- The rise of misconduct and poor performance by the corporate governance in the 2000s had resulted in tremendous collapse of companies. Businesses reported tremendous losses that, as a result, affected the shareholders’ expectations on their investments. As a consequence, shareholders demand for answers on what went wrong is one of the key reasons as to why there is a need to fix the shortcomings that contributed to the failure of the corporate governance to effectively deliver the projected company returns and strategic growth. In addition, the failure of corporate governance resulted in the rise in public mistrust of the organizations’ operations which as a result, affects the business due to the tinted image that is essential to achieving organization growth. Also, reduction in projected financial returns as well as corporate strategies as the principal investors shied away from investing in a collapsing organization calls for a need to fix the poor governance issues.
- The explanation of the factors that led to the failure of the corporate governance to deliver the organizations’ expectations can be based on the failure of the misconducts in managerial compensations and earnings, shortcomings among the gatekeepers, and the conflicting interests of the stakeholders. First, the high salaries and remuneration benefits especially equity-based pay and stock options for the CEOs motivated them to improve performance in the short-run but not a long run. In addition, the managers misreported the financial status of the organizations as a way of boosting the company’s stock price which is mostly to their personal benefits. Secondly, ineffectiveness of the gatekeepers including the external auditors, credit rating agencies and analysts in detecting financial decisions, misreporting and frauds attributed to the failure of the organizations such as Enron. This is attributed to presence of conflict of interest where the gatekeepers neglect the misconduct as a result of big consultation fees paid by the organizations they work for. Existence of laws that protect the gatekeepers also limits their effectiveness in detecting and reporting governance misconducts. Third, the institutional shareholders consisting of the banks, mutual funds, life insurance companies, pension funds and endowment funds failed to take an active responsibility in evaluating, motoring and punishing the defects of the managers. This is especially crucial since they own over 55 percent of the total organizations’ outstanding equity. The existence of conflict of interests could hinder some institutional shareholders from commenting on any management misconduct for instance where pension funds organizations fear to meddle on the performance of the management for the fear of losing their primary source of income.
- There are various recommendations that could be used in fixing the subsequent results of the mistakes done by the corporate governance. First, imposing restricted stock could limit the managers’ temptation of selling stocks that only benefit the company in the short-run. In addition, there should be a full disclosure of the financial reports to avoid misreporting and stock selling to identify the actual motivators behind the stock selling. Secondly, gatekeepers role in detecting and reporting misconducts could be improved through termination of payments for consulting services, limiting the employment terms for auditors and encourage licensing of more gatekeepers, thus increasing competitiveness which results in improved performance. Legal actions also need to be imposed on the gatekeepers caught providing false financial reports after the audit. Finally, the solution to making the institutional investors more active includes removing the incentives that grant institutional funds managers the ability to support the corporate directors. This is achieved by insisting on the need for the mutual funds to submit to their proxy votes at the end of each year. In addition, there is need to check the competence to the mutual funds’ managers and independence of the mutual funds managers so as to ensure that their decisions and independence is not influenced by the monetary promises.
References
Edward, F. (2003. US Corporate Governance: What Went Wrong and Can it be Fixed? Retrieved from https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/1661/U.S.%20Corporate%20Governance%2010-05.pdf.
