TRANSPARENCY IN CORPORATE GOVERNANCE

Transparency in Corporate Governance

Transparency in Corporate Governance

Introduction

Since 1980, corporate governance has seen a radical transformation. Before this time, public corporations were self-centered in their desire for growth, without consideration for the shareholders. Disappointed shareholders had little recourse and management controlled the seats of corporate boards. Ownership of stock and options was minor with “only 20% of the compensation of U.S. CEOs tied to stock market performance” (Chew & Gillan, 2004, p. 73).

A governance rating system was created to score companies, but it was not always reliable or based on accurate research. The schemes and methodologies used at times were founded on myths. Conflict of interest is questioned with some rating services performing dual roles. The reaction by corporate America to corporate governance is mixed with the belief that some regulations need clarifying.

Corporate governance problems leading up to the corporate scandals of the early 21st centuryMany events occurred that led up the corporate scandals of the 21st century. Because shareholders received little acknowledgment, without any voice, change was inevitable. The 1980s and 1990s were a period of transformation for many organizations. This transformation revolutionized corporate governance.

Hostile takeovers and restructuring activities began increasing in the 1980s in reaction to shareholder neglect. Debt financing which is defined asA company can raise working capital by issuing bonds or notes to individuals or institutions, along with a promise to pay interest as well as to repay the principal. The other major way of raising capital is to issue shares of stock in a public offering (AFR, 2008, p. 49)was used extensively resulting in corporate leverage ratios increasing (Chew & Gillan, 2004).

In the 1990s a brief decline in mergers occurred, but quickly returned to the same levels as in the 1980s. Hostility and leverage subsided significantly. At this time, corporate governance processes changed with the use of executive stock options and increased board of directors and shareholders participation (Chew & Gillan, 2004).

During this time, the difference between actual and potential corporate performance became visible. Changes in the market, regulations, and technology created excess capacity. The diversification tactics from the 1960s and 1970s were performing lower than expected. Many managers reacted slowly due to the lack of monetary motivation. Resistance to change occurred with many managers who believed the status quo was the right path. Soon the benefits of changing became evident and stock option plans increased as well as valuing shareholders (Chew & Gillan, 2004).

The serious accounting problems in the 1990s from several prominent companies such as Enron, WorldCom, Tyco, and HealthSouth created a breaking point. Following these scandals, many other organizations confessed to having accounting problems. The revelation that misstated financial reports were completed brought about a decline in stock prices. Many of these companies were driven to bankruptcy (Agrawal & Cooper, 2007).

McBridge Case

In response to these scandals, the Sarbanes-Oxley Act (SOX) of 2002 was adopted. The demanding corporate governance rules apply to all U.S. companies with stock listed. Additionally, the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and NASDAQ have ...