Example research essay topic: Contemporary Corporate Board Governance - 1,756 words

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Contemporary Corporate Board Governance Given revelations of numerous corporate scandals since the turn of the century, we can no longer ignore the negative impact that unethical and unlawful behaviors have had on the economic stability and capital welfare of the nation. Organizational culture is based on a set of widely shared meanings, beliefs, principles and values and is supposed to set the tone for ethical behavior. Unfortunately, the executives who are responsible for helping to set this tone, as the organizational role models, have failed in their responsibilities. Courses in business ethics are now jokingly referred to as an oxymoron in many business educational programs. The integrity of old -- where a person's word was their bond and honesty was the best policy -- has suffered because of mistrust and a lack of confidence in the capitalist way of doing business. The lack of confidence in corporate America by its stakeholders including, but not limited to, its shareholders, as well as its employees, customers and the communities at large has dampened the belief that a market-driven economic system can be a fair system to all involved in its transactions.

It is time to stand back and take a look at what has transpired since the beginning of this new century and to reflect and think of alternatives available to us so as to regain confidence in values that were once the foundation of the American way of life. (Cleimant, 2000). The integrity of U. S. corporations has continued to be assaulted with the collapse of Enron, the energy company that was the seventh largest company in the U. S. ; followed by the twin telecommunications companies, Global Crossing and WorldCom, which independently went into bankruptcy. The collapse of Enron was a shock, both because of the size of the enterprise and, more importantly, because its underlying cause was corrupt corporate manage-ment.

Yet at the time it seemed an isolated, if unfortunate and costly event. Recently it was reported that the Xerox Corp. had overstated its profits from 1997 to 2001 by $ 1. 4 billion. In the year 2002, some 250 American public companies have had to restate their accounts compared with only 92 in 1997 and 3 in 1983. Thus, the first two years of this new century has been marked by almost unprecedented corporate crisis and scandal. Some chief executive officers and other high-ranking organization members have been arrested for fraud and for "looting" their companies.

It was found that some of these bankrupted firms' financial statements had deliberately misled the public, overstating earnings by billions of dollars. Accounting firms have been found guilty of obstruction of justice; and t he credibility of supposedly independent Wall Street stock analysts and outside accounting firms have become suspect. (Cleimant, 2000). To whom should public corporations be accountable? Is their only obligation to shareholders, or do they have equivalent responsibilities to their stakeholders -- their employees, their communities, and society in general? Our legal system appears implicated too; white-collar crime is treated far more leniently than "street" crime, even though its economic and social costs are of greater magnitude. The effects associated with these scandalous practices have been worldwide and severe.

Pension plans have been negatively impacted, employees who had nothing to do with these wrongdoings have lost their jobs, as well as their life savings which were invested in 401 (k) s, pensions, and mutual funds. Some executives have been indicted and some companies have declared bankruptcy and / or failed. There has been a considerable loss in investor confidence and an even greater loss of trust in corporations and their executives. (Keating, 1999). The first and most obvious economic fallout from corporate wrongdoing is the legitimacy of wealth creation. With free markers under threat from protectionist politicians and anti-globalization protesters, corporate sandals are the propaganda gifts for those in the developed world who are well enough off not to worry about lower growth. They also seem to be short-sighted to recognize the adverse consequences for poor countries.

Hence, governments are increasingly charged with the task of wealth creation. There is a more fundamental question that needs to be asked. In what sense does the concept of ethics affects economic activity? The 1998 Nobel Laureate in Economic Science, Amartya Sen, has said, "A basic code of good business behavior is a bit like oxygen: we take an interest in its presence only when it is absent. " Ethical conduct creates the valuable quality of trust. Trust is defined as, "the assured reliance on the character, ability, strength, or truth of someone or something: one in which confidence is placed. " (Keating, 1999). So as defined, if trust can be established throughout the organization, then we might find a reduction in the monitoring and transaction costs in many companies and in the wider economy as well.

In the current version of stock market capitalism, the criterion for success is shareholder value, as expressed by a company's share price. This is corroborated by one view of a root cause to the current crisis articulated at the Academy of Management Annual Meeting during the summer of 2002. Thomas Korean of the MIT Workplace Center says "The overemphasis American corporations have been forced to give in recent years to maximizing shareholder value without regard for the effects of their actions on other stakeholders" is the problem. This is further explained by pressures from Wall Street growing in the aftermath of the contests for corporate control in the 1980 s. Executives turned more and more of their attention to meeting the short-term expectations of analysts and to restructuring operations to boost earnings.

