Research Korner

An Overview of Corporate Governance

An Overview of Corporate Governance Introduction             A number of perspectives have emerged on the concept of corporate governance that also justifies its importance. One perspective considers corporate governance as the “system of authoritative direction, or government”[1]. This means that corporate governance involves the exercise of authority by the leaders or top executives of the corporation to direct the company towards the achievement of its goals. Corporate governance as the exercise of authoritative direction involves the application of the fundamental principles of accountability, honesty, integrity, responsibility and trust in implementing a system of governance able to balance conflicting interests and priorities to improve financial and non-financial areas[2]. In practicing corporate governance, the company should be able to achieve effectively its goals because of the control and direction that company leaders provide. Concurrently, when there is weak leadership or poor direction, then the company would likely not achieve its goals and in the worst case, it can even result to the collapse of the company.             Another perspective considers corporate governance as the management of relationships. Corporate governance is the “connection of those relationships to the corporation and to one another”[3] with those relationships pertaining to the relationships between and among “directors, managers, employees, shareholders, customers, creditors and suppliers, as well as the members of the community and the government”[4] and these relationships involve constituents. Corporate governance as encompassing the management of relationships involves the development and maintenance of effective internal and external relationships within a defined cultural orientation as a means of motivating the corporate stakeholders to contribute to the achievement of firm goals.[5] Corporate governance is important in ensuring firm viability through sustained capital investments and profitability by providing that companies should develop effective practices such as accountability and reporting that foster the building of good relationship with shareholders as the source of capital for the company. Otherwise, poor practices could destroy the trust of shareholders resulting to a withdrawal of investments that could result to the collapse of the company.             The different perspectives represent the multidimensional aspects of corporate governance. On one hand, it involves the exercise of authority to direct the corporation towards its goals. On the other hand, it also revolves around the management of different levels of relationships occurring within the corporation and between the corporation and external parties such as suppliers. When taken together, corporate governance is the application of principles of leadership and authority and the management of multilevel relationships to achieve corporate goals.             Effective corporate governance makes a big difference in corporate outcomes since the business firms that have been able to develop effective corporate governance systems are also the firms that have become industry leaders in the domestic and even in the international market. A typical governance model of successful business firms includes a board of directors who fulfil their jobs competently and reliably, a competent CEO selected by the board and accorded sufficient authority to manage the business, a system in line with laws that enables the firm to fulfil its obligations to various stakeholders, and a system of accountability and disclosure of corporate affairs.[6]             Concurrently, failures in corporate governance lead to the collapse of firms for a number of reasons. One is the loss of efficiency when leaders neglect their roles and responsibilities in running the company and managing the firm’s relationship with its shareholders. When leaders violate regulations, effectiveness of the board suffers as expressed in unmet targeted goals, irresponsibly allocated resources, and eroded investor relations. Another is the inability to achieve firm sustainability because of disruption in the normal flow of business, heavy losses, and poor public reputation.[7] When these happen, the firm loses its investors and without investors, it cannot continue its operations. The result is bankruptcy as shown in the cases discussed in the succeeding sections.             Since part of corporate governance is accountability and disclosure to various stakeholders, this justified the development of corporate governance laws and regulations applicable in different jurisdictions. Provisions on corporate governance usually include responsibility of leaders or the board to provide public access to vital information to enable investors to gain freedom of choice and practice accountability through a limited tenure of the directors, quorum rules in the decision-making process, approval systems for investment policies, and rules of financial reporting. These rules not only develop efficiency but also protect stakeholder interests through corporate affairs guided by sound principles. Corporate Governance in the U.S. and U.K.             Corporate governance in the United States works through the Sarbanes-Oxley Act 2002 that introduced corporate governance initiatives infused into federal securities statutes while corporate governance in the United Kingdom operates through the combined code that focused on board composition and functions. These initiatives constituted significant changes in the law and departed from the previous system of regulation[8]. Sarbanes-Oxley constituted a response to the widespread fraud that occurred in the United States involving corporations such as Enron, Tyco and WorldCom. The provisions of the law also enhanced corporate governance in national securities and shareholdings by widening the function of the audit committee of the corporation.[9] With the new law, corporate governance in the United States placed stress on the key areas of internal control certifications, internal control assessment, and disclosures. The combined code coincided with the reviews made in the United States in the 1990s that ended with the establishment of the combined code due to the merging of the three review committees, Greenbury, Cadbury and Hampel committees. The combined codes was a response to the case of Maxwell Communications Corporation, which involved the diversion of pension funds of the firm to fund the firm’s operations after the company’s engagement in high risk investments that resulted to huge losses and placed the corporation in debt. Since then revisions have been made in 2003 coinciding with the Sarbanes-Oxley development in the United States, with subsequent changes in 2006.[10] The combined code establishes standards for good practice relative to issues on board composition and board-related development, remuneration responsibilities, and processes of audit relative to shareholders.             An important corporate governance rule in these two jurisdictions is internal audit. In Sarbanes-Oxley, corporations take responsibility not only in filing periodic reports but also in certifying that the officer signing the document has reviewed the document and the report contains true accounts of facts on the financial condition of the company.