Law, Business and Ethics: Corporate Governance Practice

Table of Contents

Scandals on corporate governance practice
Gatekeepers and the financial crisis
Regulatory framework and the takeovers market
Works Cited

Scandals on corporate governance practice

Corporate governance scandals usually have a great impact on the practice of leadership in corporations that are in the vicinity of the places where the scandals occur. This is normally due to the fact that humans tend to learn from mistakes, and thus the occurrence of a scandal in a given, or a number of corporations, leads people within the organization to re-strategize and revise their priorities, and possibly responsibilities to avoid such occurrences in the future.

In this light, there are a number of issues that have arisen due to corporate scandals, and which have made organizations in the U.S. and Europe change their corporate practices. One of the issues that have arisen is the question of the fiduciary duty of a director within a corporation. This issue arises from the fact that directors are supposed to be appointed by shareholders to protect the interests of the latter. It, therefore, follows that directors who are appointed by other parties apart from the shareholders are unlikely to protect the interests of the shareholders, and thus such an action will lead to a scandal that could potentially discredit a corporation in the public domain. A number of corporations in both the United States and Europe have been victims of these kinds of scandals. This has made shareholders be increasingly wary of how corporations in which they hold shares are run (Eldujee 1). This issue has also led corporations in the U.S. and Europe to develop strict policies for the appointment of directors which ensure that the interests of shareholders are protected as much as possible.

Another issue that has substantially affected corporate policies in both the U.S. and Europe is the issue of the confidentiality of the board of directors of a corporation. In the past, board confidentiality was being viewed as an end, instead of a means to an end. It was viewed as a duty that every member of the board has to fulfill. However, the truth is that the confidentiality of the board is meant to make the board perform its duties well. Thus directors should keep confidentiality policies. However, if doing the same can be interpreted as being contrary to the law, or being against the interests of the shareholders, the director involved should be entitled to violation of the policy of confidentiality for the board. This is an issue that has attracted numerous scandals in the corporate world making a number of companies in Europe and the United States revise their confidentiality policies. Investigations for suspected violations of the confidentiality of the board have also attracted substantial controversy. This controversy has been brought about by the fact that it is hard to determine the extent to which a director can be investigated for violation of the confidentiality policy of the board without unreasonably intruding on their privacy (Eldujee 1). This has particularly led to substantial numbers of corporate conflicts brought about by the connection between the violation of the confidentiality of the board, and intrusion of personal privacy.

Gatekeepers and the financial crisis

Gatekeepers are entities like credit rating agencies, auditors, financial analysts, investment consultants/advisors lawyers etcetera. They have an in-direct function in capital markets and other investment markets in that they ensure stability and integrity in such markets. Investors depend on them for accurate and timely information, which the former use in making investment decisions. Even though they have access to such information, which the investors cannot access, it is not guaranteed that they give accurate information to the investors, and the investors do not have a way of knowing if the information they are given by the gatekeepers is accurate. A role of the gatekeepers that is also worth mentioning here is the fact that they influence corporate investors, and thus they can potentially control the ability of corporations to get capital from shareholders. This implies that lack of accountability on the part of gatekeepers affects both shareholders (the public), and corporations. It is thus apparent that such a lack of accountability and an increase in malpractices involving huge transactions can substantially affect key industries like the real estate industry. This may, in turn, lead to massive losses being incurred by investors whose source of capital could negatively affect the economy. For instance, if real-estate investments are financed by mortgages and the activities of gatekeepers lead to losses in the real estate industry, many people will default on their mortgage repayments. This will have an effect on the economy as people borrow more money to pay loans, and as properties are disposed of for repayment of loans. After the recent financial crisis occurred, the malpractices of gatekeepers have been put in the spotlight with the ethical values of companies like Tyco and Enron being questioned (Tuch 170). It was discovered that part of the responsibility for the occurrence of the financial crisis was on the gatekeepers, who engaged in malpractices like conflicts of interest, lack of accountability or even poor disclosure. The effect of these malpractices is that individual investors and corporate investors make investment decisions based on erroneous or insufficient information leading to huge losses that may substantially affect the economy.

To evidence the fact that gatekeepers had a role to play in the recent financial crisis, credit rating agencies used to operate with freedom before the start of the financial crisis. This was before the Credit Ratings Agency Reform Act of 2006 (Sanford 1), was passed. After the passing of the act, disclosure issues were minimized, and together with other fiscal policies, the financial crisis was eased out. However, more efforts are still needed to achieve genuine accountability, a substantial level of transparency, and also to make regulation stronger in issues related to gatekeepers. The SEC (Securities and Exchange Commission), and Congress have unearthed instances in which credit raters gave inflated ratings for financial products with an aim of winning business from some particular firms (Sanford 1). It has also been established that virtually all rating agencies are becoming increasingly negligent of the values of fairness and accountability. It is of essence that the SEC controls the practices of gatekeepers to ensure that they operate accountably. This will go a long way in helping to keep financial crises at bay.

Regulatory framework and the takeovers market

The market for takeovers has been free from regulation, in a number of countries of the world, for a long time. However, in the recent past, countries have started reigning in the takeovers market with most of them operating in a market that is both controlled by legislation, and self-regulated. An example of such a country is India, which implemented a combination of legislation and self regulation in the takeovers market in the year 2006 (Haartman 3). Indias implementation of takeover regulation was guided by the legislation that was implemented earlier on in Sweden. Such legislations, which are passed in countries that did not previously have takeover legislation, affect takeover markets significantly. However, these legislations have different effects on different corporations. For instance, in India, takeover decisions do not bring about as much controversy as in the U.S. This is because a majority of companies that are domiciled in the United States are listed companies. That is, they are public companies whose ownership is split between major shareholders and minor shareholders. It therefore follows that the process of making takeover decisions is long and controversial. On the other hand, companies domiciled in India are mainly owned by individual persons, or families (Banaji 1). This implies that takeover decisions in India are far easier to make than in the U.S. The legislation governing takeovers in both countries is also substantially different, reflecting the differences in the composition of ownership of a majority of companies in both countries.

With this discussion, it can be easily seen that although takeover legislations are intended to bring sanity to takeover decisions, and protect shareholders. The legislation negatively affects the takeover market. The strict requirements for takeover provided by the takeover legislation have served to reduce the number of takeovers, which has seen a myriad of corporations miss golden chances. This is because with some takeovers comes new management that improves corporate operations and increases the profits that the corporation realizes.

In addition to this, the regulatory framework of takeovers puts restrictions in place that hinder the defensive action of the corporation to be taken up by the target company. This is to mean that specific provisions of the articles of association as well as other contractual documents with regard to the company shares are not applicable to the takeover bids (Haartman 2). Taking for example the case of Sweden whereby in accordance to their Takeover Act in the fourth chapter a Swedish registered bidder targeting a Swedish listed company is mandated to have its employees informed of the offer before making it public. It is also obliged to inform them concerning their recommendation on the offer. Thereafter, the target takeover company is bound to get authorization prior to the shareholders general meeting. All the aforementioned restrictions on the regulatory framework of market takeovers are meant to reduce active takeovers in the market hence protecting the shareholders.

The same case applies to other nations of the globe whereby the regulatory framework of takeovers has been effectively used as a method of combating instances of takeovers in the economy (Banaji 1). In India where most of the companies are family owned these regulations have been put in place whereby the Securities and Exchange Board of India has initiated corporate control and governance such that if any takeovers are to take place, they have to be orderly conducted.