Corporate Governance Financial

Corporate Governanceis a new text which considers the problems surrounding governance and proposes solutions to help restore investor confidence in the corporate world. The book is intended for board members, corporate executives, regulators, auditors, creditors and analysts seeking a concise analysis of the governance issues facing financial and nonfinancial corporations round the world. The book is fully international in context and includes real life examples and cases to emphasize the practical nature of governance problems and solutions.

Erik Banks has held senior risk management positions at several global financial institutions, including Partner and Chief Risk Officer of Bermuda reinsurer XL Capital's derivatives subsidiary, and Managing Director of Corporate Risk Management at Merrill Lynch.

List of figures

xi

List of tables

xiii

Acknowledgments

xv

The author

xvi

PART I: THE FUNCTION OF CORPORATE GOVERNANCE

1

(100)

1 Governance defined

3

(29)

The re-emergence of governance

3

(8)

Basic corporate structure

11

(11)

Limited liability, equity investors, and debt holders

11

(3)

Value maximization and the search for enterprise value

14

(3)

Diffusion, control, and the agency problem

17

(3)

Forms of ownership and control

20

(2)

Accountability and the need for corporate governance

22

(10)

Internal governance

24

(1)

External governance

24

(6)

The benefits of governance

30

(2)

2 Internal governance mechanisms: corporate accountability

32

(22)

The board of directors

34

(8)

Executive management

42

(2)

Internal control groups

44

(3)

Code of conduct

47

(1)

Implementation of internal governance measures

48

(6)

Best practice codes

50

(4)

3 External governance mechanisms: systemic accountability

54

(29)

Regulatory oversight

54

(2)

Legal/bankruptcy regimes

56

(3)

Capital markets access

59

(2)

Corporate control activity

61

(9)

Mergers, acquisitions, and spin-offs

65

(2)

LBOs and MBOs

67

(1)

Antitakeover defenses

68

(2)

Block holder monitoring

70

(4)

Activist institutional investor monitoring

74

(3)

External audits

77

(2)

Credit rating agency review

79

(4)

4 Protecting internal and external stakeholders

83

(18)

Direct and indirect stakeholders

85

(14)

Shareholders

86

(2)

Labor/employees

88

(2)

Creditors

90

(4)

Customers and suppliers

94

(2)

Professional service providers

96

(1)

Communities

97

(1)

Indirect stakeholders

98

(1)

Protecting stakeholders

99

(2)

PART II: CORPORATE GOVERNANCE PROBLEMS

101

(156)

5 Common failures in the governance process

103

(44)

Flaws in governance

103

(3)

Detecting governance flaws

105

(1)

Failure of board directors and executive management

106

(10)

Ineffective boards

107

(8)

Breach of duties of care and loyalty

115

(1)

Entrenched management

115

(1)

Failure of corporate policies

116

(15)

Failure of internal controls

131

(5)

Lack of technically qualified, independent controls

132

(1)

Liberal accounting policies

133

(1)

Excessive risk-taking

134

(1)

Inadequate internal audits

135

(1)

Failure of external controls

136

(11)

Inadequate regulatory mechanisms

136

(4)

Insufficient legal/bankruptcy regimes

140

(1)

Lack of block holder/activist investor monitoring

140

(1)

Weak/underdeveloped capital markets

141

(2)

Misguided/insufficient corporate control activity

143

(1)

Unacceptable external audit practices

144

(3)

6 The impact of governance problems on corporate operations

147

(19)

First stage impact: reputational damage

150

(1)

Second stage impact: early financial problems

151

(3)

Third stage impact: growing financial distress

154

(3)

Fourth stage impact: bankruptcy

157

(2)

The impact of bankruptcy on stakeholders

159

(7)

7 Studies in flawed governance I: companies

166

(65)

Company studies

170

(61)

Case study 1: Enron, USA

170

(5)

Case study 2: Arthur Andersen, USA

175

(4)

Case study 3: WorldCom, USA

179

(6)

Case study 4: Tyco International, USA/Bermuda

185

(4)

Case study 5: Adelphia Communications, USA

189

(3)

Case study 6: Allfirst/Allied Irish Bank, USA/Ireland

192

(4)

Case study 7: Waste Management, USA

196

(4)

Case study 8: SAirGroup (Swissair), Switzerland

200

(4)

Case study 9: Vivendi, France

204

(4)