[11] The CEO and CFO takes responsibility for quarterly certifications included in the financial reports, disclosure of all known deficiencies in control in the previous reporting period, and disclosure of fraudulent acts. Internal audit is also requires corporations to include a report on internal control that states the responsibilities of management in establishing and maintaining sufficient internal controls and processes in financial reporting and provides assessments of the level of effectiveness of the internal control system based on the financial reporting in the most recent fiscal year. In addition, the public accounting firms need to provide an attestation on the assessment of the corporation.[12] This obliges corporations to regularly assess and report on internal controls together with the attestation of the independent accountant. Under this provision, corporate management and the independent auditor takes responsibility over certification of internal controls assessment with an attestation by the independent accountant, and quarterly change reviews. In the combined code, accountability and auditing involves the board taking responsibility in deriving a clear and balanced assessment and reporting of the position and prospects of the firm. Corporations take responsibility for maintaining a sound internal control system as a means of safeguarding the assets of the firm and the investments of shareholders. The corporation should also establish a three-person audit committee and develop formal business relations with the committee.[13]             Another important corporate governance rule covers the board of directors. Sarbanes-Oxley prohibits members of the board from arranging or obtaining personal loans or other internal arrangements such as cashless options or insurance arrangements. The board of directors cannot engage in insider trading and due reports should be made with the SEC. In addition, CEO and CFO of the firm have to reimburse the firm for payments or profits earned in case the firm needs to restate financial statements because of reasons such as misconduct. In the combined code, the structure and composition of the corporate leadership, particularly on the important role of the board in taking responsibility over the success of the firm was stressed. There should also be a clearly defined division of responsibilities in order to prevent the concentration of power on one person or a small group of people. Achieving this involves the inclusion of executive and non-executive officers. In the appointment of officers, this should be made by applying a formal, thorough and transparent process of selecting directors and other members of the board. Competence has to be developed by the members of the board in considering new business related and regulatory information important to the performance of their jobs and update their skills and knowledge, with the performance of the board subject to formal evaluations. The directors are subject to re-election into their position but this should be supported by sustained satisfactory performance. The remuneration of members of the board of directors is also tackled, with the amount sufficient to attract qualified people and the system of remuneration should have links with the system of performance. A formal remuneration system should also exist so that the directors themselves do not have control over the determination of their respective remuneration.[14]             Still another salient corporate governance rule is disclosure or transparency. In Sarbanes-Oxley, the corporation reports additional information to the public regarding all material changes in its financial condition as these materialises. The report should use plain English since the intended audience is the public.[15] Real time disclosure protects investors and the public who could experience effects of the changes in the corporation financial condition. Management and independent auditor takes responsibility in monitoring emerging operational risks, reporting material events, and indicating the real time implication of these events. In the combined code, it is the responsibility of the corporate leadership to maintain communications and a good business relationship with shareholders in order for shareholders to gain important data pertaining to their investments.             Corporate governance in the United States after the enactment of Sarbanes-Oxley draws corporate management to practice truthful and responsible accounting through the assumption of responsibilities over reporting, internal controls assessments, and disclosures as well as independent accountants and auditors to take responsibility in reviewing financial reports and internal control assessments through attestation requirements. The regulatory provisions for corporations covered by the combined code provide best practices on board composition and remuneration as well as shareholder relations that constitute corporate responsibilities. Key Differences in U.S. and U.K. Corporate Governance             Although the corporate governance regulations in the United States and United Kingdom have similarities, there is a major difference in the nature and application of corporate governance in these two jurisdictions. In the United States, corporate governance rules carry the nature of being legislative and prescriptive while in the United Kingdom, corporate government regulations comprise a ‘comply and explain’ system. This means that corporate governance rules in the United States apply to corporations in a mandatory manner while the regulations in the United Kingdom work through the voluntary action of corporations.[16] This is supported by the inclusion of provisions on criminal penalties for non-compliance to the corporate governance rules in the United States while the combined code in the United Kingdom does not have similar penalties clause. In addition, the tone of Sarbanes-Oxley is prescriptive and imposing when compared to the combined code that only provide general guidelines and exact voluntary compliance largely dependent on the self-regulatory actions of the corporate leaders. As such, in the United States non-compliance results to prosecution while the United Kingdom a possible violation of best practices entails an explanation by corporate leaders.             There are also specific differences between the corporate governance regime in the United States and United Kingdom. First is the condition in the United Kingdom for the roles of CEO and Chairman to be separated in order to achieve checks and balances in the board composition. This condition is not prescribed in the United States. Second is the requirement for the composition or inclusion of independent non-executives as members of the board. In the U.K., majority of the board should be made-up of independent non-executives but in the U.S., all the members of the board should be independent non-executives to ensure accountability. Third is the prescription of internal audit committee under the U.S. corporate governance regime but there is no requirement for such committee in the U.K. but firms should explain the lack of this committee.