Cases in Corporate Governance

Introduction

Contributors: Robert Wearing Print Pub. Date: 2005 Online Pub. Date: May 31, 2012 Print ISBN: 9781412908771 Online ISBN: 9781446212400 DOI: 10.4135/9781446212400 Print pages: 1-3 This PDF has been generated from SAGE Knowledge. Please note that the pagination of the online version will vary from the pagination of the print book.

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Chapter One: Introduction

The focus of this book is on case studies of companies that have experienced problems with their corporate governance procedures. Nine case studies are presented here and it is hoped that the reader will find the material both interesting and instructive. Some common themes tend to run through these cases, such as charismatic and powerful business leaders, companies experiencing rapid and unsustainable rates of growth, unreasonably optimistic market expectations of future growth and unnecessarily complicated organization. Not all the companies discussed in this book have collapsed. Shell, for example (see Chapter 12), operates profitably but its corporate governance procedures have been the subject of debate in the media because of its overstatement of oil and gas reserves, announced in January 2004. Many believe that robust systems of corporate governance are important for both large and small organizations. The purpose of this book is to provide some insight into why corporate governance can break down and, by discussing case studies, to look at what might be done to remedy such situations. In addition, two chapters provide an introduction to corporate governance theory and corporate governance regulation.
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This book can be thought of as a supplementary source of material, which encourages topical discussion in seminars and classes. Each case study in the book is designed to introduce the reader to a factual real life episode which has corporate governance implications. Each case is designed to reinforce the reader's knowledge and understanding of corporate governance theory and help to explain why corporate governance codes and regulations are widely thought to be essential in modern business life. It is intended that each case will motivate students to discuss, in a seminar or class setting, the reasons why corporate governance failed, or was seen to be inadequate. This book does not pretend to offer easy solutions to the problems identified in the case studies. However, certain elements and themes can be identified, such as the problems that can occur when the chairman or chief executive becomes too powerful (or indeed
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is the same person) or when the non-executive directors are seen to be lacking in independence and authority. The reader is encouraged to adopt an independent and analytical [p. 2 ] approach to the case material and use the discussion section to reinforce their understanding of corporate governance issues. Corporate governance cases and their ramifications tend to be in the public eye over a long period of time. When court action is involved, cases can take many years to resolve. Cases such as BCCI and Polly Peck came to the public's attention in the early 1990s, but legal disputes are still ongoing. Case studies have a valuable role to play in affording a deeper understanding of corporate governance issues. Case-study analysis can also assist social scientists in the development of theories and hypotheses, which can then be subject to more rigorous scientific investigation. At the same time, it is important to be aware of the difficulties involved in trying to derive general conclusions from a case study.
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The book is structured as follows: the two chapters on the theory and regulation of corporate governance are followed by nine case studies, with a final chapter which offers a synthesis of conclusions. Chapter 2 on corporate governance theory reviews the development of the modern corporation and discusses principal-agent theory and stakeholder theory as suitable frameworks for analysing corporate governance problems. Chapter 3 on corporate governance regulation discusses the development of The Combined Code on Corporate Governance in the UK and Sarbanes-Oxley legislation in the USA. It is debatable whether these codes and regulations can ever be sufficient on their own to tackle weak corporate governance, and there have been suggestions that a change in business culture is required. Also, when framing corporate governance codes and regulations, a suitable balance needs to be struck between the demands of managers and the needs of stakeholders. Finally, the chapter closes by suggesting that some answers to the question What is good corporate governance? may be found by analysing and dissecting cases where many observers would agree that a definite failure in corporate governance procedures has occurred.

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Chapter 4 discusses the case of the Robert Maxwell's business empire. In November 1991 Robert Maxwell, an apparently successful business leader with important newspaper and publishing interests, disappeared at sea from his yacht Lady Ghislaine and it soon became apparent that his business empire was in serious financial difficulties. Employees who lost substantial pension entitlements were particularly disadvantaged. Chapter 5 discusses issues arising from the collapse of Polly Peck, a large UK quoted company, in October 1990. In 2004 this case had not yet been fully resolved, mainly because the former chairman and chief executive is effectively in exile in northern Cyprus. Chapter 6 discusses the case of the Bank of Credit and Commerce International (BCCI), which was forced by regulators to suspend its operations in July 1991. The Bank of England's regulatory practices were subsequently criticized in an official report the following year. [p. 3 ] Chapter 7 addresses the financial scandal surrounding Enron, one of the world's largest energy groups, operating in the USA. The company filed for bankruptcy in 2001 and it was discovered that reported profits had been substantially overstated. Chapter 8 discusses another corporate failure, WorldCom, which became bankrupt in July 2002. A main concern was that capital expenditures were found to have been misclassified. It is widely believed that Enron and WorldCom were crucial factors in getting the Sarbanes-Oxley legislation onto the statute books. Chapter 9 discusses the events surrounding the financial collapse of Parmalat, an Italian multinational company. In 2004 senior executives of the company were facing charges of false accounting in connection with the collapse. Chapter 10 examines the relationship between the company and shareholders of Eurotunnel. Eurotunnel came to the market in 1987, but its actual capital expenditures proved to be much higher than those projected in the original prospectus. In addition, projected revenues proved to be substantially overstated. This case specifically addresses the issue of how shareholders (as principals) can effectively monitor the actions of managers (as agents). Chapter 11 discusses the case of Barings Bank which collapsed in 1995 following unauthorized trading by one of its derivatives traders, Nick Leeson.
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Chapter 12 examines events at Shell. In January 2004 Shell announced that it had overstated its oil and gas reserves, and this case study examines the subsequent impact on the share price and how the company has attempted to reform its organization structures and corporate governance practices. Chapter 13 attempts to draw together the arguments and issues raised in the previous chapters and offers suggestions and recommendations for improving corporate governance. This chapter aims to show that the study of real-world examples of corporate governance is necessarily backward looking, but it is through this type of analysis that lessons can be learned for the future and relevant theories and hypotheses can be developed. Finally, it should be noted that the discussion questions, which appear at the end of each case study, have not been formulated with the intention of leading to a right answer since there is unlikely to be complete consensus on what is good corporate governance. Managers of companies are more likely to be aware of the costs of corporate governance, in terms of resources devoted to compliance with codes and regulations. On the other hand, stakeholders are more likely to be aware of the benefits, which could prevent or avoid loss of shareholders capital, loss of employment, loss of pension entitlements and loss of amounts owing from failed companies. 10.4135/9781446212400.n1

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