International Corporate Governance Scandals
The now iconic Enron scandal has informed many of the initiatives in the Commonwealth Caribbean towards an increased vigilance of corporate governance standards for publicly trading companies.
Enron was one of the largest companies in the United States and it collapsed in 2001 due to widespread fraud, resulting in losses in jobs, pensions and investments. Before Enron, however, the debate began in earnest in the United Kingdom after the Mirror Group fiasco in 1991 when it was found that hundreds of millions of pounds were missing from the pension funds of two publicly listed companies. The principal, Robert Maxwell, died (allegedly committing suicide, among other theories) in the wake of his fraud trial. The deficiencies in the corporate governance structure of the company included too much control by the chairman who was also the chief executive officer, ineffective non-executive directors who may not have been truly independent, weak audit functions, and the failure of the pension fund regulators to effectively investigate the Maxwell Pension Fund.[226] The Mirror Group collapse was followed in the United Kingdom by the Bank of Credit and Commerce International and the Polly Peck collapses of 1992.These cases precipitated a number of reports and corporate governance codes in the United Kingdom. Since then, many reports and codes have been introduced under a �comply or explain’ requirement, which states that companies should comply with the code or explain why they have not. Consequences of non-compliance without explanation range from board intervention to stock exchange de-listing. More recently, the United Kingdom has also introduced the Directors Remuneration Regulations 2002 and brought into force a new Companies Act 2006, which will reflect a more radical and aggressive approach to corporate governance. The provisions relating to directors and officers[227] and those relating to shareholder actions[228] which came into force in October 2007, reflect a more modern approach to corporate governance with an emphasis on accountability, transparency and, to some extent, corporate social responsibility.
The Enron scandal in 2001 involved one of the 10 largest companies in the United States. Kenneth Lay, the founder of Enron, who is now deceased, and Jeffrey Skilling, the then Chief Executive Officer, along with Enron’s auditors, Arthur Andersen, were held responsible for what resulted in a catastrophic collapse of Enron, leaving thousands of employees losing their jobs as well as their retirement savings, shareholders losing their over US$50 billion in investment, and creditors whistling for their money. Kenneth Lay and Jeffrey Skilling faced charges of securities fraud, wire fraud, money laundering, insider trading, mail fraud and conspiracy to falsely inflate Enron’s profits for personal gain. Arthur Andersen was convicted of obstructing justice for illegally shredding documents relating to the Enron investigation, but this was recently overturned by the United States Supreme Court on the basis that the judge’s instructions to the jury were faulty.[229] Nevertheless, Arthur Andersen still faced and continues to face many lawsuits by shareholders of the company.
The collapse of other large United States public companies followed: Tyco (2002), Adelphia (2002) and Worldcom (2002) and were attributed mainly to fraudulent accounting practices and generally poor corporate governance. The collapse of the European company, Parmalat in 2003 also affected thousands of American investors with losses of over US$1 billion due to fraud. This fraud inflicted a further blow to investor confidence, which was, by then, quite fragile.
It has been widely accepted that certain weaknesses in corporate governance were at the heart of many of the collapses: failure of the directors’ fiduciary duties, failure of the directors’ duty of care and skill, fraudulent accounting practices, poor risk management, conflicts of interest and excessive board compensation. The knee-jerk reaction in the United States was to enact the Sarbanes-Oxley Act.[230] This law increases the criminal and civil liabilities of directors, chief executive officers and chief financial officer; restricts the services of external auditors and the scope for conflicts of interest; and sets up the Public Company Accounting Oversight Commission to oversee the accounting profession.[231] The Sarbanes-Oxley Act reflects a legislative rather than �persuasive’ approach to corporate governance. The latter relies on moral suasion. More recently, the collapse, or near-collapse, of some of the largest banks and corporations in the United States and the United Kingdom highlights the weaknesses in the very models which the Commonwealth Caribbean territories hope to follow. The weaknesses that have been identified relate to poor risk-management and weak enforcement.
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