[17] The differences are due to the variances in the corporate governance failures experienced in these two jurisdictions as shown in the cases discussed below. Corporate Governance Failures Bank of Credit and Commerce International (BCCI)             BCCI was founded in 1972 by Agha Hasan Abedi. The primary goal of the bank is to provide support to the destitute segments of the population in the developing countries[18].             The problem of the bank started with BCCI’s response to the situation of Gulf Group, one of its primary clients, a shipping company that got into financial trouble in repaying its debts and BCCI went too far in settling Gulf Group’s loan with external creditors. This took its toll on the finances of BCCI so that the company had to offer high rates of interest to attract customers to make deposits. Evidence suggests that Abedi and Mr. Naqvi, his assistants who became CEO, falsified BCCI accounts in order to hide the drain in the accounts of the bank and make the reserves report reflect a healthy firm.[19]             In 1988, police and customs office in the United States arrested seven officials of BCCI officials in Tampa for the crimes of drug trafficking and money laundering, which I think was a good warning for the bank of England to look at BCCI operations.[20]             In 1987, Abedi agreed to appoint Price Waterhouse as its sole auditing company. According to the Bingham report, which the U.K. Prime Minister John Major commissioned to investigate and report on the problems within BCCI, Price Waterhouse acted as the sole auditor of BCCI as well as consultants charging BCCI for their services.             Price Waterhouse received information of fraud within BCCI from senior employees covering doubtful loans and wrongful information stated by BCCI management to its auditors. This prompted Price Waterhouse to make a report to the Bank of England. However, Bank of England did no make any action on the report. After a month, Price Waterhouse again sought a meeting with the Bank of England and provided evidence providing Naqvi’s admission of the falsifying documents and deceiving the auditing firm. Again, the Bank of England did not make any action on the matter. Finally and after receiving a report on the details of the fraud from the auditing company that Bank of England made the decision to close BCCI, which includes details of the fraud from Price Waterhouse, the bank decided to close BCCI. It took the Bank of England five days from the receipt of the first report to act on the matter.[21]             This case shows a clear example of corporate governance failure, and it shows why we need to apply corporate governance rules or codes of best practice. One of the obvious examples is the power of the Chairman and the chief executive officer Mr. Abedi and Mr. Naqvi in which they had too much power that they were acting like they were the only owner. It seems that the board of directors were so week that they were not concerned about being asked of the reasons or explanations for what they were doing. This reminds me of the reasons of having non-executives in the board to make sure that the company is in the right track and make sure that every thing goes according to the strategy and the plan.             The second main problem with BCCI is the complexity of the BCCI structure, in which the founder Mr. Abedi registered the parent company in Luxembourg and a major subsidiary of BCCI overseas was registered in Cayman Islands. This causes complexity since there is no central regulation on oversees operations and no official lender of last resort. This caused many people to question the reasons of splitting the operations between Luxembourg and Cayman Island. Is it because of the relaxed regulations? I doubt it because in that time there were various countries with relaxed regulations than these two countries in which BCCI already got branches. U.S. and U.K. corporate governance agrees on the point that an audit company can not work as an auditor and as a consultancy at the same time because that will lead to a conflict of interest, which happened in this case.             There were a lot of problems regarding corporate governance at BCCI but what really caused the bank to collapse was the miscalculation of the risk when they agreed to pay the creditor of Gulf Group and which took most of the cash that the bank had. It seems that this problem has nothing to do with corporate governance but in reality, it has, because this kind of decision should be referred to the board. But since the board committee in BCCI was weak and were depending on only one-sided opinion, this led to a wrong calculation of the risk.             In my view the reaction of the bank of England was not only late but also wrong. There were a lot of signs that the bank of England did not give attention to, one of the signs were the Tampa trail in which the bank of England should take some precautions toward it and investigate to make sure that everything is alright. Besides the first and the second meeting that the audit company had with the bank of England seems enough to me to open a door for investigation, but the bank was fearing that the job might be too big and complex, which was proven by the worsening of events before the bank of England finally took a decision. This was a fatal decision to shut down BCCI without examining the opportunity of restructuring and saving BCCI. This constituted a difficult decision but not impossible and worth looking at, at least to save the confidence of the investor in the banking sector. Enron Corp (Enron)             Enron is an energy company that established its headquarters in Houston, Texas. Prior to December 2001, Enron enjoyed the seventh position among the top corporations in the United States and recognition as a highly innovative firm.              Enron’s problem started when the board engaged in questionable practices. Enron wanted to expand its operations by diversifying the range of its products and engaging in online trading. However, instead of becoming a broker between buyers and sellers, which is the usual practice, Enron directly traded in gas and other products. This meant that buyers bought directly from Enron and Enron purchased directly from suppliers. This means that the continuity of its trading operations largely depended on its credit rating. When its credit rating dropped, buyers and sellers halted trade.[22] Enron’s board approved a very risky strategy that did not afford the company security in case of a decline in its credit rating and the slow down of trading.             Another activity that the board approved is the special purpose entities (SPEs), which is uses third parties to collect investment funds from people and firms not related to Enron. Even if third parties collected the funds, Enron became the guarantor of the payment of the borrowed funds and this was done by offering shares to investors. Massive external borrowing affected Enron’s credit rating because external borrowing was read as a sign of problems within the firm. In addition, economic downturns together with the extreme provisions included in the debt arrangements made through SPEs made it difficult for Enron to manage its debt.