Where is corporate governance come from

The problem with Enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer CFO , Andrew Fastow, to create independent, private partnerships to do business with Enron. What actually happened was that these private partnerships were used to hide Enron's debts and liabilities, which would have reduced the company's profits significantly.

What happened at Enron was clearly a lack of corporate governance that should have prevented the creation of these entities that hid the losses. The company also had a corporate atmosphere that had dishonest people at the top Fastow down to its traders who made illegal moves in the markets.

Both the Enron and Worldcom scandals resulted in the passage of the Sarbanes-Oxley Act , which imposed more stringent recordkeeping requirements on companies, along with stiff criminal penalties for violating them and other securities laws.

The aim was to restore public confidence in public companies and how they operate. It's common to hear of bad corporate governance examples, mainly because it is the reason some companies blow up and end up in the news.

It's rare to hear of companies with good corporate governance because it is the good corporate governance that keeps them out of the news as no scandal has occurred. One company that has consistently practiced good corporate governance and seeks to update it often is PepsiCo. In drafting its proxy statement, PepsiCo took input from investors to focus on six areas:.

The company included in its proxy statement a side-by-side graphic that depicted the current leadership structure, which shows a combined chair and CEO along with an independent presiding director, and a link between the compensation of the company's "Winning With Purpose" vision and changes to the executive compensation program.

As an investor, you want to ensure that the company you are looking to buy shares of practices good corporate governance, in the hope of avoiding losses in cases such as Enron and Worldcom. There are certain areas that an investor can focus on to determine whether a company is practicing good corporate governance or not. These areas include disclosure practices, executive compensation structure is it tied only to performance or other metrics?

Types of bad governance practices include:. These are all areas an investor can research before making an investment decision. The four P's of corporate governance are people, process, performance, and purpose. Corporate governance is important because it creates a system of rules and practices that determine how a company operates and how it aligns the interest of all its stakeholders. Good corporate governance leads to ethical business practices, which leads to financial viability.

The basic principles of corporate governance are accountability, transparency, fairness, and responsibility. Examples of corporate governance include the Anglo-US model, the German model, and the Japanese model. Corporate governance consists of the guiding principles that a company puts in place to direct all of its operations, from compensation to risk management to employee treatment to reporting unfair practices to its impact on the climate, and more. A strong, transparent corporate governance leads a company to make ethical decisions that benefit all of its stakeholders, allowing the company to place itself as an attractive option to investors if its financials are also healthy.

Bad corporate governance leads to a breakdown of a company, often resulting in scandals and bankruptcy. Leadership and Governance. Volkswagen Emissions Scandal. The Case of Enron and Parmalat ," Page Accessed Feb.

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Powered by. Businesses had concerns about some of the issues in Tentative Draft No. The draft recommended that boards appoint a majority of independent directors and establish audit and nominating committees. Corporate advocates were concerned that if companies implemented these measures, it would increase liability risks for board directors.

Law and economic scholars also heavily criticized the initial ALI proposals. Scholars maintained that market mechanisms would keep managers and shareholders aligned.

They stopped selling out when times got tough. Executives went on the defensive and struck deals to prevent hostile takeovers. State legislators countered takeovers with anti-takeover statutes at the state level. That, combined with an increased debt market and an economic downturn, discouraged merger activity. Shareholders struck back with legal defenses, but judges often favored corporate decisions when outside directors supported board decisions.

Investors started to advocate for more independent directors and to base executive pay on performance, rather than corporate size. By , banks had been taking excessive risks and there was growing concern about a possible collapse of the world financial system. Additionally, other definitions of GC can be found in the body of existing literature. For example, GC is a system that aims to provide control and direction to organizations as described by Cadbury ; They provided another definition: GC is a process in which the Financiers of an organization expect to obtain a return on their investment.

Such principles can be summarized with the following postulates: OECD, Protect the rights of shareholders and ensure equitable treatment for all of them minority and foreigners. Have the opportunity all shareholders to obtain an effective compensation for damages for the violation of their rights.

Recognize the rights of interested third parties and promote active cooperation between them and societies in the creation of wealth, the generation of jobs and the achievement of sustainable financial enterprises. Be informed adequately and on time of all the relevant matters of the company financial situation, performance, shareholding and its administration.

Have a strategic guide for the company, effective monitoring of management by the Board of Directors hereinafter CA, which in some countries would be the same JD and its responsibilities with its shareholders.