Board committees and compensation consultants restructured executive contracts to better align management incentives with investor interests. Boards likewise turned to Chief Executive Officers (CEOs) who could best manage relations with the financial community and project an image of confidence. The era of the charismatic CEO was born. Wall Street, the business media and press, and business school case writers alike reinforced these trends by committing a classic attribution error -- they attributed the successes of organizations to the leadership and vision of the CEO and his (mostly his) top executive team.

This error served to increase the perceived value of CEOs. The self-reinforcing escalation of executive compensation that ensued eventually led in the year 2000 to a 600 -to-one ratio of CEO compensation to that of the average worker (this compares to just 42 to one in 1980). As a result of this error, power became highly concentrated at the top levels of the organization. (Toronto Stock Exchange News, 1999). The growth in stock options awards to the U. S. CEO and the amounts of boardroom pay is another classic illustration of the law of unintended consequences.

In 1993, the U. S. Government attempted to cap directors' pay by imposing a $ 1 million limit on its tax deductibility. When the Financial Accounting Standards Board insisted that the cost of options should be charged in the profit-and-loss column, the suggestion was defeated by big business.

Business leaders justified extravagant option awards by claiming they aligned top executives' interest with those of shareholders. Yet in practice, options gave them a powerful incentive for the company to buy more of its own stock. In this way, the stock price is driven up, at which time, CEOs and directors exercise their options (i. e. , cash in) at the higher stock price.

In many cases this resulted in a debt-financed transfer of wealth from shareholders to managers as they bought stock at bubble-inflated values. (Toronto Stock Exchange News, 1999). At the most basic level, one might argue that ethics is a low-cost substitute for internal control and external regulation. If we conceal truth or erode trust, transactions in business becomes unreliable and the organizational system must absorb the additional cost to maintain its vitality. That is why the accounting scandals at Enron, WorldCom, etc. , the recent restatement of corporate accounts, and the subsequent collapse of Arthur Andersen, the auditors for the two firms that accounted for the two largest bankruptcies in American history, are so vitally important.

Auditors are the guardians of the integrity of our capitalist economic system. Former U. S. Chief Justice Warren Burger explains it this way, "the public watchdog function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. " Ethical behavior is thus, a necessary condition for investors to benefit from the auditor's product -- the credibility of the auditors' attestation to financial statements. They must have the skill and competence required to detect misrepresentations or omissions in financial statements.

It is important for auditors to posses the ethical traits necessary for rendering honest opinions. (Keating, 1999). Being able to trust the guardians of our financial capital is paramount for the integrity of America's reputation; and this point extends far beyond just accountancy and audit issues. In economic terms trust, truth telling and loyalty create externalities. Though they cannot be traded in markets, these qualities have a real value that increases the efficiency of the wider economic system. To work well, markets need both a robust legal framework and a behavioral infrastructure of accepted rules and codes of conduct. Where laws, rules, and codes are flouted, transaction costs go up.

Insider dealing provides a clear example. In markets where informed speculators are known to be extracting gains at others' expense, market makers will widen their spreads to protect themselves, causing the cost of dealing to rise. Investors who are not insiders will demand a discount on the price of securities when they are issued. Corporate executives are overachievers and are sometimes guilty of testing the borders of ethics. At each new and more inflated level of a stock market bubble, the robustness of executives' ethics are tested and a large number of them succumb to temptation and greed. So our society needs penalties and incentives that make good use of the self-interest motive and at the same time encourages economically productive ethical behavior.

One reason the U. S. capital market model has gone off the rails is precisely that the incentives and punishments are badly skewed. (Keating, 1999). Words: 1, 652. Bibliography: Cleimant, P. New Focus: Executive Pay, Poison Pills and Global Governance Standards, DIRECTORSHIP, at page 6 (April 2000).

How and Why Corporate Governance is Changing Worldwide. (Toronto Stock Exchange News Release, July 9, 1999). Keating, T. Improving Corporate Governance: Lessons from the European Community, 1 GLOBAL LEG. STUDIES 1 (1999). web web

Research essay sample on Contemporary Corporate Board Governance