[23]             In December 2001, Enron declared bankruptcy resulting to the decline in share prices from 83 dollars to less than a dollar. This was due in part to a series of corporate governance problems that eventually caused the decline of the firm.                      The cause of the collapse of Enron can be traced to poor corporate governance practices.             Enron’s board of directors did not have independence or oversight of its operations because of the structure, roles and remuneration of its board. Enron had fourteen members of the board comprised primarily of external members, which made it harder for the firm to control and direct its operations towards shareholder interests. Most of the external directors owned significant Enron shares and only one external director had stock options as part of compensation. In addition to the compensation of the board of directors, they received consulting fees. Many of the directors also engaged entities with which they have personal or business links and approved donations to organisational with which they have affiliations.[24] These created areas of conflict of interests implying the compromise of the board’s independence, which in turn meant a problematic internal control system.               The firm’s compensation system created the problem of earnings manipulations because it was dependent on performance thresholds[25]. In this system, the manipulation of earnings favours the board since higher earnings meant greater compensation. This encouraged Enron’s non-inclusion of substantial SPEs in its balance sheet to increase the amount of earnings. This occurred due to lack of oversight of Enron’s board.             Enron had an external auditor but the auditor failed to apprise comprehensively the board and regulatory authorities regarding the emerging and potential irregularities in Enron’s transactions including the remuneration systems and other transactions with external entities. This was due to the comprised independence of the auditor who was entitled to receive large amounts as consulting fee from Enron as the client. This prevented the conduct of an independent external audit or review.[26] WorldCom, Inc. (WorldCom)             Bernie Ebbers, who received a degree in physical education successfully built a motel chain and acquired a reputation for careful appropriation of corporate financial and skillful management of business deals. Together with associates, they set up a telecommunications company called LDDS or long distance discount services. After some time, the company experienced financial difficulties. Ebbers was appointed CEO by the board and within a few months he was able turn around the situation and make the company a profitable venture. [27]             Since then, the company acquired a reputation for aggressive practices during mergers and takeovers that started with WilTel, which was one of the major suppliers in 1995. The merger created WorldCom, which continued in its aggressive strategy. The company bought UUNET Technologies and within weeks, it took over another company known as MFS. As if that was not enough, it was able to outbid BT for a company called MCI. WorldCom continued its expansion in 1998 by taking over two large companies, Brooks Fiber and CompuServe.[28]             WorldCom problems commenced in 2000 when it received many complaints on its customer service and the lawsuits piled up. The approximate cost of the lawsuits reached $88 million. The basis of the lawsuits included excessive customer charges on calls, tricking customers to sign-up for long distance services, and billing customers for service charges given without the authorization or permission of customers. In 2002, WorldCom extended $341 million to Ebbers as personal loan at a 2.16 percent interest, which was lower than the cost to WorldCom in investing or loaning the money.[29]             Cynthia Cooper, the internal auditor for WorldCom gave the report that the ordinary operating expenses of the company were listed under capital investment, which means instead of writing the expenses in the profit and loss account, which will reduce the profit they were being taken off and written over a much longer period. The audit committee was not able to act on this information. Later, it was discovered that WorldCom was able to overstate its cash flow by more than $3.8 billion. WorldCom gave Salomon Smith Barney, a brokerage company, an exclusive right to administer the stock option plan, in which they were charging large fees for the portrayal of a positive picture and rating WorldCom’s stocks highly, even if WorldCom’s stocks were actually falling.[30]             The strategy that WorldCom was using showed that the company has weak corporate governance. It was not able to control the subsidiary companies since each telecom acquisition had different technical structures, billing structures, and sales plans. They reached the point that they were not able to get control over all these companies, beside when they were not able to maintain their profit, they started tricking and deceiving there customer, which costs them a lot of money in law suits.             The generous loan that the board of WorldCom gave to Ebbers has no explanation, especially when it was a large amount of money and the interest charged was lower than the cost to WorldCom of actually borrowing the money and was made at a time that the company was in need of cash.               The audit committee failed to act upon the information that the internal audit has found, and I think if the audit committee and the board acted at that time there is a possibility of saving WorldCom.             The overstatements of cash and the strategy that Ebbers was using shows the weakness of the board and the one sided opinion of the decision in the company, which is a failure in corporate governance. Barings plc             Barings bank was the oldest merchant banking firm in the United Kingdom that operated for nearly 200 years since it played a part in funding the Napoleonic wars and even the Erie Canal. In 1989, Nick Leeson joined Barings bank as the general manager of the Singapore operations. In his previous employment, he gained a reputation for having a through understanding of the brokerage settlement process and this was the reason that Barings gladly hired Leeson. In 1992, Leeson, acted as general manager of the bank’s engagement in the futures market. He took over the organization of the accounting and settlement department and acted as head of the trading operations in SIMEX, Singapore’s stock exchange.[31]             According to Leeson, Barings bank in the London headquarters allowed him to establish error accounts to cover any trivial items emerging in Singapore. After only a few weeks, he was asked to retain only one error account.[32]             During his tenure as general manager, Leeson applied for and received a trading license in SIMEX, which would allow him to become a stock exchange trader. Headquarters did mind his assumption of the trader role. However, although he was supposed to trade only on behalf of clients in executing their orders, he soon began to start trading on his own behalf. He used the error account to cover up his unauthorized trading activities. Leeson engaged in risky transactions because he failed to apply hedging. Consequently, from the perspective of Barings, Leeson was becoming a successful trader because they receive reports o trading successes but not his losses.