Hi Mei Chan,

On this topic there are several works (Investor protection, board composition, Principles of Corporate Governance, etc). What do you look more specifically?

The Organization for Economic Co-operation and Development (OECD) considers that corporate governance has the role to specify the distribution of rights and of responsibilities between different categories of people involved in the company like: board of directors, executives, shareholders and others, establishing rules and procedures for making decisions on the activity of a certain company. OECD also mentions that corporate governance is at the same time, both a set of relations between management, board of directors, shareholders and other interested groups and the structure through which company sets the objectives and the necessary means to reach those, but also the system of incentives offered to the board of directors and management in order to increase the objectives in the interests of shareholders and society.

According to Alexandru Panfilii, the main causes of failure behind the scandals of poor corporate governance are:

• Management incompetence.

• Non-observance of the procedures stipulated in internal regulations.

• Insufficient attention paid to risk management.

• Inconsistent distribution of duties and responsibilities.

• Inefficiency of internal audit.

• Ignorance showed to the signals provided by external audit.

• Influencing the external auditors to express an audit opinion inconsistent with reality.

Trying to carry out a more detailed analysis could be said that the boundaries within which all this factors could be grouped, is organizational culture, motivational element that differentiates the business entities, the principles and values which they lead. Analysis of the influence of culture on corporate governance has led to the identification of three groups of individuals, distributed as for Anglo-Saxon countries, with major U.S. and United Kingdom exponents, continental European countries, like Netherlands and Italy, and the third group represented by Asian countries, having as an exponent mainly Japan. In the U.S. and UK a significant number of large national companies are listed on stock exchanges, financial markets shows a high degree of liquidity, and ownership and control rights are frequently exchanged. In Japan and Germany, instead, major banks, insurance companies and government held the prevalent system of management, and many companies have reference shareholders and private law, which has the effect of limiting in the number of hostile takeovers

As possible ways to avoid future cases of collapse may be the following:

• Separation of powers of the Chairman and CEO. Each has to activate on its own pathway, otherwise we could reach a situation of excessive concentration of power and control capabilities of the supervisory board to be diluted.

• Integrity and missing of conflict of interest between managers, that should not target capital gains from the position they occupy, rather than wage remuneration they deserve.

• The existence of a strict flow of information so that decision-makers, have to receive timely and adequate information to perform their duties.

• Drawing concrete tasks and functions, especially in management teams, where decisions require a sustained effort and a great responsibility.

The main causes of poor corporate governance are, among others, the following:

Management incompetence

Non-observance of the procedures stipulated in internal regulations

Insufficient attention paid to risk management

Inconsistent distribution of duties and responsibilities

Inefficiency of internal audit

Ignorance showed to the signals provided by external audit

Influencing the external auditors to express an audit opinion inconsistent with reality.

Poorly designed rewards package

Including excessive use of share options (that distorted executive behaviour towards the short term)

The use of stock options, or rewards linked to short-term share price performance (led to Aggressive earnings management to achieve target share prices)

Trading did not deliver the earnings targets, aggressive or even fraudulent accounting tended to occur.

Questionable ethics

Behaviour at the top

Aggressive earnings management

Dear Mei,

On this topic there are several works (Investor protection, board composition, Principles of Corporate Governance, etc). What do you look more specifically?

Best Regards,

Fabrizio Rossi

With the present of UK Combined Code, poor corporate governance can be avoided but what is the reason it still exit? Human behaviour?

Thanks you Dr Fabrizio and Jorge added answers and materials.

Whilst I acknowledge the topic to be complex and it certainly needs to be discussed with due consideration given to the specific "corporation" or company or business it relates to. For example corporate governance for a construction company may have lots in common with that of a nursing home for the elderly but the nature of each business has a significant impact on the priorities of any governance program.

With that in min, i would like to say that corporate governance is mainly about managing people and what is going wrong is the mismatch of the job and the individual. That is primarily the result of an imbalance between authority and responsibility but also is influenced by the inflexible management within corporations.

