Corporate governance and the global financial crisis

Extract

[...] Madoff Securities was operating in the homogeneous and dynamic financial sector. In the late 1990s, interest rates for borrowing were at their lowest levels for decades and inflation was at record low levels. In this atmosphere of optimism, Madoff promised the implausible combination of good returns and low risk. He deliberately and dishonestly structured transactions to misrepresent the true nature of the money. The Madoff story illustrates most of the issues in corporate government practices discussed by Cullinan and Sutton (2002). [...]

[...] Conclusion Skillful good corporate governance is key to the integrity of corporations, markets, and central to the health of our economies. Unfortunately, when put to the test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking. Corporations also often ignored that the market is the ultimate compliance officer. The stock market meltdown of 2008 created a first-rate opportunity to persuade lawmakers and the OECD to introduce changes and strengthen corporate boards, address concerns about executive pay, and enhance shareholders rights. [...]

[...] The board of directors should be monitored and held accountable for what guidance it gives. The principal weakness of corporate governance today is the excessive concentration of power in the hands of top management. Rebalancing this power is a prerequisite for controlling fraud and promoting accurate financial reporting. To regain the confidence of the financial markets, employees should be recognized as key participants in the corporate process, rather than as a commodity traded in the labor market (Tipgos & Keefe 2004). The financial crisis has revealed other severe shortcomings in corporate governance (Kirpatrick 2009). [...]

[...] Kirkpatrick, G 2009, The corporate governance lessons from the financial crisis, viewed 24 February 2009, . Laufer, S 2006, Corporate Bodies and Guilty Minds: the Failure of Corporate Criminal Liability, The University of Chicago Press, Chicago. Milne, J 2006, ‘Good corporate governance, good performance. Return shareholders to the driver's seat, one theory says', Benefits & Compensation Digest, May, pp. 34-38. OECD Steering group 2004, OECD principles of corporate governance, viewed 4 March 2010, www.oecd.org/dataoecd/32/18/31557724.pdf OECD Steering group 2009, Corporate governance and the financial crisis: key findings and [...]

[...] Corporate governance principles could provide guidance to companies through a compensation structure model aligned with prudent risk taking and long term objectives. Boards poorly implemented risk management. It was often activity rather than enterprise-based. Suitable metrics to monitor strategy implementation were not established, nor were foreseeable risk factors disclosed. The enterprise risk management framework in the Principles may need clarification to encourage implementation in a corporate wide perspective. It has been suggested at the OECD that corporations have a special risk officer that reports to the board. [...]