[33]             Although receiving pieces of information on the situation in Singapore, Barings ignored the warning signals, which could have been highlighted by the extremely high demands for cash from the Singapore office. When asked, Leeson responded that the money is tied up at SIMEX so that there would be a delay in reporting. In addition, Leeson went to the extent of forging documents to provide support his claims.[34]             Barings case shows a clear example of weak internal control. Leeson was able to deceive not only the managers in Barings but also the internal auditor, which raises a question of the authority and the trust that Barings manager gave to Leesons. There was a time that Barings managers did not give attention to the signs and did not question the huge money that Leeson has been asking for. This raises the question about their corporate governance and their weak strategy.             When Leeson got his license to act as a trader in SIMEX, Barings managers did not show any objection. While it is an obvious example of conflict of interest since Leeson could act as trader and at the same time responsible for accounting for those trades in the back office.             It is worth saying that Leeson’s reason for fraud was not for personal gain.  However, this leads in the end to the same conclusion. Northern Rock             Northern Rock held the position as the top-five mortgage lender in the United Kingdom with a respectable share price in the stock exchange. However, in September 2007, Northern Rock experienced runs in its bank branches, as its clients feared losing their money after the publication of Northern Rock’s huge loan from the Bank of England. Although the situation leading to the problems experienced by Northern Rock was due to the credit crunch that affected the world, there were still issues of corporate governance that occurred on the part of Northern Rock as well as the Bank of England and the regulatory authorities[35].             On the part of Northern Rock, the failure of corporate governance was due to the board approving a high-risk money making system. Standard practice is to obtain funds from depositors, payable in the medium or long-term to allow the firm to loan the amount at a higher interest rate. The difference between the interest paid to depositors and the interest gained from loans constituted the profit of the firm. However, Northern Rock used a different strategy. It obtained credit from depositors and other banks payable in the short term and loaned these to be payable in the long-term. As money borrowed by the firm matured, this is paid off by obtaining other short-term loans while awaiting the maturity of its long-term mortgage loans. This means that as long as depositors and other banks extent approve the borrowings of Northern Rock, it can continue to make money. However, in mid-2007, the monetary policy committee raised interest rates to address inflation and crisis broke out in the mortgage market resulting to banks unwilling to extend any more loans. As such, Northern Rock could no longer pay its short-term borrowings. [36]  This constituted poor corporate governance practice since the board approved a risky system that violated its responsibilities under corporate governance to enforce an internal control system intended to safeguard the assets of the firm and the investments of shareholder as well as to maintain open communications for purposes of disclosure to stakeholders.             Investigations also uncovered excessive remunerations received by the top executives of Northern Rock even if the firm is facing collapse. This constituted poor corporate governance since remunerations should be enough to constitute incentives for productivity but not to the extent of allocating unreasonable assets for this. In addition, the extended tenure of a non-executive director of Northern Rock’s board also came up during the investigations as a violation of the combined code.[37] This could constitute poor corporate governance since this could affect the independence and balance of power of the board to act independently and outside of the control or influence of one or two people. Moreover, the independent accounting firm handling the auditing of Northern Rock’s finances was put to question because it gained large sums from Northern Rock, indicating a breach in the independence of the accounting or auditing firm or group.             On the part of the Financial Services Authority (FSA) and the Bank of England, there was also poor implementation of corporate governance rules. FSA knew that Northern Rock was facing trouble as early as August 2007, two months before the bank runs. However, there were no recommendations to improve corporate governance in the firm, especially with the raised interest rates. In addition, although the Bank of England paid off Northern Rock’s loans, albeit at a time when the firm was already at the brink of collapse, the government also announced its guarantee of ensuring deposits, which heightened the alarm of depositors. Furthermore, the deposit insurance system established by FSA came into question because it only had a limited guarantee. This showed that the corporate governance rules in the U.K. have limitations and flaws that not only allowed irregular firm practice but also poor handling of business failures largely due to poor corporate governance.   Conclusion             In the conclusion, it is worth saying that using case studies has proven the importance of corporate governance regulation and afforded a deeper understanding of the issue. The analysis of the cases discussed and other cases assist social scientists and economist in coming up with the theories and legislations that we already have and no matter which codes and regulation we are using it is difficult to foresee or visualize a system which is completely free from the possibility of corporate governance failure. The point is that we have to learn and keep our legislation and codes updated and learn the lessons from mistakes. But it seems that some people can not learn from their mistakes like the Bank of England, who did not learn the lesson from BCCI and repeated the same mistake in Barings and was about to repeat it again in Northern Rock. My point is that the Bank of England was late, in the three cases, in interfering and making right decisions. It was late in BCCI and did not look at the warnings or acted on it. Not only that but the Bank of England also did not take the allegations seriously when the audit company approached the Bank of England to express doubts over BCCI accounts. It also repeated the same mistake with Barings by leaving the bank to collapse, which makes people loose their confidence in the U.K. banking sector which pressured Bank of England to interfere and finally act as a last resort in Northern Rock, but people could not trust neither the bank of England nor northern rock on their deposits.             However, I agree with the way the combined code of best practice works but In my opinion it has some weaknesses in U.K. corporate governance because the regulatory bodies, like financial stock exchange and the Bank of England, do not interfere until its too late, which is in my opinion wrong.             