Sunday, January 18, 2009

What is Corporate Governance?

In light of recent events with the Satyam company in India, with it's principal defrauding investors out of millions and running an accounting fraud comparable on scale to that of the Enron scandal, a good hard look at what exactly is corporate governance, for the sake of the Indians, should be explored as a way forward for this emerging market.

With this, since the Enron and the Worldcom scandals of the USofA, the idea of a better corporate governance, has gotten traction within the circles of governments and companies, world wide. However, to what extent is a good corporate governance structure feasible and to what extent is it economically efficient? Also, with the free market model of India, how much can the Indian's learn, or, unlearn, from the merits of current corporate governance models --or the lack there-of?

The most noted legislation on corporate governance in recent times was the Sarbanes Oxley Act, 2002, in response to the aforementioned scandals that hit the United States. The legislation laid out 11 articles; Public Company Accounting Oversight Board (PCAOB); Auditor Independence; Corporate Responsibility; Enhanced Financial Disclosures; Analyst Conflicts of Interest; Commission Resources and Authority; Studies and Reports; Corporate and Criminal Fraud Accountability; White Collar Crime Penalty Enhancement; Corporate Tax Returns and; Corporate Fraud Accountability.

The extent to which these points, mitigated any corporate fraud or malfeasance, is debatable. However, it must be noted that the amount of corporate frauds have in fact decreased.

On the other side of this, we have had smaller and more unique investor type frauds, which effect on a more personal level. The types of scandals that are characterized with the recent investor swindling by the one Bernie Madoff. And, also, less reported, is the unholy alliance between Washington politicians and lobbyist--something, which the SOX did not, or, could not, factor into this bill even if they really wanted to.

For obvious reasons, of course, penalizing, or, raising the risk for Washington bureaucrats, would have been met with extreme criticism and perhaps, blockages--to say the very least.

More importantly, a post analysis of SOX, has revealed interesting findings and has sparked debate, in regards to the effectiveness of SOX.

SOX, seen by many analysts, has pushed American investors and possible American investors, into the arms of the EU- the UK in particular. The alternative investment market regulators in the UK, which has exploded since SOX implementation, has given the implementation of the act credit for bringing investment from the USofA to the UK. Reports from respected institutions, have all been aligned with this cause and effect.

The suggestion's now, of what can be ascertained by this economic re-allocation in resources, is that; is Europe less governed by a high degree of corporate governance standards than that of the USofA?

Considering that the EU and in particular the UK, have been following the Anglo-Saxon model for capital markets and market economy, makes the analysis on this issue a little more complicated. However, there is a simple enough explanation to all of this. And, that is, the degree to which the European companies and governments, are socially, and, inherently, tied to that of their communities and the wider economy.

There already is, by all intents and purposes, a "built-in" social responsibility model of behaviour within the European Social Market Economy model that precedes any notion of corporate governance accountability standards.

Epitomized in their high welfare transfers on wider scale and not on individual average--as with the USofA's high transfer individual averages-- Europe, has been acting socially responsible to investors and to the wider economy they serve, as a matter of being. One may say, it is the way it is.

This, is to say, explicitly, that investors and CEO's, are a part of the social fabric.

This, while obvious, is often forgotten and high end investors, at the same time they have taken on an aura of majesticism, tied to their mastery of financial and business affairs.

In addition to this, higher tax and tax transfers, are a way of life in Europe, along with the high price of goods and services, on scale and per average, than that of the USofA.

All of this leads to the idea that, while, per capita and per country-- comparability to the USofA and any other European country per population scale--, Europe, has developed a keen sense of economic profit making, built on the Anglo-Saxon model of capitalism, but also, increased with it the idea of social welfare and programs, which benefit the country from the proceeds of all economic activity. From greater training, to higher umeployment benefits and training to the unemployed and, more acutely, family oriented programs such as health-care and very generous pension schemes that are patterned for not only the recipient, but, post death transfers to spouses in particular.

This is what underpins performance in regards to corporate governance and responsibility and, sets in place, a higher level of corporate responsibility on corporations in Europe; because, they serve too many, with too many in dependence in a greater way and, an already larger per average government, which also watches and depend's on the developments in the private market.

While this suggests that government corruption is a way of life in Europe and, in many instances, like Eastern Europe, Italy, France and to a lesser extent, the UK. The flip side of it is that while taking of little from the many does in fact take place by some, to the extent of which it is inherently pervasive and on massive scales where it corrupts the system, is not equitably comparable to the USofA--enough so for constituents, to lose faith in the system as one that takes too much, and returns to little. In fact, the relation to the kind of tolerance to what some may consider government corruption in Europe, is something for another discussion.

What has to be said now, is that any idea of enforcing and before that, legislating, corporate governance standards on business, must be precluded by an attachmed foreword on the importance to the greater society it serves.

It is common knowledge that he US social and free market model, seeks individuality, over that of the greater social need and good. This is what makes America strong on one end with individual freedoms and the right's to express one's self the way he or she sees fit. But, on the other end, leaves individuals detached from the society they serve and void of sound sense of duty and responsibility, to preserve the integrity of the social fabric and the institutions that uphold it as a collective. In a nut-shell, bi-partisanism is a way of life in the USofA. The conflict model for maintaing order, check's and balances, is what has held fast to the US social and market resolution institutions.

While this by no means is a plug for higher welfare transfers and even more taxes on business--as in fact, SOX, in effect, is a tax on business. And, also, by no means is this a plug for the US to move towards a more European Social Market model.

However, this is a plug for a greater cohesive responsibility, for all governments, to the extent that it ties in a greater amount of people into the economic success of what makes profit.

The calls, amidst the current bail-out packaging of the auto-industry, is that the industry was too important to fail because it is responsible for allot of other smaller, support industries, which may have gone under if the auto-bail-out was not awarded. While this was a good attempt, the initiative and calls to and for it, rings hollow if in fact a greater responsibility by the auto-industry in the US does not include more into it's structure and diversifies it's model, both production and transfer of payments, to include a a greater proportion to scale to what they have now.

In fact, as opposed to the financial bail-out, the US auto-industry, did not "need" an auto-bail-out. But, it wanted one, because the financial markets in the private market, had failed them and were going to fail them in the near future. So, they acted before a disaster did happen--it turned to it's government. That's responsive action.

This, moving forward, should be in the front plate of India post Satyam scandal. While making it to big to fail, would not be a panacea to the structural problems either. However, making it too big and too diversified to investors and the greater society, would make it infallible and synergies of investment support in cash and in kind, would bolster any company, industry or capital market, past bleak times.

That is what corporate governance is and is supposed to target.
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