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3
GOVERNANCE SCANDALS
2001: Enron Corp.
(Fastow – CFO, Lay – Chairman and CEO, and Skilling – CEO) creation of off-the-books partnerships, aggressive accounting to
conceal huge debt and increase profits, enabling executives to reap benefits
investor loss estimated to total $64.2 Billion equity de-listed January 2002
2002: Arthur Anderson LLP (SEC alleges entire firm) auditor for Enron didn’t realize shredding documents in an investigation was illegal Fall 2002 all state licenses revoked from company mainly broken up and sold to competitors (26,000 employees)
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2003: Tyco Int’l Ltd. (Kozlowski – CEO and Swartz – CFO) took $600 Million from company ($430 Million in fraudulent stock sales) $2 Billion in erroneous accounting (restate results back to 1998) $2 Million birthday party for wife of Kozlowski; $38,000 backgammon
table; $17,000 traveling toiletry box; $15,000 umbrella stand; $6,300 sewing basket; $6,000 shower curtain; $3,000 bed sheets
loan forgiveness for around fifty employees
2003: Parmalat Spa (Tanzi family, BOA, and Deliotte & Touche) announcement of debt roughly $15 Billion (8 times the reported amount) exaggerated revenues and profits declared insolvent late 2003 largest bankruptcy in Europe
GOVERNANCE SCANDALS
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2007: Duke’s Fuqua School of Business exam cheating scandal, working in groups for individual
projects 34 students punished, 15 suspended $50,000 loss in tuition and a laptop per student 56% admit cheating during exams
2009: Satyam (chairman Ramalinga Raju) earnings restatement World Bank had banned Satyam from doing business with it
for 8 years due to inappropriate payments to the World Bank's staff
taken over by Mahindra Group
GOVERNANCE SCANDALS
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WHAT IS CORPORATE GOVERNANCE?
Set of structures that provide boundaries for the firm’s operations participants in corporate activities
managers, directors, workers, suppliers of capital
returns to participants constraints under which participants operate
Emphasis on ensuring that suppliers of capital get a return on their investment
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COMPLEXITY
REGULATORSREGULATORS
BANKSBANKS
MINORITY CREDITORSMINORITY
CREDITORS
EXECUTIVESEXECUTIVES
MINORITY SHAREHOLDERS
MINORITY SHAREHOLDERS
CONTROLLING SHAREHOLDERSCONTROLLING
SHAREHOLDERS
Bonding
Board of Directors
Law
Ownership Concentration
Executive Compensation Monitoring
EMPLOYEESEMPLOYEES
Stock Market
Debt Market
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COMPLEXITY
REGULATORSREGULATORS
BANKSBANKS
MINORITY CREDITORSMINORITY
CREDITORS
EXECUTIVESEXECUTIVES
MINORITY SHAREHOLDERS
MINORITY SHAREHOLDERS
CONTROLLING SHAREHOLDERSCONTROLLING
SHAREHOLDERS
Bonding
Board of Directors
Law
Ownership Concentration
Executive Compensation Monitoring
POLITICIANSPOLITICIANS
EMPLOYEESEMPLOYEES
Stock Market
Debt Market
9
WHY DO WE CARE?
Good Investor Protection
Lower Cost of Capital
More informed & developed capital
markets
Better Capital Allocations
Faster Economic Growth