On the other hand, U.S. regulation is very strict as a one size fits all approach. Sarbanes-Oxley does not only fail to give attention to the nature of the business but also cause problems to arise. While Sarbanes-Oxley was able to address the regulatory problems that resulted to the cases of WorldCom and Enron, its operation also gave rise to new problems. This means that while Sarbanes-Oxley was responsive to the previous problems, it created other problems. One problem is the inconsistencies experienced by foreign companies between the regulatory policies in their home country and that of the United States, with the regulatory system considered as overreaching and excessive relative to other regulatory systems. This caused a number of firms to withdraw planned entry into the United States and operate in other jurisdictions considered to have more reasonable regulatory standards. Another problem is the limited effectiveness of its strict regulations. Another problem is the failure to influence change on other key cultural areas of corporate governance to prevent future failures in corporate governance. Sarbanes-Oxley made it the responsibility of the CEO and CFO to ensure the accuracy of financial reports and even imposed criminal penalty on these officers for failing in their duty. However, the top management culture of basing incentives and pay on performance and company earnings means the incentive to increase reported earnings remains, which motivates the directors to raise earnings. This creates a situation that could be subject to abuse. Although Sarbanes-Oxley has applied measures to prevent the repeat of WorldCom and Enron, this does not guarantee that these corporate governance failures would not happen again. Directors driven by the need to raise earnings just have to look for loopholes to report higher values than the actual earnings.             The U.S. regulation is, in a way, more responsive by providing measures that address the problems that allowed WorldCom and Enron to occur. However, the emergence of new problems could put into question the effectiveness of this strict regulatory regime in preventing corporate governance failure relapse or improving the regulatory regime in the United States.    References Arcot, S.R. & Bruno, V.G., 2006. In letter but not in spirit: An analysis of corporate governance in the UK. Available at http://ssrn.com/abstract=819784 [accessed 22 April 2008] Colley, J.L., Stettinius, W., Doyle, J.L. & Logan, G., 2005. What is corporate governance?. New York: McGraw-Hill.   Financial Reporting Council., 2006. The combined code on corporate governance. Available at http://www.frc.org.uk/documents/pagemanager/frc/Combined%20Code%20June%202006.pdf [accessed 22 April 2008]   Gillan, S.L. & Martin, J.D., 2002. Financial Engineering, Corporate Governance, and the Collapse of Enron.  U of Delaware Coll. of Bus. and Econ. Ctr. for Corp. Governance Working Paper No. 2002-001. Available at http://ssrn.com/abstract=354040 [accessed 22 April 2008]   How UK and U.S. differ on corporate governance., 2005. Finance Week. Available at            http://www.financeweek.co.uk/cgi-bin/item.cgi?id=1862 [accessed 24 April 2008] Lynes, D., 2007. The Northern Rock story simplified - Why did it happen?. Ezine Articles. Available at http://ezinearticles.com/?The-Northern-Rock-Story-Simplified---Why-Did-It-Happen?&id=840080 [accessed 24 April 2008] Mardjono, A., 2005. A tale of corporate governance: Leesons why firms fail. Managerial Auditing Journal, 20(3), p. 272-283.   Monks, R. & Minow, N., 2003. Corporate governance. Oxford: Blackwell Publishing.   Peek, L.E., Blanco, H. & Roxas, M., 2004. Sarbanes-Oxley Act of 2002: Corporate governance and public accounting firms oversight in NAFTA countries. American Accounting Association 2004 Mid-Atlantic Region Meeting Paper. Available at http://ssrn.com/abstract=489046 [accessed 22 April 2008]   Romano, R., 2004. The Sarbanes-Oxley Act and the Making of Quack Corporate Governance. NYU, Law and Econ Research Paper 04-032. Available at http://ssrn.com/abstract=596101 [accessed 22 April 2008]   The Sarbanes-Oxley Act 2002. Available at http://www.law.uc.edu/CCL/SOact/toc.html [accessed 22 April 2008]   Tirole, J., 2001. Corporate Governance. Econometrica, 69(1), p. 1–35.   Wearing , R., 2005. Cases in corporate governance. Thousand Oaks, CA: Sage   Publications.   [1] Colley, J.L., Stettinius, W., Doyle, J.L. & Logan, G., 2005. What is corporate governance?. New York: McGraw-Hill. p. 3 [2] Tirole, J., 2001. Corporate Governance. Econometrica, 69(1), p. 1–35. [3] Monks, R. & Minow, N., 2003. Corporate governance. Oxford: Blackwell Publishing. p. 9 [4] Monks & Minow 2003, p. 9 [5] Tirole 2001 [6] Colley et al. 2005 [7] Mardjono, A., 2005. A tale of corporate governance: Leesons why firms fail. Managerial Auditing Journal, 20(3), p. 272-283. [8] Romano, R., 2004. The Sarbanes-Oxley Act and the Making of Quack Corporate Governance. NYU, Law and Econ Research Paper 04-032. Available at http://ssrn.com/abstract=596101 [accessed 22 April 2008] [9] Peek, L.E., Blanco, H. & Roxas, M., 2004. Sarbanes-Oxley Act of 2002: Corporate governance and public accounting firms oversight in NAFTA countries. American Accounting Association 2004 Mid-Atlantic Region Meeting Paper. Available at http://ssrn.com/abstract=489046 [accessed 22 April 2008] [10] Arcot, S.R. & Bruno, V.G., 2006. In letter but not in spirit: An analysis of corporate governance in the U.K.. Available at http://ssrn.com/abstract=819784 [accessed 22 April 2008] [11] The Sarbanes-Oxley Act 2002 [12] See Above [13] Financial Reporting Council., 2006. The combined code on corporate governance. Available at http://www.frc.org.uk/documents/pagemanager/frc/Combined%20Code%20June%202006.pdf [accessed 22 April 2008]   [14] Financial Reporting Council 2006 [15] The Sarbanes-Oxley Act 2002 [16] Arcot & Bruno 2006 [17] How U.K. and US differ on corporate governance., 2005. Finance Week. Available at http://www.financeweek.co.uk/cgi-bin/item.cgi?id=1862 [accessed 24 April 2008] [18] Wearing , R., 2005. Cases in corporate governance. Thousand Oaks, CA: Sage Publications.   [19] Wearing 2005 [20] See Above [21] See Above [22] Gillan, S.L. & Martin, J.D., 2002. Financial Engineering, Corporate Governance, and the Collapse of Enron.  U of Delaware Coll. of Bus. and Econ. Ctr. for Corp. Governance Working Paper No. 2002-001. Available at http://ssrn.com/abstract=354040 [accessed 22 April 2008 [23] Gillan & Martin 2002 [24] Gillan & Martin 2002 [25] See Above [26] See Above [27] Wearing 2005 [28] See Above [29] See Above [30] Wearing 2005 [31] Wearing 2005 [32] Wearing 2005 [33] See Above [34] See Above [35] Lynes, D., 2007. The Northern Rock story simplified - Why did it happen?. Ezine Articles. Available at http://ezinearticles.com/?The-Northern-Rock-Story-Simplified---Why-Did-It-Happen?&id=840080 [accessed 24 April 2008] [36] Lynes 2007 [37] Bettelley, C., 2005. Northern Rock defies governance code. Finance Week. Available at http://www.financeweek.co.uk/cgi-bin/item.cgi?id=370 [accessed 24 April 2008]

An Overview of Corporate Governance

An Overview of Corporate Governance Introduction A number of perspectives have emerged on the concept of corporate govern...