Instead of looking at top jobs in the public and private sector, just look at the middle management and try to find out how they reached where they are. The first surprise you will find is the total lack of consistency in the way individuals are promoted to middle management positions. For example if you look at an organization in the public sector you will find middle managers of hugely varying backgrounds and ages on the same salary and the same general area of responsibility. When you look closely you can also find huge differences in their skills, educational background and number of years of service.

Such inconsistencies demonstrate an underlying ill health within these organizations.

Hamid Rassoulian

Hi

 I agree with all of the above.Three are many factors contributed  to poor corporate governance. However, I would like to share my thesis work, I found ethics is one of the main factor to poor corporate governance. From moral perspective, ethics is the way forward. If you like I have several published articles on how ethics can be integrated and the role of ethics in corporate governance. I can give you the details if you like.

In my opinion, the main factor contributing to the poor corporate governance is the political interference and to much personal conflicts in running the business organizations. 

Dear Dr Fabrizio,

Any specific papers you would recommend for board composition and Investor protection?

Mei Chan - Your Question:   What is the quality of corporate governance practice? What are the causes behind the scandals of poor corporate governance?

My Answer:

Corporate governance problems stem from the issues of ownership (by principals) and control (by stewards or agents).  Agents ( management) always want to capitalise on the proceeds from the firm.  The issue is, "Why should we make the owner ultra rich when we are the ones who sweat?"  This is the dilemma.  Managers are running away with the agenda of the company.  They are more powerful than the owners.  Actually, if you look at director selection, its the CEO and management who call the shots.  They make the board propose and eventually select people they are connected with, the  so - called "old school boys and girls mentality".  They want their friends and acquaintances on the board so that they do not scrutinize much what they do.  They also want friends on the board so that they are also invited to sit on  boards where their friends are in management - the so called 'interlocks'.  Companies end up failing because there is no sufficient oversight from non-executive directors who are really independent in the true sense sense of the word.

When scandals take place, owners and stakeholders eg employees suffer a lot because they are innocent.  They do not see these things coming.  They just happen suddenly.  They are never prepared for corporate failure caused by these scandals.  in most countries the fat cats that cause failure go scot free.  My concern is - LETS NOMINATE, DO BACKGROUND CHECKS, POLICE CLEARANCE, INTERVIEWS AND THEN SEND THE PROPERLY DISCLOSE PROSPECTIVE DIRECTORS' DETAILS TO THE BOARDS AT AGMS SO THAT SHAREHOLDERS VOTE FOR UPRIGHT AND INDEPENDENT AND CAPABLE NON EXECUTIVE DIRECTORS.

The quality of executive directors eg CEO and CFO is also an issue.  Lets put man and women of character to be stewards of our corporations.  

There's room for improvement to the quality of corporate governance.  In a developing country such as Malaysia, the interference of political should be discouraged especially for government linked companies.

Hi Corina,

There are pros and cons when political interference in enterprise decision-making and corporate performance.  Politicians can use enterprises to achieve so-called higher national goals. However, it is difficult to determine whether the politicians are seek for achieve their own political and personal goals.

Hi,

Causes of poor corporate governance may be : Early misbehavior of the CEO or of the board of directors, a too heavy competition inside the firm leading to corporate fraud, greedy attitude of the CEO and the management team, and a brisk market allowing IPOs for example.....You can check the following papers:

Biggerstaff  L, Cicero D C, Puckett A, "Suspect CEOs, unthetical culture and corporate misbehavior", Journal of Financial Economics 2015,117, p98 -121.

Fich El, Shivdasani A, "Financial Fraud, director reputation and shareholder wealth", Journal of Financial economics, 2007, 86, p 306-336.

Hass L, MA Muller, Vergauwe S "Tournament incentives and corporate fraud", Journal of corporate Finance, 20°15, 34, p 251 -267.

Best regards

This paper tries to throw some light on that challenging issue:

Hausken, K. and Schwartz, G.A. (2012), “N-player Costly Contracting,” International Journal of Corporate Governance 3, 1, 1-18.

Article N-player costly contracting

HI,

You may have a look at this paper:

Do board interlocks increase innovation? Evidence from a corporate governance reform in India

Journal of Banking and Finance, July 2017, volume 80, Pages 51-70

Christian Helmers, Manasa Patnam, P. Raghavendra Rau

Best regards