Case study 10: Daewoo Group, Korea

208

(3)

Case study 11: Asea Brown Boveri, Sweden/Switzerland

211

(3)

Case study 12: Kirch Media, Germany

214

(3)

Case study 13: Ahold, the Netherlands

217

(3)

Case study 14: Lernout and Hauspie, Belgium

220

(3)

Case study 15: Global Crossing, USA/Bermuda

223

(3)

Case study 16: HealthSouth, USA

226

(5)

8 Studies In flawed governance II: sectors and industries

231

(26)

Case study 1: global external auditors

232

(7)

Case study 2: US energy trading companies

239

(5)

Case study 3: Japanese sokaiya scandals

244

(3)

Case study 4: US investment banking and research

247

(3)

Case study 5: Indonesian business and banking groups

250

(7)

PART III: CORPORATE GOVERNANCE REFORMS

257

(78)

9 Strengthening the governance process micro reforms

259

(32)

Strengthening the board of directors and executive management

261

(15)

Establishing active, independent, and responsive boards

262

(2)

Reducing board size

264

(1)

Creating technically expert, independent board committees

264

(7)

Separating the roles of chairperson and CEO

271

(3)

Aligning board director interests

274

(1)

Limiting D&O insurance coverage

274

(1)

Piercing the corporate veil for directors and executives

275

(1)

Reducing information asymmetries

276

(1)

Refocusing corporate policies

276

(10)

Developing rational compensation standards

277

(2)

Creating effective disclosure

279

(2)

Supporting shareholder rights

281

(2)

Returning excess capital

283

(1)

Defining and publicizing strategy

283

(1)

Developing and demonstrating a long-term perspective

284

(1)

Engaging institutional investors

285

(1)

Enhancing internal controls

286

(5)

Developing proper accounting policies

286

(1)

Enhancing internal audit

287

(1)

Reinforcing a culture of risk management

287

(1)

Implementing crisis management programs

288

(1)

Conducting effective post-mortems

289

(2)

10 Strengthening the governance process II: macro reforms

291

(27)

Promoting changes in regulatory oversight

292

(7)

Regulating potential conflicts of interest

293

(1)

Promoting uniform and meaningful accounting rules

294

(1)

Developing proper regulatory disclosure

295

(2)

Encouraging long-term investment

297

(1)

Protecting assets, investments, and pensions

297

(1)

Enhancing general governance mechanisms

298

(1)

Strengthening legal frameworks and bankruptcy processes

299

(2)

Deepening capital markets and promoting corporate control activity

301

(2)

Enhancing external audit practices

303

(1)

Encouraging investor activism

304

(3)

The legislative angle: the example of Sarbanes-Oxley

307

(1)

Creating a Public Company Accounting Oversight Board

308

(1)

Ensuring auditor independence and establishing an audit committee

309

(2)

Assigning corporate responsibility

311

(1)

Enhancing financial disclosures

312

(1)

Resolving analyst conflicts of interest

313

(1)

Assigning accountability for corporate and criminal fraud

314

(1)

Expanding white collar crime penalties

314

(1)

The international view of S-O

315

(3)

11 Improving corporate ethics

318

(9)

Corporate ethics versus corporate responsibility

319

(1)

Creating and reinforcing a proper ethical culture

320

(3)

Ethical norms

323

(2)

Ethical behavior and internal governance mechanisms

325

(2)

12 Summary: towards substantive governance

327

(8)

Simple rules of substantive governance

328

(4)

Can governance changes work?

332

(3)

Appendix: implementing global best practice

335

(55)

Supranational

338

(1)

OECD

338

(2)

BIS

340

(2)

European Union

342

(2)

Australia

344

(1)

Belgium

345

(3)

Brazil

348

(1)

Canada

349

(3)

France

352

(2)

Germany

354

(2)

Italy

356

(3)

Japan

359

(2)

Korea

361

(3)

Malaysia

364

(2)

The Netherlands

366

(2)

Singapore

368

(3)

South Africa

371

(3)

Spain

374

(2)

Sweden

376

(1)

Switzerland

377

(3)

United Kingdom

380

(4)

United States

384

(6)

Notes

390

(73)

The language of governance

463

(20)

Selected bibliography

483

(7)

Index

490

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Corporate Governance Financial Responsibility, Ethics and Controls

Summary

Author Biography

Table of Contents

Supplemental Materials