MEDIA

Media Introduction Globalization has become an indispensable part of the modern world. The increasing convergence of technology and the extension of communication modes have pushed toward a global commonality. While globalization is recognized by many people as a trend of development, whether it brings a homogenous global culture has remained to be a critical issue. One assumption that has long been held about globalization is the loss of cultural identity. Cultural globalization raises important concerns on its effects on national and local cultures including their responses to it. It takes the form of a spread in the cultural practices including habits, values and products from dominant places to others. All processes related to globalization underlie two basic concepts: communication and culture. Media and communications have long been related to the globalization of culture and the society. It has been considered to be the single most influential component in the cultural imperialism. Following this argument, media can either homogenize or heterogenize cultures. However, despite the emergence of new media and the global reach of the mass media, the homogenization of a single people is far from happening. Media and Cultural Globalization             Globalization is considered to be the process whereby the world becomes similar in some aspects through the spread of the western ways. It is about the increasing mobility of goods and commodities, information and communications, products and services and people across borders. The increasing flow of knowledge especially in the internet is assumed to lead in a homogenized world culture. Indeed, it has become a vehicle for the integration of culture from different countries. As pointed out by  (1995), globalization reflects two views of culture (as cited in , 2000, ). The first treats globalization as the extension of a specific culture to its limits though the process of homogenization and unification as a result of the consumption of same cultural and material products. The second treats globalization as the compression of different cultures. Globalization has become a prominent topic during the recent years because of the extension of systems and modes of communication. The development of satellites and cable services has transformed the television market from national to transnational. This has paved the way for more channels targeted to the global audience. The CNN is an example of a global channel proving news stories across the world. Another is MTV which has also become a global media enterprise. Through these telecommunication networks, people can enter to the global communications easily. Internet and web access has also revolutionized information age by giving access to global databases. The ubiquity of information as well as the instant access to it is turning the world into a global village (., ) Aside from the gathering of goods and information, there is also increasing mobility of people. This has become ordinary in the emerging global order. This phenomenon was described as the start of a third culture, the global culture and the cross over of such cultures. From this concept, globalization is viewed as the process of conjoining hybridization. Part of hybridization is the concept of indigenization which describes the importation of cultural forms to local features. The encounter between the different cultures also produces tensions and friction arising from confrontations and clashes in values and beliefs. One which greatly exemplifies this difficulty is the relations between the Western and the Islamic countries.             Economic and cultural developments are the results of globalization. While development is inevitably related to globalization, the process does not necessarily mean the replacement of everything that preceded it. Globalization may be viewed in terms of the gathering of cultural phenomenon in which global elements coexist with the existing local and national cultural identities. This emphasizes the combination of the old and new elements in which the culture persist while taking some form of innovation. One of the commonly held perceptions of globalization is that national reference is obsolete in the contemporary world.             Another observation in the logic of globalization is attributed to its complexities and diversities. The process of global change is diverse and is experienced differently by those who face it. The experiences and response to the forces of globalization will determine one’s economic, social and geographical positioning in the world. There are those who detach from national culture to favor cosmopolitan cultures and those who react defensively against the forces of global change. There are different encounters with these forces of globalization. Such differences are brought about by the inequality in terms of human mobility and experience which is at the center of the globalization process. On one side, there are those at the fore front of what goes on and those who are not in control of it.             In terms of the economy, globalization is concerned about organizing economic production and exploiting economies of scale. The development of economies has a long history associated mainly with the expansion of great powers. With these super powers emerged the multinational corporations that shaped the international economy. The emergence of global corporations reflects the continuing aspiration to overcome the national boundaries and global scale advantages (, n.d., ). The success of global corporations such as McDonalds and Coca Cola proves the increasing globalization of the markets.             The global economies operate by conducting instant electronic transactions and accelerated distribution of goods and products. This process is driven by corporations with the technological capacity to operate efficiently in the world market. This transformation is connected to the increasing significance of knowledge and information in the new world economy. The focus is turned on a new global economy in the information age.  (1994) emphasized the importance of information as the raw material whereby all social processes and organizations are made (as cited in , n.d., ). The capacity to create information and knowledge and apply it through information processing and telecommunications has become more critical in all economic activities.             One of the crucial factors of these transnational organizations is the development of information and communication technology. New communication and computer technologies enable the harmonization of economic activities while allowing the co existence of decentralization and functional coordination. Thus changing the basis over which the global corporation related to place and territory. The functions of global corporations no longer depend on the national economy but across borders.             However, these global economies cannot simply supersede the existing social and historical realities. This means that adopting and negotiating with local context, conditions and constraints. Globalization is also associated with the dynamics of re-localization or the global-local nexus. The concept of a global-local nexus has become important especially in corporate marketing. Global corporations are operating and competing in the world market in terms of quality, efficiently and the understanding of the market. When it comes to global marketing, they recognize the need to decentralize strategies (,  n.d., ).             Levitt, one of the main proponents of standardization, also acknowledged the differences in products between and across different nations. This according to him is the accommodation of fixed local preferences by the multinational corporations. What is clear then is the global-local nexus representing the compromise between market expansion and cultural resistance (, n.d, ). Indeed, globalization encompasses the aspect of localization which raises the question of culture and identity.             