-books1.htm Here's an example. Imagine you're a kid with a lemonade stand and you want to build a roof over it so that you and your customers aren't in the hot sun. You don't have the money because business hasn't been that good. Your brother has the money, but he won't lend it to you unless he knows that he'll make something in the deal. You're sure that having a covered lemonade stand will make all the difference for your business because your customers will enjoy sipping their drinks in the cool shade. So you decide to creatively boost your current sales figures and offer your brother a chance to invest in your business. He gives you the money to build your roof in exchange for 25 percent of your profits. For reasons unknown to you, the covered stand doesn't really sell any more lemonade than the uncovered stand did. Now your brother is mad, because the profit he thought he was going to make was based on phony sales figures. At this rate, it'll take four summers to break even and much more to actually make a profit.
- On Enhanced Financial Disclosures: From investopedia.com: Companies will often use off-balance-sheet financing to keep their debt to equity (D/E) and leverage ratios low. Examples of [legitimate, GAAP] OBSF include joint ventures, R&D partnerships, and operating leases. Enron accountants were ‘creative’ when writing up OBS items. Pro-forma figures are used to reflect a proposed change, or to emphasize particular figures when issuing a public earnings announcement. Generally considered unreliable, and not completely compliant with GAAP.
- On Enhanced Financial Disclosures: From investopedia.com: Companies will often use off-balance-sheet financing to keep their debt to equity (D/E) and leverage ratios low. Examples of [legitimate, GAAP] OBSF include joint ventures, R&D partnerships, and operating leases. Enron accountants were ‘creative’ when writing up OBS items. On Commission Resources & Authority: If we compare this to the FCA’s very popular ‘name and shame’ Warnings part of their website, https://www.fca.org.uk/news/warnings On Studies & Reports and Corporate & Criminal Fraud Accountability. This was in direct response to Aurthur Andersen’s involvement in the Enron financial reporting / auditing. Evidence was shredded. Pro-forma figures are used to reflect a proposed change, or to emphasize particular figures when issuing a public earnings announcement. Generally considered unreliable, and not completely compliant with GAAP.
- In the UK the corporate governance system typically addresses the internal business controls, financial reporting and accountability of a company. Of course some of these controls and financial reporting requirements are required by law, but Corporate Governance concerns the rights and responsibilities of people who take part in running of the company. The UK Code on Corporate Governance History: The Cadbury Report 1992 – focused on internal controls; Greenbury 1995 focused on disclosure of directors’ pay, and Hampel 1998 published the combined codes from Cadbury and Greenbury in 1998; Higgs 2003 reviewing the role and effectiveness of non-executive directors, and Smith 2003 reviewed audit committees. Owned and published by the Financial Reporting Council (FRC), known as ‘the Code’. Operates a ‘comply or explain’ Main principles of the Code: Leadership - Establishment of an effective board; Clear division of responsibilities between the board and executives Effectiveness - Board (and sub-committees) should have a balance of skills, experience, independence and company knowledge; formal and transparent procedures for appointing new directors to the board; Accountability – The Board should present a balanced and understandable assessment of the company’s position; understand the nature and extent of risks, maintain risk management and internal control systems; have clear and formal arrangements for corporate reporting Remuneration – Transparency is key; no direct should be involved in decided his or her own remuneration Relations with shareholders – The board as a whole has responsibility for ensure that a satisfactory dialogue with shareholders takes place; AGMs.
- In the UK the corporate governance system typically addresses the internal business controls, financial reporting and accountability of a company. Of course some of these controls and financial reporting requirements are required by law, but Corporate Governance concerns the rights and responsibilities of people who take part in running of the company. The UK Code on Corporate Governance History: The Cadbury Report 1992 – focused on internal controls; Greenbury 1995 focused on disclosure of directors’ pay, and Hampel 1998 published the combined codes from Cadbury and Greenbury in 1998; Higgs 2003 reviewing the role and effectiveness of non-executive directors, and Smith 2003 reviewed audit committees. Owned and published by the Financial Reporting Council (FRC), known as ‘the Code’. Operates a ‘comply or explain’ Main principles of the Code: Leadership - Establishment of an effective board; Clear division of responsibilities between the board and executives Effectiveness - Board (and sub-committees) should have a balance of skills, experience, independence and company knowledge; formal and transparent procedures for appointing new directors to the board; Accountability – The Board should present a balanced and understandable assessment of the company’s position; understand the nature and extent of risks, maintain risk management and internal control systems; have clear and formal arrangements for corporate reporting Remuneration – Transparency is key; no director should be involved in decided his or her own remuneration Relations with shareholders – The board as a whole has responsibility for ensure that a satisfactory dialogue with shareholders takes place; AGMs.
- Despite many checks Tesco are still embroiled in scandals.