Corporate governance in US and China —— Worldcom Case Study

Group members: Sisi Jin 200896093 Rui Hua 200884223

Hui Lu 200893795 Wei Zheng 200908791

Outline

Case WorldCom

Corporate governance in United States

Compare and Contrast between Corporate Governance in US and China

Why WorldCom failed????

• WORLDCOM LEADERSHIP

CEO-Bernard Ebbers CFO - Scott Sullivan

Controller - David Myers

• few senior executive officers at its Clinton, Mississippi Headquarters

• accounting and financial department personnel

direct supervisor

Collude

Unconcerned and Malfunctioning Board of directors

• Unalert top management• Non-executive directors neglect of their duties.• Whimsical CEO– No technical qualification– Priority to personal interest

• Unreasonable long tenures of board members• Unreasonable loans and benefits given to Ebbers

Other reasons

• Recession of the economy• Vast oversupply of capacity• Unhealthy focus on profits

Source from: Jackson, Gregory, 2010, ‘Understanding Corporate Governance in the United States’, Arbeitspapier 223.

Internal

Ownership structure

• Ownership right

Internal firm corporate structure

• Board of director

• Board committee

1. Participation in Governance• Institutional investors: Directly to

voice their governance concerns2. Access to the Vote3. Shareholders’ Right to Call a Meeting of

Shareholders

1. The majority of the board must consist of independent directors (U.S. stock exchange listing standards).

2. The position of chairman of the board and the CEO should be separate.

1. Audit Committee 2. Compensation Committee3. Nominating/Governance Committee4. Special Committees(e.g. the executive and

finance committees)

Mandatory

External Environment• Capital market: Liquidity, Efficient, and Transparent

Poor corporate Governance may quickly reflected in its stock price (market correction mechanism)

• Regulation and Law: The corporate governance structure in the United States is a hybrid system of laws, regulations, and best practices. The primary drivers of corporate governance are state corporate laws, federal and state securities law, judicial process, stock exchange listing standards, best practices.

• Gatekeeper: External Auditors, securities analysts, legal counsel.

Compare and Contrast between Corporate Governance in US and China

Corporate governance in US Corporate governance in China

Similarities 1.Internal control & External regulation based system(Unitary Board).

Differences(Internal)

1.Essential difference -- culture and historyEmphasizes free competition culture, are more likely have whistleblower.

Reinforces submissive culture.

2. Ownership structureShareholding are more dispersed. Shareholding are highly

concentrated.3.Board of DirectorsNED > EDMore independent directors in the board of directors.

NED < ED so NED + Board of supervision(no voting rights)to achieve balance.“one---vote negation system”

Cont’dCorporate Governance in US

Corporate Governance in China

Differences (External)

4. Capital Market

Totally market-oriented economy；the Most efficient transparent & liquidity.

Less efficient;Too much government intervention;Regulator & Participant.

5. Law and Code

State corporate laws；Federal and state securities laws &regulations.

Company Law（ 1992 2005） --all companiesSecurity Law security companies（ 2004）Codes from CSRC --listed companies etc（ 2001）

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8.Fuller, J./Jensen, M. C.: Just Say No to Wall Street, Journal of Applied Corporate Finance, 14(2), 2002, p. 41-46.

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