Regarding the first principle mentioned above, when the CG architecture establishes as a central point the effective protection of the interests of investors outside the company, they will be willing to pay more for corporate stocks and bonds, encouraging companies to issue these instruments to finance new projects La Porta, et al. Those countries that present a high degree of shareholder protection observe higher value stock markets, there are more companies traded, and there is a higher frequency of initial share offerings La Porta, et al.

The CG not only ensures the capital of the investors, but when it is applied properly it offers a set of conditions that guarantee to all the stakeholders that they will be able to recover their investment, plus some remuneration for it, whether they are owners or collaborators workers or other actors.

Lefort, In the case of proprietary constituents, also be able to give them access to the right to participate in the control of the corporation. Currently there are more than eighty-two countries that have developed and published recommendations specific to the characteristics of their country. In addition, the issuers are different depending on each country, namely: the stock exchanges when the initiative comes from the governing body of the stock market: SEC, CNMV, etc.

However, despite all these international regulations, the problem of financial crises has not changed its trend. What is wrong? Why don't other countries take the step of turning their codes into laws? One of the possible answers is found in the legal tradition of each country. There are many investigations carried out on this subject.

La Porta et al. The aim is to provide better protection to company investors in those nations where they have less legal coverage. Countries within the common law or Anglo-Saxon environment common law countries offer better legal protection than countries with a civil legal tradition code law countries La Porta et al.

For this reason, the latter include a greater number of good governance measures than those corresponding to common law countries Zattoni and Cuomo, It is clear that the more recently drafted codes seek greater investor coverage than the pioneer codes. In , Adam Smith exposed the agency problem, noting that managers of other people's money do not take the same care as the owner himself. Later in , Berle and Means highlighted the existing separation between ownership and control of the company and its consequences diversification of investment, low concentration of ownership , as well as the divergent interests between directors, managers and proprietary investors.

In the same sense, Jensen and Meckling defined an agency relationship and how the principal can limit the divergences with respect to his interests by establishing appropriate incentives for the agent. Agency problems are controlled through decision systems decision processes that separate management decisions implementation and application and control decisions ratification and monitoring at all organizational levels Fama and Jensen, This theory focuses on: information asymmetry, adverse selection and pre-contractual opportunism and moral hazard or post-contractual opportunism Van-Slyke, This theory is the most used in corporate governance research and shows a continuous increase Huang and Ho, The initial analysis related to the opening of capital of the entrepreneurial company, in this model originated in an analysis by Jensen and Meckling that focused on two objectives.

The first objective was to propose a contractual theory of the firm seen as a team of productive inputs Alchian and Demsetz, , inspired by the theory of property rights and focusing on the concept of the agency relationship. The second objective was to illustrate the explanatory power of this theory with respect to the problem of the capital structure of the company. At first, Jensen and Meckling considered the company as a nexus of contracts, associating the company and the entire group of resource contributors the input team The first linked the manager to the shareholders and the second linked the company represented by the administrators and shareholders to the financial creditors.

This initial modeling, which gave priority to the analysis of the relationship between the manager-entrepreneur who opens his capital and the new shareholders who played the role of principal and the administrator the agent, whose approach to the shareholder still dominates the research and normative reflections in the actuality.

The theory offers insight to explain the phenomena of corporate governance, particularly the agency-principle problems of conflicts between external investors and managers and the expropriation of minority shareholders by controlling shareholders Eisenhard, The main contributions of agency theory to thinking about and reforming corporate governance are the ideas of risk, uncertainty of results, incentives and information systems.

The study of conjectures that applies agency theory to corporate governance issues continues to grow, because it frequently tries to explain real events that occur in the world.

Finally, agency theory represents one of the most serious attempts to formulate a general theory of the firm in the framework of social relations Jensen and Meckling These authors define the agency relationship as a contract under which one or more people "principal" hire another person "agent" to perform some service for the benefit of the principal, which means delegating authority over the agent.

In any case, the agency theory has been the most applied in corporate governance research Tricker, To explain corporate governance, the resource dependency theory is also used in some academic papers Pfeffer and Salancik This theory interprets organizations as interdependent with the context in which they operate.

Organizations will depend, to ensure their survival, on the resources and information provided by other companies and the agents of the context in which they are immersed.

In these circumstances, organizations compete with other entities that use those same scarce resources.