Rabindra Neupane

Amrit Thapa
Bishnu Dhamala

Corporate Governance
Meaning
Importance

Enron Collapse due to the Corporate

Governance

History
Business Pattern
Reason for collapse

"Corporate governance is a field in economics that

investigates how to secure/motivate efficient management of
corporations by the use of incentive mechanisms, such as
contracts, organizational designs and legislation.

"Corporate governance - which can be defined narrowly as the

relationship of a company to its shareholders or, more broadly,
as its relationship to society -.",

Some commentators take too narrow a view, and say it

(corporate governance) is the fancy term for the way in which
directors and auditors handle their responsibilities towards
shareholders.

-Enron

Corporation (former New York Stock

Exchange ticker symbol ENE) was an
American energy, commodities, and services
company based in Houston
-Before

its bankruptcy on December 2, 2001,

Enron employed approximately 20,000 staf

Enron, founded a small gas pipeline

company in 1986 by taking advantage of the
deregulatory moves at the time, grew rapidly
through mergers and acquisitions
-

In 2001, Forbes magazine listed Enron as

the 5th largest earner in the U.S.
-

The Enron scandal, revealed in October 2001,

eventually led to the bankruptcy of the Enron
Corporation, an American energy company
based in Houston, Texas, and

-Risk management was crucial to Enron not

only because of its regulatory environment, but
also because of its business plan.
- Enron established long-term fixed
commitments which needed to be hedged to
prepare for the invariable fluctuation of future
energy prices.
- Enron's bankruptcy downfall was attributed to
its irresponsible use of derivatives and special
purpose entities.

-Even

though Enron extensively relied on

derivatives for its business, the company's
Finance Committee and board did not have
enough experience with derivatives to
understand what they were being told.
-

- The Senate subcommittee argued that

had there been a detailed understanding of
how the derivatives were organized, the
board would have prevented their use

-The

Board did not give enough consideration

when making important decisions.
- They were not really informed nor did they
understand the types of transactions Enron
was engaging in.
- The Board relied too heavily on the auditors
and did not fulfill its duty of ensuring
- the independence of the auditors.

- Enron managed their numbers to meet

aggressive expectations. They were less
concerned with the economic impact of their
transactions as they were with the financial
statement impact.
- Creating favorable earnings for Wall Street
dominated decision making.
- Enron was able to hide massive amounts of
debt and often collateralized that debt with
Enron stock

-The

Board did not efectively communicate

with its auditors from Arthur Andersen.
- The idea that Enrons employed accounting
techniques were "aggressive" was not
communicated clearly enough to the board,
who were blinded by its trust in its respected
auditors.

In 2001, cracks began to appear and in

October, Enron reported a loss of $618
million its first quarterly loss in four years.

That investigation later shown that a

complex web of partnerships was
designed to hide Enron's debt.

By late November, the company's stock

was down to less than $1. Investors had
lost billions of dollars.

ENRON scandal housed one of the biggest

accounting frauds in history of U.S & around
the world and was filed for Chapter 11
bankruptcy on Dec. 2, 2001.

The name Enron became synonymous with

corporate greed and corruption.

-Therefore,

the whole corporation was not of

responsibility for this scandal. Actually, if the
board and other shareholders paid more
attention to those decisions made by the
chief, CEO, CFO and those relevant stafs,
ENRON can avoid this result

-Excessive

leverage is usually a high-risk

strategy.
-Adequate liquidity is always a good thing.
-Fraud

never pays.
-Update your product/service/skills to remain
competitive (before your financial situation
deteriorates
-If

you can't understand it, don't invest in it.

Thank you