People incorporate elements from other cultures through localities. Even if there is a homogenization in the supply of products and in the production processes, this does not mean that the consumption is also homogenizing. Moreover, globalization/localization can be interpreted as subjective and interpretative processes. All identities are a mixture of both local and global aspects. People in the local setting reshape their individual and collective identities with the consumption of cultural elements that originated from different levels (, 2000, ).             All cultural movements in the world are not global. They are not about homogenization but about differentiation. Differences exists if there are others and boundaries. Cultures have distinguished themselves from others by emphasizing their differences rather than their similarities ( , 2000, ). Even with the transmission of information across national frontiers does not lead to automatic conformity within the national and cultural level. Globalization forces have changed the face of world culture although the result of globalization is more of diversity rather than conformity.  argued the impossibility of cultural homogeneity and domination through his five scapes. According to him, the dimensions of the global culture include ethnoscapes, technoscapes, finanscapes, mediascapes and ideoscapes (, n.d, ). All of these dimensions are unpredictable and act as a constraint in the movement of the other. Moreover,  claimed that these scapes influence culture not through homogenous interaction but with their differences and contradictions.             Cultures are also moved through time and space interacting and influencing each other. This is regarded as the process of transculturation that fuses cultural forms. While these cultural syntheses resulted from the geographic movement of people, mass media and cultural industries also play a part. The only way in which these cultural movements can be considered global is through the use of communication technologies. This means that their mode of communication is global but not their goals. Modern technology bridges the gap of cultural distance. It also creates new perception and preserves culture in some ways (, n.d, ).             Another dimension of cultural globalization is one which is promotes the interaction and encounter of cultures. This concerns the active combination and mixture of cultural elements. According to Akbar Ahmed, these processes are a result of both communication and human flows. He argued the mobility of population as a contributing factor in the mixing of images, cultures and the availability of information (, ).             Communication and culture are assumed to be the basic concepts that underlie all processes related to globalization and identity. Communication of course is related to consumption. Though the globalizing identities (globalization) and the linked process of localizing identities are the result of communication/consumption, it is through communication that culture is made public and shared. Secondly, it is through culture that the various forms of media are shaped. Further, the content of communication is culture and culture incorporates different modes of communication. Thus, culture and communication are inseparable processes. Communication is considered to be the action between people, between people and institutions and between people and products. Although such interaction can be highly influenced by culture, communication can also change cultures and identities (, 2000, ).             The cultural sphere is changed by global forces through media. Mass media is a central player in the confinement of macro social domains and the empowerment of the micro social spheres. Along with the globalize economy, it changes the face of culture around the world. The emergence of technological change has led to the new order of media. New media corporations are driven by competition and profit from the largest number of audiences. There is the expansionist tendency that pushes towards the creation of enlarged media spaces and markets. Media are detaching from the national culture towards the international consumers. This trend is explained by new technologies that allow the free flow of information and products beyond the national boundaries. The reality of the media is driven not by national identity but with the opportunities in the market. This form of media globalization can be seen with media giants such as Time Warner and Walt Disney Company (, n.d, ). Modern communication technologies are creating unprecedented opportunities for cultural contacts between people and communities that live in the remote parts of the world. Transnational television broadcasting is the most prominent although there are other mediums that bring about cross-culture contacts. The opportunities offered by modern information technology resulted to the internationalization of media communication. They are seeking for larger markets other those in the country of origin. While such technologies create potential global media, cultural interests and the logic of the market are fragmenting the global media. The globalization of media has raised important issue particularly in presenting diverse cultures in the programs which they create. For example, CNN has been considered a global operator but it was faced with accusations of being too American. It is viewed as an expression of cultural domination which conflicts with its credibility as a global news provider. This simply implies the cultural context of communication that ranges form local to global. People interpret images, ideas and views based on their cultural imagination. The assimilation of media content demonstrates the relationship of the structure and agency as reflected in cultural circumstances. Furthermore, the global village and technology based society does not replaced outdated and local social systems and cultures. Despite the wide reach of technology such as the mass media, people are far from becoming homogenous. It is true that homogenizing forces including media formats affect the people’s consciousness and culture in every part of the world. But such influences do not penetrate the cultural contexts in the same way. Instead they interact with the different local conditions. The power to transmit information in a global scale does not stimulate immediate imitation both in the national and the cultural context. While the expansion of transnational media is obvious, media globalization remains to be a myth as a concept. Media has become an important dimension of globalization but it seemed to have drifted from the idea of a singular and united global marketplace. Also, the need for localization in terms of reaching a global audience has remained a pertinent issue. Conclusion While globalization has been related to development, the process could not replace everything that preceded it. It is rather a combination of local and national cultures and identities. This emphasizes the need to adopt and negotiate with local context, conditions and constraints. Such argument is reinforced by the concept of global-local nexus. Even global corporations operating across geographic boundaries are compelled to take decentralization strategies for them to become successful in other countries. Media and communications have played a significant role in the trend of globalization. It is the primary vehicle whereby products, values and cultures are transmitted from national to transnational. The emergence of new media through technological change has even increased its power. A trend towards media enlargement and market expansion has also been driven by globalization.  Media are detaching from the national culture towards the global market. This new order of media is stimulated by competition and profit from the global audience. Indeed, it has become an important element in influencing cultures. With this, media has been assumed to take part in the homogenization of cultures. However the media globalization has remained to be a myth. The path towards the homogenization of people is far from reach despite the global reach of the mass media.     References

MEDIA

Media Introduction Globalization has become an indispensable part of the modern world. The increasing convergence of technology and the...